Atmus Filtration Technologies Inc. 2026 Q2 Earnings Call

Good morning, everyone, and welcome to the Atmus Filtration Technologies second quarter 2026 earnings call. On the call today, we have Steph Disher, Chief Executive Officer, and Jack Kienzler, Chief Financial Officer. Certain information presented today will be forward-looking and involve risks and uncertainties that could materially affect expected results. Please refer to the slides on our website for the disclosure of the risks that could affect our results and for a reconciliation of any non-GAAP measures referred to on this call. For additional information, please see our SEC filings and the investor relations pages available on our website at atmus.com. I'll turn the call over to Steph.

Thank you, Todd. Good morning, everyone. Today, I will review our second quarter results and share details of our progress executing our four-pillar growth strategy. I will also provide updates to our outlook for 2026. Jack will speak to our financial results and segment performance. I am pleased to share that we achieved record sales in the second quarter and delivered strong results among our key metrics, including adjusted EBITDA, free cash flow, and EPS. I want to thank our global team for their dedication to our customers and their efforts in delivering these impressive results. Let me provide you an update on the integration of Koch Filter, our first industrial filtration acquisition, which we closed earlier this year. Our team has made tremendous progress, and we have exited more than 95% of the Transition Service Agreement.

We expect all remaining integration activities to be completed during the third quarter. With the integration nearly complete, we are turning our attention to growth initiatives in our Industrial Solutions segment. We continue to see value creation opportunities from Koch Filter's deep industry experience, combined with our filtration capabilities and global footprint, which will provide ongoing benefits for all stakeholders. Let's turn to an update on our capital allocation strategy. Our strong cash generation provides us with balance sheet flexibility for both growing the business and returning capital to shareholders. With this balanced approach, we expect share repurchases to be $20 million-$40 million in 2026, aligned with our previous guide. Looking forward, we intend to allocate surplus cash towards paying down gross debt. This will position us for investing in future growth opportunities. Let's turn to our four-pillar growth strategy.

Our first pillar is to grow share in first fit. We continue to win with the winners by growing our long-term partnerships with leading global and regional OEMs across a broad range of applications. We are leaders in filtration science with our latest generation NanoNet N3 filtration media and advanced testing capabilities strategically located around the world. This allows us to expand our first-fit customer reach across a broad range of applications and provide advanced filtration solutions for OEMs. Our second pillar is focused on accelerating profitable growth in the aftermarket. Our global aftermarket consists of thousands of customers across many applications. We have dedicated teams located where our customers need us. We have developed a robust pipeline of opportunities and are working every day to bring our industry-leading Fleetguard and Koch Filter products to current and new customers. Our third pillar is focused on transforming our supply chain.

We have launched Lean the Atmus Way, our lean-based production system. The program includes implementation of standardized management systems and lean operating practices, which improves productivity and supports sustainable margin expansion. I want to recognize our team in Mexico for becoming the first Atmus site to achieve certification in Lean the Atmus Way. In addition, our focus on relentless improvement has allowed us to continue raising our delivery and on-shelf availability metrics to all-time highs through the Atmus-controlled distribution network. We have the right products for our customers when and where they need us. Our fourth pillar is to expand into industrial filtration markets. Following the acquisition of Koch Filter, we continue to review a robust pipeline of opportunities with a focus on industrial air to build a platform of scale by leveraging Koch Filter and creating value through targeted bolt-on acquisitions.

While our primary focus is industrial air, we remain opportunistic in evaluating industrial water and liquid filtration assets with the goal of identifying an anchor investment that can serve as the foundation as we build out our broader industrial platform over time. We are focused on delivering long-term shareholder value through the disciplined development and execution of industrial filtration opportunities. Let's discuss our second quarter financial results. Sales were a record $528 million, compared to $454 million during the same period last year. An increase of 16.4%, driven by the acquisition of Koch Filter and strong performance in Power Solutions. Adjusted EBITDA was $109 million, or 20.7%, compared to $95 million, or 21% last year. Adjusted earnings per share was $0.82 in the second quarter of 2026, and adjusted free cash flow was $67 million.

Also during the second quarter, we returned $18 million of cash to shareholders through share buybacks and dividends. Let's turn to our outlook for the Power Solutions segment. In the aftermarket, we are starting to see signs of health in the overall freight market, including higher spot rates and increasing optimism for improved freight activity. We have yet to see a significant inflection, and therefore continue to expect the market to be relatively flat year-over-year. In our first fit market, the U.S. EPA has provided the industry with some regulatory clarity surrounding the implementation of 2027 emission standards. The agency has proposed allowing current engines to be sold into 2027 with a non-conformance penalty. While this is expected to ease some pre-buy pressure, customers have indicated a stronger second half, driven by improved market conditions and a cyclical recovery.

We are already seeing the benefits of this cyclical recovery in our 2Q results and have good visibility through the end of the year. We also expect continued market share gains in both aftermarket and first fit through our multi-channel distribution strategy, improved on-shelf availability, and winning with new and existing customers. For Power Solutions overall, we expect volume growth in a range of approximately flat to 2%, inclusive of global markets and share gains. Additionally, pricing is expected to add approximately 1.5%, and foreign exchange is expected to be a tailwind of approximately 2%. In total, we expect Power Solutions revenue to be in a range of $1.82 billion-$1.865 billion, which represents growth of approximately 4.5% at the midpoint. In our Industrial Solutions segment, we expect favorable market conditions and strong performance to continue, with total revenue to be in a range of $155 million-$165 million.

Taken together, we expect total company revenue to be in a range of $1.975 billion-$2.03 billion, an increase of approximately 13.5% at the midpoint. We are narrowing our full-year adjusted EBITDA guidance and now expect to be in a range of 19.75%-20.25%. Lastly, adjusted EPS is expected to be in a range of $2.85-$3. In summary, our team continues to successfully execute our four-pillar growth strategy and provide the protection our customers need and value most. I want to thank all Atmusonians for their strong performance in the first half. I remain confident in the ability of our team to continue to deliver for all our stakeholders. Now, I will turn the call over to Jack.

Thank you, Steph, and good morning, everyone. I also want to recognize our global team for delivering another quarter of strong financial performance, all while successfully navigating challenging market conditions. Sales in the second quarter were a record $528 million, compared to $454 million during the same period last year, an increase of 16.4%. Power Solutions delivered sales of $486 million, compared to $454 million in the prior year, an increase of 7%. The increase was primarily due to higher pricing of 3%, higher volumes of 2%, and favorable foreign exchange of 2%. Industrial Solutions sales were $42 million, resulting from the acquisition of Koch Filter. Gross margin for the second quarter was $154 million, or 29.2%, compared to $131 million, or 28.9%, in the second quarter of 2025.

The increase was primarily due to favorable pricing, incremental margin from the acquisition of Koch Filter, favorable foreign exchange, higher volumes, and the cessation of one-time separation costs. This was partially offset by higher materials and manufacturing costs. Selling, administrative, and research expenses for the second quarter were $62 million, compared to $57 million in the prior year. The increase was primarily due to people-related expenses and information technology consulting. Joint venture income was $8 million in the second quarter, flat compared to prior year. Strong performance in China offset weaker markets in India, which has been impacted by the Middle East conflict. Other income expense was unfavorable by $1 million, compared to favorable by $4 million in the second quarter of 2025. The increase in expense was primarily due to foreign exchange losses and a non-operating gain that did not repeat.

Excluded from the adjusted results are one-time costs related to the integration of Koch Filter, which for the full year is expected to be in the range of $3 million-$6 million. We also exclude intangible asset amortization resulting from the Koch Filter acquisition, which is expected to be in a range of $11 million-$13 million for 2026. Total enterprise adjusted EBITDA in the second quarter was $109 million, or 20.7%, compared to $95 million, or 21%, in the prior period. Segment adjusted EBITDA for the Power Solutions was $101 million or 20.8%, compared to $95 million or 21% last year. Industrial Solutions segment adjusted EBITDA was $8 million or 18.9%. Adjusted earnings per share was $0.82 compared to $0.75 last year. Adjusted free cash flow was $67 million this quarter, compared to $36 million in the prior year. Let's turn to our capital deployment strategy.

The combination of strong cash flow and continued robust adjusted EBITDA performance has resulted in an estimated net debt to adjusted EBITDA ratio of 1.9x for the trailing 12 months ended June 30th. We also invested $13 million in capital expenditures for continued growth. We returned $18 million to shareholders, consisting of $13 million in share repurchases and $5 million of dividends. As Steph highlighted, we will continue to strategically deploy capital through investment in growth and paying down debt to provide balance sheet flexibility. Our cash flow allows us to take this balanced approach for both growth opportunities and returning capital to shareholders. In closing, I want to thank and applaud all of our teams around the world for all of your hard work and dedication in delivering a strong first half of 2026. We will take your questions.