Earnings Call Transcript - CMI Q3 2025

Operator, Operator

Greetings, and welcome to the Q3 2025 Cummins Inc. Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nick Arens, Executive Director of Investor Relations. Thank you, sir. You may begin.

Nicholas Arens, Executive Director of Investor Relations

Thank you, Maria. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the third quarter of 2025. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities 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 in the Risk Factors section of the most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website within the Investor Relations section at cummins.com. With that out of the way, I will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.

Jennifer Rumsey, Chair and CEO

Thank you, Nick. Good morning, everyone. I'll start with a summary of our third quarter accomplishments and financial results. Then I will discuss our sales and end market trends by region. Finally, I'll provide an update on how we are navigating the evolving trade and policy landscapes, along with our market outlook for the remainder of the year. Mark will then take you through more details of our third quarter financial performance. Before getting into the details of our results, I want to take a moment to highlight a few major accomplishments from the third quarter. In September, we announced a collaboration with Komatsu to develop hybrid powertrains for surface haulage heavy mining equipment. This joint development effort will leverage the breadth and scale of Komatsu's and Cummins' global capabilities to enable the acceleration of optimized hybrid solutions for mining. Retrofit hybrid solutions hold the potential to help mining customers accelerate their decarbonization journey today while lowering the cost of operations of their installed fleet assets. We are excited about this opportunity to bridge current operational needs with future low-carbon goals to support our customers' sustainability efforts. Additionally, our latest 15-liter engine delivered standout results during this quarter's Run on Less – Messy Middle event hosted by the North America Council for Freight Efficiency. Three of the 13 participating fleets ran the new X15N natural gas engine through some of the most demanding duty cycles of the demonstration, showcasing its ability to deliver true heavy-duty performance while unlocking the cost and emissions benefits of natural gas. At the same event, our X15 diesel led in fuel economy and operational efficiency, reinforcing its position as a benchmark for dependable high-performance power. These results highlight the growing adoption of Cummins' technologies and the tangible value customers are experiencing from our advanced powertrain solutions, all produced here in the U.S. Now I will comment on the overall company performance for the third quarter of 2025 and cover some of our key markets. Sales for the third quarter were $8.3 billion, a decrease of 2% compared to the third quarter of 2024. Lower sales were primarily driven by weaker North America heavy and medium-duty truck demand with unit volumes declining 40% from a year ago, which was largely offset by continued strength in our global power generation markets, higher light-duty truck volumes, and favorable pricing. EBITDA was $1.2 billion or 14.3%, compared to $1.4 billion or 16.4% a year ago. Third quarter 2025 results included $240 million of noncash charges related to our electrolyzer business within the Accelera segment, reflecting lower demand expectations due to reduced U.S. government incentives and slower market development internationally. Excluding those charges, EBITDA was $1.4 billion or 17.2% of sales, an increase of 80 basis points from a year ago, as the benefits of higher power generation and light-duty truck volume, pricing, operational efficiencies, and lower compensation expenses more than offset declines in North American truck volumes and the unfavorable impact from tariffs. We did increase the proportion of tariff costs recovered through pricing and other mitigation actions in the third quarter compared to the second quarter. However, the magnitude of total tariff costs increased from Q2 as expected, and the net impact to Cummins was negative year-over-year. Our third quarter revenues in North America decreased 4% compared to 2024. Industry production of heavy-duty trucks in the third quarter was 46,000 units, down 34% from 2024 levels. While our heavy-duty unit sales were 16,000, down 38% from a year ago. Industry production of medium-duty trucks was 20,000 units in the third quarter of 2025, a decrease of 51%, while our unit sales were 17,000, down 55% from 2024. We shipped 40,000 engines to Stellantis for use in their Ram pickups in the third quarter of 2025, up 44% from 2024 levels, driven by a ramp-up of model year '25 product, which was launched earlier this year. Revenues for North America power generation equipment increased 27%, driven by continued strength in data center demand. Our international revenues increased by 2% in the third quarter of 2025 compared to a year ago. Third quarter revenues in China, including joint ventures, were $1.7 billion, up 16% from a very weak quarter last year, as stronger unit demand was partially offset by unfavorable product mix and weaker part sales. Industry demand for medium- and heavy-duty trucks in China was 311,000 units, an increase of 50% from last year. Our sales and units, including joint ventures, were 41,000, an increase of 35%. The increase in the China market size was primarily due to higher-than-expected domestic demand driven by NS4 scrapping incentives. Industry demand for excavators in China in the third quarter was 54,000 units, an increase of 22% from 2024 levels. Our units sold, including joint ventures, were 9,000, an increase of 18%. The increase in the China market size is primarily driven by domestic rural development and small infrastructure projects as well as strong export demand. Sales of power generation equipment in China increased 26% in the third quarter due to accelerating data center demand. Third quarter revenues in India, including joint venture, were $713 million, an increase of 3% from a year ago, as stronger demand across markets was partially offset by depreciation of the rupee against the dollar. Industry truck production increased 6% from 2024, while our shipments increased 8%, driven primarily by domestic demand recovery as well as a pre-buy in advance of the potential goods and service tax rate changes. Power Generation revenues increased 41% in the third quarter, driven by strong data center demand. To summarize, we achieved strong results led by record performance in our Power Systems and Distribution segments, which were offset by sharp declines in the North America heavy- and medium-duty truck demand, which negatively impacted our Engine and Components businesses. We expect the near-term weakness in North America on-highway truck markets to persist at least through the end of this year. Across all North America on-highway applications, we anticipate unit shipments declining approximately 15% from third quarter levels, with most of the reduction expected in light- and heavy-duty trucks. This reflects some normalization in light-duty trucks after a strong Q3 ramp-up in the new model production along with fewer production days in the quarter and continued weakness in heavy-duty trucks. While we believe Q4 on-highway Engine production could mark the bottom of this cycle, the pace of recovery in these markets will depend on broader economic sentiment and the clarity of trade and regulatory policies. While near-term challenges remain in our shorter cycle markets, we continue to see strong demand for power generation equipment beyond this year. The global trade and policy landscapes remain dynamic, presenting ongoing challenges across our industry. As anticipated, tariff costs increased in the third quarter. We are nearing full recovery for those tariffs announced prior to the third quarter and are currently assessing any incremental impacts from the more recent announcements, including the medium- and heavy-duty vehicle Section 232 proclamation. We believe, overall, we are well positioned to support our customers and keep the U.S. economy moving with our long-established strategy of making products in the U.S. for the U.S. market. Rising geopolitical tensions could also pose risks to semiconductor supply and other products that utilize rare earth minerals, potentially impacting our supply chain and broader industry production. So far this year, we have not experienced significant disruptions to our production, and we are actively monitoring this evolving situation and taking steps to mitigate risk where we can. The reduction of government incentives in the U.S. to support the adoption of green hydrogen, along with slower-than-expected market development in some international markets has contributed to significantly lower demand for our electrolyzer products. As a result, we are undergoing a strategic review of our electrolyzer business to assess the best path forward, and there may be further charges as we respond to a very weak demand outlook. 2025 has presented significant challenges for our industry, as I've outlined, requiring us to focus even more on cost containment and risk mitigation than we had anticipated at the start of the year. Our experienced leadership team and dedicated employees have worked tirelessly to navigate these dynamics and also capitalize on the growing demand for power generation equipment and significantly improve company performance cycle over cycle. Looking ahead, we are hopeful that global trade policy will stabilize and that the administration's review of the 2027 EPA regulations will conclude in the coming months. This clarity will be critical for our industry and will support our plan to reinstate guidance for 2026 in February. Now let me turn it over to Mark.

Mark Smith, CFO

Thank you, Jen, and good morning, everyone. We achieved strong results in what can be characterized as a tale of two economies, particularly here in the U.S. Key takeaways today are: first, the business trends in the third quarter unfolded as we communicated at a high level three months ago. Demand for our Power Systems and Distribution businesses remains robust, partly due to the growing need for backup power for data centers. Conversely, U.S. truck production significantly slowed, with our shipments in heavy- and medium-duty truck engines down 27% from the second quarter, aligning with our forecasted decline of between 25% and 30%. Our margins were solid, as sales growth in Power Systems and Distribution led to EBITDA margin expansion, while our cost containment efforts helped mitigate the effects of declining truck volumes in the U.S. Lastly, as anticipated, the adverse effects of tariffs continued to rise in the third quarter. However, we managed the overall impact on profitability through price recovery and other measures, resulting in a sequential increase in the proportion of cost recovery for the quarter. Our operating cash flow was strong at $1.3 billion this quarter. Among these highlights, it’s important to underscore that we are continuing to enhance our performance significantly from cycle to cycle. Now let's take a detailed look at our results. Our revenues totaled $8.3 billion, a 2% decrease from the previous year. Sales in North America fell by 4%, while international revenues grew by 2%. EBITDA reached $1.2 billion, representing 14.3% of sales for the quarter, compared to $1.4 billion or 16.4% of sales last year. Our third quarter results for 2025 included $240 million of noncash charges related to our electrolyzer business within the Accelera segment. Excluding these charges, EBITDA was $1.4 billion or 17.2% of sales. The higher EBITDA percentage, without the noncash charges, was driven by increased power generation demand, light-duty truck volumes, favorable pricing, strong operational efficiencies, and reduced compensation expenses, although these were partially countered by lower North American truck demand and the negative effects of tariffs. Now I will delve deeper by line item. Gross margin for the quarter was $2.1 billion or 25.6% of sales compared to $2.2 billion or 25.7% of sales the previous year. The 2025 margins included a $30 million noncash charge for inventory write-downs related to our electrolyzer business, part of the previously mentioned noncash charges for Accelera. Excluding these charges, the gross margin percentage was 26%, an improvement from the prior year, thanks to higher power generation demand and light-duty truck volumes, favorable pricing, and operational improvements, offsetting the negative impacts from lower truck demand and tariffs. Selling, administrative, and research expenses were $1.1 billion or 13.6% of sales compared to $1.2 billion or 13.8% of sales, reflecting solid cost control across the company. Joint venture income increased by $5 million from the prior year to $104 million, driven mainly by higher volumes in China within our Engine and Power Systems segments. Other income decreased to a negative $186 million from $22 million in profit a year prior, primarily due to a $200 million noncash goodwill impairment in the electrolyzer segment. Interest expense remained flat at $83 million compared to the previous year. The overall effective tax rate for the third quarter was 32.7%, which included $36 million or $0.26 per diluted share of additional tax expense related to the One Big Beautiful Bill Act due to reduced foreign income deduction and research and development credits. We expect cash benefits from our decisions under this new U.S. tax legislation, although the impact on the current period income statement was negative. Total net earnings for the quarter were $536 million or $3.86 per diluted share, down from $809 million or $5.86 per diluted share a year earlier. The Accelera noncash charges amounted to $240 million or $1.73 per diluted share. Excluding these charges and the effects of the recent changes in U.S. tax legislation, our net earnings stood at $812 million or $5.85 per diluted share, just $0.01 lower despite a 40% drop in U.S. truck volumes. Operating cash flow improved to $1.3 billion from $640 million a year ago. Our credit metrics have significantly improved since the Meritor acquisition, granting us greater flexibility in capital allocation. Now let me provide more details on segment performance and the outlook for the remainder of 2025. Tariff costs affected all our operating segments. To save time, I won't repeat this point while discussing each segment. For the Engine segment, third quarter revenues were $2.6 billion, an 11% decrease from the previous year. EBITDA was 10%, down from 14.7%, impacted by weaker North American and heavy-duty truck volumes, the costs and overhead from developing new engine platforms ahead of the 2027 emissions regulations, and some reduced aftermarket sales, partially offset by higher volumes and pricing from new product launches in light-duty markets and effective cost management. The Components segment reported revenue of $2.3 billion, a 15% decrease year-over-year. EBITDA was 12.5%, compared to 12.9% the previous year, with weaker on-highway demand in North America somewhat mitigated by operational efficiencies, strict cost management, and reduced product coverage costs. In the Distribution segment, revenues increased by 7% year-over-year to a record $3.2 billion, with EBITDA also reaching a record 15.5% compared to 12.5% last year, driven by higher power generation demand and increased aftermarket earnings. In the Power Systems segment, revenues soared to a record $2 billion, an 18% increase from last year. EBITDA dollars also set a record at $457 million, with the percentage of sales rising from 19.4% to 22.9%, driven by strong volume, especially in data center applications, favorable pricing, and effective capacity expansions. Accelera revenues rose by 10% to a record $121 million, as increased e-mobility sales helped offset lower electrolyzer installations. Our EBITDA loss, excluding noncash charges, was $96 million compared to a loss of $115 million last year, reflecting a reduced cost base resulting from actions taken in the fourth quarter of 2024. In summary, we achieved remarkable profitability in the third quarter due to enhanced operational execution, strong demand in power generation markets, and pricing that more than compensated for significant declines in the North American truck markets and negative tariff impacts. However, these factors were not consistent across all segments. Despite an increased impact from tariffs in the third quarter, we have worked diligently to mitigate these effects and expect to approach a price/cost neutral position for the tariffs that were announced before the third quarter as we enter the fourth quarter. Ongoing changes to tariffs continue to be challenging. Overall, our third quarter results highlighted Cummins' strong financial stability and our capability to navigate ongoing uncertainties. Our diversified portfolio and global presence position us well to support our customers and continue enhancing performance over time. We foresee sustained strong demand for Power Systems and Distribution through the fourth quarter and into 2026. While being cautiously optimistic, I hope North American on-highway market demand is nearing its lowest point in the fourth quarter, following a prolonged and challenging downturn. We expect a further 15% decrease in our engine shipments to on-highway markets in the fourth quarter compared to the third quarter. We are hopeful about reinstating our guidance in February as more clarity emerges around trade and regulatory policies, which ideally will provide stability for the North American truck industry and the broader industrial economy. As these markets rebound, we are confident in our ability to build on this year’s strong performance and continue delivering value to shareholders. Now let me hand it back to Nick.

Nicholas Arens, Executive Director of Investor Relations

Thank you, Mark. Operator, we are ready for our first question.

Operator, Operator

Our first question comes from Jamie Cook with Truist Securities.

Jamie Cook, Analyst

Congratulations on a nice quarter. I guess two questions. One, Mark, how you're thinking about Engine margins in the fourth quarter and the ability to cover tariff costs or how to think about margins would be my first question. I guess then just my second question. As we think about Power Systems, obviously, the margins were very strong in the quarter. Just trying to think through how we think about 2026, the ability to ramp production more? How you're thinking about price cost? And I guess, Mark, do we need to raise the margin targets in Power Systems?

Mark Smith, CFO

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

Jennifer Rumsey, Chair and CEO

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

Operator, Operator

Our next question comes from Angel Castillo with Morgan Stanley.

Angel Castillo Malpica, Analyst

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

Jennifer Rumsey, Chair and CEO

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

Mark Smith, CFO

Yes. And then just on the component technologies, we're also selling to other customers as well, somewhat akin to the components business story. So yes, it's exciting to be talking about investment with visibility and the returns in that business.

Angel Castillo Malpica, Analyst

That's very helpful. And then just for my follow-up, Mark, on the Section 232, could you help us quantify, I guess, how much the headwind is in 3Q and 4Q on kind of a gross basis? And any comments or kind of way to maybe put guardrails around the potential for getting a similar rebate on engines manufactured in the U.S. as we've seen, I think, the U.S. trucks manufacturers get? And what is kind of the financial impact of that as we think about potentially 2026 if getting such a rebate?

Mark Smith, CFO

I completely share your questions, and we need more detailed information than we currently have to make accurate predictions. I can say that we are a robust engine manufacturer here in the U.S., which positions us well to assist our customers during this time. While modeling is important, there are several key questions we need more insight on to provide accurate calculations and communication. Overall, we are well-positioned given our infrastructure, and we will continue to be a strong partner for our customers. Stability going forward would be very beneficial. This decline in truck orders is one of the sharpest I've seen, and while tariffs are a factor, they contribute to overall uncertainty. We hope for more clarity and stability, and we are committed to collaborating with our customers and suppliers despite the significant demands on all parties involved.

Operator, Operator

Our next question comes from David Raso with Evercore.

David Raso, Analyst

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

Mark Smith, CFO

What I would say is that in this quarter, the noncash impairment charge is primarily a goodwill write-down, which is disappointing but necessary given the weaker outlook. So far, what we've done doesn’t significantly change the trajectory. However, as Jen mentioned, we are closely examining further actions to reduce the rate of losses. This accounts for less than half of the total losses in the Accelera segment. We will keep you updated on this.

David Raso, Analyst

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

Mark Smith, CFO

There are various actions we can take, but we are aware that in a lower demand environment, no one is comfortable with the current level of losses. We are examining all of this and will be open about our findings once we reach a conclusion, but we are actively working on it now.

Jennifer Rumsey, Chair and CEO

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

Mark Smith, CFO

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

Operator, Operator

Our next question comes from Rob Wertheimer with Melius Research.

Robert Wertheimer, Analyst

Thank you for your comments regarding our direction; they are appreciated. Regarding natural gas, data centers, and prime power, Cummins has established successful natural gas platforms across various engines. Could you provide an overview of what that involves? Is it a significant engineering challenge to adapt this for larger engines? Does it require extensive operating hours? What factors influence that decision? Additionally, could you discuss any changes in the data center landscape? Cummins was ahead of the data center boom—are there any shifts now? Has there been a change in data center design? Do they all utilize backup ratios? What developments have occurred in the market over the past few months?

Jennifer Rumsey, Chair and CEO

Yes, Cummins has expertise in engine technology, research and development, and manufacturing. We recognize the potential of natural gas. Currently, we have a set of natural gas products and are evaluating the demand for natural gas in data centers to determine the most suitable product. If we don't have the right product today, developing it typically takes several years, but we are prepared to invest if we foresee significant growth opportunities in that area. Regarding the data center landscape, reliability is crucial, and the need for backup power remains essential. Data centers don't operate their backup systems frequently, but the primary challenges lie in ensuring adequate power supply from the grid and addressing prime power needs. Data centers are exploring solutions like backup generators for peak shaving or alternative primary power sources. As I mentioned earlier, we can perform some peak shaving with our existing products. We have also started investing in stationary energy storage solutions that can be applied in data centers, and we are continuously assessing other potential investments that could yield attractive returns.

Operator, Operator

Our next question comes from Kyle Menges with Citigroup.

Kyle Menges, Analyst

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

Mark Smith, CFO

Most of our sales in e-mobility are focused on bus applications, particularly in the U.S., and this trend is continuing. We are well-positioned in this area. There are ongoing discussions and explorations, but the e-mobility industry has experienced a significant shakeout due to lower growth prospects, even as we continue to grow. Many companies have revised their growth projections downward, leading to challenges for many startups and less well-capitalized participants. However, there remains ample opportunity for Cummins in e-mobility, and our story has been one of progress. We have transitioned from significant losses and negative gross margins to a more stable and sustainable position, although it remains modest in the context of our $35 billion company. We are seeing progress and are committed to investing in this area. Regarding electrolyzers, we initially set ambitious growth targets and were closely monitoring our trajectory for revenue growth. Unfortunately, we have experienced a quicker decline in this area than anticipated, particularly in the U.S., as well as in some international markets. We approached the new year with caution as we weren’t sure what to expect. While our original revenue guidance was reasonable, we have seen unexpected declines internally. This situation may give the appearance that we are on track, but the reality is that electrolyzer performance is lacking. The lead time from order to product shipment to revenue recognition is creating a significant gap in our revenue projections for the next few years. We recognize the urgency of the situation. While challenges exist outside of e-mobility, we are pleased with the progress in that sector, and I want to highlight the achievements of the e-mobility team.

Kyle Menges, Analyst

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

Mark Smith, CFO

I'll be straightforward and say that I don’t anticipate achieving 8% margins in the fourth quarter for the Engine business. There are several factors at play; for instance, we're experiencing a decline in volume, which we didn't expect. While I am somewhat confident that this downturn could reach a bottom, we also noted a slowdown in parts, and we hope that trend does not persist. Additionally, our ongoing efforts on cost management, productivity improvements, and navigating tariffs may help alleviate some pressures. However, things are not likely to improve significantly as we are facing more challenges. I want to be clear about that. I also want to mention that there is typically some seasonality in the fourth quarter during the holiday period, which tends to be more pronounced in a weak economic environment. Nevertheless, we are striving hard each day in the Engine business to find the right balance. Our financial reports show that engineering costs have increased year-over-year as we are still in the prelaunch development phase, and certain regulations are not yet finalized. This trend will likely continue, but we don't expect a drastically worse situation in the fourth quarter. So, while there won't be any miracles, I also don't foresee achieving 8% EBITDA based on my current understanding.

Jennifer Rumsey, Chair and CEO

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

Mark Smith, CFO

Yes, there's always some natural variation across our businesses. Generally, we expect Power Systems and Distribution to perform strongly. No two quarters are ever exactly the same, even if they appear similar at first glance. The Engine business and Components are still facing pressure. We are maintaining tight cost controls and exploring options for Accelera. Additionally, we've made significant improvements to our credit metrics, enhancing our flexibility for future capital allocation. While navigating troughs is challenging, doing so effectively provides a strong foundation and confidence to move forward when demand picks up. I wish I could express more optimism and say that we're highly confident; however, we do feel we are nearing the bottom of the trough in the on-highway segment. We anticipate continued positive trends in power generation and data centers, which will benefit Power Systems and Distribution. Ideally, we would see strong demand across the company soon, but it currently feels a bit elusive in the truck sector. Given how long and deeply this cycle has gone, we believe it's just a matter of time in a cyclical business, although an immediate turnaround is not expected.

Operator, Operator

Our next question comes from Tami Zakaria with JPMorgan.

Tami Zakaria, Analyst

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

Jennifer Rumsey, Chair and CEO

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

Tami Zakaria, Analyst

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

Jennifer Rumsey, Chair and CEO

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

Operator, Operator

Our next question comes from Steven Fisher with UBS.

Steven Fisher, Analyst

Congrats on the power results. Just curious on the international data center opportunities relative to the U.S., how do you see those being different? And is there any difference in the momentum there? And how are the competitive dynamics differ internationally versus on the domestic side?

Jennifer Rumsey, Chair and CEO

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

Mark Smith, CFO

Okay, and then...

Steven Fisher, Analyst

Go ahead, Mark.

Mark Smith, CFO

In China, there tends to be a greater presence of local competition or attempts to enter the market compared to what we see in the U.S. or other regions.

Operator, Operator

Our next question comes from Noah Kaye with Oppenheimer.

Noah Kaye, Analyst

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

Jennifer Rumsey, Chair and CEO

In the scenario where regulations remain unchanged, I expect our research spending to remain relatively stable leading up to next year's product launch, after which we can begin to reduce it. Regarding demand, as we prepare for next year, there's considerable uncertainty, especially concerning on-highway demand. As Mark pointed out, we believe we are nearing the bottom of the cycle and see some potential for improvement. The question is when this will occur, considering the capacity reductions made in response to the downturn and how quickly we can restore capacity once demand increases. I anticipate some revenue growth at some point during the year, but R&D spending will remain flat.

Mark Smith, CFO

Yes. Accelera probably won't be growing, and there's always the question of what are we investing in the future, whether that's in Engines and Components or in Power Systems or future technologies. But yes, not a dramatic change for the next year. There's just natural inflation because a lot of those costs are people costs. There is some natural inflation that we're always counting against. So it will not be a significant tailwind, let's put it like that. Longer term, yes, but not tomorrow.

Jennifer Rumsey, Chair and CEO

Yes.

Noah Kaye, Analyst

Yes, yes, yes. And on that topic of investing, and I want to tie it back to the discussion around the prime power opportunity. 30% of data center sites could be using prime power in some form 5 years out from now. You've got fuel cell in the portfolio. You've got battery. You've got natural gas and diesel gen. How do you think about tying together some of those elements, including what might sit in Accelera today to go after expanded wallet share if prime power becomes more of a growth opportunity?

Jennifer Rumsey, Chair and CEO

Our strategy has been to maintain a diverse portfolio of solutions across various customers and markets. There isn't a single solution. Our strong position in engines positions us well as power demand increases and energy transition progresses. We are particularly focused on battery opportunities in both power generation and mobile applications, as we see more potential there compared to fuel cells. We have slowed down our investment and efforts in the fuel cell area, and we will share more if we identify a compelling investment opportunity on the prime side. Currently, we are concentrated on executing the investments we've made to enhance our standby capacity and being disciplined about any additional investments in that market.

Mark Smith, CFO

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

Operator, Operator

Our next question comes from Scott Group with Wolfe Research.

Cole Couzens, Analyst

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

Mark Smith, CFO

I simply can't answer that. I wouldn't consider tariffs as a means to improve margins. They have been a significant cost challenge that we've been trying to address and mitigate as much as possible. I understand your question, but we are not viewing tariffs as an opportunity for margin enhancement in any way. They have been a major obstacle for our industry, and we hope to see some stability and relief.

Cole Couzens, Analyst

Okay. Fair enough.

Mark Smith, CFO

You're correct. As we approach Q4, we are indeed recovering from the impact of the tariffs. I want to clarify that our focus isn't on any incremental changes in that area. We are optimistic about creating a foundation for increased demand from our end user customers.

Jennifer Rumsey, Chair and CEO

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

Mark Smith, CFO

Yes, we don't have enough information to fully understand the details of any recently announced items, including rebates. There are many intricacies involved, especially regarding emissions regulations. While the headlines are encouraging, there's a lot more to consider about how these changes work financially and practically. We wish we could provide more clarity, but at this time, we are unable to do so.

Cole Couzens, Analyst

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

Mark Smith, CFO

We are well-positioned to support all of our customers in the U.S., and we have strong penetration across various brands and OEMs. Overall, we have seen an increase in customer demand for Cummins products in heavy- and medium-duty trucks over the past few years. We believe we are in a good position, although it has been quite complex for everyone involved and continues to be.

Operator, Operator

Our final question comes from Chad Dillard with Bernstein.

Charles Albert Dillard, Analyst

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

Jennifer Rumsey, Chair and CEO

Yes. From a capacity standpoint, we are assessing whether we should pursue any initiatives on the prime power side, as we've discussed this morning. We are also exploring opportunities to invest in capacity because we see strong ongoing demand. This is evident from the orders we received last quarter and the discussions we're having with customers globally. We believe this demand will persist, and if we identify opportunities to increase capacity, we will consider them. Looking ahead, we expect the demand for prime power to continue. While there is often a cycle of excitement around technology, the fundamental need to store increasing amounts of data in the cloud—whether driven by AI or other factors—is a trend that will keep growing.

Mark Smith, CFO

We have not provided guidance on the gross amounts generally, but the net position has been negative for the company, with a negative impact in the tens of millions of dollars each quarter so far. That's the extent of what I can share. As for what happens next, I can't speculate because we simply don't have enough information. However, we have been working hard to offset costs in the industry. Even if we recover it, it still impacts our margins.

Jennifer Rumsey, Chair and CEO

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

Mark Smith, CFO

All right. Appreciate it, everybody. Thanks for joining us.

Nicholas Arens, Executive Director of Investor Relations

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.

Operator, Operator

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