Atmus Filtration Technologies Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Atmus designs, manufactures and sells Fleetguard-branded filtration, coolant and chemical products for on-highway and off-highway applications in more than 150 countries. The filing covers the three and six months ended June 30, 2023, compared with the comparable 2022 periods.
Atmus completed its separation from Cummins and began trading on the NYSE on May 26, 2023. Cummins sold 16.2 million shares in the IPO but received the proceeds; Cummins retained approximately 80.5% ownership. Historical periods before the IPO are based on carved-out financial information and include allocations of Cummins corporate costs that may not reflect future standalone costs.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $413.6 million | $393.2 million | $832.2 million | $775.7 million |
| Gross margin | $114.4 million | $95.4 million | $224.2 million | $176.8 million |
| Gross margin percentage | 27.7% | 24.3% | 26.9% | 22.8% |
| Operating income | $64.2 million | $58.0 million | $133.4 million | $102.5 million |
| Net income | $46.2 million | $49.2 million | $98.9 million | $84.0 million |
| Net income margin | 11.2% | 12.5% | 11.9% | 10.8% |
| Diluted EPS | $0.55 | $0.59 | $1.19 | $1.01 |
Six-month operating cash flow was $89.0 million, compared with $39.7 million in 2022. Capital expenditures were $19.1 million, producing reported free cash flow of $69.9 million. Cash and cash equivalents were $139.6 million at June 30, 2023.
Atmus had $650.0 million of long-term debt at June 30, 2023: a fully drawn $600.0 million term loan and $50.0 million drawn under a $400.0 million revolving facility. Total remaining revolving capacity was $350.0 million. The facilities mature September 30, 2027, and Atmus was in compliance with its financial covenants. On July 31, 2023, Atmus repaid $20.0 million of the revolver, reducing the drawn amount to $30.0 million.
Non-GAAP six-month EBITDA was $145.4 million, adjusted EBITDA was $158.3 million, and adjusted EBITDA margin was 19.0%. Adjusted EPS was $1.31. These measures exclude or adjust for specified standalone-company separation costs and should be considered alongside GAAP results.
Material changes versus the prior comparable period
- Q2 sales increased 5.2%; six-month sales increased 7.3%. Pricing contributed approximately $32.0 million in Q2 and $68.3 million for six months, partly offset by lower volumes and unfavorable currency effects.
- Q2 gross margin increased 3.4 percentage points, primarily from pricing and lower commodity and freight costs. Six-month gross margin increased 4.1 percentage points.
- Q2 net income declined 6.1% despite higher operating income, primarily because of $4.1 million of incremental interest expense from the new $650 million debt, lower other income, and a higher effective tax rate.
- Q2 selling, general and administrative expense increased 41.5%, driven by separation costs, IPO execution inefficiencies, higher variable compensation and employee costs. Six-month SG&A increased 30.9%.
- Q2 included approximately $8.8 million of one-time standalone-company expenses. Management expects approximately $30 million to $50 million of one-time expenses and $20 million to $40 million of separation-related capital expenditures between December 31, 2022 and December 31, 2024.
- Foreign currency translation produced a $2.1 million six-month other comprehensive loss, compared with a $19.5 million loss in the prior year period.
Guidance, outlook, risks and unusual items
Management stated that aftermarket demand remained strong during the first half of 2023, but anticipated a slowdown in the second half because of weaker global economic activity and normalization of supply-chain backlogs and customer inventories. First-fit demand remained strong due to OEM order books.
Supply-chain conditions improved but continued to create disruptions and incremental costs. Inflation, labor and energy costs remained elevated, while material pressures had stabilized somewhat. Pricing actions largely offset these cost pressures. Currency effects, cyclical end markets, OEM production schedules, commodity costs, supply shortages and customer concentration remain important performance risks.
The company disclosed a material weakness in internal control over financial reporting involving period-end intercompany and related-party accounting. The weakness caused errors in related-party balances, net parent investment, cash flows and parent transfers, resulting in a restatement of March 31, 2023 financial statements and revisions to prior annual and interim periods. Management implemented a manual review control during the quarter, but the weakness had not been remediated as of June 30, 2023.
Product warranty liabilities totaled $16.1 million, including an $8.2 million remaining accrual for a fuel-heater recall campaign. The company also maintained a $1.5 million reserve for Russian customer receivables. Management reported no pending litigation expected to have a material adverse effect, although indemnification exposures cannot be estimated.
The company expects cash from operations and available credit facilities to support working capital, capital expenditures and contractual obligations, but cautioned that a severe economic or credit-market disruption could materially affect liquidity. Interest-rate exposure is material: a 0.125% change in SOFR would have an estimated $0.8 million annual effect on interest expense based on debt outstanding at June 30, 2023.
Key facts investors should verify
- Confirm the impact and status of the disclosed material weakness, the March 31, 2023 restatement and revisions to prior periods.
- Assess post-IPO standalone operating costs, including the remaining $30 million to $50 million estimated one-time expense range and ongoing Transition Services Agreement costs with Cummins.
- Evaluate leverage, floating-rate exposure, covenant compliance and the September 2027 debt maturity against operating cash flow and available revolver capacity.
- Monitor whether expected second-half market softening, lower volumes, supply-chain normalization and currency headwinds offset pricing benefits.
- Review reliance on Cummins, which retained approximately 80.5% ownership, including related-party sales, supply agreements, shared services and tax arrangements.
- Reconcile reported GAAP cash flow and non-GAAP measures to the financial statements, particularly the filing’s cash-flow presentation and separation-cost adjustments.