2023-05-16 13:31:06 ET
Summary
- Atmus Filtration Technologies has filed proposed terms for a $275 million IPO.
- The company is beginning the separation process from parent firm Cummins.
- ATMU is growing revenue at nearly 10%, is producing good operating and net margins and generating impressive cash flow.
- For investors seeking exposure to a solid manufacturing company in the vehicle and industrial equipment filtration sectors, my outlook on the IPO is a Buy at up to $19.50 per share.
A Quick Take On Atmus Filtration Technologies
Atmus Filtration Technologies Inc. ( ATMU ) has filed to raise $275 million in an IPO of its common stock, according to an amended S-1/A registration statement.
The firm is a unit of parent firm Cummins and provides filtration products for on- and off-highway vehicles and industrial equipment.
For investors interested in a solid manufacturing company focused on vehicle and equipment filtration systems, my outlook on the IPO is a Buy at up to $19.50 per share.
Atmus Filtration Overview
Nashville, Tennessee-based Atmus Filtration Technologies Inc. was created and branded as Cummins Filtration to design and manufacture filtration technologies for engines and industrial equipment.
Management is headed by Ms. Steph Disher, who has been with the firm since 2013 and was previously Operations Director and Managing Director for parent firm Cummins in the South Pacific region.
The company’s primary offerings include the following:
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OEM filtration parts
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Aftermarket filtration parts
As of March 31, 2023, Atmus has booked fair market value investment of $499.7 million from parent firm Cummins Inc. ( CMI )
Atmus - Customer Acquisition
The company seeks customers among OEMs and through aftermarket distributors in over 150 countries worldwide.
The firm's sales force operates in 25 countries and combined with its manufacturing and distribution centers, has a presence on six continents.
Selling, G&A expenses as a percentage of total revenue have risen slightly as revenues have increased, as the figures below indicate:
Selling, G&A | Expenses vs. Revenue |
Period | Percentage |
Three Mos. Ended March 31, 2023 | 9.3% |
2021 | 8.9% |
2020 | 8.8% |
(Source - SEC)
The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, was 0.9x in the most recent reporting periods:
Selling, G&A | Efficiency Rate |
Period | Multiple |
Three Mos. Ended March 31, 2023 | 0.9 |
2021 | 0.9 |
(Source - SEC)
Atmus’ Market & Competition
According to a 2022 market research report by Allied Market Research, the global market for automotive air filters was an estimated $4.7 billion in 2020 and is forecast to reach $7.8 billion by 2030.
This represents a forecast CAGR of 5.4% from 2021 to 2030.
The main drivers for this expected growth are increasing regulations on the emission of greenhouse gasses and a desire by manufacturers for better-performing technologies.
Also, the chart below shows the automotive filter market growth trajectories for various vehicle types through 2030:
The company operates in other engine filtration markets globally.
Major competitive or other industry participants include the following:
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MANN+HUMMEL
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Donaldson
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Sogefi
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Parker
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MAHLE
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Robert Bosch
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Others
Atmus Filtration Technologies’ Financial Performance
The company’s recent financial results can be summarized as follows:
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Increasing top-line revenue growth
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Growing gross profit but variable gross margin
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Fluctuating operating profit
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Variable cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
Three Mos. Ended March 31, 2023 | $ 418,600,000 | 9.4% |
2021 | $ 1,562,100,000 | 8.6% |
2020 | $ 1,438,800,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
Three Mos. Ended March 31, 2023 | $ 109,800,000 | 34.9% |
2021 | $ 358,900,000 | 2.4% |
2020 | $ 350,500,000 | |
Gross Margin | ||
Period | Gross Margin | % Variance vs. Prior |
Three Mos. Ended March 31, 2023 | 26.23% | 4.9% |
2021 | 22.98% | -5.7% |
2020 | 24.36% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
Three Mos. Ended March 31, 2023 | $ 69,200,000 | 16.5% |
2021 | $ 203,600,000 | 13.0% |
2020 | $ 214,700,000 | 14.9% |
Net Income (Loss) | ||
Period | Net Income (Loss) | Net Margin |
Three Mos. Ended March 31, 2023 | $ 52,700,000 | 12.6% |
2021 | $ 170,100,000 | 40.6% |
2020 | $ 171,300,000 | 40.9% |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
Three Mos. Ended March 31, 2023 | $ 67,500,000 | |
2021 | $ 177,000,000 | |
2020 | $ 202,300,000 | |
(Source - SEC)
As of March 31, 2023, Atmus had no cash and $452.9 million in total liabilities.
Free cash flow during the twelve months ending March 31, 2023, was $204 million.
Atmus’ IPO Details
ATMU parent Cummins will exchange for debt the approximately 14.1 million shares of common stock at a proposed midpoint price of $19.50 per share for gross proceeds of approximately $275.4 million, not including the sale of customary underwriter options 50% each with J.P. Morgan Securities and Goldman Sachs in a debt-for-equity exchange.
The effect of the debt-for-equity exchange by Cummins will be to pay down Cummins’ debt by the IPO amount, net of fees.
Cummins will retain voting control of the company immediately post-IPO.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $2.2 billion.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 16.96%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management says the firm is subject to claims as a normal part of its business and does not believe any claims are material individually or in the aggregate.
The listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan and other investment banks.
Valuation Metrics For Atmus Filtration
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
Measure [TTM] | Amount |
Market Capitalization at IPO | $1,624,307,022 |
Enterprise Value | $2,164,307,022 |
Price / Sales | 1.02 |
EV / Revenue | 1.35 |
EV / EBITDA | 9.48 |
Earnings Per Share | $2.20 |
Operating Margin | 14.28% |
Net Margin | 11.76% |
Float To Outstanding Shares Ratio | 16.96% |
Proposed IPO Midpoint Price per Share | $19.50 |
Net Free Cash Flow | $204,000,000 |
Free Cash Flow Yield Per Share | 12.56% |
Debt / EBITDA Multiple | 2.85 |
CapEx Ratio | 6.41 |
Revenue Growth Rate | 9.44% |
(Source - SEC)
Commentary About Atmus Filtration
ATMU is seeking to float its shares on U.S. public capital markets as it begins its separation process from parent firm Cummins.
The company’s financials have shown higher top-line revenue growth, increasing gross profit but variable gross margin, uneven operating profit and fluctuating cash flow from operations.
Free cash flow for the twelve months ending March 31, 2023, was an impressive $204 million.
Selling, G&A expenses as a percentage of total revenue have increased slightly as revenue has increased; its Selling, G&A efficiency multiple was stable at 0.9x for the most recent reporting period.
The company has 'not yet determined the extent to which [it] will pay dividends' on its common stock.
The firm’s CapEx Ratio indicates it has spent moderately on capital expenditures as a percentage of its operating cash flow.
The market opportunity for engine filtration products is large and expected to grow at a moderate rate of growth over the coming years.
Goldman Sachs is the lead underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of 34.8% since their IPO. This is a top-tier performance for all significant underwriters during the period.
Risks to the stock’s outlook post-IPO include distribution of all or part of parent firm Cummins’ remaining equity interest in Atmus to shareholders, which may lead to new investors selling those shares, putting downward pressure on Atmus’ stock price.
As for valuation expectations, management is asking IPO investors to pay an Enterprise Value / EBITDA multiple of approximately 9.5x.
Atmus is generating attractive operating and net margins, growing revenue at nearly 10% and is producing impressive free cash flow at a reasonable valuation at IPO.
For investors interested in a solid manufacturing company focused on vehicle and equipment filtration systems, my outlook on the IPO is a Buy at up to $19.50 per share.
Expected IPO Pricing Date: May 25, 2023.
For further details see:
IPO Update: Atmus Filtration Readies $275 Million IPO