Kalle Ahl - The Equity Group Kyle Loudermilk - President, CEO & Director Christopher Sorrells - COO & Director Emmett Pepe - CFO

Welcome to the GSE Systems, Incorporated 2017 Third Quarter Financial Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Kalle Ahl of The Equity Group. Thank you, Mr. Ahl, you may begin.

Thank you, Elmer, 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 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 comparable GAAP measures in accordance with regulation -- SEC Regulation G can be found in the company's earnings release. 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, and good afternoon. I'd like to welcome everyone to GSE Systems Third Quarter 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 our third 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. We made significant progress in executing our growth strategy in the third quarter of 2017, delivering year-over-year increases in revenue, adjusted net income and adjusted EBITDA, while completing an earnings accretive acquisition of Absolute Consulting on September 20, 2017. In Absolute Consulting, we acquired a highly regarded provider of professional services to the global nuclear power industry. Since its founding 2 decades ago, Absolute has established long-term relationships with blue-chip clients throughout the nuclear power sector, while developing strong technical expertise in areas such as procedure writing, engineering, technical support, project management, training, project controls and corrective actions. The purchase of Absolute Consulting transforms GSE into a company of scale with pro forma latest 12-month revenue of approximately $100 million, and significantly increases our position as the go-to provider of consulting solutions to the nuclear power industry. In addition to adding roughly $40 million to our LTM revenues, Absolute brings new and highly complementary capabilities to our solution offering, deepens our relationships with existing clients and brings new customers on to our platform. We expect to see a meaningful financial impact from Absolute Consulting beginning in the fourth quarter as the acquisition closed 10 days prior to the end of the third quarter. In the roughly two months since we acquired Absolute, we've moved quickly to integrate the companies and I believe this transaction clearly represents a major proof point of our thesis that GSE is a compelling platform for consolidating a fragmented vendor ecosystem for nuclear power. Even after the purchase of Absolute Consulting, we ended the quarter with approximately $16.5 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 Sorrells will provide some additional color on Absolute and discuss our pipeline a bit later in the call. We're pleased with where we are on our growth thesis and remain focused on continuous improvement. There is a lot that we're doing to ensure we operate optimally across our business with properly scaled business functions and locations aligned to our core lines of business and geographies. As such, we are working diligently with the leadership team on options to simplify and improve our global operations. We plan to provide an update on our fourth quarter earnings call, if not sooner, as we look to address any efficiencies and suboptimal performance from the business. Returning to our third quarter operating results. Adjusted EBITDA increased 31% to $0.9 million from $0.7 million in the prior year quarter, and cash flow from operations was $0.3 million. These are solid results, especially given that our Performance Improvement Solutions segment was negatively impacted by a timing difference related to percent complete accounting for 3 projects from a major customer. Emmett will provide additional color on that later in the call. GSE's quarter end backlog remained strong at $76.4 million compared to $73.2 million at the end of 2016. Total backlog consisted of $51.8 million of Performance Improvement Solutions and $24.6 million of Nuclear Industry Training and Consulting backlog, of which will $12.7 million was attributable to Absolute. In summary, we continue to ensure we remain lean and agile, always in the ready position to take advantage of the long-term industry dynamics, which we feel remain in our favor. We're focused on growing our revenue in 2017 by executing operationally in our backlog, driving organic sales and effectuating our corporate development strategy. We're with our performance in the first 9 months of 2017, and we feel GSE remains 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 some additional color on the Absolute acquisition and its operating model. During our first seven weeks of ownership, things are going well and integration is in full swing. Preclose, we prepared a detailed 100-day plan to integrate the business with our Hyperspring division as well as merging the Absolute back-office with GSE's. We are moving swiftly to ensure that Absolute is fully integrated into GSE by the end of 2017. For the past two years, Absolute has averaged approximately $40 million in revenue with quarterly revenue ranging from approximately $8 million to $11 million. Gross margin is approximately 13%, very similar to Hyperspring's gross margin at the time of the acquisition by GSE. On an LTM basis, Absolute had approximately $2 million-plus in adjusted EBITDA when including our preclose identified synergies. The 3 largest areas of focus for Absolute are typically, procedural related work, approximately 25% of revenue; engineering, approximately 20% of revenue; and technical support, approximately 15% of revenue. This mix is highly complementary to our Hyperspring offerings. Absolute's customer mix is well balanced in our view with one customer in 2016 representing approximately 35% of gross profit. No other customer representing -- represents more than 15% of gross profit. We expect this transaction to be immediately accretive to earnings, having used cash on hand to purchase the business. As Kyle indicated, 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. Absolute has a great back-office team and processes, which we will further leverage as we look to make additional acquisitions. Our ongoing M&A efforts are active, and we are excited by our pipeline. Our four target areas remain unchanged, technical engineering, staffing and consulting, software and value-added components. Our goal is to close 1 or 2 additional deals in 2018 to drive enhanced growth in revenue, adjusted EBITDA and earnings per share. With that said, we will certainly remain very focused on our publicly stated criteria for M&A to ensure that each transaction provides our investors with asymmetrical risk reward, attractive IRR and an ROIC that exceeds our cost of capital. Moving on to our overall operations. With the acquisition of Absolute complete, we will provide investors with our updated 3-year operating model to properly frame our vision for where we want GSE to be by 2020. We believe this operating framework will help investors model our business as well as understand our latest strategy based on new information and activities as they unfold. We plan to share the operating model in an updated investor deck, which would be published on our website and via an 8-K filing prior to our participation in 2 upcoming investor conferences, LD Micro in Los Angeles on December 6, and the ROTH Industrial Growth & Cleantech Conference in New York City on December 11. Let me conclude with some important recent industry developments and news. On September 28, U.S. Energy Secretary, Rick Perry, directed the nation's federal grid regulator to create rules favoring nuclear generators, in particular. The notice of proposed rule-making stated that the Federal Energy Regulatory Commission must order grid operators to increase how they value reliability and resilient -- resilience attributes in energy generation. All licensed nuclear power plants and a significant portion of existing coal plants can meet those requirements today. If implemented, this would be one of the most sweeping changes to the U.S. electricity supply market in the past 2 decades. With expedited FERC review, this could be implemented before the coming winter heating season. The bottom line of this proposal is that eligible power sources would be able to participate in a "details to be determined" rate structure that allows owners to fully recover allocated costs plus a fair return on equity. In addition, Perry announced a separate action to help move along the development of new nuclear plants with conditional commitments of up to $3.7 billion in loan guarantees to be owners of the Vogtle nuclear power plant in Georgia. Perry stated that he believes the future of nuclear energy in the U.S. is bright, and he looks forward to expanding the American leadership in innovative nuclear technologies. He characterized advanced nuclear energy product -- projects like Vogtle as the kind of important energy infrastructure projects that support a reliable and resilient grid promoting economic growth, strengthening our energy and national security. More good policy news continues to unfold and at the end of October Connecticut passed a bill that may help it keep its Millstone nuclear power plant open. The bill, which passed the State Senate and House last month and the governor signed into law, permits state energy officials to change the rules for how Dominion sells electricity from Millstone. Millstone could sell up to 75% of its output in competition with the other zero-carbon sources of electricity under the bill. This is a significant recognition of the strategic value that nuclear power provides via zero-carbon baseload. Lastly, Korea, which is a key market for GSE, resumed construction on Units 5 and 6 of the Shim Kori nuclear power plant on November 8. According to a report submitted to the South Korean Parliament, this will happen once approval is obtained from the Nuclear Safety and Security Commission. Construction of the units was suspended in July, pending the recommendation of a citizens' jury on whether work should continue. Recognizing the strategic value of the plants and the zero-carbon baseload they would provide, the citizen -- citizens' jury voted overwhelmingly in support of continuing construction. With that, I'd like to turn it over to Emmett who will review the third quarter financial results.

Thank you, Chris. I'll begin with the review of new business. Our Performance Improvement Solutions segment bookings totaled $2.9 million in Q3 of 2017 compared to $10.2 million in Q3 of 2016. Year-over-year comparisons were impacted by the timing of a few key orders totaling approximately $4.6 million that slipped from the quarter. New Performance Improvement Solutions contracts in the third quarter of 2017 included $1.7 million for simulator upgrades and services in the nuclear power market, $0.5 million for new full-scope simulators and other projects in the fossil power market, and $0.1 million for various tutorials and simulators for customers in the oil and gas industry, and finally $0.6 million for miscellaneous engineering services and training projects. Nuclear Industry Training and Consulting orders totaled $6.3 million in Q2 2017 compared to $3.6 million in Q3 of 2016. In our Nuclear Industry Training and Consulting segment, Absolute Consulting contributed revenues of $1.2 million with a gross profit of $0.2 million and net income of $0.1 million for the last 10 days of Q3 2017. Consequently, we are looking forward to a full quarter of business from Absolute in Q4 2017. In addition to our preclose identified synergies, we've begun the back-office integration of Absolute Consulting, consolidating benefit plans, 401(k) plans and have started the process to integrate them into our ERP system by the end of the year. Now on to a review of our financial results for the third quarter. Total revenue in Q3 2017 increased 7% to $15.4 million from $14.4 million in Q3 2016. Nuclear Training and Consulting revenues rose 58% to $6.7 million in Q3 2017 from $4.2 million in Q3 2016, reflecting higher staffing demand from major customers and 10 days of revenue from the Absolute Consulting acquisition. Performance Improvement Solutions revenue in Q3 2017 declined 14% to $8.7 million from $10.2 million in Q3 of 2016, mainly due to the timing difference related to percentage of completion accounting for 3 projects from a major customer. This would result in supplier delays which pushed our time lines on certain revenue recognition milestones on these projects out of Q3. Although we've had some timing issues in Q3 of 2017, the 3 primary projects from this major customer has delivered approximately $9.1 million of revenue for the 9 months ended September 30, 2017, and $10.7 million inception-to-date through Q3 2017. On a year-to-date basis, these three projects account for 30% of the Performance Improvement segment revenues. Gross profit in Q3 2017 increased 6% to $4.2 million or 27.4% of revenue, up from $4 million or 27.7% of revenue in Q3 2016. For the Nuclear Training and Consulting segment, the Q3 2017 gross profit increased 169% to $1.3 million from $0.5 million in Q3 2016. The segment continues to perform well in 2017. Our 2017 year-to-date orders, revenue and gross margin are all the highest they have been since the acquisition of Hyperspring. The Q3 2017 gross profit is the highest quarterly total in that same period. As we integrate Absolute, we look forward to continuing our track record of growth in this segment. The Performance Improvement segment's Q3 2017 gross profit decreased 17% to $2.9 million from $3.5 million in Q3 2016. Management team is keeping a close eye on this segment, and will remain in the ready position so that we can execute on upcoming opportunities. SG&A expenses in Q3 2017 totaled $4.4 million or 28.4% of revenue compared to $2.9 million or 20.3% of revenue in Q3 2016. The increase in SG&A expenses was primarily due to $0.7 million of higher contingent consideration expense related to the fair value adjustments related to the November, 2014 acquisition of Hyperspring, which will be finalized and closed out in Q4 2017. In addition, onetime transaction costs of $0.5 million related to our acquisition of Absolute Consulting on September 20, 2017, and higher noncash stock compensation expense of $0.2 million. Net loss in Q3 2017 was approximately $605,000 or negative $0.03 per basic and diluted share compared to net income of approximately $168,000 or $0.01 per basic and diluted share in Q3 of 2016. Non-GAAP adjusted net income as defined in our earnings release in Q3 2017 was approximately $615,000 or $0.03 per diluted share compared to approximately $372,000 or $0.02 per diluted share in Q3 2016. Non-GAAP adjusted EBITDA as defined in our earnings release was approximately $939,000 in Q3 2017 compared to approximately $717,000 in Q3 2016. In Q3 2017, we generated $300,000 of operating cash flow. Our cash position at September 30, 2017, totaled $16.5 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 million at the end of the third 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.

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

[Operator Instructions]. Our first question is from Lawrence Kaplan [ph], LK Management.

Question, the backlog was down by $9.5 million in the quarter, if you take away Absolute. Any reason for that? Is it seasonal? Is it something that's going to show up in the fourth quarter as far as lower sales or?

Well, it's a good question, Larry. I -- it's something that we have a keen eye on. We break out our bookings by performance -- by business segments, so Performance Solutions as well as Nuclear Industry Training and Consulting. We're obviously focused on that Performance Solutions bookings number right now. And we don't have an answer for you as to why, whether it be cyclical or other. But it is something we have a keen eye on.

And one of the other things you'll notice in Emmett's commentary is that just under $5 million in orders literally crossed into -- within a couple of days into October. So you get that from time to time, right. So something to keep a keen eye on as we've all said, but you did have $5 million that a couple days, a week earlier would have been in the quarter.

[Operator Instructions]. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Kyle Loudermilk for closing remarks.

Well, thanks, everybody 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. Thank you, again, for your time and interest in GSE.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.