Executive Summary / Key Takeaways

• Atmus Filtration Technologies (ATMU), recently spun off from Cummins, is a global leader in filtration products for commercial vehicles and industrial equipment, deriving over 80% of its revenue from the resilient aftermarket.
• Despite challenging end markets and currency headwinds in Q1 2025, the company demonstrated operational strength, achieving a 19.6% Adjusted EBITDA margin and generating $28.7 million in operating cash flow, driven by cost controls and improved working capital management.
• ATMU is actively executing a four-pillar growth strategy focused on gaining share in first-fit OEM markets, accelerating aftermarket growth, transforming its supply chain, and expanding into industrial filtration, supported by investments in technology like the new NanoNet N3 media.
• Management forecasts 2025 total revenue to be flat to up 4% ($1.67B - $1.735B) and Adjusted EBITDA margin between 19% and 20%, anticipating continued market softness but offsetting this through pricing actions (expected 3.2% tailwind), market outperformance (expected 2% aftermarket growth), and operational efficiencies.
• Key risks include ongoing market volatility, unfavorable foreign currency impacts, the evolving landscape of global tariffs (particularly the 145% tariff on Chinese imports and potential impacts from the Section 232 investigation), and the pace of execution on strategic initiatives, including inorganic growth in industrial filtration.

The Journey to Independence: Building a Filtration Leader

Atmus Filtration Technologies traces its roots back over 65 years as the Filtration Business of Cummins Inc. (CMI). This long history established Atmus, primarily under the Fleetguard brand, as a global leader in providing essential filtration products for a wide array of heavy-duty applications, from on-highway commercial vehicles to off-highway equipment used in agriculture, construction, mining, and power generation. Operating within Cummins provided a strong foundation, fostering a global footprint, developing a robust multi-channel distribution network, and cultivating deep technological expertise, particularly in fuel filtration and crankcase ventilation.

The strategic decision to separate the filtration business, announced in April 2022, marked a pivotal moment. The subsequent incorporation of Atmus, the transfer of assets and liabilities, securing independent financing through a $1 billion credit facility, and the successful completion of the IPO in May 2023 paved the way for full independence, achieved in March 2024 through Cummins' exchange offer. This separation unlocked Atmus's ability to accelerate its own growth strategy and manage its capital structure and allocation with greater autonomy.

Post-separation, Atmus is structured around a clear four-pillar growth strategy: growing share in first-fit OEM markets, accelerating profitable growth in the aftermarket, transforming its supply chain, and expanding into industrial filtration. This strategic framework leverages the company's foundational strengths while targeting new avenues for value creation.

Technological Edge and Competitive Positioning

Atmus's competitive standing is fundamentally underpinned by its technology leadership and established market presence. The company is a recognized leader in fuel filtration and crankcase ventilation, critical areas for engine performance, emissions control, and asset protection in demanding environments. Its Fleetguard brand is well-regarded, particularly within the Cummins ecosystem, offering integrated solutions that provide a distinct advantage in compatibility and serviceability for Cummins-powered equipment.

A key technological differentiator is Atmus's NanoNet media. The recent launch of the next generation, NanoNet N3, highlights the company's ongoing innovation. This advanced media technology enables more compact filter designs while delivering superior service life in harsh environments and across a wide variety of fuels. While specific quantifiable performance metrics for NanoNet N3 compared to previous generations or competitor offerings were not detailed, the stated benefits of superior asset protection and extended service life are critical value propositions for customers, potentially leading to reduced downtime and lower total cost of ownership. The new media manufacturing facility in South Korea is designed to produce NanoNet Plus multilayer media and increase capacity for nanofiber lines, indicating a strategic investment to meet growing demand for premium filters and broaden product capabilities.

In the competitive landscape, Atmus operates alongside major players like Donaldson Company Inc. (DCI), Parker Hannifin Corporation (PH), and 3M Company (MMM), all offering filtration solutions across various industrial and vehicle markets. While precise, directly comparable market share figures across all specific niches are challenging to ascertain, Atmus holds a significant position, estimated around 12% in its primary segments.

Comparing key financial metrics from recent periods (TTM):

• Atmus's Gross Profit Margin (TTM 27.98%) and Operating Profit Margin (TTM 15.73%) trail those of DCI (Gross Margin 36%, Operating Margin 15%), PH (Gross Margin 36%, Operating Margin 18%), and significantly, 3M (Gross Margin 41%, Operating Margin 20%). This suggests potential differences in cost structure, pricing power, or product mix compared to some rivals.
• ATMU's EBITDA Margin (TTM 16.91%) is competitive with DCI (16%) and PH (18%), but lower than 3M (20%).
• While Atmus's revenue growth in Q1 2025 was impacted by specific market and FX factors, its strategic focus on aftermarket outperformance (expected 2% growth contribution in 2025) and disciplined approach to pricing aim to drive growth despite market headwinds. Competitors like PH have shown higher recent revenue growth rates (8-10%), indicating a more dynamic expansion, potentially through broader market exposure or acquisitions.

Atmus's competitive advantages lie in its deep aftermarket penetration (86% of 2024 sales), strong brand loyalty, specialized technology tailored for heavy-duty applications, and a strategically positioned global manufacturing and distribution network (with the Mexico facility noted as a source of competitive advantage). The ongoing supply chain transformation, including transitioning distribution centers, aims to further enhance on-shelf availability and customer service, strengthening its competitive position, particularly in the aftermarket. However, vulnerabilities may include a relatively lower R&D spend compared to some larger, more diversified competitors like 3M and PH, and potential exposure to cyclical downturns in its core OEM markets. The strategy to expand into industrial filtration is a direct response to seek diversification and potentially higher-margin opportunities outside its traditional heavy-duty vehicle focus.

Performance and Operational Strength

Atmus's financial performance in the first quarter of 2025 reflected the challenging market conditions, with net sales decreasing by 2.4% to $416.5 million compared to $426.6 million in Q1 2024. This decline was primarily driven by unfavorable currency impacts ($11.4 million) and lower volumes ($3.5 million), partially offset by favorable pricing actions ($4.8 million).

Despite the top-line pressure, the company demonstrated operational resilience. Gross margin as a percentage of net sales improved slightly to 26.5% from 26.2% in the prior year period. While the absolute gross margin decreased by $1.3 million due to factors including unfavorable currency, one-time separation costs ($3.5 million), and logistic costs, these were partially offset by pricing, lower manufacturing costs ($3.9 million), and reduced warranty costs ($1.7 million). This margin expansion reflects the ongoing benefits of the supply chain transformation and cost reduction efforts, which have contributed to a significant 410 basis point expansion in Adjusted EBITDA margin since 2022.

Operating expenses saw increases in Selling, general and administrative expenses ($2.6 million higher due to people-related and consulting costs), while Research, development and engineering expenses decreased ($1.0 million lower due to people-related costs). Equity, royalty, and interest income from investees decreased by $1.2 million, mainly due to softer market conditions in India impacting joint venture earnings. Interest expense decreased by $2.1 million as debt principal payments were made.

Net income for Q1 2025 was $44.7 million, down slightly from $45.5 million in Q1 2024. Diluted earnings per share remained stable at $0.54. Excluding one-time separation costs, Adjusted EBITDA was $81.7 million, resulting in a strong Adjusted EBITDA margin of 19.6%, up from 18.8% in the prior year period.

Liquidity remains robust. At March 31, 2025, Atmus held $183.3 million in cash and cash equivalents. Net cash provided by operating activities saw a significant increase to $28.7 million in Q1 2025 from a net cash used of $8.2 million in Q1 2024, primarily driven by lower working capital requirements ($37.0 million improvement). This demonstrates improved efficiency in managing receivables, inventory, and payables. Capital expenditures were $12.4 million, including $3.5 million related to separation costs.

Net cash used in financing activities was $17.9 million, reflecting share repurchases ($10.0 million), dividend payments ($4.1 million), and debt principal payments ($3.8 million). The company has $400.0 million available under its revolving credit facility and $120.0 million remaining under its $150 million share repurchase authorization, providing ample flexibility for strategic investments and capital returns.

Outlook and Forward Strategy

Atmus's outlook for 2025 reflects a cautious but confident stance amidst ongoing market uncertainty. Management expects total company revenue to be in the range of $1.67 billion to $1.735 billion, representing flat to up 4% growth compared to 2024. The Adjusted EBITDA margin is projected to remain strong, in the range of 19% to 20%, and Adjusted EPS is expected to be between $2.35 and $2.60.

This guidance is based on several key assumptions. In the aftermarket, which drives the majority of revenue, freight activity is expected to continue at current subdued levels, resulting in a flat market at the midpoint (range -1.5% to +1.5%). First-fit markets are anticipated to decline further, with US heavy-duty down 5%-15% and medium-duty down 10%-20%, and no prebuy activity is assumed. India is expected to be flat to down, and China remains weak.

Despite this challenging market backdrop, Atmus expects to offset market weakness through strategic execution. The company anticipates contributing 2% of aftermarket revenue growth through market outperformance, leveraging its enhanced distribution network, brand initiatives ("We Protect" campaign), and digital tools. Pricing actions are expected to provide a significant 3.2% tailwind to revenue, including approximately 1.5% specifically related to offsetting tariff impacts. Management aims for margin dollar neutrality on tariffs, although some implementation lag is expected. A strong U.S. dollar is anticipated to be an approximate 1.5% revenue headwind.

One-time standalone costs related to the separation are expected to decrease significantly in 2025, projected to be $10 million to $15 million (revised up slightly due to Q1 costs), down from $25 million in 2024, as separation activities are substantially completed. One-time capital expenditures for separation are expected to be $5 million to $10 million.

The strategic focus remains on the four pillars. Growing first-fit share involves leveraging technology like NanoNet N3 and strengthening OEM relationships, aiming for increased bid rates. Accelerating aftermarket growth is driven by expanding channels, enhancing brand awareness, and utilizing data analytics. Supply chain transformation continues with the completion of distribution network transitions and ongoing efficiency improvements (automation, purchasing). Expansion into industrial filtration remains a key long-term growth vector, primarily through inorganic acquisitions, although near-term M&A activity is noted as softer due to economic uncertainty. The company maintains a disciplined approach to M&A, prioritizing strategic fit, scaling potential, and value creation over valuation alone.

Risks and Challenges

While Atmus has demonstrated resilience, several risks could impact its performance and outlook. The primary external risks stem from the volatile macroeconomic environment. Continued softness or further deterioration in global end markets, particularly in the aftermarket freight activity and first-fit truck production, could pressure volumes beyond current expectations. Foreign currency exchange rate fluctuations also pose a risk, as evidenced by the Q1 2025 headwind, potentially impacting reported financials.

The evolving global trade policy landscape, specifically the introduction and potential escalation of tariffs, presents a significant uncertainty. The recently announced 145% tariff on substantially all products of Chinese origin is the most substantial impact to date, and while Atmus is implementing pricing actions and supply chain adjustments to mitigate this, the full impact and potential retaliatory measures remain fluid. The Section 232 investigation into medium- and heavy-duty trucks and related parts could lead to additional tariffs, potentially impacting products sourced from key manufacturing locations like Mexico, despite efforts to leverage USMCA certifications. The ability to fully offset tariff costs through pricing or other mitigation actions is not guaranteed and could impact margins or market share.

Regulatory changes, such as the EPA's review of emissions standards for the U.S. heavy-duty market, introduce uncertainty regarding future product requirements and potential market dynamics like prebuy activity. While Atmus is positioned to adapt, significant shifts could impact R&D priorities and market demand timing.

Execution risks related to the strategic pillars also exist. Successfully integrating potential acquisitions in the industrial filtration space, completing the remaining separation activities from Cummins without further delays or cost overruns, and fully realizing the intended benefits of the supply chain transformation are critical for achieving long-term targets. Customer concentration, particularly with large OEMs and within the Cummins ecosystem, remains a factor, although the full separation from Cummins has shifted this relationship to arms-length transactions.

Conclusion

Atmus Filtration Technologies has successfully navigated its transition to a fully independent public company, demonstrating operational strength and strategic clarity despite a challenging market backdrop. The company's core investment thesis is grounded in the resilience of its high-margin aftermarket business, its established technology leadership under the Fleetguard brand, and a clear four-pillar strategy aimed at driving growth and operational efficiency.

While Q1 2025 results reflected ongoing market softness and currency headwinds, Atmus's ability to expand Adjusted EBITDA margin and significantly improve operating cash flow highlights effective cost management and working capital discipline. The 2025 outlook, while cautious on market recovery timing, projects stable revenue and strong profitability, supported by anticipated market outperformance, strategic pricing actions to counter inflation and tariffs, and the realization of further operational efficiencies as separation activities conclude.

Key factors for investors to monitor include the timing and strength of a potential rebound in aftermarket freight activity, the evolution of global tariff policies and Atmus's ability to effectively mitigate their impact, and the pace and success of inorganic expansion into the industrial filtration market. With a solid balance sheet, ample liquidity, and a commitment to returning capital to shareholders alongside investing for growth, Atmus appears well-positioned to leverage its filtration expertise and strategic initiatives to deliver value over the long term, even as it operates in a dynamic and uncertain environment.