Good morning, and welcome to the Cardinal Infrastructure Hughes Brothers acquisition conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mike Rowe, Cardinal's Chief Financial Officer. Please go ahead.
Thank you, and good morning, everyone. Joining me today is Cardinal's Chief Executive Officer, Jeremy Spivey. This morning, we issued a press release announcing our entry into a definitive agreement to acquire Hughes Brothers, a leading heavy civil and site development contractor. Today's remarks will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to varying risk and uncertainty. With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Jeremy Spivey.
Thank you, Mike. Good morning, everyone, and thank you for joining us. We're really excited to announce the acquisition of Hughes Brothers and our entry into Central Florida. When we look at a new platform, there are a few things that really matter to us. It starts with the people. Then we look at the customer relationships, the services they provide, how much work they self-perform, the equipment they own, and ultimately, whether this is a business we can build around for a long time. When we looked at Hughes Brothers, we saw a lot of Cardinal. They have an experienced team of more than 500 employees, an owned equipment fleet, strong wet utility and site development capabilities, and long-standing relationships with customers across residential, commercial, industrial, and municipal markets. Importantly, we're entering Central Florida with scale on day one.
We have the people, equipment, customer relationships, and backlog already in place. Their average project is more than 80 acres, so this is a team accustomed to executing the type of large and complex site work that fits very well with how Cardinal operates. We've talked since the IPO about building Cardinal across the Southeast. We started in Raleigh, expanded across the Carolinas, and entered Atlanta through ALGC. Florida is a natural next step, but the important thing for us was finding the right business and the right team to enter the market with. We believe Hughes gives us both. Just as importantly, Chad and Justin Hughes will continue leading the business. Our job isn't to come in on day one and change what has made Hughes successful.
It's to support the team, bring Cardinal's resources to the table, and identify opportunities over time to add capabilities, build density, and help the business grow faster. We've seen that playbook work with ALGC We acquired an already strong grading and site development business, then began adding services, increasing density, and bringing work in-house that had previously been subcontracted. We see similar opportunities over time with Hughes, whether that's adding complementary capabilities, doing more with existing customers, expanding across end markets, or pursuing tuck-in acquisitions around the platform. This will be our fourth acquisition this year following ALGC, Piedmont Pipe, and Allied Paving. Hughes fits the platform framework we've laid out for investors. Strong local leadership, meaningful scale, wet utility capabilities, significant self-performance, and a financial profile that fits Cardinal very well. I'll turn it back to Mike to walk through the transaction details.
Thanks, Jeremy. We are acquiring Hughes Brothers for initial consideration of $357.5 million, funded through a combination of Cardinal Class A stock, $156 million in new debt, and cash on hand. At least 40% of the closing consideration will be funded with Cardinal equity, and shares issued to the selling shareholders will be subject to 180-day lock-up. The initial purchase price is consistent with the valuation framework we communicated for new market platform acquisitions. The structure also preserves balance sheet flexibility and keeps Hughes' ownership team aligned with Cardinal shareholders. From a leverage perspective, we expect pro forma net leverage of approximately 1.4 x, well below our stated maximum target of 2.5 x. This leaves us with meaningful flexibility to continue our disciplined organic and inorganic investment approach.
Turning to Hughes' financial profile, the business generated more than $220 million of revenue from the trailing 12 months ended June 30th, and its adjusted EBITDA margin profile is immediately accretive to Cardinal's current guided margin range. Hughes also has $350 million of backlog, providing strong visibility into future activity. As we discussed, for Cardinal's own backlog, project timing can move, so investors shouldn't view that backlog as a precise quarter-by-quarter revenue schedule. But it gives us confidence in both the activity level and the customer relationships we're acquiring. The selling shareholders are also eligible to receive up to $97.5 million of additional consideration based on Hughes Brothers' 2026 adjusted EBITDA performance, payable in cash and Cardinal stock. Put simply, the additional consideration is tied directly to the financial performance of the business.
The point I want to emphasize is that we like the economics of this transaction based on the business as it operates today. We're not underwriting the deal to a large synergy target or assuming we have to materially change Hughes for the transaction to work. We certainly see opportunities to create additional value over time, but we view those as upside to an already attractive platform. I'll turn it back to Jeremy.
Thanks, Mike. I'll leave you with this. We're entering Central Florida with a strong business, an experienced local team, and the scale to compete from day one. Chad, Justin, and their team have already built a great company, and our job is to help them build on it. We've seen the Cardinal playbook work across our existing markets, and we're excited to now bring that same approach to Central Florida. Operator, let's open the line for questions.
Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question will come from the line of Brian Brophy of Stifel. Brian, your line is open.
Yeah. Thanks. Good morning, everybody. Congrats on the deal. Just a couple of questions here. Can you give us a sense for the end market mix of Hughes? I would assume it's primarily residential. Just given that, how has backlog been trending here over the past year or so, given some of the softness we've seen in Florida's housing market? Thanks.
Yeah. Good morning, Brian. Hughes has a longstanding customer relationship across residential, commercial, industrial, a little bit of municipal, geared mostly towards residential, given their location in Central Florida and the buyer profile that is moving to that area. We spent a meaningful amount of time on customer concentration during the diligence period, and we're very comfortable with that profile. The backlog as it has trended, has been substantially moving higher. It appears, and I'll speak more to this later, but it appears that the Florida market's cycle is timed differently than the rest of the Southeast. Given the end market user and the buyer profile that's moving to Central Florida, they appear to be on the upper side of the trough. One of the other things that attracted to us is the breadth of customer relationships and end markets.
They do a significant amount of C&I work and we are very excited about where they sit and how they are trending and how their forecasts, their outlook into 2027 with pipeline of bid activity looks.
Okay. That is helpful. Then, I guess just any additional color on the earn-out. I guess I am a little surprised it is tied to 2026 EBITDA. Can you give us a sense, I guess, for what the benchmarks are there in order to hit that earn-out? Thanks.
Yes. Hey, Brian, Mike. Like we said on the call, the initial consideration as well as the earn-out is consistent with our valuation frameworks we have already communicated for new market platforms acquisitions. It is completely performance-based. So in effect, at the end of 2026, if their EBITDA goes up, it is just the difference between what the initial consideration was on the EBITDA, and the difference is at the same multiple we were doing it for. We are not providing that multiple today. We are just going to communicate the framework, which we already have.
We believe that the initial consideration for this business is absolutely corresponding to financial performance, which we have remained disciplined about our valuations, and we believe the price approximately reflects the financial profile of this business, the customer relationships, the strategic value of Cardinal entering Central Florida with immediate scale, and the scale and quality of the business.
Okay. That is helpful. Then, based on the answer, maybe you do not want to give too much color, but just any other detail you can provide on the EBITDA margin of Hughes? Thanks.
Yeah. We are not providing the EBITDA margin today. We said it is immediately accretive. We know it is. It is absolutely accretive to our current guided margin range. We still believe that by doing this, we are setting ourselves up for future success.
Okay. Appreciate it. I will pass it on. Thank you.
Our next question will be coming from the line of Noah Levitz of William Blair. Your line is open, Noah.
Great. Thanks, and congrats on the deal. Mike, Jeremy, I appreciate that you do not want to explicitly comment on the margins, but assuming a stereotypical platform deal multiple, it does imply mid to high 20% margins. Even if it is not as strong, it is still immediately accretive. Can you just provide some more color as to why the margins are so strong? Obviously they do some self-perform work, but how vertically integrated are they? What have they done that perhaps there are best practices they can share? Just any more color as to why they have gotten to where they have gotten.
Yeah. I can. The quality and sustainability of these earnings are absolutely a major focus for us and why we looked at this business so wholeheartedly. During our diligence, we found out everything we wanted to find out that these margins, the margin profile, they absolutely significantly self-perform like we do. They do it with customers they have had for a long time. These customers have enjoyed the quality of work they do, and that relationship has helped build them into a place where they have been able to achieve these margins. They do large and complex projects. That helps as well. They have an experienced workforce, and they own their own equipment.
Great. That is super helpful. And then just also just on broader margin picture, you say in the press release that the deal is accretive to your margin guidance. But can you give any color now that the quarter is ended, how margins performed relative to your expectations? Just because the revised guidance you put out after Q2 seemed a pretty big step up sequentially. So I think it would be helpful, especially given if this deal closes in Q4, plus you have Allied Paving, just kind of help level set where you see yourselves at now that the quarter is closed.
Yeah, Noah, we are still in the middle of closing our quarter. We are not going to disclose or do anything related to the quarter performance at this point.
Okay. No, that's fine. I guess, Jeremy, for you, just you have your ear very close to the ground, across all the end markets, but in particular the residential end market. Are you and the Hughes Brothers hearing similar things across this residential market, or are you seeing meaningful differences across North Carolina, Florida? Also you can loop in Georgia to this question. Thanks.
We're seeing meaningful difference in the terms of timing. If you were to ask Justin Hughes about where they were in the cycle, six months ago, eight months ago, it's a lot different than what's being reported by the rest of the Southeast. They seem to be experiencing some tailwinds. I think a lot of it has to do with a comment I said earlier, was the buyer profile. This is a more established, older buyer profile that's moving into these markets of Central Florida. They're cash buyers. It's not a workforce-based buyer pool. The residential seems to be having some pretty good tailwinds in that specific market. Florida's a huge market, so if you go around Florida, everybody has something different to report.
They seem to have a lot of confidence in 2027, in the pipeline of work that's in front of them to bid, and a lot of the C&I opportunities they have as well and we're good to go from there.
Great. Thanks, guys. That's all from me.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. Our next question will be coming from the line of Brent Thielman of Oppenheimer. Your line is open, Brent.
Hey. Great. Thanks. Hey, Jeremy, any sense for market share for Hughes in the region? Can you talk through kind of competitive dynamics of that particular market they operate in?
Yeah. So market share, there are several companies at scale in the Central Florida market that they compete with. Obviously, size and scale of projects dictate kind of who you are going to go with, if you have a level of importance based on execution and stuff like that. So the customer base that they work with is geared towards the larger, more complex projects. Same goes for C&I. You have several players, and they all kind of do the same thing. Where we intend to start to set ourselves apart as we grow and scale and then eventually move across the region and with geographic expansion in Florida is by integrating the services. There is nobody in that market that performs full turnkey.
Where we will start to see acceleration with the existing customer base and diversification in markets and those customers will be once we get in there, get level set through the integration, get SOP set up, is to start integrating vertically and then start to go capture and then move across the Florida markets.
Okay. Then I guess one other question. It sounds like growth's been pretty good there. Has that been organic? Has it been through a combination of acquisitions? Maybe just some clarity there.
Yeah. That's all been organic. They've not done any acquisitions. The belief is when we look at the opportunity to vertically integrate, we will tuck stuff in, but they have not done any acquisitions yet.
Yeah. Hughes Brothers has been 100% organic. Part of the attraction to each other was their desire to grow their business and their footprint and create opportunities for their employees. Partnering with us, who has experience in doing it, was a natural marriage between the two. We come from the same background. We grew up the same way. We speak each other's language. As they look for opportunities, and next steps for their business, when we were introduced, we hit it off right off the bat. We're excited for that.
Got it. Thank you. I'll pass it on.
I would now like to turn the call back to management for closing remarks.
Yeah. We are good with not having any closing remarks. We think we have done.
We are good.
Okay. This concludes today's conference call. Thank you all for participating. You may now disconnect.