Business Overview and History
Southland Holdings, Inc. (SLND) is a leading provider of specialized infrastructure construction services, with roots dating back to 1900. The company has grown to become one of the largest infrastructure construction companies in North America, serving a diverse range of end markets including bridges, tunnels, transportation and facilities, marine, steel structures, water and wastewater treatment, and water pipelines.
Southland Holdings, Inc. has a rich history spanning over a century. Founded in 1900 as a small regional construction firm in Texas, the company has undergone significant growth and transformation over the decades. Through a series of strategic acquisitions, Southland expanded its geographic footprint and diversified its service offerings, establishing itself as a major player in the infrastructure construction industry.
A pivotal moment in Southland's history came in 2020 with the acquisition of American Bridge Company, a renowned builder of specialty construction projects. This move significantly enhanced Southland's capabilities, allowing the company to take on larger and more complex projects across North America, including bridges, tunnels, marine facilities, and other critical transportation infrastructure.
The early 2020s presented challenges for Southland, including the impact of the COVID-19 pandemic on the construction industry. However, the company demonstrated its resilience by focusing on cost management and strategically bidding on projects that aligned with its core strengths. This approach allowed Southland to navigate the difficult period while maintaining its position as a leading provider of infrastructure construction services.
In 2023, Southland underwent a transformative event when it merged with Legato Merger Corp. II, a special purpose acquisition company. This merger marked Southland's transition to a publicly traded company, providing access to additional capital and resources to support its growth initiatives. The transaction also necessitated enhancements to Southland's corporate governance and reporting practices to meet the requirements of a public company.
Today, Southland operates through six primary subsidiaries - Johnson Bros. Corporation, American Bridge Holding Company, Oscar Renda Contracting, Southland Contracting, Mole Constructors, and Heritage Materials. These subsidiaries provide Southland with a diverse set of expertise and allow the company to tackle a wide range of specialized infrastructure projects across North America.
Financial Performance and Outlook
Southland's financial performance has been mixed in recent years. In fiscal year 2023, the company reported revenue of $1.16 billion and a net loss of $19.25 million. The company's gross profit margin declined from 12.2% in 2022 to just 3.1% in 2023, primarily due to challenges in the company's Materials & Paving business line.
However, the company's new core business, which excludes the Materials & Paving segment, delivered mid-teen margins in 2023, underscoring the strength of Southland's diversified portfolio and strategic initiatives. As of the latest 10-Q filing in 2024, Southland reported a total backlog of $2.74 billion, with $2.5 billion in its new core business, providing strong visibility into future revenue and profitability.
Financials
For the most recent fiscal year (2023), Southland reported revenue of $1.16 billion, a net loss of $19.25 million, operating cash flow of -$10.26 million, and free cash flow of -$21.11 million. In the most recent quarter (Q3 2024), the company reported revenue of $173.32 million, a net loss of $54.73 million, operating cash flow of -$5.29 million, and free cash flow of -$7.27 million. Year-over-year revenue decreased by 44.5% from Q3 2023 to Q3 2024.
Southland operates through two main reportable segments: Civil and Transportation. In the nine months ended September 30, 2024, the Civil segment generated $219.49 million in revenue (30.8% of total revenue) with a gross profit of $8.69 million (4.0% gross margin). The Transportation segment generated $493.44 million in revenue (69.2% of total revenue) with a gross loss of $79.40 million (-16.1% gross margin).
The Civil segment experienced a 9.8% decrease in revenue for the nine-month period, primarily due to lower revenue from a tunnel project in Canada, partially offset by increased revenue from a water pipeline project in the Southwest. The Transportation segment saw a 19.8% decrease in revenue, mainly attributed to lower revenue from the Materials Paving business line and certain projects in the Bahamas and Texas.
Geographically, the majority of Southland's customers are located in the United States. Revenue earned outside of the US was 11% in Q3 2024, down from 25% in Q3 2023.
The company has also taken steps to strengthen its balance sheet, including the recent closing of a $160 million senior secured term loan facility. This financing has enabled Southland to refinance existing debt and provide additional liquidity to support its growth initiatives.
Liquidity
As of September 30, 2024, Southland reported a debt-to-equity ratio of 2.19, cash balance of $91.38 million, a current ratio of 1.48, and a quick ratio of 1.48. The company entered into a $160 million senior secured term loan facility in September 2024, consisting of a $140 million initial draw term loan and a $20 million committed delayed draw term loan. This new facility, along with a $42.5 million real estate sale-leaseback transaction completed in the third quarter, has provided Southland with additional financial flexibility to execute on its backlog and pursue new opportunities.
Looking ahead, Southland's management has expressed confidence in the company's ability to return to profitability in 2025, driven by the strong performance of its new core business and the continued burnoff of its legacy Materials & Paving projects. The company expects the remaining $180 million in Materials & Paving backlog to be substantially complete by the end of 2025, with one project extending into 2026 but expected to be immaterial by that point. Additionally, the remaining $105 million in non-Materials & Paving legacy backlog is expected to be substantially complete by the end of 2025.
The company's pipeline of opportunities across its Civil and Transportation segments remains robust, with the potential for significant growth in the coming years. Southland ended the third quarter of 2024 with a backlog of $2.74 billion, which was essentially flat compared to the prior quarter and up from $2.54 billion in the third quarter of 2023. The company booked approximately $140 million of new awards during the third quarter of 2024, including a $132 million water treatment plant project for the Bureau of Reclamation.
In terms of financial guidance, Southland expects interest expense to be approximately $9.5 million per quarter on a go-forward basis. The company also anticipates an effective tax rate in the 20% to 24% range going forward, depending on tax credits, non-deductible items, and state/local taxes.
Risks and Challenges
While Southland's diversified business model and strategic initiatives have positioned the company for long-term success, the company faces several risks and challenges that investors should be aware of.
One of the primary risks is the company's exposure to the cyclical nature of the construction industry, which can be influenced by macroeconomic factors such as changes in spending patterns, consumer preferences, and the availability of skilled labor. Additionally, the company's operations are subject to various regulatory requirements and environmental considerations, which can impact project timelines and costs.
Southland has also faced challenges related to the performance of its Materials & Paving business line, which has significantly weighed on the company's overall financial results in recent years. While the company has taken steps to wind down this segment, the potential for further unexpected losses or delays cannot be overlooked.
Furthermore, the infrastructure construction industry is highly competitive, with Southland facing stiff competition from both regional and national players. The company's ability to maintain its competitive edge and secure profitable projects will be crucial to its long-term success.
Industry Trends and Opportunities
The construction industry, particularly the infrastructure sector, is experiencing strong demand driven by government initiatives such as the Infrastructure Investment and Jobs Act. This has created a favorable market environment for Southland, providing opportunities for growth and expansion in its key markets.
In the second quarter of 2023, Southland made a strategic decision to discontinue certain types of projects in its Materials Paving business line and sold related assets. This move was aimed at better focusing the company's resources on more profitable lines of business, aligning with the broader industry trend of specialization and efficiency.
Conclusion
Southland Holdings, Inc. is a diversified infrastructure construction giant with a rich history and a promising future. The company's strategic initiatives, including the acquisition of American Bridge and the focus on its new core business, have positioned it for potential growth in the coming years. However, investors should closely monitor the company's financial performance, particularly the continued burnoff of its legacy Materials & Paving projects, as well as the broader industry risks and competitive landscape.
With a strong backlog of $2.74 billion, a strengthened balance sheet, and experienced management, Southland appears well-positioned to capitalize on the growing demand for infrastructure investment in North America. The company's focus on resolving disputes and change orders related to legacy projects, combined with its strong pipeline of new opportunities, provides a foundation for improved financial performance in the future. As Southland continues to execute on its strategic initiatives and navigate industry challenges, it remains a noteworthy player in the specialized infrastructure construction sector.