Gates Industrial Reports Third-Quarter 2023 Results

For the three months ended

(USD in millions)

September 30,
2023

October 1,
2022

% Change

% Core Change

Net sales

$536.4

$522.5

2.7 %

1.2 %

Adjusted EBITDA

$116.5

$101.9

14.3 %

Adjusted EBITDA margin

21.7 %

19.5 %

220 bps

For the nine months ended

(USD in millions)

September 30,
2023

October 1,
2022

% Change

% Core Change

Net sales

$1,658.4

$1,621.1

2.3 %

3.8 %

Adjusted EBITDA

$343.2

$302.1

13.6 %

Adjusted EBITDA margin

20.7 %

18.6 %

210 bps

For the three months ended

(USD in millions)

September 30,
2023

October 1,
2022

% Change

% Core Change

Net sales

$336.5

$338.2

(0.5 %)

(3.0 %)

Adjusted EBITDA

$72.9

$75.8

(3.8 %)

Adjusted EBITDA margin

21.7 %

22.4 %

(70 bps)

For the nine months ended

(USD in millions)

September 30,
2023

October 1,
2022

% Change

% Core Change

Net sales

$1,048.5

$1,039.8

0.8 %

0.4 %

Adjusted EBITDA

$218.0

$212.5

2.6 %

Adjusted EBITDA margin

20.8 %

20.4 %

40 bps

Prior 2023

Updated 2023

Core Revenue Growth

0 to 2%

0 to 2%

No Change

Adjusted EBITDA

$710 to $740 Million

$725 to $735 Million

+$5 Million

Adjusted EPS

$1.18 to $1.24

$1.22 to $1.28

+$0.04

Capital Expenditures

<$100 Million

<$85 Million

Lower

100%+

100%+

Gates Industrial Corporation plc

Condensed Consolidated Statements of Operations

(Unaudited)

Three months ended

Nine months ended

(USD in millions, except per share amounts)

September 30,
2023

October 1,
2022

September 30,
2023

October 1,
2022

Net sales

$                872.9

$                860.7

$            2,706.9

$            2,660.9

Cost of sales

529.5

551.2

1,685.7

1,720.3

Gross profit

343.4

309.5

1,021.2

940.6

Selling, general and administrative expenses

213.4

199.7

666.2

644.0

Transaction-related expenses

1.3

0.7

2.1

2.0

Asset impairments

0.1

0.5

0.1

1.1

Restructuring expenses

2.6

4.7

10.3

8.4

Other operating expenses

0.1

0.1

0.2

0.2

Operating income from continuing operations

125.9

103.8

342.3

284.9

Interest expense

39.5

33.3

124.8

98.9

Other (income) expense

(0.2)

3.1

3.8

11.8

Income from continuing operations before taxes

86.6

67.4

213.7

174.2

Income tax expense

1.0

11.4

25.9

21.5

Net income from continuing operations

85.6

56.0

187.8

152.7

Loss on disposal of discontinued operations

0.1

—

0.5

0.3

Net income

85.5

56.0

187.3

152.4

Less: non-controlling interests

6.8

4.1

17.3

16.5

Net income attributable to shareholders

$                  78.7

$                  51.9

$                170.0

$                135.9

Earnings per share

Basic

Earnings per share from continuing operations

$                  0.30

$                  0.18

$                  0.62

$                  0.48

Earnings per share from discontinued operations

—

—

—

—

Earnings per share

$                  0.30

$                  0.18

$                  0.62

$                  0.48

Diluted

Earnings per share from continuing operations

$                  0.29

$                  0.18

$                  0.61

$                  0.47

Earnings per share from discontinued operations

—

—

—

—

Earnings per share

$                  0.29

$                  0.18

$                  0.61

$                  0.47

Gates Industrial Corporation plc

Condensed Consolidated Balance Sheets

(Unaudited)

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

As of

September 30, 2023

As of

December 31, 2022

Assets

Current assets

Cash and cash equivalents

$                556.8

$                578.4

Trade accounts receivable, net

821.9

808.6

Inventories

646.1

656.2

Taxes receivable

50.0

13.0

Prepaid expenses and other assets

243.1

221.2

Total current assets

2,317.9

2,277.4

Non-current assets

Property, plant and equipment, net

615.7

637.5

Goodwill

1,984.3

1,981.1

Pension surplus

9.8

10.1

Intangible assets, net

1,399.6

1,490.4

Right-of-use assets

121.3

132.2

Taxes receivable

15.1

15.1

Deferred income taxes

607.8

600.3

Other non-current assets

37.8

47.5

Total assets

$            7,109.3

$            7,191.6

Liabilities and equity

Current liabilities

Debt, current portion

$                  27.7

$                  36.6

Trade accounts payable

441.1

469.6

Taxes payable

68.3

23.5

Accrued expenses and other current liabilities

243.3

222.6

Total current liabilities

780.4

752.3

Non-current liabilities

Debt, less current portion

2,417.7

2,426.4

Post-retirement benefit obligations

72.3

76.2

Lease liabilities

111.9

121.9

Taxes payable

65.0

79.5

Deferred income taxes

165.5

192.0

Other non-current liabilities

84.2

99.7

Total liabilities

3,697.0

3,748.0

Shareholders' equity

—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares:
264,094,061 (December 31, 2022: authorized shares: 3,000,000,000; outstanding shares:
282,578,917)

2.6

2.8

—Additional paid-in capital

2,575.7

2,542.1

—Accumulated other comprehensive loss

(886.4)

(917.8)

—Retained earnings

1,399.3

1,482.9

Total shareholders' equity

3,091.2

3,110.0

Non-controlling interests

321.1

333.6

Total equity

3,412.3

3,443.6

Total liabilities and equity

$            7,109.3

$            7,191.6

Gates Industrial Corporation plc

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended

(USD in millions)

September 30,
2023

October 1,
2022

Cash flows from operating activities

Net income

$                187.3

$                152.4

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

Depreciation and amortization

162.5

164.1

Foreign exchange and other non-cash financing expenses

33.8

31.0

Share-based compensation expense

19.6

34.8

Decrease in post-employment benefit obligations, net

(7.0)

(11.5)

Deferred income taxes

(39.2)

(53.2)

Asset impairments

0.1

1.4

Other operating activities

4.0

4.7

Changes in operating assets and liabilities:

—Change in accounts receivable

(22.9)

(147.2)

—Change in inventories

12.0

(50.8)

—Change in accounts payable

(24.4)

(17.3)

—Change in prepaid expenses and other assets

12.8

(15.6)

—Change in taxes payable

(5.8)

(23.0)

—Change in other liabilities

(41.1)

(51.0)

Net cash provided by operating activities

291.7

18.8

Cash flows from investing activities

Purchases of property, plant and equipment

(39.6)

(59.0)

Purchases of intangible assets

(7.6)

(6.7)

Cash paid under corporate-owned life insurance policies

(18.2)

(11.6)

Cash received under corporate-owned life insurance policies

6.6

4.6

Proceeds from the sale of property, plant and equipment

0.8

—

Other investing activities

—

1.2

Net cash used in investing activities

(58.0)

(71.5)

Cash flows from financing activities

Issuance of shares

17.5

15.1

Buy-back of shares

(251.7)

(175.8)

Proceeds from long-term debt

100.0

70.0

Payments of long-term debt

(114.7)

(45.5)

Debt issuance costs paid

(0.4)

(0.3)

Dividends paid to non-controlling interests

(0.5)

(28.7)

Other financing activities

8.1

(11.8)

Net cash used in financing activities

(241.7)

(177.0)

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

(13.3)

(32.8)

Net decrease in cash and cash equivalents and restricted cash

(21.3)

(262.5)

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

$                560.1

$                398.4

Supplemental schedule of cash flow information

Interest paid

$                125.8

$                  95.2

Income taxes paid

$                  70.9

$                  97.7

Accrued capital expenditures

$                    1.4

$                    1.9

Gates Industrial Corporation plc

Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA

(Unaudited)

Three months ended

Nine months ended

(USD in millions)

September 30,
2023

October 1,
2022

September 30,
2023

October 1,
2022

Net income from continuing operations

$                 85.6

$               56.0

$            187.8

$            152.7

Adjusted for:

Income tax expense

1.0

11.4

25.9

21.5

Net interest and other expenses

39.3

36.4

128.6

110.7

Depreciation and amortization

54.0

53.2

162.5

164.1

Transaction-related expenses ⁽¹⁾

1.3

0.7

2.1

2.0

Asset impairments

0.1

0.5

0.1

1.1

Restructuring expenses ⁽²⁾

2.6

4.7

10.3

8.4

Share-based compensation expense

3.3

7.2

19.6

34.8

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

2.2

7.5

6.3

18.7

Severance expenses (included in cost of sales)

(0.1)

—

0.4

—

Severance expenses (included in SG&A)

—

—

0.9

0.4

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

—

—

11.4

—

Cybersecurity incident expenses ⁽⁵⁾

—

—

5.1

—

Other items not directly related to current operations

0.1

0.1

0.2

0.2

Adjusted EBITDA

$              189.4

$            177.7

$            561.2

$            514.6

Net Sales

$              872.9

$            860.7

$         2,706.9

$         2,660.9

Adjusted EBITDA Margin

21.7 %

20.6 %

20.7 %

19.3 %

(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 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

Nine months ended

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

September 30,
2023

October 1,
2022

September 30,
2023

October 1,
2022

Net income attributable to shareholders

$                  78.7

$                  51.9

$                170.0

$                135.9

Adjusted for:

Loss on disposal of discontinued operations

0.1

—

0.5

0.3

Amortization of intangible assets arising from the
2014 acquisition of Gates

29.1

28.4

87.3

87.1

Transaction-related expenses ⁽¹⁾

1.3

0.7

2.1

2.0

Asset impairments

0.1

0.5

0.1

1.1

Restructuring expenses ⁽²⁾

2.6

4.7

10.3

8.4

Share-based compensation expense

3.3

7.2

19.6

34.8

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

2.2

7.5

6.3

18.7

Adjustments relating to post-retirement benefits

(0.7)

(1.6)

(2.2)

(4.8)

Financing and other FX related losses

2.5

4.0

10.1

16.1

One-time tax benefit from unrecognized tax
benefit ⁽⁴⁾

(12.3)

—

(12.3)

—

Credit loss related to customer bankruptcy
(included in SG&A) ⁽⁵⁾

—

—

11.4

—

Cybersecurity incident expenses ⁽⁶⁾

—

—

5.1

—

Other adjustments

(1.9)

(2.2)

(4.5)

(5.9)

Estimated tax effect of the above adjustments

(10.4)

(11.7)

(34.8)

(35.9)

Adjusted Net Income

$                  94.6

$                  89.4

$                269.0

$                257.8

Diluted weighted-average number of shares
outstanding

267,835,011

285,174,344

278,488,060

288,359,685

Adjusted Net Income per diluted share

$                  0.35

$                  0.31

$                  0.97

$                  0.89

(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)

During the three and nine months ended September 30, 2023, one-time tax benefit of $12.3 million related to unrecognized tax benefits due to lapsed statute of limitations.

(5)

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 continue to monitor the circumstances surrounding the bankruptcy in determining whether adjustments to this recovery estimate are necessary.

(6)

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 September 30, 2023

(USD in millions)

Power
Transmission

Fluid Power

Total

Net sales for the three months ended September 30, 2023 ⁽¹⁾

$             536.4

$             336.5

$            872.9

Impact on net sales of movements in currency rates

(7.8)

(8.4)

(16.2)

Core revenue for the three months ended September 30, 2023

$            528.6

$            328.1

$            856.7

Net sales for the three months ended October 1, 2022

522.5

338.2

860.7

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

$                 6.1

$             (10.1)

$               (4.0)

Core revenue growth (decline)

1.2 %

(3.0 %)

(0.5 %)

Nine months ended September 30, 2023

(USD in millions)

Power
Transmission

Fluid Power

Total

Net sales for the year ended September 30, 2023

$         1,658.4

$         1,048.5

$         2,706.9

Impact on net sales of movements in currency rates

24.7

(4.3)

20.4

Core revenue for the year ended September 30, 2023

$         1,683.1

$         1,044.2

$         2,727.3

Net sales for the year ended October 1, 2022

1,621.1

1,039.8

2,660.9

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

$               62.0

$                 4.4

$               66.4

Core revenue growth

3.8 %

0.4 %

2.5 %

(1)

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