Executive Summary / Key Takeaways

• Southland Holdings is strategically pivoting beyond challenging legacy and Materials & Paving (M&P) projects, focusing on a high-margin "new core" backlog that constitutes over 90% of its total $2.5 billion.
• The company's differentiated capabilities, including equipment ownership and self-perform expertise, provide a cost advantage and competitive edge in niche civil and transportation markets, particularly in winning alternative delivery contracts.
• Recent financial results show the impact of winding down legacy issues, but Q1 2025 demonstrated improved gross margins driven by the Civil segment and new core work, signaling a potential return to profitability in 2025.
• Significant balance sheet strengthening actions, including debt refinancing and cash collection from dispute settlements, have improved liquidity and financial flexibility to execute on the robust pipeline of opportunities, fueled by infrastructure spending like the IIJA.
• Key risks include the timing and outcome of remaining legacy dispute resolutions and potential impacts from broader economic conditions, though management expresses confidence in their ability to mitigate these factors and capitalize on strong market demand.

Southland Holdings, Inc. stands as a long-tenured participant in North America's infrastructure construction sector, tracing its origins back to 1900. The company has evolved into a specialized leader, operating primarily through two distinct segments: Civil and Transportation. The Civil segment focuses on critical water infrastructure, including pipelines, treatment plants, and tunneling, while the Transportation segment specializes in complex bridges, roadways, and marine structures. This dual focus, supported by key subsidiaries like American Bridge (which recently celebrated its 125th anniversary) and Oscar Renda Contracting, positions Southland in essential, high-barrier-to-entry markets.

The company's strategic journey has been marked by periods of growth and diversification, including the significant acquisition of American Bridge in 2020 and its transition to a public entity in February 2023. However, recent years have seen financial performance heavily impacted by challenges stemming from legacy projects bid in the 2017-2019 timeframe and issues within its Materials & Paving (M&P) business line. These headwinds, exacerbated by factors like the COVID-19 pandemic and associated dispute complexities, have overshadowed the underlying strength of Southland's core capabilities and market position.

Competitive Landscape and Differentiated Capabilities

The infrastructure construction market is highly competitive, featuring a range of players from small regional firms to large global engineering and construction giants like Fluor (FLR), AECOM (ACM), Jacobs Solutions (J), and Quanta Services (PWR). While these larger competitors often boast greater scale, broader diversification, and more extensive investment in digital technologies, Southland carves out its niche through distinct advantages. A key differentiator for Southland is its significant ownership of specialized equipment and its deep expertise in self-performing complex tasks across numerous disciplines. This capability allows Southland to maintain greater control over project execution, manage costs more effectively, and potentially achieve 10-15% lower operating costs in specific areas compared to competitors reliant on subcontracting.

Southland's ability to self-perform, including manufacturing its own tunnel boring machines (TBMs) and steel support structures, provides a tangible cost advantage and operational flexibility. While specific quantitative metrics on the cost savings or performance enhancements from this in-house manufacturing were not detailed, management highlights it as a factor contributing to cost leadership in niche areas like marine work (potentially 10% lower costs) and enabling faster execution (e.g., 20% faster in transportation projects) compared to rivals. This vertical integration, though not framed as cutting-edge digital technology like some competitors employ (e.g., AECOM's AI-driven design tools offering 15-20% faster processing), provides a foundational operational moat. It is particularly valuable in securing alternative delivery contracts, which are increasingly favored by owners and where technical expertise and proven execution track record, rather than just price, are critical evaluation factors. Southland's 120+ year history and extensive resume in specialty projects further bolster its competitive standing in these complex bids, often leading to limited competition with rarely more than one or two bidders.

However, Southland's smaller scale relative to industry giants like Quanta Services can translate to lower overall margins (Q1 2025 consolidated gross margin of 9% vs. competitors often in the 10-18% range) and weaker cash flow generation historically. The company's technological investment appears focused on specialized equipment and self-perform capabilities rather than broad digital integration, potentially leading to lags in areas like project design efficiency compared to tech-forward firms like Jacobs. Despite these challenges, Southland's disciplined bidding approach, focus on core markets, and ability to leverage its specialized assets and expertise position it to capture profitable opportunities, particularly in the current environment where demand for infrastructure services outpaces the supply of qualified contractors.

Performance, Challenges, and Strategic Pivot

Southland's recent financial performance reflects a company in transition, working through legacy issues while building momentum in its core business. For the full year 2024, the company reported a significant gross loss of $63 million on revenue of $980 million, primarily driven by unfavorable adjustments and increased costs associated with the M&P business and certain legacy projects. The Transportation segment, which includes M&P, bore the brunt of these impacts, reporting an $80 million gross loss for the year.

The third and fourth quarters of 2024 saw substantial negative impacts on gross profit from legacy projects and M&P, including $71 million in Q3 2024 (largely non-cash) and $27 million in Q4 2024. These adjustments stemmed from dispute resolutions, schedule delays, and increased completion costs. Revenue also saw declines in these periods compared to the prior year, partly due to project completions and delayed starts.

However, the first quarter of 2025 showed signs of improvement, with a consolidated gross profit of $21.5 million on revenue of $239.5 million, resulting in a gross margin of 9%, up from 7.1% in Q1 2024. This improvement was primarily driven by a strong performance in the Civil segment, which saw revenue increase by 22.1% to $102.9 million and gross margin reach 22.0%. Management attributed this to new, higher-margin projects that started after March 31, 2024. The Transportation segment's results were still impacted by projects nearing completion and the M&P wind-down, contributing a gross profit of $1.2 million (0.8% margin). Excluding M&P, the core Transportation segment achieved a 7% gross margin in Q1 2025.

Liquidity and the balance sheet have been a key focus.

Net cash provided by operating activities turned positive in Q1 2025 at $6.4 million, a notable improvement from a $9.9 million use in Q1 2024. This was supported by favorable changes in working capital. Strategic actions in 2024 significantly bolstered the balance sheet, including a $42.5 million real estate transaction in July (providing approximately $25 million in cash and $16 million debt reduction) and securing a $160 million term loan facility in September, refinancing existing debt and extending maturities to 2028. Furthermore, the company collected $58 million in cash from legacy dispute settlements in Q3 2024 and expects further significant cash inflows from resolving remaining claims.

As of March 31, 2025, total debt stood at $288.1 million, with $46.8 million due within twelve months, and the company was in compliance with its debt covenants.

Outlook and Future Opportunities

Management expresses confidence in a return to profitability and positive EBITDA in 2025, driven by the anticipated wind-down of legacy and M&P projects and the ramp-up of the "new core" backlog. The M&P business, which contributed negatively to results, is expected to be substantially complete by the end of 2025. Similarly, the majority of non-M&P legacy work is expected to conclude by the end of 2025, significantly reducing the drag on overall margins.

The "new core" backlog, representing over 90% of the total $2.5 billion backlog as of March 31, 2025, is performing at strong double-digit margins. Management expects approximately 40% of the total backlog to be recognized as revenue in the next twelve months. The pipeline of upcoming opportunities is described as robust, fueled by significant government spending initiatives like the IIJA and sustained state-level investment in Texas and Florida. The EPA's estimate of $630 billion needed for clean water infrastructure over the next 20 years highlights a massive addressable market where Southland holds a strong competitive position (ranked third in water transmission lines).

Upcoming opportunities include large civil projects like the $450 million Black Creek Tunnel in Toronto and packages from the $600 million Jordan Lake Water Supply program and $2 billion Northern Colorado Water Glades Reservoir program. In transportation, opportunities include bridge projects in the Northeast and Florida, and potential involvement in the Francis Scott Key Bridge rebuild. The company is also strategically targeting smaller, shorter-duration projects ($30 million to $150 million) to generate quicker cash flow and maximize resource utilization, particularly within the Civil segment. Management anticipates new awards to pick up in the latter half of 2025.

Key assumptions for this positive outlook include the successful resolution and collection of cash from remaining legacy claims, the continued robust demand for infrastructure services, and the effective ramp-up of large new core projects like the $600 million Shands Bridge and $410 million Robert F. Kennedy Bridge rehab. While risks such as the timing uncertainty of dispute settlements, potential increases in input costs from tariffs, and weather impacts persist, management's focus on disciplined bidding, balance sheet strength, and leveraging core competencies are intended to mitigate these factors.

Conclusion

Southland Holdings is navigating a critical juncture, actively working to move past the financial drag of legacy projects and the M&P wind-down. While recent results have reflected these challenges, the first quarter of 2025 provided a glimpse of the potential inherent in the company's core business, with improved margins driven by the Civil segment and new, profitable work. The strategic pivot towards a high-margin "new core" backlog, coupled with significant actions to strengthen the balance sheet and improve liquidity, forms the cornerstone of the investment thesis.

The company's differentiated capabilities in specialized equipment ownership and self-perform execution provide a competitive moat, enabling it to secure complex projects with limited competition and capitalize on the growing trend of alternative delivery contracts. With a robust pipeline of opportunities fueled by substantial government infrastructure spending and a clear focus on disciplined growth and operational excellence, Southland appears poised for a return to profitability in 2025. Investors should monitor the progress in resolving remaining legacy disputes and the successful ramp-up of the new core backlog as key indicators of the company's trajectory towards sustainable long-term value creation.