Cummins · 10-Q · Item 2 MD&A

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as “anticipates,” “expects,” “forecasts,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “should,” “may” or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as “future factors,” which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:

GOVERNMENT REGULATION

•any adverse consequences resulting from entering into agreements with the U.S. Environmental Protection Agency (EPA), California Air Resources Board (CARB), the Environmental and Natural Resources Division of the U.S. Department of Justice (DOJ) and the California Attorney General's Office to resolve certain regulatory civil claims regarding our emissions certification and compliance process for certain engines primarily used in pick-up truck applications in the U.S., which became final and effective in April 2024, (collectively, the Settlement Agreements), including required additional mitigation projects, adverse reputational impacts and potential resulting legal actions;

•increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world;

•evolving environmental and climate change legislation and regulatory initiatives;

•any adverse consequences from changes in tariffs and other trade disruptions;

•changes in international, national and regional trade laws, regulations and policies;

•emissions deregulation;

•changes in taxation;

•global legal and ethical compliance costs and risks;

•future bans or limitations on the use of diesel-powered products;

BUSINESS CONDITIONS / DISRUPTIONS

•raw material, transportation and labor price fluctuations and supply shortages;

•aligning our capacity and production with our demand;

•the actions of, and income from, joint ventures and other investees that we do not directly control;

•large truck manufacturers' and original equipment manufacturers' customers discontinuing outsourcing their engine supply needs or experiencing financial distress, or change in control;

PRODUCTS AND TECHNOLOGY

•product recalls;

•variability in material and commodity costs;

•the development of new technologies that reduce demand for our current products and services or not successfully developing new technologies and products to effectively address the energy transition;

•lower than expected acceptance of new or existing products or services;

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•product liability claims;

•our sales mix of products;

GENERAL

•climate change, global warming, more stringent climate change regulations, accords, mitigation efforts, greenhouse gas regulations or other legislation designed to address climate change;

•our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions, divestitures or exiting the production of certain product lines or product categories and related uncertainties of such decisions;

•increasing interest rates;

•challenging markets for talent and ability to attract, develop and retain key personnel;

•exposure to potential security breaches or other disruptions to our information technology (IT) environment and data security;

•the use of artificial intelligence (AI) in our business and in our products, services and features, and challenges with properly managing its use;

•political, economic and other risks from operations among, between and within numerous countries including political, economic and social uncertainty and the evolving globalization of our business;

•competitor activity;

•increasing competition, including increased global competition among our customers in emerging markets;

•failure to meet sustainability expectations or standards, or achieve our sustainability goals;

•labor relations or work stoppages;

•foreign currency exchange rate changes;

•the performance of our pension plan assets and volatility of discount rates;

•the price and availability of energy;

•continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and

•other risk factors described in Part II, Item 1A in this quarterly report and our 2025 Form 10-K, Part I, Item 1A, under the caption “Risk Factors.”

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ORGANIZATION OF INFORMATION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2025 Form 10-K. Our MD&A is presented in the following sections:

•EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

•RESULTS OF OPERATIONS

•REPORTABLE SEGMENT RESULTS

•OUTLOOK

•LIQUIDITY AND CAPITAL RESOURCES

•APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

•RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

Overview

We are a global power leader committed to powering a more prosperous world. Since 1919, we have delivered innovative solutions that move people, goods and economies forward. Our five reportable segments - Engine, Components, Distribution, Power Systems and Accelera - offer a broad portfolio, including advanced diesel, electric and hybrid powertrains; integrated power generation systems; critical components such as aftertreatment, turbochargers, fuel systems, controls, transmissions, axles and brakes; and zero emissions technologies like battery and electric powertrain systems. With a global footprint, deep technical expertise and an extensive service network, we deliver dependable, cutting-edge solutions tailored to our customers' needs, supporting them through the energy transition with our Destination Zero strategy.

We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc., Traton Group, Daimler Trucks AG and Stellantis N.V. We serve our customers through a service network of approximately 640 wholly-owned, joint venture and independent distributor locations and more than 13,000 Cummins certified dealer locations in approximately 190 countries and territories.

Our segment reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Components segment sells axles, drivelines, brakes and suspension systems for commercial diesel and natural gas applications, aftertreatment systems, turbochargers, fuel systems, valvetrain technologies, automated transmissions and electronics. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products, maintaining relationships with various OEMs throughout the world and providing selected sales and aftermarket support for our Accelera business.

The Power Systems segment is an integrated power provider, which designs, manufactures and sells standby and prime power generators, engines (16 liters and larger) for standby and prime power generator sets and industrial applications (including mining, oil and gas, marine, rail and defense), alternators and other power components. The Accelera segment designs, manufactures, sells and supports electrified power systems with innovative components and subsystems, including battery and electric powertrain technologies. The Accelera segment is currently in the early stages of commercializing these technologies with efforts primarily focused on the development of electrified power systems and related components and subsystems. We continue to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.

Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, off-highway, power generation and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules, stoppages and supply chain challenges. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by geopolitical risks, currency fluctuations, political and economic uncertainty, tariffs and related trade disruptions, public health crises (epidemics or pandemics) and regulatory matters, including adoption and enforcement of environmental and emission standards.

As part of our growth strategy, we invest in businesses in certain countries that carry higher levels of these risks such as China, Brazil, India, Mexico and other countries in Europe, the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped

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limit the impact from a drop in demand in any one industry, region, customer or the economy of any single country on our consolidated results.

Global Trade Environment

As disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, we operate our business on a global basis and changes in international, national and regional trade laws, regulations and policies affecting and/or restricting international trade, including higher tariffs, trade disruptions (such as embargoes, sanctions and export controls) and broader geopolitical tensions, could adversely impact the demand for our products and our competitive position. In 2025, the U.S. imposed tariffs on certain countries and products, which was followed by retaliatory tariffs and other trade actions against U.S. goods and services. On February 20, 2026, the U.S. Supreme Court ruled that U.S. tariffs imposed under the International Emergency Economic Powers Act (IEEPA) on goods imported into the U.S. were unauthorized.

After this ruling, new tariffs were subsequently imposed under different statutes. The global trade environment has contributed to ongoing market volatility and heightened concerns about potential economic impacts. Our primary risks include reduced global movement of goods impacting freight activity, increased costs for suppliers and end-users and uncertainty around supply availability. These factors could lead to a decline in business confidence, reduced demand for our products and increased product costs. We continue to pursue mitigation strategies, including engaging with our suppliers, exploring alternative sourcing and negotiating agreements with our customers to recover tariff-related costs. The financial impact of tariffs, net of mitigation actions and U.S. government tariff refunds (net of amounts to be returned to customers), was immaterial to our profitability and operating cash flows during the three and six months ended June 30, 2026.

However, continued and increasing tariff costs, the effectiveness of our mitigation efforts and ongoing market volatility could materially and adversely affect our results of operations, financial condition and cash flows in the future. We continue to monitor developments and take actions to minimize the related impacts to our business to the extent possible. See the “OUTLOOK” section for a discussion of the potential tariff impacts for the remainder of 2026.

2026 Second Quarter Results

A summary of our results is as follows:

Three months ended

Six months ended

In millions, except per share amounts

Net sales

$

$

$

$

Net income attributable to Cummins Inc.

Earnings per common share attributable to Cummins Inc.

Basic

$

$

$

$

Diluted

Net income attributable to Cummins Inc. was $932 million, or $6.73 per diluted share, on sales of $9.5 billion for the three months ended June 30, 2026, versus the comparable prior year period net income attributable to Cummins Inc. of $890 million, or $6.43 per diluted share, on sales of $8.6 billion. The increases in net income attributable to Cummins Inc. and earnings per diluted share were primarily driven by higher sales leading to improved gross margin, partially offset by higher compensation costs. Diluted earnings per common share for the three months ended June 30, 2026, benefited $0.01 from fewer weighted-average shares outstanding due to the stock repurchase program.

Net income attributable to Cummins Inc. was $1.6 billion, or $11.44 per diluted share, on sales of $17.9 billion for the six months ended June 30, 2026, versus the comparable prior year period net income attributable to Cummins Inc. of $1.7 billion, or $12.38 per diluted share, on sales of $16.8 billion. The decreases in net income attributable to Cummins Inc. and earnings per diluted share were primarily driven by the loss on sale of business and settlement of current and future customer obligations as well as higher compensation costs, partially offset by higher sales leading to improved gross margin and favorable currency fluctuations (mainly in the Euro and Brazilian real).

Diluted earnings per common share for the six months ended June 30, 2026, benefited $0.03 from fewer weighted-average shares outstanding due to stock repurchase programs. See NOTE 14, “REPORTABLE SEGMENTS,” to our Condensed Consolidated Financial Statements for additional information on loss on sale of business and settlement of current and future customer obligations.

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The table below presents our consolidated net sales by geographic area based on the location of the customer:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

United States and Canada

$

$

$

8

%

$

$

$

1

%

International

%

%

Total net sales

$

$

$

9

%

$

$

$

6

%

Worldwide revenues increased by 9 percent in the three months ended June 30, 2026, compared to the same period in 2025, primarily due to higher demand for power generation equipment, especially in data center applications, and in international construction markets. International sales (excludes the U.S. and Canada) improved 12 percent mainly due to higher sales in China and Asia Pacific. The increase in international sales was primarily due to higher demand for power generation equipment and in construction markets as well as favorable foreign currency fluctuations of 2 percent (primarily the Chinese renminbi and Euro). Net sales in the U.S. and Canada improved 8 percent driven by higher demand for power generation equipment and medium-duty trucks.

Worldwide revenues increased by 6 percent in the six months ended June 30, 2026, compared to the same period in 2025, mainly due to higher demand for power generation equipment, especially in data center and commercial applications, and in international construction markets, partially offset by lower demand in most on-highway markets. International sales (excludes the U.S. and Canada) improved 14 percent primarily due to higher sales in China, Europe and Asia Pacific. The increase in international sales was driven by higher demand for power generation equipment and in construction markets as well as favorable foreign currency fluctuations of 4 percent (primarily the Euro and Chinese renminbi). Net sales in the U.S. and Canada improved 1 percent mainly due to higher demand for power generation equipment, partially offset by lower demand in most on-highway markets.

The following tables contain sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by reportable segment for the three and six months ended June 30, 2026 and 2025. See NOTE 14, “REPORTABLE SEGMENTS,” to our Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.

Three months ended June 30,

Reportable Segments

Percent change

Percent

Percent

In millions

Sales

of Total

EBITDA

Sales

of Total

EBITDA

Sales

EBITDA

Engine

$

%

$

$

%

$

6

%

(4)

%

Components

%

%

7

%

(4)

%

Distribution

%

%

9

%

1

%

Power Systems

%

%

%

%

Accelera

1

%

1

%

%

%

Total segments

%

%

%

8

%

Intersegment eliminations

%

NM

Total

$

$

$

$

9

%

4

%

“NM” - not meaningful information

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Six months ended June 30,

Reportable Segments

Percent change

Percent

Percent

In millions

Sales

of Total

EBITDA

Sales

of Total

EBITDA

Sales

EBITDA

Engine

$

%

$

$

%

$

2

%

%

Components

%

%

1

%

(8)

%

Distribution

%

%

8

%

9

%

Power Systems

%

%

%

%

Accelera

1

%

(1)

1

%

%

%

Total segments

%

%

6

%

(1)

%

Intersegment eliminations

8

%

NM

Total

$

$

$

$

6

%

(3)

%

“NM” - not meaningful information

(1) In the first quarter of 2026, we sold our low pressure fuel cell business to a customer, cancelled future commitments and resolved certain claims against us with that customer resulting in a net payment by us of $175 million. These transactions resulted in a net charge of $199 million which is reflected in other operating expense, net in our Condensed Consolidated Statements of Net Income.

We generated $1,808 million in cash from operations for the six months ended June 30, 2026, compared to $782 million for the comparable period in 2025. See the section titled “Cash Flows” in the “LIQUIDITY AND CAPITAL RESOURCES” section for a discussion of items impacting cash flows.

Our debt to capital ratio (total capital defined as debt plus equity) at June 30, 2026, was 35.6 percent, compared to 36.0 percent at December 31, 2025. The decrease was primarily due to an increased equity balance from strong earnings since December 31, 2025, partially offset by a higher total debt balance at June 30, 2026. At June 30, 2026, we had $3.9 billion in cash and marketable securities on hand and access to our $4.0 billion credit facilities (net of $348 million of commercial paper outstanding), if necessary, to meet working capital, investment, acquisition and funding needs.

In July 2026, the Board of Directors (the Board) authorized an increase to our quarterly dividend of 10 percent from $2.00 per share to $2.20 per share.

In the first half of 2026, we repurchased $468 million, or 0.8 million shares, of common stock.

In the first half of 2026, we entered into a series of interest rates swaps to convert $350 million of our senior notes, due in 2054, from a fixed rate of 5.45 percent to a floating rate equal to the daily Secured Overnight Financing Rate (SOFR) plus a spread. See NOTE 13, “DERIVATIVES,” to our Condensed Consolidated Financial Statements.

On March 31, 2026, we sold our low pressure fuel cell business to a customer, cancelled future commitments and resolved certain claims against us with that customer resulting in a net payment by us of $175 million. These transactions resulted in a net charge of $199 million, which is reflected in other operating expense, net in our Condensed Consolidated Statements of Net Income.

As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged. See the section titled “Credit Ratings” in the “LIQUIDITY AND CAPITAL RESOURCES” section for our current ratings.

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RESULTS OF OPERATIONS

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions, except per share amounts

Amount

Percent

Amount

Percent

NET SALES

$

$

$

9

%

$

$

$

6

%

Cost of sales

%

(6)

%

GROSS MARGIN

8

%

6

%

OPERATING EXPENSES AND INCOME

Selling, general and administrative expenses

%

%

Research, development and engineering expenses

(8)

%

(6)

%

Equity, royalty and interest income from investees

%

%

Other operating expense, net

%

NM

OPERATING INCOME

4

%

(6)

%

Interest expense

7

8

%

8

5

%

Other income, net

8

9

%

9

6

%

INCOME BEFORE INCOME TAXES

6

%

(5)

%

Income tax expense

(9)

%

(3)

%

CONSOLIDATED NET INCOME

4

%

(7)

%

Less: Net income attributable to noncontrolling interests

2

5

%

2

3

%

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

$

$

$

5

%

$

$

$

(7)

%

Diluted Earnings Per Common Share Attributable to Cummins Inc.

$

$

$

5

%

$

$

$

(8)

%

“NM” - not meaningful information

Three months ended

Favorable/

(Unfavorable)

Six months ended

Favorable/

(Unfavorable)

Percent of sales

Percentage Points

Percentage Points

Gross margin

%

%

%

%

—

Selling, general and administrative expenses

%

%

%

%

Research, development and engineering expenses

%

%

—

%

%

—

Net Sales

Net sales for the three months ended June 30, 2026, increased by $814 million versus the comparable period in 2025. The primary drivers were as follows:

•T1Power Systems segment sales increased 19 percent primarily due to higher demand for power generation equipment, especially in China and North America.

•Distribution segment sales increased 9 percent principally due to higher demand for power generation equipment, especially in North America.

•Components segment sales increased 7 percent mainly due to higher emission solutions demand, primarily in China and North America, and increased demand in components and software markets, especially in China and North America.

•Engine segment sales increased 6 percent largely due to higher demand in construction markets in China and medium-duty truck markets in North America.

Net sales for the six months ended June 30, 2026, increased $1.0 billion versus the comparable period in 2025. The primary drivers were as follows:

•Power Systems segment sales increased 19 percent primarily due to higher demand for power generation equipment, especially in China and North America.

•Distribution segment sales increased 8 percent principally due to higher demand for power generation equipment, especially in North America.

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•Engine segment sales increased 2 percent largely due to increased demand in construction markets in China, partially offset by lower heavy-duty truck demand in North America.

•Components segment sales increased 1 percent mainly due to higher demand in emission solutions and components and software markets in China and India, partially offset by lower drivetrain and braking demand in North America and India.

•Favorable foreign currency fluctuations of 2 percent of total sales, primarily in the Euro and Chinese renminbi.

Sales to international markets (excludes the U.S. and Canada), based on location of customers, for the three and six months ended June 30, 2026, were 41 percent and 42 percent of total net sales compared with 40 percent and 39 percent of total net sales for the comparable periods in 2025. A more detailed discussion of sales by segment is presented in the “REPORTABLE SEGMENT RESULTS” section.

Cost of Sales

The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; compensation and related expenses, including variable compensation, salaries and fringe benefits; depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; freight costs; engineering support costs; repairs and maintenance; production and warehousing facility property insurance and rent for production facilities and other production overhead.

Gross Margin

Gross margin increased $184 million for the three months ended June 30, 2026, and decreased 0.3 points as a percentage of net sales versus the comparable period in 2025. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by increased compensation expenses. Gross margin as a percentage of sales decreased due to higher compensation expenses. The net impact of tariff costs and related recoveries was immaterial for the three month period ended June 30, 2026.

Gross margin increased $272 million for the six months ended June 30, 2026, and remained flat as a percentage of sales versus the comparable period in 2025. The increase in gross margin was primarily due to higher volumes and favorable pricing, partially offset by increased compensation expenses. The net impact of tariff costs and related recoveries was immaterial for the six month period ended June 30, 2026.

The provision for base warranties issued as a percentage of sales for the three and six months ended June 30, 2026, was 1.9 percent and 1.9 percent, respectively, compared to 1.9 percent and 1.9 percent for the comparable periods in 2025.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $114 million and $188 million and increased 0.4 points and 0.5 points as a percentage of net sales, respectively, for the three and six months ended June 30, 2026, versus the comparable periods in 2025. T2The increases were primarily due to higher compensation expenses and increased consulting costs. Compensation and related expenses included salaries, fringe benefits and variable compensation.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased $28 million and $42 million for the three and six months ended June 30, 2026, respectively, versus the comparable periods in 2025, primarily due to higher compensation expenses. Compensation and related expenses included salaries, fringe benefits and variable compensation. Overall research, development and engineering expenses as a percentage of net sales remained flat for both the three and six months ended June 30, 2026 versus the comparable periods in 2025.

Research activities continue to focus on development of new products and improvements of current technologies to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas-powered engines and related components, as well as development activities around electrified power systems with innovative components and systems including battery and electric power technologies.

Equity, Royalty and Interest Income from Investees

Equity, royalty and interest income from investees increased $36 million for the three months ended June 30, 2026, versus the comparable period in 2025, primarily due to increased earnings at Dongfeng Cummins Engine Co., Ltd., Chongqing Cummins Engine Co., Ltd., Beijing Foton Cummins Engine Co., Ltd., Komatsu Cummins Chile, Ltda. and higher royalty and interest income from investees.

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Equity, royalty and interest income from investees increased $53 million for the six months ended June 30, 2026, versus the comparable period in 2025, mainly due to increased earnings at Chongqing Cummins Engine Co., Ltd., Beijing Foton Cummins Engine Co., Ltd. and Dongfeng Cummins Engine Co., Ltd.

Other Operating Expense, Net

Other operating expense, net for the six months ended June 30, 2026, increased by $227 million, primarily due to the loss on sale of business and settlement of current and future customer obligations. See NOTE 14, “REPORTABLE SEGMENTS,” to our Condensed Consolidated Financial Statements for additional information.

Income Tax Expense

Our effective tax rate for 2026 is expected to approximate 23.0 percent, excluding any discrete items that may arise.

Our effective tax rates for the three and six months ended June 30, 2026, were 25.1 percent and 26.0 percent, respectively. Our effective tax rates for the three and six months ended June 30, 2025, were 24.2 percent and 24.1 percent, respectively.

The three months ended June 30, 2026, contained net unfavorable discrete items of $29 million, primarily due to $17 million of unfavorable return to provision adjustments and $12 million of other net unfavorable discrete tax items.

The six months ended June 30, 2026, had an unfavorable discrete tax impact due to the $199 million loss on sale of business and settlement of current and future customer obligations for which no tax benefit was recognized. Other discrete items were net unfavorable $22 million, primarily due to $23 million of unfavorable return to provision adjustments, partially offset by $1 million of other net favorable discrete tax items. See NOTE 14, “REPORTABLE SEGMENTS,” to our Condensed Consolidated Financial Statements for additional information on loss on sale of business and settlement of current and future customer obligations.

The three months ended June 30, 2025, contained net favorable discrete tax items of $3 million, primarily due to $4 million of favorable adjustments for uncertain tax positions, partially offset by $1 million of other unfavorable adjustments.

The six months ended June 30, 2025, contained net favorable discrete tax items of $10 million, primarily due to $8 million of favorable adjustments for share-based compensation tax benefits and $5 million of favorable adjustments for uncertain tax positions, partially offset by $3 million of other unfavorable tax items.

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Comprehensive Income - Foreign Currency Translation Adjustment

The foreign currency translation adjustment was a net gain of $23 million and a net loss of $86 million for the three and six months ended June 30, 2026, respectively, compared to a net gain of $197 million and $314 million for the three and six months ended June 30, 2025, respectively, driven by the following:

Three months ended

In millions

Translation adjustment

Primary currency driver vs. U.S. dollar

Translation adjustment

Primary currency driver vs. U.S. dollar

Wholly-owned subsidiaries

$

9

Brazilian real and Chinese renminbi, partially offset by Euro

$

Euro, British pound and Brazilian real

Equity method investments

Chinese renminbi

Chinese renminbi

Consolidated subsidiaries with a noncontrolling interest

2

Chinese renminbi and Euro

2

Euro

Total

$

$

Six months ended

In millions

Translation adjustment

Primary currency driver vs. U.S. dollar

Translation adjustment

Primary currency driver vs. U.S. dollar

Wholly-owned subsidiaries

$

Indian rupee, Euro and British pound, partially offset by Brazilian real

$

Euro, British pound and Brazilian real

Equity method investments

Chinese renminbi, partially offset by Indian rupee

Chinese renminbi

Consolidated subsidiaries with a noncontrolling interest

Indian rupee

4

Euro and Indian rupee

Total

$

$

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REPORTABLE SEGMENT RESULTS

Our reportable segments consist of the Engine, Components, Distribution, Power Systems and Accelera segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as the basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments.

See NOTE 14, “REPORTABLE SEGMENTS,” to our Condensed Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Condensed Consolidated Statements of Net Income.

Tariff related costs and recoveries were evaluated independently of all other drivers included in the disclosures below and all references to “price” and “material cost” variances exclude these separately evaluated tariff costs and recoveries. The net impact of tariff costs and related recoveries were immaterial to each reportable segment's EBITDA, unless specifically noted.

Following is a discussion of results for each of our reportable segments.

Engine Segment Results

Financial data for the Engine segment was as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

External sales

$

$

$

9

%

$

$

$

3

%

Intersegment sales

(2)

—

%

(2)

%

Total sales

6

%

2

%

Research, development and engineering expenses

%

%

Equity, royalty and interest income from investees

%

%

Interest income

8

2

%

2

%

Segment EBITDA

(4)

%

%

Percentage Points

Percentage Points

Segment EBITDA as a percentage of total sales

%

%

%

%

Sales for our Engine segment by market were as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

Heavy-duty truck

$

$

$

(8)

(1)

%

$

$

$

(7)

%

Medium-duty truck and bus

8

%

(2)

%

Light-duty automotive

5

1

%

4

%

Total on-highway

3

%

(3)

%

Off-highway

%

%

Total sales

$

$

$

6

%

$

$

$

2

%

Percentage Points

Percentage Points

On-highway sales as percentage of total sales

%

%

(2)

%

%

(4)

Table of Contents

Total engine shipments by engine classification, including on and off-highway units, were as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

Amount

Percent

Amount

Percent

Heavy-duty

2

%

(3)

%

Medium-duty

%

%

Light-duty

2

%

3

%

Total unit shipments (1)

%

6

%

(1) Unit shipments exclude aftermarket parts.

Sales

Engine segment sales for the three months ended June 30, 2026, increased $185 million versus the comparable period in 2025. The following were the primary drivers by market:

•Off-highway sales increased $108 million primarily due to higher international construction demand, especially in China.

•Medium-duty truck and bus sales increased $80 million primarily due to higher truck demand, especially in North America, with shipments up 15 percent.

Engine segment sales for the six months ended June 30, 2026, increased $86 million versus the comparable period in 2025, primarily due to an increase in off-highway sales of $219 million mainly due to higher international construction demand, especially in China. The increase was partially offset by a decrease of $130 million in heavy-duty truck sales principally due to lower demand, especially in North America, with shipments down 10 percent.

Segment EBITDA

Engine segment EBITDA for the three months ended June 30, 2026, decreased $14 million versus the comparable period in 2025, primarily due to higher compensation expenses and increased freight costs, partially offset by improved tariff recovery.

Engine segment EBITDA for the six months ended June 30, 2026, decreased $193 million versus the comparable period in 2025, primarily due to higher compensation expenses and lower volumes.

Components Segment Results

Financial data for the Components segment was as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

External sales

$

$

$

6

%

$

$

$

4

—

%

Intersegment sales

%

5

%

Total sales

7

%

1

%

Research, development and engineering expenses

%

%

Equity, royalty and interest income from investees

—

—

%

3

%

Interest income

1

%

5

%

Segment EBITDA

(4)

%

(8)

%

Percentage Points

Percentage Points

Segment EBITDA as a percentage of total sales

%

%

%

%

Table of Contents

Sales for our Components segment by business were as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

Drivetrain and braking systems

$

$

$

2

%

$

$

$

(5)

%

Emission solutions

%

6

%

Components and software

%

7

%

Automated transmissions

1

1

%

%

Total sales

$

$

$

7

%

$

$

$

1

%

Sales

Components segment sales for the three months ended June 30, 2026, increased $186 million versus the comparable period in 2025. The following were the primary drivers by business:

•Emission solutions sales increased $88 million primarily due to higher demand in China, North America and Latin America.

•Components and software sales increased $70 million mainly due to increased demand in China and North America.

Components segment sales for the six months ended June 30, 2026, increased $46 million versus the comparable period in 2025. The following were the primary drivers by business:

•Emission solutions sales increased $101 million principally due to higher demand in China and India.

•Components and software sales increased $83 million mainly due to improved demand in China and India.

•Favorable foreign currency fluctuations, primarily in the Euro and Chinese renminbi.

These increases were offset by the following decreases:

•Drivetrain and braking systems sales decreased $110 million mainly due to lower demand in India and North America.

•Automated transmissions sales decreased $28 million primarily due to lower demand in North America and China.

Segment EBITDA

Components segment EBITDA for the three months ended June 30, 2026, decreased $16 million versus the comparable period in 2025, mainly due to increased product coverage costs and higher compensation expenses, partially offset by favorable pricing.

Components segment EBITDA for the six months ended June 30, 2026, decreased $61 million versus the comparable period in 2025, primarily due to increased compensation expenses and higher product coverage costs.

Distribution Segment Results

Financial data for the Distribution segment was as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

External sales

$

$

$

9

%

$

$

$

8

%

Intersegment sales

6

7

(1)

%

1

8

%

Total sales

9

%

8

%

Research, development and engineering expenses

(1)

(7)

%

(2)

(7)

%

Equity, royalty and interest income from investees

8

%

8

%

Interest income

7

7

—

—

%

1

8

%

Segment EBITDA

6

1

%

9

%

Percentage Points

Percentage Points

Segment EBITDA as a percentage of total sales

%

%

%

%

Table of Contents

Sales for our Distribution segment by region were as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

North America

$

$

$

%

$

$

$

8

%

Asia Pacific

%

%

Europe

(7)

%

2

%

China

7

6

%

7

%

India

1

1

%

7

%

Africa and Middle East

%

9

%

Latin America

%

%

Total sales

$

$

$

9

%

$

$

$

8

%

Sales for our Distribution segment by product line were as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

Power generation

$

$

$

%

$

$

$

%

Parts

6

%

5

%

Service

8

%

6

%

Engines

9

2

%

(2)

%

Total sales

$

$

$

9

%

$

$

$

8

%

Sales

Distribution segment sales for the three months ended June 30, 2026, increased $285 million versus the comparable period in 2025, primarily due to increased demand for power generation equipment in North America, especially in data center applications.

Distribution segment sales for the six months ended June 30, 2026, increased $494 million versus the comparable period in 2025, mainly due to increased demand in power generation equipment in North America, especially in data center and commercial applications.

Segment EBITDA

Distribution segment EBITDA for the three months ended June 30, 2026, increased $6 million versus the comparable period in 2025, primarily due to favorable mix and increased volumes, partially offset by higher compensation expenses, increased product coverage costs and higher freight costs.

Distribution segment EBITDA for the six months ended June 30, 2026, increased $74 million versus the comparable period in 2025, primarily due to favorable mix and increased volumes, partially offset by higher compensation expenses.

Table of Contents

Power Systems Segment Results

Financial data for the Power Systems segment was as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

External sales

$

$

$

%

$

$

$

%

Intersegment sales

%

%

Total sales

%

%

Research, development and engineering expenses

%

%

Equity, royalty and interest income from investees

7

%

%

Interest income

5

4

1

%

8

2

%

Segment EBITDA

%

%

Percentage Points

Percentage Points

Segment EBITDA as a percentage of total sales

%

%

%

%

Sales for our Power Systems segment by product line were as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

Power generation

$

$

$

%

$

$

$

%

Industrial

6

%

4

%

Generator technologies

3

2

%

6

%

Total sales

$

$

$

%

$

$

$

%

Sales

Power Systems segment sales for the three and six months ended June 30, 2026, increased $366 million and $673 million, respectively, versus the comparable periods in 2025, primarily due to increased power generation sales resulting from higher demand in China and North America.

Segment EBITDA

Power Systems segment EBITDA for the three months ended June 30, 2026, increased $122 million versus the comparable period in 2025, mainly due to higher volumes.

Power Systems segment EBITDA for the six months ended June 30, 2026, increased $310 million versus the comparable period in 2025, mainly due to higher volumes and improved operational leverage.

Table of Contents

Accelera Segment Results

Financial data for the Accelera segment was as follows:

Three months ended

Favorable/

Six months ended

Favorable/

(Unfavorable)

(Unfavorable)

In millions

Amount

Percent

Amount

Percent

External sales

$

$

$

%

$

$

$

%

Intersegment sales

5

7

(2)

%

(6)

%

Total sales

%

%

Research, development and engineering expenses

%

%

Equity, royalty and interest loss from investees

(3)

(5)

2

%

(9)

2

%

Segment EBITDA

%

%

Accelera segment sales for the three months ended June 30, 2026, increased $40 million versus the comparable period in 2025, mainly due to higher sales for electrified powertrains and electrolyzers.

Accelera segment sales for the six months ended June 30, 2026, increased $38 million versus the comparable period in 2025, primarily due to improved sales of electrolyzers and favorable foreign currency fluctuations related mainly to the Euro.

In the first quarter of 2026, we sold our low pressure fuel cell business to a customer, cancelled future commitments and resolved certain claims against us with that customer resulting in a net payment by us of $175 million. These transactions resulted in a net charge of $199 million which is reflected in other operating expense, net in our Condensed Consolidated Statements of Net Income.

OUTLOOK

T3The global trade environment, characterized by tariffs, export controls and broader geopolitical tensions, has created significant market volatility while introducing uncertainty around future demand for capital goods as well as potential impacts to our supply chain and our related product costs. Given the breadth, severity and uncertain duration of these global trade measures, our outlook presented below could be negatively impacted by policy-driven volatility. We are proactively taking steps in our supply chain to mitigate impacts where possible and we are working with our customers to pass through incremental costs.

Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential in 2026.

Positive Trends

•We expect demand within markets served by our Power Systems business to remain strong, including the power generation and industrial markets.

•We anticipate our aftermarket business will remain stable, driven primarily by demand in our Engine and Power Systems businesses.

•We expect strong demand for medium-duty and heavy-duty trucks in North America to continue for the remainder of 2026.

Challenges

•Increases in costs, tariffs, as well as other inflationary pressures, could negatively impact earnings.

•The potential for trade disruptions (including embargoes, sanctions, export controls and the ongoing conflict in Iran) could cause disruptions in production, further increases in the price of oil and other inputs and could negatively impact earnings.

•The slower adoption of zero-emission solutions reduced Accelera’s near-term revenue outlook, prompting significant restructuring actions in 2024 and 2025 and a refined strategic investment approach. While we anticipate these actions will gradually improve the cost structure, we expect ongoing investments in priority technologies to result in continued near-term operating losses.

Table of Contents

Current Regulatory Challenges For 2026 and Beyond

•Changes in government policies (such as reduced incentives, delayed infrastructure mandates or revised emissions standards) may impact Accelera’s ability to compete, scale or recover investments in zero-emission technologies.

•Our engines are subject to extensive statutory and regulatory requirements governing emissions, including greenhouse gas (GHG) standards set by the EPA and fuel consumption standards set by the National Highway Traffic Safety Administration (NHTSA). To comply with these regulations, we utilize banking and trading of regulatory compliance credits. In June 2025, NHTSA published an interpretive rule questioning the current regulatory framework of allowing credits as a compliance vehicle. In July 2025, the EPA published a proposed rule that would repeal GHG emissions standards and thus remove the requirement for vehicle and engine manufacturers to measure, control and report these emissions from vehicles. T4In February 2026, the EPA finalized the rescission of the 2009 Greenhouse Gas Endangerment Finding and repealed all GHG emission standards for on-highway vehicles and engines with an effective date of April 20, 2026.

NHTSA rules currently still allow credits as a compliance vehicle. Depending on NHTSA's future rulemaking as indicated by the June 2025 interpretive rule, we may no longer utilize emission compliance credits on future engines sales and the credits could have a minimal, if any value to us. While the rules will likely be subject to legal challenges, in the period NHTSA finalizes a rule, we could be required to incur a non-cash expense up to the value of our existing credits. At June 30, 2026, we had $89 million of GHG emission compliance credits.

•We are navigating a dynamic regulatory environment in the U.S. that could impact future product launches and we are actively engaged with customers, regulators and suppliers to ensure product development and certification requirements are met while delivering high-quality, dependable products that align with customer needs.

•On July 1, 2026, the U.S. declined to extend the United States-Mexico-Canada Agreement (USMCA). The U.S. is reportedly negotiating new terms with Canada and Mexico that would either maintain the current tri-lateral agreement structure or form new, bi-lateral agreements with each country. We are actively monitoring negotiations, but are currently unable to determine how future agreement revisions may impact our business.

LIQUIDITY AND CAPITAL RESOURCES

Key Working Capital and Balance Sheet Data

We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month-to-month depending on short-term liquidity needs. As a result, working capital is a prime focus of management's attention. Working capital and balance sheet measures are provided in the following table:

Dollars in millions

Working capital (1)

$

$

Current ratio

Accounts and notes receivable, net

$