Q2 2025 Earnings Call Transcript

Greetings. Welcome to Cummins Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the call over to Nick Arens, Executive Director of Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second 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 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 Securities and 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 and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our 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 a 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. We delivered impressive results in the second quarter, led by record performance in our Distribution and Power Systems segments that more than offset continued softening in the North America truck market. The record financial performance from these 2 segments, along with strong operational execution across our entire company, led to EBITDA increasing 310 basis points year-over-year despite North America heavy- and medium-duty truck volumes declining 30% from a year ago.

I am incredibly proud of our employees' continued focus on meeting customer commitments and delivering our priorities, and I'm confident that our efforts will allow us to continue to operate from a position of strength. Now, I will move on to some highlights from our second quarter. Then I will discuss our sales and end market trends by region. Finally, I will provide an update on how uncertainties in our current environment may impact our end markets for the remainder of the year.

Mark will then take you through more details of our second quarter financial performance. In the second quarter, we continue to make progress in the execution of our Destination Zero strategy with the introduction of a new product in our Power Systems segment. Expanding on the success of our acclaimed Centum Series generator sets, we launched the new 17-liter engine platform generator that produces up to 1 megawatt of power. The S17 Centum genset was developed to produce a larger power output within a compact footprint to meet the growing power demands in urban environments, where compact design and high performance is critical.

The new genset is designed to support a wide range of critical market segments such as commercial properties, health care facilities and water treatment plants. In July, we also announced a 10% increase in our quarterly dividend from $1.82 to $2 per share, the 16th consecutive year in which we have increased the dividend. During the quarter, we returned $251 million to shareholders in the form of dividends, consistent with our long-term plan to return approximately 50% of operating cash flow to shareholders. Now I'll comment on the overall company performance for the second quarter of 2025 and cover some of our key markets.

Revenues for the second quarter were $8.6 billion, a decrease of 2% compared to second quarter of 2024. EBITDA was $1.6 billion or 18.4% compared to $1.3 billion or 15.3% a year ago, and gross margin improved 150 basis points from a year ago. This improvement in profitability was driven by the benefits of higher Power Generation demand, operational efficiencies, pricing and lower compensation expenses, which more than offset lower North America truck volumes and the unfavorable net impact from tariffs. We see a marked contrast in demand between longer-cycle sectors such as Power Generation, which also continues to benefit from some well-established secular themes and declining confidence in some of our more economically sensitive shorter-cycle markets in North America, particularly truck, pickup and consumer-related markets.

We anticipate this contrast will become more pronounced in the second half of the year. Our second quarter revenues in North America decreased 6% compared to 2024. Industry production of heavy-duty trucks in the second quarter was 57,000 units, down 27% from 2024 levels, while our heavy-duty unit sales were 22,000, down 29% from a year ago. Industry production of medium-duty trucks was 28,000 units in the second quarter of 2025, a decrease of 36%, while our unit sales were 25,000, down 35% from 2024. We shipped 34,000 engines to Stellantis for use in the Ram pickups in the second quarter of 2025, down 18% from 2024 levels.

Revenues for North America Power Generation equipment increased by 25%, driven primarily by continued strong demand in data centers and mission-critical applications. \ Our international revenues increased by 5% in the second quarter of 2025 compared to a year ago. Second quarter revenues in China, including joint ventures, were $1.8 billion, an increase of 9% as accelerating data center demand and higher domestic truck demand driven by government stimulus more than offset lower export demand. Industry demand for medium- and heavy-duty trucks in China was 304,000 units, an increase of 13% from last year.

Our sales in units, including joint ventures, were 43,000, an increase of 31%. The increase in 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 second quarter was 59,000 units, an increase of 11% from 2024 levels. Our units sold were 11,000, an increase of 13%.

An increase in the China market size is primarily due to domestic cyclical replacement demand, rural development and farmland renovation demand. Sales of Power Generation equipment in China increased 32% in the second quarter due to accelerating data center demand. Second quarter revenues in India, including joint ventures, were $699 million, a decrease of 1% from the second quarter a year ago. Industry truck production increased 1% from 2024. Power Generation revenues increased 31% in the second quarter, driven by increases in G-Drive and data center demand.

To summarize, we achieved impressive results in the second quarter with record financial performance in our Power Systems and Distribution segments. As we look ahead to the third quarter, we expect North America heavy- and medium-duty truck volumes to decline 25% to 30% from second quarter levels as we have seen truck orders recently reached multiyear lows and OEMs have initiated reduced work weeks through the next 3 months. The duration of this reduced demand in North America truck markets will largely depend on the trajectory of the broader economy, the evolution of trade and tariff policies and the pace at which regulatory clarity emerges.

Despite the challenges in the North America truck markets, we have the benefit of operating a diversified global business and expect continued strength in our Power Generation market in addition to stability in our aftermarket and industrial businesses. Tariffs are undoubtedly having an impact on Cummins, our suppliers, customers and end users, creating uncertainty over freight activity linked to the movement of goods and increasing costs. We did experience increasing tariff costs in the second quarter. However, as anticipated, we did not see the full impact of the current policies as supply chains work through existing inventory.

We've been active in our efforts to mitigate tariff exposures and negotiate agreements with customers that position us to enter fourth quarter near full recovery. Additionally, although we primarily produce engines and gensets in the markets where we sell them, we are further mitigating our efforts by continuing to evaluate and implement dual sourcing where possible and economically viable for our supply base and component manufacturing. As we navigate these uncertainties, we will continue to maintain discipline by managing our costs while continuing to invest to meet our critical priorities so that we are well positioned as markets recover.

In summary, we had a strong second quarter performance that demonstrates the earnings potential of Cummins at a time when demand in North America and China truck market sits at weak levels. While we expect demand in North America truck markets to decline significantly in the third quarter from second quarter levels, we remain well positioned with an experienced leadership team that has demonstrated capability in managing through periods of uncertainty, and we will maintain our focus on our customers, employees and shareholders. I'm confident that we will further raise our performance when markets recover and look forward to reinstating guidance when some of the uncertainty has subsided.

Now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. The highlight of the second quarter is our strong profitability delivered in the face of global uncertainty. Our revenues were $8.6 billion, down 2% from a year ago. Sales in North America decreased 6%, while international revenues increased 5%.

EBITDA was $1.6 billion or 18.4% of sales for the quarter compared to $1.3 billion or 15.3% of sales a year ago. The higher EBITDA percentage was driven by higher Power Generation demand, strong operational efficiencies, positive pricing and lower compensation expenses, which were partially offset by lower North America truck volumes and the unfavorable impact of tariffs on all of our operating segments. Now I'll go into more detail by line item. Gross margin for the quarter was $2.3 billion or 26.4% of sales compared to $2.2 billion or 24.9% last year.

The improved margins were driven by favorable pricing and operational improvements, especially in Power Systems and Distribution. Selling, administrative and research expenses were $1.1 billion or 13.1% of sales compared to $1.2 billion or 13.7% of sales. Lower compensation costs, primarily variable compensation, benefited both gross margin and operating expenses and the financial performance of all operating segments year-over-year. Joint venture income of $118 million increased $15 million from the previous year, primarily driven by higher China volumes within our engine business as demand improved compared to a weak 2024. Other income increased to $49 million positive compared to negative $3 million from the prior year, driven by the positive impacts of foreign currency valuation and gains on investments related to company-owned life insurance.

Interest expense was $87 million, a decrease of $22 million from prior year, primarily driven by lower weighted average interest rates, partially offset by higher debt balances. The all-in effective tax rate in the first quarter was 24.2%, including $3 million or $0.02 per diluted share of favorable discrete tax items. All-in net earnings for the quarter were $890 million or $6.43 per diluted share compared to $726 million or $5.26 per diluted share a year ago. Operating cash flow was an inflow of $785 million compared to an outflow of $851 million a year ago, with the difference mainly driven by the $1.9 billion required by the previously disclosed settlement agreements with the regulatory agencies, which flowed out in Q2 last year.

Excluding the settlement, operating cash flow was an inflow of $1.1 billion a year ago. I will now comment on segment performance and provide some comments for the remainder of 2025. For the Engine segment, first quarter revenues were $2.9 billion, a decrease of 8% from a year ago. EBITDA was 13.8%, a decrease from 14.1% a year ago as weaker North American truck volumes were partially offset by pricing related to the launch of updated products in light-duty markets, operational efficiencies and higher joint venture income in China. Components revenue was $2.7 billion, a decrease of 9% from a year ago.

EBITDA was 14.7% compared to 13.6% of sales a year ago as lower product coverage costs, operational efficiencies and pricing more than offset lower on-highway demand in North America. In the Distribution segment, revenues increased 7% from a year ago to $3 billion. EBITDA was a record $445 million and improved as a percent of sales to 14.6% compared to 11.1% of sales a year ago, driven by higher Power Generation, strong parts demand and overall improvements in gross margin. In the Power Systems segment, revenues were $1.9 billion, an increase of 19% from a year ago.

EBITDA dollars were also a record at $433 million, rising from 18.9% to 22.8% of sales, driven by strong volume, particularly in data center applications and other mission-critical applications, favorable pricing and a continued focus on productivity and other operational improvements. Accelera revenues decreased 5% to $105 million as increased e-mobility sales mainly to bus customers, partially offset lower electrolyzer installations. Our EBITDA loss was $100 million compared to an EBITDA loss of $117 million a year ago, reflecting a lower cost base resulting from the actions we took in the fourth quarter of 2024. In summary, we delivered strong profitability for the second quarter as a result of improved operational execution across our business that more than offset weaker demand in North America truck markets.

For the third quarter, we expect North America truck demand to sharply decline from second quarter levels as recent truck orders are at multiyear lows driven by uncertainty due to trade tariffs, product regulation and caution about the prospects for freight. Since our last earnings call, we've seen a steady stream of updates from our OEM customers, extending the number of production down days through the third quarter. We view current order levels as unsustainably low, but immediate catalysts for recovery are not yet clear. We have not yet felt the full impact from tariffs, and there is still uncertainty about duration and ongoing levels, which was highlighted again last week with the flurry of new announcements.

It remains to be seen what this will impact this will have on business confidence and the demand for capital goods beyond trucks. We've worked hard to mitigate the impact of tariffs. And while negative to profitability in the second quarter, we should enter the fourth quarter close to a price/cost neutral position with regard to tariffs. As you saw in our second quarter results, Cummins is in a strong position to navigate through this uncertainty.

And with our industry- leading portfolio of products and our global network, we are well placed to support our customers. While we expect the coming months to be much more challenging, primarily for the Engine and Components segment, we are staying focused on our strategic priorities whilst also taking actions in the short term to reduce costs and lower inventory. We look forward to reinstating our outlook when the economic picture becomes clearer, and we are confident that as markets recover, we will continue to raise our performance as we have clearly done in the first half of this year. Thanks for joining us today.

And 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 1 question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we are ready for our first question.

[Operator Instructions] Our first questions come from the line of Stephen Volkmann with Jefferies.

It seems like you have a little bit of feast and a little bit of fam in here. So I'll focus on the feast, if that's all right. Power Systems, let's talk about Power Systems. Big margin there, obviously, much higher than I think we expected.

I know you've been doing a lot of work on this over the past few years, Jen. But at the end of the day, I'm curious if you think that is sort of the right margin level that we should be thinking about as we start modeling forward? Is that sustainable? Or was there anything in there that we should be aware of?

Yes. Thanks, Steve, for the question. And really pleased with the performance of the Power Systems business. As you noted, we started a couple of years ago on a journey to really improve operational performance and really coupled with the strong and growing demand in the Power Generation market has really benefited that business.

So we've made many of the steps in really better leveraging the capacity that we have and trying to improve throughput and operational performance. And frankly, the team has outperformed in terms of the efforts for that, and that has led to the really strong margin improvement that you've seen over the last couple of years. We're continuing to focus on areas where we can improve operational efficiency and performance. We're continuing our investment in doubling the capacity in that business, which we expect to be fully online by the beginning of next year.

So I think the pace of improvement has probably stabilized, but we will certainly continue to work on operational efficiencies and delivering value to our customers and being able to price for that and drive that mentality across all of our businesses.

And Steve, just to say there's nothing unique in there other than demand is strong for both generators and parts. But there's no one- timers in there or anything like that.

Right. Understood. And then I assume you must have pretty good backlog in that segment. Maybe you can comment on that. But do you have pricing flexibility in that backlog if you need it? Can you reprice this stuff, if necessary before delivery?

Yes. We have backlog out about 2 years in that business. And so we continue to see strong demand, strong backlog, and we've been working with customers where we have backlog on the tariff recovery and made some progress there. So typically, we're not repricing beyond that in existing orders that we've taken.

We price in aftermarket as the market moves. And as I said, working on tariff recovery across all of our businesses.

Our next questions come from the line of Angel Castillo with Morgan Stanley.

Congrats on another strong quarter here. I wanted to ask a little bit of a bigger picture, sticking to the kind of Power Systems dynamic. Back at your Investor Day last year, you quantified that total data center, I think, business was $1.4 billion, I think, in sales, and that you were kind of 23% of the, I think, $6 billion global market for data centers. I think at the time, you also kind of noted that, that would be a $2 billion sales for you in 2026 and maybe a $9 billion market.

I know it's difficult to quantify, and it's crazy [indiscernible] starting next year. But I guess, could you just comment on that? How are you seeing your business growth and demand and market share ultimately evolve toward that kind of $2 billion top line? And kind of where are we in terms of the size of your business within data centers?

Yes. Thanks for the question. So we are continuing to be very well positioned. We think the combination of our products, and we've launched the Centum series.

We've continued to add some products, but the larger ones of those are quite popular in data centers, coupled with our distribution. Business provides Cummins an advantage. So we're a strong player in a growing backup power provider to data centers. We feel like we continue to maintain that position and take advantage of new products and capacity investment.

We expect this year to be pretty stable in the second half with typical seasonality. But as I said, we'll have some additional capacity coming online as we go into 2026.

That's helpful. And I guess, is it fair to assume then that $2 billion is still kind of the way to think about 2026?

Yes.

Yes. There's been no change in enthusiasm for demand.

Our next question has come from the line of Jamie Cook with Truist Securities.

I guess what struck me about the quarter is your margin performance even with North America truck going through a correction. So I guess the 2 areas that stuck out to me besides Power Systems was your distribution margins, which I'm assuming is getting the benefit of power. Are margins moving structurally higher there just because of the benefit that you get through -- from the Power System business? And then also on the component side, you were able to improve your margins despite sales declines.

I think you noted lower product coverage. Is there any way you could quantify that? Just trying to think about the implications for margins in the back half. And then I guess my second question, Jen, just relates to sort of you know what I mean the cycle like in North America, obviously, we're seeing a big correction in 2025, lack of prebuy based on what you're hearing from your customers, how are you thinking about North America in 2026 and 2027?

Jamie, I'll start on the margin question. So on distribution, yes, the benefits of power, the benefits of strong parts business, and then we've got positive pricing in the distribution business as well. So all of those have combined to make for very positive results in distribution overall. Yes, in component, it's not reasonable to expect on significant continuing declines in truck volumes that we can maintain margins in the short run.

We expect, obviously, margins to improve over the long run in Engines and Components. But you're right, we called out the product coverage numbers because that was a tougher quarter a year ago and a much cleaner quarter just within the components for the company overall, there really wasn't much difference in the product coverage numbers. But in the Components segment, that was probably worth something like 0.5 point. That was not one-time.

It was more the absence of a problem from a year ago than something that's special that happened in this quarter. But just to be clear, given the rates of decline here in the third quarter from second quarter in Engines and Components, we should expect that there's going to be a negative impact on the profitability of those 2 segments.

Okay. And then, Jen, just on the cycle?

Yes. On the cycle, Jamie, it's -- there's a number of typical factors and then some atypical factors that we see influencing the truck cycle. So spot rates continue to be low, economic demand isn't really growing for customers. Interest rates are still higher.

And while the age of the fleet on average has gone up some, we still are seeing that kind of cyclical -- normal cyclical down in the truck market, which then add on top of it, this uncertainty around tariff policy, the impact that's going to have on price of trucks and regulatory uncertainty, which means customers are really just holding, waiting to see what happens, get more stability and clarity on orders. And in Q2, build rates held up okay. We saw some softening. But as Mark noted, we're seeing a lot more down days and our customers and us restructuring in our plants in anticipation of a much weaker Q3. How long will it last is a little bit hard to predict.

The optimistic gen would say we get more tariff clarity and stability in Q3 and more certainty on regulation. We still believe today that we'll have '27 NOx regulation. And if we do, then that will likely drive demand back up. But it's uncertain right now.

We're working closely with the EPAs to try to push for clarity and help them understand levers that they may have to reduce the total cost impact of that, in particular, longer emissions warranty, but it's really hard for me to predict. So the pessimist says it drags out longer, and that's part of why we're not giving guidance is it's just really difficult to predict.

And the pessimist sat next to us, I would just point out that more years than not, Q4 is not particularly stronger than Q3. So we're hoping for that. That would definitely help all industry participants, but we need to see a significant change in the momentum. The momentum for orders to us for engine systems is down, obviously, clearly down.

Our next questions come from the line of Rob Wertheimer with Melius Research. Rob, could you please check if yourself muted?

You guys just touched on the engine margins. And Mark, I take -- I understand your comments on where things have to go given volumes. But this quarter was pretty good and last quarter was great. And I wondered if you might comment on price that might influence that or anything else given a shallow margin decline on lower revenues in engines.

And Jen just touched on EPA27. I wonder if you have any guess as to when we have at least clarity on what the resolution will be.

Yes. So a couple of factors on the engine margin. We called out in prior quarters because it's been a running theme. As we've launched new models in the light-duty segment, we have raised prices.

Product quality has been very stable and positive. And then China, I don't want to get people overexcited on China, but stepped up a little bit from weaker levels. Now the engine business benefits a lot from the joint venture earnings in China, which are a little bit higher. So all those factors.

And then when we say strong parts, that's flowing through the Engine business and Power Systems generally. So all those were factors. But the pricing primarily on new engines was around light duty.

I'll just add, we have -- the focus on operational efficiency coming through a couple of years, we had a lot of supply disruption and high demand. We've had a focus on really just improving the fundamentals of how our business operates and how our plants operate. And then we did do some targeted restructuring last year to optimize how our business operates and took advantage of the softening that we started to see last year to do that. So you're seeing some benefit of that across the company as well.

Our next questions come from the line of Tim Thein with Raymond James.

The first question was on the Power Gen business. And I guess, more domestically, this kind of speed to power theme is gaining a lot of momentum and traction in terms of operators that want to get up -- get power access quickly. And just given the long lead times for industrial gas turbines, it seems like you're starting to see and hear a little bit more of operators that are looking to leverage [indiscernible] as a way to kind of gain off-grid primary power. And I'm just curious if that's something that Cummins has seen or is expecting to see?

Maybe just a comment on that.

I mean I think the trend certainly is need for more power, challenges of getting that power. Today, we are still primarily positioned in backup power. Certainly, strategically, we're looking at where we want to position ourselves for the future as that demand for power continues to exist, but it's not really meaningfully impacting our business today or in the near future.

Okay. All right. Understood. And then just on distribution, I can remember years ago when double digits was talked about as kind of the aspirational target there.

I'm just curious as the Power Gen business obviously has been growing for some time. Are there more -- just as the power demands increase and maybe as the data centers are consuming more and more power, is that bringing along more services and more kind of ancillary type revenues with those installations such that, that business carries higher margins? Or would that all be kind of reflected in Power Systems margins? I'm just curious as the parts part of distribution as a percentage has continued to decline, which I would think would be dilutive to the margin.

So maybe just a comment on that would be helpful.

I think, yes, you're right. Any of those services and other things would show in distribution, not in Power Systems. But I think what lies beneath the surface a little bit, Tim, is just a more broad-based improvement in our international operations. I do also remember vividly those double-digit margin targets when we set them.

There's been dramatic improvements in area like Africa, where we had high growth aspirations that quite frankly, had some risk management issues and execution issues early on, those are long behind us. So I think we've really more broadly improved the operational effectiveness and profitability focus outside North America in addition to improving North America. So I think it's a more broad-based phenomena that's really driven the results.

But typically, in the Power Generation market, if we're doing backup power, then there's minimal aftermarket parts demand, but the distribution business can do additional content on the installation and benefit from that work with the customer.

Our next questions come from the line of David Raso with Evercore ISI.

I know you don't want to give guidance, but I am curious just directly to ask the EBITDA margin for Engine in third quarter, fourth quarter, how are you thinking about that relative to -- we've been above 13% now for a while, haven't been below 12%, 11% since, I think, late 2021. And you mentioned the JV income maybe a little bit better as an offset. It's obviously more impactful, the lower the consolidated revenues are. Just because people are going to look at sort of at least a thought process of a bottoming truck in the next few quarters when it comes to margins and then sort of go from there on how to think about '26 earnings.

Can you give us any quantification of how to think about the EBITDA margins in engines in the third quarter or back half of '24 -- '25?

Yes. We spend a lot of time, [indiscernible] at that, as you can imagine. And what I would say is I don't see a lot of momentum. China has improved off a very rough bottom, but we're going to come under pressure here in the second half.

What I'd say is whilst the margins are going to go down, clearly, there's nothing structural about that. We just -- the volumes are going to go down significantly. I think if we looked on a full year basis, we might see -- there's no reason to see why the decrementals are very different on a full year basis from prior cycles. But clearly, for engines and components, they're going to come under significant pressure.

And just to give a bit more technical -- not to be negative, just to give the fact. We already know what -- how many engines we produce in heavy and medium-duty truck in July. We can see the order build rate for August. It's going to be very depressed, as Jen said, down 25% to 30%.

That's not surprising given how low the orders are. But I think as we look forward, we're confident that we -- margins will rebound quickly as the volume comes through. The other complexity that we're dealing with is a lack of clarity on emissions regulations means we've got to retain flexibility on the engineering side. And we said at our last Analyst Day, over time, we expect engineering to come down as a percent of sales in engines and components.

We're not able to execute that side of it yet because of this lingering uncertainty. So clear reduction, but nothing structural, no significant changes to market pricing, which always could have an impact structurally. So we're going to go down and then we're going to rebound in those 2 businesses. And hopefully, that's quicker rather than later.

History says we don't have that many quarters of down. We're a few quarters in already, but we're waiting for more momentum on the order side. But yes, it's going to be tough definitely a tough second half.

The incremental margins, again, I know you're avoiding quantifying, but just so we can frame this a little bit, is the idea of the decremental margins and EBITDA for engines for the third quarter, it's that 35-ish, 40% kind of range. We're just trying to get some sense of...

Yes, they're going to be pretty heavy. They're going to -- I'm not trying to hide from it. They're going to be pretty heavy. These are some of the largest declines we've seen.

If you look at the orders in the past 3 or 4 months, they're amongst the weakest 3- or 4-month periods we've had in the last 20 years. That's going to show up in our numbers, but it's going to be -- it's a cyclical business, and it will rebound. And just to reinforce, it's going to be tough. But then when the volumes come back, which they inevitably will, quite when, we can't say we'd expect performance to rebound as well.

So hopefully, July is the trough. We started with a spreadsheet. Imagine a spreadsheet in front of you. I'm still old and I use spreadsheets where we've got customer down days by brand, by location.

And when we sat here 3 months ago, it was modest for the third quarter, and now it's kind of a sea of red. But we'll come through this period, but the margins will come under pressure. We're not going to hide from that, but there's nothing structural changing. That's what I want investors to leave.

If it was something structural, we would tell you, but it's going to be volume based and it's going to be tough. The good news is we've got 2 businesses that are performing at record levels where demand is high. That's what we look for and stronger than they have done in prior cycles. And we expect broadly demand for those businesses to remain stable for the remainder of the year.

So I hope that helps a bit. I know it's tough. The reason why we haven't given guidance is, as you can see, we withdrew guidance. It was nothing to do with our performance in the second quarter, but the number of variables out there essentially remain the same from 3 months ago.

Yes, we've got more visibility into Q3, and it's much worse than we would have imagined at the start of the year. It's worse than we would have imagined 3 months ago, but we hope this is the bottoming period and then we're moving on. And hopefully, the industry is set up for a better 2026, and we are well positioned with strong position in the markets, good relationships with excellent customers. So we look forward to that.

But yes, this is going to be one of those tougher periods.

Our next questions come from the line of Kyle Menges with Citi.

I was hoping, Mark, if you could just touch on your thoughts on capital allocation quickly and how you're thinking about leverage at current levels, appetite for share buybacks? And then I'm thinking you guys should be beneficiaries from the big beautiful bill and favorable cash taxes. And just have you tried to quantify that impact and thoughts on where you might deploy that excess cash to?

Yes. So we've had a pretty long track record of returning capital to shareholders. We set kind of this long-term benchmark of at least 50%, and we've been living up to that even during a period where we made a major acquisition. You saw we had a healthy increase in the dividend here.

We've been working hard to improve our leverage metrics, and I feel good about where they are now. So really, the pace of capital allocation is really based on economy, prospects for the business. When we do capital allocation, we're also looking at making sure we're doing that in the most effective way that we can. So yes, incrementally, we should be looking for more of that going forward as a base case.

The -- yes, if the taxes are the beautiful part, then the tariffs are definitely not, right? And the challenge is that the tariff costs have created great uncertainty. I'll just say a little bit about tariffs since haven't been asked about that yet. But the cost of the tariffs to Cummins, and I'll quantify the tax benefits in a moment, are multiples of the tax -- the pull forward of tax benefits that are allowed under accelerated depreciation.

And whilst we've done a pretty good job in mitigating tariffs, it's placing a significant burden on the industries and all the participants that we play on. So all that weighs into all this calculus of liquidity, capital allocation. To answer you specifically on the Tax bill, I mean, we've got some choices to make and what elections we want to make through the various dynamics of tax legislation, you could reasonably expect $125 million to $250 million of cash benefit, but we haven't -- we'll finalize our choices in the third quarter. In taxes, inherently some strange trade-offs where cash benefits today can be negative for long-term tax rates.

And then we have quite a relatively complex global business. So we've got to think all of that through. So I would say -- on the margin, could that be like 5% to 8% of our operating cash flow for the year? Yes.

Does it fundamentally change any of our business plans for this year? No. We've invested a lot in North America to meet the upcoming emissions regulations. And quite frankly, we're looking for some clarity to be able to deploy that capital effectively with our new products going forward.

So we're not rushing to spend more capital here. We're hoping for clarity on utilizing the capital we invested. So sorry for the long -- little bit of winding there, but just to reinforce the complexity that we're facing.

That's helpful. And then just it sounds like you're expecting to completely offset tariff impacts and pass through to the customer. You commented a little bit on how the industry is handling it. But maybe you could just expand on just what you're seeing and hearing from the customers and markets and how they're handling that pass-through of the tariff costs?

And then is the plan still to roll out the EPA27 compliant engine in '26 and that will be additional pricing on that. So just, I guess, would love to hear your thoughts how you're thinking about that and the industry's ability to handle even more pricing.

So tariffs were negative to profitability for Cummins in the second quarter. So we did not fully recover. We're approximately $22 million negative net in the quarter. We've been working hard to mitigate the costs through managing when we're buying materials, where we're buying it from, resourcing where we can.

We've done a lot, as you can imagine, making choices about supply chain is hard when the international tariff dynamic keeps changing. So it's hard to make any decisions to shift when you're not sure that we've reached a period of stability. So about $22 million negative, as we said 3 months ago, we didn't expect the full impact until the second half of the year. That's the case.

So both the cost of Cummins and the degree of recoveries will be increasing in subsequent quarters. We expect to enter Q4 on a much closer to price cost neutral on tariffs starting in the fourth quarter. But there's a gap in Q2, will be a gap in Q3. Q4 will get close. But it's hard to underestimate the amount of resources and time that this is consumed amongst all industry participants.

It is -- I do believe we don't know exactly what the end user prices are, but we do know that everybody is suffering with this. It doesn't help at a time when truck orders, in particular, had already been slowing. But that's maybe more than you wanted. I'll move on quickly from a very uncomfortable topic here.

And on the product launches, so the regulations are still in place today. We're continuing to work towards launching and we have our new platforms, of course, the helm engine platforms launching as a part of the 27 regulations. We are no longer launching the X15 earlier in the year. So at the end of next year, we'll be launching those new platforms to comply with the 27 regulation and continue to keep the team focused on that.

Just as a reminder, those engines are all made in the U.S., and we're investing $1 billion in our engine plants `primarily because of the new platforms, which we believe will really position us with the most efficient, highest power density, best products in the market.

Our next question comes from the line of Tami Zakaria with JPMorgan.

Yet one more question on Power Systems. Should we expect better cost absorption and improved incremental margin versus what we are seeing now when the remaining capacity goes live next year? The premise of the question is whether you're currently seeing some inefficiencies as you're building capacity and firing on all cylinders against robust demand. And so whether incremental margin could get even better once the new capacity is live and running at full rate.

So if you could comment on that.

Perfectly reasonable question that makes the assumption that so many things are standing still, right? I mean there's always a million and one things going on. But if you ask us, do we have aspirations for the Power Systems margins over time to go high? Yes, we do, right?

And yes, when capacity is fully installed and the demand is still there, usually, that's better. But there’s a lot of variation. We don't just make one engine in one facility, a lot of differences by end market and region. But just to be clear, do we expect over time, not -- what's been nice to see is this consistency now of higher performance quarter-on-quarter.

Yes, we still think there's plenty of things to work on to take us high. We don't expect dramatic changes for the remainder of this year. Revenue should be relatively range bound, but as we go forward, yes, after absorbing investments, we'd hope to do better, all other things being equal.

Our next questions come from the line of Steven Fisher with UBS.

Just wanted to start on Power Gen. You mentioned that you have backlog out 2 years. I'm assuming that's for the largest engines. Just curious what the lead times are on some of those. And obviously, you have the capacity coming online fully next year. How does that affect the lead times that you see there?

Yes. So obviously, as we're taking orders, we're considering the incremental capacity that we'll have coming online next year. So we are taking orders out in the '27 time frame now from our customers. If we have any movement in terms of current order backlog and order demand, we reallocate those slots and we work with our customers to do that.

But if you want, in particular, the larger engine orders today, I'm happy to put you in the queue in '27 for that.

Okay. And then sorry to ask a follow-up on the uncomfortable topic. But in terms of the Q4 tariffs, you mentioned that you expect to kind of be price versus cost neutral there from customers. Is that sort of just contractually what you have embedded in these new agreements? Or is there a negotiation that has to happen there? Just curious how that should play out.

It is not contractual. And so in most cases, we've been out actively negotiating with our customers on tariff recovery time line.

Our next questions come from the line of Noah Kaye with Oppenheimer Company.

I wanted to tie together a couple of points you mentioned earlier. I think, Mark, you highlighted that maybe engineering spend intensity is being negatively impacted by the uncertainty around the regs. And then, Jen, you mentioned some actual launch pushouts. So can you help us understand just operationally how your engineering and technology strategy are being affected at this moment?

I mean are you doing sort of redundant or duplicative engineering development for a variety of outcomes? Just trying to get a better handle on how you're navigating the uncertainty.

So the majority of the work we're doing is focused on these new product launches. And so you've got a peak of investment in research and development as well as capital going in ahead of that launch at the end of next year. And we did delay by 6 months, one of the product launches because, frankly, the uncertainty around regulation and tariffs, which created an environment where even though it was a more efficient product that we thought could bring some value to customers, the demand was a concern. So we've delayed that, that then extends some of the R&D for that program.

We're, of course, doing some additional work on contingency plans at a much lower level while keeping the team focused on the launches that we have beginning of '27. And then we anticipate following that, that the level of R&D and capital investment in engine business and components will start coming down.

Okay. Great. So '27 is really when we start to see some leverage there. And then just quickly shifting gears to power.

As you mentioned, I mean, your content is primarily today around the backup gen set. With the shift towards more on-site direct power, I mean, you have an entire division that can do battery backup and fuel cell power. You're obviously very familiar with natural gas generation. And you've talked in the past, including Investor Day about microgrids.

Just can you give us any color on trends in wallet share expansion with the data center customers and if you're seeing that, where it's coming from?

So we have launched in the last year a stationary energy storage product in the market. We have some limited offerings, I would say, today in both natural gas and stationary energy storage. And that's an area that we are continuing to evaluate our position, the products that we have in our portfolio and over time, how we might want to participate and if that's an area we want to expand. So no firm decisions or anything to give guidance on today, but that certainly is an area that could be interesting for Cummins in the microgrid space. given the growing demand for power and the challenges for customers to meet that.

Our next questions come from the line of Chad Dillard with Bernstein.

So you commented about tariff or the price cost being neutral by the fourth quarter. And I was just wondering whether that's true on a segment-by-segment basis or is it biased towards one versus the other? And then secondly, what was price cost in 2Q? And if you can share any thoughts on what it should look like in the third quarter, that would be helpful.

I mean I think it's a challenge in all segments of our business is what I would say for tariffs with the engine business and components, probably absorbing more than the rest of the company, but not dramatically different. Price cost overall, when we weigh in the actions that we've taken on parts, the actions that we've taken on light-duty engines, some of the improvements in Power Systems. I ignore -- if I ignore tariffs, then we were about 1.2% improvement overall across all the businesses, remembering that's a big step-up in Power Systems and Distribution in particular. You see that the Engine business and Components margins were down or flat, ex-product coverage not improved.

And secondly, just on Accelera, just recognizing that we're in, I guess, a new regime when it comes to like alternative powertrains. I guess, how are you thinking about the growth trajectory, particularly maybe more so on the electrolyzer side and then like the path towards the long-term profit targets that you set out? Has that changed?

Yes. I mean it's fair to say the trajectory of growth in that business has slowed. You have seen us growing and reducing losses. We did a restructuring at the end of last year to try to focus on the areas, the technologies and products that we think will grow.

And I do think it positions Cummins well because we're continuing to, of course, offer engine-based solutions. Start-ups are not surviving and many of our OEM customers don't really want to invest given the uncertainty. So we're really trying to position ourselves to pace investments but be able to be the provider as the market starts to develop. We're continuing to move forward with our partners in the Amplify Cell joint venture here in the U.S. with commercial vehicle cell and pacing investments in that together as well.

So it's slowing, but we're committed to continue to reduce losses over time and grow as the market grows. And in the meantime, we'll sell more engines, which will be positive for our base business.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Nick Arens for closing comments.

Thank you. That concludes our teleconference for today. Thank you all for participating and your continued interest. As always, the Investor Relations team will be available for questions after the call.

Thank you, ladies and gentlemen. That does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.