Power Solutions International, Inc.: Form 10-Q for the period ended Sep 30, 2025

The following discussion and analysis includes forward-looking statements about the Company’s business and consolidated results of operations for the three and nine months ended September 30, 2025 and 2024, including discussions about management’s expectations for the Company’s business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and are made in light of recent events and trends. These statements should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause the Company’s actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Forward-Looking Statements” in this Quarterly Report. The following discussion should also be read in conjunction with the Company’s unaudited consolidated financial statements and the related Notes included in this Quarterly Report.

Executive Overview

The Company designs, engineers, manufactures, markets and sells a broad range of advanced, emission-certified engines and power systems that run on a wide variety of clean, alternative fuels, including natural gas, propane, and biofuels, as well as gasoline and diesel options, within the power systems, industrial and transportation end markets with primary manufacturing, assembly, engineering, R&D, sales and distribution facilities located in suburban Chicago, Illinois and Darien and Beloit, Wisconsin. The Company provides highly engineered, comprehensive solutions designed to meet specific customer application requirements and technical specifications, including those imposed by environmental regulatory bodies, such as the U.S. Environment Protection Agency (“EPA”), the California Air Resource Board (“CARB”) and the People’s Republic of China’s Ministry of Ecology and Environment (“MEE”).

The Company’s products are primarily used by global original equipment manufacturers (“OEM”) and end-user customers across a wide range of applications and equipment that includes standby and prime power generation, demand response, microgrid, combined heat and power, arbor care, material handling (including forklifts), agricultural and turf, construction, pumps and irrigation, compressors, utility vehicles, light- and medium-duty vocational trucks, school and transit buses, and utility power. The Company manages the business as a single reportable segment.

Net sales by geographic area and by end market for the three and nine months ended September 30, 2025 and 2024 are presented below:

(in thousands)

(in thousands)

Recent Trends and Business Outlook

PSI’s growth in net revenue for the nine months in 2025 was driven by power systems markets, including data center and oil and gas products, partially offset by lower sales from more mature, lower-margin markets such as industrial. This shift in markets reflects the Company’s conscious strategic prioritization toward higher growth, higher-margin markets with less emphasis on more mature markets.

The Company is focused on leading the business through a growth phase with a stronger balance sheet while strategically prioritizing products that demonstrate strong demand and higher gross margins. Consistent with those goals, the Company is actively pursuing several initiatives to enhance and expand manufacturing capacity to meet the increasing demand from data center markets. Pivoting the focus to these markets is driving current net sales growth and profitability. Through expanded capacity and strategic partnerships, management expects this positive trend to continue.

PSI’s business is impacted by the current macroeconomic and geopolitical environment. For example, although the oil and gas market, in which the Company has historically operated, has experienced year over year growth from its historic lows, sales levels may not reach their previous higher levels because of lower rig counts. The Company has been actively navigating these challenges by balancing its investments, expenses, pricing and sales efforts in this market as well as others.

In addition to prioritizing gross profit, the Company is committed to efficiently managing expenses, including streamlining operating expenses and prioritizing certain R&D investments in support of long-term growth objectives. The Company is committed to focusing on growth opportunities and investment while also optimizing its cost structure to enhance growth and profitability, ultimately delivering sustained value to our shareholders.

The Company experiences recent tariff costs associated with its supply chain products. We are actively assessing the evolving tariff environment and are committed to proactively mitigate any associated risks through strategic sourcing, pricing actions, and supply chain agility. The potential for continued economic uncertainty and unfavorable oil and gas market dynamics may have a material adverse impact on the levels of future customer orders and the Company’s future business operations, financial condition and liquidity. On July 30, 2025, the Company amended its Revolving Credit Agreement with Standard Chartered Bank and three other lenders. The amended Revolving Credit Agreement allows the Company to borrow up to $135.0 million and extends the maturity date to July 30, 2027.

Results of Operations

Condensed consolidated results of operations for the three and nine months ended September 30, 2025, compared with the three and nine months ended September 30, 2024 (UNAUDITED):

(in thousands, except per share amounts)

NM Not meaningful

* Non-GAAP measurement, see reconciliation below

Net Sales

Net sales increased $78.0 million, or 62%, during the three months ended September 30, 2025, compared to the three months ended September 30, 2024, as a result of higher sales of $85.3 million in the power systems end market, partially offset by a decrease of $4.7 million and $2.6 million within the industrial and transportation end markets, respectively. This shift in market mix reflects our deliberate strategic focus on higher-growth sectors such as data centers and oil and gas. In particular, we are prioritizing the rapidly expanding data center sector by enhancing our manufacturing capacity and capabilities to meet evolving customer demand. The decline in industrial sales is largely attributable to softer demand in the material handling market.

Net sales increased $199.5 million, or 60%, during the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024, as a result of higher sales of $213.8 million in the power systems end market, partially offset by a decrease of $11.5 million and $2.8 million within the industrial and transportation end markets, respectively. This shift in market mix reflects our deliberate strategic focus on higher-growth sectors such as data centers and oil and gas. In particular, we are prioritizing the rapidly expanding data center sector by enhancing our manufacturing capacity and capabilities to meet evolving customer demand. The decline in industrial sales is largely attributable to softer demand in the material handling market.

Gross Profit

Gross profit increased during the three months ended September 30, 2025 by $12.3 million, or 34%, compared to the three months ended September 30, 2024. Gross margin was 23.9% and 28.9% during the three months ended September 30, 2025 and 2024, respectively. The decrease in gross margin is primarily due to strong sales growth in comparatively lower-margin products and temporary inefficiencies related to our accelerated production ramp-up.

Gross profit increased during the nine months ended September 30, 2025 by $45.7 million, or 47%, compared to the nine months ended September 30, 2024. Gross margin was 26.9% and 29.4% during the nine months ended September 30, 2025 and 2024, respectively. The decrease in gross margin is primarily due to strong sales growth in comparatively lower-margin products and temporary inefficiencies related to our accelerated production ramp-up.

Research and Development Expenses

Research and development expenses during the three months ended September 30, 2025 and 2024 were $4.8 million and $4.7 million, respectively.

Research and development expenses during the nine months ended September 30, 2025 and 2024 were $13.6 million and $14.8 million, respectively. The decrease of $1.2 million was primarily driven by the timing of R&D program expenditures and the recovery of R&D costs from certain customers.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $15.3 million during the three months ended September 30, 2025, an increase of $4.3 million, or 39%, compared to the three months ended September 30, 2024. The variance reflects higher costs associated with employee incentive programs, expense related to customer relationship improvement efforts, and increased sales and administrative expenses to support ongoing business growth in 2025.

SG&A expenses were $43.0 million during the nine months ended September 30, 2025, an increase of $18.0 million, or 72%, compared to the nine months ended September 30, 2024. The increase is primarily due to a favorable non-recurring legal reserve reduction in 2024, higher costs associated with employee incentive programs, expense related to customer relationship improvement efforts, and increased sales and administrative expenses to support ongoing business growth in 2025.

Interest Expense

Interest expense was $1.6 million for the three months ended September 30, 2025, as compared to $2.8 million for the three months ended September 30, 2024, largely due to reduced outstanding debt and lower overall effective interest rates. See Note 6. Debt, included in Part 1, Item 1. Financial Statements, for additional information.

Interest expense was $5.1 million for the nine months ended September 30, 2025, as compared to $9.1 million for the nine months ended September 30, 2024, largely due to reduced outstanding debt and lower overall effective interest rates. See Note 6. Debt, included in Part 1, Item 1. Financial Statements, for additional information.

Income Tax (Benefit) Expense

The Company recorded income tax benefit of $0.9 million for the three months ended September 30, 2025, as compared to income tax expense of $0.3 million for the same period in 2024. The tax benefit in the third quarter of 2025 was primarily driven by the release of$7.0 million valuation allowance on deferred tax assets. The effective tax rate in the third quarter of

2024 was low mainly due to the utilization of net operating loss carryforwards and other tax credits. Pretax income was $26.7 million for the three months ended September 30, 2025, compared to $17.6 million for the same period in 2024.

The Company recorded income tax benefit of $17.2 million for the nine months ended September 30, 2025, as compared to income tax expense of $1.4 million for the same period in 2024. The year-to-date benefit primarily reflects the $36.6 million valuation allowance release. Pretax income was $80.7 million for the nine months ended September 30, 2025, compared to $47.4 million for the same period in 2024.

See Note 11. Income Taxes, included in Part I, Item 1. Financial Statements, for additional information related to the Company’s income tax provision.

Non-GAAP Financial Measures

In addition to the results provided in accordance with U.S. GAAP above, this report also includes non-GAAP (adjusted) financial measures. Non-GAAP financial measures provide insight into selected financial information and should be evaluated in the context in which they are presented. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP, and non-GAAP financial measures as reported by the Company may not be comparable to similarly titled amounts reported by other companies. The non-GAAP financial measures should be considered in conjunction with the consolidated financial statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated below.

The Company believes that Adjusted net income, Adjusted net income per share – diluted, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company’s management in assessing the performance of the Company. Adjusted net income is defined as net income as adjusted for certain items that the Company believes are not indicative of its ongoing operating performance. Adjusted net income per share – diluted is a measure of the Company’s diluted earnings per common share adjusted for the impact of special items. EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA further excludes the effects of other non-cash charges and certain other items that do not reflect the ordinary earnings of the Company’s operations.

Adjusted net income, Adjusted net income per share – diluted, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a measure of performance of the Company’s operations and as a basis for strategic planning and forecasting. Adjusted net income, Adjusted net income per share – diluted, and Adjusted EBITDA may be useful to an investor because these measures are widely used to evaluate companies’ operating performance without regard to items excluded from the calculation of such measures, which can vary substantially from company to company depending on the accounting methods, the book value of assets, the capital structure and the method by which the assets were acquired, among other factors. They are not, however, intended as alternative measures of operating results or cash flow from operations as determined in accordance with U.S. GAAP.

The following table presents a reconciliation from Net income to Adjusted net income for the three and nine months ended September 30, 2025 and 2024:

(in thousands)

31

The following table presents a reconciliation from Net income per share – diluted to Adjusted net income per share – diluted for the three and nine months ended September 30, 2025 and 2024:

The following table presents a reconciliation from Net income to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2025 and 2024:

(in thousands)

1. Amounts reflect non-cash stock-based compensation expense and have no material impact on the Adjusted net income per share – diluted for the three and nine months ended September 30, 2025 and 2024.

2. Amounts include severance expense for the three and nine months ended September 30, 2025.

3. Amounts include legal settlements for the three and nine months ended September 30, 2025 and 2024.

Cash Flows

Cash was impacted as follows:

(in thousands)

Cash Flows for the Nine Months Ended September 30, 2025

Cash Flow from Operating Activities

Net cash provided by operating activities was $28.7 million for the nine months ended September 30, 2025, compared to net cash provided by operating activities of $29.7 million for the nine months ended September 30, 2024, resulting in a decrease of $1.0 million in cash provided by operating activities year-over-year. The decrease in cash provided by operating activities primarily resulted from a $31.4 million increase of cash used by working capital accounts and an increase in earnings of $51.9 million. The decrease in cash generated from working capital was primarily related to the purchases of inventory and the timing of collections on accounts receivables, reflecting higher sales volume and operational growth, partially offset by an increase in accounts payable and other current liabilities for the nine months ended September 30, 2025 compared to September 30, 2024.

Cash Flow from Investing Activities

Net cash used in investing activities was $7.0 million for the nine months ended September 30, 2025, compared to cash used in investing activities of $2.0 million for the nine months ended September 30, 2024. For the nine months ended September 30, 2025 and 2024, cash used in investing activities related to capital expenditures.

Cash Flow from Financing Activities

The Company used $27.5 million in cash from financing activities for the nine months ended September 30, 2025, compared to $10.7 million cash used by financing activities for the nine months ended September 30, 2024. The cash used by financing activities for the nine months ended September 30, 2025 was due to the full repayment of the SLA and other existing debt year to date. See additional discussion in Note 6. Debt, included in Part I, Item 1. Financial Statements, which further describe the Company’s debt arrangements.

Liquidity and Capital Resources

The Company’s sources of funds are cash flows from operations, borrowings made pursuant to its credit facilities and cash and cash equivalents on hand. Uses of funds include payments of principal on our debt facilities and shareholder’s loan agreements, capital expenditures, and working capital needs.

The Company has achieved profitability and generated positive cash flows from operating activities in 2025. As of September 30, 2025, the Company’s total outstanding debt obligations under the Revolving Credit Agreement and for finance leases and other debt, were $96.7 million in the aggregate, and its cash and cash equivalents were $49.0 million. See Item 1. Financial Statements, Note 6. Debt, for additional information. On July 30, 2025, the Company amended its Revolving Credit Agreement with Standard Chartered Bank and three other lenders. The second amended Revolving Credit Agreement allows the Company to borrow up to $135.0 million and extends the maturity date to July 30, 2027.

PSI’s business is impacted by the current macroeconomic and geopolitical environment. For example, although the oil and gas market, in which the Company has historically operated, has experienced year over year growth from its historic lows, sales levels may not reach previous higher levels because of lower rig counts. The Company experiences tariff costs associated with products in its supply chain. We are actively assessing the evolving tariff environment and are committed to proactively mitigate any associated risks through strategic sourcing, pricing actions, and supply chain agility. The potential for continued economic uncertainty and unfavorable oil and gas market dynamics may have a material adverse impact on the levels of future customer orders and the Company’s future business operations, financial condition and liquidity.

At September 30, 2025, the Company had four outstanding letters of credit totaling $1.8 million. See Item 1. Financial Statements, Note 10. Commitments and Contingencies for additional information related to the Company’s off-balance sheet arrangements and the outstanding letters of credit.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP. Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. The Company has identified the items listed below as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.

The Company’s significant accounting policies are consistent with those discussed in Note 1. Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company’s 2024 Annual Report. During the nine months ended September 30, 2025, there were no significant changes in the application of critical accounting policies.

The Company has identified the following accounting policies as its most critical because they require the Company to make difficult, subjective, and complex judgments and estimates:

• Revenue Recognition
• Goodwill Impairment
• Warranties

Impact of New Accounting Standards

For information about recently issued accounting pronouncements, see Note 1. Summary of Significant Accounting Policies and Other Information, included in Part 1, Item 1.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Exchange Act as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and communicated to its management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures as of September 30, 2025. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2025, to provide reasonable assurance that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the third quarter of 2025 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.