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WPCS Reports FY2012 Third Quarter Financial Results


March 16, 2012 - Exton, PA

WPCS International Incorporated (NASDAQ: WPCS), a leader in design-build engineering services for communications infrastructure, today announced financial results for the fiscal year 2012 third quarter ended January 31, 2012. Excluding our Trenton Operations, the remaining operations centers have generated EBITDA profit of approximately $322,000 compared to $205,000 for the same period in the prior year. Similarly, for the nine months ended January 31, 2012, the remaining operations centers have generated an EBITDA profit of approximately $3.0 million compared to a loss of $55,000 during the same period a year ago.

However, we have experienced significant profit fades on three projects at our Trenton Operations that caused the company to post a consolidated EBITDA loss for the third quarter of $5.1 million, compared to an EBITDA loss of $201,000 for the same period in the prior year. For the nine months ended January 31, 2012, the company reported a consolidated EBITDA loss of $3.7 million, compared to an EBITDA loss of $1.8 million for the same period in the prior year.

WPCS defines EBITDA in the traditional sense of earnings before interest, income taxes, depreciation and amortization but in addition, WPCS has incurred one-time charges for the loss from discontinued operations and the strategic alternatives effort as well as non-cash charges from deferred tax asset valuation allowances, acquisition related earn-out costs and goodwill impairments. These charges are also excluded from the EBITDA calculation so that the company can provide a more meaningful perspective on the results for the continuing operations.

For the third quarter, WPCS reported revenue of $20.5 million compared to $21.4 million for the same period a year ago. The decrease in revenue pertains to the cumulative adjustments required on prior revenue recognition for the three projects that experienced the significant profit fades at our Trenton Operations.

In regards to net income for the third quarter ended January 31, 2012, WPCS reported a net loss of approximately $10.3 million or $1.48 per diluted share, which includes a non-cash charge of $6.7 million related to valuation allowances recorded for deferred tax assets. As a result of the losses incurred by our Trenton Operations in the third fiscal quarter, WPCS re-evaluated the realization of deferred tax assets in light of the change in our current financial performance and as a result established a full valuation allowance on its U.S. federal and state deferred tax assets. WPCS will continue to evaluate the realization of its deferred tax assets on a periodic basis and will likely recoup the allowance in future periods as the financial performance improves. The net loss for the third quarter ended January 31, 2012 compares to a net loss of $3.5 million or $0.50 per diluted share for the same period a year ago.

For the nine months ended January 31, 2012, WPCS reported revenue of $72.2 million compared to $67.9 million for the same period a year ago, which represents an increase of approximately 6%. For the nine months ended January 31, 2012, WPCS reported a net loss of approximately $12.0 million or $1.73 per diluted share which includes the $6.7 million non-cash deferred tax asset valuation allowance and $1.3 million loss from discontinued operations. This compares to a net loss of $9.8 million or $1.41 per diluted share for the same period a year ago.

Andrew Hidalgo, CEO of WPCS, commented, "I am pleased to mention that for the three months ended January 31, 2012, excluding the Trenton Operations the remaining operations centers have generated EBITDA of $322,000 compared to $205,000 for the same period a year ago and for the nine months ended January 31, 2012, generated an EBITDA profit of $3 million compared to a loss of $55,000 during the same period a year ago. This represents a significant improvement. However, we have experienced significant profit fades on three projects at our Trenton Operations that caused us to post a consolidated EBITDA loss for the third quarter and through the nine months ended January 31, 2012. The profit fades were attributable to inadequate estimates that resulted in increased costs, to complete these projects. We have been in discussions with the general contractors for these projects and we are trying to obtain change orders for what we believe is additional work beyond the scope of the original estimate. If these change orders are approved, it will recover some of the lost profit in the quarters ahead.

"The most significant of these projects is an electrical contracting job for a hospital that was awarded to WPCS at $14.4 million which will cost us an estimated $16 million to complete. Based on the increased cost to complete on this project, we have accrued the total expected loss on this project in the third quarter. While it is disappointing that we experienced these profit fades, this fiscal year will still be an improvement from last fiscal year from an EBITDA perspective. Once we get the Trenton Operations back to a profitable state, we are expecting to achieve positive EBITDA results from all operation centers in fiscal year 2013 which begins May 1, 2012. This will be a big step in getting WPCS back to the profitability levels the company has historically generated. In addition, WPCS is expecting to generate positive EBITDA results in the current quarter.

"We believe our future quarters look promising. Our bid activity of $192 million remains high at the end of our third quarter. We are finding that more and more opportunities are presenting themselves in the healthcare and public services market. In addition, we have expanded our bid activity in the solar renewable energy space due to the recent increase in oil prices. Our commitment to quality workmanship and our special certifications in design-build engineering continue to give us a competitive advantage during this economic recovery. As evidenced in the press releases announcing new contracts, customers continue to seek bids from WPCS because of our outstanding reputation. At the end of the third quarter, WPCS continues to maintain a backlog of $27.5 million comprised of a variety of projects in the public services, healthcare and energy sectors. Our goal in the next few quarters is to convert more of our bids into backlog. The conversion of these bids to backlog and the effective management of projects through completion will give us the opportunity to increase our EBITDA performance and get back to positive earnings per share results in the quarters ahead.

"Our management team continues to implement cost efficiencies as well as emphasizing the improvement of gross margins. Through the nine months ended January 31, 2012, the consolidated gross margin was 16% compared to 19% for the same period one year ago. The year-to-date gross margin decline is specifically related to the profit fades for the projects mentioned. However, if we were to exclude the gross margin impact of the fades in profit for the specific projects at our Trenton Operations, the consolidated gross margin was 22% which is more in line with our estimates. We anticipate that the gross margins will improve to a range of 23% to 25% in the quarters ahead. If we can achieve these levels, it should enhance future EBITDA performance. As reported at the end of the third quarter, WPCS continues to maintain a healthy balance sheet with approximately $6.8 million in working capital. Also, the company has generated $1.6 million in cash from operations through the first nine months of this fiscal year ended January 31, 2012."

As a reminder, there will be an investor conference call at 5:00 pm ET today. To participate on the conference call, please dial 800-875-3456 for calls within the U.S. or 302-607-2001 for calls from international locations. Upon reaching the operator, verbally transmit the participant code VH46147. When the overview concludes, your questions can be asked by pressing *1 and your questions can be removed from the queue by pressing the number sign. Replays of the call will be available for a period of five days by dialing 402-220-2946 and entering 46147 # as the program identification number.

About WPCS International Incorporated:

WPCS is a design-build engineering company that focuses on the implementation requirements of communications infrastructure. The company provides its engineering capabilities including wireless communication, specialty construction and electrical power to the public services, healthcare, energy and corporate enterprise markets worldwide. For more information, please visit www.wpcs.com

Statements about the company's future expectations, including future revenue and earnings and all other statements in this press release, other than historical facts, are "forward looking" statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve risks and uncertainties and are subject to change at any time. The company's actual results could differ materially from expected results. In reflecting subsequent events or circumstances, the company undertakes no obligation to update forward looking statements.

This press release references a financial measure that is not in accordance with GAAP. Management uses EBITDA to evaluate the Company's operating and financial performance in light of business objectives, for planning purposes, when publicly providing our business outlook and to facilitate period-to-period comparisons. WPCS believes that this measure is useful to investors because it enhances investors' ability to review the Company's business from the same perspective as our management and to facilitate comparisons of this period's results with prior periods. Non-GAAP measures are used by some investors when assessing the ongoing operating and financial performance of our Company. This financial measure is not in accordance with GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. The presentation of the additional information should not be considered a substitute for net income or loss or net income or loss per diluted share prepared in accordance with GAAP. The primary material limitations associated with the use of non-GAAP measures as compared to the most directly comparable GAAP financial measures are (i) they may not be comparable to similarly titled measures used by other companies in our industry, and (ii) they exclude financial information that some may consider important in evaluating our performance. Pursuant to the requirements of Regulation G, WPCS has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.



WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended Nine Months Ended
January 31, January 31,
2012 2011 2012 2011
------------ ------------ ------------ ------------

REVENUE $ 20,492,197 $ 21,424,211 $ 72,216,831 $ 67,890,522
------------ ------------ ------------ ------------

COSTS AND EXPENSES:
Cost of revenue 19,905,127 16,942,020 61,006,554 54,874,195
Selling, general
and
administrative
expenses 5,492,699 4,888,104 14,803,061 15,310,797
Depreciation and
amortization 580,323 561,944 1,692,936 1,863,694
Goodwill and
intangible assets
impairment - 2,600,000 - 6,900,000
Change in fair
value of
acquisition-
related
contingent
consideration - 41,783 83,628 178,430
------------ ------------ ------------ ------------

25,978,149 25,033,851 77,586,179 79,127,116
------------ ------------ ------------ ------------

OPERATING LOSS (5,485,952) (3,609,640) (5,369,348) (11,236,594)

OTHER EXPENSE
(INCOME):
Interest expense 263,346 293,219 594,559 409,914
Interest income (27,409) (11,436) (59,378) (35,803)
------------ ------------ ------------ ------------

Loss from continuing
operations before
income tax
provision (benefit) (5,721,889) (3,891,423) (5,904,529) (11,610,705)

Income tax provision
(benefit) 4,560,610 (560,141) 4,690,610 (1,647,472)

------------ ------------ ------------ ------------
LOSS FROM CONTINUING
OPERATIONS (10,282,499) (3,331,282) (10,595,139) (9,963,233)
------------ ------------ ------------ ------------

Discontinued
operations
Income (loss) from
operations of
discontinued
operations, net
of tax of $0,
($313,948),
($188,819) and
$56,934,
respectively - 10,026 (299,668) 237,340
Loss from disposal - - (1,027,637) -

------------ ------------ ------------ ------------
Income (loss) from
discontinued
operations, net
of tax - 10,026 (1,327,305) 237,340
------------ ------------ ------------ ------------

CONSOLIDATED NET
LOSS (10,282,499) (3,321,256) (11,922,444) (9,725,893)

Net income
attributable to
noncontrolling
interest 36,500 141,547 96,560 76,041
------------ ------------ ------------ ------------

NET LOSS
ATTRIBUTABLE TO
WPCS $(10,318,999) $ (3,462,803) $(12,019,004) $ (9,801,934)
============ ============ ============ ============

Basic and diluted
net loss per common
share attributable
to WPCS:
Loss from
continuing
operations
attributable to
WPCS $ (1.48) $ (0.50) $ (1.54) $ (1.44)
(Loss) income from
discontinued
operations
attributable to
WPCS - - $ (0.19) $ 0.03
------------ ------------ ------------ ------------
Basic net loss per
common share
attributable to
WPCS $ (1.48) $ (0.50) $ (1.73) $ (1.41)
============ ============ ============ ============

Basic and diluted
weighted average
number of common
shares outstanding 6,954,766 6,954,766 6,954,766 6,954,766
============ ============ ============ ============

 WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS January 31, April 30, ASSETS 2012 2011 ------------- ------------- (Unaudited)CURRENT ASSETS: Cash and cash equivalents $ 1,746,624 $ 4,879,106 Accounts receivable, net of allowance of $1,507,887 and $1,662,168 at January 31, 2012 and April 30, 2011, respectively 22,232,336 22,474,024 Costs and estimated earnings in excess of billings on uncompleted contracts 2,053,250 4,669,012 Inventory 1,229,217 1,972,905 Prepaid expenses and other current assets 1,896,727 1,413,151 Prepaid income taxes 210,024 173,700 Income taxes receivable 50,158 1,166,225 Deferred tax assets 230,400 2,621,329 ------------- ------------- Total current assets 29,648,736 39,369,452 PROPERTY AND EQUIPMENT, net 4,869,828 6,035,353 OTHER INTANGIBLE ASSETS, net 617,669 803,171 GOODWILL 1,988,186 2,044,856 DEFERRED TAX ASSETS - 2,675,511 OTHER ASSETS 570,032 134,654 ------------- ------------- Total assets $ 37,694,451 $ 51,062,997 ============= ============= WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND EQUITY January 31, April 30, 2012 2011 ------------- ------------- (Unaudited)CURRENT LIABILITIES: Current portion of loans payable $ 153,243 $ 35,724 Borrowings under line of credit 3,103,830 7,000,000 Current portion of capital lease obligations 26,178 54,496 Accounts payable and accrued expenses 12,288,104 10,249,503 Billings in excess of costs and estimated earnings on uncompleted contracts 3,248,558 2,039,117 Deferred revenue 895,727 792,414 Due joint venture partner 3,094,682 3,415,641 Acquisition-related contingent consideration - 1,008,200 ------------- ------------- Total current liabilities 22,810,322 24,595,095 Loans payable, net of current portion 249,994 10,554 Capital lease obligations, net of current portion - 15,465 Deferred tax liabilities 148,174 - ------------- ------------- Total liabilities 23,208,490 24,621,114 ------------- ------------- COMMITMENTS AND CONTINGENCIES EQUITY: Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued - - Common stock - $0.0001 par value, 25,000,000 shares authorized, 6,954,766 shares issued and outstanding at January 31, 2012 and April 30, 2011 695 695 Additional paid-in capital 50,493,039 50,433,626 Accumulated deficit (38,614,835) (26,595,831) Accumulated other comprehensive income on foreign currency translation, net of tax effects of $212,125 and $185,060 at January 31, 2012 and April 30, 2011, respectively 1,451,058 1,564,965 ------------- ------------- Total WPCS equity 13,329,957 25,403,455 Noncontrolling interest 1,156,004 1,038,428 ------------- ------------- Total equity 14,485,961 26,441,883 ------------- ------------- Total liabilities and equity $ 37,694,451 $ 51,062,997 ============= =============

Reconciliation of GAAP to Non-GAAP Financial Measures (Unaudited)

(1) Reconciliation of Non-GAAP EBITDA:

 Three Months Ended Nine Months Ended January 31, January 31, 2012 2011 2012 2011 ------------ ------------ ------------ ------------ NET (LOSS) INCOME ATTRIBUTABLE TO WPCS, GAAP $(10,318,999) $ (3,462,803) $(12,019,004) $ (9,801,934) ------------ ------------ ------------ ------------ Plus: Net income attributable to noncontrolling interest 36,500 141,547 96,560 76,041 Income tax provision (benefit) 4,560,610 (560,141) 4,690,610 (1,647,472) Interest expense 263,346 293,219 594,559 409,914 Interest income (27,409) (11,436) (59,378) (35,803) Change in fair value of acquisition- related contingent consideration - 41,783 83,628 178,430 Goodwill and intangible assets impairment - 2,600,000 - 6,900,000 One time strategic costs (199,260) 204,895 (58,748) 480,570 Depreciation and amortization 580,323 561,944 1,692,936 1,863,694 Income (loss) from discontinued operations, net of tax - 10,026 (299,668) 237,340 Loss from disposal of discontinued operations - - (1,027,637) - ------------ ------------ ------------ ------------Consolidated EBITDA, Non-GAAP $ (5,104,889) $ (201,018) $ (3,651,532) $ (1,813,900) ============ ============ ============ ============Plus: Operating loss (gain), Trenton operations center 4,684,359 (179,103) 4,495,639 (700,100) Corporate operating expenses 742,628 584,902 2,193,216 2,459,059 ------------ ------------ ------------ ------------EBITDA of Performing Operation Centers, Non-GAAP $ 322,098 $ 204,781 $ 3,037,323 $ (54,941) ============ ============ ============ ============

CONTACT:

WPCS International Incorporated
610-903-0400 x101
Email Contact

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