Hammond Power Solns Q3 2026 Earnings Call Transcript
Hammond Power Solns (TSX:HPS) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Hammond Power Solutions reported a record quarter with consolidated sales of $446.3 million, more than double the previous year, driven by the integration of AEG and strong performance in Power Magnetics.
Gross margins improved significantly to 34.4%, attributed to price increases, higher volumes, and process improvements; however, some factors like product mix may vary in sustainability.
The company announced a new manufacturing facility in Fort Worth, Texas, to expand capacity and support long-term growth in electrification and power infrastructure.
Operational highlights included full ramp-up of the Monterey IV facility and improvements at the Guelph facility, which contributed to increased throughput and customer responsiveness.
Integrated Electrical Solutions (IES), primarily AEG, contributed $90.8 million, with strong service revenue but facing challenges due to geopolitical tensions and market conditions.
Management remains optimistic about the long-term prospects of AEG and future cross-selling opportunities in North America, although project cycle times are lengthy.
The company maintains a strong cash position and plans to continue investing in growth opportunities while managing debt from the AEG acquisition.
Future priorities include sustaining shipment execution in Power Magnetics and focusing on order growth and execution in IES, with an emphasis on expanding as a broader provider of power solutions.
Full Transcript
OPERATOR
Good morning, ladies and gentlemen. Welcome to Hammond Power Solns 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. 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 Solns.
Adrian Thomas (Chief Executive Officer)
Good morning, everyone, and thank you for joining us. I’m pleased to share Hammond Power Solns 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’ll 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 446.3 million, more than double the third quarter of last year, adjusted EBITDA of 84 million and adjusted earnings per share of $3.13. Year to date, sales have now surpassed 1 billion, reaching 1.04 billion through the first nine months of the year.
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 business 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’ll 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, our reporting segment that includes our historical business without AEG. Power Magnetics delivered an exceptional quarter with sales of 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 United States 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. 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, Monterey 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. 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 $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 90.8 million of sales in the quarter. The Service business was the most resilient part of the portfolio, with both service revenue and 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.
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.
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. 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 Vollering (Chief Financial Officer)
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 $446.3 million in the third quarter, up 104.4% compared to $218.3 million in the third quarter of 2025. Power Magnetics contributed $355.5 million, an increase of 66.1%, and IES contributed $90.8 million. Year to date, sales were $1.04 billion, up 60.8% from $644.2 million in 2025.
Within Power Magnetics, the US 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 US 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 $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 $9.2 million, comparable to the prior year. Gross margins continued to improve. Consolidated gross margin was $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. 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 $57.1 million, or 12.8% of sales, compared to 11.1% last year. AEG’s operations added $15 million and purchase accounting amortization of acquired customer relationships added a further $1.8 million. The remainder of the increase was driven by higher Power Magnetics volumes and the distribution costs required to support that growth.
General and administrative expenses, including share-based compensation, were $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 $3.2 million. Excluding share-based compensation, general and administrative expenses increased $11.8 million, including $8.6 million from AEG, but improved 90 basis points as a percentage of sales. Earnings from operations were $71.6 million compared to $24.9 million in the third quarter of last year. Adjusted EBITDA was $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 $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. Reported net earnings were $27.7 million, or $2.33 per share, compared with $17.4 million, or $1.46 per share, in the prior quarter.
Reported results included $10.3 million of acquisition-related costs, foreign exchange losses of $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 $9 million compared to $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 $1.7 million of net earnings in the quarter. Adjusted earnings per share, which exclude foreign exchange, share-based compensation, and acquisition-related costs, increased to $3.13 from $1.56 last year, which better reflects the strength of the underlying operating performance. Year to date, adjusted earnings per share were $7.68 compared to $4.88 in 2025. Cash flow was strong in the quarter. Cash generated from operating activities was $75 million compared to cash used of $2.1 million in the third quarter of last year, with changes in non-cash working capital generating $22.5 million. Year to date, operating activities generated $80 million. At the end of the quarter, we had a net operating cash position of $51.6 million, representing cash of $134 million, net of bank operating lines of $82.4 million, compared to net operating debt of $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 $352.9 million. Gross borrowings under our syndicated credit facility were $496.9 million, comprising $412.8 million of term loans and $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, capital expenditures and scheduled debt repayments, and support a successful integration of AEG, while continuing to invest in the growth opportunities ahead. We believe Hammond Power Solns 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 Baltez Sidhu with National Bank of Canada.
Baltez Sidhu (Analyst)
Hey, good morning everyone. So 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 timing related?
Richard Vollering (Chief Financial Officer)
Hey, Baltez. It’s Richard. Yeah, thanks for your question. So, 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, and it was very favorable in the quarter. But 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.
And so that is a little bit more durable as well, provided the volume stays.
Baltez Sidhu (Analyst)
Understood. So barring any massive inflationary cost inputs towards aluminum and copper, it seems like these levels are kind of a percentage point on either point could be a sustainable level looking forward. Is that correct?
Richard Vollering (Chief Financial Officer)
I think there are portions of it that are, yes. And 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.
Baltez Sidhu (Analyst)
Understood. And now turning to your annualized run rate capacity, I think you’re sitting at around north of 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 1.5 billion or 1.6 billion before the new Texas facility starts to ramp up in Q4 and Q1 of 2020?
Richard Vollering (Chief Financial Officer)
I doubt it would be that high, Baltez. I think kind of that 1.4, 1.45. And you have to remember that these are all indicative, really, because it does depend on what the mix is, which factories are busy, which ones are less busy. But yeah, I’d say sort of that 1.4 to 1.45 range in the near term. But 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.
Baltez Sidhu (Analyst)
Thank you. I will turn the line over.
OPERATOR
Okay. Our next question comes from Nicholas Boychuk with ATB Capital Markets.
Nicholas Boychuk (Analyst)
Thanks. Morning, guys. I don’t want to beat a dead horse here on this margin dynamic, but I’m still not fully understanding how much of this is permanent versus transient. So, Richard or Adrian, I’m curious if you can unpack this quarter. There was one line in the MD&A talking about possible volume pull-through. I suspect that’s just a dynamic with the data center orders. I mean, 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, you know, we’ve 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 (Chief Financial Officer)
Yeah, there will be some variation from quarter to quarter depending on what projects are flowing through. And I think what I was trying to communicate—and I can’t get too specific on exactly how much of it is sustainable and how much of it isn’t—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)
Okay, understood. And on those initiatives you called out in the prepared remarks, some of the things you’ve been working on from even last year into this, on that efficiency. Is that fully complete now such that we’re kind of seeing the benefits, or are there ongoing things that will drive this even further?
Adrian Thomas (Chief Executive Officer)
Thanks. So 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 can’t comment on. But I think we called out Guelph because it’s one of our facilities producing large custom projects. So 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 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’s running around 40% of our revenue. So we have quite a bit of other business in sectors which is also healthy, which is creating sort of that general product mix that we have without data center business. So we see that healthy, particularly in the US, and so 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)
Okay, understood. Appreciate it. On AEG in particular, for it to have put up 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 (Chief Executive Officer)
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. And so 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.
I would caution this is one quarter, and so our view on AEG was really long term—how we develop the business together. And so 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. Yes. You know, 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, and so that is a positive tailwind for that business.
OPERATOR
Our next question comes from Tomo Sano with JP Morgan.
Tomo Sano (Analyst)
Hi, good morning everyone.
Adrian Thomas (Chief Executive Officer)
Hey, good morning.
Tomo Sano (Analyst)
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 4 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 (Chief Executive Officer)
So, you know, 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. So 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. But the short answer: we believe that between now and when Fort Worth will be operating, we can manage the growth of our business. And when Fort Worth starts producing, we’ll have extended our runway.
Tomo Sano (Analyst)
Thank you, Adrian. And 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 (Chief Executive Officer)
So 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, 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.
So 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. So 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)
Great, thank you, Adrian. Congrats on the quarter. Thank you.
OPERATOR
Our next question comes from Nelson Ng with RBC Capital Markets.
Nelson Ng (Analyst)
Great, thanks, and good morning everyone. First question just relates to margins. So on the IES side of the business, which is mainly AEG, I was originally under the impression that historically the EBITDA margins were kind of lower than Hammond Power Solns’ transformer business. But then looking into this quarter, it seems like it might be higher. I know that there’s some commentary on like some nuclear shipments and data center shipments, but can you just talk about margins at AEG in Q3 compared to the rest of Hammond Power Solns?
Richard Vollering (Chief Financial Officer)
Yeah, they are—well, they are… Well, 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. 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. And 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)
Okay, all right, that’s clear, because the gross margins seem pretty high. So I was kind of under the impression that—
Richard Vollering (Chief Financial Officer)
Yeah, the gross margins are high, and that was really primarily driven by a higher service mix in the quarter.
Nelson Ng (Analyst)
Got it. Okay, that makes sense. And 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, like potentially get delayed, deferred, given all the kind of noise we’ve been hearing about sentiment on data centers?
Adrian Thomas (Chief Executive Officer)
Nelson, I think broad brush, just a couple things on data centers maybe from our perspective. So as we mentioned before—but just as a quick reminder—our products are shipped relatively late in the project cycle. So 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. And so we’re usually at the latter end of that cycle. And so, you know, we are sort of entering projects that are kind of in flow, as I would say.
And so 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. And then, you know, we do see that, you know, some of the recent announcements—that there continues to be increases in capital commitments for those projects. And then I think the other piece that we look at is just quotation activity, and there’s no change there; it continues to be strong. And so 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. So hopefully that gives you some color from our business perspective.
Nelson Ng (Analyst)
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 (Chief Executive Officer)
So that is a broad statement. And, you know, 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)
Got it. And then 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? Like I know Monterrey 4 was primarily custom products, and as that ramp, the portion of custom products would also increase. And then I guess going forward, will Texas be mostly custom as well? So I guess over time do you see that 70% trending higher?
Adrian Thomas (Chief Executive Officer)
So, correct. Fort Worth is focused on larger custom transformers. And so 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 so 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’re used everywhere, it’s usually more related to the overall economic conditions of the region.
Nelson Ng (Analyst)
Got it. Okay, thanks, Adrian. I’ll leave it there.
OPERATOR
Our next question comes from Razi Hassan with Paradigm Capital.
Razi Hassan (Analyst)
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? Any comments there?
Richard Vollering (Chief Financial Officer)
Yeah, so we have—you know, we always talk about the backlog being kind of roughly two to three quarters on average of business. So, you know, we typically have visibility into Q1 and, you know, kind of Q2, and then it tails off. And that’s pretty normal, Razi, given the business cycle for our type of product.
Razi Hassan (Analyst)
Okay, thanks, that’s helpful. And 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?
Adrian Thomas (Chief Executive Officer)
You know, I mean, look, we talk about quotation activity as being a sort of leading indicator for us, and for us it’s still—we’re still seeing a lot of projects being quoted on. So, you know, hard to answer that question, Razi. But I think, you know, 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 Hassan (Analyst)
Okay, that’s helpful. And 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 transformers?
Richard Vollering (Chief Financial Officer)
I was really referring more to Power Magnetics.
Razi Hassan (Analyst)
Okay, okay, perfect, thanks.
Richard Vollering (Chief Financial Officer)
It might be just a good opportunity for me to sort of remind everybody that for AEG, their sales cycle is a little bit different, and 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. Thanks.
Razi Hassan (Analyst)
Very much.
OPERATOR
Our next question comes from Sean Jack with Raymond James.
Sean Jack (Analyst)
Morning, guys. Thanks for taking my questions. Just thinking about the normal two- to three-quarter visibility that Richard just mentioned, is there any thought, or are you seeing any need, to try and rework any of the Monterrey capacity—maybe towards more large-type or custom-type—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?
Adrian Thomas (Chief Executive Officer)
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)
Got it, got it. Okay. And then 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, you know, unlock and kind of break into North American cross-selling opportunities?
Adrian Thomas (Chief Executive Officer)
Hi Sean. So we’ve begun, we’ve started to invest in resources in North America. To my comment earlier, we’re focused in Q4 on helping develop that commercial framework of collaboration between the two regions. And then 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 27 and then I think revenue ramp from North America would follow after that according to the project cycles.
But on, on the product business, the cycle times tend to be a little bit longer. So just keep that in mind.
Sean Jack (Analyst)
Okay, awesome. That’s all from you 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 (Chief Executive Officer)
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’re entering the fourth quarter with strong operating momentum, clear set of execution priorities and confidence in the long term demand for the products and capabilities HPS provides. I’d 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.
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