Cummins Inc (CMI) — Q2 2025 Earnings Call Transcript

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 two 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 continued 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 the 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 reach multiyear lows and OEMs have initiated reduced work weeks through the next three 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 the 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.

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 the 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 impact 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 action 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.

It seems like you have a little bit of feast and a little bit of famine 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 I’m 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 two 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.

Congratulations on another strong quarter. I wanted to discuss the bigger picture regarding the Power Systems sector. During your Investor Day last year, you mentioned that your total data center business generated $1.4 billion in sales, which represented about 23% of the global $6 billion data center market. At that time, you also projected that your sales could reach $2 billion by 2026, with the market possibly expanding to $9 billion. I understand it's challenging to quantify, but could you elaborate on your business growth, demand, and market share as you move towards that $2 billion target? Additionally, where do you see your business currently positioned within the data center sector?

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

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 two 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 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 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 the second quarter in Engines and Components, we should expect that there's going to be a negative impact on the profitability of those two segments.

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

Yes. In terms of the cycle, there are several typical and some unusual factors influencing the truck market. Spot rates remain low, economic demand from customers is not increasing, and interest rates are still elevated. Although the average age of the fleet has risen, we continue to observe a typical cyclical downturn in the truck market. Additionally, there is uncertainty regarding tariff policies, which affects truck prices, along with regulatory uncertainties. As a result, customers are hesitant and are waiting for more stability and clarity before placing orders. In the second quarter, build rates were relatively stable, though we did notice some softening. As Mark mentioned, we are experiencing more downtime and are restructuring our operations in anticipation of a weaker third quarter. It's challenging to predict how long this situation will continue. Optimistically, one could hope for greater clarity on tariffs and regulations in the third quarter, and we still anticipate the implementation of the 2027 NOx regulation which could boost demand. However, there is a lot of uncertainty at this moment. We are collaborating closely with the EPA to seek clarity and to communicate potential measures that could lessen the overall cost impact, especially regarding longer emissions warranties. But predicting the outcome is quite difficult. On the pessimistic side, it could take longer to resolve, which is part of the reason we are not providing guidance—it’s simply too hard to forecast.

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.

You guys just mentioned the engine margins. Mark, I understand your thoughts on the direction things need to move given the volumes. However, this quarter performed well and last quarter was excellent. I was curious if you could share any insights on pricing that might affect that or any other factors, considering the slight margin decline on lower engine revenues. Jen also mentioned EPA27, and I'm wondering if you have any predictions on when we might have clarity regarding the resolution.

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 want to emphasize that we have been concentrating on operational efficiency over the past couple of years, especially during a time of significant supply disruptions and high demand. Our main goal has been to enhance the fundamentals of our operations and plant performance. Last year, we implemented some targeted restructuring to optimize our business operations and took advantage of the softening conditions we began to notice. As a result, you can see the benefits of these efforts manifesting across the company.

The first question was about the Power Generation business. It seems that the theme of quickly accessing power is gaining momentum domestically, as more operators are looking to get power access rapidly. With the long lead times for industrial gas turbines, it appears that operators are increasingly interested in leveraging off-grid primary power solutions. I'm curious if Cummins has observed this trend or expects to see it in the future. Any comments on this would be appreciated.

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.

I understand. Regarding distribution, I recall that double-digit growth was once seen as an aspirational target. Given that the Power Gen business has been growing for a while, I'm curious whether the increasing power demands, particularly from data centers, are leading to additional services and ancillary revenue from those installations, potentially resulting in higher margins for that business. Alternatively, would this be reflected in the margins of Power Systems? It seems that the parts aspect of distribution has been declining as a percentage, which may negatively impact margins. A comment on this would be appreciated.

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 areas 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 phenomenon 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.

I know you don't want to provide guidance, but I'm curious about the EBITDA margin for Engine in the third and fourth quarters. How are you viewing that, considering we've been above 13% for some time and haven't dipped below 12% or 11% since late 2021? You mentioned the joint venture income might be a bit better as an offset, which is more significant when consolidated revenues are lower. Many will be considering the potential for a bottoming out of margins in the next few quarters as they think about earnings for 2026. Can you provide any insights into the EBITDA margins for engines in the third quarter or the latter half of 2024 and into 2025?

Yes, we spend a lot of time analyzing that, as you can imagine. I don't see a lot of momentum. China has improved from a very difficult situation, but we are going to face challenges in the second half. While margins are expected to decline, this isn't due to any structural issues; it's simply that volumes will decrease significantly. Looking at the full year, there's no reason to expect that the decrementals will differ greatly from previous cycles. However, engines and components will experience substantial pressure. To provide a bit more technical insight—without being negative—our engine production figures for heavy and medium-duty trucks in July are known, and the order build rate for August is projected to decline by 25% to 30%, which aligns with the low order levels. Nevertheless, we are confident that margins will recover quickly as volume increases. Another challenge we face is the uncertainty surrounding emissions regulations, which requires us to maintain flexibility in our engineering approach. At our last Analyst Day, we mentioned that we expect engineering expenses to decrease as a percentage of sales in engines and components over time, but we cannot implement that yet due to this ongoing uncertainty. So, while we anticipate reductions, there are no significant structural changes in market pricing that could create further complications. We expect to see a downturn followed by a rebound in these two areas, and we hope that it happens sooner rather than later. Historically, we haven't experienced many quarters of decline; we are already a few quarters in, but we are looking for more momentum in orders. It will definitely be a challenging 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 significant. I'm not trying to downplay it. These are some of the largest declines we've observed. If you review the orders over the past few months, they rank among the weakest periods we've encountered in the last two decades. This will reflect in our numbers, but it's a cyclical industry, and we expect a recovery. I want to emphasize that it will be challenging. However, when volumes return, which they will eventually, we anticipate that performance will improve as well. Hopefully, July marks the lowest point. Picture a spreadsheet in front of you, tracking customer downtimes by brand and location. Three months ago, it appeared reasonably modest for the third quarter, but now it's rather concerning. We will get through this stage, although margins will be pressured. We are not going to conceal that, but there aren't any fundamental changes occurring. I want investors to understand that if there were structural issues, we would communicate those. The challenges we're facing are volume-related and they will be tough. On a positive note, we have two businesses performing at record levels with strong demand. We are optimistic that demand for those businesses will remain stable for the rest of the year. I hope this provides some clarity. We chose not to provide guidance because the situation remains similar to what it was three months ago. While we have better visibility into the third quarter, it's considerably worse than we expected at the beginning of the year and worse than we anticipated three months back. We hope this is the phase where things bottom out before we progress. We are optimistic about a better 2026, and we have a strong market position along with good relationships with excellent customers. We look forward to that, but yes, this is going to be one of those more challenging periods.

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?

We have a strong history of returning capital to shareholders, aiming for a long-term benchmark of at least 50%, which we've maintained even during significant acquisitions. Recently, we've increased our dividend and improved our leverage metrics, and I'm pleased with our current position. Our capital allocation decisions are mainly influenced by economic conditions and business prospects. When allocating capital, we strive to do so as effectively as possible, and we anticipate additional returns going forward as a baseline. Regarding tariffs, they have introduced substantial uncertainty and costs that outweigh the tax benefits we may experience from accelerated depreciation. Although we've managed to mitigate some tariff impacts, they still impose a heavy burden on our industry and participants. This complicates our liquidity and capital allocation decisions. As for the tax bill, we are evaluating our options amid various tax legislation changes, expecting potential cash benefits between $125 million and $250 million, with final decisions made in the third quarter. Our complex global business means that immediate cash benefits can sometimes negatively affect long-term tax rates. Specifically, this could represent about 5% to 8% of our operating cash flow for the year, but it does not fundamentally alter our business strategies for this year. We have heavily invested in North America to comply with upcoming emissions regulations and are seeking clarity to effectively deploy that capital with our new products. Thus, we are not in a hurry to increase capital expenditures and prefer to wait for clear opportunities to utilize our invested capital.

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 on that and the industry's ability to handle even more pricing.

Tariffs negatively impacted Cummins' profitability in the second quarter, resulting in approximately $22 million in losses for the quarter. We have been diligently working to manage costs by carefully selecting when and where to purchase materials and resourcing where possible. Making supply chain decisions has been challenging due to the shifting international tariff landscape, making it difficult to achieve stability. As mentioned three months ago, we anticipated not fully feeling the impact until the second half of the year, and that has proven to be true. Costs for Cummins and the extent of recoveries are expected to rise in the coming quarters. We aim to enter the fourth quarter at a more balanced position regarding tariff costs, though there will be discrepancies in the second and third quarters. It's important to acknowledge the significant amount of resources and time that this issue has required from all industry players. While we cannot precisely predict end-user prices, we know that everyone is experiencing difficulties, especially as truck orders have been declining. I'll now shift to a different topic.

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 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.

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.

That's a valid question that assumes everything is static. In reality, there are always numerous factors at play. If you ask us whether we aim for higher margins in Power Systems over time, the answer is yes. When our capacity is fully installed and demand remains strong, that typically leads to better outcomes. However, there are many variables involved, including different engines produced in various facilities and the fluctuations by market and region. To clarify, we do expect to see consistent higher performance from quarter to quarter in the future. While we don't anticipate any dramatic changes for the rest of this year and expect revenue to remain relatively stable, we believe that after making the necessary investments, we can improve our performance going forward, assuming all other conditions stay the same.

Just wanted to start on Power Gen. You mentioned that you have backlog out two 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.

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 six 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.

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 think all segments of our business face challenges due to tariffs, particularly the engine business and components, which are likely experiencing more impact than the rest of the company, but not significantly more. Overall, when we consider the measures we've implemented regarding parts, light-duty engines, and some enhancements in Power Systems, ignoring tariffs shows an estimated 1.2% improvement across all businesses. It's important to note this reflects a significant increase in Power Systems and Distribution specifically. Meanwhile, the margins for the Engine business and Components remained flat or declined, excluding product coverage which did not show improvement.

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.

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.