Gates Industrial Reports Second-Quarter 2023 Results

Power Transmission Segment Results

For the three months ended

(USD in millions)

July 1, 2023

July 2, 2022

% Change

% Core Change

Net sales

$573.9

$543.0

5.7 %

7.0 %

Adjusted EBITDA

$119.0

$102.4

16.2 %

Adjusted EBITDA margin

20.7 %

18.9 %

180 bps

For the six months ended

(USD in millions)

July 1, 2023

July 2, 2022

% Change

% Core Change

Net sales

$1,122.0

$1,098.6

2.1 %

5.1 %

Adjusted EBITDA

$226.7

$200.2

13.2 %

Adjusted EBITDA margin

20.2 %

18.2 %

200 bps

Fluid Power Segment Results

For the three months ended

(USD in millions)

July 1, 2023

July 2, 2022

% Change

% Core Change

Net sales

$362.4

$363.8

(0.4 %)

(0.8 %)

Adjusted EBITDA

$78.3

$77.7

0.8 %

Adjusted EBITDA margin

21.6 %

21.4 %

20 bps

For the six months ended

(USD in millions)

July 1, 2023

July 2, 2022

% Change

% Core Change

Net sales

$712.0

$701.6

1.5 %

2.1 %

Adjusted EBITDA

$145.1

$136.7

6.1 %

Adjusted EBITDA margin

20.4 %

19.5 %

90 bps

Prior 2023

Updated 2023

Core Revenue Growth

1 to 5%

0 to 2%

(2) %

Adjusted EBITDA

$700 to $750 Million

$710 to $740 Million

No Change

Adjusted EPS

$1.13 to $1.23

$1.18 to $1.24

Capital Expenditures

~$100 Million

<$100 Million

Down Slightly

100 %

100%+

Gates Industrial Corporation plc
Condensed Consolidated Statements of Operations
(Unaudited)

Three months ended

Six months ended

(USD in millions, except per share amounts)

July 1,
2023

July 2,
2022

July 1,
2023

July 2,
2022

Net sales

$                936.3

$                906.8

$            1,834.0

$            1,800.2

Cost of sales

583.6

580.6

1,156.2

1,169.1

Gross profit

352.7

326.2

677.8

631.1

Selling, general and administrative expenses

220.7

209.1

452.8

444.3

Transaction-related expenses

0.6

0.5

0.8

1.3

Asset impairments

—

0.6

—

0.6

Restructuring expenses

2.2

3.2

7.7

3.7

Other operating expenses

0.1

0.1

0.1

0.1

Operating income from continuing operations

129.1

112.7

216.4

181.1

Interest expense

44.5

33.0

85.3

65.6

Other expenses

3.7

8.1

4.0

8.7

Income from continuing operations before taxes

80.9

71.6

127.1

106.8

Income tax expense

9.6

12.3

24.9

10.1

Net income from continuing operations

71.3

59.3

102.2

96.7

Loss on disposal of discontinued operations

0.1

0.2

0.4

0.3

Net income

71.2

59.1

101.8

96.4

Less: non-controlling interests

6.3

6.0

10.5

12.4

Net income attributable to shareholders

$                  64.9

$                  53.1

$                  91.3

$                  84.0

Earnings per share

Basic

Earnings per share from continuing operations

$                  0.24

$                  0.19

$                  0.33

$                  0.29

Earnings per share from discontinued operations

—

—

—

—

Earnings per share

$                  0.24

$                  0.19

$                  0.33

$                  0.29

Diluted

Earnings per share from continuing operations

$                  0.23

$                  0.19

$                  0.32

$                  0.29

Earnings per share from discontinued operations

—

—

—

—

Earnings per share

$                  0.23

$                  0.19

$                  0.32

$                  0.29

Gates Industrial Corporation plc
Condensed Consolidated Balance Sheets
(Unaudited)

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

As of
July 1, 2023

As of
December 31, 2022

Assets

Current assets

Cash and cash equivalents

$                565.0

$                578.4

Trade accounts receivable, net

874.8

808.6

Inventories

644.4

656.2

Taxes receivable

39.8

13.0

Prepaid expenses and other assets

250.4

221.2

Total current assets

2,374.4

2,277.4

Non-current assets

Property, plant and equipment, net

633.8

637.5

Goodwill

2,018.0

1,981.1

Pension surplus

10.1

10.1

Intangible assets, net

1,438.5

1,490.4

Right-of-use assets

126.2

132.2

Taxes receivable

15.1

15.1

Deferred income taxes

618.4

600.3

Other non-current assets

42.4

47.5

Total assets

$            7,276.9

$            7,191.6

Liabilities and equity

Current liabilities

Debt, current portion

$                  36.7

$                  36.6

Trade accounts payable

470.7

469.6

Taxes payable

52.5

23.5

Accrued expenses and other current liabilities

238.3

222.6

Total current liabilities

798.2

752.3

Non-current liabilities

Debt, less current portion

2,520.6

2,426.4

Post-retirement benefit obligations

74.2

76.2

Lease liabilities

117.3

121.9

Taxes payable

77.3

79.5

Deferred income taxes

176.5

192.0

Other non-current liabilities

121.8

99.7

Total liabilities

3,885.9

3,748.0

Shareholders' equity

—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares:
263,685,743 (December 31, 2022: authorized shares: 3,000,000,000; outstanding shares:
282,578,917)

2.6

2.8

—Additional paid-in capital

2,573.1

2,542.1

—Accumulated other comprehensive loss

(825.9)

(917.8)

—Retained earnings

1,320.6

1,482.9

Total shareholders' equity

3,070.4

3,110.0

Non-controlling interests

320.6

333.6

Total equity

3,391.0

3,443.6

Total liabilities and equity

$            7,276.9

$            7,191.6

Gates Industrial Corporation plc
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Six months ended

(USD in millions)

July 1, 2023

July 2, 2022

Cash flows from operating activities

Net income

$                101.8

$                  96.4

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

108.5

110.9

Foreign exchange and other non-cash financing expenses

20.5

25.1

Share-based compensation expense

16.3

27.6

Decrease in post-employment benefit obligations, net

(5.1)

(7.9)

Deferred income taxes

(22.3)

(30.8)

Asset impairments

—

0.9

Other operating activities

3.5

4.3

Changes in operating assets and liabilities:

—Increase in accounts receivable

(66.8)

(153.5)

—Decrease (increase) in inventories

23.0

(40.3)

—Decrease in accounts payable

(2.1)

(5.7)

—Decrease (increase) in prepaid expenses and other assets

7.6

(38.0)

—Decrease in taxes payable

(0.8)

(27.8)

—Decrease in other liabilities

(0.2)

(43.0)

Net cash provided by (used in) operating activities

183.9

(81.8)

Cash flows from investing activities

Purchases of property, plant and equipment

(24.4)

(34.9)

Purchases of intangible assets

(5.4)

(3.2)

Cash paid under corporate-owned life insurance policies

(17.0)

(10.3)

Cash received under corporate-owned life insurance policies

5.3

4.6

Proceeds from the sale of property, plant and equipment

0.4

—

Other investing activities

—

1.2

Net cash used in investing activities

(41.1)

(42.6)

Cash flows from financing activities

Issuance of shares

16.7

13.9

Buy-back of shares

(251.7)

(175.8)

Proceeds from long-term debt

100.0

70.0

Payments of long-term debt

(9.8)

(10.3)

Debt issuance costs paid

(0.3)

(0.3)

Dividends paid to non-controlling interests

—

(14.5)

Other financing activities

(15.3)

(10.3)

Net cash used in financing activities

(160.4)

(127.3)

Effect of exchange rate changes on cash and cash equivalents and restricted cash

4.4

(12.9)

Net decrease in cash and cash equivalents and restricted cash

(13.2)

(264.6)

Cash and cash equivalents and restricted cash at the beginning of the period

581.4

660.9

Cash and cash equivalents and restricted cash at the end of the period

$                568.2

$                396.3

Supplemental schedule of cash flow information

Interest paid

$                  76.6

$                  57.4

Income taxes paid

$                  48.0

$                  68.7

Accrued capital expenditures

$                    1.6

$                    2.5

Gates Industrial Corporation plc
Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA
(Unaudited)

Three months ended

Six months ended

(USD in millions)

July 1,
2023

July 2,
2022

July 1,
2023

July 2,
2022

Net income from continuing operations

$               71.3

$               59.3

$            102.2

$               96.7

Adjusted for:

Income tax expense

9.6

12.3

24.9

10.1

Net interest and other expenses

48.2

41.1

89.3

74.3

Depreciation and amortization

54.0

55.8

108.5

110.9

Transaction-related expenses ⁽¹⁾

0.6

0.5

0.8

1.3

Asset impairments

—

0.6

—

0.6

Restructuring expenses ⁽²⁾

2.2

3.2

7.7

3.7

Share-based compensation expense

6.8

3.5

16.3

27.6

Inventory impairments and adjustments ⁽³⁾
(included in cost of sales)

3.5

3.6

4.1

11.2

Severance expenses (included in cost of sales)

—

—

0.5

—

Severance expenses (included in SG&A)

0.3

0.1

0.9

0.4

Credit loss related to customer bankruptcy
(included in SG&A) ⁽⁴⁾

0.7

—

11.4

—

Cybersecurity incident expenses ⁽⁵⁾

—

—

5.1

—

Other items not directly related to current
operations

0.1

0.1

0.1

0.1

Adjusted EBITDA

$            197.3

$            180.1

$            371.8

$            336.9

Net Sales

$            936.3

$            906.8

$         1,834.0

$         1,800.2

Adjusted EBITDA Margin

21.1 %

19.9 %

20.3 %

18.7 %

(1)

Transaction-related expenses relate primarily to advisory fees and other costs recognized in respect of major corporate transactions, including the acquisition of businesses, and equity and debt transactions.

(2)

Restructuring expenses represent items qualifying for recognition as such under U.S. GAAP and include costs related to the closure of lines of business, facility closures and consolidations, fundamental organizational rationalizations and non-recurring employee severance related to such actions.

(3)

Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a Last-in-First-out ("LIFO") basis. The inflationary environment of the prior year period caused LIFO values to drop below First-in, First-out ("FIFO") values because LIFO measurement resulted in inflated costs being matched against sales while current, lower costs are retained in inventories.

(4)

On January 31, 2023, one of our customers filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In connection with the bankruptcy proceedings, we evaluated our potential risk and exposure relating to our outstanding pre-petition accounts receivable balance from the customer and have recorded an $11.4 million pre-tax charge to reflect our estimated recovery. We will continue to monitor the circumstances surrounding the bankruptcy in determining whether adjustments to this recovery estimate are necessary.

(5)

On February 11, 2023, Gates determined that it was the target of a malware attack. Cybersecurity incident expenses include legal, consulting, and other costs incurred as a direct result of this incident, some of which may be partially offset by insurance recoveries.

Gates Industrial Corporation plc
Reconciliation of Net Income Attributable to Shareholders to Adjusted Net Income
(Unaudited)

Three months ended

Six months ended

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

July 1,
2023

July 2,
2022

July 1,
2023

July 2,
2022

Net income attributable to shareholders

$                  64.9

$                  53.1

$                  91.3

$                  84.0

Adjusted for:

Loss on disposal of discontinued operations

0.1

0.2

0.4

0.3

Amortization of intangible assets arising from
the 2014 acquisition of Gates

29.2

29.1

58.2

58.7

Transaction-related expenses ⁽¹⁾

0.6

0.5

0.8

1.3

Asset impairments

—

0.6

—

0.6

Restructuring expenses ⁽²⁾

2.2

3.2

7.7

3.7

Share-based compensation expense

6.8

3.5

16.3

27.6

Inventory impairments and adjustments ⁽³⁾
(included in cost of sales)

3.5

3.6

4.1

11.2

Adjustments relating to post-retirement benefits

(0.8)

(1.6)

(1.5)

(3.2)

Financing and other FX related losses

6.0

9.6

7.6

12.1

Credit loss related to customer bankruptcy
(included in SG&A) ⁽⁴⁾

0.7

—

11.4

—

Cybersecurity incident expenses ⁽⁵⁾

—

—

5.1

—

Other adjustments

(0.8)

(1.6)

(2.6)

(3.7)

Estimated tax effect of the above adjustments

(10.8)

(10.0)

(24.4)

(24.2)

Adjusted Net Income

$                101.6

$                  90.2

$                174.4

$                168.4

Diluted weighted-average number of shares
outstanding

279,915,448

286,038,818

283,953,084

290,550,618

Adjusted Net Income per diluted share

$                  0.36

$                  0.32

$                  0.61

$                  0.58

(1)

Transaction-related expenses related primarily to advisory fees and other costs recognized in respect of major corporate transactions, including the acquisition of businesses, and equity and debt transactions.

(2)

Restructuring expenses represent items qualifying for recognition as such under U.S. GAAP and included costs related to the closure of lines of business, facility closures and consolidations, fundamental organizational rationalizations and non-recurring employee severance related to such actions.

(3)

Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a Last-in-First-out ("LIFO") basis. The inflationary environment of the prior year period caused LIFO values to drop below First-in, First-out ("FIFO") values because LIFO measurement resulted in inflated costs being matched against sales while current, lower costs are retained in inventories.

(4)

On January 31, 2023, one of our customers filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In connection with the bankruptcy proceedings, we evaluated our potential risk and exposure relating to our outstanding pre-petition accounts receivable balance from the customer and have recorded an $11.4 million pre-tax charge to reflect our estimated recovery. We will continue to monitor the circumstances surrounding the bankruptcy in determining whether adjustments to this recovery estimate are necessary.

(5)

On February 11, 2023, Gates determined that it was the target of a malware attack. Cybersecurity incident expenses include legal, consulting, and other costs incurred as a direct result of this incident, some of which may be partially offset by insurance recoveries.

Gates Industrial Corporation plc
Reconciliation of Net Sales to Core Revenue Growth
(Unaudited)

Three months ended July 1, 2023

(USD in millions)

Power
Transmission

Fluid Power

Total

Net sales for the three months ended July 1, 2023 ⁽¹⁾

$             573.9

$             362.4

$            936.3

Impact on net sales of movements in currency rates

7.1

5.5

Core revenue for the three months ended July 1, 2023

$            581.0

$            360.8

$            941.8

Net sales for the three months ended July 2, 2022

543.0

363.8

906.8

Increase (decrease) in net sales on a core basis (core revenue)

$               38.0

$               (3.0)

$               35.0

Core revenue growth (decline)

7.0 %

(0.8 %)

3.9 %

Six months ended July 1, 2023

(USD in millions)

Power
Transmission

Fluid Power

Total

Net sales for the year ended July 1, 2023

$         1,122.0

$             712.0

$         1,834.0

Impact on net sales of movements in currency rates

32.5

4.1

36.6

Core revenue for the year ended July 1, 2023

$         1,154.5

$            716.1

$         1,870.6

Net sales for the year ended July 2, 2022

1,098.6

701.6

1,800.2

Increase in net sales on a core basis (core revenue)

$               55.9

$               14.5

$               70.4

Core revenue growth

5.1 %

2.1 %

3.9 %

(1)

Throughout this document the terms "net sales" and "revenue" are used interchangeably in reference to the GAAP measure "net sales."