Gates Industrial Reports Second-Quarter 2019 Results

DENVER, Aug. 6, 2019 /PRNewswire/ --

Second-Quarter 2019 Highlights

• Net sales of $809.9 million compared to prior-year period of $875.1 million.
• Net income attributable to shareholders of $21.5 million, or $0.07 per diluted share, compared to prior-year period of $85.6 million, or $0.29 per diluted share.
• Adjusted Net Income of $75.2 million, or $0.26 per diluted share.
• Adjusted EBITDA of $165.4 million and Adjusted EBITDA margin of 20.4%.

Gates Industrial Corporation plc (NYSE:GTES), a leading global provider of application-specific fluid power and power transmission solutions, today reported results for the second quarter ended June 29, 2019.

Ivo Jurek, Gates Industrial's Chief Executive Officer, commented, "Our second-quarter results were adversely affected by a noticeable change in the demand environment, particularly in industrial end markets, which decelerated as the quarter progressed.  The decline in revenue from the prior year was largely attributable to broad weakness in Europe and China, due, in part, to persisting economic and trade uncertainty, as well as weakening industrial activity in North America.  These broader macroeconomic conditions are resulting in a heightened level of caution across many of our customers and channel partners.  As a result of the decelerating volumes, our margins were pressured as we continue to right-size our manufacturing costs and reduce inventory levels."

Jurek continued, "Given the change in the end market backdrop during the quarter and the primarily short-cycle nature of our business, we have reset our full-year outlook to reflect the current conditions in our end markets.  We continue to manage the business with a long-term perspective, but are taking actions to navigate the challenges presented by the current environment.  We are focused on the items we can control, and have accelerated and expanded our previously announced restructuring program.  The recently completed investment in our Fluid Power footprint will allow us to more efficiently consolidate some of our sub-scale production sites.  This investment, along with the investment we've made in new product development, will be a margin headwind in the current market conditions, but positions us well for long-term growth.  We believe that we have an appropriate action plan in place and are confident in our ability to execute through the cycle while generating a high level of free cash flow."

Second-Quarter Financial Results

Second-quarter net sales of $809.9 million decreased 7.5% over the prior-year quarter net sales of $875.1 million, including a 4.8% core revenue decline, which was driven by the challenging conditions that developed across our industrial end markets, as well as persisting adverse automotive first-fit market conditions in China and Europe.  Net sales included an unfavorable foreign currency impact of 2.9% and a 0.2% benefit from acquisitions.

Net income attributable to shareholders in the second quarter was $21.5 million, or $0.07 per diluted share, compared to $85.6 million, or $0.29 per diluted share, in the prior-year period.  Adjusted Net Income, which primarily excludes amortization of certain intangibles, transaction-related expenses and foreign currency financing gains and losses, was $75.2 million, or $0.26 per diluted share, compared to $112.1 million, or $0.38 per diluted share, in the prior-year period.  The diluted weighted average number of shares outstanding in the second quarter of 2019 was 291,802,754 compared to 297,385,570 in the second quarter of 2018.

Second-quarter Adjusted EBITDA was $165.4 million, or 20.4% of net sales, compared to $204.9 million, or 23.4% of net sales in the prior-year quarter.  Excluding acquisitions which were not included in the prior-year period, Adjusted EBITDA margin contracted by approximately 290 basis points to 20.5% in the second quarter. The Company maintained a positive price/cost position in the quarter, which was offset by lower production volumes and the negative impact of foreign currency translation.

Power Transmission Segment Results

Power Transmission net sales decreased 8.8% to $501.5 million in the second quarter, reflecting a core revenue decline of 5.3% and an additional 3.5% of unfavorable foreign currency effects.  The Company continued to observe strong replacement channel sales growth in emerging markets, with the highest global growth rate in China. Additionally, Power Transmission net sales were impacted by declines in the agriculture and general industrial end markets. Net sales in emerging markets experienced a greater decline than in developed markets, due primarily to automotive first-fit exposure.

Adjusted EBITDA decreased 20.8% over the prior-year quarter, while Adjusted EBITDA margin contracted by 320 basis points, attributable to the decline in volumes and related manufacturing inefficiencies.

Fluid Power Segment Results

Fluid Power net sales decreased 5.3% to $308.4 million in the second quarter, reflecting a core revenue decline of 3.9% and unfavorable foreign currency effects of 1.9%, partially offset by incremental net sales from recent acquisitions of 0.5%.  The core revenue decline was driven by weakening across industrial end markets, particularly in the agriculture end market. The Company did see low-single digit growth in emerging markets during the quarter, a result of growth in the oil and gas and general industrial end markets.

Excluding acquisitions, Adjusted EBITDA margin declined 250 basis points over the prior-year quarter, driven largely by lower volumes and associated manufacturing inefficiencies, as well as the investments we've made in our footprint and product development capabilities.

Liquidity and Capital Resources

During the second quarter of 2019, the Company generated $111.5 million of cash from operations, impacted by lower Adjusted EBITDA performance and higher working capital.  With the manufacturing footprint investment completed at the end of 2018, second-quarter capital expenditures declined to $19.2 million, the largest portion of which represented maintenance expenditures.

As of June 29, 2019, the Company had total cash of $411.0 million and total outstanding debt of $3.0 billion, representing a flat net leverage ratio of 3.7 times last twelve months ("LTM") Adjusted EBITDA compared to the second quarter of 2018.

2019 Outlook

To reflect the current market conditions, the Company is resetting its full-year 2019 outlook.  Core revenue is now expected to decline in the range of 5.0% to 7.0%, with Adjusted EBITDA in the range of $590 million to $630 million.  The Company expects total capital expenditures of approximately $110 million and Free Cash Flow Conversion of greater than 80% of Adjusted Net Income.

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 Second 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 8788556, 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 that reflect our current views with respect to, among other things, our operations and financial performance. 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. Forward-looking statements include statements relating to our estimated and projected earnings, margins, costs, expenditures, restructuring program, cash flows, liquidity, de-leveraging plans, growth rates and financial results. 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 in or implied by our forward-looking statements. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those expressed in or implied by 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"), which include 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, including exchange rate fluctuations; 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; 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 Inc., over us, as such factors may be updated from time to time in the Company's 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 other periodic filings. 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.

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 total profitability on a basis that is consistent with that of our operating segments. Adjusted EBITDA Margin is Adjusted EBITDA for a particular period expressed as a percentage of revenues for that period.

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 net cash provided by 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 historical 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.

Contact
Bill Waelke
(303) 744-4887
[email protected]

SOURCE Gates Industrial Corporation plc