Good morning. My name is Sergio, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southland Third Quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star, then the number two. Thank you. Alex, you may begin your conference.
Good morning, everyone. This is Alex Murray, Director of Corporate Development and Investor Relations. Welcome to the Southland Third Quarter 2023 conference call. Joining me today are Frank Renda, President and Chief Executive Officer, and Cody Gallarda, Executive Vice President and Chief Financial Officer. I'd like to begin with a gentle reminder. This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Forward-looking statements are uncertain and outside of Southland's control. Southland's actual results and financial condition may differ materially from those projected in forward-looking statements.
Therefore, you should not rely on any of these forward-looking statements, and we do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our Form 10-Q we filed last night and our Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 21, 2023. We will also refer to non-GAAP financial measures, and you will find reconciliations in the earnings release relating to this conference call, which can be found on the Investor Relations page of our website. With that, I will now turn the call over to Frank.
Thank you, Alex. Good morning, and thank you for joining Southland's Third Quarter 2023 conference call. Revenue for the quarter was $312 million. This is a decrease in revenue compared to the third quarter in the prior year of $335 million. The decrease in revenue in the quarter was driven by the timing of new project starts and the continued effort to close out legacy materials and paving projects. We are making good progress and have decreased the remaining M&P backlog to approximately $290 million, which is a decrease of 14% from last quarter. Gross profit margin for the quarter was 9.5%. Our core business had a strong performance, but was offset by challenges in our legacy projects.
Although we still have more to do finishing out this legacy backlog, we have made significant strides this quarter to complete this work. We recognize that while we have made progress on this legacy work and have made the necessary operational changes, challenges remain as we work towards completion. We are on track to putting this work behind us and focusing solely on the core business, which continues to perform well. We finished the quarter with $2.54 billion of backlog. This is an increase of 7% from $2.37 billion at the end of the third quarter last year. During the third quarter, we had $150 million in new awards, which included a marine project in our Transportation segment for a private client in the Caribbean.
We have a strong track record of completing technical marine projects and have a strong presence in the region. This project is very similar in scope to the existing project that we are currently building for another private client in the region. The new project is in the design phase and is anticipated to start by the second quarter of next year. The timing works well, as the existing marine project is expected to wind down by the second quarter of next year, and we will start mobilizing crews to the new project at this time. Also included in the $150 million of new awards in the third quarter was a utility relocation project in our Civil segment for the City of Denton, Texas. We have started mobilizing crews and expect construction to start late this year.
We're off to a great start for new awards in the fourth quarter. Yesterday, we announced a $77 million water pipeline project that we were awarded in North Dakota. The project includes installing over 8 mi of 72-in diameter pipe. This project is an initial phase of the over $1 billion Red River Valley Water Supply Project. The project is expected to provide a sustainable water supply to a community that has experienced periods of drought, and the total program is expected to benefit nearly 50% of the state's population. We anticipate there will be an additional opportunity to bid on remaining packages from this program over the next several quarters. I'm also pleased to announce the Southland joint venture has been selected as Construction Manager, General Contractor, or CMGC, for the Earthquake Ready Burnside Bridge in Portland, Oregon.
A Southland subsidiary was part of the fabrication team for the original Burnside Bridge in 1926, and we're excited to work with our partners in the county to help upgrade an essential route for the community. We will work collaboratively with the owner through the design phase over the next two years. We anticipate our portion of the total contract to range between $200 million-$300 million. The construction contract execution is expected in late 2025 or early 2026 and will be added to backlog at that time. I would also like to remind you that a different Southland joint venture was selected as CMGC for a broadband project in May of this year. Conversations with the owner have progressed well, and we anticipate booking our $40 million portion of this total expected $80 million project into backlog in the second quarter of 2024, when construction is expected to start.
This brings our total pending CMGC contracts to approximately $300 million, which are not included in our $2.54 billion of backlog today. We feel highly confident the CMGC pre-construction contracts will turn into construction awards, as they typically do. We also believe the total dollar amount of these projects can grow as we finalize the pre-construction phases. Early in the fourth quarter, we have also completed several small emergency water and bridge repair projects in our key markets in the Southeast and in Sunbelt states. These types of emergency projects are a reflection of our diverse capabilities and strong relationships with our clients and key markets. As anticipated, we had a significant bidding activity in the back half of the year.
We currently have nearly $2 billion of bids or proposals pending. We anticipate being notified if we will be selected for these projects over the next several months. This includes the Lock and Dam 25 project in Missouri for the U.S. Army Corps of Engineers, which has received partial funding from the IIJA. We are also awaiting notification on two projects submitted last week, including the RFK Suspended Span Retrofit in New York and Phase 2 of the North End Treatment Plant project in Winnipeg. We are currently working on Phase 1 of this project. We also continue to see robust demand across our end markets despite macroeconomic uncertainty and higher costs of capital.
As we have stated previously, approximately 80% of our revenue is generated from public agencies that are well funded, have essential infrastructure projects that must be completed, and are not materially impacted by higher borrowing costs. Federal infrastructure spending has also yet to have a major impact on backlog today, although we are seeing increased bidding activities and expect to see more opportunities in 2024 and 2025 as IIJA funding continues to flow to federal, state, and local agencies. We believe this funding will provide us with consistent opportunities and to be a sustainable tailwind for the next decade. Additionally, we continue to see strong demand from blue chip private clients. Over the next two months, we expect to bid on over $1 billion of projects where we are shortlisted. We will compete for these project opportunities against a very limited number of competitors.
In summary, bidding activities have increased in the second half of the year, and we are awaiting final notification on a significant number of bids. We continue to be optimistic about the exciting opportunities in front of us. There continues to be a high level of demand for our wide breadth of infrastructure services in spite of macroeconomic uncertainty and the rising cost of capital. With that, I will now turn this call over to Cody for a financial update.
Thank you, Frank, and good morning, everyone. My prepared remarks will cover our financial performance for the third quarter of 2023. You can find additional details and information in the financial statements, footnotes, and management's discussion and analysis that was filed on Form 10-Q last night. Revenue for the third quarter of 2023 was $312 million, a decrease of $23 million, or 7%, from the same period in 2022. This was driven by a decrease of $42 million in our Transportation segment, offset by a $19 million increase in our Civil segment. Gross profit for the third quarter of 2023 was $30 million, a decrease of $33 million from the same period in 2022. Our gross profit margin was 9.5% in the third quarter.
The majority of this decrease was driven by the decreased profit contribution from the large backlog of takeover work related to the American Bridge acquisition, as more of that work was completed in the third quarter of 2022. Selling, general and administrative costs in the third quarter were $15 million, effectively flat compared to the same period in 2022. Operating income for the third quarter was $14 million, a decrease of $33 million from the same period in 2022. Interest expense for the quarter was $6 million, an increase of $4 million from the same period in 2022. This increase was driven by increased borrowing costs and higher debt balances. Income tax expense for the third quarter was $5 million, compared to an income tax expense of $11 million for the same period in 2022.
The primary driver for the increased income tax percentage was the impact of valuation allowances on certain federal and state net deferred tax positions and changes in the expectation of pre-tax profit for the full year tax period. I'd like to point out that the majority of Southland subsidiaries had an S Corp tax election in 2022 and earlier years, resulting in non-comparable tax treatment when comparing 2023 to prior years. We expect full year 2023 effective tax rate to be between 30% and 35%, given one-time impacts from losing the S Corp election and other changes in deferrals. Going forward on a long-term basis, we expect our annual effective tax rate to be in the 22%-25% range, depending on certain tax credits, nondeductible items, and certain state and local taxes.
We recorded a GAAP net income of $4 million, or $0.08 per diluted share in the third quarter, compared to net income of $35 million in the same period in 2022. Our weighted average basic and diluted share count was 47.9 million shares. In the third quarter, we produced EBITDA, or earnings before interest, taxes, depreciation, and amortization, of $22 million, compared to EBITDA of $60 million for the same period in 2022. Now to touch on segment performance. For the quarter, our Civil segment had revenues of $91 million, an increase of $20 million from the same period in 2022. Our Civil segment gross profit was $12 million, an increase of $3 million from the same period in the prior year.
As a percentage of revenue for the quarter, our Civil segment had gross profit margin of 14%, compared to 13% in the same period of 2022. For the quarter, our Transportation segment had revenues of $222 million, a decrease of $42 million from the same period in 2022. Our Transportation segment gross profit was $17 million, a decrease of $36 million from the same period in the prior year. As a percentage of revenue for the quarter, our Transportation segment had a gross profit margin of 8%, compared to 20% for the same period in 2022. The Materials and Paving business line contributed $48 million to revenue and -$11 million to gross profit in the third quarter.
The additional charge in M&P was primarily driven by the impact of taking over certain scopes of work and related procurement from subcontractors on two paving projects. Our core operating results in this segment, or results excluding Materials and Paving, would have been $173 million of revenue and $28 million of gross profit, for a gross profit margin of 16%. Turning to the balance sheet. As of September 30, 2023, we had net debt of $262 million, inclusive of cash and restricted cash of $47 million. With respect to backlog, our backlog decreased slightly from $2.7 billion at the end of the second quarter to $2.5 billion at the end of this quarter. Year-over-year, our backlog increased 7% from $2.4 billion at the end of the third quarter last year. Thank you for your commitment and time to Southland. I'll now pass the call back to the operator for questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. As previously mentioned, if you have a question, simply press star one. If you want to withdraw your question, please press star two. Your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please, for your first question. Your first question comes from Adam Thalhimer, from Thompson Davis. Please go ahead.
Hey, good morning, guys.
Morning, Adam.
Morning, Adam.
Hey, Frank, I just, y ou gave a lot of numbers in your remarks. I was just curious kind of how you think that all shakes out with regards to where backlog ends the year, could end the year?
Right now, Adam, we have several large bids going in around the same time, so it's difficult to say. N early $2 billion of proposals that were submitted, and, you know, we're still waiting to hear on the results on those proposals. We also expect to submit on $1 billion of work over the next two months, where we're shortlisted on, and that doesn't even include, you know, the regular hard bid opportunities, where there is no shortlist. Y ou know, just it's a timing issue as to exactly, you know, when some of these actually bid or, you know, have the possibility to turn into contracts. I t's hard right now to give you an exact number on where backlog could end up. You know, with all the demand out there, we expect to win our fair share of projects.
Okay, sounds good. Cody, the, so the gross profit impact in transportation in Q3, I guess that wasn't expected because of the charge you took in Q2? My question was gonna be: how are the M&P projects progressing versus expectations? It sounds like it was a touch worse in Q3?
Yeah, that's correct, Adam. We had two subcontractor issues in Q3 that we had to take over scopes of work and procurement. That obviously produces some downstream effects, but you know, were known items at the end of Q2. We're excited about the core margin results from the Transportation segment to absorb that and still being able to put up a you know, 9.5% gross profit number on the quarter.
Got it. Okay. Cody, what are your expectations on free cash flow for the year? Any chance we'll get closer to positive?
We, we believe so. If you look at the main driver of the negative cash from ops, at the end of the third quarter, the majority of that was the large increase in accounts receivable, which you would expect coming out of our seasonally busiest quarter of the year. W e expect that to naturally reverse, over the next couple quarters and report positive cash flow from operations.
Positive cash from operations for the full year. Okay, got it. I'll hop back in queue. Thanks, guys.
Thanks, Adam.
Thank you. Your next question comes from Oliver Chornous, from D.A. Davidson. Please go ahead.
Hey, can you guys hear me? Thanks so much for having me on the call.
Hey, thanks, Oliver.
You've seen a lot of backlog growth in the last couple years, but it's been slow to convert to revenue. Why is that, and when do you anticipate more of an impact on your revenue?
Yeah. W ith the large pickup of awards that we had at the end of 2022 there, Oliver,
Okay.
Some of that was skewed by a very large bridge project, the Shands Bridge job that we announced in Florida, which is about a $600 million project with a longer burn. You know, you may recall from prior remarks we've made, we had a lull in bidding pursuits as we completed off a large portion of the American Bridge backlog, which drove to the significant year-over-year delta. W e're looking forward to the newer work that we've been awarded picking up, and as Frank mentioned in his prepared remarks, a significant amount of proposals that we'll find results back on over the next couple of quarters, and think that that will convert into revenue as early as mid-2024 and beyond. Y ou'll see the greater pickup from those larger jobs naturally as activity increases, and the larger awards contribute.
Awesome. Great news! T hen I'll follow that up with, should you get some working capital release in the fourth quarter as activity slows down, which boosts your cash flow? Or is the ramp on jobs gonna make sure that that's less likely to happen?
Yeah. L et me just talk about the seasonality a bit, and then Frank can talk about our bidding strategy on the cash flow side. You know, naturally, we are gonna see a slowdown in the fourth quarter, like you mentioned, and we think that spike of change in accounts receivable at the end of Q3 will naturally unfold. Back to Adam's question, we expect most of that will come in Q4. Some of it could come in early Q1, but certainly we'll see some of the seasonality slowdown contribute to improved working capital. Frank, you wanna talk about our project identification a little bit there?
Yeah. Y ou know, we've talked about in the past our rigorous go, no-go process. Y ou know, one thing that we're really excited about is some of these pipeline projects that we've picked up that are short-term projects, where we'll be able to get in there and turn some cash fairly quickly. T hat should help with the cash position as well.
Great. T hen one, one last quick one, if I could. Why was the tax rate so high on positive pre-tax earnings?
Yeah. I t's a weird tax year for us coming off of the SPAC, where we lost an S Corp election. T hat was a big driver of that. We also, you know, with the beat in Q3, had to change our estimated full year pre-tax income, which that adjustment is recorded in the period of May, so that contributed to the much higher effective tax rate in Q3. Expect it to be about 30%-35% effective tax rate on the year, and will normalize in 2024 back to that 22%-25% range.
Excellent. Okay, thanks so much, guys. I'll jump back in the queue.
Thanks, Oliver.
Thank you. Your next question comes from Christian Schwab from Craig-Hallum Capital Group. Please go ahead.
Hey, great. Thanks for taking my question. Frank, on the $2 billion of bids that we have outstanding, last quarter we kind of highlighted, you know, a funnel on $5.5 billion that we were looking at. Can you give us an update on, you know, did you decide to bid on $2 billion of the $5.5 billion, or are those still outstanding? Or, you know, I think you talked about, you know, three large transportation projects, a ton of work on the West Coast, and a bunch of civil work, as a quick reminder.
Yeah. A s far as the three projects, you know, we've submitted on two of those projects in the Northeast. We're still awaiting one. It pushed back a little bit, Christian. That's the Connecticut River Bridge, and it's gonna bid sometime in January now. On the West Coast, you know, one of those projects was the Burnside Bridge, and we announced that we were the low bidder on that on the CMGC side. As far as total dollar values, you know, that $2 billion and the $1 billion that we referenced, those are projects that we're shortlisted on. We bid a lot of other projects, you know, during the quarter, that were not in that shortlist process. A s far as the $5 billion, that might have been, you know, over the next couple of quarters.
There is a ton of demand out there and, you know, the pipeline sure has not slowed down, Christian.
Yeah. J ust a quick follow-up on that, you know, Frank, given kind of the ton of demand that's out there, you know, what do you think your, y ou know, what is the capability of backlog, you know, over a 12 month-24 month time frame that you think you could support? Is it materially, you know, bigger than the backlog today? Any color there would be great.
Yeah. W e have a, you know, we have a great talent pool. We have resources in the Northeast, Pacific Northwest, that, you know, we're waiting to deploy. With some of the pending awards, you know, we could be close to record backlog if a couple of those come through. But we have the resources. You know, we're vigorously training labor, and to be able to grow the business. But we're gonna always continue to be disciplined and bottom line focused, Christian.
That's great. No other questions. Thank you.
Thank you.
Thanks, Christian.
Thank you. Your next question comes from Julio Romero from Sidoti & Company. Please go ahead.
Thanks. Hey, good morning. Maybe did the Midwest bridge or the American Bridge post any profit losses in the third quarter that were in addition to the gross loss taken in the second quarter?
Yeah. T here were some small movements on that job in the Midwest, Julio. None that were material enough to qualify for disclosure. That project continues to work towards completion, and we made a lot of good progress in Q3.
Okay, that's, that's helpful. T hen, Frank, you talked about the Burnside Bridge work and the broadband work. Why do those projects not enter your backlog until you start working on them?
They're CMGC contracts, and it's a, you know, it's a newer alternative delivery method that we're seeing more than in the past. T hese projects are awarded based on the best value of qualifications, technical ability, and experience. Y ou're able to get in there with the owner and, you know, start negotiating and helping on the front end, design and the planning stages. Cody, if you wanna talk about, you know, what, why?
Yeah. Julio, we see some variation across our peer group on this. There is a potential on the CMGC process that we get through the integrated design and constructability phases with the owners, but it doesn't turn into a contract for one reason or another. It's unlike I'll say unlikely that that happens. You typically do see both of those phases being awarded, but we have not executed a contract for the construction phase, and that's why we're not including it in backlog at this time.
Okay, that's helpful. Y ou know, I know the majority of your projects that you bid on are publicly funded. J ust curious, given the high interest rate environment, if you're seeing any effect on the private funded side, in regards to the projects you guys are bidding, and if that potentially shifts your mix, your customer mix even further to the public side going forward?
Yeah, you know, as you mentioned, we're probably 80% public, 20% private. In the blue chip private clients that we work for, we've not seen a major effect. You know, we're bidding on quite a few projects that are in the pipeline, and it sure doesn't seem to be slowing down. I think the reshoring effort, you know, some of these manufacturers is really helping demand on the water side for us.
Okay, got it. T hen just last one for me is just on the balance sheet, the secured notes you have that mature in 2024. Just remind us how much that is from a dollar perspective, and what's the current fixed rate you're paying on the 2024 notes?
Good question, Julio. W e've got the maturities of notes in there. I'll have to go back and look at that. I don't believe any of our equipment notes or an immaterial amount of our equipment notes mature in 2024. There is a smaller number of some unsecured notes payable that do mature in 2024, and if necessary, we expect to roll those for another term. The interest rate on those is currently, say, sub 5% and would be renegotiated at market rates.
Okay. Really appreciate the color, guys. I'll pass it on.
Thank you.
Thank you. Your next question coming from Adam Thalhimer from Thompson Davis. Please go ahead.
I was serious about getting back in the queue. I'm curious, the way the street's modeling 2024, I wonder if that's the right way to look at it, because they're modeling 15% revenue growth, gross profit of, you know, almost $130 million. I wonder if the gross profit forecast is right? But with you guys having, with the M&P revenue coming off, I wonder if revenue is more flattish, but margins are higher?
Yeah, I think, fortunately, we get to give you limited information. You get to base your model off that. You know, we've disclosed that we expect over the next 12 months, including the three quarters of 2024, obviously, we'll burn 42% of our current backlog. That doesn't include, you know, pickup from new awards that may contribute. P ending, you know, the significant amount of awards that we have outstanding, we could be flat, we could add. It's still too early to tell, and, you know, we look forward to having more color on that on the next call as we get some, as we find out the results on these bids outstanding.
Okay. What, what's the timing on the SR-23 down in Florida?
If you're referring to the Shands Bridge, you know, we're continuing on the design and, you know, we're getting close to starting to break ground on the project. Y ou know, once we do, over the next few years, it's a fairly linear project, and we should be able to kind of project that out. R eally excited about what the team's done there, the design process, what we have in place, and excited to get it started on the construction here very shortly.
Okay. Cody, do you have, lastly, Cody, do you have any thoughts on interest expense in Q4?
You know, we're, we had a large equipment note refinance that we talked about already on some of our equipment that's fully depreciating at a higher rate. I think you're gonna see us be in that 5.5-ish to 6-ish range in Q4.
Okay. Great. Thanks, guys.
Thanks, Adam.
Thank you. There are no further questions at this time. Please proceed with the closing remarks, Mr. Murray.
Thank you, everyone, for joining the call. If you have follow-ups, please reach out. Thank you, everyone.
Thanks, everybody.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect.