Business Context and Reporting Period
Atmus Filtration Technologies Inc. designs, manufactures and sells Fleetguard-branded filtration, coolant and chemical products for OEM and aftermarket applications across more than 150 countries. This Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Atmus completed its IPO and began trading on the NYSE on May 26, 2023; Cummins retained approximately 80.5% ownership at the IPO closing.
Pre-IPO results are based on historical carved-out financial information from Cummins and include allocated corporate costs that may not reflect the costs of operating as a standalone public company. Post-IPO, Atmus incurred standalone-company costs and continues to receive certain services from Cummins under a transition services agreement.
Financial Performance and Position
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net sales | $396.2 million | $401.2 million | Down 1.2% |
| Gross margin | $102.9 million; 26.0% | $99.7 million; 24.9% | Up $3.2 million; margin up 1.1 points |
| Operating income | $58.8 million | $64.9 million | Down 9.4% |
| Net income | $37.6 million | $50.4 million | Down 25.4% |
| Net income margin | 9.5% | 12.6% | Down 3.1 points |
| Diluted EPS | $0.45 | $0.61 | Down $0.16 |
| Adjusted EBITDA | $72.5 million; 18.3% | $71.7 million; 17.9% | Up $0.8 million; margin up 0.4 points |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Net sales | $1,228.4 million | $1,176.9 million | Up 4.4% |
| Gross margin | $327.1 million; 26.6% | $276.5 million; 23.5% | Up $50.6 million; margin up 3.1 points |
| Operating income | $192.2 million | $167.4 million | Up 14.8% |
| Net income | $136.5 million | $134.4 million | Up 1.6% |
| Net income margin | 11.1% | 11.4% | Down 0.3 points |
| Diluted EPS | $1.64 | $1.61 | Up $0.03 |
| Adjusted EBITDA | $230.9 million; 18.8% | $189.9 million; 16.1% | Up $41.0 million; margin up 2.7 points |
Q3 sales reflected lower volumes of approximately $25.3 million, partly offset by $17.0 million of pricing and $3.3 million of favorable currency effects. Nine-month sales benefited from approximately $85.3 million of pricing, offset by lower volumes of $25.9 million and unfavorable currency effects of $7.9 million.
Q3 operating income and net income were pressured by higher selling, general and administrative expenses, research and development costs, variable compensation, separation costs and substantially higher interest expense following the IPO-related borrowings. The nine-month gross margin improvement primarily reflected pricing and lower freight and commodity costs, partly offset by manufacturing costs, compensation, lower volumes, separation costs and unfavorable currency effects.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $147.3 million for the first nine months of 2023, compared with $87.9 million in 2022.
- Capital expenditures were $29.6 million, including approximately $4.8 million of one-time separation expenditures. Free cash flow was $117.7 million and adjusted free cash flow was $122.5 million.
- Cash and cash equivalents were $138.8 million at September 30, 2023, compared with no reported cash balance at December 31, 2022.
- Debt was $600.0 million, consisting of the fully drawn term loan. The $400.0 million revolving facility was undrawn and available, subject to applicable conditions. On a simple cash-minus-debt basis, net debt was approximately $461.2 million.
- The credit facilities mature on September 30, 2027 and contain leverage, secured leverage and interest coverage covenants. At September 30, 2023, Atmus reported compliance with all covenants.
- Debt principal maturities total $7.5 million in 2024, $22.5 million in 2025, $30.0 million in 2026 and $540.0 million in 2027.
Outlook, Commentary, Risks and Unusual Items
- Management stated that aftermarket demand slowed slightly across many end markets in Q3 and expects the slowdown to continue in Q4 2023 due to anticipated global economic weakness and normalization of supply-chain backlogs and inventories.
- First-fit demand remained strong, supported by OEM order books. Pricing actions have largely offset material, labor and energy cost pressures.
- Supply-chain disruptions, production constraints, inflation, commodity costs, foreign currency movements and cyclical end markets remain significant operating risks.
- Atmus incurred approximately $7.4 million of one-time separation expenses in Q3 and $20.4 million in the first nine months. It expects total one-time expenses of approximately $30 million to $50 million from December 31, 2022 through December 31, 2024, plus separation-related capital expenditures of approximately $20 million to $40 million over the same period.
- The company has a material weakness in internal control over financial reporting related to intercompany and related-party transaction accounting. The weakness caused a restatement of March 31, 2023 financial statements and revisions to prior-year financial statements. Management implemented a new manual review control in Q2, but the weakness was not yet considered remediated as of September 30, 2023.
- Sales to related parties were $86.9 million in Q3 and $263.2 million for the first nine months. Cummins remains the controlling shareholder and a significant customer and service provider.
- The Russia operations suspension continues to create collection risk; the reserve for Russian accounts receivable was $1.5 million at September 30, 2023. The remaining fuel-heater campaign warranty accrual was $3.1 million.
- No formal quantitative financial guidance is provided in the filing. Management believes operating cash flow and available credit facilities are sufficient for expected operating, capital and debt-service needs, while cautioning that severe economic or credit-market conditions could impair liquidity.
Investor Verification Priorities
- Verify the remediation and independent testing of the material weakness, including whether additional restatements or control deficiencies arise.
- Assess the sustainability of pricing benefits and gross-margin gains as aftermarket demand, volumes and supply-chain conditions normalize.
- Monitor standalone-company costs, separation expenditures and whether the stated $30 million to $50 million estimate is exceeded.
- Evaluate refinancing and repayment capacity for the $540.0 million of debt scheduled to mature in 2027, including exposure to SOFR-based interest rates.
- Review the continuing economic dependence on Cummins, including related-party sales, purchases, services, ownership control and separation-agreement obligations.
- Track foreign currency, commodity, labor, warranty, Russia-related collection and product-recall exposures.