Executive Summary / Key Takeaways

• Cummins, a global power solutions leader, is strategically navigating evolving market dynamics through its multi-solution "Destination Zero" approach, leveraging core engine and power systems expertise while investing in electrified and hydrogen technologies.
• The Power Systems segment, particularly driven by robust data center and mission-critical demand, delivered record performance in Q1 2025 and FY 2024, showcasing operational efficiency gains and providing a significant offset to cyclical weakness in other markets.
• Escalating trade tariffs have introduced substantial economic uncertainty, leading Cummins to withdraw its full-year 2025 guidance, highlighting potential impacts on demand for capital goods and supply chain costs, with effects expected to build over the coming months.
• Despite near-term market volatility and regulatory uncertainties (including around EPA 2027), Cummins is proceeding with key product launches like the HELM platform (X10, B7.2, X15 diesel/natural gas) and investing heavily in capacity and R&D to maintain its competitive edge and capitalize on future demand and regulatory changes.
• While facing competitive pressures from larger, more diversified players like Caterpillar (CAT) and Deere (DE), Cummins differentiates itself through specialized technology (e.g., fuel efficiency, emission control) and a strong global distribution and aftermarket service network, which are critical moats in a cyclical and transitioning industry.

Setting the Scene: A Century of Power Evolution

Cummins Inc., founded in 1919 as a pioneering diesel engine manufacturer in Columbus, Indiana, has evolved into a global power solutions leader. With a history deeply rooted in internal combustion engines, the company has successfully adapted to changing market demands and technological advancements, expanding its portfolio to include a wide array of powertrain-related components, power generation systems, and, increasingly, electrified power and hydrogen technologies. This strategic evolution is encapsulated in its "Destination Zero" strategy, a multi-solution approach designed to reduce the environmental impact of its products today while developing cleaner power solutions for the future.

Cummins operates through five distinct, yet interconnected, business segments: Engine, Components, Distribution, Power Systems, and Accelera. This structure allows the company to serve diverse global markets, from heavy-duty trucking and construction to power generation and industrial applications, supported by an extensive service network spanning approximately 190 countries. The company's ability to leverage its global manufacturing footprint, often producing engines and gensets in the markets where they are sold, is a foundational strength.

The industry landscape is characterized by cyclical demand tied to overall economic conditions and significant regulatory pressures, particularly around emissions standards globally. Competition is intense, coming from both large, diversified industrial conglomerates and more specialized players in specific product areas. Navigating these dynamics requires not only technological leadership but also operational efficiency, a robust supply chain, and strong customer relationships.

The Technological Edge: Powering Performance and Efficiency

At the heart of Cummins' competitive positioning lies its differentiated technology, particularly within its core engine and power systems businesses. The company has a long-standing reputation for developing reliable, durable, and increasingly efficient power solutions.

A prime example is the Cummins HELM engine platform, applied across its B, X10, and X15 series. This platform is designed to offer fuel flexibility, allowing customers to utilize advanced diesel, natural gas, or hydrogen fuels on a common engine architecture. This flexibility is a critical benefit in a transitioning energy landscape, enabling customers to choose the fuel best suited to their operational needs and decarbonization goals without sacrificing performance. The X15N natural gas engine, part of this platform, entered full production in Q3 2024 and is being adopted by major fleets looking to reduce their carbon footprint. The upcoming X15 diesel version, slated for launch in 2026, is expected to deliver significant fuel efficiency improvements, potentially up to 7%, offering a tangible reduction in operating costs for customers and strengthening Cummins' competitive stance in the diesel market ahead of future regulations. The new B7.2 diesel engine and the X10, replacing the L9 and X12 platforms, are also designed with the latest technology to enhance performance, durability, and efficiency for medium and heavy-duty applications, with North America production starting in 2027.

In the Power Systems segment, the introduction of new Centum Series generator sets, designed specifically for critical applications like data centers, highlights Cummins' ability to innovate for high-demand markets. These systems leverage powerful engines like the QSK50 and QSK78. While specific quantifiable performance metrics for these new generator sets were not detailed, their engineering for mission-critical use implies a focus on reliability, power density, and efficiency essential for data center operations.

Cummins' R&D efforts, while currently at a high level due to investments in these new platforms and future technologies, are strategically aimed at maintaining this technological edge. The company is also investing in emerging areas through its Accelera segment, focusing on electrified power systems (battery and electric powertrain technologies) and hydrogen production (electrolyzers). While the adoption rate of zero-emission solutions has been slower than initially anticipated in some regions, leading to a strategic reorganization and refocusing within Accelera in Q4 2024, the company remains committed to these technologies. The Amplify Cell Technologies joint venture, targeting battery cell production in the US by 2027, and the Accelera electrolyzer plant in Spain, capable of producing 500 megawatts/year, demonstrate concrete steps in building capabilities for the future energy transition.

The "so what" for investors is clear: Cummins' investment in and development of advanced, fuel-flexible, and efficient power solutions provide a competitive moat. These technologies enable the company to offer products that meet stringent emissions standards while delivering value to customers through lower operating costs and reliable performance. This differentiation supports pricing power and strengthens market share, particularly as regulatory landscapes evolve globally. The strategic pacing of investments in zero-emission technologies positions Cummins to participate in the long-term energy transition, mitigating the risk of disruption to its core business.

Competitive Landscape: Navigating a Dynamic Market

Cummins operates within a fiercely competitive environment, facing off against a range of players across its diverse segments. Key publicly traded competitors include large, diversified industrial companies like Caterpillar Inc. and Deere & Company, as well as more specialized players such as PACCAR Inc. (PCAR) in trucking and Allison Transmission Holdings Inc. (ALSN) in components.

Compared to giants like Caterpillar and Deere, Cummins is more specialized, primarily focused on power solutions rather than integrated equipment manufacturing. While this specialization allows Cummins to develop deep expertise and potentially achieve higher efficiency in specific product areas (e.g., engine fuel efficiency), it also means it lacks the broader portfolio and scale advantages of its larger rivals. Looking at TTM financial ratios, Cummins' Gross Profit Margin (25.16%) and Operating Profit Margin (11.43%) trail those of Caterpillar (36% and 20%) and Deere (39% and 23%), suggesting these larger competitors may benefit from greater operational efficiency or pricing power across their broader product lines. However, Cummins' EBITDA Margin (14.46%) is more competitive, indicating strong profitability before accounting for depreciation and amortization.

In the trucking market, Cummins competes directly with PACCAR, which manufactures its own trucks and engines. Cummins' strength lies in its ability to supply multiple OEMs, including PACCAR and Daimler Trucks North America, leveraging its technological advancements like the HELM platform to win business. While PACCAR's TTM Operating Margin (15%) is slightly higher than Cummins' (11.43%), Cummins' focus on engine technology and its extensive aftermarket service network provide a competitive advantage, particularly in supporting diverse fleets and applications.

Allison Transmission, a competitor in the components segment, specializes in transmission systems. While Cummins develops and integrates its own transmissions, Allison's TTM Gross Profit Margin (47%) significantly exceeds Cummins' (25.16%), suggesting a strong position in its niche. This highlights the competitive pressure Cummins faces in certain component areas, requiring it to continually innovate and optimize its offerings.

Cummins' competitive advantages, or moats, include its proprietary technology, such as advanced emission control systems and fuel-efficient engine designs, which provide performance benefits over alternatives. Its extensive global distribution and aftermarket service network is another critical differentiator, enabling rapid service delivery and fostering strong customer loyalty, particularly important for mission-critical applications like power generation. This network is a key reason why market demand for backup power in data centers is concentrated among a few large engine manufacturers like Cummins.

However, Cummins also faces vulnerabilities. Its reliance on cyclical markets like trucking and construction exposes it to demand fluctuations, as evidenced by the recent softening in North America heavy-duty truck orders. While its specialization is a strength, it also means it is less diversified than giants like Caterpillar and Deere, potentially making it more susceptible to downturns in specific sectors. The energy transition, while an opportunity, also presents a challenge as the pace and nature of adoption for zero-emission technologies remain uncertain, requiring careful investment pacing to avoid stranded assets or missed opportunities.

Strategically, Cummins positions itself as a trusted partner providing reliable, technologically advanced power solutions across a spectrum of fuel types. Its partnerships with OEMs like Daimler, PACCAR, and Isuzu (ISUZY), and joint ventures like Amplify, underscore its collaborative approach to market penetration and technology development. The company's focus on operational efficiency and cost control, alongside strategic pricing, are key levers to maintain profitability in a competitive and sometimes challenging market.

Performance and Financial Health: Resilience Amidst Shifting Tides

Cummins delivered a complex financial picture in Q1 2025, reflecting both underlying strength in key segments and the impact of external headwinds. Consolidated net sales decreased 3% to $8.17 billion compared to Q1 2024, primarily due to the absence of sales from the divested Atmus Filtration (ATMU) business and weaker demand in North America on-highway truck markets. However, this decline was partially offset by robust growth in power generation markets.

Despite the slight revenue dip, gross margin improved, driven by favorable pricing and lower material costs, partially mitigating the impact of lower sales volume and unfavorable mix. Operating expenses, including selling, general, administrative, and R&D, decreased, largely attributable to the Atmus divestiture. This contributed to an increase in operating income to $1.13 billion in Q1 2025, up significantly from $923 million in Q1 2024 (though the Q1 2024 figure was impacted by certain costs).

Net income attributable to Cummins Inc. in Q1 2025 was $824 million, or $5.96 per diluted share. This represents a substantial decrease from $1.99 billion, or $14.03 per diluted share, in Q1 2024. However, the Q1 2024 results included a significant $1.3 billion non-taxable gain from the Atmus divestiture. Excluding this one-time gain, the underlying net income performance in Q1 2025 demonstrated resilience, supported by improved gross margins and operational cost control.

Segment performance highlights the divergent trends across Cummins' markets. The Engine segment saw sales decrease 5%, primarily due to lower North America heavy-duty truck demand, but EBITDA increased 11%, benefiting from favorable pricing and operational efficiencies. The Components segment sales fell 20%, mainly due to the Atmus divestiture and weaker demand in North America and Western Europe trucking, leading to a 19% decrease in EBITDA. In stark contrast, the Distribution segment's sales surged 15%, and EBITDA jumped 28%, driven by strong North America power generation demand. The Power Systems segment was a standout performer, with sales increasing 19% and EBITDA soaring 64%, reaching a record 23.6% of sales, fueled by high volumes and favorable pricing in power generation (data center) and industrial (mining, defense) markets. Accelera's sales increased 11%, and its EBITDA loss narrowed by 15%, reflecting increased electrified powertrain and electrolyzer sales alongside cost management, though the Amplify joint venture contributed to losses as it advances towards production.

Financially, Cummins maintains a solid balance sheet. As of March 31, 2025, total assets stood at $32.53 billion, with cash and marketable securities totaling $2.16 billion. The debt-to-capital ratio was 38.5%, a slight increase from year-end 2024 but indicative of manageable leverage. The company has access to $4.0 billion in revolving credit facilities, providing ample liquidity, though $1.7 billion was utilized by commercial paper outstanding as of March 31, 2025. Operating cash flow in Q1 2025 was a modest outflow of $3 million, a decrease from an inflow of $276 million in Q1 2024, primarily due to higher working capital requirements related to accounts receivable and inventory. However, full-year 2024 saw strong operating cash flow generation ($1.49 billion), albeit impacted by the $1.9 billion regulatory settlement payment in Q2 2024. Capital expenditures remain significant, projected at $1.4 billion to $1.5 billion in 2025, reflecting ongoing investments in new products and capacity expansion, particularly in North America and Power Systems. The company continues to return value to shareholders through dividends, recently increasing its quarterly payout, and maintains a strong pension funding status.

Outlook and Risks: Uncertainty Clouds the Horizon

The most significant development regarding Cummins' outlook is the withdrawal of its full-year 2025 guidance on May 5, 2025. This decision stems directly from the growing economic uncertainty driven by escalating trade tariffs. Management explicitly stated that the breadth and changing nature of these tariffs make it impossible to predict performance with confidence for the remainder of the year. The concern is not solely the direct cost impact of tariffs, but their broader effect on the global economy and demand for capital goods, with impacts expected to build over the coming months. Management indicated they would reinstate guidance when economic conditions and tariff clarity improve.

Prior to this withdrawal, the initial 2025 outlook provided in Q4 2024 projected total company revenues to be down 2% to up 3% compared to 2024, with EBITDA margins expected to improve to 16.2% to 17.2% (up from 15.7% in 2024). This earlier outlook anticipated weaker demand in North America heavy-duty truck markets (projected production of 260,000-290,000 units, flat to down 10%), particularly in the first half, but expected continued strength in Power Systems (revenues up 2%-7%, EBITDA 19%-20%) and resilience in Distribution (revenues up 2%-7%, EBITDA 12%-13%). It also factored in modest growth in China and India revenues and stable performance in mining and aftermarket. The expected profitability improvement was predicated on operational efficiencies, cost control, and favorable mix shifts towards higher-margin segments like Power Systems.

The withdrawal of guidance underscores the material risk posed by the current geopolitical and economic environment. Key risks include:

• Trade Tariffs: The escalating tariff environment creates significant market volatility, potential supply chain disruptions, increased costs, and uncertainty regarding demand for products moving between affected regions (e.g., US and China). The ability to fully pass through costs and the duration of these impacts are uncertain.
• Market Cyclicality: Despite strength in some areas, core markets like heavy-duty trucking and construction remain cyclical and sensitive to economic conditions, interest rates, and freight activity. A prolonged downturn in these sectors would pressure revenues and profitability.
• Regulatory Uncertainty: While Cummins is preparing for EPA 2027 NOx regulations and expects them to proceed, uncertainty exists around potential modifications (e.g., warranty requirements) and the future trajectory of greenhouse gas regulations (Phase 3 from 2030). Changes could impact product development costs, market demand (e.g., pre-buy timing/extent), and competitive positioning.
• Energy Transition Pace: The slower-than-anticipated adoption of zero-emission technologies in some markets impacts the Accelera segment's growth trajectory and profitability, requiring careful management of investment pacing.
• Settlement Agreement Consequences: Ongoing obligations under the emissions settlement agreement, including potential stipulated penalties for non-compliance and related litigation, pose financial and reputational risks.

Conclusion: Awaiting Clarity, Anchored by Core Strengths

Cummins enters a period of heightened uncertainty, primarily driven by the unpredictable impact of escalating trade tariffs on the global economy and demand for capital goods. The withdrawal of its full-year 2025 guidance reflects this challenging near-term outlook, requiring investors to temper expectations for the coming quarters.

However, the investment thesis for Cummins is anchored by its demonstrated resilience and strategic positioning. The company's core business, particularly the Power Systems segment with its record performance driven by secular growth in data center demand and operational improvements, provides a significant buffer against cyclical weakness elsewhere. Cummins' multi-solution "Destination Zero" strategy, while facing pacing challenges in zero-emission adoption, ensures the company is developing technologies across the power spectrum, from advanced clean diesel and natural gas to electric and hydrogen, positioning it to serve evolving customer needs and regulatory requirements over the long term.

The company's technological leadership, particularly in engine efficiency and emission control, coupled with its extensive global distribution and aftermarket service network, remain critical competitive advantages in a dynamic industry. While facing intense competition from larger and more specialized players, these moats support market share and profitability.

While the near-term is clouded by macroeconomic and tariff-related risks, Cummins' strong balance sheet, consistent cash generation (excluding one-time items), commitment to strategic investments in future products and capacity, and dedication to returning cash to shareholders provide a foundation of financial stability. Investors should monitor the impact of tariffs on demand and profitability, the clarity around future regulations, and the continued execution of operational efficiencies and strategic growth initiatives, particularly in the high-performing Power Systems segment, as key indicators for the company's trajectory once the current period of uncertainty subsides.