Financial Trends -- 6/10

Three-year revenue roughly flat -- peaked at ~$34.1B in FY2023-24, turned negative in FY2025. Total revenue of $33,670M declined -1.3% YoY despite strong power gen growth. Five-year CAGR (2020-2025) is +11.2%, but the 2-year CAGR (2023-2025) is -0.6%. Adjusted EBITDA margin expanded +170 bps to 17.4%. Gross margin up ~240 bps over the period. Adjusted EPS of $23.78 grew ~21% vs FY2023. FCF recovered to ~$2.39B in FY25 from the $279M FY24 trough. No dilution -- shares down -7% over 5 years.

Power Systems and Distribution are the growth engines -- guided +14-19% and +9-14% FY2026E respectively. Power Systems accelerated to $7,463M (+16.5% YoY), driven by data-center power generation demand. Distribution grew to $12,405M (+9.0% YoY). Engine contracted -7.1% to $10,875M. Components fell -13.1% for the second consecutive year (partly Atmus divestiture, partly cyclical).

Power Systems EBITDA margin at 22.7% (FY25) is exceptional, and Q1 FY26 reached a record 29.5%. Power Systems EBITDA grew from $343M (FY2020) to $1,694M (FY2025), a nearly 5x increase. Distribution margin expanded +250 bps to 14.6%. Engine margin compressed -140 bps to 12.7% due to lower volumes, EPA 2027 launch costs, and tariff impacts. Accelera losses widened to ($896M) on just $460M of revenue.

Revenue troughed at -2.7% YoY in Q1 CY25, now re-accelerating to +2.7% run-rate. Quarterly revenue was negative for most of CY25, but Q4 showed +1.1% YoY and the most recent quarter turned to +2.7%. Management guided FY2026 to +8-11% consolidated revenue growth, anchored by Power Systems (+14-19%) and Distribution (+9-14%). GAAP operating income was down YoY in the latest quarter, triggering the -1 penalty on the base score.

Engine EBITDA margin collapsed from 16.5% (Q1) to 10.1% (Q4) -- a dramatic H2 deterioration. Engine quarterly EBITDA fell from $458M (Q1 2025) to $263M (Q4 2025). Power Systems EBITDA peaked at $457M in Q3 2025. Accelera losses included significant Q3 write-downs of ($336M) and a Q4 loss of ($374M).

Final Score: 6 / 10. Base of 7 for a company with revenue re-accelerating off a trough, margin expansion (~240 bps gross and adj EBITDA), FCF recovery to ~$2.39B, and Power Systems at record 29.5% Q1 EBITDA margin. Penalty of -1 for GAAP operating income declining YoY in the latest quarter. Improvement is narrow and partly cyclical -- Engine and Components segments still contracting with compressing margins. Three-year revenue roughly flat. A score of 7+ would require broadening of the recovery beyond Power Systems/Distribution and sustained GAAP operating income growth.

Data Center Demand: Total company data center revenue of ~$3.5B in 2025, up 30-35% YoY. Two-year backlog for large engines with orders being taken into 2027. Management described this as a "low-risk weighted play on the AI boom." Capacity being added for power gen.

EPA 2027 Pre-Buy Uncertainty: Regulations under review. If unchanged, engine product launches proceed in 2026. Parallel operating systems running (old and new engine platforms), creating cost headwinds. Engine EBITDA margins compressed -140 bps as a result.

Accelera Restructuring: Electrolyzer demand described as "sharp and dramatic" decline. Q3 2025 included significant non-cash charges. Management stated they are "not comfortable sitting at the losses" and are executing cost actions. Restructuring expected to improve 2026 loss trajectory.

Aftermarket/Distribution Opportunity: Emerging long-term opportunity as installed base of power gen units grows. Backup power units have minimal aftermarket demand today, but the installed base is building. Distribution segment is the clear aftermarket beneficiary.

Tariff Impacts: India tariffs impacted Q4 2025 Power Systems margins. For 2026, tariff pass-through on revenue is ~EPS neutral at midpoint but dilutive to EBITDA margin by ~50 bps.