GSE Systems Inc (GVP) 2017 Q4 法說會逐字稿

Greetings, and welcome to the GSE Systems Fourth Quarter Fiscal 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Kalle Ahl of The Equity Group. Thank you. You may begin.

Thank you, Matt, 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 U.S. 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.

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 businesses 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.

So with that, I'd like to now turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Kyle, please go ahead.

Thanks, Kalle. Good afternoon. I'd like to welcome everyone to GSE Systems Fourth Quarter and Full Year 2017 Earnings Conference Call. Also on today's call are Chris Sorrells, our Chief Operating Officer; and Emmett Pepe, our Chief Financial Officer.

Earlier today, we issued a press release covering GSE's Fourth Quarter and Full Year 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.

Today, we reported solid 2017 financial results, concluding a terrific year for GSE. In 2017, our revenue and adjusted EBITDA grew 33% and 15%, respectively, while cash flow from operations exceeded $7.7 million. Adjusted net income for 2017 decreased 24% to $2.8 million or $0.14 per diluted share. Beyond the year's bottom line results, we made significant progress on our strategy to position GSE as the value-creating acquisition platform. We committed significant time and resources to identify compelling opportunities in the global power industry vendor ecosystem, including in technical engineering, staffing and training, simulation and software, and value-added components and services.

Our acquisition of Absolute Consulting in September 2017 is the first in what we believe will be a line of successful transactions to follow. The Absolute integration is progressing, bringing additional annual revenue, complementary long-term relationships with blue-chip clients in the nuclear power sector and enhanced technical expertise in areas such as procedure writing and engineering. Even after the purchase of Absolute Consulting for approximately $9 million in cash, we ended the fourth quarter with more than $20 million of cash and no debt. With a robust and active M&A pipeline, we are in an extremely good position to scale GSE further. Chris will provide some additional color on Absolute and discuss our M&A pipeline.

We are pleased with the evolution of our growth thesis and remain focused on continuous operational improvement. In that regard, in December of 2017, we announced important steps to streamline and optimize our global operations, including ceasing operations of TAS Engineering, an unprofitable non-core business in the U.K. and closing our offices in Sweden, India and the U.K. This allows us to consolidate duplicate functions into Maryland, greatly simplifying our operations and improving the efficiency of our business. We anticipate that these actions will deliver annual savings of approximately $1 million, of which majority will be reinvested in our business to enhance our growth.

A leaner, more agile business with less complexity will allow us to better serve our customers and dedicate more resources to executing our M&A strategy. Now we believe we have the right structure in place and do not anticipate any additional office closures.

Touching on our fourth quarter performance, which Emmett will discuss in more detail later in the call, this was the first full quarter of contribution from Absolute, which drove a 66% year-over-year increase in GSE's total revenue. New orders during the quarter increased $17.9 million from $16.7 million in the fourth quarter of 2016.

As a result, GSE's backlog at quarter-end remained strong at $71.4 million compared to $73.2 million at the end of 2016. Total backlog consisted of $46.3 million of Performance Improvement Solutions backlog and $25.1 million of Nuclear Industry Training and Consulting backlog, of which $13.1 million was attributable to Absolute.

As we execute on our organic and inorganic growth strategy, we envision significant longer-term upside from current levels and have established longer-term company goals to achieve by the end of 2020, which include the following objectives: revenue of approximately $300 million, gross margin of approximately 25% and adjusted EBITDA of between 7% and 10%.

As implied by our 2020 vision, we identified a pathway to create $15 million to $25 million of additional EBITDA for the company over the long term. In the near term, we are focused on growing our revenue in 2018 by executing operationally in our backlog, driving organic sales and effectuating our corporate development strategy. We're delighted with our performance in 2017 and optimistic for another year of healthy growth in 2018.

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

Thanks, Kyle. To begin, let's start with an update on the performance and integration of Absolute Consulting since our acquisition in September. As you recall, the financials we filed in our 8-K filings reveal that Absolute's 2016 and run rate year-to-date 2017 revenue and EBITDA were approximately $40 million and $1 million, respectively, excluding the cost synergies. We identified approximately $1 million in cost synergies between the 2 organizations and executed most of those synergies upon closing the transaction. We expect to fully realize the remaining synergies in 2018.

As far as the fourth quarter, we fully integrated Absolute's back office into GSE's operations and are happy with both the progress made as well as the operating performance.

In the fourth quarter of 2017, Absolute contributed roughly $7.6 million in revenue and $510,000 to our consolidated EBITDA or approximately a 7% adjusted EBITDA margin. Revenue was below expectations due to approximately 5% lower billable field professionals resulting from an earlier holiday season that's typical, but adjusted EBITDA was in line with our expectations, which is always our primary focus.

We noticed the same trend in our Hyperspring business, which happens from time to time, depending on amounts remaining and planted budgets at year-end. We plan to operate the business development and recruiting team as part of GSE's Nuclear Industry Training and Consulting business, separate from the business development effort or Performance Solutions segment of GSE.

We are keeping the Absolute name and logo, given its brand recognition within the industry. However, with each acquisition, the plan is to brand each with a GSE company mark beneath each logo. We are in the process of adding talent to our Absolute business development team to aggressively go after new business in 2018 and expect to have new hires in place by summer.

As we talked about in the past, the Absolute acquisition is a terrific proof point in our thesis that GSE is an industry-leading platform upon which to consolidate a fractured vendor ecosystem for the power industry with a keen eye to nuclear power.

Moving on, let me discuss a major milestone for GSE. The company's fourth quarter financial results include a reversal of a portion of the valuation allowance recorded against the deferred tax assets of the company. This reversal resulted in the recognition of a onetime income tax benefit in the fourth quarter of 2017 of $9.4 million, or $0.48 per diluted share.

The company has performed a continuing evaluation of its deferred tax asset valuation allowance on a quarterly basis. The company has now concluded that as of December 31, 2017, it's more likely than not that the company will generate sufficient taxable income than the applicable net operating loss carryforward periods to realize a portion of its deferred tax assets.

This conclusion and the resulting partial reversal of the deferred tax asset valuation allowance is based upon consideration of a number of factors, including the company's 3-year cumulative positive earnings, its demonstrated ability to meet or exceed budgets and its forecast of future profitability. The NOLs are likely to be utilized, which currently amount over $20 million or almost 1/3 of our market cap. This is a great validation of our team's hard work and focus on profitability over the past 2.5 years and our outlook going forward.

Now let me speak about our M&A efforts. We hit the ground running in 2018, and our M&A efforts are very active. In fact, it's the most active we have seen since we formally kicked off our roll-up strategy in January of '17. We are excited by our pipeline, which continues to grow.

Our goal remains to close 1 or 2 additional deals in 2018 to drive enhanced growth in revenue, adjusted EBITDA and EPS, resulting in approximately $4 million-plus in adjusted EBITDA to our platform in 2018.

As Kyle touched on, our 4 target areas remain unchanged: technical engineering, staffing consulting, software solutions and value-added components. As always, we will remain very focused on our publicly stated criteria for M&A to ensure that each transaction provides our investors with asymmetrical risk award, attractive IRR and an ROIC that exceeds our cost of capital.

Given all the noise on 2 nuclear -- new nuclear reactors being built in the U.S., we want to just give a quick update. Recently, Southern Company filed its semiannual report with the PSC on construction progress related to the construction of 2 AP1000 units called Vogtle Units 3 and 4. The most recent report covers the period from July 1 through December 31, 2017, and is the first since the PSC's decision in December to approve Georgia Power's recommendation to complete the units. It also reaffirm the target in-service states of November 2021 for Vertical 3, November 2022 for Vertical 4. And that completing the units remain the best cost option to meeting the state's future energy needs following contractor Westinghouse's Chapter 11 bankruptcy filing last March.

Construction work is currently tracking ahead of the plan to achieve the target in-service dates Georgia Power has set. So we remain optimistic that these plans get filled, and Southern is an important customer GSE.

Moving onto some of the recent industry developments and updates. On the federal level, the bipartisan budget, though, that was signed into law on February 9 extends tax credits to nuclear power reduction past year in 2020, which is expected to benefit the Unit 3 and 4 expansion at the Vogtle plant in Georgia. Previously, new reactors were required to be in operation prior to 2021 to be eligible, but this deadline removed, tax credit to the 18-megawatt hour over 8 years are available up to 6,000 megawatts of new capacity.

Extending the credit was a key factor behind Georgia Public Service Commission's unanimous vote in December to allow Georgia Power and its 3 utility partners to complete the $25 billion Vogtle project. Another example, the likely beneficiary of the extend tax credits for nuclear power production is NuScale Power, which is developed in the small modular reactor project at the National Lab.

On a state level, New Jersey, Ohio and Pennsylvania state legislatures continue to draft legislation that will provide support to nuclear power plants facing premature closure. The bills are considering a 0 emission certificate program that credits nuclear power for their non-emission carbon dioxide. We expect to see increased activity on this front as 2018 unfolds.

Globally, there are over -- there are less than 60 reactors under construction, with China, Russia and India leading the way. Other regions are seeing accelerating activity as well. For example, on March 5, The United States Energy Information Administration noted that nuclear electricity generation capacity in the Middle East is expected to roughly quadruple from 3.6 gigawatts in 2018 to 14.1 gigawatts by 2028 due to new construction start-ups and agreements between Middle Eastern countries and nuclear vendors. There is increasing recognition that the world needs safe, carbon-free, reliable, base load electricity. And nuke energy is a critical part of the mix.

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

Thank you, Chris. I'll begin with a review of new business. Our Performance Improvement Solutions segment bookings totaled $4.9 million in Q4 '17 compared to $13 million in Q4 2016. Year-over-year comparisons were impacted by several large orders being pushed out of Q4 2017 that we are expecting to close in the first half of 2018.

Nuclear Industry Training and Consulting orders totaled $13 million in Q4 2017 compared to $3.7 million in Q4 2016. Absolute Consulting contributed $8 million of new orders in Q4 of '17. Before discussing our fourth quarter results, I'll address the mobile restructuring plan we implemented at the end of last year.

On December 27, 2017, our Board of Directors approved an international restructuring plan to streamline and optimize the company's global operations. Beginning in December 2017, we consolidated engineering services and R&D activities to Maryland and ceased an unprofitable non-core business in the U.K.

As a result, we had a process of closing our offices in Nyköping, Sweden; Chennai, India, and Stockton-on-Tees, U.K. These actions are designed to improve productivity by eliminating duplicate employee functions and increasing our focus on GSE's core business. Improving efficiency and maintaining the full range of engineering capabilities, while reducing costs and organizational complexity. Under restructuring plan, we expect to record a total restructuring charge of approximately $1.7 million, excluding any tax impacts and cumulative translation adjustments. During Q4 2017, we recorded a restructuring charge of $0.7 million consisting of severance expenses for $500,000, asset write-offs of $200,000 and other costs of about $46,000.

Based on accounting guidance, we expect to record the remaining restructuring charges in 2018. Primarily reflecting the office closure costs and amounts to be transferred from the cumulative translation adjustments, which will be included in determining net income for the period. We expect that the projected cash, cost savings from this activity will commence no later than Q3 of 2018.

One last item, as you will see in our 10-K, we executed our remediation plan and have fully remediated our previous material weakness and our internal controls over financial reporting.

Now on to review of our financial results for the fourth quarter. Total revenue in Q4 '17 increased 66% to $22 million from $13.3 million in Q4 '16. Nuclear Training and Consulting revenue rose 135% to $12.2 million in Q4 2017 from $5.2 million in Q4 2016, reflecting higher staffing demand from major customers and a full quarter of revenue from Absolute Consulting.

Performance Improvement Solutions revenue in Q4 '17 increased 21% to $9.8 million from $8.1 million in Q4 2016, largely driven by $2.2 million increase from a major customer for the large contract executed in the first quarter of 2016, which was partially offset by lower revenues from our foreign subsidiaries of $500,000, primarily due to the winding down of the business in the U.K. and Sweden.

Gross profit in Q4 2017 increased 9% to $5.2 million or 23.5% of revenue from $4.8 million or 35.9% of revenue in Q4 2016. For the Nuclear Training and Consulting segment, in Q4 2017 gross profit increased 84% to $1.8 million from $1 million in Q4 2016. Absolute Consulting contributed $1.1 million to the gross profit for Nuclear Industry Training and Consulting segment in Q4 2017.

The Performance Improvement segment's Q4 2017 gross profit decreased 11% to $3.4 million from $3.8 million in Q4 2016. The management team is keeping a close eye on this segment, and remain in the ready position so we can execute on upcoming opportunities.

SG&A expenses in Q4 2017 totaled $3.7 million or 16.9% of revenue compared to $3.7 million, or 27.5% of revenue in Q4 2016. The increase in SG&A expenses resulted from the acquisition of Absolute Consulting, which contributed $600,000 to Q4 SG&A expenses. That increase was partially offset by $200,000 decrease in corporate charges due to lower recruiting expenses and stock compensation

-- stock-based compensation as well as $200,000 decrease in contingent consideration expense, which mainly reflected the fair value adjustments related to the company's November 2014 Hyperspring acquisition.

Net income in Q4 2017 was approximately $5.4 million or $0.28 per basic share and $0.27 per diluted share, compared to $1 million or $0.05 per basic and diluted share in Q4 of 2016. The substantial increase from prior year is primarily due to the impact from tax reform and the favorable release of the deferred tax asset valuation allowance of $9.4 million.

Non-GAAP adjusted EBITDA, as defined in our earnings release, was approximately $1.8 million in Q4 2017 compared to $2.2 million in Q4 2016. In Q4 2017, we generated $4.3 million of operating cash flow. Our cash position at December 31, 2017, totaled $20.1 million compared to $22.9 million at December 31, 2016.

We continue to operate with no long-term debt and had working capital of $11.6 million at the end of the fourth quarter. Our strong cash and working capital positions as well as our generation of cash via operations will allow us to continue to seek out organic and inorganic opportunities that can provide significant shareholder value.

I'll now turn the conversation back to Kyle.

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

(Operator Instructions) And if there are no further questions, Mr. Loudermilk, do you have any closing comments?

All right. Thanks very much. I'd just like to thank everyone for joining us. In closing, I'd 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, especially at our upcoming investor conferences. I would like to note that we will be participating at the Sidoti conference in New York City on Thursday, March 29. I hope to see many folks there. Thank you, again, for your time and your interest in GSE.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.