Q3 2020 GSE Systems Inc Earnings Call
Hello, and welcome to the GFC solutions third quarter 2021 of its results conference call. At this time all participants are the listen only mode. The question answer session will follow the formal presentation.
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On my pleasure, it's true the whole over the Cali, all with the equity group. Please go ahead.
Thank you Kevin 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 27 day of the Securities Act of 1933 as amended.
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And I'd be found in the company's earnings release.
I'd now like to turn.
On the call over to Mr., Kyle Loudermilk, Chief Executive Officer of G.S. The solutions Cow of please go ahead.
Thank you Colleen I'd like the welcome everyone. The G.S. East third quarter 2020 financial results conference call joining.
Joining me on today's call is that Mississippi, our Chief Financial Officer.
Earlier today, we issued a press release covering our third quarter financial results hopefully you've had the chance to review of this news release, but that's not a copy can be found on our website at www Dot G.S.U.S. dot com under the news section.
In the third quarter, our industry faced the continued to face curtailed bidding activity delayed contract awards and project causes steward of the Coca 19 pandemic.
We were part of the third quarter revenue of 12.9 million and adjusted EBITDA of negative 600000 bulk of which which were below our respective prior year comparable figures and well below the normalized potential of our business in.
In this challenging environment, we remain sharply focused on cost containment and debt repayment, while staying in front of our customers through a hybrid virtual and in person selling approach because the thing us for success when the industry activity is rebounds.
After repaying the Reed nearly 10 million of long term debt during the quarter, our cash cash equivalents totaled 7.7 million at September thirtyth, providing of sufficient financial flexibility to manage the business. Moreover, our business has the capacity to generate strong cash flow and even during this on precedent. It first on lots of 22.
Arnie, we generated positive cash flow with the cash provided by operations totaling 1.6 million.
While we can't predict with precision the worst certainty the near term impact of the pandemic. Our long term outlook is positive we provide essential high value services to the nuclear power industry, which plays a critical role in the global de carbonization of energy.
In the United States, we anticipate an upturn of nuclear energy I'm proud of the by the administration, which is determined to combat climate change that includes leveraging the carbon pollution free energy provided by existing sources like nuclear [laughter].
Part of Bidens ambitious two trillion climate plan on Bell the July it calls for accelerated development that the debt small modular reactors, which are less expensive to build safer and more efficient than traditional of reactors. As some of you know we are supporting our client Nuscale a leader in smart technology simulation technology and engineering services solution.
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Well both of our segments had been impacted by project delays due to the pandemic nuclear industry training and consulting has been hit harder as clients paired the hours of their own workforces and reduce staff augmentation engagements to encourage social distancing.
And I T. C. Also continued to be impacted by the significant project stoppage during the period on a quiet facility due to the COVID-19.
Our expectation is that this project will resume and 2021 its the smokers essential.
Significant staff augmentation bidding opportunities within the nuclear sector remain the buying decisions where possible have been pushed out likely into 2021 to the client caution resulting from the pandemic.
In this environment, we are fortunate to have the scalable model in which our and I actually see employees are all the on our payroll if they are available.
I have the nimble, providing an increasing level of staffing solutions to other industries, such as the broader manufacturing sector, where we recently won several new contracts.
Additionally, we are engaging with new clients, serving other industrial verticals, including but not limited to alternative energy transportation Engineering land development and information technology.
The team also continues to focus on expansion opportunities on our core energy sectors with our existing customer base as well as pursuing opportunities within the energy support industry, such as plant maintenance of manufacturing.
Given the robust long term demand outlook per staffing and training services to me you to meet the unique needs of the nuclear industry. We continue to make targeted investments in the business to improve our outlook on.
On this day in September we were thrilled to announce the appointment of Brian Green as Vice President of our nuclear industry training of consulting business, Brian brings us more than 15 years of stopping industry experience, including over a decade of system on in the professional stopping space, where he developed expertise on the nuclear energy and engineering sectors.
His passion already has re energize the ITC group during these challenging times and we expect many good things to come under his team oriented leadership style.
This quarter, we also streamlined the organizational structure of our performance improvement segment, placing DP engineering true North and GST is core engineering simulation business, all under Don horns capable leadership.
On has the remarkable long term track record delivering value for power clients and we believe this organizational change will not only deliver cost savings, but also further our goal of creating a one stop shop for cross selling of Upselling and unified suite of engineering solutions to industry.
In the third quarter performance, improving orders totaled 9.3 million up sequentially from $7.1 million of the second quarter and compared to $10.7 million on the prior year quarter.
Performance orders totaled 21.8 million for the nine months to date up from $19 million on the same period a year earlier. This is good news speaks the essential nature of the solutions. We provide we want to study flow of fundamental meat potato business. We continue to provide the central services to a critical industry in a period of time of its between.
Large school scope simulator projects.
I'd also like the call out the performance of pretty been software revenue, which is SaaS based on recurring in nature reached $942000. This quarter of approximately 20% from the prior year period.
We believe that the pandemic, maybe creating additional opportunities for envision cloud based software, which provides our clients with anytime anywhere simulation training and other tutorials requiring all the internet connectivity and the web browser clients can leverage this technology in a safe and effective manner pretty simple training and work force default.
Our total backlog at the end of Q3 stood at 44.6 million consisting of $33.2 million of performance improvement backlog of 11.2 billion of that ITC backlog.
Our backlog remained relatively flat compared to the end of the second quarter of 2020.
The met the pandemic, we fill the solid performance yet we are working diligently to up to these levels as repurchase 2021.
We remain confident about she EPS. These long term opportunity given our difficult to replicate assets specialized employs an innovative technologies.
Yes, the delivers the central services that are critical to our clients operational safety and efficiency.
As we have seen before in times of crisis certain work can only be delayed for so long and short per limited period of time. Moreover, we believe nuclear energy will play a substantial role in our carbon free future.
In closing the most importantly, our emphasis today continues to be on protecting the health and safety of our employees and clients during the other 19 pandemic.
We've migrated a meaningful portion of our employee base to remote work setting using collaboration technologies tools of best practices.
As a result, this has created an opportunity to further optimize our future real estate footprint, which we are aggressively pursuing.
Our new work environment has fundamentally improved our project delivery approach to customers. We now deliver simulation projects of the customers using integrated virtual project teams, resulting in higher quality deliverables lower schedule risk and pure of visits customer sites. This is a win win.
Regardless of the pass code. The 19 ultimately takes our long term strategy remains intact. We continue to focus on organic growth streamline our operations contain costs maximize cash flow and further strengthen our balance sheet.
I'll now turn over the call to Emmett Pepe, our CFO, who will review the third quarter financial results.
Please go ahead.
Thank you Carl.
Total revenue in Q3, 2020 was $12.9 million compared to 20 million in Q3 2019, reflecting the 4.2 million decrease in our performance improvement segment revenue and the 2.9 million decrease in on and I T. C segment revenue the.
The decrease in performance improvement revenue.
Was driven primarily by COVID-19 related headwinds our inability to commence certain projects remotely.
The decline of an ITC revenue was primarily due to cover the 19 related project delays at stoppages and lower staff augmentation each on customers during the quarter.
Gross profit in Q3, 2020 totaled 3.3 million compared to $4.7 million in Q3 2019.
Performance improvement gross profit declined by approximately 1.1 billion to 2.5 million.
I'd like to see gross profit decreased by approximately 288000 year over year to 837000.
The decreases in gross profit for each segment were in line with our revenue declines consisted of managed our cost structure during the pandemic to maintain our margin percentages in fact, our gross profit margin percentages are up in both segments quarter over quarter and year to date two year to date.
That's true net expenses totaled 2.9 million of Q3, 2021st of the comparable figure of 3.5 million in Q3 2019.
The decrease the net expenses were driven by the 952000 cash settlement received.
From an escrow account per our purchase scream on absolute consulting.
Excluding this provision assets Geneight expenses remained relatively stable on a year over year basis, reflecting our emphasis on cost containment.
Operating loss equal to approximately 371000 in Q3 2020 compared to an operating loss of approximately 365000 in Q3 2019.
Non-GAAP adjusted EBITDA loss as defined in our earnings release.
Total approximately negative 600000 in Q3 2020 compared to the positive adjusted EBITDA of 1.4 million in Q3 2019.
During the first nine months of 2020, we paid down.
$2.5 million of our long term debt it.
In August we successfully amended our credit agreement with citizens Bank and during Q3 2020 paid off the term loan used for the acquisitions of TP engineering and true North consulting.
After the pay off of this term note. We believe we have sufficient cash on working capital available to support our ongoing business.
We had been prudently managing our balance sheet.
Quarter end, our net debt totaled 5.9 million consisting of 13.6 million of debt of 7.7 million of cash flow.
Total debt includes approximately 10 million that received earlier this year under the payroll protection program loan program.
We have used these funds for payroll and related costs, such as rent utilities and other permitted uses as of September 32020, we were in full compliance with all requirements in order to apply for forgiveness under the PTP loan.
Exclusive of the 10 million PPP loan, which we expect to be forgiven, our net cash balance would be 4.2 million.
This is a testament to our ability to manage true difficult economic environment generating positive cash flow as we go.
I'll now turn the conversation back to Kyle.
Thanks, Kevin.
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What's the on that as far one to be placed in the question Q.
Our first question today is coming from Tim.
Tim should heart from merits investment your line is that a lot.
Great. Thank you just related to gross margin.
Both segments of year on year and.
Through the course of the year actually those segments are trending.
The quite strong relative to the to the the lower revenue.
If if.
If you had a recovery in revenue in future quarters would you expect gross margin to revert back for any reason or are there other current levels.
The indicative of where you can keep gross margin or or potentially on any other color there.
Yeah. This is Kyle I'll take that 10 of them. It if you have further color or thoughts well through the add on.
It's the good question and it really does you know in the time of the pandemic.
Well, it's been challenging the shed some business and see some business delayed.
It does shine the light on the fact that in our core businesses gross margins can be you know quite good and that's what we're seeing right now and that's helping us to ride out the pandemic.
It does show the ability that when business does come flying back.
To help us focus on on operating lean and mean and keeping that cadence to keep those gross margins as high as possible on.
With that said.
Some of these projects that have been delayed.
Have been lower margin than what you're seeing on our core business is right now on the.
There may be an opportunity the because of the margins based on the learning we thought during the spend that Mike and that we alluded to on the call.
And at the of any any further color.
Oh, Yes, I don't think on going to add the you touched on at the end of the mix is always going to come into play and the and ITC business has lower margin than the performance segment. So depending on the revenue that's generated by segments and that'll impact on margin of the different customers on projects.
That's the cost point, we we believe the we have strong margins overall with this business and that's what's.
What's the maintaining we're maintaining the that as we go through the back end of it.
Okay.
Yes.
You also mentioned I think specifically related to the ITC segment. The industries outside of nuclear that you are pursuing if I could if I understood that correctly I didnt catch.
The industries that you were potentially focused on but maybe you could the I think I caught all of all the of alternative energy, but there were some other so were listed there.
Instead of maybe flesh that out a little bit of give us some colors of what where you might be able to take that business outside of nuclear.
Yes, well the the ability to price staffing services.
He is really a opportunity cross vertical and so what we've seen you know with the addition of Ryan coming in and with some of these other investments and sales taxes that we have been able to crack open into some other verticals and the broader manufacturing.
One in particular.
Was automotive strong very strong need for engineering talent in the automotive sector with one of the folks that we added over the course of last year of we've seen we've seen the nice out on some services there as we've alluded in the past we have seen a set of coral add on to that.
Oh for the medical industry in California, as they were working through the pandemic as the transition to more permanent.
Set up work for that instance, but we're really focused on the energy sector, particularly nuclear but we do you find the.
Where we can be profitable, we do find opportunities in front of manufacturing, which has really helped us but some of the start of.
Okay. So it sounds like it's more opportunistic as opposed to of a bona fide.
The strategic.
Vector to try to penetrate new industries instead of the right way to think about it.
No not really we hired the spokes that I alluded to and you can see in the past earnings a conference calls where weve really essentially hired folks be on nuclear targets in particular segments.
Not.
Where where we've seen success on the the second inside of mentioned so it's the result of.
Strategic investment.
Where we've been successful we continue we talked in Boston, and that's where you see the results Weve.
We've we've discussed if we're not successful then you know we we cut our losses and you know mixture of that we.
Our ready to pounce on if the market turns.
Okay.
And.
I've got a couple more questions I don't know I don't want to.
Dominated the discussion if there's a if its better for me to go back in the in the queue. What's the what's your guidance there.
Yes, Tim I would say just maybe outside one of the short questions and I will double check on the queue jump.
You mentioned of.
The concept of simulation work, maybe being delivered virtually.
I just I'm curious about that if the if that's something that was.
The sort of a co good phenomenon or whether that's on something you've been working on for longer periods of time and what potentially that might.
Due to enhance your business going forward is delivering a of virtual simulations is.
Is it with the revenue scope remain the same with the with the margin structure change on the I'm just curious to hear more about that.
Yes, I'll walk you through an example of use case.
With that particular customer that's a working with us sliver of simulation solution and true.
Training solution for their purchase.
Particular utility plant.
Traditionally.
Utility sectors during the traditional and you know doesn't have the top quickly the change for good reason really respondents figure you're dealing with power plants and you know as long as they work on on operate safely on.
Not necessarily motivated to change the Mets pervasive and how projects are approach what we've seen during the endemic while we put on the investment and infrastructure in place to deliver on this technology and work virtually with customers. This isn't the sub infrastructure has been in place really.
For some time now because we've made the prudent investments on to try to lower the amount of t. any in our in our projects to the juice margins and be more efficient more accurate customers.
So adoption of that on the customer side hasn't been as rapid as we want it but they were moving along and which was a good sign.
The what we've seen with the endemic is there is no travel unless it's absolutely essential and we do have the need to kind of client sites, sometimes clients come to us, but what what's the pandemic that really was an opportunity on silver lining blessed to really leverage this technology educate the customers that no. We don't need to travel to you as often you don't need to travel to on.
As often.
We can work virtually his teams using cloud.
Collaborative technology, such as zoom, such as using on being able to drop files directly on the client service and vice versa and secure manner with.
The firewalls and Dpms.
And.
The able to work collaboratively for a broader scope virtually than we had been in the past that's made us more efficient more accurate on mustn't swearing share would travel because we're saving the money on t. any of you know that that can boost margins marginally.
But we don't see a reduction in the overall budgets for these projects work has to get done we're just doing it more efficiently and that also on <unk>.
Explains the somewhat of the margin gives you the Vincent.
Great I understand the appreciate it that's all for me. Thanks.
Okay. Thanks, very much on good question.
Kevin any more questions on the queue. None of this time, so I'll turn the floor back over to you for any further or closing comments.
Great. Thanks, Kevin well the I'd like to thank everyone for joining us on was good.
The discussion we appreciate your time and interest in GFC I'll, probably won't be on the road per investor conferences in the near term given the given that pandemic.
We remain accessible for one on one calls we've got a number of good cost us over these past few months and we certainly look forward to more so.
One of the emphasize that please reach out to our IR firm Colliery, all and the equity group if you're interested in scheduling follow up Paul will be delighted to speak with you once again I'd like to thank everybody for joining todays call of us.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.