GLDD - Great Lakes Dredge & Dock: Navigating The Choppy Waters

Summary

• In this article, I have discussed the reason behind GLDD stock's steep decline in the recent quarters.
• I have taken a closer look at GLDD’s results, backlog composition, balance sheet, and cash flows.
• Finally, I have discussed why near-term improvement in bid market is crucial for GLDD stock.

Great Lakes Dredge & Dock ( GLDD ) stock has experienced a significant correction of ~40% in the last six months, with the recent Q4 2022 earnings release serving as another downside catalyst for the stock. In the fourth quarter, the company reported revenue of $146.7 million, down 30% YoY, with a net loss of $31.2 million, along with an adjusted EBITDA margin of negative 16.5%, down 39 percentage points Y-o-Y.

The Story So Far

The company entered FY2022 with high expectations of returning to normal operations after the last two years of COVID-19-related challenges when these challenges delayed the bidding activity for some of the large projects from the U.S. Army Corps of Engineers. However, bidding activities turned out to be even lower in FY2022, which impacted revenue. According to the management, the overall bid market for beach renourishment projects in FY2022 was only about 73% of the 2021 levels, and coastal restoration projects were ~57% of the 2021 levels. This severely impacted the company's 2022 revenue as well as the year-end backlog.

The adjusted EBITDA margin saw a downside due to rapid inflation, unplanned maintenance of vessels, and drydocking scope increases. Additionally, due to the slow bid market, the company was left with fewer capital projects, resulting in more-than-expected idle time and operational deleverage in FY2022. To offset some of these impacts, the company took on more maintenance projects. Although it slightly helped the company's revenue, the maintenance projects are low-margin, which further diluted the margins in FY2022.

Outlook

The slowdown in the bidding market resulted in a low backlog level for GLDD entering FY2023, which is concerning for revenue. The company entered the previous year, i.e., FY2022, with a backlog of $551 million which supported the revenues despite of slow bid market. However, the company's backlog at the end of FY2022 was only $377 million, and out of it, only $148 million of the backlog is high-margin capital projects, while the rest is maintenance projects. As explained before, these maintenance projects typically earn lower margins due to the nature of the work and competitive landscape. I expect an unfavorable mix and lower volume to negatively impact the margins in the coming quarters.

Now, not everything is bad. Management anticipates some of the capital projects that got delayed last year to come up for bidding in the first half of 2023 and an overall healthy bid market in 2023. Management is also expecting to benefit from the recently passed omnibus appropriate bill for FY2023, which included ~8.7 billion for the U.S. Army Corps Engineers Work program, with around $2.3 billion allocated for the harbor maintenance fund to maintain and modernize waterways.

GLDD is also expected to benefit from the long-term shift towards renewable energy as the company provides services that aid in offshore wind project installations. GLDD has received contracts from Equinor and BP, where the company will provide subsea rock installation for Empire I and II projects. These kinds of projects are expected to provide long-term growth tailwinds for the company.

While these figures are certainly encouraging, I am not sure how much they can help the company's FY2023 results. Remember that the company entered FY22 with similarly high expectations of bid activity, but it ended up being much worse than expected as projects continued to get delayed. Also, even if the bid activity around capital projects improves in FY2023, it should take some time for it to show up in the company's P&L as there is a couple of quarters' lag between the award of the order and the company executing it and booking it in revenues.

So, even in an optimistic scenario, if bid markets improve by mid-2023, the company should be able to realize benefits from it only towards the end of this year (Q4 2023) or next year. So, the next couple of quarters should be challenging.

Meanwhile, the company's financial position is likely to keep worsening. The company's FCF has been declining since FY2020 and has turned negative in the last two years.

Its net debt levels are also rising since FY2020.

GLDD's business is capital-intensive, and the company needs significant investments to support its expenses, like new builds of dredging vessels for its fleet. So its CAPEX has been rising since 2020. For FY2023, the company has given CAPEX guidance of $175 million. The company reported $6.5 million as cash & cash equivalent and net debt of $315 million as of last quarter. Considering these figures, the company's balance sheet condition is weakening and positions it in a tough financial situation. Although there is no near-term risk as the company has a $300 million revolver and can use it to fund its CAPEX needs, if the anticipated improvement in the bid market in 2023 doesn't materialize, it may leave the company in a precarious situation.

In that situation, the stock can drift lower toward its tangible book value. The company ended last quarter with shareholder equity of ~$368 million and goodwill of ~$76 million. So its tangible book value is ~$292 million. The diluted share count was ~$66 million last quarter giving us a tangible book value per share of ~$4.4. So, there is a meaningful downside possible in this scenario.

However, I won't give the stock an outright sell rating as there is a possibility that the bidding market may improve given the pent-up demand from the last couple of years and improved government funding, a scenario management is counting on. In this scenario, the company's growth can improve in FY2024, alleviating some balance sheet concerns. I believe the investor should sit on the sidelines for this one and keep a close eye on the bidding market and the company's order wins for the next couple of quarters before taking any position in the stock. Hence, I have a neutral rating on GLDD stock as of now.

For further details see: