Atmus Filtration Technologies Inc. — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Atmus designs and manufactures filtration products, principally under the Fleetguard brand, for commercial vehicles and off-highway equipment. Approximately 81% of 2023 sales were aftermarket and 19% were first-fit OEM sales. This report covers the three months ended March 31, 2024, compared with the same period in 2023. Cummins completed the divestiture of its entire ownership and voting interest in Atmus on March 18, 2024, resulting in full separation.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $426.6 million | $418.6 million | +1.9% |
| Gross margin | $111.8 million; 26.2% | $109.8 million; 26.2% | +$2.0 million |
| Operating income | $68.6 million | $69.2 million | -0.9% |
| Net income | $45.5 million | $52.7 million | -13.7% |
| Diluted EPS | $0.54 | $0.63 | -14.0% |
| Net income margin | 10.7% | 12.6% | -1.9 percentage points |
| Adjusted EBITDA | $80.2 million; 18.8% margin | $78.7 million; 18.8% margin | +$1.5 million |
| Operating cash flow | $(8.2) million | $42.8 million | -$51.0 million |
| Free cash flow | $(18.8) million | $36.4 million | -$55.2 million |
Sales included $82.3 million from related parties in Q1 2024 versus $89.1 million in Q1 2023. Pricing contributed approximately $8.8 million to sales, favorable currency contributed $1.4 million, and lower volumes reduced sales by approximately $2.2 million.
Cash and cash equivalents were $149.2 million at March 31, 2024, compared with $168.0 million at December 31, 2023. Accounts receivable were $262.2 million and inventories were $256.9 million. Total debt was $600.0 million, consisting of the term loan; no revolving credit facility borrowings were outstanding, leaving $400.0 million of revolving capacity. The facilities mature September 30, 2027, and Atmus was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Net sales increased modestly, primarily from pricing and currency, while volumes declined.
- Gross margin dollars increased, but the margin percentage was unchanged at 26.2%. Favorable pricing and commodity costs were offset by higher manufacturing, freight and one-time separation costs.
- SG&A increased $4.2 million to $43.3 million, driven primarily by higher people-related expenses and consulting. SG&A increased to 10.2% of sales from 9.3%.
- Interest expense increased to $10.5 million from zero in the prior-year quarter because of borrowings under the Credit Agreement following the IPO.
- Net income and EPS declined despite higher sales because of interest expense, higher SG&A and separation-related costs.
- Operating cash flow turned negative, primarily because of higher working-capital requirements, including variable compensation payments, increased receivables and the transition from intercompany settlement terms with Cummins to standalone practices.
- Capital expenditures increased to $10.6 million from $6.4 million, including approximately $2.8 million of separation-related expenditures.
- Equity, royalty and interest income from investees increased to $10.4 million from $8.4 million, primarily due to higher joint-venture earnings.
Outlook, Commentary, Risks and Unusual Items
Management stated that aftermarket and first-fit demand remained stable in the first quarter. For 2024, first-fit demand is expected to soften across many key markets, while aftermarket demand is expected to recover, particularly in the second half. The company continued pricing actions to offset inflation and cost pressures.
Atmus expects approximately $10 million to $20 million of additional one-time expenses in 2024 related to becoming a standalone public company and approximately $10 million to $20 million of separation-related capital expenditures. These activities are expected to be substantially complete by year-end 2024, although some costs may extend into 2025.
Management identified ongoing supply-chain challenges, labor and freight cost pressure, commodity-price variability, foreign-currency exposure, cyclical customer markets and customer concentration among Cummins, PACCAR and the Traton Group. Other risks include competition, warranty and product liability claims, recalls, environmental and regulatory requirements, cybersecurity, tax matters, loss of Cummins-related scale and resources, substantial indebtedness and the pledge of substantially all assets as collateral.
The company reported no pending litigation expected to have a material adverse effect, although insurance may not cover all potential losses. Product warranty liabilities totaled $15.8 million at March 31, 2024. Cummins continues to provide certain administrative services under a transition services agreement, generally through May 2025, for mutually agreed fees.
Important Facts for Investors to Verify
- Whether the expected second-half aftermarket recovery offsets weaker first-fit demand.
- The magnitude and timing of the estimated $10 million to $20 million of remaining standalone-company expenses and $10 million to $20 million of separation-related capital expenditures.
- Whether negative first-quarter operating and free cash flow was temporary working-capital timing or signals ongoing cash conversion pressure.
- Interest-rate sensitivity: management estimates that a 0.125% change in SOFR would affect annual interest expense by approximately $0.8 million.
- Debt repayment capacity, including principal maturities of $7.5 million in 2024, $22.5 million in 2025, $30.0 million in 2026 and $540.0 million in 2027.
- The sustainability of earnings from equity-method investees, which Atmus does not directly control.
- The effect of full separation from Cummins on customer relationships, related-party sales, transition-service costs, corporate overhead and working-capital practices.
- Management’s disclosure that its disclosure controls were effective as of March 31, 2024 and that there were no material changes in internal control over financial reporting.