Improving Bidding Activity Has Great Lakes Dredge & Dock (GLDD) Poised For Better Profit Performance Ahead
Shares of Great Lakes Dredge & Dock (GLDD) sank more than 20% to start today’s trading session after the company reported much weaker-than-expected 2022 Q4 results this morning. Specifically, contract revenues of $146.7 million for the period were down 30.2% from the prior year and missed the consensus estimate by $14.3 million due to significant weather delays on several projects in the Northeast, production issues on a few jobs, the earlier-than-expected retirement of its Terrapin Island hopper dredge, and the longer-than-anticipated drydocking of its Ellis Island and Padre Island hopper dredges. And further hurt by a lower mix of high-margin capital projects, inflationary pressures and higher-than-projected costs related to the unexpected scope increases of the drydockings, GLDD swung from a 37-cent per share profit last year to a 47-cent loss, which was much worse than the loss of 14 cents analysts had been projecting.
Given the company’s December 20 warning that revenues and gross profit margins for Q4 would be lower than the $175-185 million and high-single digits it had previously guided to due to the operational issues mentioned above, I already knew that this would be a tough quarter. Unfortunately, the magnitude of these headwinds on GLDD’s revenues and margins for the period was far greater than even what I was anticipating. This also had the company entering 2023 at revenue and margin run-rates that are lower than I was hoping for and is likely to result in a slower pace of profit recovery this year as well.
That said, most of GLDD’s available vessels (including both the Ellis Island and Padre Island hoppers) were put to work for the majority of the current quarter, resulting in strong fleet utilization to kick off 2023. Combined with the swift and proactive actions the company has been taking on cost reductions and fleet adjustments—including rationalizing older assets like the 42-year-old Terrapin Island, cold stacking several of its least productive dredges and aggressively reducing other costs like overhead—as it waits for the bid market to regain momentum, this should yield a significant sequential improvement in profitability in Q1 even as inclement weather along the East Coast continues to severely impact certain jobs.
What’s more, the recent passing of the Omnibus Appropriations Bill for fiscal year 2023 included another record budget of $8.66 billion for the U.S. Army Corps of Engineers civil works program. Of this amount, $2.32 billion is provided for the Harbor Maintenance Trust Fund to maintain and modernize the nation’s waterways. GLDD expects these budgeted appropriations and the 2022 Corps budget to support the funding of several delayed capital port improvement projects including Sabine, Freeport, Mobile, San Juan, Houston, Corpus Christi and additional phases of Norfolk. In addition, the approval of the Disaster Relief Supplemental Appropriations Act for fiscal year 2023 makes available another $1.48 billion for the Corps to make necessary repairs to infrastructure impacted by hurricanes and other natural disasters and to initiate beach renourishment projects that will increase coastal resiliency. This increased budget and additional funding support GLDD’s continued expectation for bidding activity to ramp up significantly in the first half of 2023.
Together with the recently approved Water Resources Development Act 2022—which featured a $6 billion authorization for the deepening of New York and New Jersey shipping channels as well as $30 billion for the Coastal Texas Program—and the fact that GLDD has been seeing some of the North American LNG export projects delayed during the pandemic gaining momentum and moving closer to final investment decisions due to the increase in LNG prices, I think this has the company poised to not only significantly add to the $377.1 million in dredging backlog it entered the year with in the periods ahead but also meaningfully improve the percentage of this work that is made up of high-margin capital projects from the historically low 39% it’s at right now because of the unusually slow bid market in 2022. And that doesn’t even include the $584.7 million in open dredging options pending award it had at the end of Q4, which should also convert into formal contracts that further add to its backlog.
When further combined with the fact that GLDD’s new hopper dredge, the Galveston Island, continues to be on track to be operational by mid-year and is likely to contribute to better margins (as it replaces the capacity being retired by some older, less efficient vessels), this has me anticipating a return to more normal dredging market conditions and a substantial improvement in the company’s profit performance as the year progresses and beyond. As this occurs, I also expect investors to take greater notice of GLDD’s first-mover advantage in the offshore wind market, which I believe has been largely overshadowed by its current operational challenges but has the potential to materially add to profits in future years once the big rock installation contract awarded from Equinor and BP gets underway beginning in 2025 and from the five additional bids tendered for other offshore wind projects that GLDD anticipates will further add to its backlog of business this year. In fact, I think these growth catalysts are why its stock was able to swiftly recover from its initially steep tumble and cut this loss by more than half by day’s end. And if the next couple of earnings reports show that its operations have finally turned the corner as I believe, this rebound could have legs.