GSE Systems Inc (GVP) 2011 Q3 法說會逐字稿

Greetings and welcome to the GSE Systems reports 2011 third quarter 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, Mr. Devin Sullivan, Senior Vice President of the Equity Group. Thank you, Mr. Sullivan. You may begin.

Thank you very much. Good afternoon, everyone, and thank you for you joining us today. And before we begin, I'd 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, and Section 21E of the Securities Exchange Act of 1934. These statements reflect current expectations concerning future events and results. Words such as expect, intend, 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 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 section. GSE does not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 third quarter conference call. I'm joined today by our Senior Vice President and Chief Financial Officer, Jeff Hough; and Larry Gordon, our Senior Vice President and General Counsel.

This afternoon we issued a release covering our financial results for the third quarter, as well as an update on new business activity. We are pleased on both fronts, as we reported significant improvements in revenue and income, and announced new project awards totaling $14.4 million. Additionally, we resolved a significant change order with the Slovakian utility and our dispute with the British utility during the fourth quarter. We also continued to take the necessary steps to diversify our business model. I'll touch on that point in a few minutes.

Revenue in the third quarter of 2011 rose 5.4% to $12.5 million from $11.9 million in the third quarter of 2010. The increase was driven primarily by a $500,000 contribution from GSE EnVision. As it relates to the Slovakian job last quarter, we estimated that this project would end in the third quarter of 2010. The change order received in the third quarter this year will not impact that schedule. The change order covers increases in the scope of work due to delays with the Siemens DCS.

This change order also increased the overall gross profit percentage on the project and generated an additional $700,000 in project gross profit for the three months and nine months ended September 30, 2011. We continue to believe the margin pressure exerted by the hardware portion of this project will, to some extent, be offset by new business we have won and expect to win for the remainder of 2011 and in 2012. As part of our ongoing efforts to diversify our business model for the first nine months of 2011, approximately 36% of our revenue was generated from nonnuclear projects, compared to just 26% in the same period of 2010.

As we were demonstrating, GSE is much more than a nuclear simulation company. We believe that we have developed a platform that can span a variety of processes and workforce development needs, including fossil, oil and gas and alternative energies.

Gross profit improved on both the dollar basis and as a percentage of revenue, due in part to the $700,000 of gross profit realized in the third quarter result of the Slovakia change order. Also contributing to the improvement were contributions from the sales of products from GSE EnVision, which carry a higher gross profit percentage than our traditional offerings, and a lower revenue contribution from the Slovakia project.

Operating income rose to $975,000 from an operating loss of $328,000 from last year's third quarter. Higher revenues and improved gross margin offset a $757,000 rise in SG&A, primarily attributable to the operations of cash holdings and GSE EnVision. Net income for the third quarter of 2011 was $858,000 or $0.05 per share, compared to a net loss of $548,000 or $0.03 per share in the third quarter of 2010.

Moving to the balance sheet, our cash balance at September 30, 2011 was $17.7 million, which compares to $26.6 million at December 31, 2010. Balance sheet also included $5 million of restricted cash, as compared to just under $1 million of restricted cash at December 31, 2010. Restricted cash relates to cash collateralization requirements that are required as part of the previously announced changes to our credit facility. We have made good progress with respect to improving our credit facility.

As we discussed last quarter, the change in cash and cash equivalents from yearend 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 GSE EnVision; $4.4 million, which was used to cash collateralize standby letters of credit, which are used as performance bonds on several projects; a $2.7 million to two subcontracts on the Slovakia project; as well as the May 2011 equity investment of $500,000 in GSE units. We also paid $1.1 million purchase in GSE stock as part of our buyback program. At September 30, 2011, we had zero in long-term debt. We are comfortable in our ability to meet our liquidity and working capital needs, as well as pursue our acquisition strategy.

Backlog at September 30, 2011, was $50.8 million, down from $55 million at June 30, 2011; and $55.9 million at December 31, 2010. $5.9 million of the $14.4 million in new orders announced were not included in the Company's backlog of $50.8 million at September 30, 2011.

That allows me to segue into our business development activities. As we announced today, we have secured $14.4 million in contract awards, $11.5 million of nuclear work and $2.9 million worth of fossil and process work. Of this $14.4 million, about $8.5 million was reflected in backlog at September 30, 2011. Our effort in this area is ongoing, and we are hopeful we can announce several additional new projects in the coming months.

As it relates to our share repurchase plan during the three and nine months ended September 30, 2011, we acquired 370,519 and 521,400 shares of common stock respectively, for an aggregate purchase price of $792,000 and $1.1 million respectively. Subsequent to the close of the third quarter and through November 4, 2011, we purchased an additional 233,249 shares of common stock, bringing our total share purchase under this plan to almost 755,000 shares, or about 3.9% of our total shares outstanding when we commenced buying under this plan.

As I mentioned earlier in the call, we continue to act on our plan to diversify our business model, and importantly, change the perception of GSE and our various energy end markets.

I want to provide you with an update on the efforts in that regards. In July, we received a contract from the Electric Power Research Institute, EPRI, to develop a 3D visualization-based maintenance application for air operator valve actuators, commonly used in power plants. This was part of a pilot program by EPRI to determine the usefulness and member value of 3D visualization technology transfer solutions to augment EPRI's current maintenance and equipment reliability products. In addition to a highly realistic 3D rendering of the valve actuator, the product includes interactive lessons on disassembly inspection, reassembly and component troubleshooting aids.

The 3D air operated valve actuator application will be completely delivered in January 2012, and is designed to run both on a PC and mobile devices for field deployment. This effort supports EPRI's knowledge transfer technology demonstration pilot project and is viewed as very successful by our EPRI customers. We are currently cleaning up the final deliverable and expect a small follow-on project to make the AOB more use -- more universal. We are working with EPRI to determine the next steps.

In September 2011, we were selected to provide a real-time high fidelity engineering simulator for the Babcock & Wilcox mPower small modular reactor design. This agreement with B&W solidifies GSE's position as the industry leader in providing high fidelity engineering simulation for first-of-a-kind reactor designs. What this does is allow customers to virtually verify and validate the systems and processes for their facilities at the design stage, when changes can be made more easily and cost effectively than during plain construction.

For example, one customer who used our technology discovered problems with control schemes, mechanical systems and the individual components. With this knowledge, they sat down with the engineers and developed new workable designs. If they had discovered this problem during or after construction, the same fix may have cost them one to two months delay. This ability to see into the future can save our energy clients significant amounts of money, help ensure that their projects come in on time and at budget, and allow them to serve their customers better. We are working with B&W beyond this initial phase to expand the scope of the simulator and synchronize throughout the design process.

Just last month, we announced that Mr. Phil Polefrone had joined the Company as Senior Vice President and Workforce -- of Workforce Solutions. Phil will be responsible for developing and implementing the Company's strategic plan to address the training needs of the global nuclear and nonnuclear energy workforce. Phil's hiring underscores our commitment to the thesis that the rising energy demand is happening at the same time as the decline of availability of qualified energy operations professionals. This is a large problem in the energy industry, which is being exacerbated by the current economy.

As the nation gets older, it is estimated that retirement and attrition will require that 40% to 50% of the US nuclear and nonnuclear energy operations workforce may need to be replaced in the next five years. In today's economic climate, many of these professionals are delaying their retirement, which may be discouraging to the next generation of operations personnel from pursuing or even considering this career. So this is an issue that is getting pushed to the right, but at some point these folks will start to retire.

Therefore, investing in training, education and other associated activities becomes even more vital for the long-term viability of the industry. We believe that Phil has the background and experience to allow us to pursue opportunities in areas such as training new employees, providing ongoing education for more seasoned professionals and potentially staffing. We understand there are initiatives in this -- in areas such as 3D, engineering, training and staffing are at the early stages. We also understand that we have a lot of work to do in transforming these ideas into contracts and revenues. But we believe that we have taken some very important first steps to help drive the evolution of the Company.

We only ask that you stay tuned and judge us not so much on what we say but on how we deliver against the milestones that we have laid out. We certainly appreciate your time today, and we'll now be happy to take your questions.

Operator, please go ahead.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Mark Tobin with Roth Capital Markets. Please go ahead.

Hi, Jim. Thanks for taking my question.

Sure thing, Mark.

First just a couple of housekeeping. What was the Slovakian hardware revenue contribution for the quarter?

Sure. So third quarter it was approximately $200,000.

Okay. And what's remaining from the hardware side of that?

On total -- so in the -- I've got --

Has the ECP made this kind of a moot point, or is this still something that's going to depress the margins?

So the -- it'll still depress the margins to some extent. It's about $2 million in hardware that remains. However, the change order will raise the project margin a little bit. So overall project margins have gone up due to the change order, but it will still -- because of the huge hardware component, it will still, on a percentage basis, apply pressure to the overall gross margin percent.

Okay. And how do you envision that $2 million running off through project completion?

So we expect that it will be relatively linear through -- now through mid third quarter is when we're -- we currently have the project expected to wrap up.

Okay. And then other modeling questions. TAS and EnVision revenue contribution for the quarter?

Yes. Let's see. EnVision revenue was approximately $500,000. And Jeff, do you have TAS?

It was around $1 million.

Approximately $1 million in revenue for the quarter.

Okay, great. And I guess looking -- you know, the quarter looked great, and the second quarter in a row where gross margin has been quite a bit higher than what -- at least what I was expecting. Are you starting to feel a little more confident that, you know, mid 30%s is a sustainable gross margin level? Or I guess what is your outlook from a profitability standpoint.

Yes. So let me -- it was -- I'm happy with the quarter. For sure, we are. But please keep in mind that about $700,000 was a one-time sort of catch-up on the project. Now, remember, we used percent of completion accounting, so the work that was done prior to the settlement of that change order was at the lower margin percentage on the job. So when we actually settled this change order in the quarter, we get a catch-up on all of the revenue accumulated prior to that. So there was the one-time $700,000, you know, gross margin bump in the third quarter.

What I expect is, as you recall a year ago, we were operating in the 25% gross margin as a Company range. I think now we're probably going to -- you came from a modeling perspective. Can use 30% plus or minus as your -- sort of your new median, which was -- this is a little ahead of my goal. As I talked to you and others last year when I joined the Company, I thought after year one we'd probably be more like 28% as a center line, and we've done a little bit better than I expected a year ago. But I would use 30%, Mark.

Okay. I'll jump back in the queue. Thanks for -- thanks, again, for taking my question.

Sure thing.

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

Hi. Good evening. Thanks for taking my calls. Jim, with respect to your backlog, can you just give us a breakdown between nuclear and nonnuclear?

About 80% nuclear and about 20% nonnuclear.

Yes, it still sort of sits there, Mark. As you know, the nuclear jobs are much larger and they're much longer to execute. So while the revenue we've been able to move the needle a little more rapidly as far as the percent of nuclear and nonnuclear, from a backlog perspective it's a little more difficult because the nonnuclear jobs are more eat what you kill in the period in the year, so it really doesn't occupy a lot of the backlog. We certainly expect that to increase, but it will increase at a lesser rate than the way we're able to impact revenue.

Okay, great. And with respect to your backlog, how much of that is still based in Japan?

So we entered the -- when Fukushima (inaudible), we entered the year $9 million. About $5 million was due to be executed in the year. So, you know, that was relatively linear. So out of, you know, $5 million you can expect for the fourth quarter, we've got another $1.2 million to execute, and that leaves approximately $4 million on top of that to execute in the future. So, you know, $5 million -- a little over $5 million.

And just to give everybody an update, we still have no negative impact on any of that backlog as a result of Fukushima.

Okay. That's helpful. Thanks. And then with respect to the NuScale power of small modular reactor project, is there any movement there or any update there?

Yes, there is. I've been telling you for two quarters that we're optimistic. We're now past optimistic. As you may have seen, Fluor Corporation has agreed to invest $30 million into NuScale. We -- they are fully ramped up with their -- they brought all their staff back. They're working full time. And we expect to settle the $220,000 -- is that the right number, Jeff? Approximately $220,000 receivable that we wrote down in the fourth quarter last year. We expect to settle that in the fourth quarter this year.

And, you know, while that's terrific, more importantly is the program moves forward. So we are currently discussing with them how to ramp back up on the current projects, the projects we had in place, and we believe NuScale is one of our new reactive design customers that we will have a significant opportunity for pull through future services.

Okay, great. And then the Emirate's Simulation Academy. Any new news on that front?

Nothing I would call news. You know, because the number is relatively significant, we do exert a small amount of effort. And, you know, it's a -- when I joined the Company I had very little hope. You know, my assessment -- I have a very small amount of hope, but nothing I would call news.

Okay. And wrapping it up here, how many full-scale reactor simulators are you currently working on at the moment?

I -- you know, Mark, let me -- I'm going to have to follow up on that. I don't have that number in front of me, and I don't want to guess. So I'll -- I will update on that.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is from the line of Dick Ryan with Dougherty. Please go ahead.

Good afternoon, Jim.

Hey, Dick. How are you?

Good. Say, on your modular activities, can you kind of give us a view -- a 30,000-foot view of what is kind of going on with the NRC and their kind of review or licensing process of the modular designs that are starting to come through? Any kind of sense of timing there?

The only thing I can tell you is that the NRC and the administration, for that matter, are being very supportive, at least verbally, on the small modular reactors. And I do know that the NRC has setup a special desk to process the combined operating license. So really that's about all I can tell you from the NRC's perspective. You know, it still remains very positive in industry, and there's quite a bit of energy around it with, you know, ASME and other organizations.

Okay, good. Thanks. Say, globally, you know, we had the pause after Japan. Can you kind of give us the sense of the major players, the major countries out there that are -- you know, that are in the new builds, where they stand? Have they started moving forward?

So what I'll start with is a country that we -- you know, has announced, and we tend to believe them, that they're not going to move forward, which would be Germany. You know, I visited our key customer in Germany, and you know, the Germans tend to believe that this was not just a political maneuver, that, in fact, 2022 Germany will be out of the nuclear generation business. So, you know, I tend to believe them.

The UK is moving ahead actually pretty aggressively. China continued with all active projects, meaning those that had poured concrete. They paused for a number of months to assess on the -- those that were not going. But what I would say is the rest of the world -- I do not have any other real negative feedback from the rest of the world. Other -- UAE is moving forward. Saudi Arabia is still talking about moving forward. You know, some took a pause, but the only real negative one that I have observed would be Germany.

And I took as quite a positive note when Kan retired in Japan, and he had sort of unilaterally stated that Japan needed to end its nuclear program. His replacement announced that they would not leave nuclear power. In fact, they would take the lessons learned and operate safely and more efficiently. We also -- as you know, we're very active in Japan, and our customers lead us to believe that that is very true, that they will continue. And in fact, not the plant that -- not the Fukushima Daiichi plant, but there is another Fukushima plant they expect that possibly in five years that would be back online.

Okay. Now, on the workforce side with the new hire, can you give us kind of an update what's going on with the training center down in Georgia? And this hiring, is this, you know, an indicator that the other utilities might be moving forward on other such programs?

Well, the new hire is a very strategic hire. I'm sure you saw the press release and saw what an incredibly impressive background Phil Polefrone brings. And he, I think, brings the executive leadership as well as the contacts and the context that we need to really shape the new paradigm for both, we believe, in nuclear training as well as nonnuclear. The contract in Georgia there just wrapping up a class. So we do have opportunities we are chasing and bidding that replicate that -- the Jump Start program. And we are hopeful, Dick, that we'll be able to announce some progress in that area, you know, in the coming months.

Are you still getting the good results that you initially had with Jump Start?

Yes, absolutely. As far as the results of the training, we've seen certainly no backslide, and, you know, 100% pass rate the first time through on the (inaudible) with very high marks. So that continues to be a bright spot.

Great. Thanks, Jim.

Sure, Dick.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to Management for any closing comments.

I'd just like to thank you again for your time and continued interest in GSE Systems.

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