Southland Holdings 2026 Q3 Earnings Call

Good morning, everyone, and welcome to the Southland Third Quarter 2026 Conference Call. This is Alex Murray, Vice President of Corporate Development and Investor Relations. Joining me today are Frank Renda, President and Chief Executive Officer, and Keith Bassano, Chief Financial Officer. Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Forward-looking statements are uncertain and outside of Southland's control. Southland's actual results and financial condition may differ materially from those projected in forward-looking statements. Therefore, you should not rely on any of these forward-looking statements, and we do not undertake any duty to update these statements.

For a discussion of some of the risks that could affect results, please see the Risk Factor section of our Form 10-K for the year ended December 31, 2025, that was filed with the SEC on March 26, 2026, and the discussion in our Form 10-Q for the quarter ended September 30, 2026, that was filed with the SEC last night. We also refer to non-GAAP financial measures, and you will find reconciliations in the press release relating to this conference call, which can be found on the Investors Relations page of our website. With that, I will now turn the call over to Frank.

Thank you, Alex. Good morning, and thank you for joining Southland's Third Quarter 2026 Conference Call. Before we review the quarter, I would like to highlight some recent operational successes from our teams. Our Johnson Brothers team was recognized with two 2026 ENR Southeast Best Projects Awards in the Highway Bridge category. Our Jupiter Federal Bridge Replacement Project in Jupiter, Florida, was named Best Project, and our Kirkman Road Extension in Orlando, Florida, received an Award of Merit. Congratulations to both project teams on this well-deserved recognition. Turning to the overall business, I will start with an update on our capital structure and review our third quarter results. Then I will discuss recent awards and the opportunities we see ahead in our markets. In the third quarter, we executed the Financial Assistance Agreement and the Second Amendment to our Term Loan Facility, which formalized the support our sureties have been providing.

As we discussed on our last call, a portion of the non-bonding financing provided under the Financial Assistance Agreement is expected to convert into senior non-voting preferred shares. The preferred shares will have perpetual maturity and are not convertible into any other securities of the company. We have extended the date for issuing the preferred shares to December 18, and we continue to work closely with the sureties on finalizing the conversion. The sureties' continued support reflects confidence in our plan and our execution, and that execution started to show in our results this quarter. Third quarter revenue was $234 million, and gross profit was $21 million, or 9% of revenue. The quarter's performance was driven by our civil segment, which produced a 13% gross margin, led by strong results on a data center project and a wastewater treatment plant project in the Southwest.

We produced net income of $34 million in the quarter, driven by stronger operational performance, lower SG&A expense, a lower interest rate under our amended Term Loan, and the Washington State Convention Center settlement, which Keith will discuss in more detail. This is an important step, but we still have work ahead as we execute our plan. As part of our larger plan, we continue to focus on bidding with discipline on new high-margin opportunities that align with our core capabilities. We finished the quarter with $1.71 billion of backlog, up from $1.68 billion at the end of the second quarter. With the financing agreement in place, our bidding activity picked up this quarter, and we began converting those opportunities into awards. In the third quarter, new awards were approximately $271 million.

This was led by the $196 million Phase 3 Winnipeg North End Sewage Treatment Plant and a $71 million water pipeline project in the Southwest. The market backdrop across our core end markets also remains positive. State and local infrastructure funding continues to translate into active procurement for water, bridge, marine, and tunnel work. At the federal level, the surface transportation authorization under the Infrastructure Investment and Jobs Act expired at the end of September, and Congress extended certain programs through December 11 while it works on a longer-term reauthorization. The timing of a new bill remains uncertain, but a significant portion of IIJA funding has yet to be spent and should continue to support state and local programs over the next several years. We are encouraged by the bipartisan support for reauthorization, and we believe the funding environment for our core markets remains healthy.

We also continue to see strong demand for data center projects, which give us additional strong margin work for our crews, which complements our core water, bridge, marine, and tunnel markets. Over the longer term, we believe that that diversity of end markets positions us well to adapt as market demand shifts. This morning, we announced a $34 million tunnel project award in the Southwest, along with additional data center work in the Mid-Atlantic and the Southwest. The work in the Southwest is on an existing site of a data center project we announced earlier this year. The final contract value on the data center awards will depend on the amount of work performed, as directed by the customer. We expect these to start as short duration, strong margin projects that can grow in scope over time.

We are also completing a pre-construction contract with a major cruise facility client in the Caribbean, with the intent to negotiate a progressive design-build contract in the coming months. We also have several outstanding bids, including two data center opportunities, a water resource opportunity in the Southwest, two bridge projects in the Southeast, several marine opportunities in the Caribbean, the MoDOT Liberty Bend Bridge design-build in Missouri, and the Claiborne Pell Bridge rehab in Rhode Island. We expect to hear back on these pursuits in the coming months.

Additional opportunities in our pipeline include the Outerbridge Crossing repairs for the Port Authority of New York and New Jersey, the Veterans Drive Contract 2 project in St. Thomas, the G.E. Booth Outfall Tunnel for the Region of Peel, a transmission pipeline in North Dakota, the Marine Creek Sanitary Sewer Interceptor for the City of Fort Worth, Brookhollow Interceptor for Dallas Water Utilities, and Duckabush Restoration Project for the US Army Corps of Engineers. We are also tracking multiple bridge dehumidification rehab projects, including the Bronx Whitestone Bridge, Throgs Neck Bridge, San Francisco-Oakland Bay Bridge, and the Claiborne Pell, and multiple other water, tunnel, marine, and bridge opportunities across our core markets. The pipeline remains strong, and we expect to win our fair share of upcoming opportunities. To summarize, we are starting to see positive momentum in the business.

We delivered a profitable third quarter and booked strong new awards, growing our backlog to $1.71 billion. Demand in our core markets with both public and private clients remains strong. We are awaiting decisions on multiple outstanding bids across our end markets that could convert into new awards in the coming months. We are encouraged by this progress, but there is more to do. Our near-term priorities remain completing the preferred share issuance, finishing our remaining legacy projects, collecting on money we are owed on outstanding disputes, and continuing to convert our pipeline into profitable new awards. With that, I will turn the call over to Keith for a financial update.

Thank you, Frank, and good morning, everyone. I will discuss an overview of our financial performance during the third quarter of 2026. You can find additional details and information in the financial statements, footnotes, and management's discussion and analysis that were filed on Form 10-Q last night. Revenue in the third quarter was $233.8 million, compared to $213.3 million in the same period in 2025, an increase of $20.4 million, or 9.6%. Gross profit in the quarter was $20.6 million, or 8.8% of revenue, compared to gross profit of $1.9 million, or 0.9% of revenue in the third quarter of 2025. As Frank described, the improvement was primarily driven by our new core work, including a data center project and a wastewater treatment plant in the Southwest, partially offset by negative impacts from a materials and paving project and a water project in the Midwest.

Selling, general, and administrative expenses in the third quarter were $13.6 million, a decrease of $1 million, or 6.6%, compared to the same period in 2025. The decrease was primarily driven by a $1.9 million reduction in compensation expense, partially offset by an approximately $1 million increase in business transformation expense. Selling, general, and administrative expenses were 5.8% of revenue in the quarter, compared to 6.8% in the third quarter of 2025. Operating income was $7 million, compared to an operating loss of $12.6 million in the third quarter of 2025. Other income net was $32.4 million, compared to $2 million in the prior year period. This included a $28.7 million gain on the extinguishment of a surety payable from our settlement with one of our surety partners related to the Washington State Convention Center judgment.

Interest expense in the quarter totaled $4.1 million, a decrease of $5.1 million, or 55.2%, compared to the same period in 2025. The decrease was primarily driven by a $2.8 million adjustment to previously recorded interest expense, because the lower interest rate under the second amendment applies retroactively to March 17 of this year. On a go-forward, we expect interest expense to be approximately $6 million per quarter. We recorded tax expense of $0.5 million for the quarter, compared to $57.2 million in the same period last year, which reflected the valuation allowance we recorded against our domestic deferred tax assets in the third quarter of 2025.