Southland Holdings, Inc. — Q2 2023 Form 10-Q
Business context and period: Specialty infrastructure contractor serving transportation and civil markets. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. The February 2023 business combination was accounted for as a reverse recapitalization. Amounts below are USD millions unless noted.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $256.9 | $273.0 | $531.8 | $531.5 |
| Gross profit (loss) | $(33.8) | $37.7 | $(14.9) | $42.7 |
| Gross margin | (13.2)% | 13.8% | (2.8)% | 8.0% |
| Operating income (loss) | $(50.2) | $24.2 | $(46.9) | $14.9 |
| Net income (loss) attributable to Southland stockholders | $(12.8) | $19.4 | $(17.5) | $5.8 |
| Adjusted EBITDA | $(42.2) | $35.3 | $(29.4) | $36.6 |
- Cash flow: Six-month operating cash use was $10.6, improved from $81.9 used in 2022, supported by increases in contract liabilities and accounts payable. Investing activities provided $2.2; financing activities used $9.7. Cash and restricted cash totaled $54.1 at June 30, down from $72.0 at year-end 2022.
- Debt and liquidity: Total debt, net, was $284.5, including $51.3 due within 12 months. The $100.0 revolving facility was $98.0 drawn, leaving $2.0 available; weighted-average debt interest rate was 4.56%. The company reported compliance with debt covenants. Current liabilities were $567.4 versus current assets of $899.5.
- Working capital and contracts: Receivables were $183.4, retainage receivables $125.2, and contract assets $508.4. Contract liabilities rose to $197.3 from $131.6 at year-end. Accrued loss provisions increased to $21.4 from $9.4. Unapproved contract modifications included in transaction prices were $192.0, up from $144.2.
- Backlog: $2.698 billion at June 30, down from $2.974 billion at December 31, 2022. Remaining unsatisfied performance obligations were also reported at $2.698 billion; about 44% is expected to be recognized as revenue within the next 12 months. Backlog can be delayed, canceled, or adjusted.
Material changes versus prior periods
- Q2 revenue fell 5.9%, while six-month revenue was essentially flat. Civil revenue declined 12.4% in Q2; Transportation revenue declined 3.4%.
- Transportation gross profit swung to a $39.7 loss in Q2 from $25.3 profit a year earlier. Civil remained profitable, but its Q2 gross margin declined to 9.0% from 16.6%.
- Management attributed the deterioration primarily to Materials & Paving (M&P), American Bridge takeover work, and a Midwest bridge project loss. Q2 cost of construction rose 23.6% despite lower revenue.
- SG&A increased 21.9% in Q2, partly due to costs of becoming a public company. Interest expense more than doubled in Q2, reflecting higher borrowing and rates.
- Q2 other income was $24.0, compared with $0.8 of expense in Q2 2022. The six-month cash-flow reconciliation identifies a $20.7 noncash gain from a change in fair value of the earnout liability; this materially affected reported results. A tax benefit of $18.6 in Q2 also reduced the net loss.
Outlook, management commentary, and risks
- In Q2, Southland decided to exit certain large-scale concrete and asphalt production activities and sold related assets. It recorded a $49.0 negative gross-profit impact in Q2 from expected higher third-party material procurement and transport costs on remaining M&P work; M&P had contributed a further $11.0 to gross loss in Q1. About 12% of backlog remained in M&P, expected to take roughly two years to complete. The company said the change was not a strategic shift qualifying for discontinued-operations treatment.
- Management described end-market prospects as positive and believes it is positioned to compete for infrastructure projects, but provided no numeric 2023 earnings or revenue guidance. It stated that operating cash flow, cash, revolver availability, and other financing should meet liquidity needs for at least 12 months, while noting dependence on operating results and access to credit or additional financing.
- Southland cited high merger redemptions: 91.7% of shares eligible for redemption were redeemed, limiting cash proceeds from the transaction. It said it may pursue borrowing, asset sales, or claim settlements to support liquidity. Warrants have an $11.50 exercise price; the common stock closed at $8.33 on August 9, 2023, making significant cash proceeds from warrant exercises uncertain.
- Subsequent events: On July 5, 2023, the company refinanced about $76.4 of secured notes with a $113.5 five-year, fully amortizing equipment note at a fixed 7.3%; about $8.0 of proceeds repaid the revolver. On August 11, the revolver was extended through January 2025.
- Key exposures include project cost-estimate changes, claims and unapproved change orders, weather and schedule delays, customer cancellations, labor and materials availability, interest rates, foreign currency, litigation and government inquiries, and potential dilution or selling pressure from registered resale shares and warrants. The filing says reasonably possible legal loss ranges were immaterial at June 30; outcomes remain uncertain.
Important facts for investors to verify
- Whether the M&P exit and remaining-project cost assumptions adequately capture the full expected losses, and whether further loss provisions are needed.
- Progress and collectability of the $192.0 in unapproved modifications and the $319.0 of recorded claims, including the timing and cash impact of settlements.
- Project-level cost-to-complete estimates, particularly for the Midwest bridge, American Bridge takeover work, and projects nearing completion.
- Liquidity and refinancing capacity after the equipment-note refinancing, including revolver availability, debt maturities, covenant compliance, and cash conversion from receivables and contract assets.
- Whether backlog converts to revenue and cash as expected, given its decline and the stated possibility of delays, cancellations, and scope changes.
- The noncash earnout fair-value reversal, tax benefits, and their effects on reported earnings versus underlying operating performance; also monitor potential share-sale overhang and warrant-related dilution.