Power Solutions Intl Q3 2026 Earnings Call Transcript

Power Solutions Intl (NASDAQ:PSIX) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Power Solutions International reported third-quarter 2026 net sales of $202.1 million, a 32.5% increase sequentially but a slight 1% decrease year-over-year, attributed to continued softness in oil and gas offset by strong data center product sales.

The company launched the PowerBoost 2030 initiative, aiming to balance its product portfolio by expanding into the AI data center market while maintaining its traditional oil and gas markets.

Operational improvements at Wisconsin facilities have led to enhanced manufacturing efficiency, with a 45% increase in gross profit and a gross margin expansion to 29.7%.

Cash flow from operations was strong at $40.9 million, allowing a significant reduction in net debt to approximately $34 million.

The company raised its second-half 2026 outlook, expecting net sales to exceed those of the second half of 2025, fueled by data center product growth despite ongoing oil and gas market softness.

Full Transcript

OPERATOR

Good day, and thank you for standing by. Welcome to the Power Solutions Intl third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again.

Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Ken Janke, Vice President and Corporate Controller for Power Solutions Intl. Please go ahead.

Ken Janke (Vice President and Corporate Controller)

Good afternoon and welcome to Power Solutions Intl’s third quarter 2026 earnings conference call. I’m Ken Janke, Vice President and Corporate Controller. Joining me today are Richard Hu, our Chief Executive Officer, and Ken Lee, our Chief Financial Officer. Before we begin, I would like to remind everyone that today’s prepared remarks and responses to questions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our sales and margin outlook, order conversion, capacity ramp-up, operational improvements, new product development, potential investments in manufacturing capabilities, and our PowerBoost 2030 strategy.

These statements are based on current expectations and assumptions, speak only as of today, and are subject to risks and uncertainties that could cause actual results to differ materially. Important factors include the timing and ultimate conversion of Power System orders into revenue, including data center-related orders; quarterly variability in product mix, including the lower gross margins of data center products relative to oil and gas products; customer-specific requirements and changes to custom product orders; the cost, pace, throughput, and operational outcomes of capacity ramp-up activities at our Wisconsin operations, including the duration and magnitude of related production costs; our ability to execute operational improvement initiatives; the level and persistence of customer demand, including demand conditions in the oil and gas end market; the concentration of our sales among a limited number of customers, including in the data center market; existing material availability constraints and other supply chain factors affecting shipment timing, mix, sales, and gross margin; the non-recurrence of the tariff refund and year-end adjustments, including those arising from inventory counts; the timing, scope, cost, and funding of potential investments in manufacturing capabilities, which remain under evaluation; integration of recent acquisitions, including MTL Manufacturing and Equipment; compliance with the covenants under our credit facility; macroeconomic, regulatory, and trade conditions, including U.S. tariffs and trade restrictions; changes in management or other personnel; and the outcome of pending or threatened litigation, including the previously disclosed securities class action and related shareholder derivative actions, and other legal or regulatory matters.

Additional information concerning factors that could cause actual results to differ materially is contained in our earnings release dated November 5, 2026, and under Risk Factors and the other cautionary disclosures in our Annual Report on Form 10-K for the year ended December 31, 2025, and subsequent Forms 10-Q and other SEC filings. Those disclosures are incorporated by reference for purposes of today’s call and are available in the Investor Relations section of our website at www.psiengines.com.

Our SEC filings are also available at sec.gov. We undertake no obligation to update any forward-looking statements, except as required by law. We will also reference EBITDA, EBITDA margin, and net cash or net debt, which are non-GAAP financial measures. The accompanying presentation also includes adjusted EBITDA. EBITDA margin represents EBITDA as a percentage of net sales. Net cash or net debt represents cash and cash equivalents less total debt, including finance lease liabilities. Definitions and reconciliations to the most directly comparable GAAP financial measures appear in today’s earnings release and the appendix to the accompanying investor presentation, both available in the Investor Relations section of our website at www.psiengines.com.

These measures supplement and do not replace our GAAP results. With that, I will turn the call over to Richard.

Richard Hu (Chief Executive Officer)

Thank you, Ken, and good afternoon, everybody. Welcome again to joining us here with Power Solutions Intl earnings call. This is really my very first earnings call as a Chief Executive Officer of Power Solutions Intl. Indeed today, if I look at the calendar, it marks actually my 80th day at the company. I’m again super excited and humbled to be speaking with you during the call. Before we jump into the business, first, I do want to take the chance to thank Ken Lee for taking his leadership helping the company being an interim Chief Executive Officer, and also I want to thank Ken for his partnership and also strong cooperation during the transition. Thank you very much, Ken.

Since I joined the company in August, my focus has been learning and evaluating the business as soon as I can, as fast as I can, and I did it actually with my so‑called 6P playbooks: the people, Product buses, Profit Partners, and sometimes politics. As of today, I have met actually five of our key customers across the traditional industrial oil and gas customer segment as well as the data center power customers. I have visited all today five existing production locations we have today in Illinois and Wisconsin, and also I did already two intercontinental travels meeting our key shareholders as well.

So the takeaway here is what I have found. It’s a company. Power Solutions Intl is a company with really deep engineering expertise with a strong long‑standing relationship with our customers and also, more importantly, a wide range of balanced and resilient product portfolio which I think well position us ready to pivot to embracing the new growth opportunities from either the traditional industrial oil and gas as well as to capture the new incremental growth from a data center power market.

During the past 80 days I have worked intensively and closely with our leadership team in the company. So we did have quite several rounds of the strategic sessions, workshops together. Collectively, the team of Power Solutions Intl has developed a so‑called PowerBoost 2030 initiative. This strategy and roadmap will add the company continue to pivot to the next chapter of the company history. We call it Power Solutions Intl 2.0. Power Solutions Intl 2.0 marks, in my opinion, a new era, a new journey for the company and for the organization.

Essentially what Power Solutions Intl 2.0, or PowerBoost 2030, will do for us is to transition the company from a pure player in the industrial oil and gas market into a wider branch of the portfolio covering both our traditional market as well as to capture a new incremental data center power incremental growth market. So the key word here I would emphasize is we are going to build a more balanced and resilient portfolio in which we can grow both from our heritage market as well as to capture the new incremental data center power market.

With that being said, a minor example one step forward for the company was, like last month, we launched our new refreshed corporate logo identity, which it does reflect, in my opinion, the new evolution to moving toward a more modern, more technology‑oriented company as Power Solutions Intl. Today our priorities under PowerBoost 2030 are clear: deliver the customer commitment, expanding our presence into the new rapid growth AI data center market, and also fast forward with our key initiatives. For example, we do want to reinforce our manufacturing in the U.S. That’s one of the key initiatives we are promoting. We do want to continue to deepen our commitment and investment in North America to support our customers more sustainably and with a profitable growth.

Last but not least, let me talk about VIE—so vision into the action. Me myself being a big fan of VIE, which is all about execution. Currently our team are working intensively to put the strategy into the actions internally. As of today we are focusing on shifting and optimizing our operational model, organizational structure, processes, and promoting a greater speed and agility. And also we are making a DNA reprogramming, the culture of the company.

Above all, we are pivoting to a more agile, focus‑on‑execution, deliverable organization. So now let’s turn into the Q3 big picture. Overall I believe our Q3 results reflect a strong operational performance. Net sales of $202 million increased 32.5% sequentially versus Q2 and also it’s well in line year over year. At the same quarter last year, you look at the net income, net income was growing about 8% to $29.9 million. Or you look at from a diluted earnings per share, it’s reaching about 1.3 per diluted share. We also generated a very strong cash flow in the quarter three, so we are talking about around about $34 million net cash—very strong performance.

With that being said, Ken, the CFO, will walk you through some of the details of the quarter when it comes to cash flow because there are some one‑time factors which we do not expect to recur. Talking about market and operations, I would say again in power system we see the demand from data center related products remaining strong, and that really kind of partially offset the continued softness of oil and gas revenue. The timing and the volume for the revenue from that demand remain subject to the customer scheduling, some of the manufacturing throughput, and also some of our supply chain material availability and some challenges from a supplier base as well.

So at this moment we are not predicting a specific level of the data center revenue in any near future. With that being said, we are indeed again working very intensively with our customers focusing on the 2027 order intake. When we talk about Wisconsin operations, I think the message here is our operations are continuously improving, climbing on the performance lifting pattern. We see the performance keep moving up, reduced significantly the elevated production cost, also the capacity ramping up. It’s on track, on plan, and continue. And also we expect today the relative related production cost to persist. We remain focused on the on‑time delivery for the customer, which is number one priority for Wisconsin operations.

Again if we talk about the AI data center power industry, I think the business continued to expanding rapidly demand, and also they are asking a more reliable, scalable, and efficient power solutions. We see the situations continuously accelerating at least in the middle longer term. In response, Power Solutions Intl, what we are doing today from product perspective, we are advancing the development activities in terms of the natural gas engines and the generators because this is a new, potentially a new mainstream of the demand from the industry over the past year.

So we have established a regular quarterly earnings calls. We refreshed also our investor website to improve the communications with our external investors. I think you know this pattern we are going to continuously continue and continuously improve. Our goal is to really reinforce the communication with our investors and also in parallel we continue to strengthen our balance sheet position for the next future to support the growth when we roll out PowerBoost 2030 in 2027.

We do expect we should be able to, in a better position, provide more additional perspective on our strategy and roadmap during our Q4 earnings call onwards. With that, let me turn the call to Ken Lee, our CFO, to review more details about financial results in the quarter.

Ken Lee (Chief Financial Officer)

Thank you, Richard, and good afternoon, everyone. Net sales for the third quarter of 2026 were $202.1 million, a decrease of $1.8 …million or 1% compared with the third quarter of 2025. Sequentially, net sales increased 32.5% to around $152.5 million in the second quarter. By end market, power systems sales decreased $6.2 million year over year, a significant narrowing from the $34.6 million year-over-year decline in the second quarter. The decrease primarily reflects the continued softness in oil and gas, partially offset by higher sales of data center-related products. Transportation sales decreased $1.1 million.

Industrial sales increased $5.6 million, primarily reflecting the timing of shipment of certain legacy products, and we do not expect that level of industrial sales to continue. Gross profit was $59.9 million, an increase of $11.2 million or 23% compared with the third quarter of 2025. Gross margin was 29.7% compared with 23.9% in the prior-year period. Sequentially, gross profit increased 45% and gross margin expanded 260 basis points from 27.1% in the second quarter.

The increase in gross margin compared with the third quarter of 2025 primarily reflects the benefits of the company’s operational improvement initiatives at its Wisconsin operations, which have reduced elevated production costs associated with capacity ramp-up activities supporting data center-related applications, as well as a $3.8 million tariff refund recognized as a reduction in cost of sales in the third quarter of 2026, which contributes approximately 188 basis points to gross margin, partially offset by an unfavorable year-over-year product mix resulting from lower oil and gas sales.

These initiatives focus on enhancing manufacturing efficiency, streamlining production processes, improving labor productivity, and strengthening cost controls, resulting in lower manufacturing costs and improved gross margins. Capacity ramp-up activities at the Wisconsin operation are continuing, and the company expects ramp-up production costs to persist. Gross margin remains subject to product mix, production volumes, spare parts, and other operational factors, and we do not expect the third quarter gross margin level, which included a tariff refund, to be sustained in the fourth quarter.

Research and development expenses were $5.1 million in the third quarter compared with $4.8 million in the prior-year period. The increase was primarily driven by higher expansion to support new programs in 2026. Selling, general and administrative expense was $13.7 million, a decrease of $1.6 million or 10% compared with the third quarter of 2025. The decrease reflects certain prior-year expenses tied to customer relationship improvement initiatives, partially offset by higher costs supporting our data center goals.

As a percentage of sales, SG&A was 6.8% compared with 7.5% in the prior-year period on a GAAP basis. Net income as a percentage of net sales was 14.8% compared with 13.5% in the prior-year period and 11.1% in the second quarter. EBITDA, a non-GAAP measure, was $42.7 million compared with $29.8 million in the prior-year period. EBITDA margin was 21.1% compared with 14.6%. On a sequential basis, EBITDA increased 66% from $25.7 million in the second quarter and EBITDA margin improved 420 basis points from 16.9%.

EBITDA includes the $3.8 million tariff refund discussed earlier. Operating income was a record $40.9 million, including the $3.8 million tariff refund, an increase of $12.5 million or 44% compared with the third quarter of 2025. Operating margin expanded to 20.2% from 13.9%. Interest expense was $1.0 million compared with $1.6 million in the prior-year period, primarily due to a lower average debt balance. Income before income taxes increased 50% to $40.1 million.

Income tax expense was $10.2 million compared with an income tax benefit of $0.9 million in the third quarter of 2025. The prior-year period included $7 million, or $0.30 per diluted share, tax benefits from the release of a valuation allowance on deferred tax assets. Our effective tax rate was approximately 25.3% in the third quarter. Net income for the third quarter was $29.9 million, or $1.30 per diluted share, compared with $27.6 million, or $1.20 per diluted share, in the third quarter of 2025, which included the $0.30 per diluted share valuation allowance release I just mentioned.

Turning to cash flow, we generated $40.9 million of operating cash flow in the third quarter compared with $3.3 million in the prior-year period. For the first nine months of 2026, operating cash flow was $116.6 million compared with $28.7 million in the first nine months of 2025. Capital expenditures were $2.6 million in the third quarter. Strong cash flow enabled us to reduce total debt by approximately $34.9 million during the quarter, from $72.6 million at June 30 to $37.7 million at September 30, which includes $35 million of borrowings under our new revolving credit facility.

With $72 million of cash and cash equivalents, we ended the quarter with net cash of approximately $34 million compared with net debt of approximately $55 million at the end of 2025. In October 2026, the company made payments totaling $20 million under its revolving credit agreement, and as of today the outstanding balance under the revolving credit agreement is $15 million. In September we closed a new three-year, $220 million committed revolving credit facility.

It increased our committed borrowing capacity from $135 million and matures in September 2029. Borrowings bear interest at SOFR plus 180 basis points, compared with SOFR plus 260 basis points on our prior facility, which was paid in full and terminated at closing. This is an 80 basis point reduction in our borrowing spread. We appreciate the support of our banking partners and their confidence in Power Solutions Intl. Our balance sheet is solid, and we believe our liquidity position is sufficient to fund the working capital and the capital investments required as larger power systems orders move through production.

Turning to our outlook, based on our current production schedule and the information available today, we are raising our outlook. We now expect the second half 2026 net sales to exceed second half 2025 net sales as larger power systems orders move into production and are recognized as revenue. That compares with our prior expectation for second half sales to be approximately in line with the second half of 2025. The timing, volume and mix of shipments, including customer orders, remain subject to customer scheduling, manufacturing, spare parts, supply chain factors, and other variables, including current material availability constraints affecting certain planned fourth quarter deliveries. There can be no assurance that orders will convert to revenue in any particular quarter.

Looking ahead to the fourth quarter, gross margin is expected to decline from the third quarter because the $3.8 million tariff refund, which contributes approximately 188 basis points to third quarter gross margin, is not expected to recur. In addition to that effect, we expect a modest further reduction in gross margin, primarily reflecting a less favorable product mix. Softness in demand within the oil and gas market is set to continue, but we expect it to be approximately offset for full year 2026 by higher sales of data center products, subject to customer contracting and recognition of the associated revenue.

By year-end, data center products generally carry lower gross margin than oil and gas products. We anticipate continued benefits from our operational improvement initiatives, particularly at our Wisconsin facilities. However, continuing ramp-up costs, material availability constraints, production volume, and year-end adjustments, including those arising from inventory counts, may adversely affect gross margin and result in margin below our current expectation.

Finally, we expect to provide additional perspectives on 2027 with our fourth quarter results. With that I will turn the call back to Rachel.

Richard Hu (Chief Executive Officer)

Thank you, Ken. So finally, in closing with today’s statement, I do have three key takeaways here from my side. Firstly, I would say our operational improvement—we are delivering. If you look at our Wisconsin operational team, I would say the team is keeping up with their strong momentum, the good work to continue improving our operational performance and also ramp up the capacity. Bottom line, we are on track with that improvement plan. Secondly, I will say, like Pam mentioned before, we do have strong financial firepower prepared to invest in our growth in the future. Today the growth is, you know, strong cash flow generation and also the newly agreed, settled credit facility. It does give us a solid financial foundation and also the flexibility to deliver to our customers, to invest in the growth initiatives that will define PSI 2.0.

Thirdly, I also see, you know, again we are very well prepared with our balanced and resilient product portfolio and customer mix. So here please again, the key word from my side is balanced and resilient, right? When it comes to our product portfolio and customer mix, what that means is we do believe while we are continuously maintaining our traditional foundation of the business—industrial, oil and gas—in the meanwhile we also try to work very hard to capture the new incremental data center power growth market as well.

So overall, PSI again is at a pivotal point. Today we are going to evolve from a pure player of the traditional industrial oil and gas maker, becoming, again, a balanced and resilient wider-range power solution provider, and we are going to work on our journey with two legs—again, with our traditional industry, oil and gas, but also the new incremental data center power market in North America. The new Power Boost 2030 will pave the road for the company and will empower our journey ahead.

Thank you. And with that, operator, I think we are ready to open the line for Q&A.

OPERATOR

Thank you. At this time we will conduct the question and answer session. As a reminder, to ask a question, you will need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Eric Stein of Craig-Hallum Capital Group. Your line is now open.

Eric Stein (Analyst)

Hi everyone. Thanks for taking the questions. Hey. Hello. Maybe just touching on your ’26 outlook to start. And I know that, you know, it’s quite high level and you have increased it, but, you know, could you talk a little bit about just the moving pieces there? You’ve got oil and gas still depressed, the enclosure business, you know, you’ve still made a lot of progress but still in ramp-up mode. I’m just trying to get a little context as to what the potential magnitude or the puts and takes could be dictating how much improvement you could see over 2H’25.

Ken Lee (Chief Financial Officer)

So, Eric, as we mentioned, we raised our outlook for the second half, and previously we said it’s flat versus last year. Now we say the second half will be higher than last year, and just for the 3Q, it’s about 32.5% sales increase versus 2Q. So for the oil and gas, I would say it’s stabilizing, okay. But definitely we expect to see higher sales for data center products, and this reflects our current production schedule and also the higher expected shipments of the data center products in the fourth quarter.

On the enclosure side of the business in Wisconsin, we are making improvements in the operation, productivity, and efficiency. Definitely we see growth for the enclosure side of the business, plus the genset business to support the data center. And I will not give you a kind of quantitative number—what’s the percentage increase versus last year—but definitely, you know, we expect it will exceed the second half last year.

Eric Stein (Analyst)

Okay, well, maybe now you’re just sticking with the Wisconsin operations now that you’re, you know, it’s basically been a year, or a little under a year, since you undertook that. You’ve been making progress and it’s been ramping. You know, as you look at that and as you look at where the demand is trending and obviously continues to grow, is there a current view on whether you need more capacity in Wisconsin, or given the efficiency improvement that you’ve made in that current footprint, that that’s more than sufficient, at least for the time being.

Ken Lee (Chief Financial Officer)

So for Wisconsin, as you know, we increased our footprint pretty significantly. Right. We used to have like 150,000 square feet; now it’s about 800,000 square feet, and the facility is used for warehouse, and we see strong demand for our products. And definitely we think at the current time we don’t think we need to lease more facility to support the demand, and we are more focusing on operational excellence improvements to increase our capability to support the high demand for the enclosure business.

Richard Hu (Chief Executive Officer)

Yeah, just building on—this is Richard speaking, Eric—just building on what Ken mentioned. Again, with my 80 days at the company, I would agree with what Ken mentioned. Right. I think today the opportunity from Wisconsin, enclosure, it’s rather an internal, continuously lifting improvement on operational performance, improvement on the OEE productivity, rather than any additional expansion whatsoever. I think the current team—we are working closely with our enclosure team, monitoring week by week how they are doing.

Are they on track for the capacity ramping up? Are they on track for the productivity improvement? That’s exactly where the laser focus is, Eric.

Eric Stein (Analyst)

Okay, maybe last one for me. You just mentioned looking at, on the power gen side, natural gas, and I know to this point it’s predominantly been diesel. So what do you kind of think of that—how that market’s developing, what the overall opportunity might be?

Richard Hu (Chief Executive Officer)

Yeah, I mean, if I may answer your question, I feel overall we are seeing the data center power market remains strong. Right. We see over the past maybe 24 to 48 hours there has been some bumpy dynamics because of the midterm election whatsoever, but nevertheless we remain bullish with the mid-to-long term, this mega wave of the data center compute demand. That’s our foundational perspective. With that being said, we do see, I think, a new trend from the industry will be kind of shifting. The major demand, or incremental demand, will be shifting from, let’s say, the standby diesel. Gradually, more and more incremental demand will be shifted to the natural gas prime power or bridge power. We hear that from our customer, and we see that overall it is kind of a trend today, Eric.

Eric Stein (Analyst)

Okay, thank you.

Richard Hu (Chief Executive Officer)

And by the way, before I forget, if you look at our engineering organization focus, that’s exactly where we are allocating, tremendously, the incremental resources—developing and engineering the natural gas genset—prepared for this upcoming incremental growth.

OPERATOR

Thank you. As a reminder, to ask a question you will need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we continue to compile the Q and A roster. Okay, I am seeing no further questions at this time. So I would now like to turn the conference call back over to Richard Hu, the CEO, for the closing remarks for this conference today.

Richard Hu (Chief Executive Officer)

All right, thanks, Grace. And again, from my side and the whole Power Solutions Intl leadership team, I want to thank everybody’s interest to participate in the Q3 earnings call today. As we just mentioned, I think we are excited. We are in the beginning of a new journey, a new era. Please stay tuned, and more to come. Thank you. Thanks, everybody.

OPERATOR

Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.