Q4 2022 GSE Systems Inc Earnings Call
Speaker 1: and nuclear power technology. While it takes significant time for the industry to move through the planning process to project execution and spending, we feel that the industry is entering a major cycle of long-term investment and growth barring any major disruptions. Now for some perspective on GSE's business in Q4 in fiscal year 2022. Fiscal 2022 is a transitional year for GSE. We have to make key changes in investments to position the company for future opportunities, all the while keeping a lid on overall costs and remaining as lean as possible. While the company's performance needs to improve, we have entered 2023 having retooled key components of the business and with some key wins and momentum. Looking at the fourth quarter, it was a solid showing considering we were expecting better order flow and experienced some slippage into the first quarter. This has pushed things to the right, but the good news is that the business that slipped from Q4 did close in early Q1 and we were starting to bid on more opportunities. The company's performance engineering division continued its charge during the fourth quarter in fiscal year. Revenues for the fiscal year climbed 6.3% for the division approximately to 30 million led by systems and simulation. The solid performance of the performance engineering division included strong license revenue which helped improve our gross margins year over year.
Speaker 1: and sequentially from the third quarter. We continue to win new business in this division. Project order flow in the quarter was lower than expected, but as mentioned, that was primarily the result of key orders slipping from Q4 into early Q1 in 2023. Despite this, we recorded important wins during the quarter primarily for simulations and systems.
Speaker 1: services as well as for programs and performance services.
Speaker 1: A major deal that closes in early Q1 is the renewal contract that includes a meaningful expansion of services with two US government engineering laboratories dedicated to the support of the US Navy. This is a five-year contract that has options to make it worth up to $28 million over that time. GSE has been under a series of service contracts with these laboratories for over 20 years.
Speaker 1: partnership with a nuclear fuels technology and services supplier to support a large US-based utility with new engineering program services to support a 24-month fuel cycle operation project. Moving to a 24-month fuel cycle from a more typical 18 months is not an easy task, but when accomplished can help the operator make the plant more efficient and create major cost savings.
Speaker 1: We are excited about this win as it also shows the breadth of the capabilities GSE can offer customers while positioning us as a leader as we work to win similar opportunities with other operators and plants moving forward.
Speaker 1: Another significant win is the recent announcement of the upgrade of the training simulators at the Oelkeluotl nuclear power plant in Finland. This contract, which is worth nearly $900,000, is expected to deliver key new capabilities for TVO once completed over the next two years. I'm really excited about these wins and they are an excellent cross-section of the credibility we built in the industry.
Speaker 1: for the year, both lower on a year-over-year basis. That said, we have been extremely busy retooling the division during 2022 and have made significant progress in rebuilding the sales and recruiting teams for this business.
Speaker 1: We are currently in the midst of turning around the division and are starting to see early returns on the investments and improvements we've made. While there's more work to be done, a major positive was that during the fourth quarter we did see new order flow improve from the third quarter. Now I'd like to discuss our focus on sales and revenue generation.
Speaker 1: While revenues weren't at our historic levels, this was due to customers remaining in the planning versus the execution stage for capital spending on their facilities. It's frustrating and as a result, we're still eager for spending to recover to pre-pandemic levels. GSC was busy, however, during the year to make certain changes and investments and put the company on better ground with retooled capabilities.
Speaker 1: and with new talent. Our most recent announcement on this front has been the hiring of Ray Ruby as our new head of sales for the company. As I mentioned on prior calls, GSE was in need of the new head of sales and finding that right person would take some time. We're delighted to have Ray on board. He brings over 40 years of experience in nuclear deep industry relationships for project engineering.
Speaker 1: and to put us in the prime position as capital spend for engineering services starts to improve.
Speaker 1: So to summarize, we make good progress during the fourth quarter in fiscal year. Continue strong license revenue accompanied by recent improved orders and bookings. Other results of getting out in front of customers and being aggressive to win the business that is available to us.
Speaker 1: while setting the stage to capture more business as industry spend recovers. We're focused on targeting investment in revenue generating positions and activities. The team's highly motivated taking ownership of what we can control and we're moving forward. The many exciting developments in the industry right now continue to make me feel confident about our future.
Speaker 1: I'll now turn the call over to Emmet Pepe, GSC CFO , who will review the fourth quarter financial results. Emmet, please proceed. Thank you, Kyle. Thank you, Kyle.
Speaker 1: 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.
Speaker 1: We're pleased with the progress that we are seeing in our order flow for Q4 despite some significant deals slipping into Q1 of 23.
Speaker 1: Gross orders for the corridor were 12.7 million offset by 1.3 million of unused backlog on completed projects.
Speaker 1: The net orders amount of $11.4 million was a 12% increase on the prior quarter.
Speaker 1: We are starting to see the early signs of the investments that were made into the business development functions of each segment.
Speaker 2: revenue during the fourth quarter of 22.
Speaker 2: was 10.8 million, a decrease of 22% compared with 13.9 million in the fourth quarter of 2021.
Speaker 2: and 9% lower when compared to the 11.9 million.
Speaker 2: in the third quarter of 2022.
Speaker 2: Revenues from the company's performance engineering were improved during the fourth quarter, rising 10% year-over-year, but slightly lower sequentially from the third quarter of 2022. These improvements were offset by lower revenues from the Workforce Solutions Division.
Speaker 2: companies' performance engineering were improved during the fourth quarter, rising 10% year over year, but slightly lower sequentially from the third quarter of 2022. These improvements were offset by lower revenues from the workforce solutions divisions due to interim reduction in customer demand.
Speaker 2: Our Performance Engineering Division continued to perform well for the company with revenues of $7.5 million for the fourth quarter of 2022.
Speaker 2: This compared to $8.1 million in the third quarter of 2022 and compared to $6.8 million in the fourth quarter of 2021.
Speaker 2: Orders for this division were lower in the fourth quarter down to 4.6 million when compared to the third quarter of 2022, which was 7.2 million.
Speaker 2: and lower when compared to the fourth quarter of 2021 when it was 7.4 million.
Speaker 2: As Kyle mentioned briefly, we did experience some new order slippage into the first quarter and had the large order with the US Navy closed during the fourth quarter, new orders, had the large order closed during the fourth quarter, new orders would have improved both sequentially and year over year.
Speaker 2: Revenues in the quarter were slightly lower on a sequential basis from the third quarter due to completion of certain projects, but was higher year over year due to more revenue within the company's Systems and Simulation Division.
Speaker 2: which has been executing on backlog projects.
Speaker 2: Our programs and performance division, previously known as True North Consulting, showed consistent flow of revenues from prior quarter and was up slightly from a year ago.
Speaker 2: The Design and Analysis Division, previously known as DP Engineering, was basically in line from the third quarter and a slight decline from the fourth quarter of 2021.
Speaker 2: We are actively working this business unit to expand its reach and customer base and are encouraged by the feedback we receive from customers.
Speaker 2: Now moving to our Workforce Solutions Division revenue in the quarter.
Speaker 2: was 3.3 million compared to 3.8 million in the third quarter of 2022 and compared to 7 million in the fourth quarter of 2021.
Speaker 2: Order was significantly higher in the quarter on a sequential basis at 6.8 million, up 127% from the 3 million in the third quarter of 2022.
Speaker 2: but still lower from the fourth quarter a year ago when they were 10.5 million.
Speaker 2: As previously discussed, during the fiscal year 2022, we have been busy retooling the division with new sales and recruiting hires to build a balanced and productive group that can bring in new customers and recruit field professionals to fill roles.
Speaker 2: We are excited about the potential opportunities that this group has identified and have made some progress as seen in the improvement in the new orders for the division during the fourth quarter.
Speaker 3: Open
Speaker 2: Gross profit in the fourth quarter of 2022 was $3.1 million, or 28.2% of revenue.
Speaker 2: This compared to gross profit of $3.3 million or 27.4% of revenue in the third quarter of 2022 and $3.1 million or 22% of revenue in the fourth quarter of 2021.
Speaker 2: Gross margin improved due to project mix, including the benefit of our software sales and more revenue coming through Performance Engineering Division.
Speaker 2: which carries higher margins.
Speaker 2: While revenues were lower at Workforce Solutions, the margins were 16.2% in the fourth quarter.
Speaker 2: Roughly flat compared to the year ago period and slightly up from the third quarter's 15.7%. But delivering at the higher part of that range that this division typically yields and showing the higher quality of orders coming through.
Speaker 2: We have seen an increase in direct hire placement activities, in part due to the current labor environment, but also as a result of our retooling the sales and recruiting team in workforce solutions segment.
Speaker 2: We are excited about growing this piece of our business as it delivers much higher margins than our traditional staff augmentation business. Operating expenses, which excludes restructuring depreciation and amortization expenses.
Speaker 2: in the fourth quarter of 2022 were $3.9 million, compared to $4.5 million in the third quarter of 2022 and $4.6 million in the fourth quarter of 2021. The decrease in Q4 was partially due to tighter expense controls. As we look into 2023, we are taking a critical look at our expenses and believe we have identified additional cost containment measures.
Speaker 2: As we have mentioned on previous calls, three facility leases are ending in a few months, which will provide an opportunity to decrease our physical footprint and our fixed costs.
Speaker 2: We also are more generally assessing our vendor spend with an eye on improving our cash flow.
Speaker 2: Net loss in the fourth quarter of 2022 was 1.5 million or a loss of 7 cents per share compared to a loss of 1.9 million in the fourth quarter of 2021 or a loss of 9 cents per share. The net loss was 1.1 million.
Speaker 2: or five cents per share in the fourth quarter of 2022, compared to an adjusted net loss of $1.1 million and five cents per share in the fourth quarter of 2021.
Speaker 2: Adjusted EBITDA showed some improvement with a loss of 407,000 in the fourth quarter compared to a loss of 1.1 million in Q4 of 2021 and a loss of 690,000 reported in the third quarter of 2022.
Speaker 2: The company's backlog remained healthy at the end of the quarter, but greatly improved subsequent to the quarter end due to some key new orders received, as Kyle mentioned previously.
Speaker 2: The backlog at the end of the fourth quarter was $32.9 million.
Speaker 2: A slight improvement when compared to the $32.3 million at the end of the third quarter of 2022.
Speaker 2: as the company was able to secure additional new orders during December . Backlog levels at December 31, 2021 totaled 41.3 million.
Speaker 2: The Performance Engineering segment backlog was $23.8 million and Workforce Solutions Division was $9.1 million at the end of the fourth quarter, and compares to $26.7 million and $5.6 million respectively at the end of the third quarter.
Speaker 2: Backlog for Performance Engineering Division was $31.8 million at the end of the fourth quarter of 2021.
Speaker 2: and $9.5 million for workforce solutions at that same period.
Speaker 2: These backlog figures really highlight the company's performance. While the company has burned off some older orders and reported a lower backlog versus the year-ago period, there were few orders that closed in that first quarter of 23 and when added to the backlog levels at the end of 22, would show a sizable improvement in backlog levels. Getting the company back to levels similar to a year-ago period.
Speaker 2: giving us an excellent starting point for 2023.
Speaker 2: Moving our discussion to the company's balance sheet, we exited the fourth quarter with $2.8 million in cash and that compares to the $3.6 million at the end of 2021. The 2022 cash levels do not include restricted cash of $1.6 million, which is to secure four letters of credit with various customers totaling $1.1 million.
Speaker 2: and $500,000 to secure our corporate credit card programs.
Speaker 2: We continue to make payments on our convertible debt secured in February of 2022. On a monthly basis, we make a determination based on our cash balance and cash forecast on whether to repay cash, stock, or a combination of both.
Speaker 2: Payments on the convertible debt will be completed in February of 2024. The company had one million of ERC refunds outstanding at the end of the fourth quarter. We did receive $900,000 this past January . We are expecting to receive the remaining ERC refunds from the IRS in the next three to six months of approximately $100,000. At this point we have successfully received the majority of our ERC refunds to this point.
Speaker 2: While we are still working in a challenging environment, I am pleased with the actions in the fourth quarter and fiscal 2022 to maintain.
Speaker 2: solid capital structure and the results demonstrate that the company is stabilized and prepared for future growth.
Speaker 2: I'm also proud that we made the necessary investments and changes internally to improve our back office.
Speaker 2: These improvements, which include the completion of our ERP systems migration project, will help the company moving forward and put us in a solid position to be awarded more business. In addition, we have additional efficiencies we believe we can put into place and are currently examining our options to lower the company's costs.
Speaker 2: We also want to remind investors that in addition to the leases that run off during 2023, we anticipate that there will be further cost containment capabilities and we will report on those when appropriate. I'll now turn the conversation back to Kyle.
Speaker 1: Thank you, Emerick. To summarize, the fourth quarter and fiscal year financial results were periods of rebuilding and investment to prepare the company for new opportunities and the renewal in the nuclear industry. The company performed well in the engineering division. We made strides in retooling our workforce solutions to business.
Speaker 1: evidenced by better order flow in the fourth quarter. We continue to get in front of customers and work with them through the current challenges of high inflation and economic uncertainty, and we are performing, executing, and what is in our control, and making sure we are positioned well for future opportunities. We continue to meet with customers and potential customers more frequently to make sure...
Speaker 1: that the nuclear industry will be increasingly in demand for the foreseeable future. Given our very unique situation as a heavily tech-enabled provider of essential services to the decarbonization of the power sector in nuclear industry, we remain very confident in our opportunity to create substantial long-term value. With that said, Adam, please proceed.
Speaker 1: with the question and answer session.
Speaker 1: and answer session. We will now begin the question and answer session.
Speaker 4: To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker 4: may press star and two. We'll take a moment to assemble our roster.
Speaker 4: And again, let us star the one to join the question queue.
Speaker 1: Okay, Adam, I know you had a couple questions that you had teed up. Why don't you go ahead and ask those.
Speaker 4: with the US Navy. Maybe can you discuss is that incremental in value compared to the last contract signed five years ago?
Speaker 1: Yeah, it's a good question. It is. It has increased in its annual value potential to GSE for this contract. Again, a real testament to the team that's been doing a great job there and really unique capabilities we're working on for Navy and proud to serve that mission.
Speaker 1: We also have additional contracts with Navy which have evolved over the past five years. So in addition to the significant contract, there are other contracts in parallel that we both created and are executing on. So this is a great relationship, very grateful for the opportunity to serve Navy.
Speaker 1: Uh, so that was a good question, Adam. Thank you.
Speaker 5: Kyle, you mentioned last call about a trip to Japan. How was the trip? What are the opportunities there like?
Speaker 1: Right, we have really been on the road, myself personally, non-stop from August through December . And of course engaging with clients even when not in the road, but really have been underway the entire time and had the opportunity to line up a series of visits with customers and prospects in Japan. And for...
Speaker 1: early to mid-December. And it's really interesting, you know, Japan is very committed. This was right after Japan opened up after COVID. So, you know, they opened up about a year later in the United States, so we were on one of the first flights out there to get in front of customers.
Speaker 1: I'd like to thank them and the Department of Commerce for helping us establish new relationships in nuclear in Japan with new people.
Speaker 1: Industry is very eager to start up more of their reactors, but that's a very slow pace. They also really are looking to us to work on implementing some data validation and reconciliation and thermal performance studies for their plants. That's really to understand how they can produce optimal power from their existing assets that are up and running. Rule is the same in captions. Spell capability is different, and price levels are not normal.
Speaker 1: as well as there's some nice simulation project work that is ahead of us.
Speaker 5: You mentioned that there were some new orders that came in Q1 and were supposed to close in Q4. How should investors view the improved backlog? Can you give us any additional color there?
Speaker 2: Hi Adam, it's Emmett. I think as I mentioned on the call, I think the color is that we have a strong pipeline and a lot of times the stuff does shift. I think the good news is that those deals closed early in the quarter.
Speaker 2: And as mentioned on the call, I think it puts us back in line with our historical backlog levels from 2021. And I think the bigger thing is we're now positioned right out of the gate in 2023 with a strong order at the beginning of the year.
Speaker 5: One more question. Can you give us an update with the NASDAQ requirements and company plans to get back into compliance?
Speaker 2: I think for that Adam, I would just reference the 8K that we filed last November when we initially received the notice that company has until May 3rd, we can request an extension and if we don't get that we can appeal it.
Speaker 2: I think we're just going to follow what's been laid out in the AK and as any information changes, we will communicate that. Great, thank you. That's it for me.
Speaker 4: And as a reminder, if you would like to ask a question, please press star then 1.
Speaker 4: And this will conclude our question and answer session.
Speaker 4: I'd like to turn the conference back over to Kyle Lowdenboe for any closing remarks.
Speaker 1: All right, well, I'd just like to thank everyone for joining us. We appreciate your time and interest in GSE.
Speaker 1: If you have any questions, please reach out to Adam Loewensteiner from Lithium Partners, and we'd be happy to schedule out the follow-up call. Once again, thank you everybody and have a great day. The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.