Southland Holdings, Inc. (SLND) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to the “Company,” “our,” “us,” “we,” or “Southland” refer to Southland Holdings, Inc. 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 and certain risks included under the “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” sections 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 consolidated balance sheets, statements of cash flows, and results of operations. This information should be read in conjunction with the consolidated financial statements and the notes related thereto which are included in this Annual Report.

Overview

Southland is a diverse leader in specialty infrastructure construction with roots dating back to 1900. The end markets for which we provide services cover a broad spectrum of specialty services within infrastructure construction. We design and construct projects in the bridges, tunnels, communications, 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 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

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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. 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 on 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.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with the accounting principles generally accepted in the United States (“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 items we have identified as our critical accounting estimates.

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

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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:

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.

Accounting for Warrants

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the instruments’ specific terms and applicable authoritative guidance in FASB ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the instruments are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the instruments meet all of the requirements for equity classification under ASC 815, including whether the instruments are indexed to the Company’s own Common Stock and whether the instrument holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, was conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the instruments are outstanding. The Company has concluded that the Public Warrants and Private Warrants issued pursuant to the warrant agreement qualify for equity accounting treatment.

Recent Events

See section titled "Basis of Presentation” discussing the consummation of the Merger.

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In the second quarter of 2023, Southland decided to discontinue certain types of projects in its Materials & Paving business line (“M&P”) and sold assets related to producing large scale concrete and asphalt. M&P is reported in the Transportation segment. In an effort to wind down this component of its Transportation segment and reallocate resources towards core operations, the Company sold various materials production assets. As a result, the Company recorded unfavorable charges during the year ended December 31, 2023 related to additional expected future costs associated with procuring and transporting materials from third parties. Southland recorded the increased estimated future costs to finish these projects during the year ended December 31, 2023, in accordance with GAAP. For the year ended December 31, 2023, M&P contributed $188.3 million to revenue and $86.6 million in gross loss. The Company has concluded this action with M&P does not qualify for Discontinued Operations treatment and presentation under ASC 205-20 as it does not represent a strategic shift in the Company’s business. As of December 31, 2023, approximately 8.5% of Southland’s Backlog was in M&P, and Southland estimates this work to be substantially completed in the next 18 months.

Results of Operations

The following table sets forth our consolidated statements of operations for the years ended December 31, 2023, December 31, 2022, and December 31, 2021:

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Revenue

Revenue for the year ended December 31, 2023, was $1,160.4 million, a decrease of $1.0 million, or 0.1%, compared to the year ended December 31, 2022. The decrease was primarily attributable to a decrease in revenue of $33.2 million in our Transportation segment primarily due to impacts related to exiting the M&P business line, offset by an increase in revenue of $32.2 in our Civil segment due to new projects starting in 2023.

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.

Cost of construction

Cost of construction for the year ended December 31, 2023, was $1,124.6 million, an increase of $104.1 million, or 10.2%, compared to the year ended December 31, 2022. The increase was primarily attributable to a $26.0 million increase in our Civil segment due to the new projects starting in 2023 and a $78.4 million increase in our Transportation segment related to exiting the M&P business.

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.

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Gross profit

Gross profit for the year ended December 31, 2023, was $35.8 million, a decrease of $105.1 million, or 74.6%, compared to the year ended December 31, 2022. The decrease was primarily attributable to activity related to the M&P business line discussed in the Recent Events section and progress toward completions in our Transportation segment.

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.

Selling, general, and administrative costs

Selling, general, and administrative costs for the year ended December 31, 2023, were $67.2 million, an increase of $9.0 million, or 15.4%, compared to the year ended December 31, 2022. The increase was primarily driven by a $5.2 million increase in compensation and additional staffing, $1.9 million increase in public company costs, and a $1.9 million increase in bad debt.

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.

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.

Other income, net

Other income, net for the year ended December 31, 2023 was $23.6 million, an increase of $21.4 million, or 969.9%, compared to the year ended December 31, 2022. The increase was primarily driven by a reversal of a non-cash contingent liability due to changes in the likelihood of earnout shares being issued based on 2023 performance.

Other income, net for the year ended December 31, 2022 was $2.2 million, a decrease of $0.6 million, or 20.7%, compared to the year ended December 31, 2021. The decrease was primarily driven by a loss in foreign currency remeasurement due to the decrease in exchange rate in 2022 compared to 2021.

Interest expense

Interest expense for the year ended December 31, 2023, was $19.5 million, an increase of $10.6 million, or 119.0%, compared to the year ended December 31, 2022. The increase is primarily driven by an increase in external borrowings compared to the prior year and higher interest rates on the additional borrowings. We also experienced increased borrowing costs on our revolving credit facility compared to the same period in 2022.

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 borrowings and higher interest rates.

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Income tax expense (benefit)

Income tax benefit for the year ended December 31, 2023 was $8.5 million, or an effective rate of 31.3%.  The primary differences from the federal statutory rate of 21% were (i) the revocation of Subchapter S-corporation status by Southland and its Qualified Subchapter S Subsidiary group of entities inclusive of Southland Contracting, Johnson Bros, Mole Constructors, Heritage Materials, and Southland RE Properties of $4.8 million, (ii) the benefit from the change in valuation allowance of $3.2 million primarily due to the change in domestic filing structure and the subsequent removal of the valuation allowance on American Bridge Holding Company domestic deferred tax assets, (iii) the benefit from foreign tax rate differences of $5.5 million due to operations in jurisdictions like Canada and the Bahamas with different effective tax rates, and (iv) the permanent inclusion difference of foreign income through Section 951A Global Intangible Low-Taxed Income (GILTI) of $8.2 million net of related deduction.

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 the federal statutory rate of 21% were (i) non-taxable earnings providing a benefit of $2.1 million due to the Subchapter S-Elections by multiple entities which decreased the worldwide effective tax rate by 2.8%, (ii) the utilization of foreign tax credits of $2.5 million from the inclusion of foreign income, (iii) effect of deferred true-ups of $3.6 million, and (iv) the permanent inclusion difference of foreign income through Section 951A GILTI of $3.9 million net of related deduction.

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 the statutory rate of 21% were (i) nondeductible losses with loss of benefit of $12.1 million due to the Subchapter S-Elections by multiple entities which increased the worldwide effective tax rate by 23.0% due to losses incurred on these entities, (ii) a decrease in valuation allowances of $18.7 million due to utilization of deferred tax assets through current operations, and (iii) state income taxes of $3.9 million.

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, 2023, the excise tax on corporate share repurchases is not expected to impact Southland as Southland has no plans for repurchases in the coming year.

Segment Results

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Civil

Revenue in our Civil segment for the year ended December 31, 2023, was $337.5 million, an increase of $32.2 million, or 10.5%, compared to the year ended December 31, 2022. This was primarily attributable to increased revenues of $88.7 million for the year ended December 31, 2023, from new projects that substantially started in 2023. These increases were offset by decreased revenues of $15.8 million, $33.7 million, and $11.8 million from a water line project

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in the Midwest that was completed earlier this year, two plant projects on the east coast approaching completion, and lower activity related to a tunnel project in Texas, respectively, in 2023 versus 2022.

Revenue in our Civil segment 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.

Gross profit in our Civil segment for the year ended December 31, 2023, was $51.7 million, or 15.3% of segment revenue, compared to $45.4 million, or 14.9% of segment revenue, for the year ended December 31, 2022. The primary contribution to the increase of $6.3 million for the year ended December 31, 2023 was an increase in profit contribution of $25.2 million from new projects that substantially started in 2023. Offsetting this increase were decreases in profit contributions of $9.1 million, $5.3 million, and $4.4 million from a water line project in the Midwest that was completed earlier this year, two plant projects on the east coast approaching completion, and lower activity related to a tunnel project in Texas, respectively, in 2023 versus 2022.

Gross profit in our Civil segment 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.

Transportation

Revenue in our Transportation segment for the year ended December 31, 2023, was $822.9 million, a decrease of $33.2 million, or 3.9%, compared to the year ended December 31, 2022. The decrease was primarily attributable to decreased contributions during the year ended December 31, 2023, of $106.1 million as we make progress completing the takeover work related to the 2020 American Bridge acquisition and $52.0 million from the M&P business. The decrease was offset by increases in 2023 versus 2022, of $103.7 million from a project in the Bahamas and $21.3 million from a new bridge project start in Florida.

Revenue in our Transportation segment 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.

Gross loss in our Transportation segment for the year ended December 31, 2023, was $15.9 million, or (1.9)% of segment revenue, compared to $95.5 million gross profit, or 11.2% of segment revenue, for the year ended December 31, 2022. The primary contributions to the decrease of $111.4 million in 2023 versus 2022, were decreases of $50.2 million from M&P, and $46.0 million as we make progress completing the takeover work related to the 2020 American Bridge acquisition.

Gross profit in our Transportation segment 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.

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Key Business Metrics

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operational performance. We use the following non-GAAP measures to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that the non-GAAP financial information may be helpful in assessing our operating performance and facilitates an alternative comparison among fiscal periods. The non-GAAP financial measures are not, and should not be viewed as, a substitute for GAAP reporting measures.

EBITDA and Adjusted EBITDA

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 the 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.

Additionally, it is also customary to manage our business using Adjusted EBITDA. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that, when evaluating Adjusted EBITDA, we may have future activities similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA on a supplemental basis. The reconciliation of net income (loss) to Adjusted EBITDA below should be reviewed, and no single financial measure should be relied upon to evaluate our business. Below is a reconciliation of net income to Adjusted EBITDA.

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Adjusted EBITDA for the year ended December 31, 2023, decreased by $126.3 million, or 98.5%, compared to the year ended December 31, 2022, due primarily to activity related to the M&P business line discussed in the Recent Events section and the decrease of net income.

Adjusted 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.

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Backlog

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. 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.

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.

In connection with the closing of the Business Combination, holders of 25,296,280 shares of Common Stock, or 91.7% of the shares with redemption rights, exercised their right to redeem their shares at a redemption price of $10.30 per share. As a result, a substantial portion of the cash proceeds from our initial public offering we received in connection with the Business Combination were not available to us after giving effect to the Business Combination. Prior to the closing of the Business Combination, we planned to use the cash acquired in the Business Combination (i) to fund organic growth with increased working capital, (ii) to fund future potential acquisitions, and (iii) for general corporate needs including paying down debt. In light of the high level of redemptions, we may seek cash from (x) increasing institutional borrowings or increase the amount of our revolving credit facility, (y) selling off unused or underutilized construction assets, or (z) expediting or sale our claim settlements. However, we do not believe that the limited cash proceeds received in connection with the Business Combination will have a materially adverse impact on our operations or financial position.

We will receive the proceeds from any exercise of Warrants for cash. We believe the likelihood that Warrant holders will exercise their Warrants, and therefore the amount of cash proceeds that we would receive, is dependent upon the trading price of our Common Stock. On February 27, 2024, the closing price of our Common Stock was $4.70 per share. To the extent the market price of our Common Stock remains below the Warrant exercise price of $11.50 per share, we believe that Warrant holders will be unlikely to exercise their Warrants for cash, resulting in little or no cash proceeds to us for any such exercise. To the extent we receive any cash proceeds, we expect to use such proceeds for general corporate and working capital purposes, which would increase our liquidity. However, we do not expect to rely materially on the cash exercise of Warrants to fund our operations.

Based on historical and anticipated future operating results, we believe cash flow from operations, available cash, amounts available to us under the revolving credit facility 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 facility 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 may also

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seek to access the public or private equity markets to support our liquidity whenever conditions are favorable to us. There can be no assurance that we will be able to raise additional capital or obtain additional financing when needed or on terms that are favorable to us.

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.

The following table sets forth summary change in cash, cash equivalent and restricted cash for the years ended December 31, 2023, December 31, 2022, and December 31, 2021:

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Net cash used in operating activities was $10.3 million during the year ended December 31, 2023, compared to $66.2 million and $90.6 million for the years ended December 31, 2022, and December 31, 2021, respectively. During the year ended December 31, 2023, the primary drivers in the $10.3 million in cash used in operating activities were increases in accounts payable of $46.6 million and increases in contract liabilities of $61.8 million which were partially offset by increases in accounts receivables of $49.0 million, increases in contract assets of $42.9 million, net loss of $18.8 million and increases in earnings from equity method investments of $7.7 million. 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 2020 American Bridge acquisition. 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.

Net cash provided by (used in) investing activities was $4.5 million, $5.6 million, and ($8.5) million during the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively. During the year ended December 31, 2023, the primary drivers in the $4.5 million in cash provided by investing activities were proceeds from sale of property and equipment of $8.8 million and distributions received from subsidiaries of $7.0 million which were partially offset by an increase in purchase of property and equipment of $10.8 million. Net cash provided by investing activities for the year ended December 31, 2022 was driven primarily by the purchase of property and equipment, which contributed ($4.8) million, and proceeds from the sale of property and equipment, 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 property and equipment, which contributed ($18.8) million, and proceeds from the sale of property and equipment, which contributed $11.3 million.

Net cash provided by (used in) financing activities was ($2.6) million, $20.1 million, and $30.6 million, respectively, for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively. During the year ended December 31, 2023, the primary drivers in the $2.6 million cash used in financing activities was $13.0 million of payments on the revolving credit facility, $123.7 million of payments on notes payable and $4.8 million of payments on finance leases which were offset by $8.0 million in borrowing on a revolving credit facility, $115.2 million in borrowing on notes payable and $17.1 million in proceeds from the Merger. For the year ended December 31, 2022, the primary driver was borrowings on the revolving credit facility 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 credit facility, which was partially offset by payments on notes payable of $153.6 million and repayments of $82.0 million on the revolving credit facility.

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As of December 31, 2023, we had long-term debt of $300.4 million, of which $48.5 million is due within the next twelve months. In February 2024, the Company amended the revolving credit facility to restructure certain covenant levels. We are currently in compliance with all applicable debt covenants, as amended or waived.

Revolving Credit Facility

In July 2021, we entered into a revolving credit facility agreement with Frost Bank for $50.0 million. As of December 31, 2022, the revolving credit facility agreement had been amended and increased to $100.0 million. In August 2023, the revolving credit facility was extended through January 15, 2025 and we incurred $0.3 million as deferred financing cost. 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, 2023, $90.0 million was drawn on the revolver, and we had $10.0 million available.

Secured Notes

We enter into secured notes in order to finance growth within our business. In July 2023, we completed a routine refinancing of approximately $76.4 million of existing secured notes in exchange for a new equipment note in the amount of $113.5 million. The new equipment note is secured by specific construction equipment assets and has a five-year fully amortizing term at a fixed rate of 7.25%. We incurred $0.3 million as deferred financing cost in connection with the refinancing. The deferred financing costs are included in long-term debt on our consolidated balance sheets. Additionally, as part of the refinancing, we incurred a loss on extinguishment of debt of $0.6 million, which is included in other income, net on our consolidated statements of operations. As of December 31, 2023, we had outstanding secured notes scheduled to expire between February 2024 and March 2033. Interest rates on the secured notes range between 1.29% and 8.00%.

Mortgage Notes

We enter mortgage notes in order to finance growth within our business. As of December 31, 2023, we had mortgage notes expiring between October 2024 and February 2029. Interest rates on the mortgage notes range between 3.84% and 5.99%.

OEM Notes

We enter into Original Equipment Manufacturer (“OEM”) notes in order to finance growth within our business. As of December 31, 2023, we did not have any outstanding OEM notes that are collateralized by equipment.

Contractual Obligations

Our contractual obligations and commitments as of December 31, 2023, include:

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Backlog

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.

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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 or new awards for which we are awaiting an executed contract or authorized notice to proceed. 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.

Below is our Backlog by segment.

Civil

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Transportation

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