GSE Systems Inc (GVP) 2011 Q4 法說會逐字稿

Greetings. Welcome to the GSE Systems Inc. fourth quarter and year end 2011 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. Mr. Sullivan, you may now begin.

Thank you very much. Good afternoon everyone, and thank you for joining us today. Before we begin, I would like to remind everyone that statements made during this 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 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 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 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 would now like to turn the call over to Mr. Jim Eberle, Chief Executive Officer of GSE Systems. Please go ahead, Jim.

Good afternoon. I would like to welcome each of you to GSE Systems 2011 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 Counsel. This afternoon, we issued a press release covering our financial results for the fourth quarter and full year. With are pleased with our performance in both periods, and also excited about 2012 and the opportunities we are pursuing.

Before discussing the fourth quarter, I want to provide an overview of our performance in 2011. When I became CEO in late 2010, I was very fortunate to inherit a number of valuable assets to assist me and my team in creating and implementing a new strategic vision for GSE as a global provider of energy services solutions. These included a dedicated group of talented officials, and unparalleled reputation in our industry for service and performance, and a solid financial foundation. We entered 2011 with the following goals. Define who we are and what we want to become. This became especially important after the events at Fukushima in March of 2011. Increase our revenues. Improve our margins. And continue to adhere to a philosophy of prudent fiscal management. With the hard work and resolve our employees around the world, I am pleased to record that we made outstanding progress against these objectives, and in some cases exceeded our own expectations.

We reported annual revenues of $51.1 million, up 8.3% from 2010. Increased gross margin to 32% from 23.5% in 2010. And reported net income of $2.8 million, a $5 million improvement from a net loss of $2.2 million in 2010.

We enacted a major internal reorganization designed to support our evolution as a global energy service solutions provider. This manifested in a number of ways including the January 2011 acquisition of GSE EnVision. The introduction of new products such as PSAHD, an engineering grade nuclear simulation solution that allows operations personnel to train for and develop responses to severe accident scenarios. The commercialization of our 3D visualization products leading to a contract from the Electric Power Research Institute, otherwise known as EPRI, to develop a 3D visualization-based maintenance application for error operated value actuators commonly used in power plants. Also a contract from a major southeastern utility to develop 3D visualization learning applications for circuit breakers commonly used across the industry.

We also achieved dynamical resolution to the project issues with our British utility customer. We were selected to provide a high, a real-time high fidelity engineering simulator for the Babcock & Wilcox and Power small module reactor. 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. The October 2011 of hiring of Phil Polefrone as the Senior Vice President of Workforce Solutions, who will develop and implement a plan to address the training needs of the global energy nuclear and nonnuclear work force. And a training contract with a major southeastern utility, to provide instructors for SRO certification training utilizing our VPanel technology as a differentiator. We also entered into a new long term credit agreement with Susquehanna Bank that allows us to pursue our growth objectives, and enhance our liquidity. And lastly, we positioned ourselves to grow and grow profitably in 2012 and beyond.

Now on to the fourth quarter. Revenue in the fourth quarter of 2011 rose 20.7% to $15 million from $12.3 million in fourth quarter of 2010. This increase was due to the $2.5 million revenue impact of a change order with our British utility customer, as well as $0.9 million in revenue generated at GSE EnVision which we acquired in January 2011.

As part of our ongoing efforts to diversify our business model for the full year of 2011, approximately 67% of our revenue was generated from nuclear projects, compared to 72% in 2010. Gross profit improved on both the dollar basis and a percentage of revenue. A significant portion of the improvement is attributable to the fact that in the fourth quarter of 2010 the Company had a large negative adjustment due to the above mentioned change and project scope, and no corresponding adjustment in the fourth quarter of 2011. Additionally, only 3.9% of the total fourth quarter 2011 revenue was comprised of lower margin revenue from the Slovakia reactor project, as compared to 18.9% of total revenue in the forth quarter of 2010. Also contributing to the improved fourth quarter 2011 gross margin was revenue from GSE EnVision whose products typically generate a substantially higher gross profit margin than the Company's normal gross profit margin.

Operating income rose to $1.3 million from an operating loss of $2.1 million from last year's fourth quarter. The improvement reflects the fourth quarter 2011 higher gross margin, and a $1 million reduction in SG&A expenses. The change in the fair value of contingent consideration related to TAS and EnVision acquisitions, resulted in a gain of $0.7 million for the fourth quarter 2011, versus a loss of $0.1 million in the fourth quarter of 2010. In the fourth quarter 2010, the Company incurred bad debt expense of $200,000. Net income for the fourth quarter of 2011 was $1.2 million, or $0.07 per share, compared to a net loss of $2.5 million, or $0.13 per share in the fourth quarter of 2010.

Moving to the balance sheet, our cash balance as of December 31st 2011, was $20.3 million,which compares to $26.6 million at December 31st 2010. The change in cash and cash equivalence from year end 2010, was primarily attributable to the use of approximately $1.2 million of cash in the first quarter 2011, related to the acquisition of GSE EnVision, $4.4 million which was used to cash collateralized stand-by letters of credit, which are used as performance bonds on several projects. A $2.7 million payment to two subcontractors on the Slovakia project, as well as a May 2011 equity investment of $500,000 in GSE units. We also purchased $1.6 million in GSE stock as part of our buy back program.

The balance sheet also included $6.2 million of restricted cash and unrestricted certificates of deposit as compared to just $179,000 of restricted cash at December 31st 2010. Our cash and cash equivalents at December 31st 2011, equates to $1.09 per diluted share. If we were to add in the $6.2 million of restricted cash, and unrestricted CDs, our cash per share would be approximately $1.42 per diluted share. And based upon today's closing price, we are trading at $0.44 over our full cash position.

As it relates to our share repurchase plan during the three and 12 months ended December 31st, 2011, we acquired 302,974 and 824,374 shares of common stock respectively. During 2011 we purchased an additional 150,287 shares of common stock, bringing our total share repurchase under this plan to just over 970,000 shares. At December 31st, 2011, we have zero long term debt, and over $30 million in working capital. We are comfortable in our ability to pursue our acquisition strategy for the foreseeable future.

Backlog at December 31st 2011was $51.5 million, compared to $50.8 million at September 30, 2011,and $55.9 million at December 31st 2010. We believe that approximately $34.3 million of backlog at December 31, 2011 will convert to revenue in 2012. Not included in backlog at December 31st 2011, is approximately $8 million of new orders announced during the first quarter of 2012.

With respect to business development, we won $44.4 million in contract awards during 2011, 58% of which is nuclear work, and 42% of fossil and process work. The $8 million in new awards announced in February, include nuclear, fossil, and process simulation, as well as tutorials and consulting services. Our effort in this area is continuing, and we are hopeful that we can announce several additional new projects in the coming months. As we enter 2012, a few things are clear. Our legacy simulation businesses remains strong,and we have maintained our industry leading position in these markets. We must continue to diversity our revenues and end markets.

In that regard, we must also focus on exciting new areas, such as 3D visualization, engineering, training, and staffing. Transforming these ideas into revenue takes patience and fortitude. But the progress we made in 2011 gives us great hope that we are on the right track.

Before we turn things over for questions, I want to take a moment to welcome Chris Sorrells to our Board of Directors. Chris is a Managing Director at NGP Energy Technology Partners, and he has more than 17 years of experience working with companies that operate at the intersection of energy and technology, like GSE. My experiences with Chris over the past year have been nothing but positive, and I was excited when he accepted our invitation to join the Board. We look forward to his contributions.

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

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (Operator Instructions). Our first question comes from the line of Mark Tobin from ROTH Capital Partners.

Good morning gentlemen. This is Joe, filling in for Mark.

Hello, Joe.

Hi. And okay, so with the hardware for this Slovakia project, can you tell me how much that contributed during the quarter and what, and for the $5.8 million left in backlog, how much is hardware?

Yes, in the fourth quarter we had a total of about $600,000 in revenue. And $100,000 of that was hardware.

Okay.

And what we take as far as what we anticipate to generate in revenue on that project this year in 2012 is about $5.8 million. And about $2 million of that would be hardware.

Okay. And then I am assuming that the $5.8 million, how does that break down on a quarter-to-quarter basis throughout the rest of the year, would you say?

It is not exactly linear, but you can see about $1.4 million in the first quarter, about $1.7 million in each of the second and third quarter. And about $900,000 in the fourth quarter, that is our current estimates.

Okay. Great. Thanks for your time, and welcome to GSE, Chris.

Thank you very much. Next.

(Operator Instructions). Our next question comes from the line of Mark Schappel from the Benchmark Company. Please proceed with your question.

Hi, good evening. Jim, starting off with your NuScale power project, were you able to settle that receivable with them in Q4?

Yes. Good afternoon, and yes, we were, Mark, with them getting recapitalized by floor, we were able to reengage them, we did receive payment, full payments. We were able to write that on, and we are right now negotiating basically final T's and C's on the future work.

Good, thank you. And with respect to your JV in China with UNIS, is that relationship generating any material revenue yet?

So the answer is yes, but not exactly the way that you would have traditionally thought. The relationship has definitely improved our position in China. And we are getting more revenue, but right now the nuclear jobs in China are coming to GSE directly. And we are able to leverage our JVpersonnel to work on the jobs, as well as GSEpersonnel.

So we are getting the benefit of lower labor cost engineers, we are receiving full revenue at this point, and profit, and we are not exactly sure when that JV's reputation in China is going to be such that they will be able to, that the nuclear companies will feel comfortable awarding nuclear jobs directly to the JV,as opposed to GSE directly. But do we do expect that is coming. In the interim, it is the best financial answer for us, but we do expect at some point the JVwill receive the awards, that all of the work will be done in China, we do think that the nominal sale price will go down some. And at that point, is when we would see not revenue, but we would see single line entry on the income statement for 49% of whatever the profits of the JV would be.

Okay, switching gears a little bit here. With respect to your backlog, what percentage of that is nuclear verses nonnuclear?

Let's see. We are at, the backlog, it tends to remain at that 75/25, 75 nuclear, 25 nonnuclear. Even though you see the revenues changes, the order mix as we discussed changing, because the nuclear jobs are so large and multi-year, that it does tend to dominate backlog, because we tend to kill, eat what we kill during the year on the jobs like EnVision, GSE TAS, as well as the fossil and process work.

Okay, and then finally with respect to your business in Japan, I wonder if you can give us a update on what you are seeing there with respect to your existing projects? Whether they are progressing as planned?

Sure. So we have received new orders during the year of 2011 in the amounts of $1.6 million US. As of the end of the year, we take forward with us $4.6 million in backlog. So what we have seen as a result of Fukushima really to our business is no result. And deep in our 10-K we have a pretty good description of Japan, and even in the 12 months we are almost right at the anniversary of the disaster, and Japan has changed position pretty significantly. The prime minister who resigned had announced, and it appeared as thought announced independently, that Japan was going to move away from nuclear power, and the new prime minister announced that they were going to, that for the foreseeable future they were going to continue nuclear, but they were going to learn lessons, and in fact, bring the nonoperational units back. Not the ones that of course were destroyed, but the other ones in the country that were shut down.

Okay, great, thanks, that is all for me.

Thanks, Mark.

(Operator Instructions). Our next question comes from the line of Dick Ryan from Dougherty. Please proceed with your question.

Hi, Jim. Is the issue with the UK, is that all settled now? Are there any other expectations for any other changes with that? Or is it done?

So what I will tell you is if the project is not complete, so with any project, there is always some amount of project risk, but I will tell you at this point, we don't see issues with that job. We are nearing the ready for training date on that simulator. And we expect to do contract completion here as we estimated in the second quarter which takes us into warranty, so basically takes us into the normal close out of a project. So at this point, I don't expect any additional surprises, and I am very happy with the relationship that we have with the customer. It was certainly tenuous when I joined GSE, and we took this issue head on. And l will tell you the project team and some of the management team who have really gotten involved very directly, have done great work, and the customer, I was actually just in the UK at that site last week, and the customer themselves were very complimentary of the work we had done, the team that we had there, and they were looking towards the future, and potential prospects of new work.

Okay, thanks. Say on the training side, I didn't catch your earlier comments, you mentioned something about training, and maybe a new opportunity or new awards with the VPanel, but can you bring us up to speed on what is going on on the training side?

Sure. I am not at liberty to disclose the customer, but the award, it is a significant award not in a revenue standpoint, but from a principle of the work. It is the deepest that GSE has ever gone into training for a nuclear customer. We have instructors on site, we are delivering senior reactor operator certification training. And one of the significant, the reason I brought out the VPanel is when the RFPwent out, we were able because of our success with Jump Start, we had already had experience leveraging our VPanel technology with classroom instruction, so what we did was we used that as a differentiator. So we won the job, and we have people on site, we are hoping for follow-on work. And we are also anticipating that this is a first of other awards in that respect.

Is this a domestic program?

It is. This is a southeastern US utility, and it is one of the majors.

And the Jump Start program, are you still seeing the success rate of students going through that program?

Actually, the Southern has put a hold on putting additional students through. There are some schedule issues on their side that preclude them to moving forward, so all of the data that we have had on the project is all of the same success that I have explained to everyone in the past. And as they continue to move forward, what we are hoping to get is data on throughput on those individuals, the people we train went through Jump Start, and then went through their licensing training with the customer Southern. We are looking forward to gathering that data to provide some validation to the business case that we made a long time ago. The expectation that we would help them with their throughput, and be able to show demonstrable cost savings by not losing people in their training pipeline.

Okay, thanks, Jim.

Sure, Dick.

There are no further questions in the queue, I would like to hand the call back over to management for closing comments.

Alright, thank you again for your time and continued interest in GSE Systems. I hope to see some of you at the ROTH Conference next week. We are presenting at Monday March 12th at 1 PM Pacific Time. That is it.

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