Southland Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Southland is a specialty infrastructure contractor serving water, transportation, bridge, tunnel, marine and related markets. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $312.5 | $335.1 | $844.2 | $866.6 |
| Gross profit (margin) | $29.5 (9.5%) | $62.4 (18.6%) | $14.7 (1.7%) | $105.1 (12.1%) |
| Operating income (loss) | $14.3 | $46.8 | $(32.6) | $61.7 |
| Net income (loss) attributable to Southland stockholders | $3.8 | $35.2 | $(13.7) | $41.0 |
| Adjusted EBITDA | $22.3 | $59.6 | $(7.1) | $96.2 |
| Cash used in operating activities | — | $(36.6) | $(70.9) |
- Nine-month revenue declined 2.6%, while cost of construction rose 8.9%. Gross profit fell 86.0%; Transportation reported a $12.5 million gross loss for the period, compared with $76.8 million gross profit in 2022.
- Q3 revenue decreased 6.8% year over year. Civil revenue increased 27.0%, but Transportation revenue declined 15.9%. Transportation gross margin fell to 7.7% from 20.3% in Q3 2022.
- At September 30, cash and cash equivalents were $32.2 million, with an additional $14.5 million restricted. Current assets were $908.9 million and current liabilities $548.0 million; contract assets accounted for $515.4 million of current assets.
- Total debt, net, was $309.1 million, including $47.8 million current; debt was $273.6 million at December 31, 2022. The $100 million revolver had $90.0 million drawn and $10.0 million available. Weighted-average debt interest was 6.09%; the company reported compliance with debt covenants.
- The revolver was extended to January 15, 2025. In July, Southland refinanced approximately $76.4 million of secured notes with a $113.5 million equipment note, at a fixed 7.25% rate and a five-year fully amortizing term.
Material changes and unusual items
- Management attributed the sharp profit decline primarily to Materials & Paving (M&P) activity and progress on American Bridge takeover work. In Q3, M&P contributed $47.8 million of revenue and a gross loss of $11.3 million. Southland discontinued certain M&P work and sold related large-scale concrete and asphalt production assets; M&P represented about 11% of backlog at quarter-end, expected to be completed within two years.
- Nine-month other income was $23.6 million, including a $20.7 million noncash reversal related to the contingent earnout liability. The reversal materially affected reported results and Adjusted EBITDA.
- Interest expense increased to $13.8 million for the first nine months from $6.3 million, primarily because of higher borrowings and borrowing costs.
- Following the February 2023 merger, Southland’s former pass-through entities elected to revoke S-corporation status effective January 1, 2023. The tax structure change, valuation allowance release and other tax effects contributed to a $11.4 million nine-month income tax benefit despite a pretax loss.
Outlook, risks and contingencies
- Management described end-market prospects as positive and cited infrastructure spending initiatives and the company’s project capabilities. It provided no specific current-period revenue or earnings guidance in the supplied filing text.
- Backlog was $2.54 billion at September 30, down from $2.97 billion at December 31, 2022. The company expects to recognize approximately 42% of remaining unsatisfied performance obligations as revenue over the next 12 months. Backlog may be affected by cancellations, scope changes and delays.
- Management said operating cash flow, available cash, revolver availability and other financing should meet liquidity needs for at least the next 12 months. It also noted that high merger-related redemptions reduced cash proceeds; additional financing or asset sales may be needed if conditions worsen. Warrants have an $11.50 exercise price, and the company said cash proceeds from exercise should not be relied upon.
- Contract estimates are sensitive to cost-to-complete assumptions, claims and change orders. Unapproved contract modifications included in transaction prices were $180.2 million, and recorded claims assets totaled $288.2 million. Accrued loss provisions rose to $16.7 million from $9.4 million at year-end.
- Risks include project execution and cost overruns, weather and schedule delays, labor and competition, interest rates and access to credit, and the collectability or resolution of claims. Management said the aggregate range of reasonably possible legal losses was immaterial at quarter-end; outcomes remain uncertain.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Transportation project losses, including M&P and American Bridge takeover work, continue to pressure margins, and whether M&P exit plans proceed as expected.
- Cash conversion and working-capital needs, particularly collections of receivables, retainage and contract assets, and the availability of the remaining revolver capacity.
- Progress and eventual collection of the $288.2 million claims asset and $180.2 million of unapproved contract modifications, alongside changes in accrued loss provisions.
- Debt repayment and refinancing needs, borrowing costs, covenant compliance and liquidity beyond the company’s stated 12-month assessment.
- Backlog quality, cancellation or schedule risk, and the pace at which the $2.54 billion balance converts to revenue and profitable work.
- Potential dilution or selling pressure from registered resale shares, earnout shares and warrants; the filing notes the November 9, 2023 common-stock closing price was $5.65, below the $11.50 warrant exercise price.