Power Solutions International, Inc. ($PSIX)

Good afternoon, and welcome to Power Solutions International First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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, and welcome to Power Solutions International's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Dino Xykis, Chief Executive Officer; Ken 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 margins, the cost, pace and outcome of capacity ramp-up activities at our Wisconsin operations, 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, and 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 Ken 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 Ken will describe in more detail, our first quarter results were below the strong prior year period, which had benefited 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 the capacity ramp-up in our Wisconsin operation. At the same time, demand related to data center application remains 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 update 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 continued softness in the oil and gas market. These declines were partially offset by growth in our industrial and transportation end markets. Gross profit for the quarter was $29.4 million compared to $40.3 million in the prior year, and 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. So 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 raised to that ramp-up to persist with the trajectory of any further sequential improvement subject to product mix, slow cost and other operational factors. Operating expense were $18 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 growth. 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 the 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. However, 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 the 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.

[Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum Capital Group.

I'm wondering, so on Q1, if you're able to, could you just give a little detail on specifically Power Systems and maybe not exact, but talk about kind of the contribution from oil and gas. 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 and then also view that you are ramping up the enclosure business. And then curious what that enclosure business, are you expecting more of a ramp-up in Q2? What kind of goes into your Q2 view as well?

So Eric, for the Power Systems, the 1Q sales is about $96 million and versus last year, like $107 million. And as we mentioned, we start to notice the softness in the oil and gas later last year, right? And this softness extended to 1Q this year. So most of the sales decrease this quarter versus last year 1Q is driven by the Power Systems, the oil and gas, the softness and also the uneven customer demand for other data center-related products. So we -- right now, in the near term, we still assume that oil and gas will remain soft throughout the year. And if there's some pickup, definitely, it will be favorable for the sales and also margin perspective, right? Now for the Wisconsin operation, the company adding resource to support the Wisconsin operation, and we are doing a lot of process improvements, time study. We see some notable improvements in the cost structure, labor overhead in the manufacturing cost if we compare this quarter versus 4Q last year. And the improvement is also reflected in our margin -- gross margin improvement, 100 basis points this quarter versus last quarter, right? Now for the orders regarding to the data center products, as we indicated in the press release, we anticipate strong activity in the second half and this is based on some order we already received. So now we expect the second half sales will be the same level as we had last year for the second half. But again, the actual shipment timing and volume is subject to the customer schedule, our slow cost and also the supply chain, right?

Yes. No, of course. So then if I think about second quarter, I mean, are you -- because obviously, you're coming out of this period where you're now starting to ramp up the enclosure business after doing -- you've got a number of ongoing improvements, so I get that. But if you're looking for a flat sequential quarter, looking for Enclosure growth, I mean, that would imply that you are expecting further weakening of oil and gas in Q2. Curious if that is your intention or -- because I mean, it sounds like you haven't really seen an improvement there and don't expect to even if oil is certainly has appreciated given what's going on in the Middle East, but it sounds like you don't necessarily think that, that has a positive impact anytime soon.

You're right, Eric. Even though the oil price is very high, and we are not seeing a significant ordering for oil and gas products. So for the second quarter, we expect it will be the same level as Q1.

Okay. I may have missed it, but 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 then expect continued improvement throughout the year. And I'm not sure if you gave any indications of the magnitude.

So the 1Q gross margin, 22.9% and the 4Q was 21.9%. So it's about 100 basis point improvement, right? But we -- as I said, we did see some notable improvements for our Wisconsin operation. And going forward, we expect the gross margin will be flat or slightly better than 1Q. Again, this is also subject to the product mix and also our cost structure improvement. And the 1Q, the gross margin was kind of negatively impacted by product mix. Usually, our oil and gas products carry a high gross margin. So this is impacted by the oil and gas also for the 1Q.

Okay. Last one for me. Just curious, I mean, I know you're about a quarter in or a little bit over, but just would love some thoughts on the MTL acquisition, some of the benefits you're seeing, why you did it? I mean, it's pretty straightforward, but I would just love you to kind of give your thoughts on that acquisition in its early days.

Sure. So we completed the MTL acquisition on January 9 this year. And MTL specialized in fabrication, welding, painting and assembly of metal components, and it also make the data center parts. And MTL has been PSI supplier for a long time, more than 10 years. They have been supplying us the fuel tank, right? And this acquisition definitely help us to vertically integrate our supply chain, help us to reduce the lead time and also PSI can have access to its UL certification. So since the acquisition, the integration is underway, and we are exploring different opportunities to leverage the MTL asset base. to help us to do other fabrication for the data center with the components. So the revenue contribution from MTL is expected to be pretty modest in 2026. And in the near term, the team focus will be on the operational execution, slow part coloration and production consistency.

Our next question comes from the line of Alan Lau with Jefferies,

So I would like to understand more on the growth outlook, especially from the Enclosure business as the company ramps up the production. So I 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?

Thank you, Alan. So Alan, we serve our customer mainly in 3 kind of industry end markets, basically industrial power system and also transportation. And for the power system, we provide the products, microgrid, standby power, prime power and also data center-related products like Enclosure. So in our financial statements, we do not break down the sales related to the Enclosure business. So it's within our power system in the power system, the end user market. So we will say, we received some orders from our customer, and we anticipate strong activity in the second half of the year, and we expect the second half sales will be at the level we had in second half last year, right? And we still have some pretty solid demand from our customers, our products. And certainly, as I said, the actual shipment timing and the volume still subject to the customer schedule and our capability, how successful we can convert the orders to sales.

Understood. So I'd like to follow up on oil and gas because -- so you mentioned that you expect second half of the revenue will be similar to last year. So I 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. So are you -- do you mean you expect second half revenue is approximately at $4 billion level?

So the second -- right now, our kind of general outlook in the second half sales will be similar last year second half, right, because we anticipate a strong demand for our products and activity in the second half, right? So that's our outlook, based on the orders we have right now from our customer and also our forecast.

So what's the mix of oil and gas in second half last year?

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

We have never provided that, that split. It's under policies, yes.

So then I would like to know if -- like any major clients that -- I understand maybe 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.

Yes. We do not provide information on any specific customers, yes.

Understood. So would you share the update on gas engine because I think this gas engine for prime power is an upcoming trend. So I wonder if you might share updates on that front.

Yes. So the PSI, we provide a very broad portfolio of engines, right, starting from 1-liter all the way to 88-liter and 110-liter, and we are using multiple fuel cells such as gas, propane, gasoline, diesel and biofuel. So we spend R&D to develop the products, right? For the 1Q, we spent about $4.8 million, and we continue to spend R&D to develop new products and emission certification, and also develop a special application for our customers, right? So what I say is there are definitely activities going on, on the gas side. And we are working to develop the products to meet the industry demand. That's what we are doing. And I will say the current -- we have a lot of current engineering activity includes ongoing work related to the emission compliance, thermal management, packaging optimization and all kind of customer-specific application requirements. And we're also doing R&D to develop a larger diesel engine for the data center market.

So by bigger diesel engines, I wonder if it's above 3 megawatts.

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

I wonder if the bigger diesel engines are above the typical 2 to 3 megawatts.

So I think right now, we have 88-liters. It's above 3 megawatts, yes.

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