Item 1. Business
Overview
Atmus is one of the global leaders of filtration products for on-highway commercial vehicles and off-highway agriculture, construction, mining and power generation vehicles and equipment. Atmus designs and manufactures advanced filtration products, principally under the Fleetguard brand, that enable lower emissions and provide superior asset protection. Atmus estimates that approximately 19% of Atmus’ net sales in 2023 were generated through first-fit sales to original equipment manufacturers (“OEM”s), where Atmus’ products are installed as components for new vehicles and equipment, and approximately 81% were generated in the aftermarket, where Atmus’ products are installed as replacement or repair parts, leading to a strong recurring revenue base. Building on Atmus’ 65-year history, Atmus continues to grow and differentiate itself through its global footprint, comprehensive offering of premium products, technology leadership and multi-channel path to market.
For the year ended December 31, 2023, Atmus generated $1,628.1 million in Net sales, $171.3 million in Net income and $302.3 million in Adjusted EBITDA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures” in this Annual Report on Form 10-K for a description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to Net income, the most directly comparable financial measure calculated in accordance with U.S. GAAP.
Atmus’ Business Strategy
Grow share in first-fit in core markets
Atmus’ organic first-fit growth opportunities are centered on four pillars:
•Grow market share with leading OEMs: Atmus benefits from deep relationships with leading OEMs. Atmus’ technology innovations, global footprint and preferred brand position it well to grow along with the leading OEMs. As Atmus’ OEM partners continue to grow in share and through consolidation of their respective markets, Atmus will partner with them to grow. This growth with OEMs in turn increases the installed base for its products, which drives recurring aftermarket revenue.
•Support technology transitions with leading OEMs: Atmus plans to further build on its relationship with OEMs as they transition to alternate fuel technologies, such as hydrogen-powered internal combustion engines, battery electric vehicles and fuel cell electric vehicles. Based on currently available technology and Atmus’ assessment of products being developed, Atmus believes that, although battery-electric vehicles may have lower levels of filtration content than internal combustion engine vehicles, other technologies such as hydrogen-powered internal combustion engines or fuel cell electric vehicles may have similar levels of filtration content as internal combustion engine vehicles. Some of Atmus’ current developments in the zero emissions space include hydrogen water separators, air filtration products,
coolants and deionizing water filters. Atmus currently has a number of alternative fuel development programs underway with its existing customer base in the zero emissions space. Atmus is well positioned for the broader transition of technology through its existing relationships with customers.
•Enhanced product content per vehicle: Atmus has a focus on offering system modules and highly integrated solutions as customers and end-users seek improved filtration performance and quality, which it believes will result in increased first-fit content per vehicle. Atmus is also extending into smart filtration solutions, including embedded sensors, prediction algorithms and data analytics tools.
•Accelerate new product development: Atmus is accelerating its new product development cycle by continued investment in advanced system level testing capabilities, leveraging in-house 3D printing capabilities, utilizing powerful simulation tools and applying machine learning tools throughout its product development cycle.
Accelerate profitable growth in the aftermarket
Atmus estimates that aftermarket net sales represented approximately 81% of its total net sales in 2023, and has significant opportunity for further growth through these strategic initiatives:
•Expand Atmus’ product portfolio: Offering a comprehensive product portfolio provides a ‘one-stop shop’ for Atmus’ customers. Atmus offers a wide range of products to ensure product coverage and continues to release new products on a yearly basis. Atmus has launched approximately 300 new products annually, on average, over the last three years. Atmus has a team dedicated to tracking new filter releases and strategically selecting the type and quantity of products to launch each year to ensure optimal product coverage. Recent product launch focus has trended towards more targeted and focused product releases.
•Use analytics to target and capture growth opportunities: Atmus will continue to develop and enhance analytic tools, including using machine learning and artificial intelligence, to identify cross-sell or up-sell opportunities, and new or underserved customers, and precisely estimate the opportunity for additional sales of its Fleetguard-branded products. Atmus works directly with end-users or through its channel partners to define, track and measure opportunities and conversion rates.
•Expand reach through multi-channel distribution: It is important that Atmus can reach end-users no matter where they are, or how they choose to purchase Atmus products. Atmus continues to expand its presence with OEM dealers, independent distributors, service centers and retail outlets.
•Invest in product technology advantage to enhance value and protect revenue: Where Atmus is the first-fit, it increases customer retention on aftermarket opportunities by using advanced technologies and proprietary product designs that drive improved performance and create preference for its products. Where Atmus is not the first-fit, it continues to develop products that meet or exceed the first-fit product, supporting its brand position as premium quality and performance, and leading to high customer loyalty.
Transform Atmus’ supply chain
Atmus is focused on transforming its supply chain to improve customer experience, which is expected to drive growth and reduce overall cost, leading to margin enhancement. Atmus’ strategic initiatives have four pillars:
•Drive services and availability: Synchronize global planning across the network to focus on on-shelf availability.
•Optimize network: Invest in its physical footprint to provide superior availability while minimizing material and part movement.
•Transform cost structure: Optimize supplier management and spend and increase throughput across Atmus’ network of plants and increase automation.
•Invest in capabilities for the future: Deploy robust processes across the organization from forecasting through customer orders to fulfillment, and invest in critical global systems infrastructure to provide best-in-class functionality.
Expand Atmus’ technology and diversify its distribution channels beyond its core markets
Atmus is focused on building sustainable growth by expanding and diversifying into the industrial filtration market, which includes machinery and equipment, oil and gas, pharmaceuticals, food and beverage and metals and mining. Atmus believes it can leverage its global footprint and existing technical capabilities, including its proprietary filtration media technology, into these markets to open new opportunities for growth. Atmus anticipates achieving this by expanding its focus to include non-engine products that it can sell to its current and new customers within its existing markets by utilizing its global footprint. Atmus is working on developing capabilities, whether organically or through acquisitions or strategic partnerships, to enter new markets with long-term growth prospects which will further diversify its revenue base. To the extent that Atmus considers acquisitions, it will apply a disciplined financial framework in assessing these opportunities.
Atmus’ Global Footprint
Atmus serves end-users globally, with approximately 49% of its Net sales in 2023 from outside of the United States and Canada. Atmus believes that it, together with its joint ventures in China and India, has a leading position in its core markets, based on Net sales in 2023. Atmus maintains strong global customer relationships, supported by an established salesforce with work locations in 25 countries as of December 31, 2023. Also, as of December 31, 2023, Atmus operates through 11 distribution centers, 10 manufacturing facilities and five technical facilities plus 10 manufacturing facilities and two technical facilities operated by its joint ventures, giving Atmus presence on six continents.
Atmus’ Premium Products
Atmus offers a full spectrum of filtration solutions that enable lower emissions and provide superior asset protection. Atmus’ filtration products provide comprehensive and differentiated solutions, which allow its end-users to extend service intervals, reduce maintenance costs and increase uptime. Atmus’ products include fuel filters, lube filters, air filters, crankcase ventilation, hydraulic filters and coolants and other chemicals. Atmus’ broad range of products in each of its core markets enables one-stop shopping, which Atmus believes is a key competitive advantage.
Atmus’ Markets
Atmus believes the filtration product market is large and attractive, with estimated total product sales of approximately $80 billion in 2022, of which Atmus believes the total engine products market — consisting of its core markets and the passenger car market — was approximately $32 billion. Within the total engine products market, Atmus estimates that its core markets had a total addressable market of approximately $14 billion in 2022, having grown by approximately 4% compounded annual growth rate (“CAGR”) over the last five-year period ending in 2022. Atmus estimates that the passenger car market, which it does not currently and does not expect in the future to focus on, had a total addressable market of approximately $18 billion in 2022. The balance of the filtration product market is made up of industrial filtration markets, which Atmus estimates had a total addressable market of approximately $48 billion in 2022. Atmus’ strategy includes a focus on expanding into industrial filtration markets in the future; these markets have grown by approximately 7% CAGR over the five-year period ending 2022. We believe that inflation was a significant contributor to market growth during the
five-year period ending 2022. Looking ahead, excluding inflationary impact, Atmus expects the industrial filtration markets to grow by approximately 4.5% CAGR and its core markets by approximately 2% CAGR, in each case through the five-year period ending in 2027.
The engine filtration market is impacted by the following key drivers and trends:
•Growth in freight volumes (on-highway) and industrial activity (off-highway): Atmus believes broader economic growth is a strong indicator for its business. The U.S. Bureau of Transportation Statistics’ Freight Analysis Framework forecasted (as of November 2023) that between 2023 and 2050 U.S. freight volume will increase by approximately 50%, and expected that trucks will remain the predominant freight carrier in the near future. Off-highway activity is correlated with the overall construction industry. Dodge Construction Network predicted (as of November 2023) that the overall U.S. construction industry will rise 7% in 2024 after growth slowed to just 1% in 2023. It is expected that the first half of 2024 will see slower growth compared to the second half of the year. The Construction Industry Databook expects (as of October 2023) U.S. construction output to grow at 5.3% CAGR from 2023 to 2027.
•Growth in emerging markets: Global growth in core markets is being driven by macro-economic expansion, including the build-out of infrastructure. Asian markets, including India, are currently positioned for high growth. According to the International Monetary Fund (IMF), from 2018 to 2023, gross domestic product in India has grown at a compounded annual growth rate of 4.0%. The growth in India is primarily driven by the increasing demand for transportation as well as emission regulations. The growth in China was depressed in 2022 due to the COVID-19 response and remained constrained in 2023 due to declining economic conditions. China had experienced high growth in the prior years and Atmus expects a partial recovery over the next few years. Gross domestic product in China has grown at a compounded annual growth rate of 4.9% from 2018 to 2023 according to the IMF.