Business Overview
Atmus Filtration Technologies Inc. (ATMU) is one of the global leaders in the design and manufacture of advanced filtration products, primarily serving the on-highway commercial vehicle and off-highway agriculture, construction, mining, and power generation markets. With a heritage spanning over 65 years, Atmus has established itself as a trusted brand, known for its superior asset protection and emission-enabling capabilities.
Company History
The company's origins can be traced back to its role as the filtration division within Cummins Inc., a leading global power and technology company. For decades, Atmus operated as an integral part of Cummins, designing and manufacturing advanced filtration products primarily under the Fleetguard brand. These products provided superior asset protection and enabled lower emissions for Cummins' on-highway commercial vehicles and off-highway equipment customers.
In April 2022, Atmus was incorporated as a wholly-owned subsidiary of Cummins as part of the separation process. Over the following year, Cummins completed the transfer of the assets and liabilities of the Filtration Business to Atmus and its subsidiaries. To prepare for the separation, Atmus entered into a $1 billion credit agreement in September 2022, providing for a $600 million term loan facility and a $400 million revolving credit facility. These facilities became available to Atmus upon completion of the IPO, with the proceeds used to pay Cummins in partial consideration for the separation.
On May 26, 2023, Atmus completed its initial public offering, with Cummins retaining approximately 80.5% ownership. The separation allowed Atmus to establish its own strategic priorities, governance structure, and capital allocation policies, positioning the company for continued growth and success. This transition brought both opportunities and challenges as Atmus worked to build out its standalone corporate functions and infrastructure to support its global operations and customer base.
Financials
Atmus' financial performance has been consistently strong, with the company reporting annual net income of $171.3 million, annual revenue of $1.63 billion, annual operating cash flow of $189.0 million, and annual free cash flow of $143.2 million as of December 31, 2023. During the first half of 2024, the company delivered robust results, with net sales of $859.2 million, adjusted EBITDA of $172.7 million, and adjusted earnings per share of $1.32.
In the most recent quarter (Q2 2024), Atmus reported revenue of $432.6 million, up 4.6% year-over-year, and net income of $56.2 million, a 21.6% increase from the same period last year. Operating cash flow for the quarter was $22.9 million, with free cash flow of $11.3 million. The increase in revenue was driven by higher volumes of approximately 3% and 2% favorable pricing, partially offset by 0.6% unfavorable currency impacts. Gross margin expanded 280 basis points to 30.5% due to the volume and pricing gains as well as lower commodity and freight costs.
Product Segments
Atmus operates in four main product segments:
1. Fuel: This segment offers a range of fuel filtration products, including filters for fuel systems, fuel/water separators, and water-in-fuel sensors. In the first half of 2024, the Fuel segment accounted for $372.70 million in net sales, or 43.4% of total net sales.
2. Lube: The Lube segment includes oil filters, bypass filters, and filtration systems that help extend the life of engine oil and protect critical engine components. This segment generated $164.00 million in net sales in the first half of 2024, representing 19.1% of total net sales.
3. Air: Atmus' air filtration products, such as air filters and air intake systems, protect engines from harmful airborne contaminants and enable increased fuel efficiency and lower emissions. The Air segment accounted for $146.50 million in net sales in the first six months of 2024, or 17.1% of total net sales.
4. Other: This segment includes various other filtration products, such as coolant, hydraulic, and transmission filters, as well as related components and accessories. The Other segment contributed $176.00 million in net sales, or 20.5% of total net sales, during the first half of 2024.
Geographic Performance
Atmus' sales are primarily in the United States, which accounted for 46% of revenue in 2023, with the remaining 54% from other international markets. This global presence allows the company to capitalize on growth opportunities across various regions and mitigate risks associated with regional economic fluctuations.
Growth Strategy
The company's growth strategy is centered around four key pillars: 1) Expanding market share in first-fit sales to OEMs, 2) Accelerating profitable growth in the aftermarket, 3) Transforming the supply chain, and 4) Expanding into industrial filtration markets. Atmus' commitment to these strategic initiatives has already yielded tangible results, as evidenced by its recent wins with global OEMs and its efforts to enhance its distribution network and drive cost efficiencies.
Liquidity
Atmus' strong financial position, with a net debt to adjusted EBITDA ratio of 1.4x as of June 30, 2024, provides the company with the flexibility to execute on its growth plans, while also returning capital to shareholders. In July 2024, Atmus announced a quarterly cash dividend of $0.05 per share and a $150 million share repurchase program, underscoring the company's confidence in its long-term prospects and commitment to enhancing shareholder value.
The company's liquidity position remains robust, with a debt-to-equity ratio of 3.42x, $160.5 million in cash on hand, and an undrawn $400 million revolving credit facility. Atmus' current ratio stands at 2.07x, while its quick ratio is 1.30x, indicating a strong ability to meet short-term obligations.
Market Outlook and Guidance
Despite the challenges posed by global supply chain disruptions and macroeconomic headwinds, Atmus has demonstrated its resilience and ability to adapt. The company has raised its full-year 2024 guidance, now expecting revenue in the range of $1.625 billion to $1.675 billion (flat to up 3% compared to the prior year) and adjusted EBITDA margins of 18.5% to 19.5%. Adjusted earnings per share are expected to be in the range of $2.15 to $2.40.
For the aftermarket, which represents about 80% of Atmus' global revenue, the company expects overall global aftermarket revenue to be in the range of flat to up 5% compared to the prior year. This guidance reflects an expected decline in the overall aftermarket of 2% to 4%, offset by Atmus' market outperformance of 2% and benefits from destocking of 2%.
In the first-fit market, Atmus is maintaining its outlook for a decline of 7% to 12% in the US heavy-duty truck market for the full year. However, the company is raising its guidance for the US medium-duty truck market to flat to up 5%. Demand for trucks in India is expected to remain strong in both the on-highway and off-highway markets, while market conditions in China continue to remain weak.
Industry Trends
The filtration market has seen steady growth, with a compound annual growth rate (CAGR) of 4-6% over the past 5 years, driven by increasing global vehicle production and stricter emissions regulations. Atmus is well-positioned to capitalize on these trends, given its strong market presence and focus on innovative, emission-enabling filtration solutions.
Conclusion
Atmus' strong brand reputation, technological leadership, and diverse customer base have positioned the company as a formidable player in the filtration industry. With a robust financial position, a clear growth strategy, and a track record of winning new business, Atmus is well-equipped to navigate the evolving market landscape. As the company continues to execute on its strategic initiatives and capitalize on emerging opportunities, Atmus is poised to deliver sustainable growth and value for its shareholders in the years to come.