PSIX

Good afternoon, welcome to Power Solutions International First Quarter 2026 Earnings Conference Call. Currently, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to hand the conference over to Ken Janke, VP Corporate Controller, PSI. You may begin.

Good afternoon, welcome to Power Solutions International's 1st quarter 2026 earnings conference call. Joining me on today's call are Dino Xykis, Chief Executive Officer, Kenneth Li, Chief Financial Officer, and Dorothy Du, General Counsel. Statements made in today's discussion, as well as information provided from time to time by Power Solutions International, Inc., will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

Among the factors that could cause actual results to differ materially are the timing and ultimate conversion of power systems orders, including data center-related orders, quarterly variability in our product mix and corresponding gross margin, the cost, pace, and outcome of capacity ramp-up activities at our Wisconsin operation, demand in the oil and gas end market, supply chain, and component availability, macroeconomic, regulatory, and trade conditions, pending litigation and regulatory inquiries, and the other risks and uncertainties described in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q, and other filings with the SEC, all of which are incorporated by reference for purposes of today's call. The company undertakes no obligation to update any forward-looking statements except as required by law. We will also reference certain non-GAAP financial measures on today's call.

Reconciliations to the most directly comparable GAAP measures are available in our earnings release and SEC filings. With that, I will turn the call over to Dino.

Good afternoon, everyone. Thank you for joining us. We appreciate your time today and your continued interest in PSI. For many of you, this is the first earnings conference call you have heard from PSI since our December 2024 uplisting to the Nasdaq stock market. I will start with a brief overview of our company and will then turn the call over to Kenneth Li to walk through our financial performance and our outlook. Company overview. Power Solutions International, founded in 1985 and headquartered in Wood Dale, Illinois, designs and manufactures emission-certified engines and integrated power systems across natural gas, propane, diesel, gasoline, and biofuels. The company has produced more than 1.5 million engines over its history and operates manufacturing and engineering facilities across Illinois, Wisconsin, Texas, and Michigan.

PSI serves OEM customers across power systems, industrial and transportation end markets, including data centers, standby power, oil and gas, material handling, and specialized vehicles. Over the past several years, PSI has improved profitability, reduced its debt, strengthened its balance sheet, refinanced its credit facility, and uplisted to Nasdaq in December of 2024. In 2025, the company was added to the Russell 3000, Russell 2000, Russell Microcap, and MSCI USA Small Cap indices. The first quarter. Turning to the quarter, as Kenneth Li will describe in more detail, our first quarter results were below the strong prior year period, which had benefit from significant growth in our power systems business. The year-over-year declines in sales and profitability primarily reflected softer oil and gas demand, the timing of certain power system shipments, and elevated production costs associated with a capacity ramp-up in our Wisconsin operation.

At the same time, demand related to data center application remained solid, and gross margin improved sequentially from the fourth quarter of 2025, owing it in part to the company's efforts to improve operational efficiency in Wisconsin, but partially offset by unfavorable product mix. With that, I will turn the call over to Ken.

Thank you, Dino, and good afternoon, everyone. I will walk through our financial performance for the first quarter, then provide some operational context and updates on liquidity and our outlook framework for the balance of the year. Net sales for the first quarter were $128.6 million, representing a decline of approximately 5% year-over-year. This decrease was primarily driven by lower sales in our power systems end market, reflecting uneven customer ordering patterns and a continued softness in the oil and gas market. These declines were partially offset by growth in our industrial and the transportation end markets.

Gross profit for the quarter was $29.4 million, compared to $40.3 million in the prior year, the gross margin was 22.9%, compared to 29.7% in the prior year period. The year-over-year decline in gross margin reflects a less favorable product mix in the period, including lower contributions from oil and gas products, together with elevated production costs associated with capacity ramp-up activities supporting data center-related applications. On a sequential basis, gross margin was approximately 100 basis points higher than the fourth quarter of 2025, which we believe shows early progress in reducing operational inefficiencies. The gain was partially offset by an unfavorable product mix in the first quarter.

We caution that the capacity ramp-up activities at our Wisconsin operations are continuing, and we expect elevated product costs related to that ramp-up to persist with the trajectory of any further sequential improvement subject to product mix, slow parts, and other operational factors. Operating expenses were $80 million, up approximately 15% year-over-year, reflecting continued investments in research and development to support new product initiatives as well as increased selling and administrative expense to support goals. Operating income for the quarter was $11.4 million compared to $20.6 million in the prior year period. Net income was $7.3 million, or $0.32 per diluted share, compared to $19.1 million, or $0.83 per diluted share in the prior year. Adjusted EBITDA was $13.9 million, reflecting the same underlying operational dynamics impacting profitability.

Turning to cash flow, we generated $18.7 million of operating cash flow in the quarter, more than doubling compared to the prior year period and driven primarily by favorable working capital dynamics. From a balance sheet perspective, we ended the quarter with $45.1 million of cash and cash equivalents and approximately $103.4 million of total debt. Our balance sheet remains solid, and we continue to generate positive cash flow. From a liquidity standpoint, we are well-positioned. Our cash generation, combined with access to our $135 million revolving credit facility, provides flexibility to support our operations and ongoing investments. We believe our current liquidity position is sufficient to meet our anticipated cash needs for at least the next 12 months.

Turning to our priorities for 2026, our team is focused on operational execution, ongoing margin recovery, reliable delivery against customer commitments, and consistent communication with our investors. Given ongoing variability in order timing and market conditions, the company is not providing formal full-year guidance at this time. Based on current visibility, the company currently expects second quarter 2026 revenue to be generally consistent with the first quarter on a sequential basis. The company anticipates strong sales growth in the second half of 2026, approximately in line with sales in the second half of 2025 as larger power system orders move into production and are recognized as revenue. The timing and ultimate volume of those shipments remains subject to customer scheduling, manufacturing slow parts, supply chain factors, and other variables. There can be no assurance that those orders will translate to a uniformly strong second half.

Continued softness in the oil and gas end market is expected to weigh on quarterly revenue trends and the capacity ramp-up activities at the company's Wisconsin operations and their related cost effects on gross margin are expected to continue. We continue to see ongoing demand for power infrastructure, particularly in data center and distributed power applications, and to invest in our manufacturing footprint and product platforms in support of that demand. Converting that demand into revenue depends on the operational and market factors I have described, and we will continue to update investors as the year progresses. With that, operator, please open the line for questions.

Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Eric Stine with Craig-Hallum Capital Group. Your line is now open.

Hi, Dino. Hi, Ken.

Hi, Eric.

Hello. You know, I'm wondering, on Q1, if you're able to, could you just give a little detail on specifically power systems and, you know, maybe not exact, but, you know, talk about kind of the contribution from oil and gas. You know, clearly that is something that you've talked about since late last year. Have seen it, not really a surprise, but curious, how do we view that? Also view that you are ramping up the enclosure business. Curious what that enclosure business, you know, are you expecting more of a ramp-up in Q2? You know, what kind of goes into your Q2 view as well?

Alex, you know, for the whole system, the 1Q sales is about $96 million versus last year, like $107 million. As we mentioned, you know, we start to notice the softness in the oil and gas later last year, right? This softness extended to 1Q this year. Most of the sales decrease, you know, this quarter versus last year, 1Q is driven by the power system, the oil and gas softness, and also the uneven customer demand for other data center-related products. Right now, in the near term, we still assume the oil and gas will remain soft throughout the year. If there's some pickup, definitely it will be favorable for the sales and also margin perspective. Right.

For the Wisconsin operation, the company, you know, adding resource to support the Wisconsin operation. We, you know, we are doing lots of process improvements, time study. You know, we see some notable improvements in the cost structure, labor overhead in the manufacturing cost if we compare this quarter versus, you know, 4 Q last year. The improvements is also reflect in our margin, gross margin improvements, you know, 100 basis points this quarter versus last quarter. Right. For the, for the orders regarding to the data center products, as we, you know, indicate in the press release, we anticipate strong activity in the second half, this based on some order we have already received.

Now we expect the second half, the sales will be the same level as we had last year for the second half. Again, the actual, you know, shipments timing and the volume is subject to the customer schedule.

Right

Also the supply chain. Right.

Yep. No, of course.

Yeah.

If I think about second quarter, I mean, are you 'cause obviously you're coming out of, you know, this period where you're now starting to ramp up the enclosure business after doing, you know, you've got a number of ongoing improvements, so I get that. If you're looking for a flat sequential quarter, looking for enclosure growth, I mean, does that would imply that you are expecting further weakening of oil and gas in Q2? Curious if that is your intention or, 'cause I mean, it sounds like you haven't really seen an improvement there and don't expect to, even if oil, you know, is certainly, you know, has appreciated given what's going on.

-in the Middle East. It sounds like you don't necessarily think that that has a positive impact anytime soon.

You're right, Eric Stine. You know, even though the oil price is very high, and we are now seeing a significant ordering for oil and gas products. For the second quarter, you know, we expect it will be the same level as Q1.

Yeah. Okay.

Yeah.

I may have missed it, just on gross margins, can you talk about, I don't know if you said it, but, I think you might have said that you expect that you're starting to see a little bit of improvement, given all the steps that you took in Q4 and early in Q1, and that expect continued improvement throughout the year. I'm not sure if you gave any indications of the magnitude.

Mm-hmm. The one Q gross margin, 22.9%, and the four Q was 21.9%. It's about 100 basis point improvements, right? We, as I said, you know, we did see some notable improvements for our Wisconsin operation. Going forward, you know, we expect the gross margin will be flat or slight better than one Q. Again, you know, this also, you know, subject to the product mix and also, you know, our cost structure improvement. The one Q, the gross margin, you know, was kind of, you know, negatively impacted by product mix. Usually our oil and gas products carry a high gross margin. This impacted by the oil and gas also for the one Q.

Oh, okay.

Yeah.

Last one for me, just curious, I mean, I know you're about a quarter in or a little bit over, just would love some thoughts on the MTL acquisition.

You know, some of the benefits you're seeing, why you did it. I mean, it's pretty straightforward, but would just love you to kind of give your thoughts on that acquisition in its early days.

Sure. We completed the MTL acquisition on January 9th, you know, this year.

Yeah.

MTL specializes in fabrication, welding, painting, and assembly of metal components. It also makes the data center, you know, parts. MTL has been, you know, PSI supplier for a long time, more than 10 years. They have been, you know, supplying us the fuel tank. This acquisition definitely helps us to vertically integrate our supply chain, helps us to reduce the lead time, and also PSI can have access to its, you know, UL certification. Since the acquisition, the integration is underway and, you know, we are exploring different opportunities, you know, to leverage the MTL asset base to help us, you know, to do other, you know, fabrication for the data center related to the components.

The revenue contribution from MTL, you know, is expected to be pretty modest in 2026. In the near term, the team focus will be on the operational execution, slow parts correlation, and production, you know, consistency.

Okay. Thank you very much.

Yeah. Thank you. Bye.

Our next question comes from the line of Alan Lau with Jefferies. Your line is now open.

Thanks for taking my question. Would like to understand more on the group outlook, especially from the enclosure business, as the company ramps up the production. Would like to know if you might share what's the capacity in dollar terms for the enclosure business, and are you getting orders from major clients? Thanks.

Thank you, Allen. Allen, you know, we serve our customer, you know, mainly in 3 kind of industry end markets. Basically industrial power system and transportation. For the power system, we provide the products, you know, microgrid, standby power, prime power, and also data center related products like enclosure. In our financial statements, you know, we do not break down the sales related to the enclosure business, so it's within our power system, you know. In the power system, you know, the end user market, we will say is, you know, we received some orders from our customer, we anticipate strong activity in the second half of the year. We expect the second half sales will be at the level we had, you know, second half last year, right?

You know, we still have some pretty solid demand from our customer, our products. You know, certainly, you know, as I said, you know, the actual shipments timing and the volume still subject to the customer schedule and our capability, you know, our successful we can convert the orders to sales.

Understood.

Mm-hmm. Go ahead.

Would like to follow up on oil, on oil and gas because you mentioned that you expect second half of the revenue will be similar to last year. Would like to know if it's in terms of absolute terms, which means, because second half last year, I think the revenue in total is roughly $4 billion. Do you mean you expect second half, the revenue is approximately at $4 billion level?

Right now our kind of, you know, general outlook in the second half sales will be similar, you know, last year second half, right? Because we anticipate a strong demand of our products, you know, and activity in the second half. Right? That's our, you know, outlook based on the orders, you know, we have right now from our customer and also our forecast. The oil and gas.

Understood.

Yeah. Thank you. What's the mix of oil and gas in second half last year?

Alan, we do not provide, you know, the mix information, you know, particular, you know, products in the, in the end market group. Yeah.

We have never provided that split. It's under policy, yeah.

Would like to know, if like any major clients, that I understand may be a bit sensitive, but like any major orders you get from hyperscalers or key contractors for hyperscalers?

We do not name individual customers. We never have.

Yeah. We do not provide,

Oh. Understood.

-information on any specific customers. Yeah.

Understood. Could you share the updates on gas engine? I think this gas engines for prime power is an upcoming trend. Wonder if you might share an update on that front.

Yeah. You know, at PSI we provide a, you know, a very broad portfolio of engines, right? Starting from 1 liter all the way to 8.8 liter and the 110 liter, and we're using multiple fuel source such as, you know, gas, propane, propylene, gasoline, diesel and biofuel. We, we spend R&D, you know, to develop the products, right? For the 1Q we spend about, you know, $4.8 million. We continue to spend, you know, R&D to develop new products and emission certification and also develop a special, you know, special application for our customers, right? What I say is, you know, there's, there definitely activities going on, you know, on the gas side. We are working to develop the product to meet the industry demand.

That's, you know, that's what we are doing. I will say the current, we have lots of current engineering activity, you know, includes ongoing work related to the emission compliance, thermal management, packaging optimization, and all kind of, you know, customer-specific application requirements. We're also, you know, doing R&D to develop a larger diesel engine for the data center market. Yeah.

by bigger diesel engines, I wonder if it's above 3 MW?

I'm sorry, could you repeat that question again?

I wonder if the bigger diesel engines are above the typical 2-3 MW?

I think right now we have our 8.8 lit. It's above 3 megawatts. Yeah.

understood. Thank you. I'll pass on. Thank you.

Yeah, thank you.

Thank you. This concludes the Q&A session. Thank you all for your participation. This does conclude today's call. You may now disconnect.