Release Date: August 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Shimmick Corp (SHIM, Financial) settled one of the two Legacy Loss Project claims for $33 million, improving liquidity and reducing legal distractions.
- The company secured a $14.5 million project for Delta Diablo cogeneration system replacement, reinforcing its focus on water-related projects.
- Shimmick Corp (SHIM) has a strong backlog of $922 million as of the end of the second quarter, indicating a robust pipeline of future work.
- More than 75% of Shimmick Corp (SHIM)'s work is generated from repeat customers, providing a predictable long-term flow of programs and projects.
- The company completed a significant $42 million project at the Richmond wastewater treatment plant, enhancing operational efficiency and reducing environmental impact.
Negative Points
- Shimmick Corp (SHIM) reported a net loss of $51 million for the second quarter, compared to a net loss of $10 million for the prior-year period.
- Second-quarter adjusted EBITDA was a loss of $40 million, significantly worse than the $2 million loss in the prior-year period.
- Legacy Projects continue to negatively impact financial performance, with a $23 million reduction in revenue and additional $7 million in gross margin adjustments.
- Gross margins for Shimmick projects declined to 5% for the quarter, down from 8% in the first quarter of 2023, due to schedule extensions, pending change orders, and increased costs.
- Legal fees related to Legacy Loss Projects amounted to $2 million for the quarter, adding to the company's financial burdens.
Q & A Highlights
Q: Steve, I was wondering if you could give us a little bit of maybe qualitative background on the new projects out there, the activity, not so much projects that you won, but what you're seeing in terms of the funnel and maybe thoughts on how some of that translates over the next two, three, four, five, six quarters.
A: Sure. Well, we're seeing a lot of activity in the California market. Southern California, Northern California, both the projects fit our profile with the number of projects out there really having to filter them down to be in those projects that we like in size, $50 million to $150 million through your average duration. And so you've seen a lot of those projects, like what I've been most encouraged about is that a good amount of that work is allowing us to self perform up to our target amount of about 75%. So, good pipeline. We're adding more estimators, actually, Gerry, to take on the pipeline that we see, both in the Northwest and Southwest divisions plus our electrical division of work. So pretty excited about it all.
Q: Could you just go over the guidance on the legacy projects again real quick?
A: Amanda will jump in with me on this. But what we see happening, we mentioned in our release that we see one of the Legacy Projects entering into a jury trial later this year. So we're encouraged by that to get by that claim from a backlog standpoint and working that job off. We've got the majority of the most difficult part of the job nearly complete. It will finish off in the spring, and then we'll enter into more traditional installation or manufacturing piece of the work. The other project, again, the interim milestones for the most difficult work are approaching completion by the end of '24. Overall completion would be later in '25 for the majority of the project. Amanda, do you want to add any color as far as the backlog numbers and what's to burn on the Legacy A content?
A: Yeah. I hit on kind of the same remarks there that we'll continue to see the backlog winding down and the legacy jobs, the majority of that will be done through 2025 and a little going into 2026 there continue to decrease the backlog.
Q: Are there still claims outstanding that you could recoup some losses?
A: Yeah, sure. Normal course of business for us, we always see change orders coming through the system. And they have the potential to improve not only margin but certainly cash flow.
Q: How much in the quarter were legal fees? And obviously, as you get closer to some of these trials, legal fees ramp up, but just curious as to maybe a more normalized, even SG&A, once you get through some of this the settlements in this trial, what would sort of be a normalized G&A run rate?
A: Amanda, do you want to hit on the legal fees that we incurred in the quarter? I'm not sure that's rightly available.
A: Yeah. We would look to see more information in the Q that will come out later, but for the legal fees, about $2 million for the quarter.
A: And you're right, Gerry. As we approach the trial, for example, those fees really ramp up from the standpoint of the legal activity, whether it be depositions or just the press to be ready for the trial, normal run rate, what Amanda just described, we would see that fall off. And so it would be an improvement for job costs and overhead.
Q: Could we anticipate margins improving through the rest of the year? Is that what you sort of infer when you say back-half loaded?
A: Yeah, that's right. Our guidance, what we just came through was lower end of the guidance, and we've got the higher range still out there. So that would tell you that we see improvements over the next two quarters.
Q: You talked about a new operating model. Can you just share a little more on what that entails? You kind of hit targeted project size a little bit of $50 million to $150 million. But just anything margins, anything else behind that would be helpful.
A: Yeah. So geographically, we'll be focused on the California area. We're already set up there with our regional offices, headquarters in Irvine, and then our major regional office in Suisun City, which is a little bit east of Oakland. So we've got the right geographic presence for not only our estimating teams that know the local supply chain or the local market, but also our leadership and the key staff that are running the jobs. So feel really good about that and the craft labor that's following this. But I think that from a margin standpoint, we haven't seen a drop in margin opportunity as we're bidding work. And for us, the key is that we find the right mouse trap to win the job, to find that best way to finish the cost of it most efficiently, and we'll get our share of the market. So we see in that upper-teen area still as being the target area for job margins.
Q: With the pipeline you have today and just expected growth, how are you feeling about just labor capacity and labor availability in the market, and just kind of overall capacity for your business as you move forward?
A: Right. Well, what we're able to do with our teams, first of all, is we're able to work share across regions. And so we've got folks that are coming out of our -- the emphasis on the national market to be having them as the additional support for our California pursuits. And so that's a value add immediately that we can transfer over. From the standpoint of recruiting other staff, this is a great networking business. We've got a lot of connectivity in the industry and feel good about being able to get those right people. We're really scrutinizing the folks that we're going on. We want to bring those that have not only the talent, but the right culture fit for them. They can feel good about who we've recruited so far.
Q: Can you just talk about how you think cash flow trends in the coming quarters and just outlook as we head into 2025?
A: Yeah. The activities over the last quarter have been significant, not only -- previously, we had announced the asset purchase or sale of the Foundations business and those assets -- finishing that work, as Amanda mentioned in her remarks, finishing up work later this year. So that provided some liquidity. And then in addition, the sale leaseback the $17 billion provides cash into the system. And then certainly, the settlement with the core of engineers for the $33 million that is up nicely from a liquidity standpoint. So feel very good about the decisions we make to improve the liquidity, and it's a step well for not
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
