Southland Holdings, Inc 8-K/A, filed Mar 22, 2023
Southland Holdings, Inc. (SLND)
About this 8-K/A
Southland Holdings, Inc filed this 8-K/A on March 22, 2023, reporting on events of February 14, 2023.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Explanatory Note
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited consolidated financial statements of Southland as of December 31, 2022 and 2021 and for each of the years in the three-year period ended December 31, 2022 are filed herewith as Exhibit 99.1.
Also included herewith as Exhibit 99.2 and incorporated by reference herein is the related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Southland.
(d) Exhibits.
| Exhibit No. | Description | |
| 99.1 | Audited consolidated financial statements of Southland Holdings LLC as of December 31, 2022 and 2021 and for each of the years in the three-year period ended December 31, 2022. | |
| 99.2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations of Southland Holdings LLC. | |
| 104 | The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 101). |
1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Dated: March 22, 2023 | SOUTHLAND HOLDINGS, INC. | ||
| By: | /s/ Frank S. Renda | ||
| Name: | Frank S. Renda | ||
| Title: | President and Chief Executive Officer | ||
2
Exhibit 99.1
SOUTHLAND
HOLDINGS LLC
Consolidated Financial Statements
Years Ended December 31, 2022, 2021 and 2020
Contents
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Southland Holdings, LLC
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Southland Holdings, LLC and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Claims and estimates to complete associated with long-term contracts
As described further in Notes 2 and 7 to the financial statements, revenues derived from long-term contracts are recognized as the performance obligations are satisfied over time. The Company uses the input method, measured by the percentage of cost incurred to date to estimated total costs for each project to recognize revenue. Under the input method, the determination of the progress towards completion requires management to prepare estimates of the costs to complete. In addition, the Company’s contracts may include variable consideration related to contract modifications through claims, and management must estimate the timing and amount of claims revenue to recognize. We identified claims and estimates to complete associated with long-term contracts as a critical audit matter.
The principal consideration for our determination that estimates to complete associated with long-term contracts is a critical audit matter is that auditing management's estimate of the progress toward completion of its projects was complex and subjective. This is due to the considerable auditor judgment required to evaluate management's determination of the forecasted costs to complete its long-term contracts as future results may vary significantly from past estimates due to changes in facts and circumstances. In addition, the principal consideration for our determination that claims associated with long-term contracts is a critical audit matter is that auditing the Company's measurement of variable consideration is complex and highly judgmental and can have a material effect on the amount and timing of revenue recognized.
Our audit procedures related to the claims and estimates to complete associated with long-term contracts included the following, among others:
| ● | For a selection of long-term contracts, we evaluated the reasonableness of significant assumptions used to develop the estimates to complete by conducting interviews with project personnel and performing a retrospective analysis using historical actual costs and trends. |
| ● | We tested the completeness and accuracy of the costs incurred to date and the total estimated costs for a sample of long-term contracts. |
| ● | For a selection of long-term contracts, we tested the estimated variable consideration related to recorded claims revenue by evaluating the likelihood of a significant reversal of revenue at a later date, and tracing amounts to supporting documentation. |
| /s/ GRANT THORNTON LLP |
We have served as the Company’s auditor since 2022.
Dallas,
Texas
March 22, 2023
F-3
Consolidated Balance Sheets
| As of | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Cash and cash equivalents | $ | 57,915 | $ | 63,342 | ||||
| Restricted cash | 14,076 | 47,900 | ||||||
| Accounts receivable, net | 135,678 | 126,702 | ||||||
| Retainage receivables | 122,682 | 110,971 | ||||||
| Contract assets | 512,906 | 374,624 | ||||||
| Other current assets | 24,047 | 22,977 | ||||||
| Total current assets | 867,304 | 746,516 | ||||||
| Property and equipment, net | 114,084 | 156,031 | ||||||
| Right-of-use assets | 16,893 | 15,816 | ||||||
| Investments - unconsolidated entities | 113,724 | 103,610 | ||||||
| Investments - limited liability companies | 2,590 | 1,926 | ||||||
| Investments - private equity | 3,261 | 3,925 | ||||||
| Goodwill | 1,528 | 1,528 | ||||||
| Intangible assets, net | 2,218 | 3,215 | ||||||
| Other noncurrent assets | 3,703 | 3,186 | ||||||
| Total noncurrent assets | 258,001 | 289,237 | ||||||
| Total assets | 1,125,305 | 1,035,753 | ||||||
| Accounts payable | $ | 126,385 | $ | 146,455 | ||||
| Retainage payable | 33,677 | 32,706 | ||||||
| Accrued liabilities | 121,584 | 115,057 | ||||||
| Current portion of long-term debt | 46,322 | 41,333 | ||||||
| Short-term lease liabilities | 16,572 | 20,048 | ||||||
| Contract liabilities | 131,557 | 111,286 | ||||||
| Total current liabilities | 476,097 | 466,885 | ||||||
| Long-term debt | 227,278 | 195,597 | ||||||
| Long-term lease liabilities | 10,032 | 13,496 | ||||||
| Deferred tax liabilities | 3,392 | 5,962 | ||||||
| Other noncurrent liabilities | 48,622 | 51,462 | ||||||
| Total long-term liabilities | 289,324 | 266,517 | ||||||
| Total liabilities | 765,421 | 733,402 | ||||||
| Commitment and contingencies (Note 18) | ||||||||
| Noncontrolling Interest | 10,446 | 11,057 | ||||||
| Members’ capital | 327,614 | 267,831 | ||||||
| Preferred stock | 24,400 | 24,400 | ||||||
| Accumulated other comprehensive income | (2,576 | ) | (937 | ) | ||||
| Total equity | 359,884 | 302,351 | ||||||
| Total liabilities and equity | $ | 1,125,305 | $ | 1,035,753 | ||||
See accompanying notes to the consolidated financial statements
F-4
SOUTHLAND
HOLDINGS, LLC
Consolidated Statements of Operations
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Revenue | $ | 1,161,431 | $ | 1,279,186 | $ | 1,057,936 | ||||||
| Cost of construction | 1,020,497 | 1,164,998 | 964,536 | |||||||||
| Gross profit | 140,934 | 114,188 | 93,400 | |||||||||
| Selling, general, and administrative expenses | 58,231 | 58,136 | 49,653 | |||||||||
| Operating income | 82,703 | 56,052 | 43,747 | |||||||||
| (Gain) loss on investments, net | 76 | (898 | ) | (2,068 | ) | |||||||
| Other income, net | (2,204 | ) | (2,780 | ) | (1,839 | ) | ||||||
| Interest expense | 8,891 | 7,255 | 8,096 | |||||||||
| Earnings before income taxes | 75,940 | 52,475 | 39,558 | |||||||||
| Income tax expense | 13,290 | 10,945 | 9,406 | |||||||||
| Net income | 62,650 | 41,530 | 30,152 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 2,108 | 2,810 | (3,516 | ) | ||||||||
| Net income attributable to Southland Holdings | $ | 60,542 | $ | 38,720 | $ | 33,668 | ||||||
See accompanying notes to the consolidated financial statements
F-5
Consolidated Statements of Comprehensive Income
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Net income | $ | 62,650 | $ | 41,530 | $ | 30,152 | ||||||
| Foreign currency translation adjustment(1) | (1,718 | ) | 838 | (771 | ) | |||||||
| Comprehensive income | $ | 60,932 | $ | 42,368 | $ | 29,381 | ||||||
| Comprehensive income attributable to: | ||||||||||||
| Noncontrolling interest | 2,029 | 2,849 | (3,361 | ) | ||||||||
| Members’ capital | $ | 58,903 | $ | 39,519 | $ | 32,742 | ||||||
| (1) | Foreign currency translation adjustment is presented net of nominal tax expense for the years ended December 31, 2022, December 31, 2021, and December 31, 2020. |
See accompanying notes to the consolidated financial statements
F-6
SOUTHLAND
HOLDINGS, LLC
Consolidated Statements of Equity
| (Amounts in thousands) | Preferred stock | Accumulated other comprehensive income | Members’ capital | Majority | Noncontrolling interest | Total equity | ||||||||||||||||||
| Balance as of December 31, 2019 | $ | 35,000 | $ | (809 | ) | $ | 212,461 | $ | 246,652 | $ | 7,147 | $ | 253,799 | |||||||||||
| Preferred stock | (9,000 | ) | - | - | (9,000 | ) | - | (9,000 | ) | |||||||||||||||
| Preferred stock dividends | - | - | (1,039 | ) | (1,039 | ) | (188 | ) | (1,227 | ) | ||||||||||||||
| Other | - | - | (4 | ) | (4 | ) | 16 | 12 | ||||||||||||||||
| Distributions to members | - | - | (10,334 | ) | (10,334 | ) | - | (10,334 | ) | |||||||||||||||
| Net income (loss) | - | - | 33,668 | 33,668 | (3,516 | ) | 30,152 | |||||||||||||||||
| Other comprehensive income loss | - | (927 | ) | - | (927 | ) | 156 | (771 | ) | |||||||||||||||
| Balance as of December 31, 2020 | $ | 26,000 | $ | (1,736 | ) | $ | 234,752 | $ | 259,016 | $ | 3,615 | $ | 262,631 | |||||||||||
| Preferred stock | (1,600 | ) | - | (709 | ) | (2,309 | ) | (128 | ) | (2,437 | ) | |||||||||||||
| Acquisition of Heritage minority interest | - | - | (3,942 | ) | (3,942 | ) | 3,792 | (150 | ) | |||||||||||||||
| Other | - | - | - | - | 3 | 3 | ||||||||||||||||||
| Capital contributions from noncontrolling interest | - | - | - | - | 926 | 926 | ||||||||||||||||||
| Distributions to members | - | - | (990 | ) | (990 | ) | - | (990 | ) | |||||||||||||||
| Net income | - | - | 38,720 | 38,720 | 2,810 | 41,530 | ||||||||||||||||||
| Other comprehensive loss | - | 799 | - | 799 | 39 | 838 | ||||||||||||||||||
| Balance as of December 31, 2021 | $ | 24,400 | $ | (937 | ) | $ | 267,831 | $ | 291,294 | $ | 11,057 | $ | 302,351 | |||||||||||
| Preferred stock | - | - | (1,037 | ) | (1,037 | ) | (188 | ) | (1,225 | ) | ||||||||||||||
| Distributions to members | - | - | 278 | 278 | (2,452 | ) | (2,174 | ) | ||||||||||||||||
| Net income | - | - | 60,542 | 60,542 | 2,108 | 62,650 | ||||||||||||||||||
| Other comprehensive income | - | (1,639 | ) | - | (1,639 | ) | (79 | ) | (1,718 | ) | ||||||||||||||
| Balance as of December 31, 2022 | $ | 24,400 | $ | (2,576 | ) | $ | 327,614 | $ | 349,438 | $ | 10,446 | $ | 359,884 | |||||||||||
See accompanying notes to the consolidated financial statements
F-7
SOUTHLAND
HOLDINGS, LLC
Consolidated Statements of Cash Flows
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 62,650 | $ | 41,530 | $ | 30,152 | ||||||
| Adjustments to reconcile net income to net cash used in operating activities | ||||||||||||
| Depreciation and amortization | 45,697 | 47,468 | 39,370 | |||||||||
| Deferred taxes | (2,103 | ) | (271 | ) | 476 | |||||||
| Gain on sale of assets | (3,377 | ) | (5,168 | ) | (2,562 | ) | ||||||
| Foreign currency remeasurement loss (gain) | 548 | 136 | (6 | ) | ||||||||
| (Earnings) loss from equity method investments | (9,299 | ) | (7,239 | ) | (700 | ) | ||||||
| TZC investment present value accretion | (2,355 | ) | (2,265 | ) | (552 | ) | ||||||
| Gain on trading securities, net | (260 | ) | (1,145 | ) | (2,354 | ) | ||||||
| (Increase) decrease in accounts receivable | (18,432 | ) | (7,412 | ) | 15,739 | |||||||
| Increase in contract assets | (138,677 | ) | (2,116 | ) | (58,523 | ) | ||||||
| Increase in prepaid expenses and other current assets | (1,293 | ) | (765 | ) | (10,016 | ) | ||||||
| (Increase) decrease in ROU assets | (1,315 | ) | 5,990 | (8,443 | ) | |||||||
| (Decrease) increase in accounts payable and accrued expenses | (13,546 | ) | 26,480 | (752 | ) | |||||||
| Increase (decrease) in contract liabilities | 20,049 | (188,654 | ) | (59,945 | ) | |||||||
| Increase (decrease) in operating lease liabilities | 1,264 | (5,974 | ) | 8,219 | ||||||||
| Other | (5,753 | ) | 8,832 | (274 | ) | |||||||
| Net cash used in operating activities | (66,202 | ) | (90,573 | ) | (50,171 | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of fixed assets | (4,765 | ) | (18,797 | ) | (30,995 | ) | ||||||
| Proceeds from sale of fixed assets | 10,064 | 11,251 | 7,232 | |||||||||
| Loss on investment in limited liability company | 336 | 248 | - | |||||||||
| Purchase of interest in limited liability company | - | - | (534 | ) | ||||||||
| Purchase of trading securities | - | (391 | ) | (743 | ) | |||||||
| Proceeds from the sale of trading securities | 927 | 175 | 4,645 | |||||||||
| Purchase of interest of other investments | - | (150 | ) | - | ||||||||
| Receipt of funds from sureties | - | - | 231,893 | |||||||||
| Acquisitions, net of cash acquired | - | - | (5,038 | ) | ||||||||
| Capital contribution to investees | (1,000 | ) | (835 | ) | (10,643 | ) | ||||||
| Net cash provided by (used in) investing activities | 5,562 | (8,499 | ) | 195,817 | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Borrowings on line of credit | 75,000 | 67,000 | 57,000 | |||||||||
| Payments on line of credit | - | (82,000 | ) | (77,000 | ) | |||||||
| Borrowings on notes payable | 281 | 206,172 | 34,370 | |||||||||
| Payments on notes payable | (42,934 | ) | (153,587 | ) | (51,185 | ) | ||||||
| Payments of deferred financing costs | - | (260 | ) | (45 | ) | |||||||
| Advances to related parties | (1,603 | ) | (1,571 | ) | (836 | ) | ||||||
| Payments from related parties | 5 | 1,260 | 74 | |||||||||
| Other | - | - | 150 | |||||||||
| Payments on finance lease | (8,157 | ) | (4,716 | ) | (4,124 | ) | ||||||
| Capital contributions from noncontrolling members | - | 926 | - | |||||||||
| Distributions | (2,457 | ) | (2,620 | ) | (6,169 | ) | ||||||
| Preferred stock dividends | - | - | (188 | ) | ||||||||
| Net cash provided by (used in) financing activities | 20,135 | 30,604 | (47,953 | ) | ||||||||
| Effect of exchange rate on cash | 1,254 | (686 | ) | 968 | ||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (39,251 | ) | (69,154 | ) | 98,661 | |||||||
| Beginning of period | 111,242 | 180,396 | 81,735 | |||||||||
| End of period | $ | 71,991 | $ | 111,242 | $ | 180,396 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for income taxes | $ | 10,392 | $ | 14,093 | $ | 1,851 | ||||||
| Cash paid for interest | $ | 9,044 | $ | 7,519 | $ | 8,580 | ||||||
| Non-cash investing and financing activities: | ||||||||||||
| Lease assets obtained in exchange for new leases | $ | 19,558 | $ | 16,051 | $ | 35,333 | ||||||
| Assets obtained in exchange for notes payable | $ | 4,091 | $ | - | $ | - | ||||||
See accompanying notes to the consolidated financial statements
F-8
Notes to the Consolidated Financial Statements
| 1. | Description of Business |
Southland Holdings, LLC (“Southland”, the “Company”, “we”, “us”, or “our”) is a diverse leader in specialty infrastructure construction with roots dating back to 1900. We design and construct projects in the bridges, tunnels, transportation and facilities, marine, steel structures, water and wastewater treatment, and water pipelines end markets.
Southland is based in Grapevine, Texas. It is the parent company of Johnson Bros. Corporation, American Bridge Holding Company (“American Bridge”), Oscar Renda Contracting, Southland Contracting, Mole Constructors, Heritage Materials and other affiliates. With the combined capabilities of these six primary subsidiaries and their affiliates, Southland has become a diversified industry leader with both public and private customers. The majority of our customers are located in the United States.
COVID-19 Considerations
Certain impacts to public health conditions particular to the coronavirus (“COVID-19”) outbreak have had a significant negative impact on our operations and profitability. The continuing extent of the impact to our financial performance will depend on future developments, including (i) the duration and spread of the outbreak, (ii) the restrictions and advisories, (iii) the effects on the financial markets, and (iv) the effects on the economy overall, all of which are highly uncertain and cannot be predicted. If our financial performance is impacted because of these developments for an extended period, our results may be materially adversely affected. We cannot anticipate how the potential widespread distribution of a vaccine will mitigate this impact on either COVID-19 or on future variants of the disease.
We are eligible for the Canada Emergency Wage Subsidy (“CEWS”), a subsidy program offered by the Canada Revenue Agency to qualifying employers who have seen a drop in revenue due to COVID-19. Employers are eligible for a subsidy of up to 75% of eligible remuneration, paid by an eligible entity that qualified, to each eligible employee – up to a maximum of $847 per week. For CEWS periods through expiration of the program, we have qualified for subsidies of $2.5 million. We received subsidies of $0.1 million in 2022 and $2.4 million in 2021, which are included in labor and related costs.
Under the provision of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), employers were eligible for a refundable employee retention credit subject to certain criteria. As of December 31, 2022, the Companies had filed a claim with the IRS and expect to receive a refund of $2.4 million in 2023, which is included in other current assets.
| 2. | Summary of Significant Accounting Policies |
| a. | Basis of Presentation |
These consolidated financial statements have been prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”). The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) contains guidance that form GAAP. New guidance is released via Accounting Standards Update (“ASU”).
The consolidated financial statements include the accounts of Southland Holdings, LLC and our majority-owned and controlled subsidiaries and affiliates as detailed below. All significant intercompany transactions are eliminated within the consolidations process. Investments in non-construction related partnerships and less-than-majority owned subsidiaries that we do not control, but where we have significant influence are accounted for under the equity method. Certain construction related joint ventures and partnerships that we do not control, nor do we have significant influence are accounted for under the equity method for the balance sheet and under the proportionate consolidation method for the statement of operations.
F-9
These consolidated financial statements include the accounts of Southland Holdings, LLC, Southland Contracting, Inc., Johnson Bros. Corporation, a Southland Company (“Johnson Bros. Corporation”), Mole Constructors, Inc., Oscar Renda Contracting, Inc. (“Oscar Renda Contracting”), Heritage Materials, LLC, American Bridge, Renda Pacific LLC, Southland Renda JV (“Southland Renda”), Southland Mole JV (“Southland Mole”), Southland RE Properties LLC, Oscar Renda Contracting of Canada, Ltd., Southland Mole of Canada Ltd. (“Southland Mole of Canada”), Southland Technicore Mole JV (“Southland Technicore Mole”), and Southland Mole of Canada / Astaldi Canada Design & Construction JV (“Southland Astaldi”).
Southland Holdings, LLC, Renda Pacific, LLC, Southland RE Properties, LLC, and Heritage Materials, LLC, are limited liability companies. The members’ liability is limited to our investments within those companies.
| b. | Reclassifications |
Certain reclassifications have been made to the Company’s prior period consolidated financial information to conform to the current year presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total equity.
| c. | Business Combinations |
Business combinations are accounted for using the acquisition method of accounting. We use the fair value of assets acquired and liabilities assumed to account for the purchase price of the acquired business. The determination of fair value requires estimates and judgments of future cash flow expectations to assign fair values to the identifiable tangible and intangible assets. GAAP provides a “measurement period” of up to one year in which to finalize all fair value estimates associated with the acquisition of a business. Most estimates are preliminary until the end of the measurement period. During the measurement period, any material, including material items that were newly discovered, that existed at the acquisition date would be reflected as an adjustment to the initial valuations and estimates. Any changes that do not qualify as measurement period adjustments are included in current period earnings. After the measurement period, any adjustments would be recorded as current period income or expense.
| d. | Operating Cycle |
Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying consolidated balance sheets as they will be settled in the normal course of contract completion. Some of these contracts will require more than one year to settle.
| e. | Foreign Operations and Foreign Exchange Risk |
Foreign operations are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risk are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, asset seizure, domestic and foreign import or export changes, and restrictions on currency exchange. Net assets of foreign operations for the years ended December 31, 2022, and December 31, 2021, are approximately 21% and 18%, respectively, of our total net assets.
The financial records of Southland Technicore Mole joint venture, Renda Contracting of Canada, Inc., Southland Mole of Canada, Southland Astaldi joint venture, and various consolidated American Bridge subsidiaries are maintained in local currencies. Results of foreign operations are translated from the local currency to the U.S. dollar (functional and reporting currency) using the average exchange rates during the period, while assets and liabilities are translated at the exchange rate in effect at the reporting date. Certain long-lived assets and liabilities are converted at historical rates. Resulting gains or losses from translating foreign currency financial statements are recorded as other comprehensive income (loss).
We enter foreign currency transactions when a transaction is denominated in currency other than our functional currency. A transaction is initially measured and recorded using the exchange rate on the date of the transaction. Transactions are then remeasured at the end of each reporting period using the exchange rate at that date. The resulting gains or losses are recorded in the consolidated statements of operations within other income, net.
F-10
| f. | Use of Estimates |
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. It is reasonably possible that changes may occur in the near term that would affect our estimates with respect to the input method, the allowance for doubtful accounts, recoverability of unapproved contract modifications, and deferred tax assets.
| g. | Segments |
We manage our business using two distinct operating segments. Our chief operating decision maker (“CODM”) reviews information pertaining to our Transportation and Civil segments.
The classification of revenue and gross profit for segment reporting purposes is reliant on management judgment. At times, our segments undertake projects together or share resources and equipment. We also allocate some costs between segments which can include facility costs, equipment costs, and other operating expenses.
| h. | Concentration Risk |
Accounts receivable from seven customers comprised approximately 55% of contract receivables in 2022 and 42% of contract receivables from five customers as of December 31, 2021. As of December 31, 2022, we have two customers that each comprise 11% of our contract receivables.
The percentage of our labor force subject to collective bargaining agreements was 26%, 18%, and 17% as of December 31, 2022, December 31, 2021, and December 31, 2020, respectively. The collective bargaining agreements are due to expire by 2026.
During the year ended December 31, 2022, revenue earned from operations in Texas and Florida was approximately 24.9% and 16.3%, respectively. Remaining revenue earned was from operations is 23 other states or territories. Foreign revenue earned was 15% of total revenue in 9 provinces.
During the year ended December 31, 2021, revenue earned from operations in Texas and Florida was approximately 26.9% and 18.1%, respectively. Remaining revenue earned was from operations in 33 other states, or territories. Foreign revenue earned was 9% of total revenue in 7 provinces.
During the year ended December 31, 2020, revenue earned from operations in Texas and Florida was approximately 37.7% and 10.8%, respectively. Remaining revenue earned was from operations in 31 other states, territories, or provinces. Foreign revenue earned was less than 4% of total revenue.
| i. | Revenue and Cost Recognition |
We recognize revenue in accordance with FASB ASC 606 (“ASC 606”). In accordance with ASC 606, we follow the five-step process to recognize revenue:
| 1. | Identify the contract |
| 2. | Identify performance obligations |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price |
| 5. | Recognize revenue |
F-11
Most of our contracts consist of firm fixed-price and fixed-price per unit. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our contracts do not include a significant financing component. The transaction price for our contracts may include variable consideration, which includes increases to transaction price for approved and unpriced change orders, claims, increased performance of units and incentives, and reductions to transaction price for decreased performance of units and liquidated damages.
Variable consideration is recognized when realization of the adjustment is probable, and the amount can be reasonably determined. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Our performance obligations are generally satisfied over time as work progresses. Revenue is recognized over time using the input method, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because we believe expended cost to be the best available measure of progress on contracts. Because of the uncertainties in estimating costs, it is reasonably possible that the estimated used will change within the near term.
Cost of construction includes all direct material, subcontractor, equipment, and labor and certain other direct costs, as well as those indirect costs related to contract performance. Selling, general and administrative costs are charged to operations as directly incurred. Costs to mobilize equipment to a jobsite, prior to substantive work beginning (“mobilization costs”) and costs to insure a contract (“bonds and insurance”) are capitalized as incurred and amortized over the expected duration of the contract. Capitalized contract costs are included as contract assets on the consolidated balance sheets and are amortized over the expected contract length. Provisions for estimated losses on incomplete contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Costs to insure | $ | 25,091 | $ | 12,770 | ||||
| Mobilization costs | 6,990 | 5,358 | ||||||
| Costs to fulfill contracts, net | $ | 32,081 | $ | 18,128 | ||||
During the years ended December 31, 2022 and December 31, 2021, we amortized $14.5 million and $18.9 million, respectively, of mobilization and costs to insure contracts to cost of construction in the consolidated statements of operations.
Contract assets represent revenues recognized in excess of amounts billed. We anticipate substantially all incurred costs associated with contract assets to be billed and collected within one year or the lifecycle of a construction project. Contract liabilities represents billings in excess of revenues recognized.
We report revenue net of any taxes collected from the customer and remitted to government agencies.
| j. | Fair Value Measurement |
FASB ASC 820, Fair Value Measurements and Disclosures, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobserved inputs (level 3 measurements). The three levels are defined as follows:
F-12
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
Level 2
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets in inactive markets, inputs other than quoted prices that are observable for the asset or liability, inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
All assets and liabilities have been valued using a market approach, except for Level 3 assets. Fair values for assets in Level 2 are estimated using quoted market prices for the funds’ investment assets in active and inactive markets. Fair values for assets in Level 3 are estimated based on estimated fair values of the funds’ underlying assets as provided by third-party pricing information without adjustment, which are believed to be illiquid. There were no significant transfers in or out of Levels 1, 2, or 3 during 2021 or 2022.
| k. | Cash, Cash Equivalents, and Restricted Cash |
We consider all highly liquid instruments purchased with a maturity of three months or less as cash equivalents. We maintain our cash in accounts at certain institutions. The majority of our balances exceed federally insured limits.
We have not experienced any losses in these accounts, and we do not believe they are exposed to any significant credit risk.
Restricted cash and cash equivalents consist of amounts held in accounts in our name at certain financial institutions. These accounts are subject to certain control provisions in favor of various surety and insurance companies for purposes of compliance and security perfections.
Under the terms of the agreements related to the acquisition of American Bridge, the restricted cash deposited by the sureties is of immediate use for completing the active bonded projects at the time of acquisition. As the bonded projects progress toward completion, there are provisions that remove the restrictions on the restricted cash balances based upon the completion status of the backlog of bonded contracts acquired in the acquisition of American Bridge. See Note 4 for more information.
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Cash and cash equivalents at beginning of period | $ | 63,342 | $ | 30,889 | ||||
| Restricted cash at beginning of period | 47,900 | 149,507 | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | $ | 111,242 | 180,396 | |||||
| Cash and cash equivalents at end of period | $ | 57,915 | $ | 63,342 | ||||
| Restricted cash at end of period | 14,076 | 47,900 | ||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 71,991 | 111,242 | |||||
F-13
| l. | Accounts Receivable, Net |
We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the invoice. Retainages are due 30 days after completion of the project and acceptance by the contract owner. Warranty retainage receivables are typically due two years after completion of the project and acceptance by the contract owner. Receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
We expect to collect $62.3 million of our outstanding retainage receivables, net, within the next twelve months.
We can apply in writing at the time of substantial performance of the contract to substitute the amount retained as warranty receivable with a substitute bond of equal or greater value. It is at the discretion of the owners to accept a substitute bond.
As of December 31, 2022, and December 30, 2021, we had an allowance for doubtful accounts of $1.5 million and $3.0 million, respectively.
| m. | Inventory |
Inventory consists mainly of materials utilized for Heritage Materials’ materials producing plants, is stated at the lower of cost (first in, first out) or net realizable value and is reported in other current assets. As of December 31, 2022, and December 31, 2021, we had inventory of $9.8 million and $10.4 million, respectively.
| n. | Debt Issuance Costs |
We capitalize costs related to the issuance of debt. Debt issuance costs are presented with noncurrent liabilities as a reduction of long-term debt on our consolidated balance sheets. The amortization of such costs is recognized as interest expense using the interest method over the term of the respective debt instruments to which they pertain.
| o. | Property and Equipment |
Depreciation on property and equipment is provided by the straight-line method over the estimated useful life of the assets and includes amortization of finance leases. Assets for certain joint ventures are depreciated over the estimated life of the contract. Maintenance and repairs are expensed as incurred, while replacements and improvements are capitalized.
In the case of property and equipment disposal, costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss on a sale or retirement of property and equipment used in construction are recorded within cost of construction. Gains and losses related to all other property and equipment are reflected in other income, net.
A summary of the estimated useful lives is as follows:
| Buildings | 40 years | |
| Leasehold improvements | Lesser of 15 years or lease term | |
| Auto and trucks | 3-7 years | |
| Machinery and equipment | 5-10 years | |
| Office and safety equipment | 3-7 years |
Useful lives of fixed assets may be adjusted as differing equipment use and circumstances present.
F-14
| p. | Goodwill and Indefinite-Lived Intangibles |
Goodwill and indefinite-life intangibles are tested for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate that goodwill or indefinite-lived intangibles may be impaired. We evaluate goodwill at the reporting unit level (operating segment or one level below an operating segment). We identify our reporting unit and determine the carrying value of the reporting unit by assigning the assets and liabilities, including the existing goodwill and indefinite-lived intangibles, to the reporting unit. Our reporting units are based on our organizational and reporting structure. We currently identify three reporting units. We begin with a qualitative assessment using inputs based on our business, our industry, and overall macroeconomic factors. If our qualitative assessment deems that the fair value of a reporting unit is more likely than not less than its carrying amount, we then complete a quantitative assessment to determine the fair value of the reporting unit and compare it to the carrying amount of the reporting unit. For the years ended December 31, 2022, December 31, 2021, and December 31, 2020, based on the result of our qualitative assessments which determined that it was more likely than not that the fair value of the reporting units exceeded the carrying amounts and that the fair value of the indefinite-lived intangible assets exceeded the carrying amounts, we did not complete quantitative assessments and we did not record any impairment of goodwill or indefinite-lived intangible assets.
| q. | Valuation of Long-Lived Assets |
We review long-lived assets, including finite-lived intangible assets subject to amortization, for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the asset or group of assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to the future net cash flows expected to be generated by the asset or group of assets. If such assets are not considered to be fully recoverable, any impairment to be recognized is measured by the amount by which the carrying amount of the asset or group of assets exceeds its respective fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Intangible assets with a definite useful life are amortized over their useful lives. For the years ended December 31, 2022, December 31, 2021, and December 31, 2020, we recorded amortization expense of $1.0 million, $1.8 million, and $0.9 million, respectively.
| r. | Commitments and Contingencies |
We are involved in various lawsuits and claims that arise in the normal course of business. Amounts associated with lawsuits or claims are reserved for matters in which it is believed that losses are probable and can be reasonably estimated. In addition to matter in which it is believed that losses are probable, disclosure is also provided for matters in which the likelihood of an unfavorable outcome is at least reasonably possible but for which a reasonable estimate of loss or range of loss is not possible. Legal fees are expensed as incurred.
We self-insure workers’ compensation, general liability, and auto insurance up to $0.3 million per claim for Southland Contracting, Inc., American Bridge Company, and Johnson Bros. Corporation, except in New York, which general liability is $2.0 million per claim. The policies covering Oscar Renda Contracting, Inc. and Heritage Materials, LLC have a $100 thousand deductible per claim.
As of December 31, 2022, and December 31, 2021, we had $12.8 million and $12.1 million, respectively, in self-insurance reserves.
F-15
| s. | Income Taxes |
Southland Holdings, with the consent of its members, elected to be taxed as an S Corporation, under the provisions of Subchapter S of the Internal Revenue Code. Southland Contracting, Inc., Johnson Bros. Corporation, Southland Mole of Canada, Southland RE Properties L.L.C., and Mole Constructors, Inc. also made “S-elections” with the consent of their respective shareholders. Renda Pacific, LLP, is treated as a partnership for federal income tax purposes and is not subject to federal income tax at the entity level. As a joint venture, Southland Mole joint venture and Southland Renda joint venture are treated as partnerships for federal income tax purposes and do not pay federal income taxes. Heritage Materials, LLC, STM JV and SA JV are disregarded entities for tax purposes; their income is attributed to their respective joint venture owners.
Under those provisions, the above companies do not pay federal corporate income taxes on their taxable income. Instead, the owners are liable for federal income taxes on their respective shares of our income. Accordingly, no provision has been made for federal income tax in the accompanying consolidated financial statements.
Southland Contracting, Inc., Southland Mole of Canada, and Mole Constructors, Inc. are subject to foreign taxes on their respective share of taxable income from operations outside of the US.
Southland Contracting, Inc., Southland Mole of Canada, and Mole Constructors, Inc. pay state taxes in the states in which their jobs are located. All other companies pay gross margin tax in Texas.
Oscar Renda Contracting, Inc. is a corporation and has not made an “S-election.” Oscar Renda Contracting, Inc. files income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. Oscar Renda Contracting, Inc.’s tax year-end is December 31.
American Bridge is a corporation and has not made an “S-election.” American Bridge files income tax returns in the U.S. federal jurisdiction, American Bridge’s tax year-end is December 31.
Oscar Renda Contracting of Canada, Inc., a wholly owned subsidiary of Oscar Renda Contracting, Inc., is subject to foreign taxes on their taxable income from operations outside of the U.S.
For entities subject to income tax, income taxes are recognized during the year in which transactions enter into the determination of financial statement income (loss). Any taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations are accounted for as period costs. Deferred income tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book carrying amount and the tax basis of assets and liabilities including net operating loss carryforwards. A valuation allowance is provided against a deferred income tax asset when it is “more likely than not” the asset will not be realized. Similarly, if a determination is made that it is “more likely than not” the deferred income tax asset will be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded. Penalties and interest are recognized as a component of the income tax provision.
Tax benefits are recognized in the consolidated financial statements for tax positions taken or expected to be taken in a tax return when it is “more likely than not” that the tax authorities will sustain the tax position solely on the basis of the position’s technical merits. Consideration is given primarily to legislation and statutes, legislative intent, regulations, rulings, and case law as well as their applicability to the facts and circumstances of the tax position when assessing the sustainability of the tax position. In the event a tax position no longer meets the “more likely than not” criteria, the tax benefit is reversed by recognizing a liability and recording a charge to earnings. Conversely, if a tax position subsequently meets the “more likely than not” criteria, a tax benefit would be recognized by reducing the liability and recording a credit to earnings.
We classify interest and penalties attributable to income taxes as part of income tax expense.
| t. | Leases |
Leases are recognized under Accounting Standards Codification 842, Leases (“Topic 842”). We determine whether a contract contains a lease at contract inception and classify it as either finance or operating. A contract contains a lease if there is an identified asset, and we have the right to control the asset.
Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance leases are recorded in property and equipment, net, and finance lease liabilities within short-term lease liabilities and long-term lease liabilities on the consolidated balance sheets. Finance lease right-of-use assets are amortized in costs of construction on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for lease liabilities included in interest expense and recognized using the effective interest method over the lease term.
F-16
Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating leases are recorded in right-of-use assets, short-term lease liabilities, and long-term lease liabilities on our consolidated balance sheets. In the consolidated statements of operations, lease expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in cost of construction for leases related to our projects or selling, general, and administrative expenses for all other leases.
Topic 842 allows lessees an option to not recognize right-of-use assets and lease liabilities arising from short-term leases. A short-term lease is defined as a lease with an initial term of 12 months or less. We elected to not recognize short-term leases as right-of-use assets and lease liabilities on the consolidated balance sheets. All short-term leases which are not included on our consolidated balance sheets will be recognized within lease expense. Leases that have an initial term of 12 months or less with an option for renewal will need to be assessed in order to determine if the lease qualifies for the short-term lease exception. If the option is reasonably certain to be exercised, the lease does not qualify as a short-term lease.
Finance and operating lease right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Our lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate. For the purpose of lease liability measurement, we consider only payments that are fixed and determinable at the time of commencement. Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Any variable payments are expensed as incurred. We use our incremental borrowing rate at the commencement date in determining the present value of the lease payments for all asset classes, unless the implicit rate is readily determinable. Our lease terms may include options to extend or terminate the lease and are recognized when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of leased assets for which we are the lessee. For certain equipment leases, the portfolio approach is applied to account for the operating lease right-of-use assets and lease liabilities. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. See Note 12 for additional information.
| u. | Recent Accounting Pronouncements |
In December 2019, FASB issued ASU 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes (“Update 2019-12”), which removes certain exceptions for investments, intra-period allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. Update 2019-12 was adopted as of January 1, 2021. The various amendments in Update 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. Our adoption of Update 2019-12 did not have a material impact on our consolidated financial statements and related disclosures.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“Update 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We adopted Topic 848 as of January 1, 2021. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected optional expedients for and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. Interest on the Second Amended and Restated Credit Facility accrues at an annual rate of LIBOR. Our adoption of Update 2020-04 did not have a material impact on our consolidated financial statements and related disclosures. Our other outstanding debt uses the Secured Overnight Financing Rate (“SOFR”), and we do not have any other agreements that use LIBOR outside of our revolving credit facility.
F-17
In June 2016, FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, (“Topic 326”). The standard requires the immediate recognition of estimated credit losses expected to occur over the life of financial assets rather than the current incurred loss impairment model that recognizes losses when a probability threshold is met. Topic 326 is effective for annual periods beginning after January 1, 2023, and interim periods within those fiscal years. The implementation of Topic 326 in 2023 will not have a material impact on our consolidated financial statements given the nature of our contracts and our historical loss experience.
| 3. | Business Combinations |
American Bridge Holding Company and Subsidiaries
On September 30, 2020, Southland acquired 100% of the common stock of American Bridge for approximately $20.0 million.
The acquisition of American Bridge, a builder of specialty construction projects, will allow us to grow our business through new technical expertise, customers, and equipment. During the year ended December 31, 2020, we incurred acquisition costs of $5.0 million that were recorded in selling, general, and administrative costs.
As required by the terms of the acquisition related agreements, Southland assumed the obligation to complete American Bridge’s contract backlog under an agreement with the sureties of American Bridge. In consideration for assuming the obligation of completing the contract backlog in accordance with the performance bonds in place at the transaction date, the sureties contributed $225.0 million to American Bridge. The $225.0 million was restricted to funding the ongoing construction costs of completing the contract backlog. As of December 31, 2022, with respect to the cash contributed by the sureties at the acquisition date, there are no restricted cash and cash equivalents in the accompanying consolidated balance sheets.
The $225.0 million contributed from the sureties represent advance payments related to the completion of the contract backlog and other additional contingencies. Accordingly, these amounts have been classified as contract liabilities and in other noncurrent liabilities. Consistent with the negotiation with the sureties as part of the American Bridge acquisition, approximately $154.0 million was allocated to the individual contracts within the backlog and the remaining approximately $71.0 million was identified as additional contingencies to address various risks that could materialize as the contract backlog is completed, as well as to cover overheads and indirect costs required to finish the projects acquired under the terms of the agreement with the sureties. The $225.0 million is recorded as revenue as construction progresses and risk reduces in accordance with the percentage completion of the related contracts acquired under the terms of the agreement with the sureties. For the years ended December 31, 2022, and December 31, 2021, approximately $34.1 million and $123.3 million, respectively, of the $225.0 million was recognized as revenue. As of December 31, 2022, approximately $17.8 million of contract liabilities and $1.0 million of other noncurrent liabilities remain.
American Bridge’s investment in joint ventures is primarily comprised of the forecasted recovery of a claim in connection to the Tappan Zee Constructors (“TZC”) joint venture. In order to estimate fair value of the investment in subsidiaries, the Tappan Zee investment balance has been discounted to present value using a 4% discount rate and four-year term, which is estimated to be the amount of time for the claim to settle. In accordance with the terms of the acquisition related agreements, the sureties contributed an additional $7.5 million to the American Bridge to partially fund outstanding partner capital calls for the TZC joint venture. This contribution by the sureties was made in exchange for a portion of American Bridge’s percentage share in the claim recovery in excess of $15.0 million. American Bridge has priority to collect the first $15.0 million with the remainder shared on an equal basis with the sureties. Accordingly, an accrued liability to the sureties is recorded at approximately $43.0 million as is reported in other noncurrent liabilities as of the transaction date.
F-18
The table below represents the purchase price consideration and fair values of the assets acquired and liabilities assumed and includes the $225 million received from sureties discussed above. During 2021, the purchase price allocation was finalized with no material change to the allocation below.
The American Bridge acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. These estimates, judgments and assumptions and valuation of the tradename, backlog, and property and equipment were finalized as of December 31, 2021. The assets acquired and liabilities assumed are included in the Company’s Transportation segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
| Assets Acquired and Liabilities Assumed as of: | ||||
| (Amounts in thousands) | September 30, 2020 | |||
| Cash and cash equivalents | $ | 9,133 | ||
| Restricted cash | 99,978 | |||
| Receivables - contract | 59,231 | |||
| Accounts receivable, net | 137,743 | |||
| Investments | 95,022 | |||
| Costs to fulfill contract, net | 1,654 | |||
| Other current assets | 4,128 | |||
| Property and equipment, net | 20,520 | |||
| Intangible assets, net of accumulated amortization | 5,913 | |||
| Other noncurrent assets | 159 | |||
| Accounts Payable | (32,145 | ) | ||
| Other noncurrent liabilities | (6,473 | ) | ||
| Accrued Liabilities | (88,245 | ) | ||
| Contract Liabilities | (286,238 | ) | ||
| Deferred tax liabilities | (380 | ) | ||
| Total identifiable net assets | $ | 20,000 | ||
Heritage Materials
On March 5, 2021, Southland entered into an agreement to acquire the 20% interest in Heritage Materials owned by Gilgal Stones, L.L.C. (“Gilgal”) for $150,000. Prior to this transaction, Southland owned an 80% controlling partnership interest in Heritage Materials. As a result of the transaction, Heritage Materials became a wholly owned subsidiary of Southland. At the time of the transaction, Heritage Materials had a members’ deficit balance, of which $3.9 million was attributable to Gilgal and reported as non-controlling members’ capital. The carrying amount of the noncontrolling members’ capital attributable to Gilgal has been adjusted by $3.8 million to reflect Southland’s 20% increased ownership in Heritage Materials and Southland’s members’ capital has been decreased by $3.8 million to reflect the carrying amount of the Gilgal interest acquired and the $150 thousand of cash paid by Southland to Gilgal.
We incorporate the operations of Heritage Materials into our Transportation segment.
F-19
| 4. | Investment in Joint Ventures |
American Bridge Holding Company and Subsidiaries
American Bridge enters into various joint venture agreements with unrelated parties for completion of certain construction projects to mitigate risk or add additional competencies or capacity.
These construction related joint ventures are accounted for using the equity method for balance sheets reporting and the proportional consolidation method for statements of operations reporting.
American Bridge entered into the TZC joint venture with Fluor Enterprises, Inc., Granite Construction Northeast, Inc., and Traylor Bros., Inc., for the purpose of constructing the new Tappan Zee Bridge in New York. American Bridge has a 23.33% membership in the joint venture.
American Bridge entered into the Forth Crossing Bridge Constructors (“FCBC”) joint venture with HOCHTIEF Solutions AG, Dragados S.A. and Morrison Construction for the purpose of constructing the Forth Replacement Crossing Bridge in Scotland. American Bridge has a 28% partnership interest in the joint venture.
American Bridge entered into a joint venture with Skanska USA Civil Southeast, Inc. and Nova Group, Inc., forming EHW Constructors JV (“EHW”) for the purpose of constructing a large-diameter steel pile supported precast and cast-in-place concrete wharf that supports a large structural steel building. American Bridge has a 35% partnership interest in the joint venture.
Summarized and unaudited financial information of the noncontrolled joint ventures as of and for the years ended December 31, 2022, December 31, 2021 and December 31, 2020, is as follows:
| As of and for the year ended | ||||||||||||||||
| (Amounts in thousands) | December 31, 2022 | |||||||||||||||
| Assets | Liabilities | Revenues | Income (loss) | |||||||||||||
| FCBC | $ | 3,256 | $ | 11,509 | $ | (1,555 | ) | $ | (3,949 | ) | ||||||
| TZC | 530,834 | 22,770 | (17,816 | ) | 337 | |||||||||||
| EHW | 415 | 167 | 0 | (5 | ) | |||||||||||
| As of and for the year ended | ||||||||||||||||
| (Amounts in thousands) | December 31, 2021 | |||||||||||||||
| Assets | Liabilities | Revenues | Income (loss) | |||||||||||||
| FCBC | $ | 2,574 | $ | 11,419 | $ | 6,380 | $ | 6,019 | ||||||||
| TZC | 551,074 | 43,290 | (9,337 | ) | (56 | ) | ||||||||||
| EHW | 461 | 208 | - | (5,706 | ) | |||||||||||
F-20
| As of and for the year ended | ||||||||||||||||
| (Amounts in thousands) | December 31, 2020 | |||||||||||||||
| Assets | Liabilities | Revenues | Income (loss) | |||||||||||||
| FCBC | $ | 3,872 | $ | 18,792 | $ | - | $ | 1 | ||||||||
| TZC | 570,780 | 62,996 | 6,536 | (67 | ) | |||||||||||
| EHW | 794 | (30 | ) | - | - | |||||||||||
American Bridge has recognized the following as of and for the years ended December 31, 2022, December 31, 2021 and December 31, 2020.
| As of and for the year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | |||||||||||
| Revenue | Income (loss) | Equity | ||||||||||
| FCBC | $ | (435 | ) | $ | (1,106 | ) | $ | (2,311 | ) | |||
| TZC | (4,157 | ) | 79 | 108,509 | ||||||||
| EHW | - | (2 | ) | 87 | ||||||||
| Total | $ | (4,592 | ) | $ | (1,029 | ) | $ | 106,285 | ||||
| As of and for the year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2021 | |||||||||||
| Revenue | Income (loss) | Equity | ||||||||||
| FCBC | $ | 1,787 | $ | 1,686 | $ | (2,477 | ) | |||||
| TZC | (2,179 | ) | (13 | ) | 104,259 | |||||||
| EHW | - | (200 | ) | 89 | ||||||||
| Total | $ | (392 | ) | $ | 1,473 | $ | 101,871 | |||||
| As of and for the year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2020 | |||||||||||
| Revenue | Income (loss) | Equity | ||||||||||
| FCBC | $ | - | $ | 1 | $ | (4,178 | ) | |||||
| TZC | 1,525 | (16 | ) | 100,263 | ||||||||
| EHW | - | - | 288 | |||||||||
| Total | $ | 1,525 | $ | (15 | ) | $ | 96,373 | |||||
For TZC, the investment balance is substantially comprised of the forecasted recovery of a claim which has been adjusted to a present value of $108.5 million and $104.3 million for 2022 and 2021, respectively. As of September 30, 2020, American Bridge entered into an arrangement with an external party to share in the future proceeds of this claim. American Bridge had recorded a liability to the external party in the amount of $47.2 million and $45.4 million as of December 31, 2022 and December 31, 2021, respectively.
F-21
Oscar Renda Contracting of Canada, Inc.
Oscar Renda Contracting of Canada, Inc. (“ORCC”) enters into various joint venture agreements with unrelated parties for completion of certain construction projects.
These construction related joint ventures are accounted for using the equity method for balance sheet reporting and the proportional consolidation method for statements of operations reporting.
ORCC entered into the Red River Solutions GP (“RRSGP”) joint venture with AECON, Inc. for the purpose of constructing the new North End Sewage Treatment Plant during June of 2019. ORCC has a 50% membership in the joint venture.
Summarized and unaudited financial information of the noncontrolled joint ventures as of and for the year ended December 31, 2022 and December 31, 2021 is presented below. This joint venture was not material for the year ended December 31, 2020.
| As of and for the year ended | ||||||||||||||||
| (Amounts in thousands) | December 31, 2022 | |||||||||||||||
| Assets | Liabilities | Revenues | Income | |||||||||||||
| RRSGP | $ | 34,596 | $ | 19,670 | $ | 60,130 | $ | 12,165 | ||||||||
| As of and for the year ended | ||||||||||||||||
| (Amounts in thousands) | December 31, 2021 | |||||||||||||||
| Assets | Liabilities | Revenues | Income | |||||||||||||
| RRSGP | $ | 9,468 | $ | 5,999 | $ | 17,515 | $ | 3,502 | ||||||||
ORCC has recognized the following as of and for the year ended December 31, 2022 and December 31, 2021.
| As of and for the year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | |||||||||||
| Revenue | Income | Equity | ||||||||||
| RRSGP | $ | 30,106 | $ | 6,021 | $ | 7,439 | ||||||
| As of and for the year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2021 | |||||||||||
| Revenue | Income | Equity | ||||||||||
| RRSGP | $ | 8,762 | $ | 1,752 | $ | 1,739 | ||||||
F-22
| 5. | Fair Value of Investments |
Fair values of investments measured on a recurring basis as of December 31, 2022, and December 31, 2021, were as follows:
| December 31, 2022 | ||||||||||||||||
| (Amounts in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Marketable Securities | ||||||||||||||||
| Common Stocks | $ | 8 | $ | 8 | $ | - | $ | - | ||||||||
| Total | 8 | 8 | - | - | ||||||||||||
| Investments Noncurrent | ||||||||||||||||
| Private Equity | 3,261 | - | - | 3,261 | ||||||||||||
| Total noncurrent | 3,261 | - | - | 3,261 | ||||||||||||
| Overall Total | $ | 3,269 | $ | 8 | $ | - | $ | 3,261 | ||||||||
| December 31, 2021 | ||||||||||||||||
| (Amounts in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Marketable Securities | ||||||||||||||||
| Common Stocks | $ | 12 | $ | 12 | $ | - | $ | - | ||||||||
| Total | 12 | 12 | - | - | ||||||||||||
| Investments Noncurrent | ||||||||||||||||
| Private Equity | 3,925 | - | - | 3,925 | ||||||||||||
| Total noncurrent | 3,925 | - | - | 3,925 | ||||||||||||
| Overall Total | $ | 3,937 | $ | 12 | $ | - | $ | 3,925 | ||||||||
Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2022, and December 31, 2021:
| (Amounts in thousands) | Private Equity | Total | ||||||
| Balance - January 1, 2022 | $ | 3,925 | $ | 3,925 | ||||
| Total gains (losses) (realized / unrealized): | ||||||||
| In Earnings: | 263 | 263 | ||||||
| Purchases, issuances, and sales: | ||||||||
| Purchases | 131 | 131 | ||||||
| Sales | (1,058 | ) | (1,058 | ) | ||||
| Balance - December 31, 2022 | $ | 3,261 | $ | 3,261 | ||||
| (Amounts in thousands) | Private Equity | Total | ||||||
| Balance - January 1, 2021 | $ | 2,575 | $ | 2,575 | ||||
| Total gains (losses) (realized / unrealized): | ||||||||
| In Earnings: | 1,134 | 1,134 | ||||||
| Purchases, issuances, and sales: | ||||||||
| Purchases | 391 | 391 | ||||||
| Sales | (175 | ) | (175 | ) | ||||
| Balance - December 31, 2021 | $ | 3,925 | $ | 3,925 | ||||
F-23
| 6. | Investing Activities |
All securities are trading securities and are presented in the consolidated financial statements at fair value. For purposes of determining realized gains and losses, the cost of securities sold is based on specific identification.
All unrealized and realized gains and losses, including interest and dividends from investing activities, are included in the consolidated statements of operations within “gain (loss) on investments, net.”
Cost and fair value of marketable securities as of December 31, 2022, was as follows.
| (Amounts in thousands) | Amortized Costs | Net gains | Fair value | |||||||||
| Common stocks | $ | - | $ | 8 | $ | 8 | ||||||
| Total | $ | - | $ | 8 | $ | 8 | ||||||
We did not have any held to maturity marketable securities as of December 31, 2022.
Cost and fair value of noncurrent marketable securities as of December 31, 2022, and December 31, 2021, was as follows:
| (Amounts in thousands) | Amortized Costs | Net gains | Fair value | |||||||||
| Private equity | $ | 688 | $ | 2,573 | $ | 3,261 | ||||||
| Total | $ | 688 | $ | 2,573 | $ | 3,261 | ||||||
| (Amounts in thousands) | Amortized Costs | Net gains | Fair value | |||||||||
| Private equity | $ | 1,615 | $ | 2,310 | $ | 3,925 | ||||||
| Total | $ | 1,615 | $ | 2,310 | $ | 3,925 | ||||||
The noncurrent investments are in certain fairly-illiquid private equity funds. These equity funds are presented within the investments line on our consolidated balance sheets. The private equity funds invest in selected equity investments. Opportunities for redemption are limited and depend on locating another investor to purchase the interest that we desire to sell. As of December 31, 2022, and December 31, 2021, we had unfunded commitments to invest $1.5 million and $1.6 million, respectively. During the year ended December 31, 2022, we did not recognize a net gain or loss from the sale of trading securities. During the year ended December 31, 2021, we did not recognize a net gain or loss from the sale of trading securities. During the year ended December 31, 2020, we recognized a net loss of trading securities of $0.2 million. These balances are included within investments on the consolidated balance sheets.
F-24
| 7. | Revenue |
Revenue is recognized over time using the input method in accordance with ASC 606, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because we believe expended cost to be the best available measure of progress on contracts.
Our contracts are primarily in the form of firm fixed-price and fixed-price per unit. A large portion of our contracts have scope defined adequately, which allows us to estimate total contract value upon the signing of a new contract. Upon signing a new contract, we allocate the total consideration across various contractual promises to transfer a distinct good or service to a customer. These are grouped into specific performance obligations. This process requires significant management judgement. Most of our contracts have a single performance obligation. For contracts with multiple performance obligations, we allocate the total transaction price based on the estimated standalone selling price, which is the total project costs plus a budgeted margin percentage, for each of the performance obligations.
Revenue is recognized when, or as, the performance obligations are satisfied. Our contracts do not include a significant financing component. Costs to obtain contracts are generally not significant and are expensed in the period incurred.
Estimating cost to complete long-term contracts involves a significant amount of estimation and judgement. For long-term contracts, we use the calculated transaction price, estimated cost to complete the project, and the total costs incurred on the project to date to calculate the percentage of the project that is complete. The costs to complete the project and the transaction price can change due to unforeseen events that can either increase or decrease the margin on a particular project.
Our contract structure allows for variable consideration. A significant portion of this variable consideration comes in the form of change order and claims. Other variable consideration can include volume discounts, performance bonuses, incentives, liquidated damages, and other terms that can either raise or lower the total transaction price. We estimate variable consideration based on the probability of being entitled to collection of specific amounts. We include amounts that we believe we have an enforceable right to collect based on our probability of success with specific claims or contractual rights. Our estimates of total variable consideration rely on all available information about our customer including historical, current, and forecasted information.
Many of our contracts require contract modifications resulting from a change in contract scope or requirements. Change orders are issued to document changes to the original contract. We can have approved and unapproved change orders. Unapproved change orders are contract modifications for which we or our customers have not agreed to terms, scope and price. Contract modifications are necessary for many reasons, including but not limited to, changes to the contract specifications or design from the customer, modification to the original scope, changes to engineering drawings, or other required deviation from the original construction plan. Contract modifications may also be necessary for reasons including, but not limited to, other changes to the contract which may be out of our control, such as rain or other weather delays, incomplete, insufficient, inaccurate engineering drawings, different site conditions from information made available during the estimating process, or other reasons. An unapproved change order may turn into a formal claim if we cannot come to an agreement with the owner but are contractually entitled to recovery of costs and profits for work performed. Costs incurred related to contract modifications are included in the estimated costs to complete and are treated as project costs when incurred. Unless the contract modification is distinct from the other goods and services included within the project, the contract modification is accounted for as part of the existing contract. The effect of any modifications on the transaction price, and our measure of the percentage-of-completion on specific performance obligations for which the contract modification relates, is recognized as a cumulative catch-up adjustment to revenue recognized. In some cases, contract modifications may not be fully settled until after the completion of work as specified in the original contract.
F-25
We review and update our contract estimates regularly. Any adjustments in estimated profit on contracts is recognized under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods are then recognized using an updated estimate that uses inputs consisting of the remaining transaction price, the remaining contract term, and the remaining costs to be incurred on the project.
If a contract is deemed to be in a loss position, the projected loss is recognized in full, including any previously recognized margin, in the period in which the change in estimate is made. Losses are recognized as an accrued loss provision on the consolidated balance sheets in the accrued liabilities caption. For contract revenue after the date that the loss is accrued, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.
As of December 31, 2022, and December 31, 2021, we have $144.2 million and $188.2 million, respectively, of unapproved contract modifications included within our various projects’ transaction prices. These modifications are in negotiation with our customers or other third parties.
We estimate the likelihood of collection during the bidding process for new contracts. Customers with history of late or non-payment are avoided in the bidding process. We consider the necessity for write-down of receivable balances in conjunction with GAAP when evaluating our estimates of transaction price and estimated costs to complete our projects.
We bill our customers in conjunction with our contract terms. Our contracts have three main categories, (i) contracts that are billed based on a specific timeline, (ii) contracts that are billed upon the completion of certain phases of work, or milestones, and (iii) contracts that are billed as services are provided. Some of our contracts are billed following the recognition of certain revenue. This creates an asset on our consolidated balance sheets captioned contract assets. Other contracts schedules allow us to bill customers prior to recognizing revenue. These contracts create a liability on our consolidated balance sheets captioned “contract liabilities.”
We segregate our business into two reportable segments: Transportation and Civil. Our CODM uses these segments in order to operate the business. Our segments offer different specialty infrastructure projects. Our CODM regularly reviews our operating and financial performance based on these segments.
Each of our reportable segments is composed of similar business units that specialize in specialty infrastructure projects that are unique.
Our business is managed using revenue and gross profit primarily. Our CODM regularly uses this information to review operating results, plan future bids, allocate resources, target customers, and plan future growth and capital allocations. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs, and indirect operating expenses, were made.
Our Civil segment is comprised of Oscar Renda Contracting, Inc., Mole Constructors, Inc., Southland Contracting, Inc., Southland Holdings, LLC, Renda Pacific, LLC, Southland Renda JV, Southland RE Properties, Oscar Renda Contracting Canada, Southland Mole of Canada, Southland Technicore Mole joint venture, and Southland Astaldi joint venture. This segment focuses on projects that include the design and construction of water pipeline, pump stations, lift stations, water and wastewater treatment plants, concrete and structural steel, outfall, and tunneling.
Our Transportation segment is comprised of American Bridge, Heritage Materials, LLC, and Johnson Bros. Corporation. This segment operates throughout North America and specializes in services that include the design and construction of bridges, roadways, marine, dredging, ship terminals, and piers, and specialty structures and facilities.
Total assets by segment is not presented as our CODM, as defined by ASC 280, does not review or allocate resources based on segment assets. We do not have material intersegment revenue or gross profit. Joint ventures are classified into the segment with which the projects align.
F-26
Segment Revenue
Revenue by segment for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, was as follows:
| Year Ended | ||||||||||||||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| % of Total | % of Total | % of Total | ||||||||||||||||||||||
| Segment | Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | ||||||||||||||||||
| Civil | $ | 305,324 | 26.3 | % | $ | 391,629 | 30.6 | % | $ | 368,588 | 34.8 | % | ||||||||||||
| Transportation | 856,107 | 73.7 | % | 887,557 | 69.4 | % | 689,348 | 65.2 | % | |||||||||||||||
| Total Revenue | $ | 1,161,431 | 100.0 | % | $ | 1,279,186 | 100.0 | % | $ | 1,057,936 | 100.0 | % | ||||||||||||
Segment Gross Profit
Gross profit by segment for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, was as follows:
| Year Ended | ||||||||||||||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| % of Segment | % of Segment | % of Segment | ||||||||||||||||||||||
| Segment | Gross Profit | Revenue | Gross Profit | Revenue | Gross Profit | Revenue | ||||||||||||||||||
| Civil | $ | 45,464 | 14.9 | % | $ | 40,913 | 10.4 | % | $ | 58,314 | 15.8 | % | ||||||||||||
| Transportation | 95,470 | 11.2 | % | 73,275 | 8.3 | % | 35,086 | 5.1 | % | |||||||||||||||
| Gross Profit | $ | 140,934 | 12.1 | % | $ | 114,188 | 8.9 | % | $ | 93,400 | 8.8 | % | ||||||||||||
Revenue earned outside of the United States was 7% for the year ended December 31, 2022, 9% for the year ended December 31, 2021, and 4% for the years ended December 31, 2020.
| 8. | Cost and Estimated Earnings on Uncompleted Contracts |
Contract assets as of December 31, 2022, and December 31, 2021, consisted of the following:
| As of | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Costs in excess of billings | $ | 480,825 | $ | 356,495 | ||||
| Costs to fulfill contracts, net | 32,081 | 18,129 | ||||||
| Contract assets | $ | 512,906 | $ | 374,624 | ||||
Costs and estimated earnings on uncompleted contracts were as follows as of December 31, 2022, and December 31, 2021:
| As of | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Costs incurred on uncompleted contracts | $ | 6,874,709 | $ | 7,887,047 | ||||
| Estimated earnings | 398,917 | 847,786 | ||||||
| Costs incurred and estimated earnings | 7,273,626 | 8,734,833 | ||||||
| Less: billings to date | (6,924,358 | ) | (8,489,624 | ) | ||||
| Costs to fulfill contracts, net | 32,081 | 18,129 | ||||||
| Net contract position | $ | 381,349 | $ | 263,338 | ||||
F-27
Our net contract position is included on the consolidated balance sheets under the following captions:
| As of | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Contract assets | $ | 512,906 | $ | 374,624 | ||||
| Contract liabilities | (131,557 | ) | (111,286 | ) | ||||
| Net contract position | $ | 381,349 | $ | 263,338 | ||||
As of December 31, 2022 and December 31, 2021, we have recorded $260.8 million and $210.2 million, respectively, related to claims. The classification of these amounts are represented on the consolidated balance sheets as of the years ended December 31, 2022 and December 31, 2021, as follows:
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Costs in excess of billings | $ | 156,127 | $ | 105,102 | ||||
| Investments | 104,643 | 105,124 | ||||||
| Claims asset total | $ | 260,770 | $ | 210,226 | ||||
On January 1, 2022, we had contract liabilities of $111.2 million, of which $102.5 million was recognized as revenue during the year ended December 31, 2022.
On January 1, 2021, we had contract liabilities of $284.8 million, of which $161.6 million was recognized as revenue during the year ended December 31, 2021.
| 9. | Property and Equipment |
As of December 31, 2022, and December 31, 2021, property and equipment consisted of the following:
| As of | ||||||||
| (Amounts in thousands) | December 31,
2022 | December 31, 2021 | ||||||
| Land | $ | 6,211 | $ | 6,296 | ||||
| Buildings | 31,225 | 33,642 | ||||||
| Auto and trucks | 29,967 | 29,343 | ||||||
| Machinery and equipment | 304,501 | 291,889 | ||||||
| Assets in progress | 162 | 15,427 | ||||||
| Office and safety equipment | 1,244 | 1,244 | ||||||
| Property and equipment, at cost | 373,310 | 377,841 | ||||||
| Less: accumulated depreciation | (259,226 | ) | (221,810 | ) | ||||
| Property and equipment, net | $ | 114,084 | $ | 156,031 | ||||
For the years ended December 31, 2022, December 31, 2021, and December 31, 2020, we recorded depreciation expense of $44.6 million, $45.0 million, and $38.5 million, respectively.
F-28
| 10. | Intangibles |
For the year ended December 31, 2022, we performed a qualitative analysis of our indefinite-lived intangible asset and goodwill and noted no indicators of impairment. Through our analysis, we determined that it is not more likely than not that the carrying value of our indefinite-lived intangible asset and goodwill exceeded its fair value. We had goodwill of $1.5 million as of December 31, 2022, and December 31, 2021.
As of December 31, 2022, and December 31, 2021, intangible assets, net consisted of the following:
| As of December 31, 2022 | |||||||||||||||
| (Amounts in thousands; except years) | Weighted-Average Remaining Amortization Period (Years) |
Gross Carrying Value |
Accumulated Amortization |
Net
Carrying Value |
|||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||
| Trademarks | $ | 1,180 | $ | - | $ | 1,180 | |||||||||
| Finite-lived intangible assets: | |||||||||||||||
| Backlog | 0.7 | 4,732 | 3,694 | 1,038 | |||||||||||
| Total intangible assets, net | $ | 5,912 | $ | 3,694 | $ | 2,218 | |||||||||
| As of December 31, 2021 | |||||||||||||||
| (Amounts in thousands; except years) | Weighted-Average Remaining Amortization Period (Years) |
Gross Carrying Value |
Accumulated Amortization |
Net
Carrying Value |
|||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||
| Trademarks | $ | 1,180 | $ | - | $ | 1,180 | |||||||||
| Finite-lived intangible assets: | |||||||||||||||
| Backlog | 1.7 | 4,732 | 2,697 | 2,035 | |||||||||||
| Total intangible assets, net | $ | 5,912 | $ | 2,697 | $ | 3,215 | |||||||||
We recorded amortization of intangible assets of $1.0 million, $1.8 million, and $0.9 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively.
F-29
| 11. | Long-Term Debt |
Long-term debt and credit facilities consist of the following as of December 31, 2022, and December 31, 2021:
| As of | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Secured notes | $ | 177,914 | $ | 215,622 | ||||
| Mortgage notes | 901 | 1,089 | ||||||
| Revolving credit facility | 95,000 | 20,000 | ||||||
| Equipment notes | 31 | 540 | ||||||
| Total debt | 273,846 | 237,251 | ||||||
| Unamortized deferred financing costs | (246 | ) | (321 | ) | ||||
| Total debt, net | 273,600 | 236,930 | ||||||
| Current portion | 46,322 | 41,333 | ||||||
| Total long-term debt | $ | 227,278 | 195,597 | |||||
The weighted average interest rate on total debt outstanding as of December 31, 2022, and December 31, 2021, was 4.02% and 2.85%, respectively.
As of December 31, 2022, our fleet of equipment was subject to liens securing our debt.
We are currently in compliance with all applicable debt covenants.
Revolving Credit Facility
In July 2021, we entered into a revolving credit agreement with Frost Bank for $50.0 million. As of December 31, 2022, the revolving credit facility agreement had been amended and increased to $100 million. The revolving credit facility agreement bears interest on drawn balances at 1-month SOFR, subject to a floor of 0.90%, plus an applicable margin rate of 2.10%. As of December 31, 2022, $95 million was drawn on the revolver, and we had $5 million available.
Secured Notes
We enter secured notes in order to finance growth within our business. As of December 31, 2022, we had secured notes expiring between November 2023 and May 2030. Interest rates on the secured notes range between 1.29% and 6.50%.
Mortgage Notes
We enter mortgage notes in order to finance growth within our business. As of December 31, 2022, we had mortgage notes expiring between October 2023 and February 2029. Interest rates on the mortgage notes range between 3.84% and 5.99%.
Equipment OEM Notes
We enter equipment notes in order to complete certain specialty construction projects. As of December 31, 2022, we had equipment notes expiring in April 2023. As of December 31, 2022, there is no interest rate on any of our equipment notes.
F-30
Debt Maturity
Future long-term maturities are as follows for the years ended December 31:
| Year Ended | ||||
| (Amounts in thousands) | December 31, | |||
| 2023 | $ | 46,322 | ||
| 2024 | 138,428 | |||
| 2025 | 50,348 | |||
| 2026 | 26,272 | |||
| 2027 | 1,447 | |||
| Thereafter | 11,029 | |||
| Total | $ | 273,846 | ||
| 12. | Leases |
We have operating and finance leases for corporate offices, construction site related real estate, and construction equipment.
The components of lease cost for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, are as follows:
| For the Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Finance leases | ||||||||||||
| Amortization of finance leases | $ | 7,580 | $ | 4,912 | $ | 4,538 | ||||||
| Interest on lease liabilities | 547 | 749 | 856 | |||||||||
| Total finance lease cost | 8,127 | 5,661 | 5,394 | |||||||||
| Operating lease cost | 18,874 | 18,962 | 12,119 | |||||||||
| Short-term lease cost | 22,710 | 21,134 | 18,072 | |||||||||
| Total lease cost | $ | 49,711 | $ | 45,757 | $ | 35,585 | ||||||
Lease costs for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, included minimum rental payments under operating leases recognized on a straight-line basis over the term of the lease.
Other information related to leases for the years ended December 31, 2022, and December 31, 2021, and December 31, 2020, are as follows:
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||
| Operating cash flows for operating leases | $ | 18,769 | $ | 18,946 | $ | 12,164 | ||||||
| Financing cash flows for finance leases | 547 | 749 | 856 | |||||||||
| Operating cash flows for finance leases | 8,157 | 4,716 | 4,124 | |||||||||
| Operating leases | ||||||||||||
| ROU assets obtained in exchange for lease liabilities | 19,558 | 12,391 | 12,854 | |||||||||
| Finance leases | ||||||||||||
| ROU assets obtained in exchange for lease liabilities | - | 3,660 | 22,479 | |||||||||
F-31
Additional information related to our operating leases for the year ended December 31, 2022, is as follows:
| Weighted average remaining lease term (in years) | 1.6 | |||
| Weighted average discount rate | 3.00 | % |
Additional information related to our finance leases for the year ended December 31, 2022, is as follows:
| Weighted average remaining lease term (in years) | 2.0 | |||
| Weighted average discount rate | 4.80 | % |
The following tables set forth supplemental consolidated balance sheets information related to operating and finance leases as of December 31, 2022, and December 31, 2021:
| Year Ended | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Operating leases | ||||||||
| Operating lease right-of-use assets | $ | 16,893 | $ | 15,816 | ||||
| Short-term operating lease liabilities | 11,844 | 11,891 | ||||||
| Long-term operating lease liabilities | 4,696 | 3,430 | ||||||
| Total operating lease liabilities | 16,540 | 15,321 | ||||||
| Finance leases | ||||||||
| Property and equipment | 25,890 | 26,243 | ||||||
| Accumulated amortization | (17,231 | ) | (9,770 | ) | ||||
| Property and equipment, net | 8,659 | 16,473 | ||||||
| Short-term lease liabilities | 4,728 | 8,157 | ||||||
| Long-term lease liabilities | 5,336 | 10,066 | ||||||
| Total finance lease liabilities | $ | 10,064 | $ | 18,223 | ||||
Maturities of non-cancellable operating and financing leases as of December 31, 2022, are summarized in the table below:
| Year Ended | ||||||||||||
| (Amounts in thousands) | Finance Leases | Operating Leases | Total | |||||||||
| 2023 | $ | 5,066 | $ | 12,124 | $ | 17,190 | ||||||
| 2024 | 5,037 | 3,406 | 8,443 | |||||||||
| 2025 | 419 | 1,020 | 1,439 | |||||||||
| 2026 | - | 196 | 196 | |||||||||
| 2027 | - | 149 | 149 | |||||||||
| Thereafter | - | 38 | 38 | |||||||||
| Total | 10,522 | 16,933 | 27,455 | |||||||||
| Less: present value discount | (458 | ) | (393 | ) | (851 | ) | ||||||
| Lease liability | $ | 10,064 | $ | 16,540 | $ | 26,604 | ||||||
Practical Expedients
We elected the package of practical expedients for adoption of the leases standard permitted under the transition guidance. The expedients allow us to carry forward historical lease classification, indirect costs, and the original determination of whether or not a contract contained an embedded lease.
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| 13. | Preferred Stock |
Series A Preferred Stock: As of December 31, 2022, and December 31, 2021, Oscar Renda Contracting, Inc., (“Oscar Renda”), had 17.0 million shares of Series A preferred stock outstanding. The Series A preferred stock has a par value of $1 and cumulative dividends payable annually at the prime rate published in the Wall Street Journal. The redemption rate of $1 per share is subject to a Board of Directors vote.
Series B Preferred Stock: As of December 31, 2022, and December 31, 2021, Oscar Renda had 7.4 million shares of Series B preferred stock outstanding. Series B preferred stock has a par value of $1 and cumulative dividends payable annually at the prime rate published in the Wall Street Journal. The redemption rate of $1 per share is subject to a Board of Directors vote.
During the year ended December 31, 2021, the Board of Directors approved the redemption of 1.6 million of Series B preferred stock for the forgiveness of accounts receivable due from holders of preferred stock at $1 per share. There were not any Series B preferred shares forgiven during the year ended December 31, 2022.
| 14. | Income Taxes |
Due to the “S-elections” of many of our subsidiaries, our subsidiaries are generally passthrough entities for federal income tax purposes except for Oscar Renda Contracting, Inc., Southland Contracting, Inc., American Bridge, Mole Constructors, Inc, and Southland Mole of Canada which are subject to foreign taxes on their respective share of taxable income from operations outside of the U.S.
For consolidated financial statement purposes, we report our income under the input method, and for income tax purposes, we report our income under the percentage-of-completion method Deferred income taxes arise from timing differences resulting from income and expense items reported in different years for financial accounting and tax purposes. Deferred taxes are classified as noncurrent. The primary differences between the statutory income tax rates and our effective tax rate are due to the pass-through status of various consolidated entities, the tax differential on non-U.S. earnings, the impact of U.S. GILTI, and changes in valuation allowance recorded on certain deferred tax assets.
For the years ended December 31, 2022, December 31, 2021, and December 31, 2020, we recorded tax expense as follows:
| Year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Current income tax | ||||||||||||
| Federal | $ | 9,079 | $ | 7,481 | $ | 6,725 | ||||||
| State | 4,493 | 1,125 | 2,907 | |||||||||
| Foreign | 1,821 | 2,092 | (433 | ) | ||||||||
| Deferred income tax | ||||||||||||
| Federal | (499 | ) | 18,330 | (12,499 | ) | |||||||
| State | (1,059 | ) | 2,421 | (2,434 | ) | |||||||
| Foreign | (914 | ) | (1,798 | ) | 2,077 | |||||||
| Valuation allowance | 369 | (18,706 | ) | 13,063 | ||||||||
| Total tax expense | $ | 13,290 | $ | 10,945 | $ | 9,406 | ||||||
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| Year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Statutory rate | $ | 15,947 | $ | 11,020 | $ | 8,307 | ||||||
| Untaxable earnings | (2,115 | ) | 12,073 | (320 | ) | |||||||
| State income taxes - net of federal benefit | 77 | 3,911 | (457 | ) | ||||||||
| Change in valuation allowances | 369 | (18,706 | ) | 13,063 | ||||||||
| Effect of foreign tax credits | (2,493 | ) | (327 | ) | 4,358 | |||||||
| Effect of uncertain tax positions | 1,355 | 2,709 | - | |||||||||
| Ratable allocation related to acquisition | - | - | (19,608 | ) | ||||||||
| Prior year true-ups | 196 | - | 5,191 | |||||||||
| Effect of GILTI Inclusion | 3,863 | - | - | |||||||||
| Effect of deferred true-ups | (3,572 | ) | - | - | ||||||||
| Other | (337 | ) | 265 | (1,128 | ) | |||||||
| Income tax expense | $ | 13,290 | $ | 10,945 | $ | 9,406 | ||||||
The Federal statutory tax rate is 21%. Southland effective tax rate was 17.6%, 20.9%, and 23.8% for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. The largest difference in our tax rate was that Southland and multiple of our affiliates have elected to be S corporations which are not subject to federal taxes. A summary reconciliation between the federal statutory rate and our effective rate is below:
| Year ended | ||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| Statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| Untaxable earnings | (2.8 | )% | 23.0 | % | (0.8 | )% | ||||||
| State income taxes - net of federal benefit | 0.1 | % | 7.5 | % | (1.2 | )% | ||||||
| Change in valuation allowances | 0.5 | % | (35.6 | )% | 33.0 | % | ||||||
| Effect of foreign income taxes | (3.3 | )% | (0.6 | )% | 11.0 | % | ||||||
| Effect of uncertain tax positions | 1.8 | % | 5.2 | % | - | % | ||||||
| Ratable allocation related to acquisition | - | % | - | % | (49.6 | )% | ||||||
| Prior year true-ups | 0.3 | % | - | % | 13.2 | % | ||||||
| Effect of GILTI Inclusion | 5.1 | % | - | % | - | % | ||||||
| Effect of deferred true-ups | (4.7 | )% | - | % | - | % | ||||||
| Other | (0.4 | )% | 0.5 | % | (2.8 | )% | ||||||
| Income tax expense | 17.6 | % | 20.9 | % | 23.8 | % | ||||||
The following tables summarize the components of deferred income tax assets and deferred tax liabilities as of December 31, 2022, and December 31, 2021:
| Year ended | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 20,426 | $ | 23,041 | ||||
| Deferred compensation | 1,728 | 2,032 | ||||||
| Lease liability | 2,225 | 3,754 | ||||||
| Income from surety | 1,860 | 5,861 | ||||||
| Capitalized research and development expenditures | 1,811 | - | ||||||
| Other | 2,052 | 1,435 | ||||||
| Total deferred tax assets | 30,102 | 36,123 | ||||||
| Valuation allowance | (21,703 | ) | (23,111 | ) | ||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (2,408 | ) | (6,575 | ) | ||||
| Intangible assets in excess of tax basis | (623 | ) | (762 | ) | ||||
| Passthrough income / joint ventures | (975 | ) | (2,945 | ) | ||||
| ROU asset | (2,264 | ) | (3,875 | ) | ||||
| Other | (5,521 | ) | (4,817 | ) | ||||
| Total deferred tax liabilities | (11,791 | ) | (18,974 | ) | ||||
| Net deferred tax liabilities | $ | (3,392 | ) | $ | (5,962 | ) | ||
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As of December 31, 2022, and December 31, 2021, we have available, foreign net operating loss (“NOLs”) carryforwards that total $82.1 million and $87.0 million, respectively, related to Canada and the United Kingdom. United Kingdom NOLs do not expire. Canada NOLs will begin to expire in 2038.
Unremitted earnings of our non-U.S. subsidiaries and affiliates are deemed to be permanently reinvested and, accordingly, no deferred income tax liability has been recorded. If we were to remit any foreign earnings to the U.S., the estimated tax impact would be insignificant to the overall financials due to an earnings and profits (“E&P”) deficit.
The need for a valuation allowance is assessed on a jurisdiction by jurisdiction basis for each tax reporting group. As a result of historic losses in the US, Canada and UK, all American Bridge jurisdictions have a full valuation allowance against the net deferred tax assets aside from the US deferred tax liability related to the indefinite-lived intangible asset. There is no valuation allowance recorded on Southland Mole of Canada or Oscar Renda Contracting as the deferred assets are considered to be “more-likely-than-not” to be realizable as of December 31, 2022. Our other entities have made “S-elections” which allows them to operate as pass-through entities for our members and noncontrolling interests. As such, these entities do not have deferred tax assets or liabilities.
As of December 31, 2022, and December 31, 2021, we reserved $4.1 million and $2.7 million, respectively related to uncertain tax positions. As of December 31, 2022 and December 31, 2021, $0.5 million and $0.0 million, respectively, were recorded for interest and penalties. As of December 31, 2022, and December 31, 2021, we had uncertain tax positions as follows:
| Year ended | ||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | ||||||
| Balance at beginning of period | $ | 2,708 | $ | - | ||||
| Additions to current year tax positions | 1,355 | 2,708 | ||||||
| Balance at end of period | $ | 4,063 | $ | 2,708 | ||||
As of December 31, 2022, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits in the next twelve months.
We are subject to taxation in the United States, various states, and foreign jurisdictions. We remain subject to examination by tax authorities for 2013 and 2014, due to the carryback of net operating losses enabled by the CARES Act, and for tax years 2019 – 2022. American Bridge is currently under IRS audit for tax year ended December 31, 2018.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted in the United States. Among other provisions, the IRA included a new 15% Corporate Alternative Minimum Tax (“CAMT”) for corporations with financial income in excess of $1 billion and a 1% excise tax on corporate share repurchases. The CAMT is effective for tax years beginning on or after January 1, 2023. As of December 31, 2022, the excise tax on corporate share repurchases is not expected to impact the Company as the Company has no plans for repurchases in the coming year.
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| 15. | Multiemployer Plans |
We are participants in various multiemployer defined benefit pension plans under the terms of collective bargaining agreements covering our union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
| a. | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers |
| b. | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be required to be assumed by the remaining participating employers. |
| c. | If we choose to stop participating in any of our multiemployer plans, we may be required to pay those plans a withdrawal amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
The following are the multiemployer plans providing pension benefits in which we participate:
| A. | Northwest Ironworkers Retirement Trust – Seattle, Washington |
| B. | IUOE Local 302 & 612 Construct – WA State |
| C. | Carpenters Trust of Western Washington Local 196 |
| D. | Iron Workers Union Security Funds |
| E. | Excavators Union Local 731 Pension Fund |
| F. | Carpenters District Council of Kansas City Pension Fund |
| G. | California Ironworkers Field Pension Fund |
| H. | Ironworkers Pension Plan of Western Pennsylvania |
| I. | Teamsters Local 282 Pension Trust Fund |
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| Plan | EIN/
Pension Plan # |
Latest
5500 Year Ending |
Pension Protection Act Zone Status - 2022 (a) |
Pension Protection Act Zone Status - 2021 (a) |
FIP/RP
Status Pending / Implemented (b) |
2022 Contributions (Amounts in thousands) |
2021 Contributions (Amounts in thousands) |
Surcharge Imposed |
Expiration Date of CBA |
||||||||||||||||||||
| A | 91-6123688 | 6/30/2021 | G | G | No | $ | 731 | $ | 2,564 | No | 6/30/2023 | ||||||||||||||||||
| B | 91-6028571 | 12/31/2021 | G | G | No | 544 | 616 | No | 5/31/2023 | ||||||||||||||||||||
| C | 91-6029051 | 12/31/2021 | G | G | No | 572 | 507 | No | 5/31/2023 | ||||||||||||||||||||
| D | 51-6102576 | 12/31/2021 | G | G | FIP Implemented | 2,996 | 519 | No | 6/30/2023 | ||||||||||||||||||||
| E | 13-1809825 | 12/31/2021 | G | G | No | 930 | 324 | No | 4/30/2026 | ||||||||||||||||||||
| F | 43-6108379 | 3/31/2021 | G | G | No | - | 77 | No | 4/30/2023 | ||||||||||||||||||||
| G | 95-6042866 | 5/31/2021 | G | G | No | 111 | 87 | No | 12/31/2024 | ||||||||||||||||||||
| H | 25-1283169 | 12/31/2021 | G | G | No | 48 | 70 | No | 5/31/2023 | ||||||||||||||||||||
| I | 11-6245313 | 2/28/2022 | G | R | FIP Implemented | 295 | 225 | No | 6/30/2023 | ||||||||||||||||||||
| J | 11-2392157 36-6052390 | 2/1/2021 | G | G | No | 100 | 32 | No | 6/30/2023 | ||||||||||||||||||||
| K | 91-6066773 | 4/1/2021 | G | G | No | 179 | 18 | No | 3/31/2024 | ||||||||||||||||||||
| L | 94-6277608 | 6/1/2021 | G | G | FIP Implemented | 212 | - | No | 6/30/2021 | ||||||||||||||||||||
| M | 43-6052659 | 10/31/2020 | G | G | No | 166 | 118 | No | 7/31/2023 | ||||||||||||||||||||
| All Others | 409 | 700 | No | Various | |||||||||||||||||||||||||
| $ | 7,293 | $ | 5,857 | ||||||||||||||||||||||||||
We did not contribute or participate as a signatory in any multiemployer plans prior to our acquisition of American Bridge in 2020.
| (a) | The most recent Pension Protection Act zone status available is as of the plans’ year end. The zone status (as defined by the Pension Protection Act) represents the level at which the plan is funded. Plans in the red zone (R) are less than 65% funded; plans in the yellow zone (Y) are more than 65% funded, but less than 80% funded; plans in the green zone (G) are at least 80% funded. A multiemployer defined benefit pension plan that has been certified in the yellow or red zone may begin to levy a statutory surcharge on contribution rates. Once authorized, the surcharge is at the rate of 5% for the first 12 months and 10% for any periods thereafter. Contributing employers may eliminate the surcharge by entering into a collective bargaining agreement that meets the requirements of the applicable Funding Improvement Plan (FIP) or Rehabilitation Plan (RP). We were not required to pay any surcharges to any plans in 2022 or 2021. |
| (b) | The “FIP/RP Status Pending/Implemented” column indicates plans for which a FIP or RP is either pending or has been implemented. |
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Such plans are administered through the unions involved. Under U.S. legislation regarding such pension plans, a company is required to continue funding its proportionate share of a plan’s unfunded vested benefits, if any, in the event of a withdrawal from a plan or plan termination. We have no present intention of withdrawing from any of these plans, and we have not been informed that there is any intention to terminate such plans.
We also contribute to multiemployer plans in Canada. Contributions to those plans totaled approximately $0.0 million, $0.2 million, and $0.2 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively.
In addition to the aforementioned plans, we contribute to various multiemployer defined contribution plans. Total contributions to these plans during the years ended December 31, 2022, December 31, 2021, and December 31, 2020, were approximately $5.1 million, $3.2 million and $0.8 million, respectively.
We also contribute to various multiemployer health and welfare plans. Total contributions for the years ended December 31, 2022, December 31, 2021, December 31, 2020, were $7.9 million, $5.8 million and $1.5 million, respectively.
| 16. | Collaboration Agreement |
In the past we have participated in a collaborative arrangement with S. J. Louis, Inc. (“SJ Louis”) to pursue various construction projects. The scope of services provided by us and SJ Louis would vary from project to project. When a project was successfully awarded as a result of this collaborative arrangement it would be awarded solely to us, or SJ Louis. The party that was awarded the contract would book costs incurred by, or due to, the other party as cost of construction.
| 17. | Related Parties |
We have multiple business arrangements with related parties which include our own employees and officers. They are summarized in the table below.
| (Amounts in thousands) | As of | |||||||||
| Description | Balance sheet classification | December 31, 2022 | December 31, 2021 | |||||||
| Accounts receivable from employees | Accounts receivable, net | $ | 181 | $ | 177 | |||||
| Accounts receivable from officers(1) | Accounts receivable, net | 2,712 | 2,693 | |||||||
| Accounts receivable from related parties | Accounts receivable, net | 1,347 | 1,347 | |||||||
| Accounts receivable from the preferred stockholders | Other noncurrent assets | 645 | 128 | |||||||
| Notes payable due to Southland Holdings Members | Long-term debt | 9,069 | 8,912 | |||||||
| Amounts due to collaborative arrangement | Accrued liabilities | 18,534 | 19,030 | |||||||
| Total related party transactions | $ | 32,488 | $ | 32,287 | ||||||
| (1) | Accounts receivable from officers was satisfied prior to consummating the Merger. |
We and certain of our subsidiaries enter cost sharing arrangements when such an arrangement would be operationally efficient.
The relationships between us and our related parties could result in operating results or financial positions that could differ from those that would have been obtained if the companies were autonomous.
F-38
| 18. | Commitments and Contingencies |
Litigation
In the ordinary course of business, we and our affiliates are involved in various legal proceedings alleging, among other things, liability issues or breach of contract or tortious conduct in connection with the performance of services and/or materials provided, the outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcomes of which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances, our government contracts could be terminated, we could be suspended or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to resolve the proceeding, whether or when any legal proceeding will be resolved is neither predictable nor guaranteed.
Accordingly, it is possible that future developments in such proceedings and inquiries could require us to (i) adjust existing accruals, or (ii) record new accruals that we did not originally believe to be probable or that could not be reasonably estimated. Such changes could be material to our financial condition, results of operations, and/or cash flows in any reporting period. In addition to matters that are considered probable for which the loss can be reasonably estimated, disclosure is also provided when it is reasonably possible and estimable that a loss will be incurred, when it is reasonably possible that the amount of a loss will exceed the amount recorded, or a loss is probable, but the loss cannot be estimated.
Liabilities relating to legal proceedings and government inquiries, to the extent that we have concluded such liabilities are probable and the amounts of such liabilities are reasonably estimable, are recorded on the consolidated balance sheets. A certain number of the claims are insured but subject to varying deductibles, and a certain number of the claims are uninsured. The aggregate range of possible loss related to (i) matters considered reasonably possible, and (ii) reasonably possible amounts in excess of accrued losses recorded for probable loss contingencies was immaterial, as of December 31, 2022, and December 31, 2021. Our estimates of such matters could change in future periods.
Surety Bonds
We, as a condition for entering a substantial portion of our construction contracts, had outstanding surety bonds as of December 31, 2022, and December 31, 2021. We have agreed to indemnify the surety if the surety experiences a loss on the bonds of any of our affiliates.
Self-Insurance
We are self-insured up to certain limits with respect to workers’ compensation, general liability and auto liability matters, and health insurance. We maintain accruals for self-insurance retentions based upon third-party data and claims history.
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| 19. | Remaining Unsatisfied Performance Obligations |
Remaining Unsatisfied Performance Obligations (“RUPO”) consists of two components: (1) unearned revenue and (2) awarded but not started. Unearned revenue includes the revenue we expect to record in the future on in-progress contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. Contracts that are awarded, but not yet started, are included in RUPO once a contract has been fully executed and/or we have received formal “Notice to Proceed” from the project owner.
Although RUPO reflects business that we consider to be firm, deferrals, cancellations and/or scope adjustments may occur. RUPO is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate.
Fixed price contracts, particularly with federal, state and local government customers, are expected to continue to represent a majority of our total RUPO.
The following schedule shows the RUPO as of December 31, 2022, and December 31, 2021:
| Year ended | ||||||||
| (Amounts in millions) | December 31, 2022 | December 31, 2021 | ||||||
| Remaining Unsatisfied Performance Obligations | $ | 2,973 | $ | 2,218 | ||||
The Company expects to recognize approximately 48% of its RUPOs as revenue during the next twelve months, and the balance thereafter.
| 20. | Profit Sharing Plan |
Some of our affiliates offer a voluntary 401(k) profit sharing plan and trust to their employees. Employees may elect to defer a portion of their salary to the plan. Our contributions are based on matching a percentage of employee contributions. We may make additional discretionary contributions. During the years ended December 31, 2022, December 31, 2021, and December 31, 2020, we made contributions of $1.8 million, $2.2 million, and $1.4 million, respectively.
F-40
| 21. | Noncontrolling Interests Holders |
Southland has several controlling interests including both joint ventures and partnerships. We have controlling interests and allocate earnings and losses in those entities to the noncontrolling interest holders based on their ownership percentages.
We own an 84.7% interest in Oscar Renda as of December 31, 2022, December 31, 2021, and December 31, 2020.
We own a 65.0% interest in the Southland Technicore Mole joint venture and a 70.0% interest in the Southland Astaldi joint venture as of December 31, 2022, December 31, 2021, and December 31, 2020.
We acquired the remaining 20.0% stake in Heritage Materials during March 2021 and owned 100% of Heritage Materials as of December 31, 2022, and December 31, 2021. We owned 80.0% of Heritage Materials as of December 31, 2020.
We consolidated each of Oscar Renda Contracting of Canada, Southland Technicore Mole joint venture, and Southland Astaldi joint venture as a result of our significant influence and ownership percentage over the joint venture operations. We have fully consolidated revenue, cost of construction, and other costs on our consolidated statements of operations and balances on the consolidated balance sheets.
Revenue and net income (loss) attributable to noncontrolling interests is as follows:
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Revenue | $ | 38,526 | $ | 59,437 | $ | 94,494 | ||||||
| Net income (loss) attributable to noncontrolling interests | 2,108 | 2,810 | (3,516 | ) | ||||||||
| 22. | Subsequent Events |
We have evaluated subsequent events through the date the financial statements were available for issuance to determine if their occurrence after the balance sheet date requires adjustment to the financial statements or disclosures. We have concluded no such adjustment is necessary.
On February 14, 2023, as contemplated by the Agreement and Plan of Merger, dated as of May 25, 2022 (the “Merger Agreement”), by and among the Company, Legato Merger Corp. II, a Delaware corporation (“Legato II”), and Legato Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of Legato II (“Merger Sub”), and as described in Legato II’s definitive proxy statement filed with the Securities and Exchange Commission on January 27, 2023, Merger Sub merged with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Legato II. In connection with the transactions contemplated by the Merger Agreement, Legato II changed its name to “Southland Holdings, Inc.”
F-41
Exhibit 99.2
Management Discussion and Analysis of Financial Condition and Results of Operations
References to the “Company,” “our,” “us,” “we,” or “Southland” refer to Southland Holdings, LLC. The following discussion and analysis contain forward-looking statements relating to future events or our future financial performance, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included under the “Cautionary Note Regarding Forward-Looking Statements” section of Southland Holdings, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of some of the uncertainties, risks, and assumptions associated with these statements. The following discussion and analysis present information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with the consolidated financial statements and the notes contained in Exhibit 99.1 to this Amendment No. 1 to the Form 8-K.
Overview
During the year ended December 31, 2022, and prior to the Merger, Legato Merger Corp. II was a blank check company incorporated for the purpose of effecting a merger or similar business combination with one or more businesses. For more information on the Merger, see the “Basis of Presentation” section of Southland Holdings, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022.
Following the Merger, Southland is a diverse leader in specialty infrastructure construction with roots dating back to 1900. We design and construct projects in the following end markets: bridges, tunnels, transportation and facilities, marine, steel structures, water and wastewater treatment, and water pipelines.
At Southland, our mission is to build great things that shape our landscape and foster sustainable infrastructure for future generations. We do this with integrity, never compromising our ethics, and putting the safety and well-being of our employees, and stakeholders, first.
Southland is based in Grapevine, Texas. It is the parent company of Johnson Bros. Corporation, American Bridge Company, Oscar Renda Contracting, Southland Contracting, Mole Constructors, and Heritage Materials. With the combined capabilities of these six subsidiaries, Southland has become a diversified industry leader with projects spanning North America in various end markets.
Key Factors Affecting Results of Operations
Business Environment
Our Civil segment operates throughout North America and specializes in services that include the design and construction of water pipeline, pump stations, lift stations, water and wastewater treatment plants, concrete and structural steel, outfall, and tunneling.
Our Transportation segment operates throughout North America and specializes in services that include the design and construction of bridges, roadways, marine, dredging, ship terminals and piers, and specialty structures and facilities. Our Transportation segment is responsible for the construction of bridges and structures including many of the most recognizable bridges, convention centers, sports stadiums, marine facilities, and ferris wheels in the world.
Both our Civil and Transportation segments continue to identify new opportunities to grow our business, and the future outlook of the end markets we serve remains positive. Although risk and uncertainty exist, including, but not limited to, the items addressed within our forward-looking statements and risk factors, we believe that we are well positioned to compete on new infrastructure projects in both the public and private sectors. We believe that we have the operational excellence, reputation, and technical skill to continue to grow our business.
Market Trends and Uncertainties
In both our Transportation and Civil segments, we have competitors within the individual markets and geographic areas in which we operate, ranging from small, local companies to larger regional, national, and international companies. Although the construction business is highly competitive, there are few, if any, companies which compete in all of our market areas, both geographically and from an end market perspective. The degree and type of competition is influenced by the type and scope of construction projects within individual markets. Equipment ownership and ability to self-perform across numerous disciplines are two of our significant competitive advantages. These two advantages contribute to what sets us apart from our competition. We believe that the primary factors influencing competition in our industry are price, reputation for quality, safety, schedule certainty, relevant experience, availability of field supervision and skilled labor, machinery and equipment, financial strength, as well as knowledge of local markets and conditions. We believe that we can compete favorably in all of these factors.
Many of our competitors have the ability to perform work in either the private or public sectors. When opportunities for work in one sector are reduced, competitors tend to look for opportunities in the other sector. This migration has the potential to reduce revenue growth and/or increase pressure on gross profit margins.
We have seen an increase in demand for specialty construction projects in recent years at the federal, state, and local level. We anticipate the further spending on infrastructure related to economic stimulus spending including the Infrastructure Investment and Jobs Act that was passed in 2021, and other federal, state, or local initiatives.
We believe that the combination of our experience, reputation, and technical expertise are unmatched among companies of our size. This combination of skills has allowed us to pursue complex projects with fewer competitors.
Seasonality, Cyclicality, and Variability
The results of our operations are subject to quarterly variations. Much of the variation is the result of weather, particularly rain, ice, snow, heat, wind, and named storms, which can impact our ability to perform construction activities. These weather impacts can affect revenue and profitability in either of our business segments. Any quarter can be affected either negatively or positively by atypical weather patterns in any part of North America, or other areas in which we operate. Traditionally, our first quarter is the most weather-affected; however, this may or may not necessarily be true in future periods.
Our business may also be affected by overall economic market conditions, including but not limited to declines in spending by project owners, delays in new projects, by changes in client schedules, or for other reasons.
2
Key Business Metrics
Backlog
In our industry, backlog is an indicator of future revenue streams for work that has been awarded but not completed. We define backlog as a measure of the total amount of revenue remaining to be earned on projects that have been awarded. We only include a project in our backlog once we have an executed contract, or authorized notice to proceed. As a result, we believe our backlog is firm, although cancellations or scope adjustments may occur.
In our industry, backlog is an indicator of future revenue streams for work that has been awarded but not completed. We define backlog as anticipated revenue from the uncompleted portion of existing contracts and therefore can be estimated.
Backlog should not be considered a comprehensive indicator of future revenue as any of our contracts can be terminated by our customers on relatively short notice, and backlog does not include future work for which we may be awarded. In the event of a cancelation, we are typically reimbursed for all of our costs through a specific contractual date, as well as our costs to demobilize from the project site. Costs may include preconstruction and engineering services as well as that of our subcontractors. Our contracts do not typically grant us rights to revenue reflected in backlog. Projects may remain in backlog for extended periods of time as a result of schedule delays, regulatory requirements, project specific issues, or other reasons. Contract amounts from contracts where a transaction price cannot be reasonably estimated are not be included within our backlog amount.
Other Non-GAAP Financial Measures
In addition to financial results determined in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”), in our industry, it is customary to manage our business using earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”). EBITDA assists management and our Board and may be useful to investors in comparing our operating performance consistently over time as it removes the impact of our capital structure and expenses that do not relate to our core operations.
Recently Issued Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“Update 2019-12”), which removes certain exceptions for investments, intra-period allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. Update 2019-12 was adopted as of January 1, 2021. The various amendments in Update 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. Our adoption of Update 2019-12 did not have a material impact on our consolidated financial statements and related disclosures.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“Update 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We adopted Topic 848 as of January 1, 2021. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected optional expedients for and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. Interest on the Second Amended and Restated Credit Facility accrues at an annual rate of LIBOR. Our adoption of Update 2020-04 did not have a material impact on our consolidated financial statements and related disclosures. Our outstanding debt uses the Secured Overnight Financing Rate (“SOFR”), and we do not have any other agreements that use LIBOR outside of our revolving credit facility.
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In June 2016, FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, (“Topic 326”). The standard requires the immediate recognition of estimated credit losses expected to occur over the life of financial assets rather than the current incurred loss impairment model that recognizes losses when a probability threshold is met. Topic 326 is effective for annual periods beginning after January 1, 2023, and interim periods within those fiscal years. The implementation of Topic 326 in 2023 will not have a material impact on our consolidated financial statements given the nature of our contracts and our historical loss experience.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses earned and incurred, respectively, during the reporting period. Critical accounting estimates are fundamental to the portrayal of both our financial condition and results of operations and often require difficult, subjective, and complex estimates and judgments by management. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods. The following discussion addresses the item we have identified as our critical accounting estimate.
Revenue Recognition
We recognize revenue over time as we satisfy our performance obligations. We generally use an input method measured by comparing actual costs incurred to date to total estimated costs for the project to recognize revenue as it is the best available method to recognize the progress of satisfying our performance obligations and transfer of control to our customers.
Due to the nature of our industry the use of this method requires us to make material estimates and assumptions that are subject to a high degree of uncertainty. To determine estimated transaction price and estimated cost at completion we rely on our experience, and outside expert opinions on an as needed basis, with particular types of projects and customers using information that is reasonably available to us.
An estimated transaction price can be impacted by numerous items related to variable consideration, including but not limited to: claims, approved and pending changes orders, unpriced change orders, completion incentives, liquidated damages, penalties, and other contractual provisions. An estimated cost at completion may fluctuate based on numerous items, including but not limited to:
| ● | Complexity in original design, |
| ● | Owner-directed changes, |
| ● | Non-owner directed factors that necessitate change in scope or construction methodology, |
| ● | Differing site conditions, |
| ● | Productivity, |
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| ● | Availability and cost of labor, equipment, or materials, |
| ● | Weather, |
| ● | Changes in technology, |
| ● | Governmental or environmental restrictions, |
| ● | Subcontractor and joint venture partner performance, |
| ● | Expected cost of warranties, |
| ● | Insurance costs, and |
| ● | Time to recover, or not recover, additional contract costs. |
We recognize the impact of any changes in estimated transaction price or estimated cost at completion on a cumulative catch-up basis. This can result in the recognition of revenue in a current period related to the satisfaction of performance obligations that occurred or partially occurred in a prior period. This can also result in the reversal of revenue recognized in a prior period, in the current period. If it is estimated that a project will have costs in excess of expected revenues, we recognize the full loss in that period and any adjustments to that expected loss in the period in which that change in expected loss may be identified.
Results of Operations
The following table sets forth summary financial information for the years ended December 31, 2022, December 31, 2021, and December 31, 2020:
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Revenue | $ | 1,161,431 | $ | 1,279,186 | $ | 1,057,936 | ||||||
| Cost of construction | 1,020,497 | 1,164,998 | 964,536 | |||||||||
| Gross profit | 140,934 | 114,188 | 93,400 | |||||||||
| Selling, general, and administrative expenses | 58,231 | 58,136 | 49,653 | |||||||||
| Operating income | 82,703 | 56,052 | 43,747 | |||||||||
| (Gain) loss on investments, net | 76 | (898 | ) | (2,068 | ) | |||||||
| Other income, net | (2,204 | ) | (2,780 | ) | (1,839 | ) | ||||||
| Interest expense | 8,891 | 7,255 | 8,096 | |||||||||
| Earnings before income taxes | 75,940 | 52,475 | 39,558 | |||||||||
| Income tax expense | 13,290 | 10,945 | 9,406 | |||||||||
| Net income | 62,650 | 41,530 | 30,152 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 2,108 | 2,810 | (3,516 | ) | ||||||||
| Net income attributable to Southland Holdings | $ | 60,542 | $ | 38,720 | $ | 33,668 | ||||||
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Revenue
Revenue for the year ended December 31, 2022, was $1,161.4 million, a decrease of $117.8 million, or 9.2%, compared to the year ended December 31, 2021. The decrease was primarily due to fewer project starts, and more projects nearing substantial completion in 2022 versus 2021.
Revenue for the year ended December 31, 2021, was $1,279.2 million, an increase of $221.3 million, or 21%, compared to the year ended December 31, 2020. The acquisition of American Bridge Company on October 1, 2020 contributed $229.6 million to the year over year increase and project activity in Florida contributed $117.2 million to the year over year increase, offset by decreases in revenue of $48.2 million for various Texas DOT projects and a combined decrease of $73.6 million related to three large projects compared to 2020.
Cost of construction
Cost of construction for the year ended December 31, 2022, was $1,020.5 million, a decrease of $144.5 million, or 12.4%, compared to the year ended December 31, 2021. The decrease in costs was primarily due to fewer project starts, and more projects nearing substantial completion in 2022 versus 2021.
Cost of construction for the year ended December 31, 2021, was $1,165.0 million, an increase of $200.5 million, or 21%, compared to the year ended December 31, 2020. The increase in costs was primarily due to increased construction activity following our acquisition of American Bridge Company in October of 2020, which contributed $140.9 million to the year over year increase, and project activity in Florida, which contributed $41.2 million to the year over year increase, offset by combined decreases of $78.3 million related to three large projects that had significant costs of construction in 2020.
Gross profit
Gross profit for the year ended December 31, 2022, was $140.9 million, an increase of $26.7 million, or 23.4%, compared to the year ended December 31, 2021. This increase was primarily due to an increase in proportionate volume of higher margin projects led by strong operating results in our Transportation segment and negative project adjustments in 2021 that impacted the period over period increase. Our gross margin percentage was 12.1% for the year ended December 31, 2022, compared to 8.9% for the year ended December 31, 2021.
Gross profit for the year ended December 31, 2021, was $114.2 million, an increase of $20.8 million, or 22%, compared to the year ended December 31, 2020. The increase was primarily due to strength in our Florida projects as well as the acquisition of American Bridge Company. Our gross margin percentage was 8.9% for the year ended December 31, 2021, compared to 8.8% for the year ended December 31, 2020. See segment results for more information.
Selling, general, and administrative costs
Selling, general, and administrative costs for the year ended December 31, 2022, were $58.2 million, an increase of $0.1 million, or 0.1%, compared to the year ended December 31, 2021. The increase, as a percentage of revenue, for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily driven by the costs associated with the merger with Legato Merger Corp. II.
Selling, general and administrative costs for the year ended December 31, 2021, were $58.1 million, an increase of $8.5 million, or 17%, compared to the year ended December 31, 2020. The increase was driven by our acquisition of American Bridge Company in October 2020, which contributed $9.6 million to the year over year increase. The acquisition added additional headcount and back-office operations.
Gain/loss on investments, net
Loss on investments, net for the year ended December 31, 2022, was $0.1 million, a decrease of $1.0 million, or 108%, compared to the year ended December 31, 2021. The decrease was primarily driven by a decrease in our total amount invested within our investment accounts.
Gain on investments, net for the year ended December 31, 2021, was $0.9 million, a decrease of $1.2 million, or 57%, compared to the year ended December 31, 2020. The decrease was primarily driven by a decrease in the total amount invested within our investment accounts.
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Interest expense
Interest expense for the year ended December 31, 2022, was $8.9 million, an increase of $1.6 million, or 23%, compared to the year ended December 31, 2021. The difference was attributable to increased borrowing and higher interest rates.
Interest expense for the year ended December 31, 2021, was $7.3 million, a decrease of $0.8 million, or 10%, compared to the year ended December 31, 2020. The difference was attributable to lower interest rates as a result of refinancing a majority of our equipment notes and replacing our revolving credit facility.
Income tax expense
Income tax expense for the year ended December 31, 2022, was $13.3 million, or an effective rate of 17.6%. The primary differences from federal statutory tax rate of 21% were (i) nontaxable earnings of $2.1 million due to the “S-elections” by multiple of our entities which decreased the worldwide effective rates by 2.8%, (ii) the utilization of foreign tax credits of $2.5 million from the inclusion of foreign income which decreased the worldwide effective rate by 3.3%, (iii) the effect of uncertain tax positions of $1.4 million which increased the world wide effective rate by 1.8%, and (iv) the permanent inclusion difference of foreign income through Section 951A Global Intangible Low-Taxed Income (GILTI) of $3.9 million net of related deductions which increased the worldwide effective rate by 5.1%.
Income tax expense for the year ended December 31, 2021, was $10.9 million, or an effective rate of 20.9%. The primary differences from federal statutory tax rate of 21% were (i) nontaxable earnings of $12.1 million due to the “S-elections” by multiple of our entities which created effective rates of 0%, (ii) a decrease in valuation allowances of $18.7 million due to changes within future earnings projections, and (iii) state income taxes of $3.9 million.
Segment Results
Segment Revenue
| Year Ended | ||||||||||||||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| % of Total | % of Total | % of Total | ||||||||||||||||||||||
| Segment | Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | ||||||||||||||||||
| Civil | $ | 305,324 | 26.3 | % | $ | 391,629 | 30.6 | % | $ | 368,588 | 34.8 | % | ||||||||||||
| Transportation | 856,107 | 73.7 | % | 887,557 | 69.4 | % | 689,348 | 65.2 | % | |||||||||||||||
| Total revenue | $ | 1,161,431 | 100.0 | % | $ | 1,279,186 | 100.0 | % | $ | 1,057,936 | 100.0 | % | ||||||||||||
Segment Gross Profit
| Year Ended | ||||||||||||||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||
| % of Segment | % of Segment | % of Segment | ||||||||||||||||||||||
| Segmsent | Gross Profit | Revenue | Gross Profit | Revenue | Gross Profit | Revenue | ||||||||||||||||||
| Civil | $ | 45,464 | 14.9 | % | $ | 40,913 | 10.4 | % | $ | 58,314 | 15.8 | % | ||||||||||||
| Transportation | 95,470 | 11.2 | % | 73,275 | 8.3 | % | 35,086 | 5.1 | % | |||||||||||||||
| Gross profit | $ | 140,934 | 12.1 | % | $ | 114,188 | 8.9 | % | $ | 93,400 | 8.8 | % | ||||||||||||
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Civil
Revenue for the year ended December 31, 2022, was $305.3 million, a decrease of $86.3 million, or 22%, compared to the year ended December 31, 2021. The decrease was primarily due to decreased activity, as projects approach substantial completion on a wastewater project in Toronto and a water project on the east coast which contributed $49.4 million and $29.7 million less in 2022 versus 2021, respectively.
Revenue for the year ended December 31, 2021, was $391.6 million, an increase of $23.0 million, or 6%, compared to the year ended December 31, 2020. The increase was due to increased activity on some of our large projects which drove overall revenue.
Gross profit for the year ended December 31, 2022, was $45.4 million, or 14.9% of segment revenue, compared to $40.9 million, or 10.4% of segment revenue, for the year ended December 31, 2021. The difference is attributable to a negative project adjustment, in 2021, on a wastewater project in Toronto, which contributed $4.9 million more in 2022 versus 2021.
Gross profit for the year ended December 31, 2021, was $40.9 million, or 10.4% of segment revenue, compared to $58.3 million, or 15.8% of segment revenue, for the year ended December 31, 2020. The difference is attributable to $8.3 million in subcontractor-caused critical path delays on a project in the Midwest, and decreased productivity of $7.4 million realized on a project in the northeast.
Transportation
Revenue for the year ended December 31, 2022, was $856.1 million, a decrease of $31.5 million, or 3.5%, compared to the year ended December 31, 2021. The decrease was primarily due to a project in Florida and a project in the Pacific Northwest contributing $69.9 million and $24.6 million less, respectively, for the year ended December 31, 2022 versus the year ended December 31, 2021 as these projects approached substantial completion during the year. These decreases were offset by a project in the Bahamas producing $70.4 million more for the year ended December 31, 2022 versus the year ended December 31, 2021 as the project activity increased according to its construction schedule.
Revenue for the year ended December 31, 2021, was $887.6 million, an increase of $198.2 million, or 29%, compared to the year ended December 31, 2020. The increase was primarily due strength in our southeast division and contribution from the acquisition of American Bridge. The increase in revenue was partially offset by lower bidding activity, reducing the number of new project starts during 2021.
Gross profit for the year ended December 31, 2022, was $95.5 million, or 11.2% of segment revenue, compared to $73.3 million, or 8.3% of segment revenue, for the year ended December 31, 2021. The difference is attributable to the same projects that drove the differences in revenues in 2022 versus 2021. These projects contributed $17.4 million more gross profit for the year ended December 31, 2022 versus the year ended December 31, 2021.
Gross profit for the year ended December 31, 2021, was $73.3 million, or 8.3% of segment revenue, compared to $35.1 million, or 5.1% of segment revenue, for the year ended December 31, 2020. The difference is attributable to an increase of $16.4 million related to activity on a transportation project in Florida and contributions from projects that were part of the American Bridge acquisition. These were offset by losses on transportation projects for Texas Department of Transportation.
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EBITDA Reconciliation
In our industry, it is customary to manage our business using earnings before interest, income taxes, depreciation and amortization (“EBITDA”). Below is a reconciliation of net income to EBITDA.
| Year ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Net income | $ | 60,542 | $ | 38,720 | $ | 33,668 | ||||||
| Depreciation and amortization | 45,697 | 47,468 | 39,370 | |||||||||
| Income taxes (benefit) | 13,290 | 10,945 | 9,406 | |||||||||
| Interest expense | 8,891 | 7,255 | 8,096 | |||||||||
| Interest income | (172 | ) | (47 | ) | (570 | ) | ||||||
| EBITDA | $ | 128,248 | $ | 104,341 | $ | 89,970 | ||||||
EBITDA for the year ended December 31, 2022, increased by $23.9 million, or 22.9%, compared to the year ended December 31, 2021, due primarily to increased gross profit as discussed in the Civil and Transportation segment discussion.
EBITDA for the year ended December 31, 2021, increased by $14.4 million, or 16%, compared to the year ended December 31, 2020, due primarily to an increase of $5.1 million in net income primarily due to strength in our southeast division and contribution from the acquisition of American Bridge. The combination were the primary factors in the increase of $20.8 million of gross profit. The increase in gross profit was partially offset by an increase in selling, general, and administrative costs of $8.5 million and an increase in net loss attributable to noncontrolling interests $6.3 million.
Liquidity, Capital Commitments and Resources
Our principal sources of liquidity are cash generated from operations, funds from borrowings, and existing cash on hand. Our principal uses of cash typically include the funding of working capital obligations, debt service, and investment in machinery and equipment for our projects.
Based on historical and anticipated future operating results, we believe cash flow from operations, available cash, amounts available to us under the revolving credit agreement, and other financing will be adequate to meet our liquidity needs for at least the next twelve months, including any anticipated requirements for working capital, capital expenditures, and scheduled debt service.
Our current and future liquidity is greatly dependent upon our operating results, which are largely determined by overall economic conditions and our current contracts and backlog. Our liquidity could be adversely affected by a disruption in the availability of credit. If such a material adverse event were to occur, we may be unable to borrow under our revolving credit agreement or may be required to seek additional financing. In addition, we may be required to seek additional financing to refinance all or a significant portion of our existing debt on or prior to maturity.
We are exposed to market risks relating to fluctuations in interest rates and currency exchange risks. Significant changes in market conditions could cause interest rates to increase and have a material impact on the financing needed to operate our business.
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The following table sets forth summary change in cash, cash equivalent and restricted cash for the years ended December 31, 2022, December 31, 2021, and December 31, 2020:
| Year Ended | ||||||||||||
| (Amounts in thousands) | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Net cash used in operating activities | $ | (66,202 | ) | $ | (90,573 | ) | $ | (50,171 | ) | |||
| Net cash provided by (used in) investing activities | 5,562 | (8,499 | ) | 195,817 | ||||||||
| Net cash provided by (used in) financing activities | 20,135 | 30,604 | (47,953 | ) | ||||||||
| Effect of exchange rate changes | 1,254 | (686 | ) | 968 | ||||||||
| Net change in cash, cash equivalents, and restricted cash | $ | (39,251 | ) | $ | (69,154 | ) | $ | 98,661 | ||||
Net cash used in operating activities was $66.2 million during the year ended December 31, 2022, compared to $90.6 million and $50.2 million for the years ended December 31, 2021, and December 31, 2020, respectively. During the year ended December 31, 2022, and in addition to net income of $62.7 million, the primary driver in cash used in operating activities comes from a $138.7 million increase in contract assets that represents the timing difference between recognizing revenue and billing the customer. This was partially offset by a $20.0 million increase in contract liabilities and an amortization and depreciation amount of $45.7 million. During the year ended December 31, 2021, the primary driver in cash used in operating activities comes from a $188.7 million decrease in contract liabilities. This was primarily related to the contract liabilities assumed by Southland as part of the American Bridge business combination. This was partially offset by an increase to $26.4 million in accounts payable and accrued expenses and an increase in depreciation and amortization to $47.5 million. During the year ended December 31, 2020, the primary driver in cash used in operating activities comes from a $60.0 million decrease in contract liabilities and was driven by liabilities assumed as part of the American Bridge business combination. Contract assets increased $58.5 million due to contracts assets assumed as part of the American Bridge business combination. This was partially offset by $39.4 million in depreciation and amortization and a decrease of $15.7 million in accounts receivable.
Net cash provided by (used in) investing activities was $5.6 million, ($8.5) million, and $195.8 million during the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. Net cash provided by investing activities for the year ended December 31, 2022 was driven primarily by the purchase of fixed assets, which contributed ($4.8) million, and proceeds from the sale of fixed assets, which contributed $10.1 million. Similarly for the year ended December 31, 2021, the net cash used in investing activities was driven primarily by the purchase of fixed assets, which contributed ($18.8) million, and proceeds from the sale of fixed assets, which contributed $11.3 million. Net cash provided by investing activities was $195.8 million for the year ended December 31, 2020. The year ended December 31, 2020, was an outlier due to the receipt of $231.9 million from the sureties related to the American Bridge combination, which was partially offset by $31.0 million in purchases of property and equipment.
Net cash provided by (used in) financing activities was $20.1 million, $30.6 million, and ($48.0) million, respectively, for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. For the year ended December 31, 2022, the primary driver was borrowings on the line of credit for $75.0 million and payments on notes payable for $42.9 million. For the year ended December 31, 2021, the primary driver was borrowings of $206.2 million in new borrowings on notes payable and $67.0 million in borrowing on the revolving loan, which was partially offset by payments on notes payable of $153.6 million and repayments of $82.0 million on the revolving loan. During the year ended December 31, 2020, we repaid $77.0 million on the revolving loan, $51.2 million of notes payable, and made distributions of $6.2 million. This was partially offset by borrowings of $57.0 million on the revolving loan and $34.4 million in notes payable.
As of December 31, 2022, we had long-term debt of $273.6 million, of which $46.3 million is due within the next twelve months.
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Revolving Credit Facility
In July 2021, we entered into a revolving credit agreement with Frost Bank for $50.0 million. As of December 31, 2022, the revolving credit facility agreement had been amended and increased to $100 million. The revolving credit facility agreement bears interest on drawn balances at 1-month SOFR, subject to a floor of 0.90%, plus an applicable margin rate of 2.10%. As of December 31, 2022, $95.0 million was drawn on the revolver, and we had $5.0 million available.
Secured Notes
We enter secured notes in order to finance growth within our business. As of December 31, 2022, we had secured notes expiring between November 2023 and May 2030. Interest rates on the secured notes range between 1.29% and 6.50%.
Mortgage Notes
We enter mortgage notes in order to finance growth within our business. As of December 31, 2022, we had mortgage notes expiring between October 2023 and February 2029. Interest rates on the mortgage notes range between 3.84% and 5.99%.
Equipment OEM Notes
We enter equipment notes in order to complete certain specialty construction projects. As of December 31, 2022, we had equipment notes expiring in April 2023. As of December 31, 2022, there is no interest rate on any of our equipment notes.
Backlog
The following table sets forth backlog information for the years ended December 31, 2022 and December 31, 2021:
| (Amounts in thousands) | Backlog | |||
| Balance: December 31, 2020 | $ | 2,897,381 | ||
| New contracts, change orders, and adjustments | 592,393 | |||
| Gross backlog | 3,489,774 | |||
| Less: contract revenue recognized in 2021 | (1,271,201 | ) | ||
| Balance December 31, 2021 | $ | 2,218,573 | ||
| New contracts, change orders, and adjustments | 1,892,946 | |||
| Gross backlog | 4,111,519 | |||
| Less: contract revenue recognized in 2022 | (1,137,634 | ) | ||
| Balance December 31, 2022 | $ | 2,973,885 | ||
Backlog should not be considered a comprehensive indicator of future revenue as any of our contracts can be terminated by our customers on relatively short notice, and backlog does not include future work for which we may be awarded. In the event of a cancelation, we are typically reimbursed for all of our costs through a specific contractual date, as well as our costs to demobilize from the project site. Our contracts do not typically grant us rights to revenue reflected in backlog. Projects may remain in backlog for extended periods of time as a result of schedule delays, regulatory requirements, project specific issues, or other reasons. Contract amounts from contracts where a transaction price cannot be reasonably estimated are not included within our backlog amount.
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Construction Costs and Raw Materials
We manage our business to minimize or eliminate exposure to labor and material price increases, including through inflation, in our bids for projects, when possible. Our contracts typically contain protections in the case of excessive increases in the cost of either labor or equipment. In our fixed price contracts, we bid with assumptions of increases in wages and prices of raw materials. Frequently, we obtain fixed price quotes from major subcontractors and material suppliers early in our project schedules. Our fixed price contract bids also tend to contain contingencies for inflation or other significant increases. The construction and other materials needed to complete our projects tend to be available locally from multiple suppliers which insulates us from being overly reliant on any particular vendor.
Supply-chain disruption has continued for many of the materials and inputs that we need to complete our projects. Specifically, prices of oil, gas, and other fuel sources have increased. Additionally, the cost and availability of many construction materials and labor has impacted project costs and scheduling. We have continued to mitigate these impacts to the extent possible by passing these costs on to our customers when possible and agreeing to fixed-cost contracts with suppliers and subcontractors for labor and materials.
Our operations can be impacted by increases in prices, whether caused by inflation or other economic factors. We attempt to recover anticipated increases in the cost of labor, materials, equipment, and fuel through price escalation provisions in certain contracts and by considering the estimated increases in costs in our bidding on new work. We often seek to get fixed-price bids from subcontractors and suppliers upon signing new contracts to control costs. For the years ended December 31, 2022, December 31, 2021, and December 31, 2020, we did not have material impacts to our profitability due to increased costs. This does not mean that we will be able to effectively manage the impact of increasing costs on our profitability in the future.
Due to the “COVID-19” pandemic and Russia’s invasion of Ukraine, the construction industry has experienced widespread supply chain impacts. Labor costs continue to increase due to shortages of qualified workers. Hiring and retaining our skilled workers continues to be a priority to avoid future potential labor shortages.
Risk Management, Insurance, and Bonding
We are insured to cover a broad range of exposures arising from our work in the construction industry. All of our policies have been procured with limits and deductibles or self-insured retention amounts of varying amounts per occurrence. We believe that our insurance coverage meets or exceeds our needs relating to any casualty or other type of insurance loss.
Our safety team has created an atmosphere of safety at our projects which results in a favorable loss experience factor. Our safety directors and site-specific safety managers work together to assess and control potential losses and liabilities both before and during our construction projects. Our safety record is in-line with industry standards.
In our industry, we are generally required to possess various types of surety bonds guaranteeing our completion of projects for most public and private customer contracts. Surety bond costs and our ability to obtain surety bonds are largely contingent on our working capital, Backlog, past performance and reputation, capitalization, management and technical expertise, and other factors at the underwriter’s discretion. To date, we have been able to acquire the level of surety bonds necessary to support our business.
Government Regulations
Our business is subject to environmental, health and safety, government procurement, anti-bribery, and other government regulations and requirements. We believe that we have all of the necessary licenses required to conduct our operations and that we are in substantial compliance with applicable regulatory requirements.
Below is a summary of some of the significant regulations that impact our business.
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Environmental
Our operations are subject to various federal, state, local, and foreign laws and regulations relating to the environment, including those relating to the Clean Water and Clean Air Acts. In addition, the Environmental Protection Agency (the “EPA”) and other federal, state, local, and international agencies regulate our operations including in regards to the handling, transportation and disposal of non-hazardous and hazardous substances and waste, as well as emission and discharges into the environment; including discharges to air, surface water, groundwater, soil, and others.
We have a substantial investment in construction equipment that utilize diesel and gasoline fuel, which could be negatively impacted by regulations related to greenhouse gas emissions from such sources.
We are subject to laws and regulations governing the liability and cleanup responsibility for the release of hazardous substances into the environment. Under certain of these laws and regulations, liability can be assessed for sites to which hazardous substances or wastes were sent by current, or former operations at our facilities, or for the cleanup of previously owned or leased properties, irrespective of whether our activities were in violation of laws and regulations at the time or whether we directly caused the contamination. The presence of contamination from hazardous substances or wastes at our sites could preclude the sale, lease or use of our properties as collateral for financing.
We evaluate our compliance with environmental laws on a continual basis.
The majority of our revenue was recognized from contracts funded by federal, state, and local government agencies and authorities. Government contracts contain specific procurement regulations, contract provisions, and a variety of other requirements related to the formation, administration, project performance, and accounting. These agreements require certification of compliance.
Our operations are subject to various statutes and executive orders. These include but are not limited to:
| ● | the Davis-Bacon Act which regulates wages and benefits, |
| ● | Executive Order 11246 which establishes equal employment opportunity and affirmative action requirements, |
| ● | the Walsh-Healy Act which prescribes a minimum wage and regulates overtime and other working conditions, |
| ● | Executive Order 14063 which requires project labor agreements on all federal construction projects with contract values over $35 million, |
| ● | the Drug-Free Workplace Act, and |
| ● | the Federal Acquisition Regulation and the Federal Civil False Claims Act. |
We are also subject to the rules and regulations promulgated by the Occupational Safety and Health Administration (“OSHA”) and the Mine Safety and Health Administration and other regulations. In addition, certain contracts within our government agency projects contain minimum Disadvantaged Business Enterprise (“DBE”) participation clauses.
These laws and regulations affect how we transact business and, in some instances, impose additional costs on our business operations, which may adversely affect our business, results of operations and financial condition. As further described in the “Item 1A. Risk Factors” section of Southland Holdings, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022, violation of specific laws and regulations could lead to fines, contract termination, debarment of contractors and/or suspension of future contracts. Our government customers can also terminate, renegotiate or modify any of their contracts with us at their convenience.
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Anti-Corruption and Bribery
We are subject to the Foreign Corrupt Practices Act (“FCPA”). The FCPA prohibits U.S. and other business entities from making improper payments to foreign government officials, political parties or political party officials. We are also subject to the applicable anti-corruption laws in the jurisdictions in which we operate, thus potentially exposing us to liability and potential penalties in multiple jurisdictions. The anti-corruption provisions of the FCPA are enforced by the Department of Justice while other state or federal agencies may seek recourse against the Company for issues related to FCPA. In addition, the “SEC” requires strict compliance with certain accounting and internal control standards set forth under the FCPA. Failure to comply with the FCPA and other laws can expose us and/or individual employees to potentially severe criminal and civil penalties. Such penalties may have a material adverse effect on our business, results of operations and financial condition. We devote resources to the development, maintenance, communication and enforcement of our Code of Conduct, our anti-bribery compliance policies, our internal control processes and compliance related policies. We strive to conduct timely internal investigations of potential violations and take appropriate action depending upon the outcome of the investigation.
Human Capital Resources
We have built a culture of hard work and excellence with a diverse and inclusive workplace as a business imperative because our people are our single most important asset. In our high-performance culture, everyone is treated fairly and respectfully and has equal access to opportunities based on capabilities and performance, regardless of gender, generation, sexual orientation, mental and physical ability, race, ethnicity, and other protected classes.
Our workforce was made up of approximately 2,500 employees as of December 31, 2022, of which 550 were salaried and 1,950 were hourly.
Union Workforce
Several of our subsidiaries are a signatory to numerous local and regional collective bargaining agreements, both directly and through trade associations, as a union contractor. These agreements cover all necessary union professions and are subject to renewal periodically. As of December 31, 2022, about 660, or 26%, of our employees were represented by a union. Estimated amounts for wage escalation related to the expiration of union contracts are included in our bids on various projects.
Diversity and Inclusion
We employ a dynamic mix of people to create the strongest company possible. Our policy strictly forbids discrimination in employment on the basis of age, culture, gender, national origin, sexual orientation, physical appearance, race, or religion. We are an inclusive, diverse company with people of all backgrounds, experience, culture, styles, talents, and other protected classes.
Professional and Career Development
We strive to develop and sustain a skilled labor advantage by providing thorough on and off-site training programs, project management training, and leadership development programs.
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Safety, Health, and Wellness
We are committed to providing a safe environment for our employees. We pride ourselves in workplace safety. We track and maintain several key safety metrics, which senior management reviews monthly, and we evaluate management on their ability to provide safe working conditions on job sites and to create a strong safety culture.
Compensation and Benefits
As part of our compensation philosophy, we believe that we must offer and maintain market competitive total compensation and benefit packages for our employees in order to attract and retain superior talent. We benchmark our benefits package against our competitors on a yearly basis.
We also provide additional benefits to our employees, including a 401(k) Match Plan, healthcare and insurance benefits, paid time off, family leave, flexible work schedules, and employee assistance programs.
Code of Conduct
All of our employees are subject to our Code of Conduct, which includes guidance and requirements concerning, among other things, general business ethics, including policies concerning the environment, conflicts of interest, harassment and discrimination, data security and privacy, and the Anti-Bribery and Corruption Policy, which includes guidance and requirements concerning, among other things, interactions with government officials, provisions of gifts, entertainment and hospitality, and charitable and political contributions.
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