Executive Summary / Key Takeaways

• Westport Fuel Systems is undergoing a profound strategic transformation, divesting its Light-Duty segment to sharpen its focus on hard-to-decarbonize heavy-duty transport and industrial applications through its Cespira HPDI joint venture and High-Pressure Controls & Systems business.
• The company's core technological differentiation lies in its fuel-agnostic HPDI systems, which deliver diesel-equivalent performance and superior fuel economy (e.g., 10 MPG for Volvo's HPDI vs. 6 MPG for spark-ignited competitors), offering a cost-effective pathway to low-carbon and net-zero fuels.
• Recent financial performance shows improving adjusted EBITDA and gross margins, with Q2 2025 adjusted EBITDA at negative $1 million, an improvement from negative $2 million year-over-year, driven by cost reductions and strategic shifts.
• Despite the $62.5 million net proceeds from the Light-Duty divestiture, a "going concern" disclosure remains, highlighting the ongoing need for disciplined financial management and successful execution of growth initiatives, particularly in Cespira.
• The outlook is centered on capitalizing on the "pendulum swing" back to natural gas in North America and continued hydrogen development in China, with Cespira targeting volume growth and the High-Pressure Controls & Systems segment pivoting to CNG applications.

A Strategic Pivot Towards Hard-to-Decarbonize Transport

Westport Fuel Systems Inc. ($WPRT), a company with 30 years of experience in alternative fuel systems, is executing a significant strategic transformation. Incorporated in 1995, Westport has historically developed and supplied components for various alternative fuels, including hydrogen, natural gas, and LPG. This deep-rooted expertise now underpins its sharpened focus on the challenging heavy-duty transport and industrial sectors, segments that are proving difficult to electrify. The company's strategy centers on its High-Pressure Direct Injection (HPDI) technology through the Cespira joint venture with Volvo (VOLVY), and its High-Pressure Controls & Systems business.

The global heavy-duty truck market is projected to reach nearly 2 million new trucks on the road in 2025, underscoring the critical need for decarbonization solutions in this growing sector. Broad industry trends indicate a "pendulum swing" back towards natural gas as a foundational fuel for heavy transport, driven by its affordability, abundant infrastructure, and growing production. This shift is particularly evident in North America, where fleet operators are expressing skepticism about electrification due to higher-than-expected energy costs and persistent hydrogen distribution challenges. Concurrently, regulatory environments are evolving, with instances like California pausing or rolling back mandates, signaling greater flexibility for alternative fuels. In Europe, LNG and RNG adoption is rebounding sharply, with LNG emerging as a preferred fuel due while China continues to drive hydrogen development with strong government support.

Westport's competitive positioning is rooted in its differentiated technology. The company's HPDI fuel system stands out as a fuel-agnostic solution capable of running on natural gas (CNG, LNG, RNG) and hydrogen. This technology delivers diesel-equivalent performance without compromise, offering a commercially viable and affordable option for achieving net-zero carbon emissions in heavy-duty transport. For instance, the latest HPDI iteration in the 500-horsepower Volvo FH Aero cab achieves a fuel economy of 10 miles per gallon on diesel, significantly surpassing traditional spark-ignited competitors that typically operate in the 6 miles per gallon range. This performance gap solidifies HPDI's reputation as the high-efficiency choice for long-haul applications. Furthermore, Westport's GFI brand has established itself as a market leader in performance for high-pressure controls and systems, crucial components for managing compressed gases.

Technological Edge and Innovation Roadmap

Westport's core technological advantage lies in its High-Pressure Direct Injection (HPDI) system and its High-Pressure Controls & Systems. The HPDI system performs the "on-engine" work, enabling internal combustion engines to efficiently utilize alternative fuels. Its fuel-agnostic nature is a key differentiator, allowing it to operate on various natural gases and hydrogen. This versatility provides customers with a flexible and cost-effective pathway to adopt low-carbon and net-zero fuels today, while also preparing for increased hydrogen availability in the future.

Recent innovation highlights include the development of a CNG HPDI solution capable of running on 700 bar storage without a compressor. This advancement not only enhances performance but also expands the horizons for cleaner fuel alternatives, especially in regions where CNG is more accessible than LNG. The HPDI fuel system has also demonstrated normal operation with a 5% to 10% hydrogen blend by volume at pressures up to 600 bar, opening new decarbonization pathways. This development is a proactive effort by Westport to "pull the market" and potentially shorten the long development cycles typically associated with heavy-duty engine platforms for OEMs.

The High-Pressure Controls & Systems segment, operating under the GFI brand, designs and produces critical components like tank valves, pressure controls, and safety devices for managing compressed gases. Historically focused on hydrogen, this segment is now strategically pivoting to leverage its expertise for the growing CNG product portfolio, particularly in North America. This involves combining its controls capability directly with tank valves, regulators, and pressure relief devices to move towards a system-based solution. To support its global ambitions, Westport is opening a state-of-the-art hydrogen innovation center and manufacturing facility in China in late 2025. This facility will serve as a hub for research, development, and collaboration to meet the increasing demand for hydrogen transportation solutions in the region. Concurrently, the company is relocating its European high-pressure controls & systems manufacturing operations to its existing technology center in Canada in Q3 2025, aiming to improve product design flexibility, increase speed to market, and bolster its commitment to global clean transportation solutions.

Financial Performance and Liquidity

Westport's financial performance in recent quarters reflects its ongoing strategic transformation and cost reduction initiatives. In Q2 2025, consolidated revenue, including the Light-Duty segment (now discontinued operations), totaled $88.8 million, an increase from $83.4 million in the same period of 2024. However, revenue from continuing operations decreased by 11% to $12.5 million, primarily due to lower sales volumes in the High-Pressure Controls & Systems and Heavy-Duty OEM segments. Cespira, the HPDI joint venture, generated $12 million in revenue during Q2 2025.

The company demonstrated an improvement in adjusted EBITDA, reporting negative $1 million in Q2 2025, compared to negative $2 million in Q2 2024. This improvement was largely driven by a significant reduction in operating expenses, which decreased to $15.5 million in Q2 2025 from $21.6 million in Q2 2024. For the full year 2024, Westport achieved positive net cash from operations of $7.2 million, a notable $20.4 million improvement over 2023, and the first time the company generated positive operating cash flow. Gross margin for the full year 2024 increased to 19% ($57.6 million) from 15% ($48.9 million) in 2023.

Despite these improvements, the High-Pressure Controls & Systems segment saw its Q2 2025 revenue decrease to $2.9 million from $3.6 million in Q2 2024, with gross margin falling to 3% ($100,000) from 31% ($1.1 million), primarily due to a slowdown in the hydrogen industry and increased material costs. Cespira reported a gross loss of $1.9 million in Q2 2025, compared to a $200,000 gross profit in Q2 2024, indicating that profitability for the joint venture remains a key focus. Management emphasizes that achieving Cespira's profitability is a "multifaceted attack to profitability," with volume growth being the "number one key," alongside cost reduction and supply base management.

Liquidity remains a critical area of focus. Cash and cash equivalents at June 30, 2025, stood at $21.4 million, with $6.1 million attributed to continuing operations. The decrease in cash during Q2 2025 was primarily due to operating losses, funding of the Cespira joint venture, fixed asset purchases, and debt repayments. The successful divestiture of the Light-Duty business in July 2025 provided $62.5 million in net proceeds, including $41.2 million in initial cash, $8.5 million in deferred payments (expected September 2025), and $12.8 million held in escrow, with the first tranche of escrowed funds expected by the end of 2025. Post-divestiture, Westport's debt will consist solely of the EDC loan, with $4.9 million outstanding at June 30, 2025, and quarterly payments of $1 million plus interest until September 2026. Despite these proceeds, the "going concern" disclosure in the interim financial statements is expected to remain in place, underscoring the ongoing need for diligent financial management.

Outlook and Strategic Initiatives

Westport's forward-looking strategy is firmly anchored in the opportunities presented by the evolving alternative fuels landscape. Management anticipates continued volume growth for Cespira over the next 12 months, driven by a renewed industry focus on CNG, LNG, and RNG for heavy-duty transportation and more stable fuel pricing. Volvo is actively expanding HPDI's presence globally, "planting growth seeds" in markets such as India, South America, Africa, and East Asia, building on its established success in Europe. The company is also actively pursuing additional OEM partnerships for Cespira, which was structured to serve multiple manufacturers.

For the High-Pressure Controls & Systems business, while hydrogen development has slowed in many regions outside China, the company is proactively pivoting to leverage its high-pressure expertise for the growing CNG market in North America. This strategic shift aims to capture opportunities arising from the "huge swing towards the compressed natural gases" in the region. Management expects operating expense reductions to continue as the organization rightsizes post-divestiture, with full reductions in R&D spend and normalized operating expenses anticipated in 2026. Total cash spending in Q3 2025 is projected to be approximately $15 million, covering incremental funding for Cespira, transaction costs, relocation expenses for the High-Pressure Controls & Systems manufacturing to Canada, and restructuring costs.

The company is targeting to achieve and sustainably maintain EBITDA break-even on a quarterly basis. The restructuring and reorganizing of the business is a multi-year effort, expected to take at least another year to complete. Westport's commitment to innovation is further demonstrated by the anticipated mid to late 2025 start of Euro 7 LPG fuel system deliveries for a global OEM customer, building on the successful Euro 6 program which exceeded 2024 delivery expectations.

Competitive Landscape and Risks

Westport operates in a competitive landscape with both direct and indirect rivals. Direct competitors include established players like Cummins Inc. (CMI), which, through its joint ventures, offers natural gas engines for heavy-duty applications, and specialized alternative fuel providers such as Clean Energy Fuels Corp. (CLNE) focusing on natural gas infrastructure, and Plug Power (PLUG) in hydrogen fuel cell technology.

Westport's HPDI technology provides a specialized edge in enabling cleaner fuel transitions with diesel-like performance, differentiating it from CMI's broader engine portfolio. While CMI benefits from extensive OEM relationships and diversified revenue, Westport's focused innovation in high-pressure direct injection offers superior efficiency in fuel conversion. Compared to CLNE, Westport provides a more comprehensive technological solution for vehicle applications, while CLNE excels in infrastructure deployment. Westport's versatility across fuel types also contrasts with PLUG's singular focus on hydrogen, potentially offering better stability in mixed-fuel markets, though PLUG leads in pure hydrogen innovation speed.

Key competitive advantages for Westport include its proprietary HPDI technology, which translates into tangible benefits like superior fuel efficiency and reduced emissions, potentially leading to improved pricing power and capital efficiency. Its GFI brand's leadership in high-pressure controls also strengthens its market position. However, Westport faces vulnerabilities due to its smaller scale, which can lead to higher customer acquisition costs and supply chain dependencies.

Significant risks include the "going concern" disclosure, which persists despite the Light-Duty divestiture proceeds, indicating ongoing financial pressures. The slowdown in hydrogen infrastructure development outside China poses a multi-year delay risk for widespread adoption, impacting the High-Pressure Controls & Systems segment. Furthermore, the lack of significant orders from Weichai (WEICY) against their HPDI fuel system agreement introduces uncertainty regarding future revenue from that partnership. The company's ability to successfully integrate its new strategic focus, achieve Cespira's profitability, and effectively pivot its high-pressure controls business to natural gas applications will be crucial in mitigating these risks.

Conclusion

Westport Fuel Systems is at a pivotal juncture, having strategically divested its Light-Duty business to concentrate on the high-impact, hard-to-decarbonize segments of heavy-duty transport and industrial applications. The company's core investment thesis is built upon its differentiated, fuel-agnostic HPDI technology and its expertise in high-pressure control systems, which offer compelling performance and environmental benefits in a market increasingly embracing natural gas. While the "going concern" disclosure highlights the ongoing need for disciplined financial management, the recent improvements in adjusted EBITDA and gross margins, coupled with the proceeds from the divestiture, provide a stronger foundation.

The path to sustainable profitability hinges on Cespira's volume growth, the successful pivot of the High-Pressure Controls & Systems business to capitalize on the natural gas resurgence, and the continued execution of cost reduction initiatives. Westport's technological leadership, particularly in HPDI's efficiency and fuel versatility, positions it favorably against competitors in a dynamic energy landscape. Investors should closely monitor the company's progress in securing additional OEM partners for Cespira, the ramp-up of its new manufacturing facilities, and its ability to translate its technological advantages into consistent financial performance as it navigates this transformative period.