Gates Industrial Reports First-Quarter 2019 Results
DENVER, May 7, 2019 /PRNewswire/ --
First-Quarter 2019 Highlights
-- Net sales of $804.9 million compared to the prior-year period of $852.0
million.
-- Net income attributable to shareholders of $613.7 million, or $2.08 per
diluted share, compared to prior-year period of $24.2 million, or $0.09
per diluted share.
-- Adjusted Net Income of $82.4 million, or $0.28 per diluted share.
-- First-quarter Adjusted EBITDA of $165.5 million and Adjusted EBITDA
margin of 20.6%.
Gates Industrial Corporation plc (NYSE:GTES), a leading global provider of application-specific fluid power and power transmission solutions, today reported results for the first quarter ended March 30, 2019.
Ivo Jurek, Gates Industrial's Chief Executive Officer, commented, "The first quarter started weaker than we anticipated as we faced the continuation of challenging market conditions in Europe and China. In addition, despite reasonably stable end user demand for our products, we were impacted by destocking in our replacement channels in Europe and, most notably, North America. The slower conditions impacted our core growth and margins. Operationally, we took actions in the quarter to align our production and inventory levels with the current environment."
Jurek continued, "While we navigate through this more difficult environment, we are moderating our full-year expectations. We expect destocking to persist through the first half of the year and some of the regional market weakness, particularly in Europe, to continue later into the year. We anticipate a return to more typical performance in the second half of the year. We are focused on stepping up productivity actions and have initiated our previously announced footprint optimization initiatives. Despite the near-term challenges, we remain confident in our ability to deliver on our long-term objectives of developing innovative new products, driving organic revenue growth, expanding our profitability and generating significant free cash flow."
First-Quarter Financial Results
First-quarter net sales of $804.9 million were lower compared to the prior-year quarter net sales of $852.0 million, driven primarily by automotive first-fit weakness in China and Europe. The Company also experienced destocking in the replacement channel business, primarily in North America and, to a lesser degree, Europe. Regionally, South America and East Asia & India contributed single-digit growth. Recent acquisitions added 0.7% to net sales during the period, which were offset by a 4.1% negative impact from foreign currency.
Net income attributable to shareholders in the first quarter was $613.7 million, or $2.08 per diluted share, compared to $24.2 million, or $0.09 per diluted share, in the prior-year period. The significant increase was a result of a one-time, non-cash net tax benefit related primarily to the release of certain valuation allowances. Adjusted Net Income, which excludes this one-time net tax benefit as well as amortization of certain intangibles, transaction-related expenses and foreign currency financing gains and losses, was $82.4 million, or $0.28 per diluted share, compared to $71.6 million, or $0.25 per diluted share, in the prior-year period. The diluted weighted average number of shares outstanding in the first quarter of 2019 was 294,661,913, compared to 284,304,449 in the first quarter of 2018.
First-quarter Adjusted EBITDA was $165.5 million, or 20.6% of net sales, compared to $183.9 million, or 21.6% of net sales in the prior-year quarter. The Company maintained a positive price/cost position in the quarter, which was offset by the negative impact of foreign-currency translation and lower volumes.
Power Transmission Segment Results
Three months ended
(USD in millions) March 30, 2019 March 31, 2018 % Change % Core Change
Net sales $499.5 $546.0 (8.5%) (3.7)%
---
Adjusted EBITDA $109.9 $125.3 (12.3%)
---
Adjusted EBITDA
margin 22.0% 22.9%
(90 bps)
---
Depreciation &
amortization (1) $16.4 $15.5 +5.8%
---
Amort. of
intangibles from
acq. of Gates $18.4 $19.6 (6.1%)
---
(1) Excludes the amortization of
intangible assets arising from
the 2014 acquisition of Gates.
Power Transmission net sales decreased to $499.5 million in the first quarter, reflecting core revenue decline of 3.7% and a foreign currency headwind of 4.8%. Core revenue growth in industrial end markets was offset by a decline in the Company's automotive business, primarily a result of regional market slowdowns in China and Europe, as well as destocking in the replacement channel.
Adjusted EBITDA declined 12.3% over the prior-year quarter, and Adjusted EBITDA margin dropped by 90 basis points, primarily driven by lower volumes and unfavorable movements in average currency exchange rates.
Fluid Power Segment Results
Three months ended
(USD in millions) March 30, 2019 March 31, 2018 % Change % Core Change
Net sales $305.4 $306.0 (0.2%) +0.8%
---
Adjusted EBITDA $55.6 $58.6 (5.1%)
---
Adjusted EBITDA
margin 18.2% 19.2%
(100 bps)
---
Adjusted EBITDA
margin,
excluding
acquisitions 18.0% 19.2%
(120 bps)
---
Depreciation &
amortization (1) $10.0 $8.9 +12.4%
---
Amort. of
intangibles from
acq. of Gates $11.3 $11.0 +2.7%
---
(1) Excludes the amortization of
intangible assets arising from
the 2014 acquisition of Gates.
Fluid Power net sales were $305.4 million in the first quarter, compared to $306.0 million in the first quarter of 2018. Sales in the first quarter of 2019 reflect incremental core revenue growth of 0.8% and a 1.8% contribution from recent acquisitions, offset by unfavorable foreign currency effects of 2.8%. The core revenue growth was driven by regional double-digit growth in South America and China, as well as strong growth in the General Industrial and Oil & Gas end markets, offset by a decline in the Agriculture end market and the impact of destocking.
Excluding acquisitions, Adjusted EBITDA margin decreased 120 basis points over the prior-year quarter, driven largely by costs associated with ramping up the Company's new manufacturing facilities and increased investment in commercial capabilities.
Liquidity and Capital Resources
During the first quarter of 2019, the Company used $47.7 million of cash from operations. First-quarter capital expenditures decreased by $37.6 million to $22.9 million, driven primarily by the increased level of expenditures in the prior-year period related to our investment in new manufacturing capacity in the Fluid Power segment.
As of March 30, 2019, the Company had total cash of $333.6 million and total outstanding debt of $3.0 billion, representing a net leverage ratio of 3.6 times last twelve months ("LTM") Adjusted EBITDA.
2019 Outlook
The Company is updating its full-year 2019 outlook for core revenue growth, Adjusted EBITDA and capital expenditures. Core revenue growth is now expected to be in the range of 0% to 2%. Adjusted EBITDA is expected to be in the range of $740 million to $760 million and the Company expects total capital expenditures of approximately $140 million. Free cash flow conversion is expected to be greater than 80% of Adjusted Net Income, with net leverage at approximately 3.0 times Adjusted EBITDA at year end, absent M&A activity.
Conference Call and Webcast
Gates Industrial Corporation plc will host a conference call today at 5:00 pm ET to discuss the Company's financial results. The conference call can be accessed by dialing (866) 393-4306 (domestic) or +1 (734) 385-2616 (international) and requesting the Gates Industrial Corporation First Quarter 2019 Earnings Conference Call. A webcast of the conference call and accompanying presentation materials can be accessed through Gates Industrial's website at investors.gates.com. An audio replay of the conference call can be accessed by dialing (855) 859-2056 (domestic) or +1 (404) 537-3406 (international), and providing the passcode 6838479, or by accessing Gates Industrial's website at investors.gates.com.
About Gates Industrial Corporation plc
Gates is a global manufacturer of innovative, highly engineered power transmission and fluid power solutions. Gates offers a broad portfolio of products to diverse replacement channel customers, and to original equipment ("first-fit") manufacturers as specified components. Gates participates in many sectors of the industrial and consumer markets. Our products play essential roles in a diverse range of applications across a wide variety of end markets ranging from harsh and hazardous industries such as agriculture, construction, manufacturing and energy, to everyday consumer applications such as printers, power washers, automatic doors and vacuum cleaners and virtually every form of transportation. Our products are sold in more than 120 countries across our four commercial regions: the Americas; Europe, Middle East & Africa; Greater China; and East Asia & India.
Forward-looking Statements
This press release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include all statements that are not historical facts. In some cases you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "predicts," "intends," "trends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Statements relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. These forward-looking statements are subject to risk, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Important factors could affect our results and could cause results to differ materially from those expressed in our forward-looking statements, including but not limited to the factors described in the section entitled "Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2018, as filed with the Securities and Exchange Commission (the "SEC") and the following: conditions in the global and regional economy and the major end markets we serve; economic, political and other risks associated with international operations; availability of raw materials at favorable prices and in sufficient quantities; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; competition in all areas of our business; pricing pressures from our customers; continued operation of our manufacturing facilities; our ability to forecast demand or meet significant increases in demand; exchange rate fluctuations; market acceptance of new product introductions and product innovations; our cost reduction actions; litigation, legal or regulatory proceedings brought against us; enforcement of our intellectual property rights; recalls, product liability claims or product warranties claims; anti-corruption laws and other laws governing our international operations; existing or new laws and regulations that may prohibit, restrict or burden the sale of aftermarket products; our decentralized information technology systems and any interruptions to our computer and IT systems; environmental, health and safety laws and regulations; insurance coverage of future losses we may incur; lives of products used in our end markets as well as the development of replacement markets; our ability to successfully integrate acquired businesses or assets; our reliance on senior management or key personnel; our ability to maintain and enhance our brand; work stoppages and other labor matters; our investments in joint ventures; liabilities with respect to businesses that we have divested in the past; terrorist acts, conflicts and wars; losses to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events; additional cash contributions we may be required to make to our defined benefit pension plans; the loss or financial instability of any significant customer or customers; changes in legislative, regulatory and legal developments involving taxes and other matters; our substantial leverage; and the significant influence of our majority shareholder, The Blackstone Group L.P., over us, as such factors may be updated from time to time in our periodic filings with the SEC. Investors are urged to consider carefully the disclosure in our filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this press release and in our periodic filings with the SEC. Gates undertakes no obligation to update or supplement any forward-looking statements as a result of new information, future events or otherwise, except as required by law.
Gates Industrial Corporation plc
Consolidated Statements of Operations
(Unaudited)
Three months ended
(USD in millions,
except per share
amounts) March 30, 2019 March 31, 2018
--- ---
Net sales $
804.9 $
852.0
Cost of sales 497.6 516.1
Gross profit 307.3 335.9
Selling, general and
administrative
expenses 200.5 208.6
Transaction-related
expenses 0.4 4.7
Impairment of
intangibles and
other assets - 0.3
Restructuring
expenses (income) 3.3 (0.3)
Other operating
expenses 2.9 4.3
Operating income
from continuing
operations 100.2 118.3
Interest expense 38.1 59.8
Other (income)
expenses (3.3) 17.4
Income from
continuing
operations before
taxes 65.4 41.1
Income tax (benefit)
expense (539.7) 11.7
Net income from
continuing
operations 605.1 29.4
Loss on disposal of
discontinued
operations, net of
tax, respectively,
of $0 and $0 0.3 0.1
Net income 604.8 29.3
Less: non-
controlling
interests (8.9) 5.1
Net income
attributable to
shareholders $
613.7 $
24.2
Earnings per share
Basic
Earnings per share
from continuing
operations $
2.12 $
0.09
Earnings per share
from discontinued
operations -
Earnings per share $
2.12 $
0.09
Diluted
Earnings per share
from continuing
operations $
2.08 $
0.09
Earnings per share
from discontinued
operations -
Earnings per share $
2.08 $
0.09
Gates Industrial Corporation plc
Consolidated Balance Sheets
(Unaudited)
(USD in millions,
except share numbers
and per share
amounts)
As of
As of
March 30, December 29,
2019 2018
--- ---
Assets
Current assets
Cash and cash
equivalents $
333.6 $
423.4
Trade accounts
receivable, net 790.5 742.3
Inventories 559.7 537.6
Taxes receivable 26.8 7.2
Prepaid expenses and
other assets 125.4 104.1
Total current assets 1,836.0 1,814.6
Non-current assets
Property, plant and
equipment, net 757.2 756.3
Goodwill 2,055.0 2,045.9
Pension surplus 54.4 52.6
Intangible assets, net 1,963.0 1,990.6
Right-of-use assets 120.9
Taxes receivable 27.9 27.9
Deferred income taxes 594.5 5.1
Other non-current
assets 28.9 29.6
Total assets $
7,437.8 $
6,722.6
Liabilities and equity
Current liabilities
Debt, current portion $
34.2 $
51.6
Trade accounts payable 399.8 424.0
Taxes payable 19.8 19.2
Accrued expenses and
other current
liabilities 187.9 184.2
Total current
liabilities 641.7 679.0
Non-current liabilities
Debt, less current
portion 2,928.9 2,953.4
Post-retirement
benefit obligations 154.4 155.9
Lease liabilities 108.5
Taxes payable 152.7 81.9
Deferred income taxes 409.5 439.5
Other non-current
liabilities 80.0 79.2
Total liabilities 4,475.7 4,388.9
Shareholders' equity
-Shares, par value of
$0.01 each -
authorized shares:
3,000,000,000;
outstanding shares:
290,043,420 (December
29, 2018: authorized
shares:
3,000,000,000;
outstanding shares:
289,847,574) 2.9 2.9
-Additional paid-in
capital 2,420.6 2,416.9
-Accumulated other
comprehensive loss (840.0) (854.3)
-Retained earnings 995.6 381.9
Total shareholders'
equity 2,579.1 1,947.4
Non-controlling
interests 383.0 386.3
Total equity 2,962.1 2,333.7
Total liabilities and
equity $
7,437.8 $
6,722.6
Gates Industrial Corporation plc
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
(USD in millions) March 30, 2019 March 31, 2018
--- ---
Cash flows from operating activities
Net income $
604.8 $
29.3
Adjustments to reconcile net income to net
cash used in operations:
Depreciation and amortization 56.1 55.0
Non-cash currency transaction
(gain) loss on net debt and
hedging instruments (13.6) 4.7
Premium paid on redemption of
long-term debt - 27.0
Other net non-cash financing
costs 13.1 6.4
Share-based compensation
expense 2.6 1.6
Decrease in post-employment
benefit obligations, net (2.4) (1.2)
Deferred income taxes (624.4) (11.1)
Other operating activities 2.4 0.8
Changes in operating assets and liabilities,
net of effects of acquisitions:
-Increase in accounts
receivable (46.1) (78.8)
-Increase in inventories (21.3) (29.0)
-(Decrease) increase in
accounts payable (25.8) 23.3
-Increase in prepaid expenses
and other assets (12.4) (1.3)
-Increase (decrease) in taxes
payable 51.7 (2.4)
-Decrease in other liabilities (32.4) (50.8)
Net cash used in operations (47.7) (26.5)
Cash flows from investing activities
Purchases of property, plant
and equipment (21.3) (55.9)
Purchases of intangible assets (1.6) (4.6)
Net cash paid under corporate-
owned life insurance policies (8.8) (8.0)
Other investing activities - (0.9)
Net cash used in investing
activities (31.7) (69.4)
Cash flows from financing activities
Issue of shares, net of
underwriting costs 1.2 799.1
Other offering costs - (3.2)
Payments of long-term debt (12.7) (920.1)
Premium paid on redemption of
long-term debt - (27.0)
Dividends paid to non-
controlling interests (1.8)
Other financing activities 0.2 6.2
Net cash used in financing
activities (13.1) (145.0)
Effect of exchange rate
changes on cash and cash
equivalents and restricted
cash 2.8 5.1
Net decrease in cash and cash
equivalents and restricted
cash (89.7) (235.8)
Cash and cash equivalents and
restricted cash at the
beginning of the period 424.6 566.0
Cash and cash equivalents and
restricted cash at the end of
the period $
334.9 $
330.2
Supplemental schedule of cash flow
information
Interest paid, net of amount
capitalized $
51.4 $
73.4
Income taxes paid, net $
33.0 $
25.5
Accrued capital expenditures $
0.4 $
2.6
Accrued deferred offering
costs
$ $
5.1
Non-GAAP Financial Statements
This press release includes certain non-GAAP financial measures, which management believes are useful to investors, securities analysts and other interested parties. Management uses Adjusted EBITDA as its key profitability measure. This is a non-GAAP measure that represents EBITDA before certain items that impact comparison of the performance of our business either period-over-period or with other businesses. We use Adjusted EBITDA as our measure of segment profitability to assess the performance of our businesses, and it is used for total Gates as well because we believe it is important to consider our profitability on a basis that is consistent with that of our operating segments.
Management uses Adjusted Net Income as an additional measure of profitability. Adjusted Net Income is a non-GAAP measure that represents net income attributable to shareholders before certain items that impact comparison of the performance of our business, either period-over-period or with other businesses.
Core revenue growth is a non-GAAP measure that represents net sales for the period excluding the impacts of movements in foreign currency rates and the first-year impacts of acquisitions and disposals. We present core revenue growth because it allows for a meaningful comparison of year-over-year performance without the volatility caused by foreign currency gains or losses, or the incomparability that would be caused by the impact of an acquisition or disposal.
Management uses Free Cash Flow to measure cash generation and liquidity. Free Cash Flow is a non-GAAP measure that represents cash provided by (used in) operations less capital expenditures. Free Cash Flow Conversion is a measure of Free Cash Flow for the preceding twelve months expressed as a percentage of Adjusted Net Income for the same period. We use this metric as a measure of the success of our business in converting Adjusted Net Income into cash.
These non-GAAP financial measures should be considered only as supplemental to, and not as superior to, financial measures prepared in accordance with GAAP. Please see below for a reconciliation of non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP. Because GAAP financial measures on a forward-looking basis are not accessible, and reconciling information is not available without unreasonable effort, we have not provided reconciliations for forward-looking non-GAAP measures. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results.
Gates Industrial Corporation plc
Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA
(Unaudited)
Three months ended
(USD in millions) March 30, 2019 March 31, 2018
--- ---
Net income from
continuing operations $
605.1 $
29.4
Adjusted for:
Income tax (benefit)
expense (539.7) 11.7
Net interest and other
expenses 34.8 77.2
Depreciation and
amortization 56.1 55.0
Transaction-related
expenses (1) 0.4 4.7
Impairment of intangibles
and other assets - 0.3
Restructuring expenses
(income) (2) 3.3 (0.3)
Share-based compensation 2.6 1.6
Sponsor fees (included in
other operating
expenses) (3) 1.8 1.9
Other operating expenses 1.1 2.4
Adjusted EBITDA $
165.5 $
183.9
(1) Transaction-related expenses relate
primarily to advisory fees
recognized in respect of our initial
public offering, the acquisition of
businesses and costs related to
other corporate transactions such as
debt refinancings.
(2) Restructuring expenses (income)
represents costs in relation to
specifically defined restructuring
projects and includes costs related
to decisions to close lines of
business, facility closures and
relocations, strategic
organizational rationalizations and
related non-recurring employee
severance.
(3) Sponsor fees relate to fees paid to
our private equity sponsor for
monitoring, advisory and consulting
services.
Gates Industrial Corporation plc
Reconciliation of Net Income Attributable to Shareholders to Adjusted Net Income
(Unaudited)
Three months ended
(USD in millions, except
share numbers and per
share amounts) March 30, March 31,
2019 2018
--- ---
Net income attributable
to shareholders $
613.7 $
24.2
Adjusted for:
Loss on disposal of
discontinued operations 0.3 0.1
Amortization of
intangible assets
arising from the 2014
acquisition of Gates 29.7 30.6
Transaction-related
expenses (1) 0.4 4.7
Impairment of intangibles
and other assets - 0.3
Restructuring expenses
(income) (2) 3.3 (0.3)
Share-based compensation 2.6 1.6
Sponsor fees (included in
other operating
expenses) (3) 1.8 1.9
Adjustments relating to
post-retirement
benefits (1.3) 1.0
Premium on redemption of
long-term debt - 27.0
Financing-related FX
gains (4) (0.9) (9.4)
One-time net tax benefit
(5) (541.3)
One-time non-
controlling interest
adjustment (15.0)
Other adjustments (0.9) (0.4)
Estimated tax effect of
the above adjustments (10.0) (9.7)
Adjusted Net Income $
82.4 $
71.6
Diluted weighted average
number of shares
outstanding 294,661,913 284,304,449
Adjusted Net Income per
diluted share $
0.28 $
0.25
(1) Transaction-related expenses relate
primarily to advisory fees recognized
in respect of our initial public
offering, the acquisition of
businesses and costs related to other
corporate transactions such as debt
refinancings.
(2) Restructuring expenses (income)
represents costs in relation to
specifically defined restructuring
projects and includes costs related
to decisions to close lines of
business, facility closures and
relocations, strategic organizational
rationalizations and related non-
recurring employee severance.
(3) Sponsor fees relate to fees paid to
our private equity sponsor for
monitoring, advisory and consulting
services.
(4) Financing-related FX gains relate
primarily to net foreign currency
remeasurement gains on the unhedged
portion of Gates' Euro-denominated
debt, and, in the three months ended
March 31, 2018, a gain of $5.8
million on a currency derivative
entered into as part of the
redemption of our Euro Senior Notes.
(5) During the three months ended March
30, 2019, we recognized a one-time,
non-cash tax benefit related to the
release of valuation allowances on
net operating loss carryforwards in
Europe. This benefit was offset
partially by certain indirectly
related unrecognized tax benefits.
Gates Industrial Corporation plc
Reconciliation of Net Sales to Core Revenue Growth
(Unaudited)
(USD in
millions)
Power Fluid Power
Total
Transmission
---
Net sales(1)
for the three
months ended
March 30, 2019 $
499.5 $
305.4 $
804.9
Impact on net
sales of
movements in
currency rates 26.1 8.5 34.6
Impact on net
sales of
acquisitions - (5.6) (5.6)
Core revenue
for the three
months ended
March 30, 2019 $
525.6 $
308.3 $
833.9
Net sales for
the three
months ended
March 31, 2018 546.0 306.0 852.0
(Decrease)
increase in
net sales on a
core basis
(core revenue) $
(20.4) $
2.3 $
(18.1)
Core revenue (3.7) 0.8 (2.1)
growth (%) % %
%
(1) Throughout this document the terms "net
sales" and "revenue" are used
interchangeably in reference to the
GAAP measure "net sales."
Gates Industrial Corporation plc
Reconciliation of Free Cash Flow and Free Cash Flow Conversion
(Unaudited)
Three months ended
Twelve months ended
(USD in millions) March 30, March 31, March 30, March 31,
2019 2018 2019 2018
--- ---
Cash provided by
operations $
(47.7) $
(26.5) $
292.3 $
305.9
Capital
expenditures (1) (22.9) (60.5) (145.1) (157.7)
Free Cash Flow $
(70.6) $
(87.0) $
147.2 $
148.2
(1) Capital expenditures represent
purchases of property, plant
and equipment and purchases of
intangible assets.
Twelve months ended
(USD in millions) March 30, March 31,
2019 2018
---
Free Cash Flow $
147.2 $
148.2
Adjusted Net Income 390.0 234.4
Free Cash Flow Conversion 37.7 63.2
% %
Contact
Bill Waelke
(303) 744-4887
investorrelations@gates.com
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SOURCE Gates Industrial Corporation plc
