Q3 2025 Earnings Call: Contradictions Emerge on Legacy Claims Settlement, Civil Margins, and Data Center Strategy

Date of Call: November 13, 2025

Financials Results

• Revenue: $213.3M, up $40.0M year-over-year
• EPS: Net loss of $1.39 per share (net loss $75.2M), compared to net loss of $1.14 per share (net loss $54.7M) prior year; ~ $1.06/share due to one-time noncash valuation allowance on deferred tax assets
• Gross Margin: Consolidated gross margin 1.5%, compared to -29.5% in prior year

Guidance:

• Expect to burn ~39% of $2.26B backlog over the next 12 months
• Effective tax rate for 2026 expected to be 15%–20%
• Interest expense expected to average approximately $9.5M per quarter
• Legacy projects to have less impact in 2026; majority winding down by 2026–27
• Expect to convert selected data-center utility/site opportunities to backlog in coming quarters
• Exploring a debt facility to increase capacity; expect to close before next quarter
• Expect overall positive operating cash flow in 2026 despite potential Q4/Q1 timing variability (Q4: $3M expected collections)

Business Commentary:

* Completion of Legacy Projects: - Southland Holdings achieved substantial completion on the last of the 27 highly technical projects assumed from the acquisition of American Bridge Company. - This accomplishment was a result of the company's operational expertise, technical knowledge, and ability to execute complex infrastructure projects.

• Improvement in Financial Performance:
• The company reported third-quarter revenue of $213 million, with a gross profit of $3.3 million, marking a significant improvement from the same period last year.

• The increase in gross profit margin to 1.5% was driven by strong performance in new core work and fewer impacts from legacy projects.

• Progress in Resolving Disputes:

  

• Southland made progress in resolving smaller disputes, resulting in cash collections of approximately $6.5 million in the quarter, with an additional $3 million expected in the coming months.

• This progress is attributed to ongoing negotiations and a focus on finalizing legacy projects.

• Positive Outlook on Market Demand:

• The company has a positive outlook on market demand for infrastructure, expecting robust demand to continue for years.

• This outlook is supported by strong demand for infrastructure in both public and private markets, including the IIJA, Texas Water Fund, and other upcoming opportunities.

• Expansion into Data Center Projects:

• Southland is evaluating data center opportunities, with a focus on projects that align with the company's core capabilities in utility and site development.
• This expansion is driven by the growing demand for data centers, particularly in rural areas, and the potential for attractive margins in utility packages.

Sentiment Analysis:

Overall Tone: Neutral

• CEO: 'our core business is performing well' and expects to 'win our fair share of high-margin projects.' CFO: consolidated gross margin improved to 1.5% from -29.5% prior year and EBITDA improved to negative $3.5M vs negative $8.7M prior year; large one-time $57.3M valuation allowance drove much of the GAAP loss.

Q&A:

• Question from Adam Thalhimer (Thompson, Davis & Company, Inc., Research Division): I want to start with your comment on data centers. I was curious if you were looking at anything else on the private side? And what is the scope that -- or how big are those packages potentially for you?
  Response: Data-center utility/site opportunities align with our water/wastewater core capabilities and are being pursued selectively to supplement public work.

• Question from Adam Thalhimer (Thompson, Davis & Company, Inc., Research Division): You took an $8M hit to gross profit from claims settlement in Q3, but that's going to lead to $9.5M in cash, so not a terrible trade-off there. I'm just curious, you sounded like you had a little better sense and you had a little bit more, I don't know, momentum or it seemed like you had a higher confidence that maybe a lot more of these legacy claims would get settled, call it, in the next 12 months. Is that fair to say?
  Response: Yes — we've made progress on smaller disputes, see contract assets declining, and expect meaningful settlement progress and cash collections over the next 12 months.

• Question from Adam Thalhimer (Thompson, Davis & Company, Inc., Research Division): The project delays that impacted you in Q3. Have those projects started in Q4? And I know you're not giving guidance, but just curious if you kind of expect to end the year on a higher note.
  Response: Q4 should be similar to Q3 with perhaps a slight uptick.

• Question from Julio Romero (Sidoti & Company, LLC): I wanted to talk about the free cash flow outlook for the fourth quarter, just given the decrease in the contract assets, which is certainly notable, but also the increase in the receivables. I believe you called out the $3 million in cash collections expected in the fourth quarter, but just -- I keep looking at that increase in receivables. I'm just trying to see if you could help us out with kind of a finer point on free cash for the fourth quarter.
  Response: We generated positive operating cash flow in the quarter and year-to-date; may see a decrease in Q4 and Q1 2026 but expect overall positive operating cash flow for 2026.

• Question from Julio Romero (Sidoti & Company, LLC): Can you help us size up the pipeline for some of these additional quick turn projects in the Civil segment? And has the size and runway evolved at all since Texas's passage of Proposition 4 to fund order infrastructure projects?
  Response: Civil is producing double-digit margins (10.5% this quarter; ~17% YTD); pipeline targets $50M–$150M quick-turn projects and Texas Prop 4 adds long-term water project tailwinds.

• Question from Julio Romero (Sidoti & Company, LLC): Are you guys kind of the only game in town with those tunnel boring machines? Or can you just speak to how that kind of differentiates you there?
  Response: We have a meaningful competitive advantage owning/producing TBMs and operate one of the larger PBM fleets in the U.S., which should help win tunnel work.

• Question from Christian Schwab (Craig-Hallum Capital Group LLC, Research Division): Frank, I'm just wondering if you could give us an idea of the size of the projects for a typical data center that you're looking into?
  Response: Targeting data centers near existing water/wastewater projects; package sizes cited in the call varied roughly in the ~$15M–$75M range per package.

• Question from Christian Schwab (Craig-Hallum Capital Group LLC, Research Division): As we go into '27, would you expect your core business is to run at the current margin profile? Or do you think that could actually improve in '27?
  Response: 2025 was a reset to clean up legacy work; expect to move into core work in 2026 and be fully in core markets by 2027 with improved profitability.

Contradiction Point 1

Legacy Claims Settlement and Cash Flow

It involves differing expectations around the settlement of legacy claims and their impact on cash flow, which is crucial for financial planning and investor expectations.

Does the $8M gross profit hit from Q3 claims settlements (which will result in $9.5M in cash) indicate higher confidence that more legacy claims will be resolved within the next 12 months? - Adam Thalhimer(Thompson, Davis & Company, Inc., Research Division)

2025Q3: We've made some progress this quarter on some of the smaller disputes, which leads to some optimism. It's good to see our contract assets balances coming down. But no, we're at the table on numerous claims, and we expect some real progress over the next 12 months. - Frankie S. Renda(CEO)

Will contract asset reduction accelerate in 2025? - Adam Thalhimer(Thompson Davis)

2024Q4: We're making progress on legacy claims, primarily from 2017-2019 jobs. We expect significant cash flow from these claims in coming quarters. - Frank Renda(CEO)

Contradiction Point 2

Civil Segment Margin Expectations

It involves differing expectations around the margins of the Civil segment, which is an important indicator of the segment's financial health and operational efficiency.

Can you size up the pipeline for additional quick-turn projects in the Civil segment? Has the size and runway evolved since Texas passed Proposition 4 to fund infrastructure projects? - Julio Romero(Sidoti & Company, LLC)

2025Q3: Civil margins have been strong, and we expect this to continue. This quarter, Civil margins were 10.5%, which included impacts of $8 million from dispute resolutions. Year-to-date, gross margins are roughly 17%. - Frankie S. Renda(CEO)

Can you explain the drivers of gross profit in the Civil segment and whether non-M&P legacy issues will be resolved by year-end 2025? - Julio Romero(Sidoti Company)

2024Q4: We're excited about core Civil projects producing strong margins. An unfavorable dispute resolution impacted Q4, but we expect to complete most non-M&P legacy work by end of 2025. - Cody Gallarda(CFO)

Contradiction Point 3

Contract Assets and Cash Flow

It involves expectations surrounding the resolution of legacy claims, which directly impacts the company's cash flow and financial stability.

You recorded an $8 million gross profit reduction from claims settlements in Q3 but expect $9.5 million in cash recovery. Have you gained increased confidence that more legacy claims will resolve within the next 12 months? - Adam Thalhimer(Thompson, Davis & Company, Inc., Research Division)

2025Q3: We've made some progress this quarter on some of the smaller disputes, which leads to some optimism. It's good to see our contract assets balances coming down. But no, we're at the table on numerous claims, and we expect some real progress over the next 12 months. - Frankie S. Renda(CEO)

Can you provide an update on outstanding disputed contracts? - Christian David Schwab (Craig-Hallum)

2025Q2: We continue to make small progress on settling legacy claims. No major updates this quarter. We're working vigorously to collect every dollar we are owed and expect positive cash flow from these claims in the coming quarters. - Frankie S. Renda(CEO)

Contradiction Point 4

Data Center Opportunities and Current Market Focus

It highlights differing perspectives on the company's focus and potential growth areas within the data center sector.

Are you exploring other private opportunities, and what is their potential size? - Adam Thalhimer(Thompson, Davis & Company, Inc., Research Division)

2025Q3: What we're looking at is stuff that's in our core market. There are some larger data centers, and these developments have exploded in the past couple of years. - Frankie S. Renda(CEO)

How will the business's margin profile be affected this summer as you phase out legacy designs, and will the phase-out be complete by year-end 2025? - Christian Schwab (Craig-Hallum Capital Group LLC, Research Division)

2025Q1: For the U.S., we get our gross margin improvement from the data center segment. But you have to remember, data center is a more immature market for us. And as we said before, we've got to get to 10 or 15. We're going to get there, but it's going to put pressure on us. - Keith Bassano(CFO)