GSE Systems Inc (GVP) 2017 Q2 法說會逐字稿

Greetings, and welcome to The Equity Group GSE Systems 2017 Second Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Kalle Ahl of The Equity Group. Mr. Ahl, please begin.

Thank you, Tim, and good afternoon, everyone. 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 27A of the Securities Act of 1933 as amended and Section 21E of the Securities 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 sections. GSE does not intend to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

On this call, management may refer to EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS, which are not measures of financial performance under generally accepted accounting principles or GAAP. Management believes that these non-GAAP figures in addition to other GAAP measures provide meaningful supplemental information regarding the company's operational performance. Management uses these non-GAAP measures to evaluate the performance of GSE's business and to make certain operating decisions, such as budgeting, planning, employee compensation and resource allocation.

This information facilitates management's internal comparisons to GSE's historical operating results as well as for the operating results of its competitors. Since management finds these measures useful, GSE believes that investors may benefit by evaluating both non-GAAP and GAAP results. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to and not as a substitute for or superior to any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP measures to their most directly comparable GAAP measures in accordance with SEC Regulation G can be found in the company's earnings release. With that, I'd now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Kyle, please go ahead.

Thanks, Kalle, and good afternoon. I'd like to welcome everyone to GSE Systems Second Quarter 2017 Earnings Conference Call. Also, on today are Chris Sorrells, our Chief Operating Officer; and Emmett Pepe, our Chief Financial Officer. Earlier today, we issued a press release covering our second quarter 2017 financial results. Hopefully, you've had a chance to review this news release, but if you have not, a copy can be found on our website at www.gses.com under the News section.

During the second quarter of 2017, we delivered strong revenue growth -- organic growth on both top line and bottom line. On a year-over-year basis, GSE's total revenues increased 38% to $17.1 million, adjusted EBITDA grew 72% to $2.1 million and adjusted net income rose 92% to $1.6 million or $0.08 per diluted share. Our reported GAAP net income in Q2 2017 totaled $8,000 or $0.04 per diluted share. Strong growth in each of our segments underpinned GSE's second quarter results.

Compared to our prior year period, Performance Improvement Solutions revenue increased 40%, while Nuclear Industry Training and Consulting revenue rose 33%. While our Performance Improvement Solutions segment has experienced strong revenue growth, we have been able to maintain our margins by utilizing our unique know-how to meet customer and industry needs, while optimally managing our costs. This discipline has produced the highest gross profit in over 4 years for this segment. We're very pleased with the performance of our Nuclear Industry Training and Consulting segment, which has had an excellent start to the year. To date, 2017 has been a record year for orders, revenue, gross profit. We're working diligently to maintain the success and build on the momentum of our Nuclear Industry Training and Consulting segment over the next 12 to 18 months. We're very pleased with our second quarter financial performance, which reinforces the merits of the strategy and culture we introduced nearly 2 years ago, when I joined GSE. We have come a long way, and we still have more to accomplish.

We ended the second quarter with $24.5 million in cash and have been working diligently over the last several quarters to identify and execute strategic acquisitions that will enhance GSE's growth, allow us to create more value for our customers and in turn, create additional value for our shareholders. We believe we can use GSE as a unique platform to consolidate our fragmented industry. We continually monitor industry developments with an eye on identifying new growth avenues for GSE. The aging of the nuclear power workforce, advancement of digitization technologies and data analysis could create new opportunities for us. For example, by leveraging data and intelligence extracted from our simulators, we may be able to further increase efficiency, optimize systems and reduce downtime for our clients. It's still early, but these are areas that we are investigating and working on for the industry.

GSE's quarter end backlog remained relatively high at $68.6 million compared to $73.2 million at the end of 2016. With total backlog consisted of $57.4 million of Performance Improvement Solutions backlog and $11.2 million of Nuclear Industry Training and Consulting backlog. In summary, the long-term industry dynamics remain in our favor, and we are focused on growing our revenue in 2017 by executing operationally on our backlog, driving organic sales and effectuating our corporate development strategy. We are delighted with our performance in the first half of 2017, and we remain on track for another year of healthy growth in 2017.

I'll now turn the call over to Chris Sorrells, our COO. Chris, please go ahead.

Thanks, Kyle. I'll start with the review of some recent industry developments and news. In June, the World Nuclear Association published its 2017 World Nuclear Performance Report, which revealed the largest annual increase in global nuclear capacity in 25 years. More than 9 gigawatts of new NUC capacity came online in 2016 with the completion of 10 reactors, 5 of which were built in China. Approximately, 60 nuclear reactors remain under construction worldwide at the end of 2016. Many of these reactors will come online within the next 3 years. GSE stands to benefit in this environment as the industry makes progress towards meeting the harmony goal of supplying 25% of global electricity by 2050. The data presented in the WNA report excludes significant capacity that is still off-line in Japan, which shut down all of its 42 reactors following the March 2011 Fukushima accident. However, we continue to hear encouraging news out of the country. In July, Kansai Electric restarted its Takahama-3 and -4 power plants, raising the total number of operable reactors in Japan to 5. According to the latest estimate, a total of 10 Japanese nuclear power reactors likely will be restarted by March 2019. Historically, Japan has been a very good market for GSE, and we are well positioned to benefit from this emerging trend. Here in the United States, the Trump administration is communicating strong support for nuclear energy. In June, during Energy Week at the U.S. DOE headquarters in Washington, DC, President Trump announced plans for a complete review of U.S. nuclear energy policy to identify ways to revitalize the industry. The same week, Energy Secretary, Rick Perry said that one of the DOE's objectives is to "Make nuclear energy cool again." Arguing that nuclear is an essential 0 emissions component of any clean energy portfolio.

Domestically at the state level, initiatives designed to preserve carbon free energy, jobs and a diverse power mix continue to advance. Last month, federal courts in both New York and Illinois dismissed cases brought by independent generators, challenging each of those states' nuclear energy subsidies, ruling in favor of 0 emission credits. In July, Connecticut's governor ordered state regulators to assess the economic viability of the Millstone nuclear plant to determine if the state should provide financial support. With respect to Ohio, FirstEnergy noted, during its second quarter conference call, that they are actively working on advancing legislation in the state. Legislation was introduced in the Ohio State and Senate in April to help keep nuclear assets in Ohio's energy mix. In Pennsylvania, Exelon reiterated in July that they will close their Three Mile Island nuclear plant by September 2019, unless Pennsylvania policymakers implement a program that fairly compensates plants for 0 emission energy.

Similarly in New Jersey, nuclear plant operator PSE&G said, during the second quarter conference call, that it will continue to educate stakeholders at the state level about the need to preserve the diversity and resiliency of our electric generating mix. PSE&G is asking for financial compensation for its emissions free nuclear generation and noted that the company has received just about universal support for the continued operation of its nuclear plants.

Finally, with respect to the Westinghouse bankruptcy earlier this year. At June 30, 2017, GSE had approximately $300,000 in net billed and unbilled prepetition receivables attributed to Westinghouse. On July 31, South Carolina Electric & Gas announced that it will cease construction of a new nuclear plant at the V.C. Summer Nuclear Station. Although, there has been no formal rejection of the contract as part of the Westinghouse bankruptcy process, GSE now considers it likely that a rejection will occur. Therefore, as of June 30, GSE reserved 100% of accounts receivable, unbilled receivables and the billings buildings in excess related to the V.C. Summer Nuclear Station resulting in a net bad debt charge of $118,000. The company has assessed the recoverability of the remaining balances and concluded that the likelihood of loss is not probable. And therefore, none of the remaining outstanding amounts have been reserved as of June 30.

Given this news, I want to reemphasize that Westinghouse currently accounts for less than 5% of our total AR and less than 2% of our backlog. We have had a historically terrific relationship with Westinghouse and feel confident that once their bankruptcy restructuring is concluded, we will maintain our relationship with them for mutual benefit. I will note that we do not expect to be materially impacted by the SCANA decision. Let me conclude with an update on our M&A efforts. We have evaluated a large group of potential acquisition targets across the competitive landscape, including software, training, consulting, technical engineering, value-added components and parts and staffing companies. Most of which are focused on our core market, the nuclear power industry. I am pleased to report that we're making significant progress in narrowing the target list and have advanced our due diligence on a few of the highest potential opportunities.

As I mentioned last call, we continue to have serious interest in the track -- training and staffing sector and believe that we can find the right business and cultural fit and at accretive valuation we can create significant value for all parties involved, including our shareholders. Despite a few pockets of the geopolitical uncertainty, the global nuclear industry continues to expand and long-term growth is supported by the unquestionable need for reliable inexpensive and carbon free energy. Against this backdrop, we believe GSE is well positioned to excel as we continue to execute our growth strategy.

With that, I'd like to turn it over to Emmett, who will review the second quarter financial results.

Thank you, Chris, I'll begin with the review of new business. Our Performance Improvement Solutions business segment bookings totaled $4.2 million in Q2 2017 compared with $5.8 million in Q2 2016 with orders across multiple sectors and geographies. New Performance Improvement Solutions contracts in the second quarter of 2017 included $2.1 million for simulator upgrades and services in the nuclear power market, $900,000 for new full-scope simulators and other projects in the fossil power market, $8,000 for various tutorials and simulators for customers in the oil and gas industry and $400,000 for miscellaneous engineering services and training projects.

Nuclear Industry Training and Consulting orders totaled $3.9 million in Q2 '17 compared with $3.4 million in Q2 of '16. Now on to review of our financial results for the second quarter. Total revenue in Q2 '17 increased 38% to $17.1 million from $12.4 million in Q2 of '16, resulting in our highest quarterly consolidated revenue in over 10 years. Performance Improvement Solutions revenue in the quarter rose 40% to $11.7 million from $8.3 million in Q2 '16. This was our highest revenue for this segment in over 3 years. Nuclear Training and Consulting revenue grew 33% to $5.4 million in Q2 of '17 from $4.1 million in Q2 of 2016, reflecting higher staffing demand for a major utility customer. This was the best first half of the year for this business segment since our acquisition of Hyperspring.

Gross profit in Q2 2017 increased 41% to $5 million or 29.3% of revenue from $3.6 million or 28% of revenue in Q2 of '16. This was our highest quarterly profit since Q3 of 2012. SG&A expenses in the quarter totaled $3.8 million or 22% of revenue compared with $2.6 million or 20.6% of revenue in Q2 of '16. The increase in SG&A expenses was driven by our higher noncash stock-based compensation expense, which continues our commitment to provide incentives that align with shareholders' interests and higher professional services.

Net income in Q2 of '17 was approximately $827,000 or $0.04 per basic and diluted share compared to net income of approximately $111,000 or $0.01 per basic and diluted share in Q2 of '16. Non-GAAP adjusted net income, as defined in our earnings release, in Q2 of '17 was approximately $1.6 million or $0.08 per basic and diluted share compared to approximately $900,000 or $0.05 per basic and diluted share in Q2 of '16. We have now had 7 straight quarters of positive adjusted net income.

Non-GAAP adjusted EBITDA, as defined in our earnings release, was approximately $2.1 million in Q2 of '17 compared to approximately $1.2 million in Q2 of '16, marking 8 straight quarters of positive adjusted EBITDA.

In the quarter, we generated $1.8 million of operating cash flow. Our cash position as of June 30, 2017 totaled $24.5 million compared to $22.9 million as of December 31, 2016. We continue to operate with no long-term debt and have working capital of $15.4 million at the end of the second quarter. Our strong cash and working capital positions as well as our generation of cash via operations will allow us to seek out organic and inorganic opportunities that provide significant shareholder value.

I'll now turn the conversation back to Kyle.

Thanks, Emmett. Operator, please open the floor for questions.

(Operator Instructions) At this time, we have no questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Okay, well, thanks, everyone, for joining us. In closing, I would like to say how pleased we are with our progress and reiterate our focus on continued improvement. In the coming months, I hope to get a chance to meet and speak with many of you. We expect to attend several investor conferences before the end of the year, and we'll issue updates closer to the events. Thank you, again, for your time and interest in GSE.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.