GSE Systems, Inc.
Q4 2021 Earnings Call Transcript

Published: 1 Apr 2022

[Operator:]

Good afternoon and welcome to the GSE Systems Inc. Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Adam Lowensteiner with Lytham Partners. Please go ahead.

[Adam Lowensteiner:]

Thank you, Gary and good afternoon, everyone and thank you for all of us -- for everyone for joining us today to review the financial results for GSE Systems for the fourth quarter and fiscal year ended December 31, 2021. With us on the call representing the company today are Kyle Loudermilk, President and CEO of GSE Systems; and Emmett Pepe, Chief Financial Officer of GSE Systems. Before we begin, I would like to remind everyone that the 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 in 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 material or 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 or 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. Investors should recognize that these non-GAAP figures may not be comparable to similarly tied 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 the most directly comparable GAAP measures in accordance with 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, President and Chief Executive Officer of GSE Solutions. Kyle, please proceed.

[Kyle Loudermilk:]

Thank you, Adam. I'd like to welcome everyone to GSE's fourth quarter and fiscal 2021 financial results conference call. Earlier today, we issued a press release detailing our 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. To lay out the agenda for today's call, I plan on opening my remarks with an overall discussion of the industry, then drill down into commentary on the quarter and fiscal year's highlights and the status of each of our divisions, including our engineering segment, also known as the Performance Improvement Solutions; and Workforce Solutions, also known as Nuclear Industry Training Consulting or NITC as well as our SaaS-based software solutions. Emmett Pepe will then give a recap of the financial results and we will then open the call to any questions at the end. To start my formal discussion with a macro overview, I'd like to say that our thoughts and prayers are with the citizens of Ukraine. The nuclear industry owes a lot to the country of Ukraine which has several nuclear facilities and, of note, has had deployments of GSE simulators beginning in the late 1980s. Despite a raging war, the nuclear power industry in Ukraine continues to operate and focus on safety with disasters seemingly diverted at the six unit Zaparosa nuclear power plant the world owes the operators of the plant tremendous gratitude and respect for their expertise and commitment to safety. As a bit of background, after the Chernobyl accident in 1986, there was a keen interest in improving the safety of Russian-designed reactors. In 1989, Zaporizhzhia nuclear power plant reached out to the West to address this need by adopting modern robust operator training simulators. These simulators are used throughout the world to allow operators to practice normal operations as well as how to respond in the event of equipment failure or other abnormal conditions. Unit 5 at the Zaporizhzhia nuclear power plant was the first Russian design reactor site to receive one of these modern simulators through the international nuclear safety programs sponsored by the U.S. Department of Energy. Since then, GSE has provided numerous such simulators throughout Eastern Europe, including Ukraine and specifically two additional simulators for Units 1 and Units 3 at Zaporizhzhia. Zaporizhzhia plant's commitment to improve safety and training didn't stop with the purchase of the simulator. They embarked on an extensive effort to learn from industry peers, resulting in a multiyear program conducted by Western companies to teach and help implement the systemic approach to training methodology adopted by the U.S. nuclear industry to develop robust and focused training programs. The fact that the plant was able to avoid a catastrophe during the war was years in the making through the plant's commitment to safety and training. While GSE currently has minimal active project exposure in Ukraine, the country is near and dear to us and, again, our prayers are with them. As the invasion demonstrates, reliance on fossil fuels is catastrophic for the world on two dimensions

[Emmett Pepe:]

Thank you, Kyle. With the numbers highlighted in detail in the press release, let me focus my comments on a few areas and provide added color where I can. Kyle highlighted a few of our key new orders in Q4 which led to our highest quarterly total since Q1 of 2020. Workforce Solutions led the charge with their highest quarterly total since Q1 of 2020. Revenue during the fourth quarter of 2021 was $13.9 million, an increase of 9.6% compared to $12.7 million in the fourth quarter of 2020. The year-over-year improvement was driven by a 38% increase in the company's Workforce Solutions segment, demonstrating that our customers are moving back to do more work on site. Revenue for fiscal 2021 in total was $55.2 million, a 4.2% decrease when compared to $57.6 million in fiscal 2020. Due to several significant projects that ended in the prior year and a slower bounce-back from the COVID pandemic that expected, particularly in the first half of '21. Engineering Performance revenues were $6.8 million in the fourth quarter of 2021 compared to $7.4 million in the third quarter of 2021 and $7.6 million in the year ago fourth quarter. The sequential and year-over-year change was due to lower orders within the simulator part of our business which can be cyclical in nature. However, we have seen this business segment pick up in the second half of 2021 as orders increased 63% over the first half of 2021. For the year, engineering performance revenue was $28.1 million in 2021 compared with $32.8 million in 2020. The year-over-year decrease is primarily due to significant projects that were completed in the prior fiscal year. Workforce Solutions revenue increased approximately 38.1% to $7 million in the fourth quarter, up from $5.1 million in the fourth quarter of 2020 and slightly decreased when compared to $7.3 million in the third quarter of 2021. For the fiscal year, Workforce Solutions revenue was $27 million in 2021 compared to $24.8 million in 2020, an increase of 8.9%. The year-over-year increase in revenue was primarily due to a new significant customer obtained in the first quarter of 2021 and due to overall increase in activity due to subsiding of the COVID-19 pandemic. Gross profit in the fourth quarter of 2021 was $3.1 million or approximately 22% of revenue. This compared to gross profit of $3.8 million or 29.9% of revenue in the fourth quarter of 2020 and $3.2 million or 21.7% of revenue in the third quarter of 2021. Gross margin was down primarily due to project mix as our Workforce Solutions segment contributed a larger portion of revenue and our core GSE performance business being down slightly which is typically our highest-margin business. While the gross profits can fluctuate due to project mix, we do anticipate gross profit improvement over time. Also, I'd like to point out that while Workforce Solutions dominated in the fourth quarter, gross profit for that division was 16.1%, nearly 400 basis points above levels reported in the same quarter last year and we had some lower-margin projects in prior periods and Q4 margins are usually better since taxes paid for employees are more front-end loaded in the year. Operating expenses which excludes restructuring and impairment charges and amortization expense in the fourth quarter of 2021, were $4.6 million compared to $3.4 million in the third quarter of 2021 and fourth quarter of 2020. The large increase in Q4 2021 is due roughly to $800,000 noncash entry for an allowance for doubtful accounts related to a customer contract with our GSE Beijing entity which we will continue to pursue billing and collections on. For 2021, operating expenses were approximately $15.5 million compared to $16.5 million in 2020. And the decrease was due to ongoing tight expense controls implemented in 2021. We continue to closely monitor our operating expenses and expect them to be in line with the prior guidance of $3.5 million to $4 million per quarter. Same as many other companies in our industry and across the economy, we are seeing higher expenses for everything from corporate insurance and other inflationary pressures. Despite these pressures, we continue to track to our historical run rate for operating expense. The net loss in fourth quarter of 2021 was $1.9 million or $0.09 per basic and diluted share compared to a loss of $1.5 million or $0.07 per basic and diluted share in Q4 of 2020. Net income for fiscal 2021 was $10.6 million or $0.51 per basic and diluted share compared to a net loss of $10.5 million in fiscal 2020. The positive income reported in fiscal '21 was from the recording of the forgiveness of the PPP loan as well as income recorded from our employee retention credits. Adjusted EBITDA was a loss of $1.1 million in the fourth quarter of 2021, a decrease from $0.1 million recorded in the third quarter of 2021 and $1.1 million recorded in the fourth quarter of 2020. As mentioned earlier, we booked roughly $800,000 in Q4 '21 for the allowance for doubtful accounts. The company's backlog improved during the fourth quarter to $41.3 million, up from $37.5 million at the end of the third quarter 2021. The sequential increase in the backlog was primarily from our Workforce Solutions division which was $9.5 million at the end of the fourth quarter, up from $6 million at the end of Q3. Performance Engineering segment backlog was fairly stable at $31.8 million. These levels in the backlog revealed continued post-pandemic activity amongst our clients. This highlights improvement in our existing contracts and combined with the increase in new orders in the quarter put GSE in a solid position heading into 2022. As we have stabilized the business, balance sheet has benefited. We exited the fourth quarter with $3.6 million in cash and $1.8 million that remained on our credit facility which was lower during the quarter by $250,000. That said, as many of you are aware, subsequent to the quarter and year-end, the company entered into an agreement for a convertible debenture which will greatly improve the company's liquidity. We are pleased to enter into this finance agreement as we couldn't borrow on our own line of credit and, as seen in recent quarters, had to repay the line. Given the nature of our business and the timing of contracts, the poor line of credit was not offering the company any real financial flexibility. In addition to eliminating the prior line of credit with restrictive covenants and with the new financing, we were able to file our 10-K without a going concern. This is great news for the company. While I can't get into specific updated figures, I will express that our cash position is currently much higher and the company is focused on driving new orders and opportunities to improve its financial results. In addition, we have received $1.1 million of the ERC refunds due to us during the first quarter which has also enhanced our capital structure. And we anticipate the additional $3 million in ERC refunds still outstanding. As the business has been rightsized and our operating expenses have been tightly managed, we believe we have positioned ourselves for stability, renewed growth in the coming periods. I'll now turn the conversation back to Kyle.

[Kyle Loudermilk:]

All right. Thanks so much, Emmett. To summarize, we believe the effects of the pandemic on our industry are largely behind us. And as seen in the improvements in new orders, both for the fiscal year and more recently in the back half of 2021, especially the $18 million in new orders booked in the fourth quarter. Our team is highly focused on improving order flow and I believe we're in a solid position to capitalize on helping our customers upgrade, maintain their existing fleet of facilities. This really bodes well for GSE in the near to mid -- and midterm. Looking at the longer term, we see an interesting dynamic unfold on a global basis on two major fronts we believe will act as strong tailwinds for services GSE provides. One is the focus on decarbonization. But the other is the recent rise in energy prices caused by geopolitical issues combined with a shortage in new power production. The recent rise in energy prices have caused and will cause major inflationary issues that only add more pressure to global leaders to reexamine energy strategies and address them for the long term. If I may, it really is a perfect storm. Everyone needs more energy and many want it to be clean and zero-carbon. Put the two together and the only answer is to embrace nuclear energy. So as I've discussed earlier, we're storing energy prices and desire for countries and companies to seek consistent means of energy sources. They put a large focus on nuclear and this has -- and we've seen this with the continued price increases in uranium. It's our belief that the damage is already done and the realization and implementation of SMRs are being put to the top of the list and priorities of time line and making them a reality has been moved up a significant amount as a result of what's going on globally right now. Before we open the call for questions, I'd like to publicly welcome Thomas Dougherty as our newest Board member for GSE. Tom brings to GSE over 40 years of experience in the nuclear power industry and currently serves as the Nuclear Safety Review Board chairperson at several Exelon sites as well as subcommittee chair for the NSR Southern Company and Energy Northwest. We are extremely appreciative of Tom joining the Board and believe his deep expertise will offer the company tremendous insight and counsel to myself and other Board members into the company. Tom, we heartily welcome you on board. I'd like to conclude that we believe the company has worked hard in the past year to stabilize our operations, strengthen our balance sheet and continue to work on pursuing newer contracts for the industry as it resumes upgrades and maintenance in their facilities and workforce. Bidding in recent months continues to improve. Many of our customers are coming back to the table and the need for upgrades and upkeep services. While the timing on this business is still hard to pinpoint, we believe that we can see the business in front of us and as much -- and it is a matter of when, not how or if. Given our efforts in 2021, GSE is well positioned to win our fair share of opportunities and with a leaner cost structure and stronger balance sheet. Given our very unique situation as a heavily tech-enabled provider of essential services to the decarbonization of the power sector and nuclear power industry, we remain very confident in our opportunity to create substantial long-term value. With that said, operator, please open the floor for questions.

[Operator:]

Our first question is from Don Burgess with Burgess Capital .

[Unidentified Analyst:]

Once revenues returned to recover levels, on gross profit margins, do you expect any differences up or down to where they were pre-COVID? Are you -- specifically, are you able to pass on cost increases where you have them?

[Kyle Loudermilk:]

Yes. I'll speak qualitatively to that and perhaps Emmett can chime in quantitatively. If you look at pre-COVID margins, they're obviously higher than, say, where they are currently and not largely reflected the mix of business. With the snapback in Workforce Solutions business which has come back really strong, it's really been a highlight in the second half of the year, particularly in Q4. Because it's a lower margin business than our Performance Solutions business which is still climbing back but not at such a rapid pace, that, of course, drove down our overall gross margins. So if we look out ahead of us, returning to pre-coronavirus environment, that's where we probably see margins overall climb back to approaching what they were at that time. Emmett, do you have any other comments there?

[Emmett Pepe:]

I think just to add, I mean, I think some of it you touched upon -- and a lot of our -- we've been working very hard to increase rates from an inflationary perspective in our software agreements. We have CPI+ language. So all that together would bolster some margins for us as well.

[Unidentified Analyst:]

And my other question is on the SaaS business is interesting. We know it's small but it has impressive growth. And can you say anything more about the potential of that business, how much upside do you see for that and what you're doing to develop it?

[Kyle Loudermilk:]

Yes. I mean, look -- it's a great question, Don. When you look at when we came in, our company had a business practice of giving away it’s technology in order to win service work. And that was obviously upside down. And with our backgrounds, we work to change that, professionally package and license solutions. And we've gone from de minimis to two years of really meaningful growth year-over-year. 2020 was a big growth year above 2019. And, again, 2021, the great growth year and the composition of that growth was even higher quality than 2020. So the potential is -- we don't talk futures but you can you look at the past two years' performance and we're focused on continuing that. We're introducing new products. We've had a great press release around -- recently around our thermal performance monitoring solution which is a software technology solution, really leveraging our know-how and how to get these plants to operate leanly, accurately report the amount of power they're putting on to the grid, recovering the costs for that power. So finding millions of dollars, lose change in accounts, monitoring it real time on an ongoing basis to ensure peak operations and the like. So -- that was new product, net new came out over the last year and it's doing great. I really feel we're at an inflection point. So we're really excited about the growth of this business and really what it means for the company as we move forward.

[Operator:]

[Adam Lowensteiner:]

Okay. Gary, this is Adam Lowensteiner. I'll jump in with a couple of questions for the management team. Kyle and Emmett, regarding the bipartisan infrastructure and jobs bill that passed in November, are you starting to see some effects from that? The money is obviously there. How long does it take to make its way into the economy?

[Kyle Loudermilk:]

Now industry is certainly very excited about the fact that there's national recognition from U.S. at the level to the top of the U.S. government for investing in their current infrastructure to make it more robust, produce more power and extend the lifetime of these plants. So with the formation of the groups that they're seeking information around how best to disperse these $9 million of funds, I don't think they gave a time line. But I would expect over the next year, we're going to see the money start to flow. And the industry is really super excited about it because it finally is starting to level the playing field around subsidies that went in salaries to get that really turned the market upside down and was hurting the very goals of decarbonization as a result. So now that there's this broader enlightenment around the approach of zero-carbon with actual funding and intellectual thought and business thought put into it, industries really feel things to turn a corner.

[Adam Lowensteiner:]

Maybe this one is a little bit more for Emmett. I know an investor asked me, you couldn't be on the call today but said can you describe how important the financing conducted in February is to the company?

[Emmett Pepe:]

Yes. Look, as I stated earlier, it's tremendous. We -- the line of credit we had was restricted. We had no capacity. We had restrictive covenants that really hampered us and contributed heavily to having a going concern from an accounting perspective. So being able to remove that opens up a lot of flexibility for the company. And then having some rightsized and corrected balance sheet, it positions us very well for what we're open as a good solid year. And that balance sheet flexibility is important.

[Adam Lowensteiner:]

And one more I'll pose to you both. SMRs are on their way up. NuScale is going public, Maybe discuss a little bit about your work on SMRs and how it's upfront and what kind of revenue opportunity per construction that could be for GSE?

[Kyle Loudermilk:]

Yes. Well, look, we've been partnered with NuScale for over a decade, providing the technology that they've used to simulate their design basis and get that initial licensing from the NRC in record time. They have an amazingly capable staff and many GSEs that work there as well as at the SPAC, there's a GSE alum folks that we know have known for a long time that are driving this effort. So it's a very small world. It's a very tight relationship with NuScale. And we've been generating revenue over the past decade. And if they get their first plant up and running by the end of this decade, it really gives you a sense of the lead time, where we -- our technology can be used very early upfront to generate revenue. We see that with the AP1000s, with Westinghouse as well. And the closer they get to construction, the closer on any of these plants, the more relevant are engineering services. And our Workforce Solutions groups become as they look to debottleneck their own ability to conduct work, workforce solutions can be brought to bear to look at pre-inspection -- or preservice thermal performance and studies, well, that's where our engineering services can come in a bear. So as they build these plants, they're built to be optimally performing. And then as you get close to actual operations, pre-service inspection and testing, things that we really specialize on. So, I won't put -- what does it mean for construction project dollars? It can mean a lot. And the important thing is that our company is entirely relevant to the whole life cycle of these plants. And once the plant up and running, the entire company's portfolio is highly relevant. But it's -- as we've said, it's been relevant for a decade in amounts of where we are right now with NuScale. So we just have a really neat portfolio of capabilities that we purpose built over the last five, six years as we look to bolt-on really specialty engineering services and workforce solutions.

[Adam Lowensteiner:]

Great. Thanks, Kyle. I think that's all the questions we have and you can proceed to conclude.

[Kyle Loudermilk:]

Yes. Well, thanks very much. Well, look, I'd like to thank everyone for joining us. Long call today but I thought it was important to give the context of where we are in the nuclear power industry and all the very exciting things that are occurring and you see that flowing through to our results. So we're really excited by that. We appreciate your time and interest in GSE. And we're very excited about what lays ahead of us. I will note that next week, we are presenting at the Lytham Partners Spring 2022 Investor Conference next week, April 5 to April 7. And hopefully, a number of you will join and we can get into further discussions there. If you have any questions, don't hesitate to reach out to Adam from Lytham Partners. And we'd be happy to schedule a follow-up call or just call me directly. Thanks again, everyone and have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.