GSE Systems utilizes derivative instruments, specifically forward foreign exchange contracts, to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated contract receivables. The company is required to determine the fair value of its foreign currency contracts at the end of each quarter, and the change in the fair value is recorded in net income. The quarterly gains or losses incurred from the changes in fair value will net out to zero upon the foreign exchange contract expiration. The use of these derivative instruments is intended to protect the company’s customer contract values and margins at the time the contracts are signed and are not designed to speculate on the direction of any currency, up or down. Simply put, the derivative instruments are protecting against currency fluctuations in a way that, regardless of which way a given currency moves, the ultimate payments from foreign customers will translate to the originally agreed to amounts.
For the three months ended March 31, 2009, the company incurred a $13,000 pretax non-cash gain on the change in fair value of its derivative instruments and the related mark-to-market adjustment of the related contract receivables.
GSE Systems’ backlog as of March 31, 2009 was around $58.0 million compared to $38.1 million at December 31, 2008. Backlog is defined as the remaining value of signed contracts and does not include any value for contracts being negotiated or for contracts that have been signed since March 31, 2009. Therefore, the backlog of $58.0 million does not include the expected total value of the two new full scope simulators for a Japanese customer or the expected total value of the full scope nuclear simulator currently being built for Westinghouse Electric company’s Haiyang project in China. Taking into account the expected approximate values of these projects, implied backlog at March 31, 2009 exceeded $70 million.
“I am pleased to report a solid quarter of improved financial performance versus the comparable period last year,” said John V. Moran, GSE Systems’ chief executive officer. “Backlog continues to grow, our cost structure and margins are within expected ranges and our balance sheet remains strong. We continue to maintain a large pipeline of both near and longer term opportunities and year to date, have not experienced any material project delays or cancellations as a result of the global economic conditions. We remain very optimistic about our prospects and positive growth trends going forward.”
