POWER SOLUTIONS INTERNATIONAL INC

Previous wording

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, 2024 and 2023, 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.

Current wording

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, 2024 and 2023, 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.

Previous wording

Net sales by geographic area and by end market for thethree months ended March 31, 2024 and 2023 are presented below:

Current wording

Net sales by geographic area and by end market for the three and six months ended June 30, 2024 and 2023 are presented below:

Previous wording

Despite the recent recovery of the global economy, there continues to be challenges based on the current macroeconomic and geopolitical environment. Average crude oil prices reached the highest average price in five years in 2022 but has steadily declined while remaining near atop the 5-year averages at the end of the first quarter 2024. Rig counts in the U.S. oil markets remain below historical levels as of the first quarter of 2024. Despite increasing rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market that it participates in remains below historical levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2023, as compared to the prior year, sales remain below historic levels. A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. The Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible. 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.

Current wording

Despite the recent recovery of the global economy, there continues to be challenges based on the current macroeconomic and geopolitical environment. Average crude oil prices reached the highest average price in five years in 2022 but have steadily declined while remaining near atop the 5-year averages at the end of the second quarter 2024. Rig counts in the U.S. oil markets remain below historical levels as of the second quarter of 2024. Despite increasing rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market that it participates in remains below historical levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2023, as compared to the prior year, sales remain below historic levels. A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. The Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible. 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.

Previous wording

Results of operations for the three months ended March 31, 2024 compared with the three months ended March 31, 2023:

Current wording

Condensed consolidated results of operations for the three and six months ended June 30, 2024, compared with the three and six months ended June 30, 2023:

Previous wording

Net sales decreased $21.2 million, or 18%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, as a result of sales decreases of $14.1 million and $24.4 million in the industrial and transportation end markets, respectively, partly offset by an increase of $17.3 million in the power systems end market. Higher power systems end market sales are primarily due to increased demand for products across various applications, with the largest increases attributable to products used within the packaging market such as enclosures serving the fast-growing data center market, as well as oil and gas products and demand response products. The decreased sales within the transportation end market were primarily attributable to lower sales in the truck and school bus market as customer products have evolved and new compliance and regulatory requirements have changed engine product offerings. Decreased industrial end market sales are primarily due to decreases in demand for products used within the material handling and arbor care markets, as well as the direct effects of enforcement of the UFLPA, which limited the Company’s ability to import certain raw materials in early 2024.

Current wording

Net sales decreased $11.3 million, or 9%, during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, as a result of lower sales of $14.1 million and $15.8 million within the industrial and transportation end markets, respectively, partially offset by an increase of $18.6 million in the power systems end market. Higher power systems end market sales were primarily due to increased demand for products across various applications, with the largest increases attributable to products used within the packaging market such as enclosures serving the fast-growing Data Center market, as well as oil and gas products and demand response products. We are strategically prioritizing the rapidly expanding Data Center sector, improving and increasing our manufacturing capacity and capabilities to meet and exceed our customers’ evolving demands for our products. The decreased sales within the transportation end market were primarily attributable to lower sales in the truck and school bus market as customer products have evolved, decrease in sales from our shifting sales away from some of our transportation customers, and new compliance and regulatory requirements have changed engine product offerings. Decreased industrial end market sales are primarily due to decreases in demand for products used within the material handling and arbor care markets, as well as the direct effects of enforcement of the UFLPA, which limited the Company’s ability to import certain raw materials in early 2024.

Previous wording

Research and development expenses during the three months ended March 31, 2024 and 2023 were $5.2 million and $4.6 million, respectively. The increase is primarily related to the testing of new products.

Current wording

Research and development expenses during the three months ended June 30, 2024 and 2023 were $5.0 million and $4.7 million, respectively. The increase is primarily related to the testing of new products.

Previous wording

Selling, general and administrative (“SG&A”) expenses decreased during the three months ended March 31, 2024 by $0.4 million, or 4%, compared to the three months ended March 31, 2023. The decrease is primarily due to lower selling expenses associated with decreased sales in the transportation segment and lower professional fees, partially offset by an increase in incentive compensation expenses.

Current wording

Selling, general and administrative(“SG&A”)expenses decreased during the three months ended June 30, 2024 by $6.0 million, or 57%, compared to the three months ended June 30, 2023, due largely to a decrease in the legal reserve, lower professional fees and the decrease selling expenses associated with decreased sales in the transportation market.

Previous wording

Interest expense decreased $1.3 million to $3.3 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, largely due to lower average outstanding debt, partially offset by higher overall effective interest rates on the Company’s debt. See Note 6. Debt, included in Part I, Item 1. Financial Statements, for additional information.

Current wording

Interest expense was $2.9 million for the three months ended June 30, 2024, as compared to $4.6 million for the three months ended June 30, 2023, largely due to lower average outstanding debt, partially offset by higher overall effective interest rates on the Company’s debt. See Note 6. Debt, included in Part 1, Item 1. Financial Statements, for additional information.

Previous wording

The Company recorded income tax expense of $0.2 million and$0.1 millionfor the three months ended March 31, 2024 and 2023, respectively. The Company’s pretax income was$7.3 million for the three months ended March 31, 2024, compared to a pretax income of $3.9 million for the three months ended March 31, 2023. The Company continues to record a full valuation allowance against deferred tax assets. See Note 10. Income Taxes, included in Part 1, Item 1. Financial Statements, for additional information related to the Company’s income tax provision.

Current wording

The Company recorded income tax expense of $0.9 million for the three months ended June 30, 2024, as compared to income tax expense of $0.2 million for the three months ended June 30, 2023. The Company’s pretax income was $22.4 million for the three months ended June 30, 2024, compared to a pretax income of $6.7 million for the three months ended June 30, 2023. The Company continues to record a full valuation allowance against deferred tax assets.

Previous wording

The Company believes that Adjusted net income, Adjusted net income per share, 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 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.

Current wording

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.

Previous wording

Adjusted net income, Adjusted net income per share, 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, 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.

Current wording

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.

Previous wording

The following table presents a reconciliation from Net income to Adjusted net income for the three months ended March 31, 2024 and 2023:

Current wording

The following table presents a reconciliation from Net income to Adjusted net income for the three and six months ended June 30, 2024 and 2023:

Previous wording

The following table presents a reconciliation from Net income to EBITDA and Adjusted EBITDA for the three months ended March 31, 2024 and 2023:

Current wording

The following table presents a reconciliation from Net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023:

Previous wording

Amounts reflect non-cash stock-based compensation expense and have no material impact on the Adjusted earnings per share for the three months ended March 31, 2024 and 2023.

Current wording

Amounts reflect non-cash stock-based compensation expense and have no material impact on the Adjusted net income per share – diluted for the three and six months ended June 30, 2024 and 2023.

Previous wording

Amounts include legal settlementsand have no material impact on the Adjusted earnings per share for the three months ended March 31, 2024 and 2023.

Current wording

Amounts include insurance recoveries related to a prior year incident and have no material impact on the Adjusted net income per share – diluted for the three and six months ended June 30, 2024 and 2023.

Previous wording

Cash Flows for the Three Months Ended March 31, 2024

Current wording

Cash Flows for the Six Months Ended June 30, 2024

Previous wording

Net cash provided by operating activities was $15.6 million for the three months ended March 31, 2024, compared to net cash provided by operating activities of $5.0 million for the three months ended March 31, 2023, resulting in an increase of $10.6 million in cash provided by operating activities year-over-year. The increase in cash provided by operating activities primarily resulted from the $3.4 million increase in earnings, $8.5 million increase of cash provided by working capital accounts, offset by an increase of cash used for other accrued expenses, primarily associated with accrued compensation and benefits.

Current wording

Net cash provided by operating activities was $17.2 million for the six months ended June 30, 2024, compared to net cash provided by operating activities of $26.6 million for the six months ended June 30, 2023, resulting in a decrease of $9.4 million in cash provided by operating activities year-over-year. The decrease in cash provided by operating activities primarily resulted from a $30.0 million decrease of cash provided by working capital accounts, partially offset by an increase in earnings of $18.5 million. The decrease in cash generated from working capital was primarily related to the increase of prepaid expenses, and offset by less purchases of inventory and less collections on accounts receivables for the six months ended June 30, 2024.

Previous wording

Net cash used in investing activities was $0.8 million for the three months ended March 31, 2024, compared to cash used in investing activities of $0.6 million for the three months ended March 31, 2023. For the three months ended March 31, 2024 and 2023, cash used in investing activities primarily related to capital expenditures associated with normal maintenance of the Company’s facilities.

Current wording

Net cash used in investing activities was $1.5 million for the six months ended June 30, 2024, compared to cash used in investing activities of $1.3 million for the six months ended June 30, 2023. For the six months ended June 30, 2024 and 2023, cash used in investing activities primarily related to capital expenditures associated with normal maintenance of the Company’s facilities.

Previous wording

The Company used $5.2 million in cash from financing activities forthe three months ended March 31, 2024, compared to $1.6 million cash used by financing activities for the three months ended March 31, 2023. The cash used by financing activities for the three months ended March 31, 2024, was a result of repayment of existing debt during the quarter. See additional discussion below and in Note 6. Debt, included in Part I, Item 1. Financial Statements, which further describe the Company’s debt arrangements.

Current wording

The Company used $10.2 million in cash from financing activities forthe six months ended June 30, 2024, compared to $21.7 million cash used by financing activities for the six months ended June 30, 2023. The cash used by financing activities for the six months ended June 30, 2024, was a result of repayment of existing debt year to date. See additional discussion below and in Note 6. Debt, included in Part I, Item 1. Financial Statements, which further describe the Company’s debt arrangements.

Previous wording

The Company’s sources of funds are cash flows from operations, borrowings made pursuant to its credit facilities, shareholder’s loan agreements, and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal interest on our debt facilities and shareholder’s loan agreements, capital expenditures, and working capital needs.

Current wording

The Company’s sources of funds are cash flows from operations, borrowings made pursuant to its credit facilities and shareholder’s loan agreements, and cash and cash equivalents on hand. Principal uses of funds consist of payments of principal interest on our debt facilities and shareholder’s loan agreements, capital expenditures, and working capital needs.

Previous wording

As of March 31, 2024, the Company’s total outstanding debt obligations under the Credit Agreement, the$25 Million Loan Agreement, the$50 Million Loan Agreement, the$30 Million Loan Agreement and for finance leases and other debt were $140.2 million in the aggregate, and its cash and cash equivalents were $33.1 million. See Item 1. Financial Statements, Note 6. Debt, for additional information.

Current wording

As of June 30, 2024, the Company’s total outstanding debt obligations under the Credit Agreement, the$25 Million Loan Agreement, the$50 Million Loan Agreement, the$30 Million Loan Agreement and for finance leases and other debt were $135.1 million in the aggregate, and its cash and cash equivalents were $28.8 million. See Item 1. Financial Statements, Note 6. Debt, for additional information.

Previous wording

Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Credit Agreement or shareholder’s loan agreements in the future. Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the outstanding indebtedness under the Company’s existing debt arrangements as they become due. Management currently plans to seek an extension and/or replacement of its existing debt arrangements or seek additional liquidity from its current or other lenders before the maturity dates in 2024 and 2025. There can be no assurance that the Company will be able to successfully complete a refinancing on acceptable terms or repay this outstanding indebtedness when required or if at all.

Current wording

Uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Credit Agreement or shareholder’s loan agreements in the future. Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the outstanding indebtedness under the Company’s existing debt arrangements as they become due. Management currently plans to seek an extension and/or replacement of its existing debt arrangements or seek additional liquidity from its current or other lenders before the maturity dates in 2024 and 2025. There can be no assurance that the Company will be able to successfully complete a refinancing on acceptable terms or repay this outstanding indebtedness when required or if at all.

Previous wording

Despite the recent recovery of the global economy, there continues to be challenges based on the current macroeconomic and geopolitical environment. Average crude oil prices reached the highest average price in five years in 2022 but has steadily declined while remaining near atop the 5-year averages at the end of the first quarter 2024. Rig counts in the U.S. oil markets remain below historical levels as of the first quarter of 2024. Despite increasing rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market that it participates in remains below historical levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2023, as compared to the prior year, sales remain below historic levels. A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. The Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible. 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.

Current wording

Despite the recent recovery of the global economy, there continues to be challenges based on the current macroeconomic and geopolitical environment. Average crude oil prices reached the highest average price in five years in 2022 but have steadily declined while remaining near atop the 5-year averages at the end of the second quarter 2024. Rig counts in the U.S. oil markets remain below historical levels as of the second quarter of 2024. Despite increasing rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market that it participates in remains below historical levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2023, as compared to the prior year, sales remain below historic levels. A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. The Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible. 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.

Previous wording

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 2023 Annual Report on Form 10-K (the “2023 Annual Report”). During the three months ended March 31, 2024, there were no significant changes in the application of critical accounting policies.

Current wording

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 2023 Annual Report. During the six months ended June 30, 2024, there were no significant changes in the application of critical accounting policies.