Power Solutions International, Inc. Common Stock 2026 Q2 Earnings Call

Sir, please go ahead. Good afternoon, and welcome to Power Solutions International second quarter 2026 earnings conference call.

I'm Ken Janke, Vice President and Corporate Controller, and joining me today is Ken Lee, our Interim Chief Executive Officer and Chief Financial Officer. Before we begin, I would like to remind everyone that today's prepared remarks and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 systems orders into revenue, including data center-related orders, quarterly variability in product mix, and the corresponding effect on gross profit and gross margin. The cost, pace, throughput, and operational outcomes of capacity ramp-up activities at our Wisconsin operations.

Our ability to execute operational improvement initiatives. The level and persistence of customer demand, including demand conditions in the oil and gas end market. Supply chain and component availability. Integration of recent acquisitions, including MTL Manufacturing & Equipment. 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 and other legal or regulatory matters. Additional information concerning factors that could cause actual results to differ materially is contained in the cautionary language in today's earnings release and in the factors and other cautionary disclosures in our most recent Form 10-K, subsequent 10-Qs, 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 and at sec.gov. We undertake no obligation to update any forward-looking statements except as required by law.

We will also reference certain non-GAAP financial measures in today's call. EBITDA margin represents EBITDA as a percentage of net sales. A definition of EBITDA and a reconciliation to net income appear in today's earnings release, which is available in the investor relations section of our website. With that, I will turn the call over to Ken.

Thank you, Ken, and good afternoon, everyone. Thank you for joining us. Before we reveal the second quarter results, I would like to briefly address the leadership transition we announced on July 27th. Richard Hu will become PSI's Chief Executive Officer on August 17th. Richard brings more than 25 years of global industrial leadership experience, including six years at BorgWarner. Most recently as Vice President and General Manager of the Americas region for its turbo and thermal technology business units, where he led a $multi-billion operation and a global team of approximately 3,900 employees across the United States, Mexico, and Brazil. We look forward to welcome him and working with him as PSI continues to execute its strategy. I will continue to serve as interim Chief Executive Officer until Richard begins and will continue as Chief Financial Officer following the transition.

Now let me turn to our second quarter results. To clear financials, before I walk through the detailed financials, I want to briefly run the quarter. On a sequential basis, the second quarter showed meaningful improvements in several key metrics. Sales of $152.5 million increased 18.6% from the first quarter, and the gross margin improved approximately 420 basis points to 27.1% from 22.9%. The gross margin improvements reflect in part the early benefits of our ongoing operational improvement efforts in Wisconsin and was partially offset by unfavorable product mix. Strong operating cash flow also enabled us to reduce total debt by approximately $30.8 million during the quarter.

Compared to the second quarter of 2025, net sales reflects the timing of certain power systems shipments and a softer demand in our oil and gas business. Gross margin reflects a low mix of oil and gas products, together with elevated production costs associated with capacity ramp-up activities at our Wisconsin operations. Year-over-year comparisons in net income were also significantly affected by our non-recurring $29.2 million, or $1.27 per diluted share, tax benefits in the prior year period related to the release of our valuation allowance. Demand for our data center power solutions remains strong. Based on our current production schedule, we expect the second half 2026 sales to exceed the first half 2026 sales as larger power systems orders move into production.

Although shipment timing and quarterly results may vary, the remainder of our remarks will cover results by end markets, gross margin drivers, operating expense, cash flow and balances, and updates on MTL and our outlook. Net sales for the second quarter of 2026 were $152.5 million, a decrease of $39.4 million, or 21%, compared to the second quarter of 2025. Sequentially, sales increased 18.6% from the first quarter of 2026, exceeding our prior expectation that the second quarter revenue would be generally consistent with the first quarter. The year-over-year decrease was primarily driven by lower sales of $34.6 million in the power systems end markets, $3.7 million in the industrial end markets, and $1.7 million in the transportation end markets. Within our power systems end markets, the year-over-year decline primarily reflects the uneven order patterns and the shipment timing for data center-related products.

Together with continued softness in our oil and gas business, we continue to see strong demand for our data center power solutions. Based on our current production schedule, we expect the second half 2026 sales to exceed the first half 2026 sales as larger power systems orders move into production and are recognized as revenue. At the same time, the timing and ultimate volume of revenue recognized from that demand remains subject to customer scheduling, manufacturing flow paths, supply chain factors, and other variables, and we are not predicting any specific level of data center revenue in any future period. Gross profits for the second quarter of 2026 was $41.4 million compared to $54.1 million in the second quarter of 2025. Gross margin was 27.1% in the quarter, compared to 28.2% in the prior year period.

On a sequential basis, gross margin improved approximately 420 basis points from 22.9% in the first quarter to 27.1% in the second quarter. The improvements reflect, in part, the early benefits of our ongoing operational improvement efforts in Wisconsin and was partially offset by unfavorable product mix in the quarter. We are encouraged by that progress. For the first half of 2026, gross margin was 25.2%. I want to be clear about the outlook on gross margin. Our capacity ramp-up activities in Wisconsin are continuing, and we expect rates to elevate the production costs to persist. The trajectory of any future sequential improvements will depend on product mix, flow paths, and other operational factors. We are not providing a specific gross margin outlook for 2026 at this time.

Over the longer term, our goal is to focus on business opportunities that can support gross margin at or around the 25% level. Research and development expense were $5.1 million in the second quarter compared to $4.6 million in the prior year period. 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 admin expense were $12.1 million in the second quarter, a decrease of $4.6 million, or 27%, compared to the second quarter of 2025. The decrease was primarily attributable to lower compensation expense related to the revaluation of previously awarded stock appreciation rights, as well as lower costs associated with employee incentive programs, partially offset by incremental selling and administrative expense associated with MTL Manufacturing & Equipment. Total operating expense was $17.4 million in the quarter.

Operating income was $23.9 million compared to $32.5 million in the second quarter of 2025. Interest expense was $1.6 million in the second quarter, compared to $1.7 million in the prior year period, reflecting lower overall effective interest rates. Income tax expense was $5.6 million in the second quarter of 2026, compared to an income tax benefit of $20.1 million in the prior year period. As I noted, as the offset, the prior year second quarter included a $29.2 million, or a $1.27 per diluted share, non-recurring tax benefit related to the release of a valuation allowance on deferred tax assets. That one-time benefit is the primary driver of the significant year-over-year difference in net income, and investors should keep that context in mind when reading the year-over-year comparison.

Net income was $16.9 million, or $0.73 per diluted share in the second quarter of 2026, compared to net income of $51.2 million, or $2.22 per diluted share. In the second quarter of 2025, on a sequential basis, net income increased $9.6 million and diluted earnings per share more than doubled from the first quarter. EBITDA for the second quarter was $25.7 million, compared to $34.1 million in the prior year period. EBITDA margin was 16.9% compared to 17.8% in the prior year period. On a sequential basis, EBITDA nearly doubled from $13.2 million in the first quarter, while EBITDA margin improved 670 basis points from 10.2% to 16.9%. The sequential increase reflects the higher sales and gross profit in the second quarter, together with lower operating expense.