GSE Systems, Inc. (GVP) Q3 2015 Earnings Call Transcript
Published at 2015-11-12 19:36:03
Kalle Ahl - IR, Equity Group Kyle Loudermilk - CEO Chris Sorrells - Interim COO Jeff Hough - CFO
Greetings, and welcome to the GSE Systems Inc. Third Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, our conference is being recorded. I would now like to turn the conference over to our host, Kalle Ahl with The Equity Group. Thank you. Mr. Ahl, you may begin.
Thank you, Tim. 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 the 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. Kyle Loudermilk, Chief Executive Officer of GSE Systems. Please go ahead, Kyle.
Thanks, Kalle, and good afternoon. I would like to welcome everyone to GSE Systems’ third quarter 2015 conference call. Also on today’s call are Chris Sorrells, our Interim Chief Operating Officer and Jeff Hough, our CFO. Earlier today we issued a press release covering our financial results for the third quarter of 2015. Hopefully you’ve had a chance to review this news release, but if you have not, the copy can be found on our website at www.gses.com under the Investor Relations section. It’s been a busy and productive first three months since I joined GSE. As I mentioned on last quarter’s call, GSE’s recent financial performance has disappointed our investors and we are taking decisive careful steps to improve operations and create value for our shareholders. Among our accomplishments in Q3 2015 are the following. We hired a new Interim COO, Chris Sorrells, who is on the call with us today. Chris brings a wealth of relevant experience and expertise to GSE and already has played an instrumental role in helping enhance our operations. We conducted a comprehensive review of GSE’s global operations and implemented the restructuring program that we estimate will result in annual cash cost savings of nearly $5million. These are significant growth savings that will have an immediate favorable impact on our future performance. The cost reductions were primarily achieved through the follows actions; streamlining our management and staff to be best aligned with the core functions of our business; discontinuing unpromising R&D efforts, while focusing on the compelling and unique technology that is essential to our customers; consolidating offices and updating benefit policies to reflect best practices. We introduced the culture of continuous improvement at GSE and are replacing inefficient processes with best practices throughout our organization. Diligent operations management will remain one of our top priorities even as we embark on an expanded growth strategy. In Q3 2015 we recorded adjusted EBITDA of $162,000. This is the first positive quarterly adjusted EBITDA that GSE has generated since the fourth quarter of 2013. Working from the starting point, and with the benefit of our recently streamlined operations, I believe we are very well positioned for improved EBITDA and cash flow heading into 2016. Of note, during the quarter, our Hyperspring subsidiary signed a new three-year contract with a longstanding utility customer for the continuation of nuclear operation support services allowing for total payment of up to $35 million. The continuation of this ongoing relationship is clear validation of the significant value proposition of our solutions. Our quarter-end backlog remained very strong at $47.5 million, compared to $48.4 million at the end of last year. Since September 1, we have been awarded multiple contracts of an aggregate value of over $4.6 million, including nuclear, fossil and oil and gas projects, primarily in the Asia and North America. Having taken steps to improve GSE's cost structure, we are commencing in earnest the next phase of our turnaround plan, which involves reinvigorating the growth of our existing businesses, while evaluating new opportunities for sustainable growth in adjacent markets. During my first 100 days at GSE, I've met with many of our value customers and now better understand how truly important our solutions are for their organization. To succeed going forward, we must maintain GSE's track record of excellence, delivering high-quality solutions and superior customer service to our clients. In our existing businesses, we’re focusing on our core markets of serving the nuclear power industry and fossil power industry with simulation solutions, training systems, services and consulting. We will also continue to focus on advancing EnVision, which is an essential solution for training and workforce development in the process industries. Through these areas of focus, we feel that we can serve the global power and process industries most effectively, resulting in profitable revenue streams for the long-term. At the same time, we’re exploring new adjacent markets that offer sustainable, profitable growth potential. We are focusing on transforming our business model over time, towards greater recurring revenues with less realized on project-based sales. As we evaluate all of our growth opportunities, I want to make it clear that we would be intelligent and deliberate about our capital allocation decisions. At quarter end, we had zero debt and cash totaling $16.4 million or $0.91 per diluted share, which equates to more than 60% of GSE’s recent market capitalization. $12.8 million of our cash balance is unrestricted. At this time, unless we identify a compelling accretive use for our cash, we intend to preserve and grow our cash position. In addition, we plan to create an equity focused culture within GSE, using our long-term incentive plan, which is already approved by our shareholders. We plan to grant the combination of options RSUs and performance RSUs over time. This serves to line employee and to those of our investors access a retention tool for key employees and provides our employees an opportunity to participate in the wealth we create for shareholders. We expect this to follow a similar structure to my compensation plan whereby employees are rewarded from this plan as a result of generating outstanding returns for our shareholders. We plan to start the plan in the fourth quarter of 2015, and hope to create a yearly grant program for key employees who deliver exceptional value to GSE through outstanding customer engagement. So in closing, we’re off to a great start, but we have much to do. As our turnaround initiatives take effect, I’m optimistic that we will create a brighter, more sustainable future for GSE and enhance value for our shareholders in the process. With that, I’ll now turn it over to Jeff for his review of the quarter.
Thanks, Kyle. I would like to remind everyone that as a result of our acquisition of Hyperspring, we are now reporting selected financial results for two business segments, Performance Improvement Solutions, which provide simulation, engineering and training solutions and services to the nuclear and fossil fuel power industry and to the chemical and petrochemical industries and our Nuclear Industry Training and Consulting segment, formerly referred to as our Staff Augmentation segment, which provides highly technical training personnel to fulfill primarily senior level training positions on a short-term basis to energy industry customers. Hyperspring’s results are included in the Nuclear Industry Training and Consulting segment. I will begin with an update on backlog and new business. We ended the quarter with $47.5 million of backlog, compared to $48.4 million at the end of the fourth quarter 2014. Our backlog at the end of the third quarter 2015 includes $5.4 million of Nuclear Industry Training and Consulting backlog and $42.1 million of Performance Improvement Solutions backlog. In the third quarter 2015, our Performance Improvement Solutions’ bookings totaled $3.8 million, compared to $17.6 million in the third quarter of 2014, with orders across multiple sectors and multiple geographies. Nuclear Industry Training and Consulting orders totaled $1.5 million. New Performance Improvement Solutions contracts in the third quarter of 2015 included $1.2 million for simulator upgrades and services in the nuclear power market, $1 million for new full-scope simulators and other projects in the fossil power market, $0.7 million for various tutorials and simulators for customers in the oil and gas industry and $0.9 million for miscellaneous engineering services and training projects. Now on to a review of our financial results for the third quarter. Total revenue for the quarter 2015 was $15 million, which included $5.1 million of incremental nuclear industry training and consulting revenue from Hyperspring compared to total revenue of $7.8 million in the third quarter of 2014. Performance Improvement Solutions revenue increased 26.6% to $9.9 million from $7.8 million in the third quarter 2014 driven by a $1.0 million increase in fossil project revenue and smaller revenue increases in other end-markets. Gross profit in the third quarter 2015 was $2.3 million or 15.1% of revenue compared to $2.5 million or 31.4% of revenue in the third quarter of 2014. In the third quarter 2015, we reported $1.5 million write-down of capitalized software development costs, which impacted our reported gross profit. Excluding this write-down, our adjusted gross profit was $3.8 million or 25.4% of revenue in Q3 2015, which was a decline from 31.4% in the third quarter of 2014. This reduction in gross profit percent is mainly due to the incremental Hyperspring nuclear industry training and consulting revenue, which has a lower gross margin in Performance Improvement Solutions revenue that has operating margin that typically exceeded 7% given very low SG&A and minimal capital expenditures. Nuclear industry training and consulting gross profit was $0.7 million or 13.4% of revenue in the third quarter 2015. Performance Improvement Solutions gross profit was $3.1 million or 31.6% of revenue in the third quarter of 2015 compared to $2.5 million or 31.4% of revenue in the third quarter of 2014. SG&A in the third quarter 2015 was $3.8 million, down from $4 million in the third quarter of 2014. SG&A was lower in the third quarter of 2015 mainly due to a reduction in uncapitalized software development costs. These reductions were partially offset by a $300,000 increase in contingent consideration accretion expense related to the Hyperspring acquisition. We reported $1.6 million of restructuring charges in the third quarter of 2015 associated with costs for facility closings, severance and other employee benefits. Restructuring charges in the quarter 2014 totaled $0.3 million and were related to US severance and other employee benefit costs. Operating loss for the third quarter of 2015 was $3.4 million compared to an operating loss of $1.9 million in the third quarter of 2014. Adjusted operating loss, excluding the impact of the previously mentioned write-down of capitalized software development costs and restructuring was $0.3 million compared to an adjusted operating loss of $1.7 million in the third quarter 2014. Gain on derivatives was $20,000 in the third quarter of 2015 compared to a gain of $69,000 in the third quarter 2014. Our provision for income taxes was $50,000 in the third quarter of 2015 compared to $61,000 in the third quarter of 2014. The net loss for the third quarter of 2015 was $3.6 million or $0.20 per basic and diluted share compared to a net loss of $1.9 million or $0.11 per basic and diluted share in the third quarter of 2014. EBITDA loss, which is earnings before interest, taxes, depreciation and amortization for the third quarter of 2015 was $3.3 million compared to an EBITDA loss of $1.7 million in the third quarter of 2014. Excluding the write-down of capitalized development costs, loss from the change in fair value of contingent consideration and the restructuring charges, adjusted EBITDA in the third quarter 2015 was $162,000 positive compared to an adjusted EBITDA loss of $1.4 million in the third quarter 2014. GSE’s cash position at September 30, 2015 was $12.8 million, excluding $3.5 million of restricted cash as compared to cash and equivalents of $13.6 million, excluding $4.2 million of restricted cash at December 31, 2014. The decline in GSE’s cash position is due in part to the following cash outlays during the first nine months of 2015; $1.6 million of capital expenditures, including software development costs, $0.5 million for payment of contingent consideration for the acquisition of EnVisionSystems, Inc., and $0.3 million to pay down the outstanding balance of Hyperspring’s line of credit. These items were partially offset by approximately $1.6 billion generated by changes in working capital. At the end of the third quarter, we had no long-term debt and working capital of $8.3 million. I'll now turn the conversation back to Kyle.
Thanks Jeff, we're excited about the progress made during my first 100 days on the job. While we have accomplished much, we have much to do ahead of us. With that said, I'm more excited of what I seen now than before I took the job, our technology is more robust than I expected, I’m more impressed by our loyal and very talented employees as well as our stickiness with our blue-chip customer base. We’re also better positioned operationally than we were 100 days ago. I truly believe that we can utilize the base business at GSE as a platform from which to build a terrific industrial, technology, and services company over the next three to five years. We expect to outline our vision for the future over the course of the first half of 2016. I'll now ask the operator to open the floor for questions.
Okay. Well, thanks everybody for joining us. I hope we get a chance to meet and speak with many of you in the coming months, and 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 and have a wonderful rest of your day.