GSE Systems Inc (GVP) 2010 Q4 法說會逐字稿

Greetings, and welcome to the GSE Systems fourth-quarter and full-year 2010 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Devin Sullivan of The Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you, Manny. Good afternoon, everyone, and thank you for joining us today. Before we begin, I would like to remind everyone that statements made during the course of this call may be considered forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended, and Section 21-E of the Securities Exchange Act of 1934. These statements reflect our current expectations concerning future events and results. Words such as expect, intend, believe, may, will, should, could, anticipate, and similar expressions to identify, are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking.

These statements are not guarantees of future performance, and are subject to risks and uncertainties, and other important factors that could cause actual performance or achievements to be materially different from those projected. For a full discussion of these risks, uncertainties and factors, you are encouraged to read GSE's documents on file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward-looking statements and risk factors sections. GSE does not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I would now like to turn the call over to Jim Eberle, the Chief Executive Officer of GSE Systems. Please go ahead, Jim.

Good afternoon. I'd like to welcome each of you to GSE Systems 2010 fourth-quarter and full-year financial results conference call. I am joined today by our CFO, Jeff Hough, and Larry Gordon, our Senior Vice President and General Council.

This afternoon we issued a release covering our financial results for the fourth quarter and full year, and news regarding $15 million in new contract wins. I am sure that you have a number of questions, so I will keep my prepared remarks brief so we can get to the Q&A as quickly as possible. One note, we filed our 10-K this afternoon.

We really did experience the impact of a perfect storm, or perhaps better stated, imperfect storm in the 2010 fourth quarter. Despite higher revenues, reported a net loss of $2.5 million, or $0.13 per share, due in large part to a $1.2 million loss related to an ongoing simulation project with a large customer, the impact of lower margin revenues associated with our simulation project in Slovakia, and $1.7 million increase in selling, general and administrative expenses.

I want to first address the $1.2 million loss related to the disagreements with a British utility customer on a $4.7 million contract to provide a full-scope simulator replacement. The specific issues involved, the extent and composition of the simulator testing procedures, the scope of certain plant systems being included in the simulator, and the project schedule. We expect to complete the remaining $2.8 million of revenue expected on this contract by the end of the first quarter in 2012.

Although these issues were resolved in early 2011, GSE is currently in negotiations with the customer for additional funding. The costs associated with completing this project have significantly increased, and the negative impact on our margins will linger through 2011, and the first quarter of 2012. I want to stress that this was a unique situation for GSE. We believe that the issues surrounding this disagreement are confined to this specific project and customer. We've also addressed the internal causes that led to this disagreement, and are confident that we will not encounter a situation like this again.

Gross profit in the fourth-quarter 2010 declined to $1.9 million, or 15.7% of revenues, from $2.7 million, or 24.6% of revenues in the fourth-quarter 2009. This was due primarily to the loss on the British utility contract, as well as the impact of lower margin revenues associated with the Slovak reactor project. In the fourth quarter of 2010, 18.9% of total revenue was comprised of revenue from the Slovak reactor project, as compared to 15.6% of the total revenue in the fourth quarter of 2009. Revenues associated with this $23.8 million project carry a much lower margin because of the impact associated with the $16.4 million hardware portion of the contract, the largest portion of which is a Siemens digital control system.

The operating loss for the fourth quarter of 2010 increased to $2.1 million from $1.1 million in the fourth-quarter 2009, reflecting the above referenced issues, and higher selling, general and administrative costs. Higher SG&A was due primarily to the addition of TAS's SG&A, which was $495,000, $437,000 of expenses related to the Company's acquisition efforts, a bad debt expense of $249,000, and an increase in business development costs due to additional personnel of $112,000.

The net loss for the fourth quarter was $2.5 million, or $0.13 per diluted share, compared to a net loss of $2.2 million or $0.11 per diluted share in the fourth quarter of 2009. In the fourth-quarter 2009, the Company had determined that its investment in the Emirates Simulation Academy LLC in the United Arab Emirates, of which GSE is a 10% owner, had been impaired, and the Company recognized a $2.4 million charge.

Moving to the balance sheet, the Company's cash balance at December 31, 2010, was $26.6 million, or $1.40 per share on a basic and diluted basis. We used approximately $1.2 million of cash in the first-quarter 2011, related to the acquisition of EnVision. I think it's important to note that our commitment to prudent fiscal management and maintaining a solid financial position, has allowed us to deploy our capital in a way that we believe will substantially enhance shareholder value without a significant associated debt burden. Cash flow from operating activities at December 31, 2010, improved to $2.4 million from $326,000 for the year ended December 31, 2009. Backlog at December 31, 2010, was $55.9 million, compared to $59.1 million at September 30, 2010, and $53.9 million at December 31, 2009.

I want to take a moment to highlight the significant progress that GSE made in 2010 and early 2011. We won $47.4 million of new contract awards in 2010, in a variety of nuclear and non-nuclear end markets; announced 2011 year-to-date awards totaling $9.5 million; expanded our non-nuclear simulation and energy services by acquiring TAS Holdings and EnVision Systems; elevated our industry profile via the feature of our VPanel full-scope nuclear simulator and Jump Start training program in the January 2011 issue of Nuclear News Magazine; and realized a 100% pass rate on the Nuclear Regulatory Commission's general fundamentals exams by our Jump Start students for the fifth consecutive class.

At this time, I would like to take a moment and discuss the nuclear situation in Japan, as we have significant contracts there, and how this might affect the nuclear industry more globally. First, our deepest sympathy goes out to the Japanese people in this terrible time of suffering and loss. Next, I am happy to report that we had four employees in Japan during the earthquake and tsunami, who we have been able to locate and contact all four, and I am extremely pleased to report that they are all safe.

It is still very early in this incident, and much more will be revealed over the coming days, weeks and months. However, for those of us in the nuclear industry, there are a lot of positives to be taken from how the people in the plants responded. First, it must be noted that what the Japanese are dealing with is well beyond the designed basis accident. This earthquake was the largest in the recorded history, 8 times worse than what the plant was designed for, followed by an epic tsunami. Through all of this, there appears to be very limited amount of radioactive release, and it doesn't appear that there will be a significant negative effect as a result.

Additionally, the safety systems worked as they were supposed to. The reactors scrammed, the diesel generators started, and supplied power to the cooling systems until the tsunami disabled them, then the battery back-ups powered the cooling systems for approximately one hour. At that point, the containment systems did what they were supposed to do.

Additionally, this plant was approximately 40 years old, and didn't have the benefit of the latest design of Generation III-plus reactors, such as the Westinghouse AP 1000. The Westinghouse AP 1000 has passive safety features allowing natural circulation, [removes the KE], and doesn't require human interaction for at least 72 hours. And lastly, this reinforces GSE's strategic move to broaden our focus to the energy industry as a whole, regardless of the source.

Today more than ever, GSE's management and Board of Directors understand the challenges and opportunities that lie in front of us by leveraging a diverse operating platform, and we intend to actively provide the global energy industry with the necessary technology to fuel the energy renaissance. This includes our investment in 3-D visualization to complement our training content and simulation technologies to allow the next-generation workforce to learn faster, better, and less expensively.

We appreciate your time today, and we would now be happy to take your questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we will not be conducting a question-and-answer session.

(Operator Instructions).

Our first question is from the line of Chris Ransome with Ransom Research. Please go ahead.

Jim, I know we're very early in this tragedy, but if you were to try to assess the net affect of projects that either get delayed, or that are not going to come to the table in this political environment that is very likely to unfold, versus the need to upgrade, particularly the simulation facilities of existing plants, how would you comment on that -- those two scenarios?

Okay. Very good question, and I will take it in parts. First, certainly, it is too early for me with precision to predict, certainly, what is going to happen from a political nature. There are proponents and opponents to nuclear energy. Obviously, the opponents are going to try to leverage this for their purposes. I have seen significant releases from both sides, and as I mentioned in the prepared statement, the truth of the matter is, the plant and the systems and the people did very well with what they are up against.

I agree.

So, and, I will tell you also, we have been in contact, of course, with our people in Japan as well as customers, and at this point, it is still early, but at this point we don't believe that even our Japanese projects are going to experience any significant negative effect. However, I would also point out that this could be a huge propellant to push for the new designs. The AP 1000, which I mentioned, has advanced past the safety, and this kind of incident would not be possible with the new designs. So, that is one possible outcome.

Then, the undeniable fact is that the energy demand on the world is going to continue to increase by large amounts, if you look at prepared studies. Whether it is Nuclear or non-Nuclear to GSE is -- I won't say immaterial, obviously, a significant amount of revenue and our backlog is in the Nuclear space, but we have actively been pursuing the non-Nuclear spaces for just this reason.

Nuclear power is subject to geopolitical wins and strong positions, so that is one of the reasons we thought it was prudent to move into the non-Nuclear, and you'll see the two most recent acquisitions support that. We have one additional work in the non-Nuclear simulation space under our core simulation of non-Nuclear. We continue to bid and pursue renewable projects, and also you will see our Chinese joint venture, the partner in the joint venture, is primarily -- actually, wholly Fossil, non-Nuclear power simulation. I don't know that I have, or that I could, answer your question fully, but let me know if you have any follow-up questions.

No, that's good background. I don't think anybody really -- frankly, we all know that nobody knows what's going to happen over the next several months, but we're just trying to lay out alternatives. Thanks again.

You're very welcome.

Thank you. Our next question is from Mark Tobin with Roth Capital Partners. Please go ahead.

Hi, Jim. Thanks for taking my question.

Hi, Mark.

I guess -- following up on the previous question, trying to quantify, I guess, your exposure to Japan at this point. How much of your current -- I guess your current backlog with the backlog as of December 31 relates to Japanese projects, or Japanese nuclear projects?

Okay. I know we had that in the 10-K -- I'm actually traveling, so I don't have it with me. Jeff?

We have $9.2 million in the backlog as of the end of December that's related specifically to Japanese projects.

Okay. And, then, can you give us a sense of, I guess, your near-term pipeline, how much of that was Japan?

You mean the awards that we announced?

Yes, well, not the awards but as far as your bidding activity, and the near-term opportunity -- opportunities that you are pursuing.

We just closed a significant one, and that's one of the items that was also in the press release, Mark, certainly, we have other bids. Our Japanese customers, unfortunately, are very strict about letting us reveal their location, which plant, or their utility names. So, there's not a lot I can -- I am sure there is specific questions about the incident, I just actually can't speak to them.

But, again, Mark, I would say you can make a case on either side. This certainly shows the need. That advanced designs and safety systems, and you can certainly retrofit existing plants. Japan relies heavily on Nuclear, so I don't think that they have new plants on the book. So far, I wouldn't think that they are going to move away, especially considering the limited natural resources that they have in the nation. Again --

Okay.

I know I can't answer it fully, but I'm trying.

No, I understand. That's perfectly fine. And, just to be clear, the $9.2 million related to Japan in your December 31 backlog, does that include the most recent award that you announced within the press release?

Yes, it does.

Okay, okay. And, then, what was the revenue for tax and EnVision, if any, during -- I guess EnVision wouldn't be Q4, but what was the cash revenue for Q4?

The cash revenue I have approximately $900,000. Jeff, do you have that right in front of you?

Yes, that's correct.

Okay, that's helpful. Finally, looking at the SG&A expense for the period, it looked like there was about $400,000 that jumped out as M&A-related that looked non-recurring. Are there any other nonrecurring items in that SG&A line? I guess the other way to ask it is, what is your expected SG&A quarterly run rate at this point?

Okay. So, there are other one-time -- I mentioned the bad debt expense, and just to put a little color -- as we announced before our contracts wore with new scale for the small modular reactor out of Oregon. I don't know if everyone has seen, but their funding source is subject to SEC investigation for misappropriating funds. So, right now, their source of investment is temporarily withheld. They are -- they're hopeful that they will get a replacement investor, but, based on where they were, we took it to the $200,000 write-down for work that we had done that we believe is at risk. So, I would say on an annual basis, we are between $11 million and $12 million. Jeff, you have our budget in front of us for the year. Is that --

That's about right. Obviously, I would say probably on a quarterly basis, you're looking at maybe about $3.0 million -- $3.4 million a quarter. Understanding, of course, we have the acquired EnVision, and that will be affecting our SG&A going into 2011.

Okay, so that was $3.4 million per quarter, roughly?

Yes.

Okay. Okay. That's it for now. I will jump back in the queue. Thank you.

Thanks, Mark.

Our next question is from the line of Mark Schappel with Benchmark. Please go ahead.

Hi, good evening. Jim, to start off, could you just provide some more details on what went wrong with the project in the UK?

Sure, this is a customer that we have worked with on multiple projects in the past, and this is a very isolated incident for GSE to have a project go bad. This is a multi-year job where scope was identified as -- what they were asking for was out of scope, but it was identified early on, and it was agreed to, at the project level, that GSE would be reimbursed. As time progressed, and, I would say I visited this particular customer back in September, because after joining the company in June, I realized that this was an issue project. Spending time with decision-makers there, I also had the impression that we were going to be made whole.

As time progressed and we were not moving towards resolution, we were continuing to work at risk, and so as a management team, we became, I would say, quite forceful in making sure that we got a resolution. Now, that we have sat down and we realize that they were not intending to reimburse the full amount, it was a significant amount, so I will tell you from GSE's perspective, our sin was project management, especially early on. We did not establish scope properly early on in the project, and continued to work without establishing that scope, on the belief that what the customer was saying was true, that they would make us whole.

So, we -- for the end of the year in the fourth quarter, we have assumed a certain settlement, and we have an agreement in principle, but we are working out the details. That number could possibly change a little. If it changes at all, I would expect it to improve a little.

Okay, thank you. And, did you generate any revenue from the UNIS Chinese joint venture this quarter?

Not in the fourth quarter, Mark. As we mentioned in the previous call, the JV took a little longer getting up and going, but we did have some of the joint venture partner people transfer into the JV this year. And, one of the things that we note is that winning a Fossil job with the joint venture is going to be fine going forward.

However, because the joint venture is a new entity, we find that the customers in China are apprehensive to award a Nuclear contract directly to the joint venture, which actually, financially, is better for GSE. We announced an award in China as part of this press release as a significant multi-million dollar award, and it was awarded directly to GSE China. So, in this case, we will get revenue, as well as profit, and will be able to subcontract some of the JV resources.

Okay, then what was the percentage of Nuclear revenue to non-Nuclear work that's in your backlog right now?

In the backlog, I believe it's 83%. Jeff, is that correct?

Yes, that's correct.

What proportion would be non-Nuclear in the sense of say, oil and gas? Not energy-related?

Oil and gas, as opposed to Fossil, Mark?

Yes.

I apologize. As I mentioned, I'm traveling. Jeff, can you help me out with that one?

Yes, let me take a look here. It is only about -- it's around, basically, 4.0% of our backlog is not related to Nuclear or Fossil.

Okay, great. And, then, finally, with respect to the new scale power project, are you still working on that project today? I know that was one of the full-scope works you were doing.

We have stopped work at this point because of their financial situation. We are monitoring it very closely. We are hopeful that they will find a new investment stream. They believe that they're close, and, if they do, we expect it would pick back up this year.

How far you were through that project?

We were three out of four phases, so I would say roughly 75%, Mark.

Thank you.

Sure.

Our next question is from the line of Dick Ryan with Dougherty. Please go ahead.

Hi, good afternoon, Jim.

Hi, Dick.

Of the $38 million of backlog that you said should be converted in 2011, is there any Japanese work in that $38 million number?

Yes, Dick.

I may not have caught it earlier. How much is that?

Jeff, I believe you had that.

It's about -- just over $5.0 million.

Okay. So, $9.2 million of backlog is Japanese, $5.0 million could be converted this year?

Correct.

And, I think you were talking about the business in Q1, so far the $9.5 million. And, I may have missed it, but was there Japanese business in that $9.5 million?

No, Dick. That particular job was awarded in the fourth quarter, late in the fourth quarter.

Okay. Slovakia, how far are you through with that program, and how much impact remains with Slovakia?

Sure. So, with the Slovakian job, we are expecting about $7.9 million of revenue in 2011. We're in the middle of negotiating a schedule, so some of that may slide into the early 2012. And, we are expecting our usual gross margin on that particular job, which is in the single digits.

Okay. And, how should that be spread if you are still negotiating? Is that kind of evenly through the quarters here, at least initially, or back end loaded?

We were initially supposed to wrap that up this year, so what I would say, Dick, is that the backlog remaining on the job, and, so rather than spread it four quarters, it looks like it might go into the first quarter. Jeff, do you agree with that?

Yes, pretty much evenly through the year.

Okay. Jim, can you give any color on how we should look at gross margin? And obviously, inclusive with Slovakia here for 2011?

Sure. We -- with the British energy job, not only did it give us a hit in the fourth quarter, it is at a loss on the job, so it will operate at a negative margin through the year, so it will weigh on us. We do have the Slovakian job, as you know, so we are going to experience some pressure through 2011 on our gross margin. So, I'd say that they will be on the lower side of our typical range. And, as the backlog has filled, these -- both of these jobs, we know that as we look into 2012, we are going to replace the revenue with more traditional margins, and we expect to see a significant pickup there.

Good. And, one last one for me. With the SG&A bumping up with the addition of, I think he said, business development side, what's their focus now?

Well, what we did as part of the reorganization, we actually consolidated business development resources under one of our senior vice presidents to coordinate business development all across. So, there's still -- it's the same people who were hired at various times, some of them later in 2009, which is why some of the difference between the years. So, we had focus still in the training space. We have focused in Fossil and all of our traditional segments. In addition, we are focused on developing the EnVision business that is high-margin product based. So, if we can leverage that, that should help buoy the gross margins on the traditional simulator jobs.

Okay, and maybe one last one for me. I just want to get a good pass rate with five classes. Can you update us on what is happening with the training center with maybe the anchor clients? And are you being able to expand that to other clients as well?

Good question. Yes, the pass rate is excellent. It really reinforces the quality of the curriculum we put together and then supporting it with the [Depow] simulation technology, so you learn by doing, not just traditional classroom-based training.

There are additional classes that are being discussed at that anchor client for engineers, as well as additional operators. And, we are -- everyone who is looking at a Nuclear workforce in the United States, we are talking to, and some are further along than others, but the thing with training is, no one buys training until they absolutely need it. It will be the needs of their workforce that drive the timing. Additionally, we are looking at taking that model internationally, as we discussed, and I would say that there are active prospects in that respect.

Great. Thank you.

Sure.

(Operator Instructions).

Our next question comes from the line of Elias Moosa, with Yerba Buena Group. Please go ahead.

Good afternoon, guys. Can you hear me?

Yes. I hear you fine, Elias. How are you?

I'm all right, thanks. I was just trying to clarify a couple of things. One was, can you give kind of a magnitude of the quarterly loss that you would bear on the UK contract going forward, just to give us an idea? In the current quarter, it looks like it was $1.2 million. Can you help us with understanding what it would be in the next four quarters? And, then, similarly, on the Slovak order, you mentioned about $8.0 million in backlog. Is that all the hardware revenue, or is that also some software revenue in that $8.0 million? Or is that separate?

Okay. So, on the utility job, we are just over 50% complete on that job, so while not giving you a specific percent loss -- what we experienced was a one-time adjustment in the fourth quarter. And, so, you can tell what we've got facing us for the year. As we mentioned, negative gross margin for the year. Between 10% and 20% on that particular piece.

On the Slovak job, you are correct, we have $7.9 million, and approximately $3.3 million of that is hardware. There are -- that is directly through Siemens. Approximately half of it is hardware. There is another hardware vendor. So, roughly 50%, Elias.

Okay. So -- but the whole $8.0 million is a single digit gross margin, even though only half of it is hardware?

That is correct. It's a positive contributor. It is just very low from a percent basis due to the heavy loading of the equipment.

All right. And then I had one other [comp] on the Chinese joint venture. You got a new simulator deal in China this quarter. Is that kind of the same [Inaudible- audio interference] as your original two Haiyang and Sanmen deals? And then can you [Inaudible- audio interference] other AP 1000 that have started making or buying, basically, parts to build new factories. Where are you in that process of bidding for the simulator? Can you just give us an understanding of that?

Sure. Yes, the first question answer is yes. This isn't our typical simulation range between $6.0 million and $8.0 million. As far as other AP -- what we are bidding -- all of the other AP 1000s that are at the point of procuring simulators, as well as some construction companies that are procuring [B and V] simulators for AP 1000, we are bidding on all of them, so there are multiple bids, but certainly less than 10 at this point.

Can you help us understand a little bit the nature of those, and kind of the time frames? It seems like it's taken longer. Is there a little bit more visibility as to what's going to happen in 2011? Do you have any expectations of simulators showing up in the backlog from China?

Well, as I mentioned, we're on the bid process on a number, more than one, less than 10. We -- these typically are somewhat long procurements, so we hope to announce more than one win this year out of the joint venture. And, please keep in mind, in this case the contract is not directly with the joint venture, it is with GSE China. But, we will certainly use some of the joint venture staff. It's actually better for us from a financial reporting standpoint. We get revenue and profit.

Okay, great. Thank you.

Sure.

Thank you. Our next question is the line of David Wright with Henry Investment Trust. Please go ahead.

Hi, good afternoon.

Good afternoon.

I'm looking through the 10-K, and, if it's in here, I apologize. I haven't found it. Can you tell me how much of 2010 revenue was from non-Nuclear simulations?

That would be approximately 24%, Jeff?

Yes, approximately, yes.

And, then, can you give me the split between new and existing Nuclear simulation?

I don't have that figure available.

So, if, in 2009, existing simulation was about half of revenues, would that be in the ballpark for 2010?

Yes, so, you're talking the difference between building new full-scope and the install base services. Yes, you're rough order of 50%, that would still be a good estimate.

So, a quarter new, a quarter existing -- excuse me, a quarter new, a half existing and a quarter non-Nuclear. Round, round numbers.

Yes.

Okay. And, on the backlog, can you talk about the cancellation provisions of your orders, typically?

Typically, what there would be as we would get paid for the work complete, so we provide documentation on labor and expenses and we would be -- we'd invoice for that and be paid.

So, the unexercised portion of the backlog, that typically would have some cancellation provision in it?

That's correct.

Okay. Can you generally -- well, no. That answers all my questions. Thank you very much for taking my call.

Thank you.

Thank you. Your next question is from the line of Nick Pine with G2. Please go ahead.

Hi, dialing back to the earlier question, if you work through the numbers, it looks like the portion of revenues that's Nuclear on a recurring basis, Fossil and others about $30 million? If worse comes to worst, can you guys run flat on that revenue run rate?

So, you're asking if we scale back to $30 million a year in revenue, could we break even at that?

If you burned off the new build that you currently got in Slovakia and that kind of contract, but then get another new contract for year, let's say --

Obviously, we'd have to make huge adjustments to our structure, but with the backlog the way it is, we don't expect that we would reduce to a $30 million run rate. We have contracts to replace the Slovakian job. And, the --

Got it. Let me just ask differently then. How variable is the cost base of the business? Because clearly with the stock down 25% today, the market is imputing that you are not going to get another contract any time soon. In that environment --

I think that the amount down today was -- yes, it was due to the issues in Japan. But, our cost base is very variable. Most of our work is the Simulation base, which is labor based, so, obviously, you'd have to reduce force. That's how we generate the large majority of our revenue, is labor hours.

Got it. Got it. And, what is the timeline, generally speaking, when you think the non-nuclear business will really start to ramp? The Fossil businesses, I see, has been running in the $8.0 million to $9.0 million revenue run rate for the last three years. It seems promising, but we're not seeing those numbers yet.

Right, so some of that was, as you saw, we deployed some of our capital for acquisitions in that space to help increase that revenue. Obviously, the non-Nuclear side is not regulated, so it's not a requirement. It is a value cell. More and more people are buying into it.

You know, we partnered with Emerson, as you probably know, and we have strong relationships with the other major DCS providers that don't have their own simulation capability. So, we just, in that release, we announced the closure of one of those jobs that was just over $1 million non-Nuclear job. So, the direct answer to your question is, I am not sure, I know what we are doing as we are continuing to go after it from a business development and value cell basis, as well as augment it with some of the acquisitions.

Got it. And, one last thing. I misunderstood or did not understand from the earlier question. Of the time that you're bidding, is that strictly China or that's worldwide?

That was China. Less than 10. More than one, less than 10. That's in China alone.

Any sense of worldwide what the total bidding picture looks like?

Well, what I can tell you is our pipeline of opportunities, as well as bids, is pretty robust. We're projecting that we will grow 2011 over 2010. We see the business development activities, the sales funnel, to support that.

Got it. And, then, one last thing on an accounting basis. If you took the one-time charge in the fourth quarter of 2010 for the UK cost, why is the cost still recurring through the fourth quarter of 2001?

So, what that is, is that is a reflection of the loss on the revenue we had already generated at another margin.

Got it.

That's a catch-up. And, then, we had to take the future loss as we recognize the revenue. Jeff, how did I do?

Very good. We use percentage of completion revenue recognition. We had to, basically, reappraise how far we were completing the project, adjust the margin, and then true it up through the percent complete.

Got it. Not to poke a finger in your eye, but on the $4.7 million contract, you are wrong on $1.2 million and you only burned through half the contract. That's a pretty sizable mistake.

That's true. And, as he said, we are still negotiating with the customer to increase the total revenue, which has been already counted for in the percent complete that we are looking at.

Got it. Good luck to you.

Thank you.

Our next question is from the line of Cliff Branson with Ransom Research. Please go ahead.

I forgot one small question. Do you have any exposure in any of the five units in the two plants in Japan that are going in extremis?

Unfortunately, I can't answer that based on our customer's requirements that we don't identify who they are as a utility, or the plants of the locations. What I will tell you is that we certainly don't feel -- we don't expect or believe, have any reason to believe that we have any liability. The other is that we believe that the contracts that we have in place, the active projects, our information at this point, is that we don't expect any significant negative effect on our revenue recognition or project schedule. Of course, it's all subject to change the condition on the ground, but we have checked multiple times since this tragedy.

I don't want to get you in trouble here, so I'm going to try to ask this question as elegantly as I can. If I asked you -- if I ask you about a utility in which you did no work, you would be able to say you did no work at that utility, right?

Yes.

Thank you.

Okay. Okay, next?

We have no further questions in queue at this time. I will turn it back over to management for closing comments.

Okay. So, the one thing, just as a closing comment, I will tell you, this is the second company that I have been with that has been associated with the Three Mile Island nuclear accident in Pennsylvania. General Physics Corporation, which is a wholly owned subsidiary of GP Strategies, and now GSE Systems, both of which were able to develop solutions that answer the needs of the industry following such an incident. And, I believe that while this situation is tragic, the Nuclear industry does a very good job of autopsies, finding out what went wrong, figuring out what the root causes are, and the solutions.

And, I believe that, as terrible as this is, there will be opportunities for those companies that can develop solutions that can help the industry as a whole going forward. Certainly, GSE is looking to be a solution going forward. So, with that, thank you again for your time. As you may know, we will be presenting at the Roth Conference tomorrow at 1.00 Pacific time. If we don't see you here, we hope you'll listen to our presentation. Thank you, and good afternoon.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.