Atmus Filtration Technologies Inc. annual report, FY2023

Atmus Filtration Technologies Inc. — Fiscal 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing includes comparative results for 2022 and 2021. Atmus became a standalone public company following Cummins’ IPO and separation transactions in May 2023; historical pre-IPO financial statements are carved out from Cummins and may not represent standalone costs.

Business context

Atmus designs and manufactures filtration products, primarily under the Fleetguard brand, for commercial vehicles and off-highway equipment. Approximately 81% of 2023 sales came from the aftermarket and 19% from first-fit OEM applications. Approximately 49% of sales were generated outside the United States and Canada. Atmus operates one reportable segment.

Core markets are approximately 60% on-highway and 40% off-highway.
Atmus employs approximately 4,500 people globally; approximately 53% are represented by unions.
Cummins owns approximately 80.5% of Atmus following the IPO.
Atmus has 11 distribution centers, 10 owned or operated manufacturing facilities and five technical facilities, excluding joint-venture facilities.

Key financial metrics

Metric	2023	2022	Change
Net sales	$1,628.1 million	$1,562.1 million	+4.2%
Gross margin	$432.7 million; 26.6%	$359.2 million; 23.0%	+$73.5 million; +3.6 pts
Operating income	$248.4 million	$203.9 million	+21.8%
Net income	$171.3 million	$170.4 million	+0.5%
Net income margin	10.5%	10.9%	-0.4 pts
Diluted EPS	$2.05	$2.05	Flat
Adjusted EBITDA	$302.3 million; 18.6%	$243.3 million; 15.6%	+$59.0 million
Operating cash flow	$189.0 million	$165.7 million	+14.1%
Free cash flow	$143.2 million	$128.2 million	+11.7%

Adjusted EBITDA and free cash flow are non-GAAP measures. Adjusted EBITDA added back $28.6 million of one-time separation costs in 2023. Adjusted free cash flow was $152.4 million after adding back $9.2 million of separation-related capital expenditures.

Liquidity, debt and balance sheet

Cash and cash equivalents were $168.0 million at December 31, 2023, compared with no reported cash balance at December 31, 2022.
Total debt was $600.0 million, consisting of the term loan; the $400.0 million revolving facility was undrawn at year-end.
The credit facilities mature September 30, 2027. Debt principal maturities are $7.5 million in 2024, $22.5 million in 2025, $30.0 million in 2026 and $540.0 million in 2027.
Atmus reported $400.0 million of available revolving capacity and compliance with all financial covenants at year-end.
Substantially all assets are pledged as collateral under the credit facilities.
Management expects operating cash flow and available credit facilities to support working capital, capital expenditures and contractual obligations, but does not provide a formal earnings or cash-flow guidance range.

Material changes versus prior comparable periods

Sales increased $66.0 million, primarily from approximately $102.0 million of pricing actions, partly offset by lower volumes of $34.2 million and unfavorable currency effects of $1.8 million.
Gross margin benefited from pricing and approximately $41.0 million of favorable freight and commodity costs. These benefits were partly offset by manufacturing and other costs, lower volumes, increased variable compensation, separation costs and unfavorable currency effects.
SG&A increased $35.0 million, driven by separation costs, variable compensation, executive and incentive compensation, and merit-related costs.
Interest expense increased to $25.8 million from $0.7 million because Atmus began borrowing under the credit agreement after the IPO.
The effective tax rate increased to 24.3% from 19.6%, primarily because of changes in the geographic mix of earnings and discrete tax items.
Equity, royalty and interest income from investees increased to $33.6 million from $28.0 million. Unconsolidated investees contributed approximately 19.6% of 2023 net income.
Operating cash flow improved as working-capital requirements declined, while capital expenditures increased to $45.8 million from $37.5 million, including $9.2 million of separation-related spending.
A material weakness identified in 2023 involving intercompany and related-party accounting resulted in restatements or revisions to prior interim and annual financial information. Management stated that the weakness was remediated as of December 31, 2023.

Guidance, outlook and management commentary

Aftermarket demand softened during the second half of 2023, while first-fit demand remained resilient.
Management expects first-fit demand to soften across many key markets in 2024, while aftermarket demand is expected to recover, particularly in the second half of 2024.
Backlogs accumulated during 2022 declined and stabilized during 2023; further stabilization is expected in the first half of 2024.
Atmus expects approximately $5 million to $15 million of additional standalone-company expenses and approximately $10 million to $20 million of separation-related capital expenditures in 2024. These activities are expected to be substantially complete by year-end 2024, although some costs may extend into 2025.
Management is pursuing growth in first-fit OEM applications, aftermarket distribution, supply-chain productivity, smart filtration, alternative-fuel technologies and industrial filtration markets.
Atmus has not determined whether, or to what extent, it will pay dividends.

Principal risks and unusual items

Customer concentration: Cummins, PACCAR and the Traton Group represented approximately 17.4%, 15.6% and 11.8% of 2023 sales, respectively. Cummins remains the largest customer and controlling shareholder.
Standalone-company execution: Atmus remains dependent on transition services and agreements with Cummins and may incur higher-than-expected costs to establish independent systems and functions.
Leverage and interest rates: Atmus has $600 million of debt, primarily at variable rates, and substantially all assets are pledged as collateral. A 0.125% change in SOFR would have an estimated $0.8 million annual effect on interest expense based on year-end borrowings.
Technology transition: Battery-electric vehicles may require less filtration content, while demand for hydrogen and fuel-cell applications remains uncertain. Substantially all current sales relate to internal-combustion-engine filtration products.
Supply chain and commodities: Steel, resin, petrochemical products, labor, energy, transportation and geopolitical disruptions may pressure margins or limit production.
Joint ventures: A meaningful portion of earnings and dividends comes from unconsolidated ventures in China and India that Atmus does not control.
Warranty and recall exposure: The remaining accrual for the historical fuel-heater campaign was $3.0 million at year-end; total product-warranty liabilities were $14.0 million.
Tax and regulatory matters: Atmus operates across numerous jurisdictions and faces changing trade, sanctions, environmental, tax, anti-corruption and data-privacy requirements.
Internal controls: The prior material weakness was remediated, but the company will first provide management’s annual internal-control report and auditor attestation for fiscal 2024.
Legal proceedings: Management reported no currently pending claims or litigation expected to have a material adverse effect, while noting that final outcomes of legal matters remain uncertain.

Most important facts for investors to verify

Whether 2024 aftermarket recovery and first-fit demand trends develop as management expects.
The actual timing and amount of remaining separation costs, standalone capital expenditures and transition-service costs.
Debt repayment progress, interest-rate exposure, covenant compliance and available revolver capacity.
Customer concentration, particularly the renewal and performance requirements of the Cummins supply agreements.
Progress in diversifying beyond internal-combustion-engine filtration and into industrial, electric, hydrogen and fuel-cell applications.
Cash conversion after working-capital changes, capital expenditures, debt service and dividends from unconsolidated joint ventures.
Sustainability of the 2023 gross-margin improvement, including pricing, commodity costs, freight, manufacturing efficiency and currency effects.
Effectiveness of the remediated intercompany controls and the company’s first full standalone internal-control assessment for fiscal 2024.