Atmus Filtration Technologies Inc

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Atmus Filtration Technologies is a global leader in filtration products for commercial vehicles and specialized industries, providing engineered solutions for air, fluid, and fuel filtration.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Atmus Filtration Technologies (ATMU), spun off from Cummins in 2022, is a global leader in filtration products, particularly for on-highway and off-highway commercial vehicles, serving a range of markets. They design, manufacture, and sell advanced filtration products (which primarily consists of aftermarket replacement parts) used in air, fluid, and fuel management systems. These parts serve as critical replacements throughout the machine’s lifespan, making this a recurring-revenue business model. The company has a global presence, with operations in North America, Europe, South America, Asia, Australia and Africa. Key markets include transportation, construction, agriculture, mining and power generation.

  • Revenue Streams: Atmus’ revenue is divided into two major channels: original equipment manufacturers (OEMs), which account for sales to vehicle and equipment makers, and the aftermarket (AM) for replacements. Atmus generates approximately 84% of its total revenue from the AM sales channel and roughly 16% from OEMs
  • Geographic Revenue: The Americas region makes up 61% of the revenue, Europe/Middle East 26%, and Asia Pacific 13%.
  • Major Competitors: It operates within a highly competitive global filtration market, with some of its largest competitors being Donaldson, Mann+Hummel, and Parker Hannifin.
  • Key Differentiators: Atmus attempts to differentiate itself through its “deep” industry knowledge, technology leadership, and a strong presence in core markets. It focuses on developing proprietary filtration solutions, high quality manufacturing and leveraging its established brand recognition.
  • Customers: The company primarily serves aftermarket distributors, OE manufacturers, and end users in the heavy-duty vehicle, transportation, construction, mining, and agricultural industries.

Moat Assessment: 3 / 5

Atmus possesses a moderate moat primarily driven by the following factors:

  • Customer Relationships: The company has formed long term relationships with its major OEMs. Their main source of revenue though is the Aftermarket sales where they leverage existing sales channels to sell replacement filters to customers which can create a type of lock-in for the company.
  • Switching costs: For OEM channels, design integration with OEMs and long development cycles create strong, but moderate, customer-specific switching costs. For aftermarket channels, though switching is easier, the importance of reliable and high quality parts makes customers stick to known brands.
  • Proprietary Manufacturing and Technology: The filtration market has seen a rise in the importance of technology as well as manufacturing capabilities, and those companies with advantages in it are able to defend themselves from increasing competition. Having a large portfolio of patents also helps in the same.

Moat Rating Rationale:

A moat rating of 3/5 reflects a business with tangible competitive advantages that are difficult, but not insurmountable, for competitors to replicate or erode in the medium term, allowing ATMU to earn stable returns on invested capital. While Atmus has strong customer relationships and switching costs, these barriers to entry are not as high as those in companies with wider moats.

Legitimate Risks to the Moat and Business Resilience

Several risks could threaten Atmus’ moat and overall performance:

  • Dependence on Key Relationships: As a spinoff from Cummins, ATMU still depends on Cummins for many operational procedures and services. Furthermore, the majority of revenue comes from a few big OEMs.
  • Intense Competition: The market has a large amount of incumbents and they also are constantly looking to improve their market shares with aggressive pricing, technology and operational improvements.
  • Raw Material Volatility: Fluctuating prices of raw materials, such as commodities and resins, can significantly affect the cost structure and profitability for the company.
  • Technological Disruptions: New technologies or materials in filtration can render existing ATMU products obsolete.
  • Economic Downturns: Demand for aftermarket parts can decrease sharply if their customers see a downturn in economic activity, leading to lower demand for ATMU’s products.
  • Supply Chain Issues: Disruptions, shortages, and inefficiencies in the supply chain can have a material impact on production costs.

Business Resilience: Atmus has established customer relationships and a recurring revenue model, which allows for some business resilience. However, the company is vulnerable to shifts in industry trends and supply chain issues which may negatively affect the business. Furthermore, a large debt may make the company less resilient to a downturn in market.

Financial Analysis

  • Revenue Trends: While revenues have been growing from 2020-2023, they saw a noticeable decline of 5.7% year over year in the first nine months of 2024.
  • Profitability: Despite a strong performance in 2022, the company saw declining profitability margins in 2023, and that trend seems to be continuing in 2024. The gross profit margin for the first 9 months of 2024 is 36.2%, which is a huge decrease from 42.3% in the same period a year ago.
  • Net Income: The company has been profitable for the last few years except for the one ended December 2022, but profitability has declined steadily, as can be seen in the first 9 months of 2024 which show a net income of only 117.7 million compared to 150.5 million in the same period last year.
  • Cash Flow: The company’s cash flow from operations has been volatile, though the net cash flow is still relatively high and positive.
  • Return on Invested Capital (ROIC): The ROIC fell from 13.6% in 2022 to 11.1% in 2023. The trend suggests there is downward pressure on profitability that can be a matter of concern.

Capital Structure and Health Rating: 3 / 5

  • Debt Levels: The company took a loan of 1 billion dollars to fund the separation process from Cummins. They are also working with a revolving credit facility.
  • Solvency: The long term debt is $882 million, and while the company is still profitable, their operating margin has decreased notably which is an item of concern as it indicates a struggle in operational profitability. The low current ratio also suggests that the company may face some short-term liquidity risks.
  • Share Repurchases: While their buybacks look good on the surface, they are offsetting the dilution brought on by the issuance of stock awards.

Balance Sheet Health Rationale

A balance sheet health rating of 3/5 suggests that ATMU has a moderately healthy balance sheet. While they have solid assets, their relatively low cash balance and high debt could negatively affect the company if there is a downturn. In such a case, their ability to respond to it can be limited by their large amount of debt.

Understandability: 2/5

Atmus’s business, while centered on filtration products, is complex due to the number of industries and geographies it operates in. Furthermore, understanding its financial statements require analysis of GAAP and IFRS accounting methodologies which often results in significant differences in results. Also, as a recent spinoff from Cummins, determining how the company operates as a standalone entity may require some time. All of these factors make this business somewhat difficult to understand for a common investor.

Recent Issues and Management’s Response

During the last earnings call, management expressed confidence in the business strategy and reiterated their commitment to managing costs. They expect to see a recovery in sales in the coming quarters and have also been working to restructure the company to make it more efficient, and agile. They have discussed that cost pressure and high inflation has contributed to the lower gross margins in their recent results. They are also working to overcome these headwinds through streamlining operations and by using its scale to gain better pricing with its suppliers. Also, there is talk about a $600 million share repurchase plan. In previous earnings calls, management has also emphasized their efforts towards brand management, sales growth, and new product development.

Disclaimer: I am an AI Chatbot and not a financial advisor. Please do your own due diligence before making any investment decisions.