The following discussion and analysis includes forward-looking statements about the Company’s business and consolidated results of operations for the three and six months ended June 30, 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.
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Net sales by geographic area and by end market for the three and six months ended June 30, 2026 and 2025 are presented below:
(in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30,
2026 2025 2026 2025
Geographic Area % of Total % of Total % of Total % of Total
United States $ 142,962 94 % $ 178,944 93 % $ 259,662 92 % $ 306,600 94 %
North America (outside of United States) 4,904 3 % 6,268 3 % 10,445 4 % 10,281 3 %
Pacific Rim 3,190 2 % 5,647 3 % 7,988 3 % 8,428 2 %
Europe 1,365 1 % 851 1 % 2,914 1 % 1,822 1 %
Others 123 — % 197 — % 127 — % 222 — %
Total $ 152,544 100 % $ 191,907 100 % $ 281,136 100 % $ 327,353 100 %
(in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30,
2026 2025 2026 2025
End Market % of Total % of Total % of Total % of Total
Power Systems $ 122,348 80 % $ 156,963 82 % $ 218,839 78 % $ 263,610 81 %
Industrial 26,846 18 % 29,874 16 % 53,403 19 % 53,387 16 %
Transportation 3,350 2 % 5,070 2 % 8,894 3 % 10,356 3 %
Totals $ 152,544 100 % $ 191,907 100 % $ 281,136 100 % $ 327,353 100 %
Recent Trends and Business Outlook
Sales declined in the second 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. The Company expects that 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 the current production schedule and information available as of the date of this release, the Company expects second-half 2026 sales to exceed first-half 2026 sales and to be 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
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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.
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Results of Operations
Condensed consolidated results of operations for the three and six months ended June 30, 2026, compared with the three and six months ended June 30, 2025 (UNAUDITED):
(in thousands, except per share amounts) For the Three Months Ended June 30, For the Six Months Ended June 30,
2026 2025 Change % Change 2026 2025 Change % Change
Net sales(to related parties $10 and $402 for the three months ended June 30, 2026 and 2025, respectively, $19 and $865 for the six months ended June 30, 2026 and 2025, respectively) $ 152,544 $ 191,907 $ (39,363) (21) % $ 281,136 $ 327,353 $ (46,217) (14) %
Cost of sales(derived from related party net sales $3 and $271 for the three months ended June 30, 2026 and 2025, respectively, and $8 and $587 for the six months ended June 30, 2026 and 2025, respectively) 111,176 137,824 (26,648) (19) % 210,344 232,976 (22,632) (10) %
Gross profit 41,368 54,083 (12,715) (24) % 70,792 94,377 (23,585) (25) %
Gross margin % 27.1 % 28.2 % (1.1) % 25.2 % 28.8 % (3.6) %
Operating expenses:
Research and development expenses 5,051 4,615 436 9 % 9,856 8,859 997 11 %
Research and development expenses as a % of sales 3.3 % 2.4 % 0.9 % 3.5 % 2.7 % 0.8 %
Selling, general and administrative expenses 12,117 16,680 (4,563) (27) % 25,095 27,789 (2,694) (10) %
Selling, general and administrative expenses as a % of sales 7.9 % 8.7 % (0.8) % 8.9 % 8.5 % 0.4 %
Amortization of intangible assets 280 306 (26) (8) % 529 613 (84) (14) %
Total operating expenses 17,448 21,601 (4,153) (19) % 35,480 37,261 (1,781) (5) %
Operating income 23,920 32,482 (8,562) (26) % 35,312 57,116 (21,804) (38) %
Other expense (income), net:
Interest expense (from related parties of $0 and $219 for the three months ended June 30, 2026 and 2025, respectively, and $0 and $634 for the six months ended June 30, 2026 and 2025, respectively) 1,570 1,700 (130) (8) % 3,315 3,466 (151) (4) %
Other expense (income), net (122) (295) 173 NM (208) (295) 87 NM
Total other expense, net 1,448 1,405 43 3 % 3,107 3,171 (64) (2) %
Income before income taxes 22,472 31,077 (8,605) (28) % 32,205 53,945 (21,740) (40) %
Income tax expense (benefit) 5,611 (20,135) 25,746 NM 8,044 (16,349) 24,393 NM
Net income $ 16,861 $ 51,212 $ (34,351) (67) % $ 24,161 $ 70,294 $ (46,133) (66) %
Earnings per common share:
Basic $ 0.73 $ 2.23 $ (1.50) (67) % $ 1.05 $ 3.06 $ (2.01) (66) %
Diluted $ 0.73 $ 2.22 $ (1.49) (67) % $ 1.05 $ 3.05 $ (2.00) (66) %
Non-GAAP Financial Measures:
Adjusted net income * $ 17,971 $ 51,769 $ (33,798) (65) % $ 25,976 $ 71,004 $ (45,028) (63) %
Adjusted net income per share – diluted* $ 0.78 $ 2.24 $ (1.46) (65) % $ 1.13 $ 3.07 $ (1.94) (63) %
EBITDA * $ 25,723 $ 34,108 $ (8,385) (25) % $ 38,893 $ 60,024 $ (21,131) (35) %
Adjusted EBITDA * $ 26,833 $ 34,665 $ (7,832) (23) % $ 40,708 $ 60,734 $ (20,026) (33) %
NM Not meaningful
*Non-GAAP measurement, see reconciliation below
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Net Sales
Net sales decreased $39.4 million, or 21%, during the three months ended June 30, 2026, compared to the three months ended June 30, 2025, as a result of lower sales of $34.6 million, $3.0 million and $1.7 million in the power systems, industrial and transportation end markets, respectively. Net sales decreased $46.2 million, or 14%, during the six months ended June 30, 2026, compared to the six months ended June 30, 2025, as a result of lower sales of $44.8 million and $1.5 million in the power systems end market and transportation end markets, respectively. During both three and six months ended June 30, 2026, sales in the power systems end market declined primarily due to uneven order patterns and shipment timing for data center-related products, together with softness in oil and gas markets. The Company continues to see strong demand for data center power solutions. However, the timing and ultimate volume of revenue recognized from that demand 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. Based on the current production schedule, the Company expects second-half 2026 sales to exceed first-half 2026 sales as larger Power Systems orders move into production, although shipment timing and quarterly results may continue to vary.
Gross Profit
Gross profit decreased during the three months ended June 30, 2026 by $12.7 million, or 24%, compared to the three months ended June 30, 2025. Gross margin was 27.1% and 28.2% during the three months ended June 30, 2026 and 2025, respectively. Gross profit decreased during the six months ended June 30, 2026 by $23.6 million, or 25%, compared to the six months ended June 30, 2025. Gross margin was 25.2% and 28.8% during the six months ended June 30, 2026 and 2025. During both the three and six months ended June 30, 2026, 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 420 basis points compared with the first quarter of 2026. The improvement reflected in part the early benefits of the Company’s ongoing operational improvement efforts in Wisconsin and was partially offset by unfavorable product mix in the second 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 June 30, 2026 and 2025 were $5.1 million and $4.6 million, respectively. Research and development expenses during the six months ended June 30, 2026 and 2025 were $9.9 million and $8.9 million, respectively. During the three and six months ended June 30, 2026, the increase of $0.4 million and $1.0 million, respectively, 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 $12.1 million during the three months ended June 30, 2026, a decrease of $4.6 million, or 27%, compared to the three months ended June 30, 2025. SG&A expenses were $25.1 million during the six months ended June 30, 2026, an decrease of $2.7 million, or 10%, compared to the six months ended June 30, 2025. During both three and six months ended June 30, 2026, the decrease was primarily attributable to lower compensation expense related to the revaluation of previously awarded SARs, lower costs associated with employee incentive programs, partially offset by incremental selling and administrative expenses associated with MTL Manufacturing and Equipment in the first quarter.
Interest Expense
Interest expense was $1.6 million for the three months ended June 30, 2026, as compared to $1.7 million for the three months ended June 30, 2025. Interest expense was $3.3 million for the six months ended June 30, 2026, as compared to $3.5 million for the six months ended June 30, 2025. During both three and six months ended June 30, 2026, interest expense decreased largely due to overall lower effective interest rates. See Note 7. Debt, included in Part 1, Item 1. Financial Statements, for additional information.
Income Tax (Benefit) Expense
The Company recorded income tax expense of $5.6 million for the three months ended June 30, 2026, as compared to income tax benefit of $20.1 million for the same period in 2025. Pretax income was $22.5 million for the three months ended June 30, 2026, compared to $31.1 million for the same period in 2025. The Company recorded income tax expense of $8.0 million for the six months ended June 30, 2026, as compared to income tax benefit of $16.3 million for the same period in 2025. Pretax income was $32.2 million for the six months ended June 30, 2026, compared to $53.9 million for the same period in 2025. During both the three and six months ended June 30, 2026, the change from an income tax benefit in 2025 to an income tax
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expense in 2026 was primarily attributable to the release of the majority of the Company's valuation allowance during the second quarter of 2025, which did not recur in 2026.
See Note 12. 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.
Non-GAAP Financial Measure Comparable GAAP Financial Measure
Adjusted net income Net income
Adjusted net income per share – diluted Net income per share – diluted
EBITDA Net income
Adjusted EBITDA Net income
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 six months ended June 30, 2026 and 2025:
(in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30,
2026 2025 2026 2025
Net income $ 16,861 $ 51,212 $ 24,161 $ 70,294
Stock-based compensation 1 430 154 854 307
Severance and executive recruiting 2 366 403 500 403
Other legal matters 3 314 — 461 —
Adjusted net income $ 17,971 $ 51,769 $ 25,976 $ 71,004
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The following table presents a reconciliation from Net income per share – diluted to Adjusted net income per share – diluted for the three and six months ended June 30, 2026 and 2025:
For the Three Months Ended June 30, For the Six Months Ended June 30,
2026 2025 2026 2025
Net income per share – diluted $ 0.73 $ 2.22 $ 1.05 $ 3.05
Stock-based compensation 1 0.02 — 0.04 —
Severance and executive recruiting 2 0.02 0.02 0.02 0.02
Other legal matters 3 0.01 — 0.02 —
Adjusted net income per share – diluted $ 0.78 $ 2.24 $ 1.13 $ 3.07
Diluted shares (in thousands) 23,072 23,067 23,067 23,064
The following table presents a reconciliation from Net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2026 and 2025:
(in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30,
2026 2025 2026 2025
Net income $ 16,861 $ 51,212 $ 24,161 $ 70,294
Interest expense 1,570 1,700 3,315 3,466
Income tax expense (benefit) 5,611 (20,135) 8,044 (16,349)
Depreciation 1,401 1,025 2,844 2,000
Amortization of intangible assets 280 306 529 613
EBITDA 25,723 34,108 38,893 60,024
Stock-based compensation 1 430 154 854 307
Severance and executive recruiting 2 366 403 500 403
Other legal matters 3 314 — 461 —
Adjusted EBITDA $ 26,833 $ 34,665 $ 40,708 $ 60,734
1.Amounts reflect non-cash stock-based compensation expense for the three and six months ended June 30, 2026 and 2025.
2.Amounts include severance expense of less than $0.1 million and $0.1 million for the three and six months ended June 30, 2026 and 2025, respectively, as well as executive recruiting expense of $0.4 million for each period presented.
3.Amounts include legal settlements for the three and six months ended June 30, 2026.
Cash Flows
Cash was impacted as follows:
(in thousands) For the Six Months Ended June 30,
2026 2025 Change % Change
Net cash provided by operating activities $ 75,724 $ 25,474 $ 50,250 197 %
Net cash used in investing activities (14,647) (5,428) (9,219) (170) %
Net cash used in financing activities (31,502) (25,419) (6,083) (24) %
Net increase (decrease) in cash, cash equivalents, and restricted cash $ 29,575 $ (5,373) $ 34,948 *NM
Capital expenditures $ (2,736) $ (5,439) $ 2,703 50 %
Cash Flows for the Six Months Ended June 30, 2026
Cash Flow from Operating Activities
Net cash provided by operating activities was $75.7 million for the six months ended June 30, 2026, compared to $25.5 million for the six months ended June 30, 2025, representing an increase of $50.3 million in cash provided by operating activities year-over-year. The increase occurred despite a decrease in net income of $46.1 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
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impacts were partially offset by increased uses of cash related to accrued expenses and accounts payable during the six months ended June 30, 2026 compared to June 30, 2025.
Cash Flow from Investing Activities
Net cash used in investing activities was $14.6 million for the six months ended June 30, 2026, compared to cash used in investing activities of $5.4 million for the six months ended June 30, 2025. For the six months ended June 30, 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 $31.5 million in cash from financing activities for the six months ended June 30, 2026, compared to $25.4 million cash used by financing activities for the six months ended June 30, 2025. The cash used by financing activities for the six months ended June 30, 2026 was primarily due to paydown of $30.0 million on the Revolving Credit Agreement, payoff of the SBA loan, and 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 June 30, 2026, the Company’s total outstanding debt obligations under the Revolving Credit Agreement, finance leases and other debt, were $72.6 million in the aggregate, and its cash and cash equivalents were $70.1 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 June 30, 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 six months ended June 30, 2026, there were no significant changes in the application of critical accounting policies.
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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.
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