Southland Holdings, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Southland is a specialty infrastructure construction company serving transportation and civil markets, including bridges, tunnels, marine facilities, water pipelines, and treatment plants. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. The February 14, 2023 business combination with Legato II was accounted for as a reverse recapitalization; historical results reflect Southland as the accounting predecessor. Accordingly, pre-Q1 2023 periods do not include comparable per-share data.
Financial and operating results
Unless noted otherwise, amounts are in millions of dollars.
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $274.8 | $258.5 | Up 6%; Transportation growth more than offset a Civil decline. |
| Gross profit / margin | $18.9 / 6.9% | $4.9 / 1.9% | Improved substantially, primarily due to Transportation project performance. |
| Operating income (loss) | $3.4 | $(9.4) | Turned positive. |
| Net loss attributable to Southland stockholders | $(4.7) | $(13.6) | Loss narrowed; Q1 2023 loss per share was $(0.11). |
| Adjusted EBITDA | $12.7 | $1.4 | Non-GAAP measure; increase reflected higher gross profit. |
| Cash from operating activities | $(34.8) | $(37.7) | Cash use remained substantial, driven in part by receivables and contract assets. |
Transportation revenue rose 10% to $201.8 million and gross profit improved to $10.2 million from a $2.0 million loss. Civil revenue declined 3% to $73.0 million, while gross profit increased to $8.8 million. SG&A rose 9% to $15.6 million, which management attributed partly to public-company costs. Interest expense increased 65% to $3.3 million as borrowings and borrowing costs rose.
Income tax expense was $1.8 million despite a pre-tax loss, producing a negative 69.75% effective tax rate. The filing attributes the unusual tax result mainly to the merger-related change in tax filing structure and deferred-tax accounting, including a $5.0 million expense, partly offset by a $3.8 million valuation-allowance benefit.
Liquidity, debt, and balance sheet
At March 31, 2023, cash and cash equivalents were $28.9 million and restricted cash was $14.6 million, versus $57.9 million and $14.1 million, respectively, at year-end. Combined cash and restricted cash declined $28.4 million during the quarter. Current assets were $915.6 million and current liabilities $523.4 million; contract assets of $543.1 million were a substantial portion of current assets.
Debt, net of deferred financing costs, was $295.4 million, including $52.7 million due within twelve months. The $100 million revolving facility was drawn to $98 million, leaving $2 million available. Weighted-average debt interest was 4.4%; the company reported compliance with its debt covenants. Management said available cash, operating cash flow, revolver availability, and other financing should meet liquidity needs for at least twelve months, while cautioning that additional financing may be needed if conditions deteriorate.
Changes, outlook, and notable items
- Remaining unsatisfied performance obligations were $2.862 billion at March 31, 2023, versus $1.999 billion a year earlier. The company expects approximately 45% to be recognized as revenue over the next twelve months. Backlog was $2.862 billion, down from $2.974 billion at December 31, 2022; it is subject to project delays, cancellations, and scope changes.
- Management described end-market prospects as positive and cited infrastructure investment and the company’s technical capabilities as opportunities. The filing provides no formal earnings or revenue guidance.
- High business-combination redemptions—91.7% of shares with redemption rights—limited transaction cash proceeds; Southland received $17.1 million in merger proceeds. Management stated it did not expect this alone to materially harm operations or financial position.
- A $50 million pre-merger dividend is payable under a four-year promissory note bearing 7% interest. A $23.6 million earnout liability was recorded; 3,448,283 earnout shares were issued on April 27, 2023 after 2022 targets were met.
- Unapproved contract modifications included in transaction prices were $90.8 million, down from $203.5 million a year earlier. Claims-related assets were $309.4 million, up from $260.8 million at year-end. Estimates, negotiation outcomes, and collection timing may affect reported results and cash flows.
- Risks include project cost and completion estimates, weather and labor availability, working-capital demands, interest-rate exposure, and legal or government inquiries. Management said the aggregate reasonably possible legal loss was immaterial at quarter-end. The company also warned that potential resales of registered shares could pressure the stock; warrants may produce little or no cash proceeds if the share price remains below the $11.50 exercise price.
- Management considered disclosure controls effective. Internal-control design and implementation work is ongoing following the business combination.
Key facts investors should verify
- Whether operating cash flow improves as receivables and contract assets convert to billings and cash.
- Availability of liquidity given the nearly fully drawn revolver, scheduled debt maturities, and the $50 million dividend note.
- Project-level margins, cost-to-complete estimates, and realization of the $90.8 million in unapproved modifications and $309.4 million in claims-related assets.
- Backlog conversion, including timing and margin quality, and whether new awards offset completed projects.
- Effects of share resales, earnout and incentive-plan dilution, and warrant terms on share count and potential financing proceeds.