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Gates Industrial Reports Fourth-Quarter and Full-Year 2019 Results

DENVER , Feb. 4, 2020 /PRNewswire/ --

Gates Industrial Corporation

Fourth-Quarter 2019 Highlights

  • Net sales of $725.7 million compared to prior-year period of $792.1 million .
  • Net income attributable to shareholders of $19.4 million , or $0.07 per diluted share, compared to prior-year period of $75.6 million , or $0.26 per diluted share.
  • Adjusted Net Income of $56.5 million , or $0.19 per diluted share.
  • Adjusted EBITDA of $135.1 million and Adjusted EBITDA margin of 18.6%.
  • Net cash provided by operations of $203.7 million with capital expenditures of $24.6 million , resulting in free cash flow of $179.1 million and a conversion rate of 317% of Adjusted Net Income.

Full-Year 2019 Highlights

  • Net sales down 7.8% year-over-year to $3,087.1 million , representing a core revenue decline of 5.7%.
  • Net income attributable to shareholders of $690.1 million , or $2.37 per diluted share, compared to prior-year net income attributable to shareholders of $245.3 million , or $0.84 per diluted share.
  • Adjusted Net Income of $279.3 million , or $0.96 per diluted share.
  • Full-year Adjusted EBITDA of $611.0 million and Adjusted EBITDA margin of 19.8%.
  • Net cash provided by operations of $348.9 million with capital expenditures of $83.1 million , resulting in free cash flow of $265.8 million and a conversion rate of over 95% of Adjusted Net Income.
  • Initiating guidance for full-year 2020 core revenue growth, Adjusted EBITDA, capital expenditures and free cash flow conversion.

Gates Industrial Corporation plc (NYSE:GTES), a leading global provider of application-specific fluid power and power transmission solutions, today reported results for the fourth quarter and full year ended December 28, 2019.

Ivo Jurek , Gates Industrial's Chief Executive Officer, commented, "In the fourth quarter our teams stayed focused on execution. We delivered results in line with our expectations while managing through a difficult environment, as most of our global end markets experienced uncertainty and challenging demand conditions.  However, we did begin to see signs of improvement in certain key end markets and regions."

Jurek continued, "The challenges we faced in 2019 and actions we took in response, we believe, have improved the company and better positioned us for future success.  Our restructuring activities are progressing according to plan and will not only allow us to manufacture more efficiently, but also improve our flexibility to respond to fluctuations in demand.  We continued to fund our new product development and growth initiatives, which we believe positions us well for future growth, particularly as our end markets recover.  Despite the difficult environment, we generated a substantial amount of Free Cash Flow this year, at a conversion rate of 95% of Adjusted Net Income.  We are optimistic that the areas of improvement we began to see in the fourth quarter of 2019, in combination with the execution of our key growth initiatives, will continue in 2020 and look forward to delivering improved results."

Fourth-Quarter and Full-Year Financial Results

Fourth-quarter net sales of $725.7 million decreased 8.4% over the prior-year quarter net sales of $792.1 million , including a 7.6% core revenue decline, with growth in China offset by persisting weakness in our industrial end markets in Europe and North America.  Net sales included an unfavorable foreign currency impact of 0.8%.

Full-year net sales were $3,087 .1 million, a decrease of 7.8% over the prior year net sales of $3,347 .6 million. Core revenue declined 5.7%, which was driven by weakness across our end markets combined with inventory destocking in our replacement channels.  Despite destocking, net sales into replacement channels outperformed those into first-fit channels.  Regionally, emerging markets outperformed developed markets, most notably in replacement channels.

Net income attributable to shareholders in the fourth quarter was $19.4 million , or $0.07 per diluted share, compared to $75.6 million , or $0.26 per diluted share, in the prior-year period.  Adjusted Net Income, which primarily excludes amortization of certain intangibles, transaction-related expenses and financing-related foreign currency gains and losses, was $56.5 million , or $0.19 per diluted share, compared to $104.9 million , or $0.36 per diluted share, in the prior-year period.  The diluted weighted-average number of shares outstanding in the fourth quarter of 2019 was 291,649,100 compared to 294,701,563 in the fourth quarter of 2018.

Net income attributable to shareholders in 2019 was $690 .1 million, or $2.37 per diluted share, compared to $245 .3 million, or $0.84 per diluted share in 2018.  Adjusted Net Income for 2019 was $279 .3 million, or $0.96 per diluted share, compared to $379 .2 million, or $1.30 per diluted share in 2018.  The diluted weighted average number of shares outstanding in 2019 was 291,627,461 compared to 291,698,273 in 2018.

Fourth-quarter Adjusted EBITDA was $135.1 million , or 18.6% of net sales, compared to $185.8 million , or 23.5% of net sales in the prior-year quarter, representing Adjusted EBITDA margin contraction of 490 basis points. The Company maintained positive price/cost in the quarter, which was offset by lower production volumes and related inefficiencies.

Full-year 2019 Adjusted EBITDA was $611.0 million , or 19.8% of net sales, compared to $755.8 million , or 22.6% of net sales in 2018.  Full-year, Adjusted EBITDA margin was similarly impacted by lower production volumes and related inefficiencies.

Power Transmission Segment Results


For the three months ended





(USD in millions)

December 28, 2019


December 29, 2018


% Change


% Core Change

Net sales

$470.3


$490.7


(4.2%)


(3.4%)

Adjusted EBITDA

$97.4


$114.6


(15.0%)



Adjusted EBITDA margin

20.7%


23.4%


(270 bps)



Depreciation & amortization (1)

$14.0


$15.9


(11.9%)



Amort. of intangibles from acq. of Gates

$19.1


$18.3


+4.4%




For the year ended





(USD in millions)

December 28, 2019


December 29, 2018


% Change


% Core Change

Net sales

$1,945.7


$2,098.8


(7.3%)


(4.6%)

Adjusted EBITDA

$412.6


$492.2


(16.2%)



Adjusted EBITDA margin

21.2%


23.5%


(230 bps)



Depreciation & amortization (1)

$60.7


$61.3


(1.0%)



Amort. of intangibles from acq. of Gates

$74.5


$75.4


(1.2%)






(1)


Excludes the amortization of intangible assets arising from the 2014 acquisition of Gates.

Power Transmission net sales decreased 4.2% to $470.3 million in the fourth quarter, reflecting a core revenue decline of 3.4% and an additional 0.8% of unfavorable foreign currency effects.  The Company observed growth in automotive end markets, led by significant improvement in China and Europe compared to the prior quarter.  This growth was offset by declines in industrial end markets, with the larger impact being in developed markets relative to emerging markets.

Power Transmission net sales for the full-year 2019 period decreased 7.3% to $1,945.7 million , reflecting a core revenue decline of 4.6% and unfavorable foreign currency effects of 2.7%. The decline was primarily attributable to a decline in net sales into our automotive end markets, while net sales into industrial end markets were mostly flat compared to the prior-year period.

Fourth-quarter Adjusted EBITDA decreased 15.0% over the prior-year quarter, while Adjusted EBITDA margin contracted by 270 basis points. Full-year 2019 Adjusted EBITDA decreased 16.2% over 2018, while Adjusted EBITDA margin contracted by 230 basis points. Adjusted EBITDA in both periods was primarily impacted by the decline in volumes and related manufacturing inefficiencies.

Fluid Power Segment Results


For the three months ended





(USD in millions)

December 28, 2019


December 29, 2018


% Change


% Core Change

Net sales

$255.4


$301.4


(15.3%)


(14.5%)

Adjusted EBITDA

$37.7


$71.2


(47.1%)



Adjusted EBITDA margin

14.8%


23.6%


(880 bps)



Depreciation & amortization (1)

$11.4


$9.8


+16.3%



Amort. of intangibles from acq. of Gates

$10.3


$11.2


(8.0%)










For the year ended





(USD in millions)

December 28, 2019


December 29, 2018


% Change


% Core Change

Net sales

$1,141.4


$1,248.8


(8.6%)


(7.6%)

Adjusted EBITDA

$198.4


$263.6


(24.7%)



Adjusted EBITDA margin

17.4%


21.1%


(370 bps)



Depreciation & amortization (1)

$43.3


$36.9


+17.3%



Amort. of intangibles from acq. of Gates

$43.7


$44.9


(2.7%)






(1)


Excludes the amortization of intangible assets arising from the 2014 acquisition of Gates.

Fluid Power net sales decreased 15.3% to $255.4 million in the fourth quarter, reflecting a core revenue decline of 14.5% and unfavorable foreign currency effects of 0.8%.  The core revenue decline was driven by weakening across industrial end markets, particularly in the agriculture, construction and general industrial end markets. Core revenue growth in China and South America was offset by weakness in North America and Europe , resulting in emerging markets outperforming developed markets in the quarter.

Fluid Power net sales for the full-year 2019 period decreased 8.6% to $1,141.4 million , reflecting a core revenue decline of 7.6%, incremental net sales from acquisitions of 0.6% and unfavorable foreign currency effects of 1.6%. The core revenue decline was driven by weakness in industrial end markets, with the decline in North America more than offsetting growth in China and South America .

Fourth-quarter Adjusted EBITDA margin declined 880 basis points over the prior-year quarter, while full-year 2019 Adjusted EBITDA margin contracted by 370 basis points. Adjusted EBITDA in both periods was primarily impacted by lower production volumes and the associated manufacturing inefficiencies.

Liquidity and Capital Resources

During the fourth quarter of 2019, the Company generated $203.7 million of cash from operations, with the lower Adjusted EBITDA performance offset by lower working capital levels.  Fourth-quarter capital expenditures declined slightly to $24.6 million from $27.8 million in the prior-year period, the largest portion of which represented maintenance expenditures.

As of December 28, 2019, the Company had total cash of $635.3 million and total outstanding debt of $3.0 billion , representing a net leverage ratio of 3.8 times last twelve months' ("LTM") Adjusted EBITDA compared to 3.4 times in the fourth quarter of 2018.

2020 Outlook

The Company is introducing its full-year 2020 outlook, with core revenue expected to range from a decline of -1.0% to growth of 2.0%, and Adjusted EBITDA expected in the range of $610 million to $640 million . The Company expects total capital expenditures of approximately $100 million and Free Cash Flow Conversion to be 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 Fourth 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 7344847, 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  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," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. These statements include, but are not limited to, statements related to expectations regarding the performance of the Company's business, financial results, liquidity and capital resources, growth initiatives, the progression of restructuring activities, and the statements in the "2020 Outlook" section of this press release.  Such forward-looking statements are subject to various risks and uncertainties, including, among others, risks inherent to the manufacturing industry, macroeconomic factors beyond the Company's control, continued operation of our manufacturing facilities; our ability to forecast and meet demand; market acceptance of new products, and the significant influence of the Company's majority shareholders, investment funds affiliated with The Blackstone Group Inc. Additional factors that could cause the Company's results to differ materially from those described in the forward-looking statements can be found under the section entitled "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2018 , filed with the Securities and Exchange Commission ("SEC"), as such factors may be updated from time to time in the Company's periodic filings with the SEC, which are accessible on the SEC's website at  www.sec.gov . Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the Company's filings with the SEC. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Gates Industrial Corporation plc

Consolidated Statements of Operations

(Unaudited)



For the three months ended


For the year ended

(USD in millions, except per share amounts)

December 28, 2019


December 29, 2018


December 28, 2019


December 29, 2018

Net sales

$

725.7



$

792.1



$

3,087.1



$

3,347.6


Cost of sales

464.3



482.1



1,944.6



2,017.0


Gross profit

261.4



310.0



1,142.5



1,330.6


Selling, general and administrative expenses

186.9



184.7



777.3



805.8


Transaction-related expenses

1.9



0.5



2.6



6.7


Impairment of intangibles and other assets





0.7



0.6


Restructuring expenses

2.1



3.2



6.0



6.4


Other operating expenses

2.5



1.8



9.1



14.3


Operating income from continuing operations

68.0



119.8



346.8



496.8


Interest expense

43.3



36.1



157.8



175.9


Other (income) expenses

(2.6)



(0.1)



(9.8)



17.4


Income from continuing operations before taxes

27.3



83.8



198.8



303.5


Income tax expense (benefit)

1.9



1.4



(495.9)



31.8


Net income from continuing operations

25.4



82.4



694.7



271.7


(Income) loss on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0



(0.1)



0.6



0.6


Net income

25.4



82.5



694.1



271.1


Less: non-controlling interests

6.0



6.9



4.0



25.8


Net income attributable to shareholders

$

19.4



$

75.6



$

690.1



$

245.3










Earnings per share








Basic








Earnings per share from continuing operations

$

0.07



$

0.26



$

2.38



$

0.86


Earnings per share from discontinued operations








Earnings per share

$

0.07



$

0.26



$

2.38



$

0.86










Diluted








Earnings per share from continuing operations

$

0.07



$

0.26



$

2.37



$

0.84


Earnings per share from discontinued operations








Earnings per share

$

0.07



$

0.26



$

2.37



$

0.84


 

Gates Industrial Corporation plc

Consolidated Balance Sheets

(Unaudited)


(USD in millions, except share numbers and per share amounts)

As of
December 28, 
 2019


As of
December 29, 
 2018

Assets




Current assets




Cash and cash equivalents

$

635.3



$

423.4


Trade accounts receivable, net of allowances of $8.6 and $7.4

694.7



742.3


Inventories

475.1



537.6


Taxes receivable

22.1



7.2


Prepaid expenses and other assets

131.4



104.1


Total current assets

1,958.6



1,814.6


Non-current assets




Property, plant and equipment, net

727.9



756.3


Goodwill

2,060.5



2,045.9


Pension surplus

38.1



52.6


Intangible assets, net

1,876.0



1,990.6


Operating lease right-of-use assets

123.0




Taxes receivable

23.0



27.9


Deferred income taxes

587.1



5.1


Other non-current assets

17.1



29.6


Total assets

$

7,411.3



$

6,722.6


Liabilities and equity




Current liabilities




Debt, current portion

$

46.1



$

51.6


Trade accounts payable

374.7



424.0


Taxes payable

48.5



19.2


Accrued expenses and other current liabilities

188.8



184.2


Total current liabilities

658.1



679.0


Non-current liabilities




Debt, less current portion

2,912.3



2,953.4


Post-retirement benefit obligations

151.2



155.9


Lease liabilities

116.2




Taxes payable

108.8



81.9


Deferred income taxes

369.3



439.5


Other non-current liabilities

84.7



79.2


Total liabilities

4,400.6



4,388.9


Shareholders' equity




Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 290,157,299 (December 29, 2018: authorized shares: 3,000,000,000; outstanding shares: 289,847,574)

2.9



2.9


Additional paid-in capital

2,434.5



2,416.9


Accumulated other comprehensive loss

(858.4)



(854.3)


Retained earnings

1,072.0



381.9


Total shareholders' equity

2,651.0



1,947.4


Non-controlling interests

359.7



386.3


Total equity

3,010.7



2,333.7


Total liabilities and equity

$

7,411.3



$

6,722.6



 

...

Gates Industrial Corporation plc

Consolidated Statements of Cash Flows

(Unaudited)



For the year ended

(USD in millions)

December 28, 2019


December 29, 2018

Cash flows from operating activities




Net income

$

694.1



$

271.1


Adjustments to reconcile net income to net cash provided by operations:




Depreciation and amortization

222.2



218.5


Non-cash currency transaction gain on debt and hedging instruments

(16.8)



(45.5)


Premium paid on redemption of long-term debt



27.0


Other net non-cash financing costs

27.4



65.6


Share-based compensation expense

15.0



6.0


Decrease in post-employment benefit obligations, net

(9.4)



(4.6)


Deferred income taxes

(648.4)



(64.9)


Other operating activities

6.0



4.8


Changes in operating assets and liabilities, net of effects of acquisitions:




Decrease (increase) in accounts receivable

41.8



(49.6)


Decrease (increase) in inventories

65.1



(96.1)


(Decrease) increase in accounts payable

(48.2)



42.1


Increase in prepaid expenses and other assets

(2.6)



(27.5)


Increase (decrease) in taxes payable

46.2



(15.3)


Decrease in other liabilities

(43.5)