GSE Systems (GVP) CEO Jim Eberle on Q2 2014 Results - Earnings Call Transcript

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GSE Systems, Inc. (NYSEMKT:GVP) Q2 2014 Results Earnings Conference Call August 15, 2014 9:00 AM ET


Devin Sullivan - The Equity Group

Jim Eberle - Chief Executive Officer

Jeff Hough - Chief Financial Officer

Larry Gordon - SVP and General Counsel


Michael Epstein - Northeast Securities


Greetings, and welcome to the GSE Systems Reports Second Quarter 2014 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, this conference is being recorded.

I would now like to turn the conference over to Mr. Devin Sullivan, The Equity Group. Thank you, Mr. Sullivan. You may now begin.

Devin Sullivan

Thank you, Manny. Good afternoon everyone and 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 performance or achievements to be materially different from those projected.

For a full discussion of these risks, uncertainties, and factors, you're 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 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.

And now like to turn the call over to Mr. Jim Eberle, Chief Executive Officer of GSE Systems. Please go ahead, Jim.

Jim Eberle

Thanks, Devin, and good afternoon. I'd like to welcome everyone to GSE Systems second quarter 2014 conference call. Also on today's call is our CFO Jeff Hough; and Larry Gordon, our Senior Vice President, General Counsel.

First I’d like to address both comments of our press release and our earnings call, we were in the very late phase of transactions and we feel that we could complete the transaction simultaneous with release of our earnings and the earnings call. However, we were not able to complete the transaction due to some final complications and so that’s the reason for our delay and I would like to (inaudible) for the rest of the call.

However, this morning we issued press releases coming at (inaudible) for the second quarter 2014. Hope you have had a chance to review this news release. But if you have not, a copy is on our website at under the Investor Relations section.

The narrative from Q1 and 2013 remains largely unchanged. We continue to face number of challenges in our end markets nuclear fossil and process. Approximately [$60] million of orders which we first anticipated July in 2013 continue to be delayed in additional 1.7 million of orders forecasted for the second quarter of 2014 have also been delayed. We expect that these orders will be awarded in late 2014 or in 2015. Some of these are substantial in size, scope and financial impact. We have booked $9.6 million of new orders in second quarter of 2014 in addition to the $6.3 million in new orders we booked in the first quarter 2014 and $11.3 million in the fourth quarter of 2014.

As a result our backlog at June 30, 2014 was $36.1 million, up from $34.8 million at March 31, 2014. In the nuclear power space we continue to see most operators on the sidelines surveying the change in energy industry landscape with the main exception of the Chinese. We continue to believe and industry data supports for position, the nuclear power remain a part of the energy mix as we do a climate change and search for a low carbon or carbon free sources of energy production.

On an increasing pressure to deal with the country’s critical air pollution problem, the Chinese have continued to articulate the commitment to nuclear energy. The CEO of Westinghouse Electric Company was recently quoted saying that Westinghouse had recent discussions with the Chinese Government and nuclear leaders regarding the commissioning of 26 additional AP1000 plants in China which will use Westinghouse technology. As Westinghouse’s preferred simulation [AP1000], the commissioning of additional AP1000 plants represent a significant opportunity for GSE.

We continue to see a substantial market for Immersive 3D gaming technology for training purposes and for engineering segment technology for design scenarios that allow operators identify and correct problems before construction of new plants, mitigating risk saving time and money. Although we launched $25 million of pass orders in the second quarter of 2014 in U.S. customers which is the best sort of performance in U.S. fossil customers since the fourth quarter of 2011, U.S. fossil fuel powered utilities continue to delay capital expenditures through the economic regulatory uncertainty of operating coal powered plants.

The challenges included, operating in an environment of low natural gas prices and meeting the requirements of the revised Cross-State Air Pollution Rule. The Supreme Court in April upheld CSAPR which allowed the EPA to regulate air pollution to power plants across the state line.

The rule requires 28 states in the East, Midwest and South to cut back on Sulphur and Nitrogen emissions from coal-fired power plants that contribute significantly to air problems in other states.

In the second quarter 2014, we completed a restructuring of our Swedish office reducing headcount and negotiating a lease revision for the landlord resolving a write-down of $330,000.

Our balance sheet remains strong and as of June 30, 2014, we had $18.1 million in cash, working capital of $21.8 million and 0 dollars of long-term debt. We continue to invest our time and resource in exploring ways to diversify our revenue base, acquire new businesses and develop new products and services that address the opportunity which lies in intersection of the increasing global energy demand and the inevitable shortage of qualified energy work forces.

I’ll now turn the conversation over to Jeff Hough, who’ll review our results for the second quarter.

Jeff Hough

Thanks Jim and thanks to each of you for joining us today. Revenue for the second quarter declined by 25% to $8.3 million from $11 million in the second quarter of 2013, due mainly to two factors; a $2.4 million decline in revenue from the $36.6 million Slovakian simulator project which was completed in April 2014, and a $1 million decline in revenue from fossil fuel simulation projects.

Gross profit in the second quarter 2014 was $2.6 million, up from $641,000 in the second quarter of 2013. As a percentage of revenue, gross margin improved to 32% from 5.8% in last year’s second quarter. Gross profit in the second quarter of 2013 was impacted by the write-down of capitalized software development cost which totaled $2.2 million. Excluding this non-cash write-down the second quarter 2013 gross profit would have been $2.8 million or 25.5% of revenue. SG&A in the second quarter of 2014 was $4.5 million up from $3.9 million in the second quarter of 2013. SG&A was higher in the second quarter 2014 mainly due to increased software product development expenses as well as the severance and restructuring costs related to our Swedish operations partially offset by lower bidding and proposal costs.

Operating loss for the second quarter 2014 was $2 million compared to an operating loss of $8 million in the second quarter 2013. The company recorded a $2.2 million in capitalized software write-down cost and $4.5 million in goodwill impairment during the second quarter of 2013. Absent the impact of these costs, operating loss for the second quarter 2013 was $1.3 million.

Gain on derivatives was $5,000 in the second quarter of 2014 compared to a loss of $410,000 in the second quarter of 2013. Our provision for income taxes was $47,000 in the second quarter of 2014 compared to a tax benefit of 58,000 in the second quarter of 2013. The net loss for the second quarter 2014 was $2 million or $0.11 per basic and diluted share compared to a net loss of $8.2 million or $0.45 per basic and diluted share in the second quarter of 2013.

Excluding the $6.6 million in one-time non-cash charges, the net loss for 2Q 2013 would have been $1.6 million or $0.09 per diluted share. The EBITDA loss earnings before interest, taxes, depreciation and amortization for the second quarter of 2014 was $1.8 million compared to an EBITDA loss of $1.4 in the second quarter of 2013.

GSE’s cash position at June 30, 2014 was $18.1 million excluding $1 million of restricted cash as compared to cash and equivalents of $20.8 million excluding $1 million of restricted cash at March 31, 2014. At the end of the second quarter, we had no long-term debt and our working capital was $21.8 million.

I’ll now turn the conversation back to Jim.

Jim Eberle

Thank, Jeff. I’ll now ask the operator to open the floor for questions.

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). And our first question is from Michael Epstein, Northeast Securities. Please go ahead.

Michael Epstein - Northeast Securities

Good morning, gentlemen. Could we get a little clarification on this deal that you are working on; I didn't quite understand the status of it and could you give us a little more color on that?

Jim Eberle

Good morning, Michael. I can give you a little bit of color at [Gabriel]. Obviously it's not public, so I can't give you a lot. But as I have been mentioning over the last few calls and stating more strongly that I ever have that we believe we were -- we would completed significant transaction meaning an acquisition this year, it's in reference to that. And we thought we were going to be able to complete it. Prior to the press release and the earnings call yesterday afternoon, it appeared as though we could still do it but we need -- we thought we would be able to complete it in the evening and through the evening it became clear that we would not be able to complete it by this morning's call. And so that's where we are.

Michael Epstein - Northeast Securities

Does that mean that it’s still in progress or is the issue dead?

Jim Eberle

I would say it's not a dead, but we are evaluating the options that we have in front of us.

Michael Epstein - Northeast Securities

And do we have any other alternatives to use our cash to grow the company?

Jim Eberle

We do Michael. We (inaudible) it. As you may recall, we hired an investment bank, value finder to help us, really find the available companies in the spaces and the competencies that we feel would be closely adjacent or synergistic with our current capabilities. So, we actually do have a -- what I’d call a pipeline of potential. Certainly none of the opportunities are as mature as the one that I just recently discussed. With the balance sheet we have and the size of the company, we realistically can only be looking at one to two at a time. So, I hope that answers your question.

Michael Epstein - Northeast Securities

Yes, it does. Thank you for the clarification. Good luck on the deals.

Jim Eberle

Thank you, Michael.


Thank you. (Operator Instructions). We have no further questions at this time. I’d like to turn the call back over to management for any closing remarks.

Jim Eberle

I would like to thank each of you for your time and attention on the call, your continued interest in GSE. And as always, I would like to thank the dedicated hard working men and women inside GSE that deliver our value products and services every day. Have a great day.


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

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