Hammond Power Solutions Q3 2026 Earnings Results & Report

Hammond Power Solutions EPS Results

• Actual EPS: C$3.13
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Hammond Power Solutions Revenue Results

• Actual Revenue: C$446.26 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Hammond Power Solutions (TSE:HPS.A) ('HPS' or the 'Company') enables electrification through its broad range of dry-type transformers, power quality products and related magnetic and power conversion systems. HPS' standard and custom-designed products are essential and ubiquitous in electrical distribution networks through an extensive range of end-user applications. The Company has manufacturing plants in North America, Europe and Asia and sells its products around the globe.

Hammond Power Solutions Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Record results included Q3 sales of CAD 446.3 million, adjusted EBITDA of CAD 84 million, and adjusted EPS of CAD 3.13, while year-to-date sales surpassed CAD 1 billion.
• Positive Sentiment: Power Magnetics sales rose 66% year over year, supported by strong U.S. demand—particularly data centers—higher pricing, improved factory utilization, and operational efficiency. Gross margin increased to 34.4%, although management noted that product mix may create quarter-to-quarter variability.
• Positive Sentiment: Monterrey IV is fully ramped, Guelph process improvements are increasing throughput, and HPS announced a new Fort Worth facility expected to add approximately CAD 250 million of capacity. Management believes existing capacity can support growth until Fort Worth becomes operational.
• Negative Sentiment: AEG’s product business remains pressured by Middle East-related disruption, slower hydrogen and offshore wind activity, deferred projects, longer sales cycles, and pricing pressure. HPS also carries CAD 352.9 million of net debt excluding leases following the acquisition, though strong quarterly operating cash flow is supporting debt reduction.
• Neutral Sentiment: Power Magnetics backlog declined modestly as shipments exceeded bookings, but it remained approximately 61% above the prior-year level. Management continues to see robust quotation activity, while noting that backlog and larger project awards can be lumpy and typically provide two to three quarters of visibility.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions Third Quarter 2026 financial results conference call. Certain statements that will be discussed in this conference call will constitute forward-looking statements. The forward-looking information and statements included in this discussion are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements will be based on current expectations, estimates, and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties, and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information and statements.

[Operator]

These factors include, but are not limited to, such things as the impact of general industry conditions, trade, tariffs, and export controls, fluctuations of commodity prices, industry competition, the conversion of backlog into revenue, the integration of acquired businesses, and the realization of anticipated acquisition benefits, financing costs and indebtedness, foreign exchange rates, availability of qualified personnel and management, stock market volatility, and timely and cost-effective access to sufficient capital from internal and external sources. The risks just outlined should not be construed as exhaustive. Although management of the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Accordingly, listeners should not place undue reliance upon any of the forward-looking information discussed in this call. I'd like to hand the call over to Mr. Adrian Thomas, Chief Executive Officer of Hammond Power Solutions.

[Operator]

Mr. Thomas?

[Adrian Thomas, CEO at Hammond Power Solutions]

Good morning, everyone, and thank you for joining us. I am pleased to share Hammond Power Solutions Third Quarter 2026 Results. Joining me today is our CFO, Richard Vollering, who will walk through the financial results in more detail after my remarks. We will then open the line for questions. This was a milestone quarter for HPS, as we reported our first full quarter with AEG as part of our consolidated results. It was also another record quarter, with consolidated sales of CAD 446.3 million, more than double the third quarter of last year, adjusted EBITDA of CAD 84 million, and adjusted earnings per share of CAD 3.13. Year-to-date sales have now surpassed CAD 1 billion, reaching CAD 1.04 billion through the first nine months of the year.

[Adrian Thomas, CEO at Hammond Power Solutions]

Just as importantly, the quarter demonstrated the strength of our operating platform we have been building, with higher manufacturing output, improved customer service, strong cash generation, and continued profitability gains, with gross margin reaching 34.4%. New this quarter, our external reporting now presents our transformer and related magnetic operations as Power Magnetics, and our integrated electrical solutions and systems businesses as Integrated Electrical Solutions, or IES. IES is primarily comprised of AEG, but also includes the power electronics products within the Mesta business. This gives investors a clearer view of two businesses with different revenue profiles, market exposures, and margin characteristics. I will touch on both, and Richard will provide the detailed financial review, including further detail on the inclusion of AEG. Let me start with Power Magnetics.

[Adrian Thomas, CEO at Hammond Power Solutions]

Our reporting segment that includes our historical business without AEG, Power Magnetics delivered an exceptional quarter, with sales of CAD 355.5 million, an increase of approximately 66% from prior year. The primary driver was volume, supported by pricing and stronger utilization of the capacity that we have added across our manufacturing network. Demand in the U.S. remains healthy, with distribution and data center-related shipments continuing to be important contributors. We are also seeing solid engagement across industrial infrastructure, energy, and technology-related markets. Our broad exposure across customers, channels, and end markets remains a source of resilience, even as individual projects and order timing can be uneven. Canada remains a more challenging environment. Market activity is slower, and pricing is more competitive, so our focus is on disciplined commercial execution, protecting the customer relationships and market positions that matter most, while remaining selective on mix and margin.

[Adrian Thomas, CEO at Hammond Power Solutions]

During the quarter, shipments again exceeded bookings. As a result, backlog declined modestly from the second quarter, but remained approximately 61% above the prior year level. With net bookings up on a quarter-by-quarter basis, we view the movement in backlog as the result of record output and faster conversion of orders into revenue. Quotation activity continues to remain robust, including for large projects, but the timing of those awards is inherently lumpy as we engage in larger and more complex opportunities. Operationally, Monterrey IV is now fully ramped and contributed to record shipment levels. It is an important proof point for our capacity strategy. We were able to add capacity quickly, bring it into production, and convert customer demand into attractive returns. Our process improvement program also delivered the targeted production increase at our Guelph facility.

[Adrian Thomas, CEO at Hammond Power Solutions]

Together, these improvements are increasing throughput, shortening lead times, and strengthening our responsiveness to customers. With the strong outlook for electrification, we also announced our new manufacturing facility in Fort Worth, Texas. This is the next major step in expanding our North American network, bringing an additional CAD 250 million of capacity closer to key customers. The investment complements our operations and recent investments in Canada and Mexico, and reflects our confidence in the long-term need for reliable power infrastructure. The third quarter was AEG's first full reporting quarter within HPS. Integrated Electrical Solutions contributed CAD 90.8 million of sales in the quarter. The service business was the most resilient part of the portfolio, with both service revenue orders up from prior year, along with attractive margin performance. Product activity was softer, reflecting a more difficult project environment. The most significant near-term issue has been the conflict in the Middle East.

[Adrian Thomas, CEO at Hammond Power Solutions]

It has affected order intake, customer travel, project timing, and shipping and freight costs. Outside the region, those pressures have been compounded by slower activity in sectors such as hydrogen and offshore wind. The results have been longer sales cycles, deferred projects, and pricing pressure. The team is responding, as it has previously, with focus and clear commitment to execution. We are concentrating commercial resources to mitigate these impacts and developing opportunities that will help us continue to build backlog for 2027. Operationally, we are strengthening project and shipment execution while maintaining tight cost and inventory control. At the same time, our long-term view of AEG remains positive. The service platform is resilient and highly profitable, and the business brings engineering capabilities in power conversion, critical power, and industrial systems that complement our transformer portfolio.

[Adrian Thomas, CEO at Hammond Power Solutions]

We are encouraged by early customer interest in bringing more of AEG's technologies to North America, including opportunities connected to emerging data center power architectures. The integration has progressed across leadership, governance, cybersecurity, treasury, IT, and financial reporting. Completing the first full consolidated close was an important milestone. The next phase is increasingly commercial, educating both sales organizations on the combined portfolio, building collaborative customer engagements, and converting our broader capabilities into new opportunities. Strong cash generation in the quarter gives us greater flexibility. It supports debt reduction following the AEG acquisition while allowing us to continue funding the capacity, product, and market investments that can create long-term value. Richard will cover the balance sheet and cash flow in more detail shortly. Our priorities for the remainder of the year are straightforward.

[Adrian Thomas, CEO at Hammond Power Solutions]

In Power Magnetics, we need to sustain shipment execution, remain disciplined on pricing and mix, and maintain the working capital improvements achieved this quarter. In Integrated Electrical Solutions, the priorities are orders, execution, and positioning the business for 2027. More broadly, we remain focused on expanding HPS from a strong transformer company into a broader provider of Power Magnetics, power quality, and Integrated Electrical Solutions. Electrification and the growing need for reliable, efficient, and resilient power infrastructure continue to create attractive opportunities. We are pursuing those opportunities with the same discipline that has supported our growth to date. With that, I will hand the call to Richard, who will now take you through the financial results in more detail. Richard?

[Richard Vollering, CFO at Hammond Power Solutions]

Thank you, Adrian, and good morning, everyone. As Adrian mentioned, we delivered a record quarter with strong growth in Power Magnetics and our first full quarter of results from AEG. Because AEG is included for the first time, year-over-year comparisons should be considered in the context of a significant change in the composition of our operations. I'll spend a few minutes walking through the key financial highlights. Consolidated sales were CAD 446.3 million in the third quarter, up 104.4%, compared to CAD 218.3 million in the third quarter of 2025. Power Magnetics contributed CAD 355.5 million, an increase of 66.1%, and IES contributed CAD 90.8 million. Year-to-date sales were CAD 1.04 billion, up 60.8% from CAD 644.2 million in 2025.

[Richard Vollering, CFO at Hammond Power Solutions]

Within Power Magnetics, the U.S. and Mexico continued to drive our growth, with sales of $288.7 million, up 87.9% over the prior year, or 85.8% when measured in U.S. dollars. Growth was driven by higher data center shipments, modest improvement in industrial markets, and full realization of previously implemented price increases. The sequential increase from the second quarter reflected the timing of shipments for certain large projects and improved price realization. Canada was up 12.1% compared with last year to CAD 57.6 million, as certain large custom project orders were completed. This narrowed the year-to-date decline in Canada to 3.7%. India sales were CAD 9.2 million, comparable to the prior year. Gross margins continued to improve. Consolidated gross margin was CAD 153.4 million, or 34.4% of sales, compared to 30.1% in the third quarter of 2025 and 32.3% in the second quarter of 2026.

[Richard Vollering, CFO at Hammond Power Solutions]

Power Magnetics gross margin was 34.3%, up 420 basis points from last year. This improvement reflects the continued realization of price increases, higher overhead absorption from increased throughput, a greater proportion of custom products, and improved factory efficiency from our process improvement program. Copper and aluminum prices have increased in recent periods, and tariffs remain a factor, but our pricing actions and operational improvements are helping offset these pressures. In IES, gross margin before purchase accounting amortization was 37.7%. Selling and distribution expenses were CAD 57.1 million, or 12.8% of sales, compared to 11.1% last year. AEG's operations added CAD 15 million, and purchase accounting amortization of acquired customer relationships added a further CAD 1.8 million. The remainder of the increase was driven by higher Power Magnetics volumes and the distribution costs required to support that growth.

[Richard Vollering, CFO at Hammond Power Solutions]

General and administrative expenses, including share-based compensation, were CAD 23.7 million, or 5.3% of sales, compared to 7.6% last year. A lower share price during the quarter resulted in a share-based compensation recovery of CAD 3.2 million. Excluding share-based compensation, general and administrative expenses increased CAD 11.8 million, including CAD 8.6 million from AEG, but improved 90 basis points as a percentage of sales. Earnings from operations were CAD 71.6 million, compared to $24.9 million in the third quarter of last year. Adjusted EBITDA was CAD 84 million, or 18.8% of sales, compared with $30.3 million, or 13.9% of sales in the third quarter of 2025. Year-to-date, adjusted EBITDA was CAD 178.3 million, up 88.5%. The increase reflects the combined benefit of higher volumes, stronger gross margins, improved operating leverage, and the addition of AEG.

[Richard Vollering, CFO at Hammond Power Solutions]

Reported net earnings were CAD 27.7 million, or CAD 2.33 per share, compared with CAD 17.4 million, or CAD 1.46 per share in the prior quarter. Reported results included CAD 10.3 million of acquisition-related costs, foreign exchange losses of CAD 8.2 million, primarily from the settlement of hedge contracts entered into to manage the currency risk associated with the acquisition, and higher interest expense of CAD 9 million, compared to CAD 1.1 million last year, reflecting the acquisition debt. Our effective tax rate was 37.3% in the quarter, primarily due to the non-deductibility of acquisition-related costs. AEG contributed CAD 1.7 million of net earnings in the quarter.

[Richard Vollering, CFO at Hammond Power Solutions]

Adjusted earnings per share, which exclude foreign exchange, share-based compensation, and acquisition-related costs, increased to CAD 3.13 from CAD 1.56 last year, which better reflects the strength of the underlying operating performance. Year-to-date, adjusted earnings per share were CAD 7.68, compared to CAD 4.88 in 2025. Cash flow was strong in the quarter. Cash generated from operating activities was CAD 75 million, compared to cash used of CAD 2.1 million in the third quarter of last year, with changes in non-cash working capital generating CAD 22.5 million. Year-to-date, operating activities generated CAD 80 million.

[Richard Vollering, CFO at Hammond Power Solutions]

At the end of the quarter, we had a net operating cash position of CAD 51.6 million, representing cash of CAD 134 million, net of bank operating lines of CAD 82.4 million, compared to net operating debt of CAD 36.5 million at the end of the second quarter. Including the term debt used to finance the AEG acquisition, net debt, excluding leases, was CAD 352.9 million. Gross borrowings under our syndicated credit facility were CAD 496.9 million, comprising of CAD 412.8 million of term loans and CAD 84.1 million of revolving borrowings. We remain in compliance with all of our bank covenants. As we close out the year, our financial priorities are to maintain strong operating discipline, continue to generate cash from operations to fund working capital expenditures, and scheduled debt repayments, and support a successful integration of AEG, while continuing to invest in the growth opportunities ahead.

[Richard Vollering, CFO at Hammond Power Solutions]

We believe HPS is well-positioned heading into the fourth quarter, with improving operating performance and a broader platform for long-term growth. With that, I'll turn the call back to the operator so we can begin the question-and-answer session.

[Operator]

If you'd like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Baltej Sidhu with National Bank of Canada.

[Baltej Sidhu, Analyst at National Bank of Canada]

Hey, good morning, everyone. The first question I have is that it was an impressive quarter for both gross margins and EBITDA margins, and you highlighted a few of the elements driving that through price, product mix, utilization, and absorbed overhead. Could you help us understand how sustainable this margin level is as we look forward, or were there any one-time items, whether through a large order or something time-related?

[Richard Vollering, CFO at Hammond Power Solutions]

Hey, Baltej. It's Richard. Yeah, thanks for your question. Yeah, it's a good question because there were a few things that were driving that, and some of it is price, which, at least in the near term, is sustainable. Some of it is project and customer mix as well, which can change with time. It was very favorable in the quarter. I think the other element is operating leverage, right? We put a lot of volume through, and we were able to lever both factory costs and SG&A overhead costs as well. That is a little bit more durable as well, provided the volume stays.

[Baltej Sidhu, Analyst at National Bank of Canada]

Understood. Barring any massive inflation or any cost inputs towards aluminum and copper, it seems like these levels are kind of a percentage point, another point, could be a sustainable level looking forward. Is that right?

[Richard Vollering, CFO at Hammond Power Solutions]

I think there are portions of it that are, yes. I say that because price realization, as we've talked many times before, there's always a drag on price realization when we put price increases through, and we've gotten to the point at Q3 where we think we've done that effectively.

[Baltej Sidhu, Analyst at National Bank of Canada]

Understood. Now, turning to your annualized run rate capacity, I think you are sitting at around north of CAD 1.4 billion for Power Magnetics, again, largely driven by pricing and product mix. How much further do you think you can push that? Does that look like CAD 1.5 billion or CAD 1.6 billion before the new Texas facility starts to ramp up in Q4 and in Q1 of 2028?

[Richard Vollering, CFO at Hammond Power Solutions]

I doubt it would be that high, Baltej. I think kind of that 1.4, 1.45. You have to remember that these are all very indicative, really, because it does depend on what the mix is, what factories are busy, which ones are less busy. But, yeah, I would say sort of that 1.4 to 1.45, right, in the near term. But, and we have always talked about this as well, there are always ways to sort of tweak a little bit more capacity out here and there as well through process improvements and making changes in the way we build things, so.

[Baltej Sidhu, Analyst at National Bank of Canada]

Okay, thank you. I will turn the line over.

[Richard Vollering, CFO at Hammond Power Solutions]

Okay.

[Operator]

Our next question comes from Nicholas Boychuk with ATB Cormark Capital Markets.

[Nicholas Boychuk, Analyst at ATB Cormark Capital Markets]

Thanks. Morning, guys. I do not want to beat a dead horse here on this margin dynamic, but I am still not fully understanding how much of this is permanent versus transient. Richard or Adrian, I am curious if you can unpack. This quarter, there was one line in the MD&A talking about possible volume pull-through. I suspect that is just a dynamic with the data center orders. I mean, when we were on your recent site tour, we saw the volumes of what you were producing, but how sustainable is that volume? Is there going to be that unwind in the coming quarters, or is that We talked about 15 month typical leads for some of these orders. Is that persistent into the back half of the year and into 2027?

[Richard Vollering, CFO at Hammond Power Solutions]

Yeah, there will be some variation, Nick, from quarter-to-quarter, depending on what projects are flowing through. I think what I was trying to communicate, and I cannot get too specific on exactly how much of it is sustainable and how much of it is not, but I think the main message I was trying to communicate is that operating leverage is going to be the thing, I think, that offsets to the extent that margins go up or decline based on product mix. Operating leverage is going to be the thing, I think, that in the long term sustains margins.

[Nicholas Boychuk, Analyst at ATB Cormark Capital Markets]

Okay, understood. On those initiatives you called out in the prepared remarks, some of the things you have been working on from even last year into this on that efficiency, is that fully complete now, such that we are kind of seeing the benefits, or are there ongoing things that will drive this even further?

[Adrian Thomas, CEO at Hammond Power Solutions]

It is Adrian. We completed one substantial one, which I called out, which was a project we did in Guelph. I think that we have opportunity to do similar projects in other facilities. The extent of the impact of that, I cannot comment on, but I think we called out Guelph because, again, it is one of our facilities producing large custom projects. These are part of our portfolio of managing our capacity, and that was a highly successful project. Just to kind of maybe circle back, you were asking a little bit more on margins, but just in terms of the demand picture, I would call out a couple things. One, data centers obviously is very important, but at the moment, it is running around 40% of our revenue, so we have quite a bit of other business.

[Adrian Thomas, CEO at Hammond Power Solutions]

in sectors, which is also healthy, which is creating sort of that general product mix that we have without data center business. We see that healthy, particularly in the U.S. I think it's not just a data center story. It's an electrification story, and we continue to see pretty robust activity in the market.

[Nicholas Boychuk, Analyst at ATB Cormark Capital Markets]

Okay. Understood. Appreciate it. On AEG in particular, for it to have put up CAD 81.1 million in the quarter, relative to at least last year's full performance from AEG, that's a significant win, particularly with the removal of the MidEast business. Can you guys talk about a couple of the moving parts there? You called out industries in particular, but that's a material step forward.

[Adrian Thomas, CEO at Hammond Power Solutions]

Look, I think we're really pleased with a couple things on AEG. First and foremost, some of the initial integration work is complete. Rolling in a new business, getting that consolidation reporting, a lot of heavy lifting on the finance team to get that done. Integration with IT systems and cyber. We've got some of the governance items complete, so now we're starting to move forward, focusing more on commercial frameworks and the value we can create with the two businesses together. Yes, there are some headwinds, particularly in the product side of AEG, really dependent on project-based business, and so it is a little bit lumpy. But I called out highlight, part of what we liked with AEG beyond the technology and the diversification of geography was the services business, and I think that's shown through.

[Adrian Thomas, CEO at Hammond Power Solutions]

I would caution this is one quarter, and so our view on AEG was really long-term, how we develop the business together. I think we're still working on those things, and I think there's more to come. But we're, after one quarter, quite excited about the long-term opportunities of working together with AEG now part of our IES business.

[Nicholas Boychuk, Analyst at ATB Cormark Capital Markets]

Okay. Appreciate it. Last one from me on the IES segment margins. Again, those were elevated and surprised to the upside. How should we read through the mix shift, either with AEG or, I am also curious on the legacy Mesta active harmonic business? It seems as if, from looking at the numbers, that had a good quarter. Is there a positive read-through there that you are successfully moving harmonics into maybe some of these data center customers or other wins?

[Adrian Thomas, CEO at Hammond Power Solutions]

Yes. I think harmonics is an issue at data centers, particularly with a lot of pumps and drives and HVAC equipment, which is running on variable speed drives, creating harmonics. So, it is definitely supporting our filter and our power quality business. So, that is a positive tailwind for that business.

[Nicholas Boychuk, Analyst at ATB Cormark Capital Markets]

Okay. Understood. Thanks for the color, guys.

[Operator]

Our next question comes from Tomo Sano with JPMorgan.

[Tomo Sano, Analyst at JPMorgan]

Hi. Good morning, everyone.

[Richard Vollering, CFO at Hammond Power Solutions]

Hi, Tomo.

[Adrian Thomas, CEO at Hammond Power Solutions]

Hey. Good morning.

[Tomo Sano, Analyst at JPMorgan]

Good morning. Maybe just on capacity and demand of the business. With the backlog coming down despite the stronger bookings, it seems like capacity and throughput are improving. So, with Monterrey IV ramped and Fort Worth coming, how do you think about demand versus capacity from here? Are you still capacity constrained in any key areas?

[Adrian Thomas, CEO at Hammond Power Solutions]

We can't predict the future, but I think in terms of where we are in capacity and what we see for growth leading up to our expectations of when Fort Worth comes on, I feel like we can manage that. To my comment a little previously, we're seeing demand, certainly a lot of demand and project activity on the data center side, but we continue to see a lot of demand in other sectors as well. I think that is providing us with the ability to maximize capacity with beneficial mix. Mix does create some complexity in terms of what we can do. Many of our factories are flexible by industry, but in terms of size of the product, we do have some limitations.

[Adrian Thomas, CEO at Hammond Power Solutions]

The short answer, we believe that between now and when Fort Worth will be operating, we can manage the growth of our business. When Fort Worth starts producing, we'll have extended our runway.

[Tomo Sano, Analyst at JPMorgan]

Thank you, Adrian. On AEG, how quickly can you bring its capabilities into North America data centers? Are you already seeing meaningful customer interest or cross-selling opportunities there?

[Adrian Thomas, CEO at Hammond Power Solutions]

I would say, on the expansion of AEG into North America, we are seeing a handful of customers with high levels of interest. I think we could say we see more interest than maybe we expected initially, which is a positive sign. I would caution that, Tomo Sano, that these projects, there's a cycle time, and particularly with the products with AEG, the cycle time from working with the customer, designing the product, that product going is a little bit longer. I think what we would be looking for is increase in bookings as we get into 2027, and then probably start to see some of that play out late 2027 into 2028 and 2029. We are seeing the positive interest. I just want to caution in terms of the time it takes to develop the revenue stream.

[Tomo Sano, Analyst at JPMorgan]

Great. Thank you, Adrian. Congrats on the quarter.

[Adrian Thomas, CEO at Hammond Power Solutions]

Thank you.

[Operator]

Our next question comes from Nelson Ng with RBC Capital Markets.

[Nelson Ng, Analyst at RBC Capital Markets]

Great. Thanks, and good morning, everyone. First question just relates to margins. On the IES side of the business, which is mainly AEG, I was originally under the impression that historically, the adjusted EBITDA margins were kind of lower than Hammond's transformer business. But then looking into this quarter, it seems like it might be higher. I know that there's some commentary on some nuclear shipments and data center shipments, but can you just talk about margins at AEG in Q3 compared to the rest of Hammond?

[Richard Vollering, CFO at Hammond Power Solutions]

Yeah, they are. First of all, the IES division is principally AEG, but there are some other product lines in there as well. It's not exclusively AEG, which will affect those margins a little bit, Nelson Ng. But generally speaking, we've always spoke of AEG in its current makeup as being high single digits, crossing over into low double digits margins. If you go back to the pure AEG results, that is where they are in the quarter. From our perspective, there wasn't really any surprise there.

[Nelson Ng, Analyst at RBC Capital Markets]

Okay. All right. That's clear. Because the gross margins seem pretty high, so I was kind of under the impression that-

[Richard Vollering, CFO at Hammond Power Solutions]

Yeah. No, the gross margins are high, and that was really primarily driven by a higher service mix in the quarter.

[Nelson Ng, Analyst at RBC Capital Markets]

Got it. Okay, that makes sense. The next question is on backlog. Can you just comment on whether obviously, data centers could be large and small, and it could be lumpy. But in terms of the, I guess, orders coming in, have they been generally smaller, and have you seen large data center customers, I don't know, potentially get delayed, deferred, given all the kind of noise we've been hearing about sentiment on data centers?

[Adrian Thomas, CEO at Hammond Power Solutions]

Nelson Ng, I think broad brush, just a couple things on data centers, maybe from our perspective. As we've mentioned before, but just as a quick reminder, our products are shipped relatively late in the project cycle. There's a lot of pre-work in these build-outs with site and permitting and long lead time items and getting power to site and then constructing the building. We're usually at the latter end of that cycle. We're sort of entering projects that are kind of in flow, as I would say. It's not to say that there's no risk to cancellations and changes and things like that, but we're in a position where the project is already moving forward. Then, we do see that some of the recent announcements that there continues to be increases in capital commitments for those projects.

[Adrian Thomas, CEO at Hammond Power Solutions]

I think the other piece that we look at is just quotation activity. There's no change there. It continues to be strong. I think if you thread all those things together for the near term, there still appears to be a lot of activity and a lot of project work. Hopefully that gives you some color from our business perspective.

[Nelson Ng, Analyst at RBC Capital Markets]

Yeah, that helps. I know that in the disclosures, it mentions that a significant part of the bookings or backlog can be canceled without penalty. I'm just wondering, over the past year, have you seen any material cancellations at all?

[Adrian Thomas, CEO at Hammond Power Solutions]

That is a broad statement, and we serve a large and diverse set of sectors. Some of the projects we do are low volume and short cycle, and the specifics of any one contract may allow that to happen. I would say, generally speaking, when we engage in long-term, large volume projects, we ensure our contracts provide us protections in those cases.

[Nelson Ng, Analyst at RBC Capital Markets]

Okay, got it. Just one last question in terms of customer mix. I know that, I think there was a disclosure saying custom products were close to 70% of product sales overall. Do you see that increasing over time? I know Monterrey IV was primarily custom products, and as that ramps, the portion of custom products would also increase. I guess going forward, will Texas be mostly custom as well? I guess over time, do you see that 70% trending higher?

[Adrian Thomas, CEO at Hammond Power Solutions]

Correct. Fort Worth is focused on larger custom transformers, and to the extent and to the rate at which that ramps, we would expect to see more custom volume. There is opportunity for us to continue to grow our standard products. Typically, standard products are used everywhere in industry, and what we do see is in our custom products, the demand is driven more by activity in certain sectors and CapEx spending. Whereas in the standard products, because they are used everywhere, it is usually more related to the overall economic conditions of the region.

[Nelson Ng, Analyst at RBC Capital Markets]

Got it. Okay, thanks, Adrian. I will leave it there.

[Adrian Thomas, CEO at Hammond Power Solutions]

Great.

[Operator]

Our next question comes from Razi Hasan with Paradigm Capital.

[Razi Hasan, Analyst at Paradigm Capital]

Good morning. Thanks for taking my questions. Just one maybe on backlog. How much visibility do you have into 2027, given that we're in Q4? So roughly about six months in or so, or any comments there?

[Richard Vollering, CFO at Hammond Power Solutions]

Yeah. We always talk about the backlog being kind of roughly two to three quarters on average of business. So we typically have visibility into Q1 and kind of Q2, and then it tails off after that. That's pretty normal, Razi, given the business cycle for our type of product.

[Razi Hasan, Analyst at Paradigm Capital]

Okay, thanks. That's helpful. Then maybe just on backlog, down sequentially for the second quarter, just given the increase in throughput. Do you expect that to continue going forward, just as you're able to get more products out the door?

[Richard Vollering, CFO at Hammond Power Solutions]

Look, I think we talk about quotation activity as being a sort of leading indicator for us, and for us, we're still seeing a lot of projects being quoted on. So hard to answer that question, Razi but I think what could very well happen is we could end up booking some large projects at any point in time, and you'll see it go up again, and then maybe you'll see the same process where as we ship, it gets drawn down again. So it's not my expectation that you would see either perpetual quarter-over-quarter increase in the backlog, nor should you see a sort of a perpetual quarter-over-quarter decrease in the backlog.

[Razi Hasan, Analyst at Paradigm Capital]

Okay, that's helpful. Then maybe just finally, you spoke about operating leverage, sustaining margins. Just wanted to ask, does that apply for the IES segment as well, or is that mainly for the Power Magnetics?

[Richard Vollering, CFO at Hammond Power Solutions]

I was really referring more to Power Magnetics, but

[Razi Hasan, Analyst at Paradigm Capital]

Power Magnetics. Okay. Okay, perfect. Thank you.

[Richard Vollering, CFO at Hammond Power Solutions]

It might be just a good opportunity for me to sort of remind everybody that for AEG, their sales cycle's a little bit different, they tend to be more heavily weighted towards the end of the year than the beginning of the year. So, their operating leverage will fluctuate more as a result.

[Razi Hasan, Analyst at Paradigm Capital]

Thanks very much.

[Richard Vollering, CFO at Hammond Power Solutions]

Okay.

[Operator]

Our next question comes from Sean Jack with Raymond James.

[Sean Jack, Analyst at Raymond James]

Good morning, guys. Thanks for taking my question. Just thinking about the normal two to three quarter visibility that Richard just mentioned, is there any thoughts or are you seeing any need to try and rework any of the Monterrey capacity maybe towards more large type or custom type, or anything on the fringes? Or do you feel like how kind of the operations down there are set up right now, is that going to work for you guys?

[Richard Vollering, CFO at Hammond Power Solutions]

Yeah, I don't know how much of an opportunity there is for that. Look, we have to make space for all of our products, and so this is why we've concluded that we need more space in Texas.

[Sean Jack, Analyst at Raymond James]

Got it. Okay, just quickly on AEG, you guys gave some details on the ongoing integration in the release, and sorry if it's already been asked, but do you have any color that you could provide on how quickly you guys can unlock and kind of break into North American cross-selling opportunities?

[Adrian Thomas, CEO at Hammond Power Solutions]

Hi, Sean. We've begun. We've started to invest in resources in North America. To my comment earlier, we're focusing Q4 on helping develop that commercial framework of collaboration between the two regions. My caution is just that the cycle time on some of these projects is long, so first indicators would be how we see booking activity start to ramp in 2027, and then I think revenue ramp from North America would follow after that according to the project cycles. On the product business, the cycle times tend to be a little bit longer, so just keep that in mind.

[Sean Jack, Analyst at Raymond James]

Perfect. Okay, awesome. That's all from me, guys. Thanks.

[Operator]

That concludes today's question and answer session. I'd like to turn the call back to Adrian Thomas for closing remarks.

[Adrian Thomas, CEO at Hammond Power Solutions]

Thank you. Q3 demonstrated both the strength of our core Power Magnetics platform and our broader opportunity we are building through our Integrated Electrical Solutions business. We are entering the fourth quarter with strong operating momentum, a clear set of execution priorities, and confidence in the long-term demand for the products and capabilities HPS provides. I would like to thank our employees for the effort required to deliver another record quarter, our customers for their continued trust, and to our shareholders for their support. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• Adrian Thomas, CEO
• Richard Vollering, CFO

Analysts

• Baltej Sidhu, Analyst at National Bank of Canada
• Nicholas Boychuk, Analyst at ATB Cormark Capital Markets
• Tomo Sano, Analyst at JPMorgan
• Nelson Ng, Analyst at RBC Capital Markets
• Razi Hasan, Analyst at Paradigm Capital
• Sean Jack, Analyst at Raymond James