Cummins Inc.

Greetings, and welcome to the Q3 2025 Cummins Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nick Ahrens, Executive Director of Investor Relations. Thank you, sir. You may begin.

Thank you, Maria. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the third quarter of 2025. Participating with me today are Jennifer Rumsey, our chair and chief executive officer, and Mark Smith, our chief financial officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Security Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs, and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck in our filings with the Security and Exchange Commission, particularly the risk factors and section of the most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website within the investor relations section at Cummins.com. With that out of the way, I will turn you over to our chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Nick. Good morning, everyone. I'll start with a summary of our third quarter accomplishments and financial results. Then I will discuss our sales and end market trends by region. Finally, I'll provide an update on how we are navigating the evolving trade and policy landscapes, along with our market outlook for the remainder of the year. Mark will then take you through more details of our third quarter financial performance. Before getting into the details of our results, I want to take a moment to highlight a few major accomplishments from the third quarter. In September, we announced a collaboration with Komatsu to develop hybrid powertrains for surface haulage heavy mining equipment. This joint development effort will leverage the breadth and scale of Komatsu's and Cummins' global capabilities to enable the acceleration of optimized hybrid solutions for mining. Retrofit hybrid solutions hold the potential to help mining customers accelerate their decarbonization journey today while lowering the cost of operations of their installed fleet assets. We are excited about this opportunity to bridge current operational needs with future low-carbon goals to support our customers' sustainability efforts. Additionally, our latest 15-liter engine delivered standout results during this quarter's Run on Less Messy Middle event hosted by the North America Council for Freight Efficiency. Three of the 13 participating fleets ran the new X-15N natural gas engine through some of the most demanding duty cycles of the demonstration, showcasing its ability to deliver true heavy-duty performance while unlocking the cost and emissions benefits of natural gas. At the same event, our X15 diesel led in fuel economy and operational efficiency, reinforcing its position as a benchmark for dependable high performance power. These results highlight the growing adoption of common technologies and the tangible value customers are experiencing from our advanced powertrain solutions, all produced here in the US. Now I will comment on the overall company performance for the third quarter of 2025 and cover some of our key markets. Sales for the third quarter were $8.3 billion, a decrease of 2% compared to the third quarter of 2024. Lower sales were primarily driven by weaker North America heavy and medium-duty truck demand, with unit volumes declining 40% from a year ago, which was largely offset by continued strength in our global power generation markets, higher light-duty truck volumes, and favorable pricing. EBITDA was $1.2 billion, or 14.3%, compared to $1.4 billion, or 16.4%, a year ago. Third quarter 2025 results included $240 million of non-cash charges related to our electrolyzer business within the Accelera segment, reflecting lower demand expectations due to reduced U.S. government incentives and slower market development internationally. Excluding those charges, EBITDA was $1.4 billion, or 17.2% of sales, an increase of 80 basis points from a year ago, as the benefits of higher power generation and light-duty truck volume, pricing, operational efficiencies, and lower compensation expenses more than offset declines in North American truck volumes and the unfavorable impact from tariffs. We did increase the proportion of tariff costs recovered through pricing and other mitigation actions in the third quarter compared to the second quarter. However, the magnitude of total tariff costs increased from Q2 as expected, and the net impact to Cummins was negative year over year. Our third quarter revenues in North America decreased 4% compared to 2024. Industry production of heavy-duty trucks in the third quarter was 46,000 units, down 34% from 2024 levels, while our heavy-duty unit sales were 16,000, down 38% from a year ago. Industry production of medium-duty trucks was 20,000 units in the third quarter of 2025, a decrease of 51%, while our unit sales were 17,000, down 55% from 2024. We shipped 40,000 engines to Stellantis for use in the RAM pickups in the third quarter of 2025, up 44% from 2024 levels, driven by a ramp-up of model year 25 product, which was launched earlier this year. Revenues for North America power generation equipment increased 27%, driven by continued strength and data center demand. Our international revenues increased by 2% in the third quarter of 2025 compared to a year ago. Third quarter revenues in China, including joint ventures, were $1.7 billion, up 16% from a very weak quarter last year, as stronger unit demand was partially offset by unfavorable product mix and weaker part sales. Industry demand for medium and heavy-duty trucks in China was 311,000 units, an increase of 50% from last year. Our sales in units, including joint ventures, were 41,000, an increase of 35%. The increase in the China market size was primarily due to higher-than-expected domestic demand driven by NS4 scrapping incentives. Industry demand for excavators in China in the third quarter was 54,000 units, an increase of 22% from 2024 levels. Our units sold, including joint ventures, were 9,000, an increase of 18%. The increase in the China market size is primarily driven by domestic rural development and small infrastructure projects, as well as strong export demand. Sales of power generation equipment in China increased 26% in the third quarter due to accelerating data center demand. Third quarter revenues in India, including joint venture, were $713 million, an increase of 3% from a year ago. as stronger demand across markets was partially offset by depreciation of the rupee against the dollar. Industry truck production increased 6% from 2024, while our shipments increased 8%, driven primarily by domestic demand recovery, as well as a pre-buy in advance of the potential goods and service tax rate changes. Power generation revenues increased 41% in the third quarter, driven by strong data center demand. To summarize, we achieved strong results led by record performance in our power systems and distribution segments, which were offset by sharp declines in the North America heavy and medium-duty truck demand, which negatively impacted our engine and components businesses. We expect the near-term weakness in North America on-highway truck markets to persist at least through the end of this year. Across all North America on-highway applications, We anticipate unit shipments declining approximately 15% from third quarter levels, with most of the reduction expected in light and heavy duty trucks. This reflects some normalization in light duty trucks after strong Q3 ramp up in the new model production, along with fewer production days in the quarter and continued weakness in heavy duty trucks. While we believe Q4 on highway engine production could mark the bottom of this cycle, the pace of recovery in these markets will depend on broader economic sentiment and the clarity of trade and regulatory policies. While near-term challenges remain in our shorter cycle markets, we continue to see strong demand for power generation equipment beyond this year. The global trade and policy landscapes remain dynamic, presenting ongoing challenges across our industry. As anticipated, tariff costs increased in the third quarter. We are nearing full recovery for those tariffs announced prior to the third quarter and are currently assessing any incremental impacts from the more recent announcements, including the medium and heavy duty vehicle section 232 proclamation. We believe overall we are well positioned to support our customers and keep the U.S. economy moving with our long established strategy of making products in the U.S. for the U.S. market. Rising geopolitical tensions could also pose risks to semiconductor supply and other products that utilize rare earth minerals, potentially impacting our supply chain and broader industry production. So far this year, we have not experienced significant disruptions to our production, and we are actively monitoring this evolving situation and taking steps to mitigate risk where we can. The reduction of government incentives in the U.S. to support the adoption of green hydrogen, along with slower than expected market development in some international markets, has contributed to significantly lower demand for our electrolyzer products. As a result, we are undergoing a strategic review of our electrolyzer business to assess the best path forward, and there may be further charges as we respond to a very weak demand outlook. 2025 has presented significant challenges for our industry, as I've outlined, requiring us to focus even more on cost containment and risk mitigation than we had anticipated at the start of the year. Our experienced leadership team and dedicated employees have worked tirelessly to navigate these dynamics and also capitalize on the growing demand for power generation equipment and significantly improve company performance cycle over cycle. Looking ahead, we are hopeful that global trade policy will stabilize and that the administration's review of the 2027 EPA regulations will conclude in the coming months. This clarity will be critical for our industry and will support our plan to reinstate guidance for 2026 in February. Now, let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. We delivered strong results in what can be best described as a tale of two economies, certainly here in the U.S., Key takeaways today are, number one, business trends in the third quarter played out as we communicated at a high level three months ago. Demand for our power systems and distribution businesses remains very strong, driven in part by rising demand for backup power for data centers. US truck production, on the other hand, slowed sharply, with our shipments and heavy and medium duty truck engines down 27% from the second quarter right in the middle of our uninspiring projection of a decline of between 25% and 30%. Our margins were strong with sales growth in power systems and distribution converted into EBITDA margin expansion, and cost containment efforts across the company helped mitigate the impact of declining truck volumes in the US. Thirdly, also as we projected, the negative impact of tariffs continued to grow in the third quarter. However, we managed the net hit to our profitability through price recovery and other actions, and the proportion of cost recovery in the third quarter increased sequentially. Fourth, our operating cash flow was strong at $1.3 billion in the quarter. Amongst those highlights, it's worth reinforcing that we're extending our track record of meaningfully improving our performance cycle over cycle. Now let's take a little closer look at our results. Our revenues were $8.3 billion, down 2% from a year ago. Sales in North America decreased 4%, while international revenues increased 2%. EBITDA was $1.2 billion, or 14.3% of sales for the quarter, compared to $1.4 billion, or 16.4% of sales a year ago. Third quarter 2025 results included $240 million of non-cash charges related to our electrolyzer business within the Accelera segment. Excluding those charges, EBITDA was $1.4 billion, or 17.2% of sales. The higher EBITDA percent, excluding the non-cash charges, was driven by higher power generation demand and light duty truck volumes, pricing, strong operational efficiencies, and lower compensation expenses all of which was partially offset by lower North American truck demand and the unfavorable impact of tariffs. Now I will go into a little bit more detail via line item. Gross margin for the quarter was $2.1 billion or 25.6% of sales compared to $2.2 billion or 25.7% of sales last year. 2025 margins included a $30 million non-cash charge for inventory write-downs for our electrolyzer business, which were part of the previously mentioned non-cash charges for Accelera. Excluding those charges, gross margin percent was 26%, improved from the prior year as a result of higher power generation demand and light duty truck volumes, pricing, operational improvements, all offsetting negative truck and tariff impacts. Selling admin and research expenses were $1.1 billion, or 13.6% of sales, compared to $1.2 billion, or 13.8% of sales, and reflected strong cost control across the company. Joint venture income of $104 million increased $5 million from the prior year. This increase was driven by higher China volumes within our engine and power systems segments. That was the primary driver. Other income decreased to a negative $186 million compared to $22 million of income from the prior year, which was primarily a result of the $200 million non-cash goodwill impairment to the electrolyzer segment. Interest expense was $83 million, flat with the prior year. The all-ineffective tax rate in the third quarter was 32.7%, which included $36 million, or 26 cents per diluted share, of increased tax expense related to the One Big Beautiful Bill Act as a result of reduced foreign income deduction and research and development credits. We do anticipate cash benefits from our elections under this recent U.S. tax legislation, but the current period income statement impact was negative. All in net earnings for the quarter were $536 million or $3.86 per diluted share compared to $809 million or $5.86 per diluted share a year ago. Accelera non-cash charges were $240 million or $1.73 per diluted share. Excluding the Accelera charges and the impact of adopting the recent US tax legislation changes Our net earnings were $812 million, or $5.85 per diluted share, down just a penny on a 40% decline in U.S. truck volumes. Operating cash flow was $1.3 billion compared to $640 million a year ago. We have significantly improved our credit metrics since absorbing the Meritor acquisition and are now in a position of greater flexibility for capital allocation. Now let me comment a little bit more on segment performance and the remainder of 2025. Tariff costs impacted all of our operating segments. In the interests of time, I'm not going to call that out five times as I discuss each individual segment performance. For the engine segment, third quarter revenues were $2.6 billion, a decrease of 11% from a year ago. EBITDA was 10% a decrease from 14.7% as weaker North American and heavy-duty truck volumes, the costs and additional overhead of investing and deploying new engine platforms ahead of the 2027 emissions regulations, some weaker aftermarket sales were partially offset by higher volumes and pricing related to the launch of updated products in light-duty markets, and overall disciplined cost management. Component segment revenue was $2.3 billion, a decrease of 15% from a year ago. EBITDA was 12.5% compared to 12.9% of sales a year ago. It was weaker on highway demand in North America, partially offset by operational efficiencies, tight cost management, and lower product coverage costs. In the distribution segment, revenues increased 7% from a year ago to a record $3.2 billion. And EBITDA was also a record 15.5% compared to 12.5% of sales a year ago, driven by higher power generation demand and higher aftermarket earnings. In the power system segment, revenues were a record $2 billion, an increase of 18% from a year ago. EBITDA dollars were also a record at $457 million, increasing as a percent of sales from 19.4 to 22.9, driven by strong volume, particularly in data center applications, positive pricing, and effective capacity expansion in a cost-effective way. Accelera revenues increased 10% to a record $121 million as increased e-mobility sales partially offset lower electrolyzer installations. Our EBITDA loss, excluding non-cash charges, $96 million compared to an EBITDA loss of $115 million a year ago, reflecting a lower cost base resulting from the actions that we took in the fourth quarter of 2024. In summary, we delivered strong profitability for the third quarter as a result of improved operational execution, strong demand in power generation markets, and pricing that more than offset the sharp declines in North America truck markets and unfavorable impacts from tariffs, although it has to be noted that all of these factors were not uniform across each individual segment. While we saw an increased impact from tariffs in the third quarter, we've worked hard to mitigate the impact and expect to enter the fourth quarter close to a price-cost neutral position for tariffs or for those tariffs that were announced prior to the third quarter. The ongoing addition and adjustment of tariffs continues to present challenges. In summary, our third quarter results underscored Cummins' strong financial position and ability to navigate ongoing uncertainty. Our diversified portfolio and global network leave us well positioned to support our customers and continue to drive improvement in performance cycle over cycle. As we've discussed, we expect demand for power systems and distribution to remain strong through the fourth quarter and going into 2026. At the risk of sounding cautiously optimistic, I hope that demand in North America on highway markets is close to bottoming in the fourth quarter in what has been a protracted and difficult slowdown. We do anticipate a further 15% decline in our interest engine shipments to one highway markets in the fourth quarter compared to the third quarter. We are hopeful of reinstating our guidance in February as we hope to have more clarity on trade and regulatory policies that hopefully will provide stability for the North American truck industry and the broader industrial economy. As these markets recover, we are confident in our ability to build on this year's strong performance and continue delivering value to shareholders. Now let me turn it back over to Nick.

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we are ready for our first question.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Jamie Cook with Truist Securities.

Please proceed with your question. Hi, good morning, and congratulations on a nice quarter. I guess... two questions. One, Mark, how you're thinking about engine margins in the fourth quarter and the ability to cover tariff costs or how to think about margins would be my first question. I guess then just my second question, as we think about power systems, obviously the margins were very strong in the quarter. Just trying to think through how we think about 2026, the ability to ramp production more, how you're thinking about price cost, and I guess, Mark, do we need to raise the margin targets in power systems? Thank you.

High-quality questions to answer. Let's start with the engine business, and then Jen can comment on power systems. Yeah, I think there are a number of things that the engine business is dealing with that provide great complexity, right? We've got product changeover. We're preparing, hopefully, to launch new platforms. We've got some additional extra costs. We saw some slowdown in parts in the third quarter, and we're having to maintain this higher engineering budget until we get through the product launches. Having said all that, they're doing a lot, the leadership team within the engine business across the company, doing a lot to manage their costs. Hopefully, we're getting towards the low point, so I think, yeah, I wouldn't expect, with what I know right now, to see a dramatically different performance from the engine business, albeit on lower volumes in the fourth quarter. Clearly, volume is a temporary downward pressure given short quarters, an inflated ramp-up, which we're excited about on the ramp pickup, which will kind of ease a bit. But overall, I think hopefully we're moving towards the bottom in terms of the pressures on the engine business and components.

And, Jamie, on the power gen, you know, obviously we've seen really strong performance from both power systems and distribution. business and power systems in particular, we've been on a couple-year journey to really fix some of the underlying performance of that business, look at rationalizing the products that we're offering, how do we leverage the footprint that we have, get more strategic on how we're pricing in the market, and we did that at the same time that the power generation demand has grown at a really high rate, and we've been able to invest modestly in capacity expansion, about $200 million, bringing in new products, kind of exactly the right time. So that really has been firing on all cylinders, if you would, and delivering incremental margins that are touching on 50%. So what I would say is we are committed to continuing to invest for profitable growth in that business. We had record order intake in Q3, so we think that the demand remains strong, in particular for data centers. and that we will continue to invest as it makes sense in capacity and products to profitably grow and improve business performance, but I would not expect it to stay at that trajectory of incremental margin improvement as we go into future years.

Our next question comes from Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi, good morning, and congrats on another strong quarter here. Jan, I was hoping you could just kind of expand on your last comments that you just made about capacity additions. I think at this point, you know, you're well kind of ahead of your expectations at Invest Today on data center sales. And as you mentioned, you already have that doubling of kind of large diesel engines capacity underway. But just in light of kind of the stronger demand, can you maybe walk us through, you know, what work or kind of assessments you might be doing on the back end to understand, you know, whether there's need or desire to kind of do either additional capacity investments in large diesel engines or potentially, and maybe more importantly, are you exploring any potential for expanding your lines on the natural gas engine to kind of increase to the larger engine sizes to perhaps pursue some of the kind of prime power opportunities that we're seeing out there for data centers as they look for other prime power kind of speed to power opportunities? So, Any comments on this longer-term backdrop given the strong demand we're seeing?

First, I'd say our focus has really been on this capacity investment that we've talked about. We're reaching the end of that doubling in capacity on large engines, as you noted. Position has heavily been in the backup power for data centers with the products that we have that we're selling into the market today. You know, I'm really pleased with the execution of that team. You know, we've tracked, you know, kind of ahead of schedule on that capacity expansion. We're reaching the end as we come to the end of the year. And just to give you a sense, in 2024, for data center power generation, our total revenue for the company was $2.6 billion. About half of that was in power systems. About half of that was in DDU because one of the unique things that we have is engine, some of the key components and auxiliaries that we sell to that market, plus the channel. So we're getting benefit in both PSBU and DBU. For 25, we expect that revenue into the data center market is going to be up 30 to 35%. It's been ramping up. Q4 last year, we had a nice bump up, continuing to ramp up this year. And so we'll be kind of at that full run rate. on that product expansion for data centers. And then that leads to kind of the second part of your question is, you know, really focus now on what's next. Are there additional places where we want to do capacity expansion of the products that we have? Because we think that that demand in that market is going to remain strong, so we're actively looking at that. With the products that we have, engines for peak shaving, should we invest in prime power engines or more natural gas engines? So no decisions there, but certainly those are things that we're looking at and we'll continue to share as we make decisions on where we want to go next in the data center.

Yeah, and then for some of the component technologies, we're also selling to other customers as well, somewhat akin to the components business story. So, yep, it's exciting to be talking about investment with visibility and the returns in that business.

That's very helpful. And then just for my follow-up, Mark, on the Section 232, could you help us quantify, I guess, how much the headwind is in 3Q and 4Q on kind of a gross basis? And any comments or kind of way to maybe put guardrails around the potential for getting a similar rebate on engines manufactured in the U.S. as we've seen, I think, the U.S. trucks manufacturers get? And, you know, what is kind of the financial impact of that as we think about

know potentially 2026 is getting such a rebate tell you what i've got exactly the same questions that you've got and we got we need to know a lot more details than we've currently got to be able to predict that what i will say is we're in a you know we are strong manufacturer of engines in our plants here in the us so we're really well positioned to help our customers and navigate through but honestly you know all this modeling's i know it's important in some regards but the actual details you know, there's five or six questions that we need a lot more details to to be able to calculate it, let alone communicate it. So what I would say is, you know, we're in a strong position given our footprint and we'll remain a strong partner to our customers through all of this. And you can generally tell from our tone that stability going forwards would be really, really helpful for what is outside of a broad economic recession or what I'd call a hard emissions change. This is the sharpest decline in truck orders that many of who have been here a long time have witnessed. And it's not all down to tariffs, but they also don't help with that uncertainty. So look forward to more clarity, even more so the stability, but we're in a good position overall. And, you know, we're trying to work through all this collaboratively with customers and suppliers. It's been a huge demand on all participants.

Our next question comes from David Russell with Evercore. Please proceed with your question.

Hi, thank you for the time. Thinking about a delta between 25 and 26, the actions taken in Accelera sort of set up an interesting dynamic there. What percent of the losses right now are electrolyzers? How should we think about the actions taken, sort of the decision around that business, how much that can improve the size of the losses from 25 to 26?

Yep. What I would say is all we've recorded in this quarter, the really non-cash impairment charges, mostly good, we'll write down, which, yeah, is disappointing but necessary given the weaker outlook. So I would say what we've done really doesn't, so far, David, doesn't do much to change the trajectory. But as Jen pointed out, we obviously have been and continue to look very closely at further actions we can do to reduce the rate of losses. It's less than half of the total of the overall Accelera segment, but watch for updates on that from us.

Okay, and actions that would help reduce that loss. I mean, once you make that decision on the write-down, I would think there's harder decisions playing out behind the scenes on cost. Are those actions that could help 26, or is there a longer time frame when I think of the delta between 25 and 26?

There are different types of actions, but we are conscious, you know, if there's a lower demand environment, you know, we're not, nobody's comfortable sitting at the losses that we're at when the demand environments change. So we're looking at all that and we'll be transparent when we've concluded that here, but we're working on it right now.

It's fair to say strategically, we're continuing to look at the Accelera portfolio in light of, you know, how markets are moving, slowdown that's happening and what technologies we think are most likely to win. And then, investing in the places that we see the opportunity to position ourselves for the medium and long term and looking at how we reduce losses and other areas. At the end of last year, we did that in the fuel cell part of the business, and we're continuing to execute some of those changes, and now we're looking at electrolyzers, as Mark noted.

It's fair to describe the decline in revenue outlook as sharp and dramatic and merits further close review, which is ongoing right now.

Our next question comes from Rob Worthmeyer with Milius Research. Please proceed with your question.

Hi. Thanks for all the comments on direction. It's very helpful. On NatGas and data centers and prime power, I mean, Cummins obviously has very successful NatGas platforms in different engines. I wonder if you could give us a mini teach-in on what that entails. Is it a hard engineering challenge to bring it to large engines? Is it you need a lot of operating hours? maybe what goes into that decision. And then I wonder if you could just talk about any changes. I mean, you guys were ahead of the data center boom or capitalizing on that. Anything shifting now? Any change in data center design? Is it all of MUSE backup, the ratio? Just maybe what's evolved in the market over the last few months. Thank you.

Yeah, so as you said, I mean, Cummins has strengthened engine, you know, engine performance. research and development and manufacturing capability, we understand natural gas. So the question is, we have a certain portfolio of natural gas products today and assessing what is, you know, if there's demand for natural gas for data centers, what's the right product? If we don't have it today, you know, our development is a multi-year development cycle typically, but we have the capability to do that if we think that that is going to be attractive growth So that's how I would think about natural gas. In terms of the data center landscape, what you see is high reliability is absolutely critical. So the need to have backup power to ensure that high reliability is not going to go away. They don't run that often. Really where the challenge is is more in the prime power and can the grid support it and how do they solve the prime power challenge. And so that's where using a backup genset maybe for peak shaving or additional sources of prime power or what data centers are out exploring. And as I mentioned in my comments earlier, I think we have ability to do some peak shaving with products that we have today. We've started to invest in some stationary energy storage solutions that could be used in data center applications, and we're continuing to evaluate, you know, where else we think we're positioned to invest and get attractive returns.

Thank you.

Our next question comes from Kyle Mingus with Citigroup. Please proceed with your question.

Thank you. I was hoping if you could just talk a little bit more about Accelera and actually just looking at the performance. It seems like you're actually still on track to hit the midpoint, if not a little bit above the full year guide within Accelera on revenues for this year. Sounds like e-mobility had some nice growth in the quarter as well. So it would be helpful just to hear about the growth you're seeing in e-mobility versus electrolyzers and then also maybe at a high level, the differences in profitability that you're seeing right now between the e-mobility piece of Accelera and the electrolyzer piece.

Yeah, I would say most of the actual sales in e-mobility are bus applications, a lot of it here in the U.S., and that's continuing, and we're in a great position there. There's lots of other explorations and discussions. There's been a big shakeout even in the e-mobility industry given, I would say, lower prospects for accelerated growth. Even though we're growing, the overall, everybody's projections for growth has come down, and that's led to a shakeout certainly in a lot of the startups and other less well-capitalized participants. So I think there's still a lot of discussion and future opportunity for Cummins in e-mobility. And I think that's been generally been a good story that as the volumes and we've released new iterations of products that we've moved from, yeah, significant losses and negative gross margins or something a lot more stable and sustainable going forwards, It's still somewhat muted in the grand scheme of a $35 billion company, but we've seen clear progress there and we're positive in staying invested there. On electrolyzers, we went back a couple of years, we had pretty ambitious targets for growth and we were tracking that trajectory every quarter. We were tracking years out where do we need to be and we were on that curve for significant revenue growth for quite some time. And the reality is, yes, it's dried up faster than anything I have seen in my career for a variety of reasons, especially here in the US, but also some of the adoption in international markets. So whilst, yes, we've probably guided a little cautiously going into the new year, not knowing exactly what would happen, so we're not way off on the revenue from the guidance that we no longer have, but the one that we originally gave, But yeah, internally, it surprised even us to the downside. And so that's why it might look to you like we're on track, but electrolyzer is way off. And it's not just for now, but then that leaves the orders. There's a big gestation period between taking an order, shipping a product, having it installed, recognizing the revenue. And so not only is that shorter orders now, that's leaving like a hole in the projections going forwards for the next couple of years. So that's why we're acting now. So it's tough, very tough in X e-mobility, but we're pleased with the progress. And I don't want that to be lost from the e-mobility team.

That's helpful, Mark. And then just to follow up on clarifying some of your comments on the engine margins and maybe just thinking about some of the puts and takes into the fourth quarter on engine margins as you start to neutralize tariffs, even though volumes could still be down sequentially. I mean, I guess the question when you said engine could be kind of similar to the third quarter, does that mean that you have confidence in doing roughly 10% EBITDA margin again in the fourth quarter or Are we talking about similar decrementals, in which case you could be talking about 8% EBITDA margins for engine in the fourth quarter?

I'll just say it out here. I don't expect to have 8% margins in the fourth quarter in the engine business, but some of the factors. The volume is going down. Not we expect it to. I'm unfortunately confident, but we hope that's a bottoming. We also saw a slowdown in parts. We hope that doesn't continue. And then, yes, all the other things that we're doing on cost, productivity, managing through tariffs can all help mitigate. It's certainly not going to be dramatically better. We're dealing with more headwinds. I've tried to be clear about that. So hopefully that helps. There's always a bit of seasonality, fourth quarter, going into the holiday period. Those usually get exaggerated when you're in a weak economic environment. But just know we're working hard, the engine business is working hard every day to get this balance right. You can see from our financial reports that we disclose the engineering costs by segment, by quarter. You can see our engineering costs are up year over year because we're still in this pre-launch development, not yet final certain regulations, so that's got to continue, but that shouldn't be a step worse in the fourth quarter. Don't expect magic, but don't expect 8% EBITDA with what I know right now.

I'll just add a couple points. I mean, we've been working to flex down plants, and so seeing that action coming through the full Q4, as well as the engine business has seen more than its share of the net tariff impact that impacted them in Q3, to more full recovery in Q4 will reduce.

I mean, there's always some natural variation across some of the businesses. In general, as we've said, we expect power systems and distribution to be strong. No quarter's ever identical to the prior one, even if it looks similar on the top line. Pressure's still there on engine business and components. We've still got to take control on costs, and we're figuring out what else we can do on Accelera. That's the headline, and then, as I mentioned earlier, We've also done a lot to improve our credit metrics, which gives us flexibility for capital allocation going forwards. So as much as troughs are tough, they also give you, working through them effectively gives you that platform and that confidence to move forward when demand improves. Unfortunately, I wish I could be more bullish and say we're super confident. We feel like we're getting to the closer to the bottom of trough, bottom of the trough on on-highway. We think the trends on power generation, data centers which benefit power system distribution are going to continue. So hopefully we get this coming together of strong demand across the company at some point here in the not too distant future. It's a little elusive right now on trucks, but we feel given how long it's been and how far it's been down, that is a question of time and a cyclical business. But it's not imminent that it's going to turn up.

Our next question comes from Tammy Zakaria with JP Morgan. Please proceed with your question.

Hi. Good morning. Great quarter and thanks for your time. Are you able to speak to the distribution or services opportunity you see long term as you're selling these gensets and, you know, probably have a very sizable installed base right now? What is the typical expectancy of these? Is there a scenario where we would see the first wave of aftermarket services picking up for those units that you've sold over the last 12 to 24 months. So any way to comment on that or quantify that?

So, Tammy, you know, for data centers, the distribution business gets revenue on the front end for a lot of the customers as they do the installation and some of the additional components and components. product around the engine and the genset in the data center. There's not a lot of aftermarket revenue in data center backup power because they don't run that often. So there's some service and support that we provided those customers to ensure they stay out. It's not the same if you think about like a mining application or a truck application. That said, you know, our install base has been growing and those other applications that do drive or aftermarket content. So we believe aftermarket in general will be a tailwind for the distribution business and especially as customers come back. There's a little bit of waiting on service that isn't necessary right now because of business financial conditions, but we think that we'll see some improvement in aftermarket as Mark had noted.

Understood. That's very helpful. And if NOTS 2027 is not delayed after review, how are you thinking about the cadence of any product launches in 2026 tied to that?

Yeah, great. Well, we continue to maintain our focus on development of the new products that we're launching for 2027. and feel good about how we're positioned with the new platforms and technology that we're bringing to our customers. It's important to understand we've never had this level of uncertainty around regulation. So that's certainly been challenging and keeping our team focused on the launches ahead, starting to work with our supply base on different scenarios and what that could mean to try to ensure we can offer product to our customers as we understand that decision. And really, we've been engaging closely with the EPA as they look at opportunities to try to take some cost out of that rule and also just emphasizing the need to get certainty as soon as possible. And I think everybody, you know, the OEMs in the industry are pushing on that certainty point. So we're prepared to launch, really hoping to get that certainty on direction in the not too distant future and assuming that the 27 regulations largely stay in place as they are today, we'll be ready to launch our products into the market in 27.

Our next question comes from Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning. Congrats on the power results. Just curious on the international data center opportunities. Relative to the u.s. How do you see those being different and is there any difference in the momentum there? And how are the competitive dynamics different internationally versus on the domestic side?

If you look at the data center market me we see strong and growing demand in US and China Those are the kind of the standouts. There's there's growth Globally you heard in some of my numbers on how the market is moving We're seeing investment in data centers and other markets around the world, but the two are biggest areas are really U.S. and China. And, of course, everybody is trying to figure out how to get in and compete in that market. So we're very well positioned today and really trying to focus on continuing to maintain a strong position with our products as others try to figure out how do they take advantage of those market opportunities.

Okay. And then go ahead, Mark. I was going to say, obviously, in China, in most of our markets, you tend to see more presence of local competition or trying to get in than we do in the U.S. or in other markets.

That makes sense. And then on the power systems margins in general, obviously, it's still very strong, and you talked about the 50% incrementals before. I guess just noticing as the years progressed, The segment's margins have kind of flattened out a little bit. I'm just kind of curious what's driving that. Are there other things outside of data centers that are restraining that? I know at the beginning of the year we talked a lot about the aftermarket components in there. Maybe that was just fluctuating a little bit. Just curious, you know, how to think about sort of that flattening that we're seeing over the course of this year.

I would say the general trend. So that's the great news. There is some natural variation between aftermarket, old goods, segments. So some of that sometimes is at play a little bit. The good news... Back to somebody asking, should we raise the targets? I really like the way you're thinking. I'm sure Jenny and her team might be dialing in. If not, we'll relay that to them later. But, yeah, really proud of the work that we've done there. And with rising demand, yes, there's some capacity investment. You know, we're expecting earnings growth. Let's just put it out there. We're expecting earnings growth from here going into next year with what we know right now.

Sounds good. Thanks very much.

Our next question comes from Noah Kai with Oppenheimer. Please proceed with your question.

Well, thanks. You know, Jen, I think you framed it well. We talked about the level of uncertainty right now as you prepare for next year's product launch vis-a-vis the regulations. But as you kind of get into year-end budgetary planning, is it fair to think of as a baseline that, you know, engineering and development spend can be a potential tailwind into next year? Or would you expect it to be, you know, a headwind if the base case of unchanged regulations goes forward?

In the base case of unchanged regulation, I would think of our research spend as pretty flat through next year when we launch the product, and then we'll have the ability to start decreasing that after that. And then I would think about... Just in terms of demand, as we're planning for next year, that's where the highest error bars are is what's going to happen on highway demand. As Mark noted, we think we're reaching the bottom. We think there's some upside. When does that happen given the capacity that's been taken out as we've responded to this big down cycle? How quickly will capacity be added back once demand starts to come up? I'm thinking about some revenue increase at some point in the year, but R&D is staying pretty flat.

Yeah, Accelera probably won't be growing, and there's always the question of what are we investing in the future, whether that's in engines and components or in power systems or future technologies. But yeah, not a dramatic change for the next year. I mean, there's just natural inflation because a lot of those costs are people costs. There is some natural inflation that we're always counting against. So it will not be a significant tailwind, let's put it like that. Sure. That's just helpful for us.

Longer term, yes.

Longer term, yes, but not tomorrow.

Not yet.

Yep, yep, yep. And on that topic of investing, and I want to tie it back to the discussion around the prime power opportunity. 30% of data center sites could be using prime power in some form five years out from now. You've got fuel cell in the portfolio. You've got battery. You've got you know, natural gas and diesel, Jen, how do you think about tying together some of those elements, including what might sit in Accelera today, to go after expanded wallet share if prime power becomes more of a growth opportunity?

Yeah, well, you know, our strategy really has been to maintain a portfolio of solutions, likely across different customers and markets. There's not going to be one answer. I think our strong position in engines is power demand grows and as energy transition pushes out, positions us really well. We're really more focused, frankly, in both power generation and in mobile applications on the battery opportunities where we think there's more opportunity versus fuel cell. As you know, we've slowed down some of the investment and work on the fuel cell side and There will be more to say if we have a clear investment that we think is going to be attractive on the prime side, but today we're really focused on continuing to execute on some of the investments that we've made to expand capacity and stand by and being disciplined in how we think about additional investments into that market.

Makes sense. Thank you.

I think the great thing with what we've done right now, it's relatively modest investments for a lot of growth with quite high predictability of return, so we're definitely enjoying that in our financial results. Should do more going forward.

Our next question comes from Scott Group with Wolf Research. Please proceed with your question.

Hey, guys. This is Cole. I'm for Scott. Maybe just to expand on engine margins, It sounds like the net tariff impact peaked in 3Q as you recover more price and ramp down facilities in 4Q. But as you look ahead to 2026, a 3.75% rebate is not immaterial. How much could this positively impact margins in 1Q or throughout 2026, all else equal?

I just can't. I simply can't answer that. I wouldn't be thinking about tariffs as margin improvement things. it's been a big cost headwind that we've been trying to recover and work with all that we can to mitigate the cost. I think I understand why you're asking, but we are not framing tariffs as a margin opportunity in any way, shape or form. It's been a big hindrance to our industry and hopefully we get stability and relief. Okay. Fair enough.

You're right.

You're right. Going into Q4, we are, it is true. We're catching up more with the recovery of the tariffs. I correct myself. I just put anything incremental. We, That's not the way we're thinking about it. We're hoping there's a platform for greater demand for the end-user customers.

Okay. Yeah, that's just to reiterate Mark's point. The way to think about it is if we get stability and tariffs and customers start ordering again, that'll help our margins because we'll be utilizing our plants more, but by itself as a margin improvement. We're just trying to cover the cost, basically.

And we don't know enough to know all the nuances of any recently announced things, rebates or other things. There's just a lot more detail. Even the emissions regulations, it's great to get the headline. There's a gazillion things that you need to know between that as to how that actually works financially, practically, and other things. So we'd love to give you more clarity. We just can't yet.

That all makes sense. And Maybe just on the competitive dynamic, there's a lot of moving pieces with certain OEMs now either in a better or worse competitive position due to these new Section 232 tariffs. How do you expect this to impact your share position across the engine business moving forward?

We are in a strong position to support all of our customers with our U.S. base, and the great news is we've got great penetration across multiple brands and OEMs. Generally, the trend has been for our customer demand for Cummins products has been rising in heavy and medium-duty truck over the last few years. We feel like we're really well-positioned, but it's obviously been very complex for all involved and continues to be so.

Our final question comes from Chad Dillard with Bernstein. Please proceed with your question.

Hey, good morning, guys. So just given the market demand for standby power that you guys talked about, you know, record level of orders this past quarter, does Cummins need to expand capacity beyond what you've already announced? And then I was hoping you'd comment on, I guess, the role of standby power as more prime power moves behind the meter.

Yeah, so from a capacity perspective certainly we're looking at in addition to evaluating our if we do anything on the prime power side which we've talked a lot about this morning you know we are evaluating are there places that we can continue to invest in capacity because we do see such strong demand and whether it's the orders we took last quarter and the conversations we have are having with some of our customers around the world we think that that demand is going to continue and so if there's places that we think we can invest to take capacity up we'll We will be evaluating that, certainly. And we still think that, you know, in the coming years, this demand for prime power is going to continue. Well, I do think that there tends to be a hype cycle around technology. Fundamentally, the need to store more data in the cloud, whether it's AI or other driven, is a trend that's going to continue to grow.

And then second question. Just on tariffs, so can you quantify the gross tariff impact in 2025? And then what's the split between IEPA versus 232? And, you know, if we do get IEPA rolled back, I mean, should we consider this more of like a pass-through?

We have not provided the guidance on the gross amounts generally, but the net position has been negative for the company, and we're in the tens of millions of dollars of negative impact each quarter so far. That's what I can tell you. And what happens, I'm just not going to speculate. We just don't know enough for what happens. But as we said, as clearly as I possibly can, we've been battling to offset costs on the industry. It's not a margin. It's a margin diluter even if we recover it, right?

There's a lot of moving parts between IEPA and 232. Tariffs and uncertainty around that. So really we want to understand the details on that before we provide any color on what that looks like. The great news is, you know, that we make our engines and our gen sets for the U.S. here in the U.S. and the team has done an outstanding job of navigating a lot of change and challenge and working to recover the cost of those tariffs. So really proud of what they've done given the environment that we've been navigating this year.

All right.

Appreciate it, everybody. Thanks for joining us. That concludes our teleconference for the day. Thank you all for participating in your continued interest. As always, the investor relations team will be available for questions after the call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.