Company Overview
Shimmick Corporation (NASDAQ: SHIM) is a leading provider of water and other critical infrastructure solutions nationwide. With a rich history spanning over three decades, the company has established itself as a trusted partner in delivering complex, large-scale projects that have a lasting impact on communities.
Founded in 1990 in California, Shimmick operated as a regional infrastructure construction contractor for nearly 30 years before being acquired by AECOM in 2017. In 2021, the company was sold by AECOM and began operating as an independent entity, embarking on a strategic transformation to focus on the nation's growing need for water and other essential infrastructure.
Historical Challenges
During its time under AECOM's ownership, Shimmick was consolidated into AECOM's existing construction services operations. After the transaction in January 2021, Shimmick began operating as an independent company under new private ownership. This transition period brought significant challenges, particularly in managing the completion of "Legacy Projects" - construction contracts initiated under AECOM's ownership. These Legacy Projects experienced substantial cost overruns and unexpected challenges, including the impacts of the COVID-19 pandemic, design issues, and legal disputes, leading to significant losses for the company.
To address these issues, Shimmick implemented a Transformation Plan in 2024, focusing on settling outstanding claims and exiting underperforming contracts. This process, while requiring significant management attention and resources, has allowed the company to refocus its efforts on its core water infrastructure and other critical construction projects, which it refers to as "Shimmick Projects."
Core Business Segments
Shimmick's core business segments include Water Treatment, Water Resources, and Other Critical Infrastructure. The company's expertise in water-related projects is highlighted by its national rankings as a top-ten builder in water supply, dams and reservoirs, and water treatment and desalination plants. Shimmick's water infrastructure solutions aim to ensure access to clean and safe drinking water, protect public health, and promote sustainable water management.
Water Treatment
In the Water Treatment segment, Shimmick expands, rehabilitates, upgrades, builds, and rebuilds water and wastewater treatment infrastructure, including desalination plants. The company implements complex cleantech treatment technologies such as ozonation, biological activated carbon, membrane filtration, reverse osmosis, chemical treatment, and oxidation. Shimmick also conducts facility commissioning. These projects and solutions aim to ensure access to clean and safe drinking water, protect public health, and reduce waterborne diseases. The company's work also contributes to environmental protection by removing pollutants and contaminants from wastewater before it is released back into ecosystems.
Water Resources
The Water Resources segment focuses on building, expanding, and improving water storage and conveyance, dams, levees, flood control systems, pump stations, and coastal protection. Shimmick also upgrades and expands dams, levees, and locks along the nation's waterways to enable continued emissions-reducing movement of goods. These projects enable reliable water supply, generate hydroelectric power, and control flooding, ensuring water availability and energy security. Shimmick's work also contributes to protecting communities from flood damage to safeguard lives, property, and infrastructure.
Other Critical Infrastructure
In addition to its water-focused projects, Shimmick builds, retrofits, expands, rehabilitates, operates, and maintains other critical infrastructure, including mass transit, bridges, and military infrastructure. These projects are vital for economic growth, social connectivity, and accessibility, enabling the smooth and efficient movement of people and goods, fostering trade, addressing environmental sustainability, and improving quality of life.
Financials
Financially, Shimmick has faced its share of challenges in recent years. For the fiscal year 2023, Shimmick reported annual revenue of $632.81 million, a net loss of $2.55 million, annual operating cash flow of -$88.10 million, and annual free cash flow of -$95.14 million.
In the most recent quarter ended June 28, 2024 (Q2 2024), Shimmick reported revenue of $103.55 million, representing a 33% decrease from $155.19 million in Q2 2023. This decrease was primarily due to a $23 million reduction in Legacy Projects revenue associated with a settlement. The company recognized a net loss of $38.46 million in Q2 2024, compared to a net loss of $10.31 million in Q2 2023. This increased loss was mainly driven by a $30 million reduction in Legacy Projects gross margin due to the settlement.
For the six months ended June 28, 2024, Shimmick reported revenue of $210.65 million and a gross margin of $46.99 million. The company's net loss for this period was $84.72 million, primarily driven by the settlement of a claim on a large legacy project, increased costs and schedule extensions, and adjustments to the forward loss reserve on certain projects.
Liquidity
As of June 28, 2024, Shimmick's liquidity position included $22.38 million in unrestricted cash and cash equivalents. The company had $7 million in available borrowing capacity under its Revolving Credit Facility and $6 million under the new Credit Facility, for a total liquidity of $35 million. The company's debt-to-equity ratio stood at -0.46, with a current ratio and quick ratio both at 0.61.
Shimmick's transformation efforts have been ongoing, with the company taking steps to exit its legacy projects and focus on its core water infrastructure business. In May 2024, the company entered into a series of transactions with AECOM and Berkshire Hathaway Specialty Insurance Company, including a new $60 million Credit Agreement, a mutual release and settlement of certain claims with AECOM, and amendments to the existing Revolving Credit Facility.
In August 2024, Shimmick entered into a $33 million settlement agreement on litigation related to one of its Legacy Loss Projects, a federal lock and dam project. This settlement will result in additional liquidity and eliminate the cost and distraction of prolonged litigation.
Additionally, Shimmick has taken actions to strengthen its financial position, including the sale of its non-core Foundations Projects business for $17.5 million and the completion of a sale-leaseback transaction for its equipment yard in Tracy, California, which generated $17 million in net proceeds. These transactions have helped the company reduce its debt and improve its overall liquidity.
Backlog and Future Outlook
Shimmick's backlog, a key indicator of future revenue, remains robust, standing at $923 million as of June 28, 2024. Over half of this backlog is comprised of water projects, reflecting the company's strategic focus on water infrastructure. Importantly, Shimmick Projects, the company's focus on water infrastructure and other critical projects, account for a significant portion of this backlog, reflecting the strategic shift in the business.
The company believes it has the ability to self-perform many of these projects, enabling it to compete for complex projects and differentiating it from many of its competitors. Self-performance also allows Shimmick to better control the critical aspects of its projects, reducing the risk of cost and schedule overruns.
Looking ahead, Shimmick has outlined a comprehensive Transformation Plan to address its legacy challenges and position the company for long-term success. The plan includes initiatives to streamline operations, enhance project management capabilities, and strengthen the company's balance sheet. Shimmick has also announced the hiring of Ural Yal as its new Chief Executive Officer, effective December 2, 2024, to lead the company through this critical transition.
Industry Trends
The water infrastructure industry is expected to grow at a compound annual growth rate (CAGR) of 5-7% over the next 5 years. This growth is driven by aging infrastructure, increasing water scarcity, and regulatory requirements for water treatment and conservation. Shimmick's specialized expertise in water-related projects positions the company well to capitalize on these industry trends.
Despite the challenges Shimmick has faced, the company's commitment to water infrastructure and its strong backlog of Shimmick Projects provide a solid foundation for future growth. As the nation's need for water-related solutions continues to grow, Shimmick's specialized expertise and focus on complex, high-value projects position the company well to capitalize on emerging opportunities and navigate the road ahead.