Shimmick Corp

Previous wording

As of March 29, 2024, we had a backlog of projects in excess of $1 billion, with over half of that amount comprised of water projects. We believe we have the ability to self-perform many of these projects, enabling us to compete for complex projects and differentiating us from many of our competitors. Self-performance also enables us to better control the critical aspects of our projects, reducing the risk of cost and schedule overruns.

Current wording

As of June 28, 2024, we had a backlog of projects of $923 million, with over half of that amount comprised of water projects. We believe we have the ability to self-perform many of these projects, enabling us to compete for complex projects and differentiating us from many of our competitors. Self-performance also enables us to better control the critical aspects of our projects, reducing the risk of cost and schedule overruns.

Previous wording

On May 20, 2024 (the “Closing Date”), Shimmick Corporation (the “Company”), entered into a series of transactions (the “Transactions”) with AECOM, a Delaware corporation (“AECOM”) and Berkshire Hathaway Specialty Insurance Company (“BHSI”). A summary of the Transactions is included below.

Current wording

On May 20, 2024, Shimmick Corporation, entered into a series of transactions (the “Transactions”) with AECOM, a Delaware corporation (“AECOM”) and Berkshire Hathaway Specialty Insurance Company (“BHSI”). A summary of the Transactions is included below.

Previous wording

The transactions included, among other things, entry into the new $60 million Credit Agreement, a mutual release and settlement of certain claims with AECOM and a corresponding agreement to issue 7,745,000 shares of our common stock to AECOM, termination of the existing Project Financing Agreement with BHSI and amendments to the existing Revolving Credit Facility with MidCap. For a description of these transactions, see Note 6 - Debt and Note 12 - Subsequent Events to our condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

Current wording

The transactions included, among other things, entry into the new $60 million Credit Agreement, a mutual release and settlement of certain claims with AECOM and a corresponding agreement to issue 7,745,000 shares of our common stock to AECOM, termination of the existing Project Financing Agreement with BHSI and amendments to the existing Revolving Credit Facility with MidCap. For a description of these transactions, see Note 6 - Debt to our condensed consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

Previous wording

In addition, we entered into an agreement for the sale of the assets of our foundation drilling business for total consideration of $17.5 million, consisting of $15 million in cash and a $2.5 million promissory note. The sale is expected to close in May 2024. The net proceeds will be used to repay borrowings under the Revolving Credit Facility. We will continue working on certain existing foundation projects, which are largely expected to be completed by the end of the year.

Current wording

In addition, we entered into an agreement for the sale of the assets of our foundation drilling business for total consideration of $17.5 million, consisting of $15 million in cash and a $2.5 million promissory note. The sale closed on May 23, 2024 and the net proceeds were used to repay borrowings under the Revolving Credit Facility. We will continue working on certain existing Foundations Projects, which are largely expected to be completed by the end of the year.

Previous wording

In addition, we entered into a non-binding letter of intent for the sale-leaseback of our equipment yard in Tracy, California. The transaction contemplates the sale of the equipment yard for approximately $22 million, along with a five-year lease for us to continue using the property. We expect the sale-leaseback to close in the second quarter of fiscal 2024. The net proceeds will be used to repay borrowings under the Revolving Credit Facility.

Current wording

On August 9, 2024, we completed the previously disclosed transaction for the sale-leaseback of our equipment yard in Tracy, California. The agreement consummated the sale of the equipment yard for $20.5 million and allows us to continue using the property pursuant to a separately executed seven-year lease. We received net proceeds of $17 million after adjustments for prepaid rent through February 2026 and related closing costs. The equipment yard had a net book value of approximately $3 million and the $17 million of net proceeds received from the transaction were used to repay borrowings under the Revolving Credit Facility.

Previous wording

Our Ability to Control Selling General and Administrative Costs. Because we now exist as a public company, we will incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, stock exchange listing expenses, as well as third-party and internal resources related to accounting, auditing,

Current wording

Our Ability to Control Selling General and Administrative Costs. Because we now exist as a public company, we will incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, stock exchange listing expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal and investor and public relations expenses. These costs will generally be selling, general and administrative expenses. We have also implemented the 2023 Omnibus Incentive Plan to align our equity compensation program with public company plans and practices, which we expect will increase our stock-based compensation expense.

Previous wording

Gross margin represents revenue less contract costs. Contract costs consist of all direct and indirect costs on contracts, including raw materials, labor, equipment costs, and subcontractor costs.

Current wording

Gross margin represents revenue less contract costs. Contract costs consist of all direct and indirect costs on contracts, including raw materials, labor, equipment costs, and subcontractor costs. If the estimates of costs to complete fixed-price contracts indicate a further loss, the entire amount of the additional loss expected over the life of the project is recognized in the current period in the cost of revenue.

Previous wording

Equity in earnings (loss) of unconsolidated joint ventures includes our return on investment in unconsolidated joint ventures.

Current wording

Equity in (loss) earnings of unconsolidated joint ventures includes our return on investment in unconsolidated joint ventures.

Previous wording

Projects started after the AECOM Sale Transactions ("Shimmick Projects") have focused on water infrastructure and other critical infrastructure. Revenue recognized on Shimmick Projects was $90 million and $88 million for the three months ended March 29, 2024 and March 31, 2023, respectively. The $2 million increase in revenue was primarily the result of new jobs and jobs ramping up.

Current wording

Projects started after the AECOM Sale Transactions ("Shimmick Projects") have focused on water infrastructure and other critical infrastructure. Revenue recognized on Shimmick Projects was $84 million and $104 million for the three months ended June 28, 2024 and June 30, 2023, respectively. The $20 million decrease in revenue was primarily the result of a $29 million decrease from lower activity on existing jobs and jobs winding down partially offset by a $10 million increase in revenue driven by a new water infrastructure job.

Previous wording

Gross margin recognized on Shimmick Projects was $(1) million and $5 million for the three months ended March 29, 2024 and March 31, 2023, respectively. The decline in the gross margin was primarily the result of jobs winding down and costs tied to pending change orders.

Current wording

Gross margin recognized on Shimmick Projects was $5 million and $9 million for the three months ended June 28, 2024 and June 30, 2023, respectively. The decline in the gross margin was primarily the result of a $7 million decrease driven by increased cost, schedule extensions and jobs winding down and completing partially offset by a $2 million increase in margin from a new water infrastructure job.

Previous wording

As described in Note 12 - Subsequent Events, the Company has entered into an agreement to sell the assets of our non-core foundation projects in the second quarter of 2024 and will be winding down any remaining work during the year. As the revenue will decline during the year, the Company will be reporting revenue related to these projects separately for 2024 ("Foundations Projects"). Revenue recognized on Foundations Projects was $7 million and $20 million for the three months ended March 29, 2024 and March 31, 2023, respectively. The $13 million decline in revenue was the result of timing of multiple jobs winding down.

Current wording

The Company entered into an agreement to sell the assets of our non-core Foundations Projects in the second quarter of 2024 and will be winding down any remaining work during the remainder of the 2024 fiscal year. As a result, revenue from Foundations Projects will decline during the remainder of the 2024 fiscal year. Revenue recognized on Foundations Projects was $8 million and $9 million for the three months ended June 28, 2024 and June 30, 2023, respectively. The $1 million decline in revenue was the result of timing of jobs winding down.

Previous wording

In the Legacy Loss Projects, we have recognized the estimated costs to complete and the loss expected from these projects. If the estimates of costs to complete fixed-price contracts indicate a further loss, the entire amount of the additional loss expected over the life of the project is recognized as a period cost in the cost of revenue. As these Legacy Loss Projects continue to wind down to completion, no further gross margin will be recognized and in some cases, there may be additional costs associated with these projects. Revenue recognized on these Legacy Loss Projects was $15 million and $27 million for the three months ended March 29, 2024 and March 31, 2023, respectively. Gross margin recognized on these Legacy Loss Projects was $(11) million and $(1) million for the three months ended March 29, 2024 and March 31, 2023, respectively, as a result of an additional increases in the cost to complete as well as additional legal fees to pursue contract modifications and recoveries.

Current wording

In the Legacy Loss Projects, we have recognized the estimated costs to complete and the loss expected from these projects. If the estimates of costs to complete fixed-price contracts indicate a further loss, the entire amount of the additional loss expected over the life of the project is recognized as a period cost in the cost of revenue. As these Legacy Loss Projects continue to wind down to completion, no further gross margin will be recognized and in some cases, there may be additional costs associated with these projects. Revenue recognized on these Legacy Loss Projects was $(7) million and $27 million for the three months ended June 28, 2024 and June 30, 2023, respectively, as a result of the settlement discussed above. Gross margin recognized on these Legacy Loss Projects was $(32) million and $(1) million for the three months ended June 28, 2024 and June 30, 2023, respectively, as a result of the settlement of the claim discussed above.

Previous wording

Other expense, net increased by $1 million primarily due to interest expense on the Revolving Credit Facility during the three months ended March 29, 2024 which was not entered into until March 27, 2023.

Current wording

Interest expense increased by $1 million primarily due to interest charges on the Credit Facility which was not entered into until May 20, 2024.

Previous wording

As part of the AECOM Sale Transactions, we assumed the Legacy Projects and backlog that were started under AECOM. Legacy Projects revenue was $23 million, a decline of $33 million as the Company works to complete these projects. Gross margin was $(11) million, a decrease of $11 million as compared to the three months ended March 31, 2023, primarily as a result of projects winding down and additional cost overruns on a subset of these projects ("Legacy Loss Projects") that have experienced significant cost overruns due to the COVID pandemic, design issues and other factors.

Current wording

As part of the AECOM Sale Transactions, we assumed the Legacy Projects and backlog that were started under AECOM. Legacy Projects revenue was $22 million, a decline of $77 million as the Company works to complete these projects. As part of a settlement of a claim on a large Legacy Loss Project, we made a non-cash adjustment to revenue of $23 million to reflect the settlement amount. Gross margin was $(45) million, a decrease of $43 million as compared to the six months ended June 30, 2023, primarily as a result of the settlement, projects winding down and additional cost overruns on Legacy Loss Projects that have experienced significant cost overruns due to the COVID pandemic, design issues and other factors.

Previous wording

Net loss increased by $24 million to a net loss of $33 million for the three months ended March 29, 2024, primarily due to the decrease in gross margin of $22 million as described above and a $2 million decrease in gain on sale of assets as described above.

Current wording

Net loss increased by $65 million to a net loss of $85 million for the six months ended June 28, 2024, primarily due to the settlement, the equity in loss of unconsolidated joint ventures of $9 million, as well as an increase in other expense of $4 million, partially offset by increases in the gain on the sale of assets of $2 million, all as described above.

Previous wording

Adjusted EBITDA represents our Net loss attributable to Shimmick Corporation before interest expense, income tax expense and depreciation and amortization, adjusted to eliminate changes in fair value of contingent consideration, transaction-related costs, stock-based compensation, and legal fees and other costs for a Legacy Loss Project.

Current wording

Adjusted EBITDA represents our Net loss attributable to Shimmick Corporation before interest expense, income tax expense and depreciation and amortization, adjusted to eliminate stock-based compensation, legal fees and other costs for Legacy Projects and other costs. We have also made an adjustment for transformation costs we have and expect to incur including advisory costs as we settle outstanding claims, exit the Legacy Projects and transform the Company into a water-focused business.

Previous wording

(1) Consists of legal fees and other costs incurred in connection with claims relating to a Legacy Loss Project.

Current wording

(2) Consists of legal fees and other costs incurred in connection with claims relating to Legacy Projects.

Previous wording

During the three months ended March 29, 2024 our capital expenditures were approximately $5 million compared to $2 million for the three months ended March 31, 2023. Historically, we have had significant cash requirements in order to organically expand our business to undertake new projects. Our cash requirements include costs related to increased expenditures for equipment, facilities and information systems, purchase of materials and production of materials and cash to fund our organic expansion into new markets, including through joint ventures. Our working capital needs are driven by the seasonality and growth of our business, with our cash requirements greater in periods of growth. Additional cash requirements resulting from our growth include the costs of additional personnel, enhancing our information systems, our compliance with laws and rules applicable to being a public company and, in the future, our integration of any acquisitions.

Current wording

During the six months ended June 28, 2024 our capital expenditures were approximately $8 million compared to $3 million for the six months ended June 30, 2023. Historically, we have had significant cash requirements in order to organically expand our business to undertake new projects. Our cash requirements include costs related to increased expenditures for equipment, facilities and information systems, purchase of materials and production of materials and cash to fund our organic expansion into new markets, including through joint ventures. Our working capital needs are driven by the seasonality and growth of our business, with our cash requirements greater in periods of growth. Additional cash requirements resulting from our growth include the costs of additional personnel, enhancing our information systems, our compliance with laws and rules applicable to being a public company and, in the future, our integration of any acquisitions. Unrestricted cash and cash equivalents at June 28, 2024 totaled $22 million and availability under the Revolving Credit Facility and Credit Facility totaled $7 million and $6 million, respectively, resulting in total liquidity of $35 million. In addition, we expect to receive approximately $33 million in the 2024 fiscal year as a result of the settlement of the claim on a large Legacy Loss Project discussed in Recent Developments.

Previous wording

We believe that our operating, investing and financing cash flows are sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, and significant additional expenditures will be required to conduct our operations. Furthermore, as a result of the completion of our IPO on November 16, 2023, we have incurred and expect to continue to incur additional costs associated with being a public company. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of expenditures and/or seek additional capital. If we seek additional capital, we may do so through joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the expenditures necessary to conduct our operations.

Current wording

We believe that our operating, investing and financing cash flows are sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, and significant additional expenditures will be required to conduct our operations. Furthermore, as a result of the completion of our IPO on November 16, 2023, we have incurred and expect to continue to incur additional costs associated with being a public company. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of expenditures and/or seek additional capital. If we seek additional capital, we may do so through joint ventures, asset sales and sale-leaseback transactions, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the expenditures necessary to conduct our operations.

Previous wording

On March 27, 2023, we entered into the Revolving Credit Facility with MidCap Financial Services, LLC, which originally provided a total commitment of $30 million. The Revolving Credit Facility was subsequently amended on June 30, 2023, September 22, 2023 and May 20, 2024. As amended, the Revolving Credit Facility provides for a total commitment of $33 million and bears interest at an annual rate of adjusted term SOFR, subject to a 1.0% floor, plus 5.50%. Further, the Revolving Credit Facility is subject to an annual collateral management fee of 0.50% and an annual unused line fee of 0.50%. The Revolving Credit Facility includes certain financial operating covenants, including a minimum liquidity requirement of $5 million. As of March 29, 2024, we were not in compliance with the leverage covenant set forth in the Revolving Credit Facility prior to the May 20, 2024 amendment. As a result of the May 20, 2024 amendments, the leverage covenant was replaced with the aforementioned minimum liquidity requirement. As amended, we are currently in compliance with all covenants under the Revolving Credit Facility. The Revolving Credit matures on September 30, 2024.

Current wording

On March 27, 2023, we entered into the Revolving Credit Facility with MidCap Financial Services, LLC, which originally provided a total commitment of $30 million. The Revolving Credit Facility was subsequently amended on June 30, 2023, September 22, 2023, May 20, 2024 and August 14, 2024. As amended, the Revolving Credit Facility provides for a total commitment of $2.8 million and bears interest at an annual rate of adjusted term SOFR, subject to a 1.0% floor, plus 5.50%. Further, the Revolving Credit Facility is subject to an annual collateral management fee of 0.50% and an annual unused line fee of 0.50%. The Revolving Credit Facility includes certain financial operating covenants, including a minimum liquidity requirement of $7.5 million. As of June 28, 2024, we were not in compliance with the Permitted Investments covenant regarding investments in joint ventures set forth in the Revolving Credit Facility. As a result of the August 14, 2024 amendment, which redefined Permitted Investments, we are not aware of any instances of noncompliance with financial covenants. The Revolving Credit Facility matures on August 31, 2024. In the three months ended June 28, 2024, we repaid $17 million of the amount outstanding under the Revolving Credit Facility. As of June 28, 2024 and December 29, 2023, $15 million and $30 million was outstanding under the Revolving Credit Facility, respectively.

Previous wording

The Credit Agreement replaced the Project Financing Agreement. We expect to use the proceeds from the Credit Agreement for general corporate purposes. The Credit Agreement matures on May 20, 2029 (the “Maturity Date”), and the Borrowers may borrow, repay and reborrow amounts under the Credit Agreement until the Maturity Date.

Current wording

The Credit Agreement matures on May 20, 2029 (the “Maturity Date”), and the Borrowers may borrow, repay and reborrow amounts under the Credit Agreement until the Maturity Date.

Previous wording

The Credit Agreement contains customary affirmative and negative covenants for a transaction of this type, including covenants that limit liens, asset sales and investments, in each case subject to negotiated exceptions and baskets. In addition, the Credit Agreement contains a maximum leverage ratio covenant that will be tested starting for the third quarter of fiscal year 2025. The Credit Agreement also contains representations and warranties and event of default provisions customary for a transaction of this type.

Current wording

The Credit Agreement contains customary affirmative and negative covenants for a transaction of this type, including covenants that limit liens, asset sales and investments, in each case subject to negotiated exceptions and baskets. In addition, the Credit Agreement contains a maximum leverage ratio covenant as tested quarterly commencing with the close of the third quarter of 2025. The Credit Agreement also contains representations and warranties and event of default provisions customary for a transaction of this type. The Company is not aware of any instances of noncompliance with financial covenants as of June 28, 2024. As of June 28, 2024, $54 million was outstanding under the Credit Facility.

Previous wording

During the three months ended March 29, 2024, net cash used in operating activities was $35 million, compared to net cash used in operating activities of $26 million for the three months ended March 31, 2023. Cash flows used in operating activities were driven by increased net loss, adjusted for various non-cash items and changes in accounts receivable, due from unconsolidated joint ventures, contract assets, accounts payable, contract liabilities and accrued expenses balances (collectively, “Contract Capital”), as discussed below, accrued salaries and wages and other assets and liabilities.

Current wording

During the six months ended June 28, 2024, net cash used in operating activities was $79 million, compared to net cash used in operating activities of $61 million for the six months ended June 30, 2023. Cash flows used in operating activities were driven by increased net loss, adjusted for various non-cash items and changes in accounts receivable, contract assets, accounts payable, contract liabilities and accrued expenses balances (collectively, “Contract Capital”), as discussed below.

Previous wording

Changes in Contract Capital—The change in operating assets and liabilities varies due to fluctuations and timing in operating activities and Contract Capital. The changes in the components of Contract Capital during the three months ended March 29, 2024 and March 31, 2023 were as follows:

Current wording

Changes in Contract Capital—The change in operating assets and liabilities varies due to fluctuations and timing in operating activities and Contract Capital. The changes in the components of Contract Capital during the six months ended June 28, 2024 and June 30, 2023 were as follows:

Previous wording

During the three months ended March 29, 2024, the decrease in Contract Capital was $19 million, which was primarily driven by decreases in contract assets, accounts payable and contract liabilities. The Company’s Contract Capital fluctuations are impacted by the mix of projects in backlog, seasonality, the timing of new awards and related payments for work performed and the contract billings to the customer as projects are completed. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for projects.

Current wording

During the six months ended June 28, 2024, the decrease in Contract Capital was $10 million, which was primarily due to decreases in accounts payable and contract liabilities. The Company’s Contract Capital fluctuations are impacted by the mix of projects in backlog, seasonality, the timing of new awards and related payments for work performed and the contract billings to the customer as projects are completed. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for projects.

Previous wording

For the three months ended March 29, 2024, net cash used in investing activities was $7 million, which was primarily driven by purchases of property, plant and equipment of $5 million and contributions to unconsolidated joint ventures of $3 million.

Current wording

For the six months ended June 28, 2024, net cash used in investing activities was negligible, which was primarily driven by purchases of property, plant and equipment of $8 million and contributions to unconsolidated joint ventures of $4 million, offset by proceeds from the sale of assets of $11 million.

Previous wording

For the three months ended March 31, 2023, net cash used in investing activities was $2 million, which was primarily driven by purchases of property, plant and equipment of $3 million and contributions to unconsolidated joint ventures of $2 million, partially offset by return of investment in unconsolidated joint ventures of $2 million.

Current wording

For the six months ended June 30, 2023, net cash provided by investing activities was $13 million, which primarily consisted of cash proceeds from an advance on the sale of non-core business contracts of $20 million, proceeds from sale of property, plant and equipment of $5 million, and return of investment in unconsolidated joint ventures of $4 million, partially offset by unconsolidated joint venture equity contributions of $13 million and purchases of property, plant and equipment of $3 million.

Previous wording

For the three months ended March 29, 2024, net cash provided by financing activities was $7 million, which primarily consisted of net borrowings from the Revolving Credit Facility borrowings of $2 million and other notes payable borrowings of $5 million.

Current wording

For the six months ended June 28, 2024, net cash provided by financing activities was $38 million, which primarily consisted of net borrowings from credit facilities of $40 million, partially offset by debt issuance costs incurred for the Credit Facility entered into during the second quarter of 2024.

Previous wording

For the three months ended March 31, 2023, net cash provided by financing activities was $23 million, which primarily consisted of net borrowings from the Revolving Credit Facility borrowings of $23 million.

Current wording

For the six months ended June 30, 2023, net cash provided by financing activities was $29 million, which primarily consisted of proceeds from the Revolving Credit Facility borrowings of $30 million.

Previous wording

Contractual obligations of the Company consisted of liabilities associated with remaining lease payments for the nine months ending December 27, 2024 through the fiscal years ending through December 29, 2028 of approximately $7 million, $9 million, $4 million, $2 million and $2 million, respectively, and approximately $1 million in the aggregate thereafter based on balances outstanding as of March 29, 2024.

Current wording

Contractual obligations of the Company consisted of liabilities associated with remaining lease payments for the six months ending January 3, 2025 through the fiscal years ending through December 29, 2028 of approximately $5 million, $9 million, $4 million, $2 million and $2 million, respectively, and approximately $1 million in the aggregate thereafter based on balances outstanding as of June 28, 2024.

Previous wording

As of March 29, 2024, we had a backlog of projects in excess of $1.0 billion, with over half of that amount comprised of water projects. We believe we have the ability to self-perform many of these projects, enabling us to compete for complex projects and differentiating us from many of our competitors. Self-performance also enables us to better control the critical aspects of our projects, reducing the risk of cost and schedule overruns.

Current wording

As of June 28, 2024, we had a backlog of projects of $923 million with over half of that amount comprised of water projects. We believe we have the ability to self-perform many of these projects, enabling us to compete for complex projects and differentiating us from many of our competitors. Self-performance also enables us to better control the critical aspects of our projects, reducing the risk of cost and schedule overruns.