# Atmus Filtration Technologies Inc. (ATMU) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Atmus Filtration Technologies Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1921963/000192196324000007/atmu-20231231.htm
Accession: 0001921963-24-000007
Filing date: 2024-02-14
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ATMU/
All MD&A years: /company/ATMU/mda/
Next year: /company/ATMU/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis presented below provides information which management believes is relevant to an assessment and understanding of Atmus Filtration Technologies Inc. (the “Company,” “Atmus,” “we,” “our” and “us”) consolidated results of operations and financial condition. The discussion should be read in

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conjunction with Atmus’ consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Atmus” is intended to mean the business and operations of Atmus Filtration Technologies Inc. and its consolidated subsidiaries.

The following is the discussion and analysis of changes in the financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 and the year ended December 31, 2022 compared to the year ended December 31, 2021.

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, including, without limitation, those that are based on current expectations, estimates and projections about the industries in which we operate and management’s views, plans, objectives, projections, beliefs and assumptions. Forward-looking statements may be identified by the use of words such as “anticipates,” “expects,” “forecasts,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “should,” “may” or words of similar meaning. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance, discussions of future operations, impact of planned acquisitions and dispositions, our strategy for growth, product development activities, regulatory approvals, market position, expenditures and the effects of the Separation and IPO (each as defined in Note 1, Description of the Business, to our Consolidated Financial Statements included herein). These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as “future factors,” which are difficult to predict. If the underlying assumptions prove correct, or known or unknown risks or uncertainties materialize, our actual outcomes, results and financial condition may differ materially from what is expressed, implied or forecasted in such forward-looking statements. Risks and uncertainties include, but are not limited to:

•Significant customer concentration among Cummins, PACCAR, and the Traton Group;

•The loss of a top OEM relationship, or changes in the preferences of Atmus' aftermarket end-users;

•Atmus deriving significant earnings from investees that Atmus does not directly control;

•Significant competition in the markets Atmus serves;

•Evolving customer needs and developing technologies;

•Reliance on Atmus’ executive leadership and other key personnel;

•Strategic transactions, such as acquisitions, divestitures, and joint ventures;

•Management of productivity improvements;

•Work stoppages and other labor matters;

•Variability in material and commodity costs;

•Raw material, transportation and labor price increases and supply shortages;

•Complexity of supply chain and manufacturing;

•Atmus’ customers operating in cyclical industries and the current economic conditions in these industries;

•Exposure to potential claims related to warranties and claims for support outside of standard warranty obligations;

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•Products being subject to recall for performance or safety-related issues;

•Inability or failure to adequately protect and enforce Atmus’ intellectual property rights and the cost of protecting or enforcing Atmus' intellectual property rights;

•Ineffective internal control over financial reporting;

•Unexpected events, including natural disasters;

•Sales of counterfeit versions of products, as well as unauthorized sales of products;

•Statutory and regulatory requirements that can significantly increase costs;

•Changes in international, national and regional trade laws, regulations and policies affecting international trade;

•Unanticipated changes in Atmus' effective tax rate, the adoption of new tax legislation or exposure to additional income tax liabilities, as well as audits by tax authorities resulting in additional tax payments for prior periods;

•Changes in tax law relating to multinational corporations;

•Significant compliance costs and reputational and legal risks imposed by Atmus' global operations and the laws and regulations to which these are subject;

•Effects of climate change may cause Atmus to incur increased costs;

•Operations being subject to increasingly stringent environmental laws and regulations as well as to laws requiring cleanup of contaminated property;

•Potential system or data security breaches or other disruptions;

•Dependence on information technology infrastructure and assets that are increasing in complexity;

•Foreign currency exchange rate;

•Potential economic downturns that could cause the balances of recorded goodwill to decrease;

•Political, economic, and social uncertainty in geographies where Atmus has significant operations or large offerings of products;

•Uncertain worldwide and regional market and economic conditions;

•The loss of Cummins’ reputation, economies of scale, capital base and other resources as a result of the Separation from Cummins;

•Potential failure of performance by Atmus or Cummins under transaction agreements executed as part of the Separation;

•Actual or potential conflicts of interests for certain of Atmus' executive officers and directors because of their equity interests in Cummins;

•Limited liability to Atmus from Cummins and its directors for breach of fiduciary duty;

•Potential indemnification liabilities to Cummins pursuant to the separation agreement;

•Changes in capital and credit markets;

•Substantial indebtedness consisting of Atmus’ term loan and revolving credit facility, which may impact Atmus' ability to service all its indebtedness and react to changes in the industry; and

•Substantially all Atmus' assets being pledged as security for its term loan and revolving credit facility.

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Additional information about these future factors and the material factors or assumptions underlying such forward-looking statements may be found under the section entitled Risk Factors in this Annual Report on Form 10-K. It is not possible to predict or identify all such factors, and the risks described above should not be considered a complete statement of all potential risks and uncertainties. Readers are urged to consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements made herein are made only as of the date hereof and we undertake no obligation to publicly update or to revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

General Overview

Company Overview

We are 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. We design and manufacture advanced filtration products, principally under the Fleetguard brand, that provide superior asset protection and enable lower emissions. We estimate that approximately 19% of our net sales in 2023 were generated through first-fit sales to OEMs, where our products are installed as components for new vehicles and equipment. We estimate that approximately 81% of our net sales in 2023 were generated in the aftermarket, where our products are installed as replacement or repair parts, leading to a strong recurring revenue base. Building on our more than 65-year history, we continue to grow and differentiate ourselves through our global footprint, comprehensive offering of premium products, technology leadership and multi-channel path to market.

Separation from Cummins

In April 2022, Cummins Inc. (“Cummins”) announced its intention to separate its filtration business (the “Filtration Business”) into a standalone publicly traded company (the “Separation”). We were incorporated in Delaware on April 1, 2022, as a wholly-owned subsidiary of Cummins, in anticipation of the Separation, and prior to the completion of our initial public offering (the “IPO”), Cummins completed, in all material respects, the transfer of the assets and liabilities of the Filtration Business to us and our subsidiaries.

Our Registration Statement on Form S-1, as amended, filed on May 16, 2023, was declared effective on May 25, 2023, and our common shares began trading on the New York Stock Exchange under the symbol “ATMU” on May 26, 2023. On May 30, 2023, the IPO was completed through Cummins’ exchange of 16,243,070 shares of our common stock, including the underwriters’ full exercise of their option to purchase 2,118,661 shares to cover over-allotments. None of the proceeds of the IPO were for the benefit of Atmus. As of the closing of the IPO, Cummins owned, and continues to own, approximately 80.5% of the outstanding shares of our common stock.

On September 30, 2022, and as amended on February 15, 2023, Atmus entered into a $1.0 billion credit agreement (“Credit Agreement”) with Cummins and a syndicate of banks, providing for a $600 million term loan facility (the “term loan”) and a $400 million revolving credit facility (the “revolving credit facility”), in anticipation of the Separation. Borrowings under the Credit Agreement did not become available until the IPO occurred. Upon completion of the IPO, we borrowed $650 million, consisting of proceeds of the term loan and amounts drawn under the revolving credit facility, and paid such amounts to Cummins in partial consideration for the Separation.

In connection with the Separation, we entered into various agreements with Cummins, including a separation agreement. In the separation agreement, there were certain assets and liabilities identified in the schedules which were retained by Cummins, and those that were transferred to the Company. These agreements comprehensively provide a framework for our relationship with Cummins and govern various interim and ongoing relationships between us and Cummins post IPO.

Basis of Presentation

For the periods prior to the IPO, the discussion below relates to the financial position and results of operations of a combination of entities under common control that have been “carved out” of Cummins’ historical consolidated financial statements and accounting records. The historical combined financial statements reflect our historical financial position, results of operations and cash flows, in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

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For the period subsequent to May 26, 2023, as a standalone public company, we present our financial statements on a consolidated basis. The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP. Refer to Note 2, Basis of Presentation, to the Consolidated Financial Statements included elsewhere in this report for additional information.

Factors Affecting Our Performance

Our financial performance depends, in large part, on varying conditions in the markets we serve. Demand in these markets tends to fluctuate in response to overall economic conditions. Our revenues may also be impacted by OEM inventory levels, production schedules, commodity prices, work stoppages and supply chain challenges. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency exchange rate changes, political and economic uncertainty, public health crises (epidemics or pandemics) and regulatory matters, including adoption and enforcement of environmental and emission standards in the countries we serve. Some of the more important factors affecting our performance are briefly discussed below.

Market demand

Aftermarket demand softened over the second half of 2023 while first-fit demand remained resilient. We have continued to increase prices as a result of significant increases in our cost base, which has contributed to higher net sales in the year ended December 31, 2023. In 2024, we expect first-fit demand to soften across many of our key markets whereas the aftermarket is expected to recover, particularly in the second half of 2024.

Supply chain constraints

We continue to experience supply chain disruptions, incremental costs and related challenges that unfavorably affect customer demand, its ability to meet customer demand and its production. While overall supply chain conditions have substantially improved from a year ago, they continue to affect inventory and backlog levels throughout our supply chain. Our management team continues to monitor and evaluate all of these factors and the related impacts on our business and operations and we are diligently working to minimize any supply chain impacts to our business and to our customers.

Commodity prices, labor, inflation and foreign currency exchange rates

We continue to experience generally high inflation, though it has moderated in the second half of 2023. Direct material cost pressures, driven largely by steel, resin and other petrochemical products, have stabilized, but we continue to see impacts from labor and energy. Collectively, we realized lower material and freight costs which have driven a decrease in Cost of sales in 2023 and more than offset increases in other costs. To further mitigate these pressures, we instituted pricing actions throughout 2023.

During 2023, our Selling, general and administrative expenses increased as a result of costs related to the Separation, inefficiencies due to delays in the execution of our IPO and increased variable compensation costs.

Additionally, the appreciation of the U.S. dollar against foreign currencies has had and could continue to have a negative impact on our consolidated results of operations due to translation impacts. Although we did see a slightly favorable impact on our results of operations in the second half of 2023, there can be no assurances that the overall negative impact will not continue in 2024.

Standalone costs

We have incurred, and expect to continue to incur, additional costs associated with becoming a standalone public company. During the year ended December 31, 2023, we incurred approximately $28.6 million of expenses, including $10.8 million within Cost of sales and $17.3 million within Selling, general and administrative expenses in connection with becoming a standalone public company. We expect to incur additional expenses of approximately $5 million to $15 million in 2024 in connection with becoming a standalone public company. In addition, we expect to incur capital expenditures in connection with the Separation of approximately $10 million to $20 million in 2024. These expenses and capital expenditures primarily relate to the establishment of functions previously co-mingled with Cummins, such as information technologies, distribution centers and human resources. Theses expenses and capital expenditures are

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expected to be substantially complete by the end of 2024 but some expenses and capital expenditures may potentially be incurred in 2025. The actual amount of the expenses and capital expenditures we will incur as a stand-alone public company may be higher, perhaps significantly, from our current estimates for a number of reasons, including, among others, the final terms we are able to negotiate with service providers, as well as additional costs we may incur that we have not currently anticipated. Additionally, the actual timing of when we incur these incremental expenses may be different, perhaps significantly, from our current estimates for a number of reasons, including, among others, unforeseen events that may cause delays or interruptions in our plans or our service providers’ ability to provide their services.

Results of Operations

Operating results were as follows (in millions, except per share amounts):

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[[/GREPCENT_TABLE]]

2023 vs. 2022

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Net Sales

Net sales were $1,628.1 million (which included related party sales of $390.8 million) for the year ended December 31, 2023, an increase of $66.0 million compared to $1,562.1 million (which included related party sales of $344.9 million) for the year ended December 31, 2022. Of the total Net sales increase of $66.0 million, $20.1 million was an increase in external sales and $45.9 million was an increase in related party sales. Additionally, sales increased by approximately $102.0 million due to increased pricing, partially offset by lower volumes of $34.2 million and the negative impacts of currency of $1.8 million.

Gross Margin

Gross margin was $432.7 million for the year ended December 31, 2023, an increase of $73.5 million compared to $359.2 million for the year ended December 31, 2022. The increase in Gross margin was mainly due to approximately $102.0 million of favorable pricing as described above and approximately $41.0 million of favorable freight and commodities costs, partially offset by $32.1 million of unfavorable manufacturing and other costs, $11.9 million due to lower volumes, $11.1 million of increased variable compensation costs, $9.2 million of one-time separation costs, and $5.2 million of unfavorable currency impacts. Gross margin as a percentage of Net sales was 26.6% for the year ended December 31, 2023, an increase of 3.6% compared to 23.0% for the year ended December 31, 2022. The increase in Gross margin as a percentage of Net sales was primarily due to items noted above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $174.7 million for the year ended December 31, 2023, an increase of $35.0 million compared to $139.7 million for the year ended December 31, 2022. The increase was primarily driven by $13.5 million of increased variable compensation costs, $9.8 million of one-time separation costs, $6.3 million of higher executive and incentive based compensation and $5.4 million of higher merit and other costs. Selling, general and administrative expenses as a percentage of Net sales were 10.7% for the year ended December 31, 2023, an increase of 1.8% compared to 8.9% for the year ended December 31, 2022. The increase in Selling, general and administrative expenses as a percentage of Net sales was primarily driven by the items noted above increasing at a higher rate in relation to the increase in Net sales.

Research, Development and Engineering Expenses

Research, development and engineering expenses were $42.5 million for the year ended December 31, 2023, an increase of $3.9 million compared to $38.6 million for the year ended December 31, 2022. The increase was primarily due to increased variable compensation costs. Research, development and engineering expenses as a percentage of Net sales were 2.6% for the year ended December 31, 2023, an increase of 0.1% compared to 2.5% for the year ended December 31, 2022. The increase in Research, development and engineering expenses as a percentage of Net sales was mainly due to the items noted above.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees were $33.6 million for the year ended December 31, 2023, an increase of $5.6 million compared to $28.0 million for the year ended December 31, 2022. The increase was primarily due to higher earnings of $4.9 million from our joint ventures in China and India.

Other Operating Expense, Net

Other operating expense, net was $0.7 million for the year ended December 31, 2023, a decrease of $4.3 million compared to $5.0 million for the year ended December 31, 2022. The decrease was primarily due to prior year asset write-offs related to a discontinued program and the establishment of reserves against accounts receivable from Russian customers in 2022 that did not recur.

Interest Expense

Interest expense was $25.8 million for the year ended December 31, 2023, an increase of $25.1 million compared to $0.7 million for the year ended December 31, 2022. The increase was primarily due to the interest on our borrowings under the Credit Agreement in 2023.

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Other Income, Net

Other income, net was $3.8 million for the year ended December 31, 2023, a decrease of $5.0 million compared to $8.8 million for the year ended December 31, 2022. The decrease in Other income, net was primarily due to the net loss on foreign exchange rate hedging, partially offset by higher interest income as a result of cash balances held in interest-bearing accounts which we did not have prior to IPO.

Income Tax Expense

In connection with the Separation, the Company entered into a Tax Matters Agreement with Cummins that, among other things, formalized our agreement related to the responsibility for historical tax positions for the period prior to the IPO for jurisdictions where our business was included in the consolidated or combined tax returns of Cummins.

Our effective tax rate for the year ended December 31, 2023 was 24.3%, an increase of 4.7% compared to 19.6% for the year ended December 31, 2022. The increase in the effective tax rate was driven by a change in the mix of earnings among tax jurisdictions and changes in discrete tax items. Our effective tax rate differs from the U.S. statutory rate primarily due to differences in rates applicable to foreign subsidiaries, withholding taxes and state income taxes.

2022 vs. 2021

Net Sales

Net sales were $1,562.1 million (which included related party sales of $344.9 million) for 2022, an increase of $123.3 million compared to $1,438.8 million (which included related party sales of $328.6 million) for 2021. Of the total net sales increase of $123.3 million, consisting of $107.0 million in increased external sales and $16.3 million in increased related party sales, approximately $115.9 million was due to increased pricing for OEM and aftermarket products across all major regions we serve due to higher inflationary costs. The unfavorable impacts of foreign currency movements (approximately $37.8 million) were more than offset by increased volume.

Gross Margin

Gross margin was $359.2 million for 2022, an increase of $9.9 million compared to $349.3 million for 2021. The increase in Gross margin was mainly due to favorable pricing as described above (approximately $115.9 million) and higher sales volumes, largely offset by increased material costs (approximately $71.6 million), increased supply chain and freight costs (approximately $33.4 million) and the unfavorable impact of changes in foreign exchange rates on cost of sales (approximately $15.0 million). Gross margin as a percentage of Net sales was approximately 23.0% for 2022, a decrease of 1.3 percentage points compared to 24.3% for 2021. The decrease in Gross margin as a percentage of Net sales was primarily due to the high inflationary costs impacting material costs and increased freight costs due to supply chain constraints, which increased at a faster rate than the increase in Net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $139.7 million for 2022, an increase of $13.5 million compared to $126.2 million for 2021, primarily due to increased costs related to the Separation, partially offset by lower variable compensation. Selling, general and administrative expenses as a percentage of Net sales was 8.9% for 2022, an increase of 0.1 percentage points compared to 8.8% in 2021. The increase in Selling, general and administrative expenses as a percentage of Net sales is primarily driven by the costs related to separation being higher compared to the increase in Net sales.

Research, Development and Engineering Expenses

Research, development and engineering expenses were $38.6 million for 2022, a decrease of $3.4 million compared to $42.0 million in 2021, primarily due to lower corporate allocations of $7.4 million in 2022 compared to $8.9 million in 2021. Research, development and engineering expenses as a percentage of Net sales was 2.5% for 2022, a decrease of 0.4 percentage points compared to 2.9% for 2021. The decrease in Research,

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development and engineering expenses was mainly due to Net sales increasing at a higher rate than the increase in Research, development and engineering expenses and lower corporate allocations.

Equity, Royalty and Interest Income From Investees

Equity, royalty and interest income from investees were $28.0 million, a decrease of $4.4 million compared to $32.4 million for 2021, primarily due to lower earnings from our joint venture in China as a result of the COVID-19 response and declining economic conditions, as well as reduced demand in China.

Other Operating (Income) Expense, Net

Other operating (income) expense, net was $5.0 million for 2022, an increase of $5.0 million compared to zero for 2021. The increase was primarily due to asset write-offs, partially offset by gains on asset sales.

Other Income, Net

Other income, net was $8.8 million for 2022, an increase of $4.9 million compared to $3.9 million for 2021. The increase in Other income, net was primarily due to an increase in the non-service benefit of our defined benefit pension plans as compared to 2021.

Income Tax Expense

Our effective tax rate for 2022 was 19.6%, a decrease of 1.9 percentage points compared to 21.5% for 2021.

The year ended December 31, 2022 contained unfavorable discrete tax items of $5.4 million, primarily due to $5.2 million of unfavorable changes in tax reserves.

The year ended December 31, 2021 contained unfavorable net discrete tax items of $2.6 million, primarily due to $3.5 million of unfavorable changes in tax reserves, partially offset by $0.9 million of favorable other discrete tax items.

Liquidity and Capital Resources

Our facilities under the Credit Agreement provide for $1.0 billion in total availability, which includes the $600 million term loan and the $400 million revolving credit facility. As of December 31, 2023, we have borrowed $600 million on the term loan and zero on the revolving credit facility. As a result, we had capacity under our revolving credit facility of $400 million as of December 31, 2023.

We believe that cash from operations and the facilities under our Credit Agreement will continue to provide sufficient liquidity for our working capital needs, planned capital expenditures and future payments of our contractual, tax and benefit plan obligations in both the short and long term. Overall, we do not expect negative effects to our funding sources that would have a material effect on our liquidity. However, if a serious economic or credit market crisis ensues or other adverse developments arise, it could have a material adverse effect on our liquidity, financial condition, results of operations and cash flows.

Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials, labor, manufacturing and distribution, trade and promotions, advertising and marketing, tax liabilities, benefit plan obligations and lease expenses) as well as periodic expenditures for anticipated capital investments, interest payments on our long-term debt and supporting any future acquisitions.

Long-term cash requirements primarily relate to funding long-term debt repayments and our long-term benefit plan obligations.

Cash Flow

Our management reviews our liquidity needs in determining any and all indebtedness options. We have the ability to access the capital markets following the IPO, and we continue to generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity will be sufficient to

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allow us to manage our business and give us flexibility to meet our short- and long-term financial commitments. Our cash flow activity is noted below:

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[[/GREPCENT_TABLE]]

Operating Cash Flow

Net cash provided by operating activities was $189.0 million for the year ended December 31, 2023, an increase of $23.3 million compared to Net cash provided by operating activities of $165.7 million for the year ended December 31, 2022. The increase was driven primarily by lower working capital requirements of $26.1 million and a favorable change in other liabilities of $6.0 million, partially offset by an unfavorable change in income from equity method investees of $8.2 million. During the year ended December 31, 2023, lower working capital requirements resulted in a cash inflow of $11.3 million compared to a cash outflow of $14.8 million for the year ended December 31, 2022, mainly due to higher other accrued expenses, higher trade accounts payable, lower trade and related party receivables and lower inventories, partially offset by lower related party payables.

Net cash provided by operating activities was $165.7 million in 2022, a decrease of $44.2 million compared to $209.9 million in 2021. The overall decrease was driven primarily by higher working capital requirements of $41.9 million and an increase in deferred taxes of $10.0 million, partially offset by favorable changes in other assets and pension liabilities of $9.4 million. The higher working capital requirements were driven by lower related party payables and lower other accrued expenses, partially offset by lower inventories.

Dividends received from our unconsolidated equity investees were $19.8 million and $23.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. Dividends are typically paid in the second through the fourth quarters and are included in Net cash provided by operating activities.

Investing Cash Flow

Net cash used in investing activities for each fiscal year presented was primarily used for capital expenditures. Our capital expenditures were $45.8 million (of which approximately $9.2 million related to one-time separation costs), $37.5 million and $33.4 million for the years ended December 31, 2023, December 31, 2022,and December 31, 2021, respectively, corresponding to approximately 2.8%, 2.4% and 2.3% of Net sales in 2023, 2022 and 2021, respectively.

Financing Cash Flow

Net cash provided by financing activities for the year ended December 31, 2023 consisted primarily of long-term debt proceeds from our borrowings of $650 million under our Credit Agreement, partially offset by net transfers of $579.5 million to Cummins as part of the Separation and $50.0 million in payments made on our revolving credit facility. Net cash used in financing activities for the years ended December 31, 2022 and December 31, 2021 consisted entirely of transfers to Cummins.

Contractual Obligations

Our commitments consist of lease obligations for real estate and equipment. For more information regarding our lease obligations, see Note 9, Leases, to the Consolidated Financial Statements, which provides a summary of our future minimum lease payments.

Debt

Our total debt outstanding was $600 million at December 31, 2023. We had no debt outstanding at either December 31, 2022 or December 31, 2021. At December 31, 2023, the weighted-average term of our

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outstanding long-term debt was 3.8 years. Refer to Note 12, Debt and Borrowing Arrangements, to the Consolidated Financial Statements for more information on our debt and debt covenants.

Non-GAAP Measures

We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in our underlying operating results and provide additional insight and transparency on how we evaluate our business. We use non-GAAP financial measures to budget, make operating and strategic decisions and evaluate our performance. We have detailed the non-GAAP adjustments that we make in our non-GAAP definitions below. We believe the non-GAAP measures should always be considered along with the related U.S. GAAP financial measures. We have provided the reconciliations between the U.S. GAAP and non-GAAP financial measures below, and we also discuss our underlying U.S. GAAP results throughout our Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K.

Our primary non-GAAP financial measures are listed below and reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change. When our definitions change, we provide the updated definitions and present the related non-GAAP historical results on a comparable basis.

•“EBITDA” is defined as earnings or losses before interest expense, income taxes, depreciation and amortization and “EBITDA margin” is defined as EBITDA as a percent of Net sales. We believe EBITDA and EBITDA margin are useful measures of our operating performance as they assist investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Additionally, we believe these metrics are widely used by investors, securities analysts, ratings agencies and others in our industry in evaluating performance.

•“Adjusted EBITDA” is defined as EBITDA after adding back certain one-time expenses, reflected in Cost of sales and Selling, general and administrative expenses, including costs associated with becoming a standalone public company and “Adjusted EBITDA margin” is defined as Adjusted EBITDA as a percent of Net sales. We believe Adjusted EBITDA and Adjusted EBITDA margin are useful measures of our operating performance as it allows investors and debt holders to compare our performance on a consistent basis without regard to one-time costs attributable to our becoming a standalone public company.

•“Adjusted earnings per share” is defined as diluted earnings per share (the most comparable U.S. GAAP financial measure) after adding back certain one-time expenses, reflected in Cost of sales and Selling, general and administrative expenses, including costs associated with becoming a standalone public company less the related tax impact of the same one-time expenses. We believe Adjusted earnings per share provides improved comparability of underlying operating results.

•“Free cash flow” is defined as cash flows provided by (used for) operating activities less capital expenditures and “Adjusted free cash flow” is defined as Free cash flow after adding back certain one-time capital expenditures including costs associated with becoming a standalone public company. We believe Free cash flow and Adjusted free cash flow are useful metrics used by management and investors to analyze our ability to service and repay debt and return value to shareholders.

The metrics defined above are not in accordance with, or alternatives for, U.S. GAAP financial measures and may not be consistent with measures used by other companies. The metrics should be considered supplemental data; however, the amounts included in the EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted earnings per share, Free cash flow and Adjusted free cash flow calculations are derived from amounts included in the consolidated statements of net income and cash flows. We do not consider our non-GAAP financial measures as superior to, or a substitute for, the equivalent measures calculated and presented in accordance with GAAP. Some of the limitations are:

•such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

•such measures do not reflect changes in, or cash requirements for, our working capital needs;

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•such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

•other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

To properly and prudently evaluate our business, we encourage you to review the consolidated financial statements included elsewhere in this report and not rely on a single financial measure to evaluate our business.

A reconciliation of Net income to EBITDA and Adjusted EBITDA is shown in the table below:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["NET INCOME","$","171.3","","","$","170.4","","","$","170.1"],["Plus:"],["Interest expense","25.8","","","0.7","","","0.8"],["Income tax expense","55.1","","","41.6","","","46.5"],["Depreciation and amortization","21.5","","","21.6","","","21.6"],["EBITDA (non-GAAP)","$","273.7","","","$","234.3","","","$","239.0"],["Plus:"],["One-time separation costs(a)","$","28.6","","","$","9.0","","","$","\u2014"],["Adjusted EBITDA (non-GAAP)","$","302.3","","","$","243.3","","","$","239.0"],["Net sales","$","1,628.1","","","$","1,562.1","","","$","1,438.8"],["Net income margin","10.5","%","","10.9","%","","11.8","%"],["EBITDA margin (non-GAAP)","16.8","%","","15.0","%","","16.6","%"],["Adjusted EBITDA margin (non-GAAP)","18.6","%","","15.6","%","","16.6","%"]]
[[/GREPCENT_TABLE]]

(a)Primarily comprised of one-time expenses related to information technology, warehousing and human resources separation costs.

A reconciliation of Diluted earnings per share to Adjusted earnings per share is shown in the table below:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2023","","2022","","2021"],["","(per share)"],["Diluted earnings per share","$","2.05","","","$","2.05","","","$","2.04"],["Plus:"],["One-time separation costs(a)","$","0.34","","","$","0.11","","","$","\u2014"],["Less:"],["Tax impact of one-time separation costs(a)","$","0.08","","","$","0.02","","","$","\u2014"],["Adjusted earnings per share (non-GAAP)","$","2.31","","","$","2.13","","","$","2.04"]]
[[/GREPCENT_TABLE]]

(a)Primarily comprised of one-time expenses related to information technology, warehousing and human resources separation costs and the related tax impact of those expenses. The tax impact of one-time separation costs for the years ended December 31, 2023, 2022 and 2021 were $6.9 million, $1.8 million and zero, respectively.

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A reconciliation of Net cash provided by operating activities to Free cash flow and Adjusted free cash flow is shown in the table below:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2023","","2022","","2021"],["","(in millions)"],["Cash provided by operating activities","$","189.0","","","$","165.7","","","$","209.9"],["Less:"],["Capital expenditures","$","45.8","","","$","37.5","","","$","33.4"],["Free cash flow (non-GAAP)","$","143.2","","","$","128.2","","","$","176.5"],["Plus:"],["One-time separation capital expenditures","$","9.2","","","$","0.5","","","$","\u2014"],["Adjusted free cash flow (non-GAAP)","$","152.4","","","$","128.7","","","$","176.5"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in conformity with U.S. GAAP. The preparation of our financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Note 3, Summary of Significant Accounting Policies, in the notes accompanying Atmus’ financial statements included elsewhere herein for a summary of Atmus’ significant accounting policies, and discussion of recent accounting pronouncements. Atmus believes that the following discussion addresses Atmus’ most critical accounting policies, which are those that are most important to the portrayal of Atmus’ financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Revenue Recognition

We sell to customers either through long-term arrangements or standalone purchase orders. Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued. Typically, we recognize revenue on the products we sell at a point in time, in accordance with shipping terms or other contractual arrangements.

The transaction price of a contract could be reduced by variable consideration, including aftermarket rebates, volume and growth rebates and sales returns. At the time of sale to a customer, we record an estimate of variable consideration as a reduction from gross sales. We primarily rely on historical experience and anticipated future performance to estimate the variable consideration. Revenue is recognized to the extent that it is probable that a significant reversal of revenue will not occur when the contingency is resolved.

For aftermarket rebates and volume and growth rebates, management estimates are based on the terms of the arrangements with customers, historical payment experience, volume in quantity or mix of purchases of product during a specified time period and expectations for changes in relevant trends in the future. Adjustments to rebate accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.

For product returns, some aftermarket customers are permitted to return small amounts of parts and filters each year. An estimate of future returns is accounted for at the time of sale as a reduction in the overall sales revenue based on historical return rates.

Accounting for Income Taxes

We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the

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recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. At December 31, 2023, we recorded net deferred tax assets of $12.8 million. The assets included $5.6 million for the value of net operating loss and credit carryforwards. A valuation allowance of $3.7 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets.

In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We believe we made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in Note 6, “Income Taxes,” to our Consolidated Financial Statements included herein.