Investing

Engine Play: Cummins Cranks Up Carbon Filter Spin-Off Atmus in $100 million IPO

Liam Gibson

Published: February 23, 2023 10:43 pm

For investors keen on adding more industrial decarbonization solutions to their portfolios, a new spin-off deal is coming down the pipeline.  

On Tuesday, February 21, engine maker Cummins filed a Form S-1 with the Securities and Exchange Commission (SEC) for plans to take its filtration subsidiary – Atmus – public through an initial public offering (IPO) of newly issued common stock.

No date has been set for the deal, but the launch is expected to occur once the SEC review process is complete, the firm said in a press release. It intends to list on the New York Stock Exchange (NYSE) under the ticker “ATMU.” Goldman Sachs and J.P. Morgan will be the lead book runners, with Baird, Bank of America, and Wells Fargo also involved. 

Atmus’ current CEO, Steph Disher, will continue at the helm, while the parent company will retain control after the deal is done, per its prospectus. 

The firm sells first-fit and aftermarket filtration products for various industrial use cases. This includes filters for on-highway commercial vehicles as well as off-highway power generators used in agriculture, construction, mining, and other sectors.  

Atmus generated $170 million in profit from $1.6 billion in revenue in 2022. The firm has long-standing client relationships with industry-leading original equipment manufacturer (OEM) clients, including Daimler, Volvo, and Komatsu. It has been selling to these and other clients for over a decade. It also boasts a strong presence in global markets, with about half its revenue being generated from 2022 coming from outside North America. 

Atmus remains undecided on distributions, saying it has “not yet determined the extent to which we will pay any dividends.” Investors should note its parent company Cummins has historically paid a relatively high dividend yield, fluctuating between 1.5 – 4% over the past decade. 

Atmus’ three largest customers are Cummins, PACCAR, and the Traton Group, each making up roughly 19%, 16%, and 12% of the firms’ 2022 net sales, respectively. It notes that this level of customer concentration may be a risk factor to its profitability. While it enjoys a “preferred supplier relationship” with Cummins, it must now partake in competitive bids with other suppliers to win its contracts, meaning there is no iron-clad guarantee of ongoing customer orders, even from its parent company. The same goes for PACCAR, Traton, and other customers.

Atmus also has one joint venture (JV) in China and two in India, through which it holds half the economic interest. These generated $41 million in equity, royalty and interest income in 2020, $32 million in 2021, and $28 million last year. As Atmus lacks unilateral control of these JVs, the actions or inactions of these emerging market investees could impact a substantial portion of its net income and cash flow.

Assuming Atmus retains its client base and income streams from its JVs, it stands to profit from its strong position in an expanding industry. According to Persistence Industry Research’s most recent market estimate, global trade in industrial engines is worth around US$175 billion this year. The th market is expected to grow by a compound annual growth rate of 6% over the next decade to US$320 billion in 2033.

Investors who see promise in this profitable carbon-capture spin-off managed by an engine-making veteran will want to keep an eye out for this incoming deal. 

This article was produced and syndicated by Wealth of Geeks.