GSE Systems Inc (GVP) 2011 Q2 法說會逐字稿

Greetings, and welcome to the GSE Systems, Incorporated, second quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. ( Operator Instructions )

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President for the Equity Group. Thank you Mr. Sullivan, you may begin.

Thank you. Thank you, everyone. Good afternoon and thanks for joining us today.

Before we begin, I like to remind everyone that statements made during the course of this call may be considered forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended in section 21E of the Securities Exchange Act of 1934. These statements reflect our current expectations concerning future events and results. Words such as expect, intent, believe, may, will, should, could, anticipate, and similar expressions 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 than those projected.

For a full discussion of these risks, uncertainties and factors, you are encouraged to read GSE's document on file with the Securities and Exchange Commission, including those set forth in periodic reports filed under the forward-looking statements and risk factors section. GSE does not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Good afternoon. I'd like to welcome each of you to GSE Systems 2011 second quarter conference call. I am joined today by our CFO, Jeffery Hough, and Larry Gordon, our Senior Vice President and General Counsel. This afternoon, we issued a release covering our financial results for the second quarter, as well as an overview of the new contract award related to our 3-D visualization technology. My prepared remarks today will be brief, so we can get right to your questions.

Revenue in the second quarter of 2011 was $11.3 million, as compared to $11.8 million in the second quarter of 2010. The decline was driven primarily by delays in recognizing revenue associated with the previously announced pending resolution with the British Utility and customer initiated delay on the Slovakia project. These were partially offset by $600,000 of revenues from GSE EnVision, which we acquired in January of this year.

The customer initiated delay associated with the Slovakia simulator will cause this project to end later than we originally anticipated, extending from the first quarter of 2012 to early third quarter of 2012. We continue to believe that this impact will, to some extent, be offset by new business we have won and expect to win throughout 2011 and 2012.

As it relates to the British Utility, we expect this resolution to be signed by both parties in the third quarter of 2011. As part of our ongoing efforts to diversify our business model, in the second quarter of 2011, approximately 64% of our revenue was generated from non-nuclear projects, compared to 73% in the second quarter 2010. We are much more than a nuclear simulation company, and believe that we have developed a platform that can span a variety of processes and work force development needs including fossil, oil and gas, and alternate energies.

Gross profit improved on both the dollar basis and as a percentage of revenue, due to the addition of revenues from GSE EnVision, which carry a higher gross profit margin than our traditional product offerings, and a lower revenue contribution from the Slovakia project, which carries a lower margin due to the $16.4 million hardware portion of that contract. Operating income was $248,000, down about $503,000 from last year's second quarter. Notwithstanding lower revenues, higher SG&A was a primary contributing factor to the decline. This increase was primarily attributable to the operations of tax holdings and GSE EnVision. We also had a modest rise in R&D expenses, including costs related to the development of 3-D visualization technology. I'll talk a little bit about the progress of our 3-D efforts shortly.

The net loss for the second quarter of 2011 was $244,000, or $0.01 per share, compared to net income of $370,000, or $0.02 per share in the second quarter of 2010. However, excluding a $410,000 non-cash loss on foreign exchange derivative instruments, we would have been profitable for the quarter.

Moving to the balance sheet, the Company's cash balance at June 30, 2011, was $18.6 million, compared to $19.5 million at March 31, 2011, and $26.6 million at December 31, 2010. The change from year-end 2010 was primarily attributable to the use of approximately $1.2 million of cash in the first quarter of 2011 related to the acquisition of EnVision; $4.4 million which was used to cash collateralize standby letters of credit, which were used as performance bonds on several projects; a $1.4 million payment to a subcontractor on the Slovakia project, which we made in April; as well as, a May 2011 equity investment of $500,000 in our joint venture, GSE-UNIS.

As it relates to the cash collateralization, these standby letters of credit are required as part of the changes to our credit facility, as previously announced. The cash collateral is included in the restricted cash captions on our balance sheet. At June 30, 2011, we had a total of $5.4 million of restricted cash. At June 30, 2011, we had zero long-term debt. We are comfortable in our ability to meet our liquidity and working capital needs for the next 12 months, as well as pursue our acquisition strategy. Backlog at June 30, 2011, was $55 million, compared to $55.9 million at December 31, 2010. While we would have expected backlog to increase, we have seen several significant projects schedules shift to the right. As such, we expect to close in the coming quarters.

In March 2011, GSE announced that its Board of Directors authorized a share repurchase program under which the Company may, from time to time and depending on market conditions, share price, and other factors, acquire shares of its common stock on the open market, or in privately negotiated transactions, up to an aggregate purchase price of $3 million. For the period of April 1, 2011 through August 5, 2011, GSE purchased over 280,000 shares, for an aggregate purchase price of $625,000.

As I mentioned earlier in the call, I'd like to update you on our first contract award for 3-D visualization services. In July 2011, GSE received a contract from the Electric Power Research Institute, otherwise known as EPRI, to develop a 3-D visualization-based maintenance application for an air operated valve actuators, commonly used in power plants. The 3-D application to be delivered by GSE is part of a pilot program by EPRI to determine the usefulness and member value of 3-D visualization technology transfer solutions to augment EPRI's current maintenance and equipment reliability products. In addition to a highly realistic 3-D rendering of the valve actuator, the product includes interactive lessons on disassembly, inspection, reassembly, and component troubleshooting aids. The 3-D air operated valve actuator application will be delivered in January 2012, and is designed to run on both a PC and on mobile devices for field deployment.

We believe that at current levels, shares of GSE stock are an attractive long-term investment opportunity. We will continue to utilize our strong cash position to purchase shares as part of the comprehensive program to enhance the value of GSE for its shareholders.

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

Thank you. We will now be conducting a question-and-answer session. ( Operator Instructions ) Thank you. Our first question comes from the line of Mark Schappel with Benchmark Company. Please proceed with your question.

Hi, good evening. Jim, in your prepared remarks you mentioned that you saw some projects shift out to the right that didn't close this quarter. I was wondering if you could give us some more details on these, specifically whether they are on the nuclear side of your business, and did they relate to Japan?

Okay. Hello, Mark. So, it's actually both. There are both nuclear and non-nuclear, and none of the projects that we've seen move have been tied to Japan. These would be what we would characterize as the normal ebb and flow of these very large projects, tied to new plants and that can move a quarter or multiple quarters at any given time.

On the nuke side, do these include your full-scope simulators?

Yes, primarily the ones that I'm referring to, to bring attention to the investment community are the larger ones, full-scope nukes, large installed base contracts, or relatively large non-nuclear full-scope simulators.

Okay, thank you.

Also, you mentioned a $1.4 million payment to a subcontractor for the Slovakia project. I was wondering if you could just give us some more color on that. Yes, of course. As you know, a large portion, over $16 million of that contract, is hardware. Our vendor on that is the Siemens. So, that is just one of the milestone payment associated with the hardware that's part of this. The payment milestones between GSE and the Slovakian utility are not necessarily linked to the taking delivery of the equipment from the hardware vendor. So, it is more tied to a performance milestone on GSE's projects side. We fully expect that we'll be reimbursed and no concerns about it. It's just, again, the normal ebb and flow of AP and AR for us. Okay, there's nothing abnormal here then?

No, sir.

And then, your backlog breakdown. Could you give us the percent of nuclear versus non-nuclear?

Sure, in the backlog, nuclear currently sits at 81%.

Then one last question here. Could you give us an update on the new scale power, small modular reactor projects? There were some difficulties a quarter or 2 with that, and I was wondering if you could give us an update.

Yes, I'll do my best. While we don't currently have, I would say, the formal update. We are hopeful, yet cautiously optimistic, that they will get funding.

We have information that they have brought some staff back. That's encouraging. But as of this point, they have not satisfied the outstanding accounts receivable. We have been assured, if they do get funded and get back into business, we would certainly be made whole on that. I believe updates are in the very near term, but we don't have anything formal at this point.

Okay, thank you.

Sure.

Thank you. ( Operator Instructions ) Our next question comes from the line of Mark Tobin with ROTH Capital Partners. Please proceed with your question.

Hi, Jim. Thanks for taking my question.

Sure, Mark. Good afternoon.

First, just housekeeping. You have $1.2 million on revenue during the quarter on the Slovakian project. How much of that was hardware?

Sure. It's approximately $600,000, Mark.

Can you give us a sense of how much revenue broken down with the hardware portion is remaining, and more specifically, when you expect that to be recognized? Are we going to have zeroes for the next couple of quarters, and then it kicks back up in 2012?

No, I can give you some color on that. We have about $5 million remaining in backlog, and again, it is pretty evenly distributed between hardware and traditional labor associated with the simulator. What you can roughly expect is about $1.2 million in revenue, each of the next 4 quarters.

Okay, that is helpful.

Somewhat related to that topic, it is interesting to see with the lower level of Slovakian revenue that your gross margins are in the $33, mid-$30s type of range. Is that a reasonable expectation, once you are done with this project, and some of the other lower margin projects?

I wouldn't want to peg it to a number that high yet. It is not traditionally where GSE was prior to this. You can certainly see the positive effects of the acquisition companies, both TAS Holdings, which is usually in mid-$30s type of gross profit margin and EnVision which is in the 70%, plus or minus range, as well as not having the contribution of the lower margin from Slovakia.

One thing I would also point out is another thing that brought the growth profit margin up a little bit higher is we took the expense associated with the British Utility job, but not the revenue. Mathematically, because there's less revenue, and the gross profit margin would be the same whether we had the revenue or not, had we had the revenue, the number would have come down some. Suffice it to say, we expect it to be north of the 25% on a normal basis, and then really the key to getting up into the $30s, is going to be the success of all of our initiatives in the new spaces, things like the 3-D visualization, training, like the acquisition companies.

Okay, that is helpful.

Following up on Mark's prior question, I think you had $6.6 million in Japanese related backlog. Is that progressing? Or can you give us a status on those specific projects?

Yes, I'm happy to. That is progressing. Those projects are progressing, as originally planned and scheduled.

We have not seen any retreat on our existing business in Japan, which we obviously take as a positive sign, being this far past the incident and we don't expect, at this point, to see anything change.

Okay, that is helpful. I will jump into the queue. Thanks, Jim.

Sure thing, Mark.

According to my screen, you were the end of the queue, Mark.

Mr. Tobin, do you have any further questions?

I guess, just a broader question, if you could offer commentary on the general environment that you're seeing, as far as an opportunity standpoint? Certainly the nuclear sector continues to evolve and I would be interested in hearing your thoughts.

Sure, I went to a little greater lengths in the press release, this particular quarter than in some of the other quarters, to articulate that, just what you say. Really, this remains what I'll call a challenging environment in that there is, obviously, a lot of volatility in the nuclear global business. Different countries are responding, obviously, very differently. So, things that looked clear a couple of years ago, obviously, are pretty muddied.

I believe that geographically, there's still opportunity. We believe China is going to continue to be a target rich environment. They are moving forward with many reactors. And the ones that they put on hold, we have reason to believe that some of those projects when they are revived, may switch to AP1000 from the CTR1000, which we believe bodes well for us.

The underlying continuing demand for increased energy leads us to believe that we are doing the right things, regardless of the business environment of the day. Obviously, all of the volatility around the world -- but associated with the world markets, which we have experienced over the past week. More energy is going to be needed clearly. So, we still believe that more energy means more plants, and it'll be more plants of all the various energy sources. Which is right down the alley for us in our diversification strategy, to make sure we have solid offering in each of the spaces. And, more plants means more operators, more people need training, which speaks to our focus to develop the training solutions, to meet those needs.

So, I do believe we're doing the right things to prepare ourselves for future growth in both top and bottom line and also [poise in] ourselves for the addition of complementary services to the energy industry.

Okay, specifically on China, you made the investment in GSE-UNIS this period. Can you give us a sense of the progress that group's making?

Yes, one of the things we have found is that -- I'll lump GSE China and the joint venture together -- because they really operate seamlessly together. We had a very significant award in the beginning of the year, and that contract was delivered to GSE China, as opposed to the joint venture. Regardless, people out of the joint venture are going to be working on the job. So, from a financial reporting standpoint, it's actually better for GSE that we get awarded direct use. We get revenue and the profit rather than just the 49% of the profit. That was an award of an AP1000, and it was a full AP1000. We were not partnering with Westinghouse on that job, so the asking price was in our typical range. And, we are going to actually simulate the control system as well. That is the first one we have been awarded. We expect AP1000 to be at least 50% of the market share in China, as well is globally. And, we will have delivered a solution, solely from GSE.

The JV continues to win non-nuclear business. Those asking prices are much lower than what our fossil awards are in the US, and so 49% of the profit on those jobs is not the reason we did the JV. Certainly, it's nice that they continue to win work and we'll see some benefit from that. The real opportunity was for us to pursue the nuclear business in China, and we see that continuing. On our side, we're satisfied with what the joint venture's allowed us to do and we believe that there's really on the upside.

Got it, that is helpful. Thank you for the color.

Sure.

Thank you. There are no further questions at this time.

I would like to turn the floor back over to management for closing comments.

I would just like to thank everyone again for your time, and your continued interest in GSE Systems.

Thank you, this concludes today's teleconference. You made is connect your lines at this time, and thank you for your participation.