CUMMINS INC CMI

Cummins recorded $240 million in noncash charges in Q3 FY25, including a $200 million goodwill impairment and $30 million inventory write-down, within its Accelera segment. These charges reflect significantly lower demand expectations for electrolyzer products due to reduced U.S. government incentives and slower international market development. Management is conducting a strategic review of the electrolyzer business to assess the best path forward, noting the demand environment has 'dried up faster than anything I have seen' and expects further actions to reduce losses.

The Power Systems segment achieved record revenue of $2 billion, an 18% YoY increase, and record EBITDA of $457 million, expanding its margin to 22.9%. This performance was primarily driven by strong data center demand, which contributed to a 27% increase in North America power generation equipment revenue and a 26% increase in China. Cummins expects total company revenue from the data center market to grow 30-35% in FY25, building on $2.6 billion in FY24. The company is nearing completion of a capacity doubling for large diesel engines and is evaluating additional capacity investments and potential expansion into natural gas engines for prime power applications.

North America heavy-duty truck industry production declined 34% YoY to 46,000 units in Q3 FY25, with Cummins' unit sales down 38% to 16,000. Medium-duty truck industry production fell 51% YoY to 20,000 units, and Cummins' unit sales decreased 55% to 17,000. This sharp decline negatively impacted the Engine and Components segments. Management anticipates a further 15% sequential decline in on-highway engine shipments in Q4, hoping this marks the bottom of the cycle, but notes that recovery depends on broader economic sentiment and clarity on trade and regulatory policies.

Tariff costs increased in Q3 FY25, resulting in a negative net impact to Cummins' profitability, estimated in the tens of millions of dollars each quarter. However, the company successfully increased the proportion of tariff costs recovered through pricing and other mitigation actions. Management expects to be near a price/cost neutral position for tariffs announced prior to Q3 by the fourth quarter, but acknowledges that ongoing tariff adjustments continue to present challenges. Cummins emphasizes its strong U.S. manufacturing base as a key advantage in navigating these dynamics.

Revenues in China, including joint ventures, increased 16% YoY to $1.7 billion in Q3 FY25, recovering from a weak prior year. Industry demand for medium- and heavy-duty trucks rose 50% to 311,000 units, driven by NS4 scrapping incentives. Excavator demand in China increased 22% to 54,000 units, fueled by domestic rural development, small infrastructure projects, and strong export demand. Power generation sales in China also saw a 26% increase, attributed to accelerating data center demand.

Cummins is actively developing new products for the 2027 emissions regulations and feels well-positioned with its new platforms and technology. However, the company faces significant uncertainty regarding the final rule, which is impacting industry planning. Management is engaging closely with the EPA to seek clarity on the regulations and potential cost reductions, emphasizing the critical need for certainty to support the North American truck industry. Cummins is prepared to launch its products in 2027 if the regulations largely remain as currently expected.