pioneer power solutions (ppsi) may 2017 investor presentation

Pioneer Power Solutions, Inc.Investor Presentation

©2017 Pioneer Power Solutions, Inc. May 2017

Forward-Looking Statements

This presentation contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such statements may be preceded by the words "intends," "may," "will," "plans," "expects," "anticipates," "projects," "predicts," "estimates," "aims," "believes," "hopes," "potential" or similar words.

Forward-looking statements are not guarantees of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond the company's control, and cannot be predicted or quantified and consequently, actual results may differ materially from those expressed or implied by such forward-looking statements.

Such risks and uncertainties include, without limitation, risks and uncertainties associated (i) the Company's ability to expand its business through strategic acquisitions, (ii) the Company's ability to integrate acquisitions and related businesses, (iii) the fact that many of the Company's competitors are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services, which may make it difficult for the Company to attract and retain customers, (iv) the Company's dependence on Hydro-Quebec Utility Company and Siemens Industry, Inc. for a large portion of its business, and the fact that any change in the level of orders from Hydro-Quebec Utility Company or Siemens Industry, Inc. could have a significant impact on the Company's results of operations, (v) the potential loss or departure of key personnel, including Nathan J. Mazurek, the Company's Chairman, President and Chief Executive Officer, (vi) the fact that fluctuations between the U.S. dollar and the Canadian dollar will impact the Company's revenues, (vii) the Company's ability to generate internal growth, (viii) market acceptance of existing and new products, (ix) the Company's dependence on a distributor agreement with Generac Power Systems through which it derives a significant portion of its revenues, (x) operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk, (xi) restrictive loan covenants or the Company's ability to repay or refinance debt under its credit facilities that could limit the Company's future financing options and liquidity position and may limit the Company's ability to grow its business, (xii) general economic and market conditions in the electrical equipment, power generation, commercial construction, industrial production, oil and gas, marine and infrastructure industries, (xiii) the impact of geopolitical activity on the economy, changes in government regulations such as income taxes, climate control initiatives, the timing or strength of an economic recovery in the Company's markets and the Company's ability to access capital markets, (xiv) the fact that unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect the Company's profitability, (xv) the fact that the Company's Chairman controls a majority of the Company's combined voting power, and may have, or may develop in the future, interests that may diverge from yours, (xvi) material weaknesses in the Company's internal control over financial reporting that could have an adverse effect on the Company's business and common stock price, and (xvii) the fact that future sales of large blocks of the Company's common stock may adversely impact the Company's stock price.

More detailed information about the company and the risk factors that may affect the realization of forward-looking statements is set forth in the company's filings with the Securities and Exchange Commission. Investors and security holders are urged to read these filings free of charge on the SEC's web site at www.sec.gov. The company does not undertake to publicly update or revise its forward-looking statements as a result of new information, future events or otherwise.

- 2 -

Company Snapshot

Focus on niche applications and service within large, growing market segments for power equipment– Utility, Industrial, Commercial– Backup power and distributed generation

Balanced mix of revenue streams– Project-based, custom engineered equipment– Standard products, sold to distributors– Generac Industrial Power Systems franchise– Recurring annual service contracts

Financial– $59.6M market cap (Nasdaq: PPSI) (a)

– $114.4M in 2016 revenue (99% North America) 2017 Guidance

– Revenue between $120 and $127 million – Net income between $3.5 and $4.1 million– Diluted EPS between $0.40 and $0.47 based on 8.7 million shares– This reflects non-GAAP results of:

• Adjusted EBITDA of $10.0 million to $11.0 million • Non-GAAP EPS between $0.83 to $0.93

- 3 -(a) Based on recent closing price of $6.85 and 8.7M shares outstanding

A diversified manufacturer of highly customized electrical equipment

Large and Diverse End Markets

- 4 -

High Growth

Wind, solar, biomass Battery charging Data centers Drive systems Medical equipment Power quality / conditioning Prisons Casinos Nursing / assisted living Telecom / cell towers Wastewater treatment Distributed generation Microgrids

Cyclical Growth

Office buildings, shopping centers, airports, hospitals, government/municipal

Outdoor lighting Agribusiness Automobile Avionics Paper & pulp Petrochemical Printing Semiconductors Shipbuilding/marine power Steel/aluminum smelting High speed electrical rail

GDP Growth

Office, government and apartment buildings

Outdoor lighting Distribution Food processing Elevators HVAC Spa, pool and tanning UPS systems Transmission & distribution Network protection and

reliability Schools

14%

86%

T&DCritical Power

Our Business Segments

- 5 -

Critical Power SolutionsTransmission & Distribution Solutions

Q1 2017 Revenue:$27.3 million

42%

58%9%

91%

Equipment that distributes, controls, conditions and monitors the flow of electrical energy while protecting critical equipment such as transformers, motors, data center equipment and other machinery

Onsite power generation systems, control equipment and services that ensure uninterrupted power to operations in times of emergency and in primary power applications, including data centers

Field ServiceEngine-Generators

Paralleling Switchgear

Equipment

Recurring Service

Transformers

Switchgear

Based on results as of March 31, 2017 Based on results as of March 31, 2017

Power Dry Transformers

Distribution Transformers

Substation Transformers

Utility Transformers

Low & MediumVoltage Switchgear

Switchboard/Panelboard

OEM Solutions(not pictured)

Products & Services Profile

- 6 -

Segment/Product Category

Low Voltage Distribution

Transformers

Medium Voltage & OEM

Transformers

Liquid-Filled

Transformers

Low & Medium Voltage Switchgear

Switchgear & GeneratorControls

Generator Sales & Service

Gross Margin %(relative tocorporate GM)

At Below Above Below Below Above

Primary End Markets

Office, commercial& manufacturing

facilities

Industrial,large commercial,

data centers

Utilities,oil & gas, heavy manufacturing

Industrial,commercial

Data centers,hospitals, distributed

generation

Diverse: retail, telecom, health &

elder care

Key Customer Types

Distributors, Contractors, Brand Label

EPCs, OEMs,End-users

End-users,EPCs

End-users,EPCs, Distributors

End-users, EPCsGenerator Dealers

End-users,National/Regional

Accounts

Value Price,Availability

Engineering,Lead time

Engineering,Lead time

Engineering,Lead time,

Track Record

EngineeringTrack record

Price,Service

Customers / Year > 1,000/year Dozens/year Dozens/year Dozens/year Dozens/year 100s/year

Demand Drivers Commercial construction

Industrial expansion and commercial

construction

Replacement/expansion/retrofit

Industrial expansion and commercial

construction

Digital economy growth

Need for reliable power

Need for reliable power

Enabling safe and efficient delivery of power via a diverse portfolio of offerings

Pioneer’s Position in the Electrical Grid

- 7 -

GENERATION

PowerStation

TRANSMISSION

Transmission Substation Distribution

Substation

Distribution / Control Equipment

DISTRIBUTION

Power Transformers

Commercial & Industrial Users

ResidentialCustomers

Solar

Wind Farm

Pioneer’s focus is on niche markets and customized applications within the electrical grid

ON-SITE POWER GENERATION

Liquid Filled Transformers

Industrial/Utility Switchgear

Medium and Low VoltageDry-type Transformers

Light Commercial Switchgear

T&D Segment

Critical Power SegmentField Services

Engine-GeneratorsSwitchgear/Transfer Switches

Customers

- 8 -

Revenue Distribution

Q1 2017 Revenue: $27.3 Million

Utilities

EPC Firms and Distributors

Commercial and OEM

28%

49%

23%

Distributors and EPC Firms

Utilities

Commercial and Industrial

Industrial

Strong customer retention rate of ~85% for 2016

Investment Highlights

- 9 -

Management track record of growth Successful acquisition strategy &

integration

Attractive portfolio of highly engineered niche products Serving multiple large addressable markets

Leveraged to growing parts of the economy

– Positive Secular Trends – grid infrastructure, data centers, alternative energy, electric vehicles, energy storage, high-speed rail

– Positive Cyclical Trends – oil & gas, mining Long term relationships with dozens of blue chip customers – high customer

retention rates and no customer concentration Margin upside through continued costs savings and operating leverage Selective M&A strategy in a highly fragmented market Management with proven track record of operational excellence and significant

inside ownership

Industry Size and Structure

Large and Growing North American Market

Aging Power Grid

– Built more than a half century ago

– Nearly a majority of T&D infrastructure is near or past its useful service life

Demand for reliable power

– Rising number of TLR events demonstrates power grid’s inadequate capacity and lack of redundancy

– Growing number of mission critical facilities, data center investment expected up 14.5% in 2013 (c)

Growing Electricity Consumption

– U.S. electricity demand to grow 28% from 2011 to 2040 (d), increasing utility expansion and network maintenance needs

– Significant new generation capacity additions needed to meet demand (with renewables to grow fastest), requiring new T&D infrastructure

- 10 -

Value of U.S. T&D Equipment Demand ($Bn) (b)

2009 2014 2019Pole/line hardware MetersTransformers Switchgear/board apparatus

$25.5$33.4

$20.3

Service Life of the U.S. Electrical Infrastructure (a)

58% 50%

42% 50%

Transmission Distribution

Within Service Life Near or Past Service Life

(a) Black & Veatch’s 2009/2010 Third Annual Strategic Directions in the Electric Utility Industry Survey(b) Freedonia Group study, February 2015(c) 2012 DatacenterDynamics Industry Census(d) U.S. Energy Information Administration, Annual Energy Outlook 2013

Higher energy costs, stricter environmental regulations and efficiency standards leading to upgrades, retrofits and equipment replacement

Growth Strategy

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EXPAND PRODUCT / SERVICE OFFERINGS• Continued migration towards more highly

engineered power distribution solutions• Maximize sales productivity across portfolio

DERIVATIVE PLAYServing as a business enabler and critical component

provider for fast-growing energy storage market

OPERATING EFFICIENCIESContinued integration of formerly disparate business units for additional cost savings − shared resources, capacity optimization

SELECTIVE ACQUISITIONS

Targeting:~10%+ annual revenue growth

>10% EBITDA margins

1

3

4

2

Financial Overview

Summary Financial Position($ millions)

- 13 -

3/31/2017 12/31/2016

Cash & cash equivalents $0.2 $0.2

Current Assets $49.1 $46.2

Long-term Assets $30.9 $31.2

Total Assets $80.1 $77.4

Current liabilities $45.7 $43.7

Long-term debt, net of current maturities $4.8 $4.0

Total liabilities $53.6 $51.2

Total shareholders’ equity $26.5 $26.2

Total Liabilities & Shareholders’ equity $80.1 $77.4

Presenter

Presentation Notes

Grown our balance sheet ~4x in 3 years (from $15M) Mostly via acquisitions ($30M) financed w/ cash + bank debt + small amt of PPSI stock Solid position from a WC standpoint – [44] DSO, [44] DPO and [4.6] inv turns $37M of facilities with BMO between our US/CAN operations. With BMO since 2009 $20M of revolving credit lines for short term needs. ~$9M drawn as of June 30th, now up a bit since then for the Pacific acquisition. Bears interest at a combination of LIBOR and Prime-based rates, averaging out to about 3.25% $17M of term facilities, for acquisitions and 2 plant expansions. ~$6.5M drawn, interest at approx. 2.5% The “Other Debt” mostly reflects what’s left of a financing done with GE Capital in Mexico at 7% interest, and we also have a small amount of Titan notes payable Overall, our Debt-to-EBITDA is currently at 4.7x, which is higher than normal for us, but which we believe will work itself down in the sub- 2.0x range through the improvements we are expecting over the next 4 to 6 quarters, together with this equity raise. 2.0x is a level that makes us comfortable, given the overall stability and the diversity in our business which has improved by a lot in only the last year Even after Titan fully closes out, we expect to continue to have about $11M available by formula today under our revolving credit facilities alone Our bank agreement requires we get it down to 2.75x by the June 2016 quarter

Summary Operating Statement Data($ millions, except per share data)

- 14 -(a) 2017E at mid-point of guidance(b) Non-GAAP measures, from continuing operations. See appendix for a reconciliation of GAAP to non-GAAP measures.

Revenue (a) Gross Profit

$84.0 $88.2 $92.2$106.5

$114.4$123.5

2012 2013 2014 2015 2016 2017E

+22%

+5% +5%

+16%

$7.8$8.9

$5.0$3.7

$8.1

$10.5

9.2% 10.1% 5.4% 3.5% 7.1% 8.5%

2012 2013 2014 2015 2016 2017E

$18.9$21.8

$18.2$21.1

$23.4$26.8

22.6%24.7%

19.7%19.8%

20.5%

21.7%

2012 2013 2014 2015 2016 2017E

Adjusted EBITDA (a,b) Non-GAAP EPS (a,b)

$0.70 $0.80

$0.25 $0.34

$0.69

$0.88

25% 14%-69%

36% 103% 28%

2012 2013 2014 2015 2016 2017E

+7%

+8%

(% growth) (as a % of revenue)

(as a % of revenue) (% growth)

Presenter

Presentation Notes

REVENUE: +25% CAGR 2010-2014 9% internal, 14% thru acquisitions, including 2 very small ones in 2013 Our YTD #’s indicate a much steeper growth rate than that, at over 30%, driven mainly from the Titan acquisition in December last year, followed by the much smaller acquisition of Harmonics in January. On the next page we’ll take a much deeper dive into the components of our revenue growth and what’s been driving it from 2013 through to this year. GROSS MARGIN – Movement follows shifts in product mix by type & sales channel Project-based, MTO equip sold direct to customers represents our highest margins (LF xfmrs and Critical Power gear) Std pdts sold thru electrical wholesalers represents lowest margins (some of our dry-type xfmr and circuit protection products) EBITDA – After a string of nice-trending EBITDA growth years through 2013, right now we’re in the middle of doing the old logroll leap as we cross the river. We’ll look closer at what I mean by this in 2 slides, but basically what you should know is that our Canadian business (which used to represent 2/3rds of our revenue and more than that in our profit) has turned down sharply with the economic recession there. Meanwhile, we’ve built up our US-based business dramatically over the last 2 years, but have sacrificed near-term profitability in doing so, given the sheer number of people we’ve brought on, which is proving out, albeit slower than we originally planned. EPS – Again, nice string of years through 2013, with 18% annual EPS growth, then the worm turned By “Non-GAAP” we mean “Operating” or “Core” EPS - Main add-backs are for 1) M&A deal costs, 2) XOI tax gains/charges, 3) non-cash amortization, mostly for intangible assets. (see reconciliation in the appendix) I’ll talk more about EPS guidance for the next two years in a bit

2017 Guidance and Growth Drivers

- 15 -

T&D Solutions Segment Growth primarily driven from high-growth, end

markets including… energy and data storage

Critical Power Segment Expanding service component to include more multi-

location users, cell tower providers and retailers

Expected Revenue Growth Factors Expected Profit Growth Factors

T&D Solutions Segment Increased offshoring and outsourcing Further exploiting operating leverage Relocation of medium voltage dry-type transformer

manufacturing from Canada to Mexico, estimated annualized savings of $1M - $1.5M

Critical Power Segment Higher level of high-margin service business

Expected revenue growth significantly outpacing industry growth rate

(a) DOE 2016, higher pricing also applies to >1,000 existing electrical equipment distributor customers

2017 Guidance Revenue between $120 and $127 million Net income between $3.5 and $4.1 million Diluted EPS between $0.40 and $0.47 based on 8.7 million shares

This reflects non-GAAP results of: Adjusted EBITDA of $10.0 million to $11.0 million Non-GAAP EPS between $0.83 to $0.93

Contact Us

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Investor Relations:

Brett MaasManaging PartnerHayden IR, LLC(T) [email protected]

Corporate Headquarters:

Pioneer Power Solutions, Inc.400 Kelby Street, 12th FloorFort Lee, NJ 07024(T) 212.867.0700(F) 212.867.1325www.pioneerpowersolutions.com

Questions & Answers

Supplemental Financial Schedules

Reconciliation of Non-GAAP Measures(In thousands, except per share data)

- 19 -

2017 2016Reconciliation to Adjusted EBITDA and EPSNet earnings (GAAP measure) 133 569

Interest expense 508 285 Income tax expense 280 224 Depreciation and amortization 721 741 Restructuring and integration 155 119 Stock-based compensation 30 54 Other non-operating expenses 235 16

Adjusted EBITDA (Non-GAAP measure) 2,062 2,008 Tax effects - 28% rate (577) (562)

Non-GAAP net earnings 1,485$ 1,446$ Non-GAAP net earnings per diluted share 0.17$ 0.17$ Weighted average diluted shares outstanding 8,737 8,709

Tax Rate assumed to be 28%

Three Months EndedMarch 31,

Key Market & Ownership Statistics

Ticker Symbol (NASDAQ): PPSIRecent Closing Price (5/12/2017): $6.85Shares Outstanding (M): 8.7Market Capitalization ($M): $59.6 Freely Traded Float (M): 3.4

- 20 -(a) Based on mid-point of Company’s guidance

Market Information

Valuation Measures Major Shareholder Ownership Information

Stock Trading History

Employees and Directors 61.9%North Star Investment Management 4.6%Heartland Advisors, Inc. 4.0%First Wilshire Securities 3.4%Kennedy Capital Management 3.2%Perritt Capital Management Inc. 1.8%Vanguard Group, Inc. 0.3%

Enterprise Value ($M): $86.7Forward P/E Ratio (May-2017) (a): 15.7xForward EBITDA Multiple (May-2017) (a): 5.7xPrice to Book Ratio (mrq) 2.3x