Power Solutions International, Inc.: Form 10-Q for the period ended Mar 31, 2026

The following discussion and analysis includes forward-looking statements about the Company’s business and consolidated results of operations for the three months ended March 31, 2026 and 2025, 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 months ended March 31, 2026 and 2025 are presented below:

(in thousands)

(in thousands)

Recent Trends and Business Outlook

Sales declined in the first quarter of 2026, primarily within the power systems end market, reflecting uneven customer ordering patterns and some softness in the oil and gas market. Looking ahead, we expect sales to improve in the second half of the year, driven by demand in data center-related markets, partially offset by ongoing softness in the oil and gas market.

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 will drive net sales growth and profitability. Through expanded capacity and strategic partnerships, management expects this positive trend to continue.

PSI’s operating results are influenced by macroeconomic and geopolitical conditions, including recent softening in the oil and gas sector. In response, the Company is actively managing capital allocation and operating expenses while adjusting commercial strategies.

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 has experienced tariff costs associated with products in its supply chain. The Supreme Court's decision to strike down certain tariffs and the administration's response have created significant uncertainty regarding the scope, rate, duration, and legal authority for future tariffs, as well as the timing, process, and likelihood of recovering tariffs previously paid. We are actively assessing the evolving tariff environment and are committed to proactively mitigating 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.

The Company is party to several legal contingencies. See Note 11. Commitments and Contingencies for further discussion of the Company’s indemnification obligations.

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 stronger sales growth in the second half of 2026, approximately in line with sales in the second half of 2025, as larger Power Systems orders move into production and are recognized as revenue. However, the timing and ultimate volume of those shipments remain subject to customer scheduling, manufacturing throughput, supply chain factors and other variables. There can be no assurance that those orders will translate to a uniformly stronger second half. Continued softness in the oil and gas end market is expected to weigh on quarterly revenue trends, and capacity ramp-up activities at the Company’s Wisconsin operations and their related cost effects on gross margin are expected to continue.

Strategic Initiatives/Growth Strategies: The Company has initiated various business objectives aimed at improving profitability, streamlining processes, strengthening the business and focusing on achieving growth in higher-return product lines. Central to this plan is the Company’s increased emphasis on power systems product offerings through new product development and investments, in addition to leveraging the Company’s relationship with Weichai. With the recent introduction of numerous natural gas and diesel engines, coupled with its existing strong product lineup, the Company believes that it has a solid foundation to achieve long-term growth, particularly within the power systems market.

Results of Operations

Results of operations for the three months ended March 31, 2026 compared with the three months ended March 31, 2025 (UNAUDITED):

(in thousands, except per share amounts)

NM Not meaningful

* See reconciliation of non-GAAP financial measures to GAAP results below

Net Sales

Net sales for the first quarter of 2026 were $128.6 million, a decrease of $6.9 million, or 5%, compared to the first quarter of 2025. The decrease reflected lower sales in the power systems end market of $10.2 million, partially offset by increases of $3.0 million and $0.3 million in the industrial and transportation end markets, respectively. Sales in the power systems end market declined primarily due to softness in oil and gas markets, together with uneven order patterns and shipment timing for data center-related products. However, the timing and ultimate volume of related shipments remain subject to customer scheduling, manufacturing throughput, supply-chain factors, and other variables, and the Company is not predicting any specific level of data center revenue in any future period.

Gross Profit

Gross profit for the first quarter of 2026 was $29.4 million, a decrease of $10.9 million, or 27%, compared to the first quarter of 2025. Gross margin in the first quarter of 2026 was 22.9%, compared to 29.7% in the same period last year. Gross margin reflected a lower mix of oil and gas products, together with elevated production costs associated with capacity ramp-up activities supporting data center-related applications at the Company’s Wisconsin operations. On a sequential basis, gross margin improved by approximately 100 basis points compared to the fourth quarter of 2025, owing in part to the Company’s efforts to improve operational efficiency in Wisconsin, but was partially offset by an unfavorable product mix in the first quarter. The Company’s capacity ramp-up activities at its Wisconsin operations are continuing, and the Company expects related production costs to persist; the trajectory of any further sequential improvement remains subject to product mix, throughput and other operational factors.

Research and Development Expenses

Research and development expenses during the three months ended March 31, 2026 and 2025 were $4.8 million and $4.2 million, respectively. The increase was primarily driven by higher R&D program expenditures to support new programs in 2026 and the recovery of R&D costs from certain customers in 2025.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $13.0 million during the first quarter of 2026, an increase of $1.9 million, or 17%, compared to the same period in the prior year. The variance primarily reflects higher compensation expense related to the revaluation of previously awarded SARs, incremental selling and administrative expenses associated with MTL Manufacturing and Equipment, and other administrative and management expenses supporting the business in 2026.

Interest Expense

Interest expense was $1.7 million in the first quarter of 2026, compared to $1.8 million in the same period in the prior year, primarily due to lower overall effective interest rates. See Note 7. Debt, included in Part I, Item 1. Financial Statements, for additional information.

Income Tax Expense

The Company recorded income tax expense of $2.4 million and $3.8 million for the three months ended March 31, 2026 and 2025, respectively. The Company’s pretax income was $9.7 million for the three months ended March 31, 2026, compared to a pretax income of $22.9 million for the three months ended March 31, 2025. The decrease was primarily driven by lower pre-tax income in 2026, partially offset by a higher effective tax rate. See Note 12. Income Taxes, included in Part 1, 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 months ended March 31, 2026 and 2025:

(in thousands)

The following table presents a reconciliation from Net income per share – diluted to Adjusted net income per share – diluted for the three months ended March 31, 2026 and 2025:

34

The following table presents a reconciliation from Net income to EBITDA and Adjusted EBITDA for the three months ended March 31, 2026 and 2025:

(in thousands)

1. Amounts reflect non-cash stock-based compensation expense for the three months ended March 31, 2026 and 2025.

2. Amounts include severance expense for the three months ended March 31, 2026.

3. Amounts include legal settlements for the three months ended March 31, 2026.

Cash Flows

Cash was impacted as follows:

(in thousands)

Cash Flows for the Three Months Ended March 31, 2026

Cash Flow from Operating Activities

Net cash provided by operating activities was $19.1 million for the three months ended March 31, 2026, compared to $8.8 million for the three months ended March 31, 2025, representing an increase of $10.3 million in cash provided by operating activities year-over-year. The increase occurred despite a decrease in net income of $11.8 million, driven primarily by favorable changes in working capital. These changes included a significant source of cash from accounts receivable, reflecting improved collections in the current period, as well as a lower use of cash for inventory purchases compared to the prior‑year period. These favorable impacts were partially offset by increased uses of cash related to accrued expenses and accounts payable during the three months ended March 31, 2026 compared to March 31, 2025.

Cash Flow from Investing Activities

Net cash used in investing activities was $13.8 million for the three months ended March 31, 2026, compared to cash used in investing activities of $3.4 million for the three months ended March 31, 2025. For the three months ended March 31, 2026 and 2025, cash used in investing activities related to capital expenditures and the acquisition of MTL.

Cash Flow from Financing Activities

The Company used $0.7 million in cash from financing activities for the three months ended March 31, 2026, compared to $10.2 million cash used by financing activities for the three months ended March 31, 2025. The cash used by financing activities for the three months ended March 31, 2026 was primarily due to repayments of lease liabilities and share repurchases to settle tax withholding obligations for stock-based compensation awards. See additional discussion in Note 7. 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, capital expenditures, and working capital needs. We currently anticipate that cash flows from operations, available funds and access to financing sources, including under our Revolving Credit Agreement, will continue to be sufficient to meet our cash needs for the next twelve months and beyond.

Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations. The Company has achieved profitability and generated positive cash flows from operating activities in 2026. As of March 31, 2026, the Company’s total outstanding debt obligations under the Revolving Credit Agreement and for finance leases and other debt, were $103.4 million in the aggregate, and its cash and cash equivalents were $45.1 million. See Item 1. Financial Statements, Note 7. 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 subject to broader macroeconomic and geopolitical conditions. The oil and gas market, one of the Company’s end markets, has recently softened. The Company is responding by managing investments and expenses and making adjustments to its commercial strategies across its end markets. 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 mitigating 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 March 31, 2026, the Company had four outstanding letters of credit totaling $2.5 million. See Item 1. Financial Statements, Note 11. 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 2025 Annual Report. During the three months ended March 31, 2026, 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.

Our market risk includes changes in interest rates on its variable‑rate debt obligations. As of March 31, 2026, the Company’s outstanding borrowings bear interest at variable rates indexed to the SOFR. Increases in SOFR would result in higher interest expense and could adversely affect the Company’s results of operations and cash flows. The Company does not currently use derivative instruments to hedge its exposure to variable interest rates.

The Company does not have material exposure to foreign currency exchange rate risk, as substantially all of its transactions are denominated in U.S. dollars. In addition, the Company is not materially exposed to commodity price risk or equity price risk, as it does not engage in activities that are directly affected by fluctuations in commodity prices or publicly traded equity securities.

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 March 31, 2026. 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 March 31, 2026, 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 first quarter of 2026 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the risk factors described in Item 1A. Risk Factors, in Part II of the Company’s Quarterly Report on Form 10‑Q for the period ended March 31, 2025, as well as those described in Item 1A. Risk Factors, in Part I of the Company’s 2025 Annual Report on Form 10-K, filed with the SEC on March 2, 2026. These risk factors could materially affect the Company’s business, financial condition, results of operations, liquidity, or future results. The risks described in these filings are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems immaterial may also materially adversely affect its business, financial condition, results of operations, or liquidity. There have been no material changes to the risk factors previously disclosed in the filings referenced above.