GSE Systems Inc (GVP) 2012 Q2 法說會逐字稿

Greetings, and welcome to the GSE Systems reports second quarter 2012 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, Manny. Good afternoon everyone, and thank you for joining us today. Before we begin, I'd like to remind everyone that statements made during the course of this call may be considered Forward-looking statements in Section 27A of the Securities Act of 1933 as Amended, and Section 21E 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 filed under the Forward-looking statements in risk factor 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' 2012 second quarter 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 three and six months ending June 30, 2012. We are pleased with our performance, and are excited about the opportunities that lie ahead. Revenue rose 17.1% to $13.2 million 2011 from the second quarter of 2011, primarily due to $1.2 million increase in nuclear simulation revenue. Revenue in GSE EnVision also increased $200,000 from the second quarter of 2011. For the quarter ending June 30, 37% of our revenue was from non-nuclear customers. This compares to 36% in the second quarter of 2011 and 32% for all of last year.

Our gross margin of $4.5 million, or 33.9% of revenue, improved from $3.8 million, or 33.4%, of revenue in the second quarter of 2011. This was driven by a decline in revenue generated at the Slovakian simulator project, which has an overall lower gross profit percentage than GSE's normal percentage, higher margin revenue from GSE EnVision's May 2012 sale of simulation and computer-based learning modules to a subsidiary of a global energy services company. Revenue from GSE EnVision vision carries a much higher margin than our other businesses. We expect to record significant revenue from the remaining balance of this contract in the third quarter of this year. Also, our gross margin of $4.5 million or 33.9% of revenue, improved on a consecutive quarterly basis from $3.9 million, or 29.3%, of revenue in the first quarter of 2012.

Our operating income more than doubled to $560,000 from $248,000 in the second quarter of 2011, benefiting from higher revenue and gross margin and lower amortization. Compared to first quarter of 2012, operating income rose from $218,000 in the first quarter. EBITDA rose just to just under $500,000 for the quarter, compared to $123,000 in last year's second quarter. Although negatively impacted by $384,000 loss on derivative instruments, net income for the second quarter improved to $158,000, or $0.01 per share, from a net loss of $244,000, or $0.01 per share, in the second quarter of 2011, which was also negatively impacted by a $410,000 loss in derivative instruments. Moving to the balance sheet, our cash balance as of June 30, 2012 was $12.3 million, excluding $5.8 million of restricted cash. As we explained in the Press Release, cash is down from year end due primarily to a $5.6 million outstanding invoice related to the work suspension on the Slovakian simulator, combined with normal cash flow timing, $1.4 million to collatorize performance bonds, $800,000 in contingent consideration paid in connection with the acquisitions completed in 2011 and 2010, a $500,000 final capital contribution to our Chinese joint venture, and about $600,000 in Oracle implementation expense. As we have previously discussed, the Slovakian suspension is not related to the work that GSE is performing, it is, instead, a byproduct of a local government mandate to redesign certain aspects of the plant.

To provide an update on the suspension of the Slovakian project, since May of this year we have provided the Slovakian utility with a two-person engineering team at their request to support the project during its suspension. We continue negotiations to amend our existing contract, and have provided the utility with proposals for the cost to demobilize and re-mobilize our project team, including the monthly suspension cost as well as the cost related to the reduction of our team. We are currently discussing amendments to the existing contract which will address one, additional scope of work for the Company; two, payment of outstanding receivables; three, costs related to the suspension of the contract and its restart; four, the Company's continued support of the project during the suspension period; and five, which all the utility's outstanding claims. In addition to the outstanding $5.6 million invoice which I previously mentioned, at June 30, 2012 we had $819,000 of recoverable costs and accrued profit not billed, and a $2.9 million performance bond in place to secure completion of the contract. We will provide another update in next quarter's call.

At June 30, 2012 and as of today, we have zero long-term debt. During the first six months of 2012 we repurchased 162,387 shares of common stock for an aggregate purchase price of $300,000. This brings the total number of shares we have repurchased to $986,761, for an aggregate amount of $2 million. Backlog at June 30, 2012 was $51.3 million, compared to $55.0 million at June 30, 2011. The decline was primarily driven by a number of projects totalling more than $6 million moving to the right. We expect that these projects will be awarded in the next two quarters and 2013. With respect to new business development, we signed contracts for new projects worth approximately $8.6 million in the second quarter, and another $1 million thus far in the third quarter.

Before I get to everyone's questions, I want to take a moment to address a story that may have caught your attention last week. It was reported that the NRC halted some licensing activities until the Agency can sort out the issue of how and where to dispose of nuclear waste. Some of you might be concerned about the NRC's actions could impact our business. We do not believe this will impact us at all in the foreseeable future. While the government and special interest groups sort this out, the fact is that reactors currently operating are not affected by this decision. The NRC has something called a, quote, timely renewal doctrine, unquote, similar to what some other federal agencies practice. That allows the status quo to remain while the Agency deliberates. Specifically, we do not expect any impact to our work at Vogel or BC Summer. In closing, I'd like to reiterate that we're excited about the second half of 2012 and beyond, and look forward to continuing our evolution into a global energy service solutions provider.

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

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session.

(Operator Instructions)

Mark Schappel, Benchmark.

Jim, just wondering if you could just kind of review your comments one more time on the Slovakian simulator project as far as where you're at with renegotiating the contract, and maybe what we can expect in the next quarter or two.

Sure. So, as I mentioned, we're negotiating on several things, what the cost of the suspension is for ramping down and then ramping back up. We're also, as I mentioned, what we did was we scaled the team down to two engineers that remained onsite working on the project fulltime. They're currently still working, so we're addressing that amendment. We're also working on payment. As I mentioned, we have $5.6 million in outstanding receivable, and we're working on what portion of that will be paid in the very near term, in the next couple, three months. The Company, as we issue, as we presented in the K, they had put a claim in of us being behind schedule, which is true but it was not -- it was no fault of ours. The whole project is behind schedule. We believe that it was a defensive maneuver to help in future negotiations, to make sure that they weren't taken advantage because of the project's slippage.

Okay, thanks. Then haven't heard much lately on your project with the small monitor reactor projects. I think you have a couple of those going on, and I just wondering if you could just give us an update of how those are progressing?

Yes, we do. We're working with both New Scale and Babcock and Wilcox on the inpower reactors. In our last quarterly release, we had put out that we had won the next phases of both of those jobs. So those are both going extraordinarily well. The projects are very well received, customers are very happy, and we anticipate having the opportunity to provide not just these engineering simulation services, but also training services when they become needed, as well as ultimately the training simulator work down the road. So we're very happy with those projects.

Okay, great. Then with respect to R&D expenses, they jumped up a little bit this quarter. Should we just model that as kind of new normal going forward?

Yes, the way R&D works with us is our R&D people also do project work. So they sometimes, if the projects require additional support from R&D, you can see R&D spending go down below our anticipation or our budget. In this particular case, we were able to dedicate them more to R&D. So ultimately we expect that it should level out. Obviously, as they're able to spend more time on the R&D, they're getting their projects done in a faster fashion. So I don't anticipate that the R&D numbers are going to be sustainably this high. We're working with the R&D team to set priorities and level that out.

Okay. Thank you. That's all for me.

Sure. Thanks, Mark.

(Operator Instructions)

Dick Ryan, Dougherty.

Thank you. Jim, could you break out what EnVision was in the quarter? Maybe you did earlier in the call and I might have missed it.

We don't actually break their revenue out. The job, they won a very significant job back in May, as we talked about, or I should say, that project we don't break out. Jeff, can you help? Do we have the EnVision, because we have announced that?

Yes. Quarter was about $700,000.

Okay. About $700,000, Dick.

Okay, and that was up, I think you said, $200,000 from last year. So you didn't, and I'm trying to recall on that discussion, did you say how big the EnVision project was?

We didn't because it's a single contract, and as you know, for competitive reasons we don't announce, but we did kind of give you guys clues. So the clues were, we announced a little over $5 million in new awards at that last quarter release, and we announced that a majority of the new awards was the contract with that subsidiary of a major energy customer. So using that math, you can figure out sort of what the minimum was, and that's at that much higher EnVision margin than our traditional business.

What's the timing of that project to be completed?

So a majority of that revenue will be recognized in the second and third quarter of this year, and then there are some services that will trail into the fourth and next year. Then there are maintenance agreements for, essentially goes out about five years. So the maintenance agreements are not huge dollar amounts on an annual basis, but extremely high margin.

Okay. Can you talk a little bit on the training side, what's currently going on there, what you might be seeing for the second half of the year on training?

Well, we have another contract where we're providing SRO certification training. This is a different utility. We have a lot of activities and things that we believe we're very close to closing we haven't announced. Our work with -- we are populating a learning content management system for an industry organization, and we're got significant follow-on work there. So we have lots of lines in the water. We also have opportunities internationally. You're kind of catching us at a point where we're hoping for some closures on jobs here shortly, but nothing that's public at this point that I can discuss.

Okay, and you made another contribution for the Chinese joint venture. Can you provide an update for that, as well?

Sure. So that's our final capital contribution for the JV. As you will recall, in the beginning of the year we announced over $7 million of contracts in China. The JV at this point is still continues, at the business practice is that the nuclear jobs are being awarded either to GSE China or to GSE Systems here in the US. The fossil jobs go directly to the JV. So in this interim period, until the JV has been up and running for a while and the customers, I will say, trust the JV with the nuclear work, at this point we enjoy the benefit of getting both revenue and the profit. We do expect at some point in the future, whether that's two years out, it's hard to tell at this point, but when the revenue flows through the JV, we'll have a single line entry on the income statement, 49% of the income.

Okay. Thank you.

You're welcome.

Neil Feagans, Feagans Consulting.

Just a couple questions back on the Slovakia contract, and I'm not current on what's in your filings. I don't know if it's in the K or the Q you're filing, or you filed at the end of Q1, but the claims that SE has outstanding against GSE, does that include monetary damages?

There are numbers in the claims. It's approximately $1 million.

Okay, and did they make those monetary claims and claims of you guys being behind, I guess, did they make those claims prior to suspending the project? Is that something that's completely unrelated?

Yes, Neal, it's completely unrelated. They made those claims, I want to say, fall last year. Sort of October, November time frame. Then the suspension, I actually received the suspension letter the day of the first quarter call this year.

Okay.

So they are somewhat unrelated. One didn't drive the other, but obviously the project schedule certainly had something to do with it. Really it's the government, the change in design which is being driven by their regulator is the major reason for this particular suspension.

Okay. The $5.6 million of -- the outstanding invoices for $5.6 million, were they current in their payments right up until suspension, or were they getting behind going into the suspension?

Yes, they were current. In fact, third quarter last year we had a $3.1 million change order, I believe it was, and they paid in a timely fashion on that. The way that particular contract works is what -- we have to do an official invoice, and it gets logged in, gets approved, whatever month that goes in, typically the payment is at the end of the following month. So they had been current, and we are negotiating the, essentially, the next payment. As I mentioned earlier, we expect some payment in an agreed to amount in the next two to three months.

Okay. Would you describe your working relationship with them as amicable, or is it in any way becoming adversarial?

No, I wouldn't say it's adversarial, but I would say things are tense. When there is a huge project like that with huge budgets and delays, obviously it's very critical to their country and to the utility.

But it's a multi-billion dollars project with you guys having a small, little fraction of the outstanding --

Yes, that's right.

Okay.

So, certainly I wouldn't call it adversarial. As I mentioned, we worked out scaling the team back to two engineers that are out there supporting fulltime, and we're working on what the future will be.

Well, if I had to guess, you guys are probably, if not the only group in the world that can do the work, you're probably one of maybe two. So good luck. Play hardball with them a bit.

Thank you Neal.

Okay. Thanks Jim.

All right, take care.

Bye-bye.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any closing remarks.

Once again, I'd like to thank the hard-working women and men at GSE for all their effort and support, and thank you for your time and your continued interest in GSE. Good afternoon.

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