GSE Systems, Inc. (NASDAQ:GVP) Q4 2019 Earnings Conference Call April 14, 2020 4:30 PM ET
Kalle Ahl – The Equity Group
Kyle Loudermilk – Chief Executive Officer
Emmett Pepe – Chief Financial Officer
Conference Call Participants
Sam Rebotsky – SER Asset Management
Greetings and welcome to the GSE Solutions’ Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce our host, Kalle Ahl of The Equity Group. Thank you. Mr. Ahl, you may begin.
Thank you, Diego 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 the 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 comparison to GSE’s historical operating results as well as the operating results of its competitors. Since management finds these measures useful, GSE believes that investors may benefit by evaluating both GAAP and non-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.
I’d now like to turn the call over to Mr. Kyle Loudermilk, Chief Executive Officer of GSE. Kyle, please go ahead.
Thank you, Kalle. I’d like to welcome everyone to GSE’s fourth quarter 2019 financial results conference call. Joining me on today’s call is Emmett Pepe, our Chief Financial Officer.
Earlier today, we issued a press release covering our fourth quarter and full year 2019 financial results. Hopefully, you’ve had a chance to review this news release, but if not, a copy can be found on our website at www.gses.com under the news section.
First of all, COVID-19 is on the top of our minds, so I’ll begin today’s call with an overview of how our organization is addressing risks related to its spread and briefly discuss our view of its impact on GSE’s business.
First, let me say our thoughts are with those individuals whose health has been directly impacted by this outbreak as well as those in the front lines battling the crisis. We are committed to protecting our employees, business partners and customers in this time of uncertainty. In this regard, we have prohibited travel by GSE personnel to all countries with a level three health notice. Elsewhere, we are engaging in only essential travel. We remain in close communication with our clients through virtual platforms, including traditional telephone and conference calls, video conferences and e-mail.
Moreover, we have implemented a plan for our employees to work remotely from home, and the results in productivity have been good so far. We do have certain team members who work at client locations as the essential service providers. Those employees have been instructed to be aware of and comply with all safety and risk mitigation measures implemented by our customers. Our own risk mitigation plan, which follows the lead of local and national authorities and agencies, has been communicated throughout our organization and to clients who have inquired about it.
While it is difficult to quantify the precise impact of the COVID-19 outbreak on our business, recently, we were forced to furlough just a few billable employees at Hyperspring at client request. On the other hand, our absolute consulting business is providing payroll services for more than 100 individuals deployed on a new project to handle services for a standup hospital in Long Beach, California in support of the state’s COVID-19 efforts. This is an excellent example of our team’s ability to adapt and capitalize on outside-the-box opportunities. I’m proud of our team’s resilience and being part of the national solution.
By and large, our Nuclear Industry clients have designated GSE an essential services provider. As such, projects underway remain in place and continue so far. While early in this crisis, we continue to receive new orders, but would anticipate a potential delay in certain new orders and client activities as they look to determine the impact of COVID-19 on their respective environments.
A lot is simply unknown at this point. We are doing everything in our control to manage our operations effectively during these challenging times. Fortunately, as I stated, our services are considered essential given our critical role in supporting the safe and efficient operation of our clients’ nuclear facilities, which deliver reliable, always on carbon-free power to the grid.
I would like to note that GSE has submitted our application to participate in the Paycheck Protection Program through the small business administration via Citizens Bank, our lender of record. We have applied for $10 million, which represents the amount for which we believe we are eligible. We will see if and when and to what extent this is approved and keep people apprised.
Moving on to our financial results. I’m pleased with our team’s dedication and efforts to return DP Engineering to positive adjusted EBITDA this quarter. This was no easy feat after DP’s largest customer suspended and terminated its engineering of Choice Contract earlier in the year. We have taken cost out of DP’s business and streamlined its structure to be profitable at a lower annual revenue run rate, which near term is expected to be approximately $5 million to $6 million. Our swift remediation actions have ensured that DP can continue to deliver superior quality engineering services to our clients.
In our Performance Solutions segment, orders totaled $8.4 million, down from $10.9 million the prior year quarter. With that said, we have a steady flow of base meat and potato business as we continue to provide essential services to a critical industry in a period of time that is between large full-scope simulator projects.
For example, this quarter, we won a multi-year contract worth approximately $1.7 million with a long-standing large petrochemical client for our EnVision On-Demand SaaS solution. This agreement is indicative of the highly sticky nature of our business and the favorable adoption of our new SaaS platform. We expect more deals like this to follow in 2020.
After quarter end, we announced a strategic collaboration with ABB Bailey Japan for thermal simulation in the Japanese power market. Together, we will develop high-fidelity operation training simulators combined with ABB Bailey’s industry-leading distributed control systems for Japanese fossil market. We’re very excited about the long-term potential of this partnership.
In our Nuclear Industry Training & Consulting segment, orders totaled $7.8 million, down from $8.5 million in the prior year quarter. Prior to the COVID-19 crisis, we were in a discussion surrounding some potentially significant new contracts for 2020, and we’ll update investors as these opportunities evolve. The long-term demand outlook for industry stopping and training services remains very strong given the nuclear industry’s aging workforce.
Our total backlog at the end of Q4 was approximately $52.7 million, consisting of $37.2 million of Performance Improvement backlog, $1.7 million of which was attributable to DP Engineering and $15.5 million of NITC backlog. Our total backlog was $53.7 million at September 30, 2019, and $70.6 million at the end of 2018.
We believe we view this as good information as we are maintaining our backlog on a quarter-over-quarter basis. We believe that our current backlog level will support our core business, while we build and execute our business development strategy in both the Performance and NITC segments to drive organic growth this year.
Regarding our balance sheet. In the fourth quarter, we wrote-off real estate that is no longer needed for DP as well as some superfluous space at our Sykesville office. We have enough remaining space for our workforce to operate efficiently, and these actions enable us to move aggressively on opportunities to sublet excess square footage before the leases expire. This quarter, we also received an amicable settlement with the sellers of DP to recover approximately $2 million, which we used to pay down a portion of our debt. This was good and a significant help.
GSE has a solid business that generates robust cash flow, allowing us to strengthen our balance sheet.
At quarter end, our total debt was $18.5 million and our cash position was $11.7 million. In early January, we paid down our debt by an extra $3 million. We intend to pay down our debt aggressively moving forward. A $1 million payment was made at the end of March, and we anticipate making an additional payment of over $2 million by the end of June. By year-end, we expect to be able to refinance our remaining debt, and believe we can approach a net debt neutral position by year-end. Ultimately, we should be in a better position to pursue other value-creating capital allocation options, such as the potential repurchase of our common stock.
In the current volatile environment, we believe GSE shares represent substantial value. Having addressed DP’s issues in 2019, we believe 2020 will be a clean year of profitable growth for GSE, while acknowledging that the precise impact of COVID-19 is still unknown. We see potential for a meaningful uptick in our nuclear engineering training and consulting segment post the COVID-19 crisis, and a continued study flow of business on the Performance Improvement Solutions side of our business.
Coinciding with the spirit of starting fresh in 2020, this quarter, we rebranded GSE Systems as GSE Solutions to help unify the market presence of our acquired businesses and to reflect more accurately our comprehensive suite of solutions to the global power industry.
Our rebranding effort includes, a new parent company marketing identity, a unified website and repositioned solution set focused on the people, services and products that our company provides to industry.
Among other corporate developments, this quarter, our Board elected, Kathryn O’Connor Gardner as the new company director. Kathryn previously was Senior Vice President and Corporate Credit Research Analyst within AllianceBernstein’s high-yield research group, focusing on the energy sector; and Managing Director at Deutsche Bank, where she also covered energy. Kathryn brings an exceptional level of financial expertise that will benefit GSE in our financial planning efforts as we look to optimize shareholder value.
In closing, GSE’s emphasis today is on protecting the health and safety of our employees and clients during the COVID-19 pandemic, while working diligently to grow organically, streamline operations, contain costs, maximize cash flow and pay down debt. While we are focused on organic growth, we remain open to transformative M&A opportunities. We provide complex solutions and services to blue-chip nuclear power customers, which produce most of the world’s base load carbon-free energy.
Nuclear plants must be operated, maintained and serviced regardless of global disruptions, including COVID-19. As an essential services provider to this critically important industry, GSE is poised to execute on our thesis in 2020.
The longer-term fundamentals of our end market remain solid, as nuclear power industry continues to invest for safety, operational reliability, extension of plant life and performance improvement to generate more power from existing assets.
Given the difficult to replicate assets, specialized employees and innovative technologies that we have amassed under a single go-to service provider platform, we are very optimistic about GSE’s future.
I’ll now turn the call over to Emmett Pepe, our CFO, who will review the fourth quarter financial results. Emmett, please go ahead.
Thank you, Kyle. Total revenue Q4 2019 was $17.3 million compared to $22.9 million in Q4 2018, reflecting a $3.2 million decrease in our Performance Improvement segment revenue and a $2.4 million decrease in our NITC segment revenue. The decrease in the Performance Improvement revenue was driven primarily by the successful conclusion in commissioning of three new full-scope simulators to a southern nuclear utility in mid-2019 as well as a full-scope simulator build in Slovakia that is near – that’s nearing completion.
The decline in NITC revenue was primarily due to lower staff augmentation needs from customers during the quarter. As Kyle touched on previously, we are excited about new business development activity in this segment and are well positioned to deliver improved results in 2020.
Gross profit in Q4 2019 totaled $5 million compared to $6.5 million in Q4 2018. Performance Improvement gross profit declined by approximately $1.7 million to $5.1 million. NITC gross profit increased approximately $250,000 year-over-year to $1.6 million, driven by a greater mix of higher-margin projects.
In 2019, we invested in our business development function by hiring three new salespeople and are beginning to see the returns of that investment. SG&A expenses totaled $3.9 million in Q4 2019 versus a comparable figure of $3.8 million in Q4 2018. We continue to stay focused on managing our SG&A cost, which were relatively flat year-over-year despite the acquisition of DP Engineering.
Operating loss equaled approximately $1.5 million in Q4 2019 compared to an operating income of $1.8 million in Q4 2018. The year-over-year decline in operating income was driven by $1.7 million in restructuring charges due to the write-down of unused space on our current lease obligations in Sykesville, Maryland and Fort Worth, Texas.
Our footprint shrunk from approximately 56,000 square feet to 25,000 square feet. We’re actively looking to sublease the unused space to mitigate the cash outflows of our lease obligations.
Non-GAAP adjusted EBITDA, as defined in our earnings release, totaled approximately $1.8 million in Q4 2019 compared to approximately $2.8 million in Q4 2018. We concluded Q4 2019 with a cash position of $11.7 million and total debt of $18.5 million, which decreased by $1.2 million compared to the end of Q3 2019, reflecting debt payments we made during the quarter. Regarding our debt with Citizens Bank, we are currently in the process of amending our terms and expect to announce those changes this coming week.
I will now turn the conversation back to Kyle.
Thank you, Emmett. Operator, please open the floor for questions.
Thank you. We will now conduct our question and answer session. [Operator Instructions] Our first question comes from Sam Rebotsky with SER Asset Management. Please state your question.
Yes. Has the real estate been written down to zero that any rental would produce a profit? Or what are we carrying that at?
That’s a good question. Emmett, do you want to take that?
Yes. I’ll take it, Kyle. Yes, we portioned off and cordoned off and made idle space and we wrote that down to zero. So if we were to sublease that, there would be upside, yes. That Portion only has been written down.
Yes. Is there a range of potential rental income for this?
Yes. Well, I mean, we’re actively marketing the space. And the marketing out there is — it’s negotiable. I mean, I think, you’ll find our Sykesville space has been marketed anywhere from — as low as $13 a square foot up to about $17 a square foot, that would be the range. And the Fort Worth space is — if that’s what you’re looking for.
And that’s actively out there, yes.
And do we expect to basically — with the coronavirus, do we expect the $17 million to be a normal run rate where we made a profit? So is it — do we expect to be profitable going forward?
Emmett, do you want to take that?
Well, I mean we clearly expect the business to be a profitable business. So I mean, we wouldn’t give you guidance as to run rate. And as Kyle mentioned, we really have yet to see and are still assessing any impact, right? Up at this point, we’ve gotten new orders. I mean, there’s probably some things that will slip, but will not go away because they need to be done by our customers. So I think we’re not prepared to really dig into corona impact because that’s still being assessed.
I’m sorry, what was the operating income of $2 million? I’m sorry, you may have mentioned it, I sort of missed that.
I’m sorry, what was that? Please — what was your question?
Operating loss in the quarter was $1.5 million loss compared to operating income of $1.8 million previous year ago quarter.
Right. That’s right.
The — on August 27, the demand indemnification, the $2 million, is that the $2 million below the line there in the quarter ending December?
Yes. That is.
Okay. So based — other than that, you’d be losing money in this quarter. And so you would need more than $17 million to breakeven basically?
Well, everything is going to be unique to mixes on margin and other costs. Keep in mind, we also have the $1.7 million of restructuring costs in the quarter.
Okay, okay. All right. Thank you very much. Hopefully good luck.
(Operator Instructions) Ladies and gentlemen, there are no further questions. I’ll turn it back to Kyle Loudermilk for closing remarks. Thank you.
Okay. Thanks very much. First of all, I’d like to thank everyone for joining us. We appreciate your time and interest in GSE. While we won’t be on the road for investor conferences in the near-term given COVID-19, we are and remain accessible for one-on-one calls. So please reach out to our IR firm, The Equity Group, if you’re interested in scheduling a follow-up call, and I’ll certainly look forward to speaking with you. Thank you, everybody.
Thank you. This concludes today’s call. All parties may disconnect. Have a good day.