Gates Industrial Reports Second-Quarter 2024 Results

DENVER, July 31, 2024 /PRNewswire/ --

Second-Quarter 2024 Financial Summary

• Second-quarter net sales of $885.5 million, down 5.4% compared to the prior-year period and representing a core sales decline of 4.0% year-over-year.
• Net income attributable to shareholders of $70.7 million, or $0.26 per diluted share.
• Adjusted Net Income per diluted share of $0.36.
• Net income from continuing operations of $77.9 million, or a margin of 8.8%.
• Adjusted EBITDA of $202.2 million, or a margin of 22.8%.
• Generated $72.8 million of operating cash flow year to date, compared to $183.9 million in the prior year.
• Adjusting full year 2024 guidance.
• New $250 million share repurchase authorization announced.

Gates Industrial Corporation plc (NYSE:GTES), a leading global provider of application-specific power transmission and fluid power solutions, today reported results for the second quarter ended June 29, 2024.

Ivo Jurek, Gates Industrial's Chief Executive Officer, commented, "During the second quarter, we delivered a 270 basis point year-over-year increase in gross margin in an uneven demand environment. I am pleased with the progress made on our enterprise initiatives to date. Our balance sheet continues to improve underscored by a meaningful reduction in our net leverage ratio relative to the prior year period." 

Jurek continued, "We have trimmed our full year 2024 guidance for core sales, adjusted EBITDA and adjusted earnings per share to reflect softer than expected demand in our First Fit markets during the second half of the year and our normal business seasonality. At the updated midpoint, we still expect to increase our adjusted EBITDA margin by over 100 basis points year-over-year. We are intently focused on driving our various enterprise initiatives and achieving our 2026 financial targets. We remain opportunistic about deploying excess capital. As such, we have announced a new $250 million share repurchase authorization that expires at the end of 2025."

Second-Quarter Financial Results

Second-quarter net sales were $885.5 million, a decrease of 5.4% over the prior-year quarter net sales of $936.3 million, reflecting a 4.0% core sales decline and unfavorable foreign currency impact of 1.4%. At the channel level, first fit sales declined year-over-year primarily driven by Industrial First Fit, partly offset by slight growth in the replacement business. The replacement channel business grew year-over-year and benefited from modest growth in Automotive Replacement. Most end markets posted sales declines on a core basis. 

Second-quarter net income attributable to shareholders was $70.7 million, or $0.26 per diluted share, compared to net income attributable to shareholders of $64.9 million, or $0.23 per diluted share, in the prior-year quarter, with the increase driven by higher operating income and a lower share count. Adjusted Net Income was $95.5 million, or $0.36 per diluted share, compared to $95.2 million, or $0.34 per diluted share in the prior-year period, with the increase stemming from improved operating performance and a lower share count. The diluted weighted-average number of shares outstanding in the second quarter of 2024 was 266,812,510 compared to 279,915,448 in the second quarter of 2023.

Second-quarter net income from continuing operations was $77.9 million, or 8.8% of net sales, compared to $71.3 million, or 7.6% of net sales in the prior-year quarter representing an expansion of 120 basis points year-over-year driven by higher operating income and an increase in other income partially offset by higher tax expense.

Second-quarter Adjusted EBITDA was $202.2 million compared to $197.3 million in the prior-year quarter. Second-quarter Adjusted EBITDA margin of 22.8% represented an expansion of 170 basis points compared to the prior-year quarter. The increase in Adjusted EBITDA margin was led by benefits from our enterprise initiatives, favorable channel mix, and pricing, partially offset by lower volumes.

Power Transmission Segment Results

Second-quarter Power Transmission net sales decreased 5.6% to $541.9 million compared to the prior-year quarter, reflecting a core sales decline of 3.5% and unfavorable currency effects of 2.1%. Segment sales were most affected by core declines in the Personal Mobility, Construction and Automotive end markets partially offset by growth in the Energy and On-Highway markets. At the channel level, first fit sales declined double-digits primarily impacted by weaker industrial demand. Core sales in our replacement channel increased slightly led by modest growth in Industrial Replacement.

Second-quarter Power Transmission Adjusted EBITDA was $123.8 million compared to $119.0 million in the prior-year quarter. The expansion in Adjusted EBITDA was driven by benefits from enterprise initiatives that supported improved performance, favorable channel mix, and pricing, partially offset by lower volumes. Adjusted EBITDA margin of 22.8% represented an improvement of 210 basis points compared to the prior-year quarter.

Fluid Power Segment Results

Second-quarter Fluid Power net sales decreased 5.2% to $343.6 million compared to the prior-year quarter, reflecting a core sales decline of 4.9% and unfavorable foreign currency effects of 0.3%. The segment was most impacted by declines in Agriculture, Construction and Diversified Industrial partially offset by a solid increase in Automotive. At the channel level, first fit sales declined relative to the prior year period while replacement increased slightly year-over-year supported by Automotive Replacement growth.

Second-quarter Fluid Power Adjusted EBITDA was $78.4 million compared to $78.3 million in the prior-year quarter, resulting in an Adjusted EBITDA margin of 22.8%, an increase of 120 basis points compared to the prior-year quarter. The increase in Adjusted EBITDA was driven by benefits from our enterprise initiatives, favorable channel mix, and pricing, partially mitigated by lower volumes.  

Liquidity and Capital Resources

During the second quarter of 2024, the Company generated $93.8 million of cash from operations. Second-quarter capital expenditures increased to $27.2 million from $15.2 million in the prior-year quarter.

As of June 29, 2024, the Company had total cash and cash equivalents of $579.7 million and total outstanding debt of $2.4 billion, as well as committed borrowing headroom of $471.7 million.

Share Repurchase Authorization Announced

The Company also announced that its Board of Directors has authorized a share repurchase program of up to $250 million of the Company's ordinary shares. This authorization is valid through December 2025. This authorization replaces the existing authorization that was set to expire in October 2024.

The timing and actual number of shares repurchased will depend on a variety of factors, including price, available liquidity, general business and market conditions, tax considerations, and alternative investment opportunities. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, including but not limited to open market purchases and privately negotiated transactions, all in compliance with the rules and regulations of the Securities and Exchange Commission ("SEC") and other applicable legal requirements.

The repurchase program does not obligate the Company to acquire any specific dollar amount or number of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company's discretion.

Updated 2024 Guidance

The Company is updating its full year 2024 guidance. The table below reflects our updated full year 2024 financial guidance.

Share-based metrics in the Company's guidance do not include the potential effect of incremental share repurchases.

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, including expected Core Sales Growth, Adjusted EBITDA, Adjusted Earnings per Share and Free Cash Flow conversion for 2024. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results.

Conference Call and Webcast

Gates Industrial Corporation plc will host a conference call today at 9:00 a.m. Eastern Time to discuss the Company's financial results. The live webcast of the conference call and accompanying presentation materials can be accessed through Gates Industrial's website at investors.gates.com. For those unable to access the webcast, the conference call can be accessed by dialing (888) 414-4601 (domestic) or +1 (646) 960-0313 (international) and requesting the Gates Industrial Corporation Second Quarter 2024 Earnings Conference Call or providing the Conference ID of 5772067. An audio replay of the conference call can be accessed by dialing (800) 770-2030 (domestic) or +1 (647) 362-9199 (international), and providing the passcode 5772067, 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 manufacturers ("first-fit") 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 to everyday consumer applications including virtually every form of transportation. Our products are sold in more than 130 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," "predicts," "intends," "trends," "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 and financial results (including growth initiatives, margin expansion and capital deployment), market demand, and statements regarding our outlook for 2024. Such forward-looking statements are subject to various risks and uncertainties, including, among others, economic, political and other risks associated with international operations, risks inherent to the manufacturing industry, macroeconomic factors beyond the Company's control (including material and logistics availability, inflation, supply chain and labor challenges and end-market recovery), risks related to catastrophic events, continued operation of our manufacturing facilities, including as a result of cybersecurity attacks, our ability to forecast and meet demand, market acceptance of new products, and the significant influence of the Company's large shareholders, investment funds affiliated with Blackstone 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 30, 2023, filed with the 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.

Non-GAAP Financial Measures

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 net sales 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. Beginning with the three months ended June 29, 2024, we revised our definition of Adjusted Net Income to adjust for discrete tax items, which are significant, unusual or infrequently occurring tax items. We have revised the prior period amounts to conform to our current period presentation.

Core sales 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, where applicable. We present core sales 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. 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 expressed as a percentage of Adjusted Net Income. 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.

SOURCE Gates Industrial Corporation plc