Gates Industrial Reports Strong Fourth-Quarter and Full-Year 2017 Results

DENVER, March 13, 2018 –­ 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 30, 2017.

Ivo Jurek, Gates Industrial's Chief Executive Officer, commented, “We are pleased to report our full-year 2017 results, our first as a public company. We delivered a solid year of performance with greater than 60% of net sales generated from high-margin replacement channels along with another year of double-digit growth in emerging markets. Core revenue growth, which excludes the impact of foreign currency translation and acquisitions completed in the last 12 months, was approximately 9% for the quarter and full year, reflecting strong global industrial end market demand along with our product development and commercial capabilities. Our results demonstrate the ability to grow revenue and expand margin while continuing to invest in the business. This led to gross margin in excess of 40% and Adjusted EBITDA Margin expansion of 50 basis points to 22.2% in 2017, excluding the impact of acquisitions. Since beginning our transformation in 2015, we have generated sustainable productivity gains as our manufacturing, procurement and pricing actions have offset inflation and expanded our gross margin, while also improving safety and quality.”

Mr. Jurek continued, “We are very focused on delivering profitable growth over the long-term. In 2018, we expect improved demand in many global industrial end markets fueled by urbanization, acceleration of industrial automation, infrastructure investments and the increasing importance of energy efficiency. Amid this backdrop, we are confident in our targeted 2018 outlook for mid-single-digit core revenue growth helping to drive double-digit gains in Adjusted EBITDA. We look forward to executing our plan, generating additional cash flow and driving further reduction of our leverage. Long-term, we are committed to delivering on our growth plans and focused on creating shareholder value.”

Fourth-Quarter and Full-Year Financial Results

Fourth-quarter net revenues of $781.8 million grew 17.1% over the prior-year quarter, including 9.1% core growth, primarily reflecting an improved demand environment in many of the industrial end markets served and progress on growth initiatives, 4.8% growth from acquisitions and 3.2% growth from foreign currency translation. Net revenues for the full year increased $294.7 million, or 10.7%, to over $3.0 billion, compared to $2.7 billion in the prior year. Industrial end markets grew across all regions for the fourth quarter and full year.

Net income in the fourth quarter was $118.8 million, compared to the prior-year quarter net income of $9.9 million. Full-year net income increased $93.6 million to $151.3 million, compared to $57.7 million in the prior year. Fourth-quarter and full-year 2017 net income included a net tax benefit of $118.2 million associated with U.S. tax reform, primarily driven by the revaluation of U.S. deferred tax liabilities, partially offset by a repatriation tax charge. Adjusted Net Income in the fourth quarter was $56.0 million, compared to prior-year quarter Adjusted Net Income of $48.6 million. Full-year 2017 Adjusted Net Income increased to $209.5 million, compared to $185.0 million in the prior year.

Adjusted EBITDA in the fourth quarter was $173.0 million, or 22.1% of sales, up 17% compared to $147.9 million in the prior-year quarter. Adjusted EBITDA increased $74.2 million, or 12.5%, to $669.1 million, compared to $594.9 million in 2016. Excluding acquisitions, Adjusted EBITDA Margin expanded by approximately 50 basis points to 22.6% in the fourth quarter and approximately 50 basis points to 22.2% in the full year.

Power Transmission Segment Results

(USD in millions)

Q4 2017

% Change

% Core
Change

FY 2017

% Change

% Core
Change

Sales

$513.1

+12.8%

+9.1%

$2,009.4

+7.9%

+7.3%

Adjusted EBITDA

115.5

+21.6%

458.1

+12.1%

Adjusted EBITDA Margin

22.5%

+163 bps

22.8%

+86 bps

Power Transmission sales increased for the fourth quarter and full year, reflecting strong core revenue growth driven by increased demand in industrial end markets and execution of initiatives. The segment delivered solid performance across all end markets, with particular strength in the Construction, Agriculture and General Industrial end markets.

Adjusted EBITDA grew double-digits, resulting in Adjusted EBITDA Margin expansion throughout the year, attributable to strong volume along with manufacturing efficiencies and pricing initiatives.

Fluid Power Segment Results

(USD in millions)

Q4 2017

% Change

% Core
Change

FY 2017

% Change

% Core
Change

Sales

$268.7

+26.3%

+9.1%

$1,032.3

+16.7%

+12.6%

Adjusted EBITDA

57.5

+8.7%

211.0

+13.2%

Adjusted EBITDA Margin

21.4%

(346) bps

20.4%

(63) bps

Adjusted EBITDA Margin, excluding acquisitions

22.9%

(192) bps

21.0%

(9) bps

Fluid Power recorded solid core sales growth during 2017 driven by strong industrial end market demand, emerging markets and execution of growth initiatives. Core revenue growth included double-digit expansion in the Construction, Oil & Gas and General Industrial end markets. Acquisitions, including the addition of Atlas in the fourth quarter of 2017, provided additional sales growth.

Adjusted EBITDA Margins were unfavorably impacted by the acquisitions completed in 2017, which decreased segment Adjusted EBITDA Margin by 154 basis points in the fourth quarter and 54 basis points for the full year 2017.

Liquidity and Capital Resources

During full-year 2017, the Company generated $313.5 million of cash flow from operating activities and invested $111.1 million in capital expenditures, a large portion of which represented investment in new manufacturing plants in its fluid power segment, resulting in Free Cash Flow of $202.4 million. Free Cash Flow declined compared to the prior year largely as a result of significant investments in new plants, a build-up of inventory to support expanding customer demand and a one-time tax refund in 2016.

At December 30, 2017, the Company had total cash of $564.4 million and total outstanding debt of $3.956 billion. In January 2018, the Company completed its initial public offering, raising net proceeds of $799.2 million. The net proceeds were used, along with cash on hand, to repay approximately $907.8 million of outstanding debt, plus applicable premiums and unpaid interest, resulting in significantly improved leverage metrics. Upon completion of the offering the Company had 289,749,605 basic shares outstanding and 294,765,828 diluted shares.

2018 Outlook

Based on continued strength in core industrial end markets, the significant potential to further penetrate highly fragmented core markets, and our broad emerging market exposure, the Company expects full-year 2018 net revenue growth to be in the range of 7.5% to 10.5%, with core revenue growth in the range of 5.0% to 6.0%. The Company anticipates higher net revenues, combined with manufacturing, procurement and pricing initiatives, to deliver Adjusted EBITDA in the range of $735 million to $755 million, representing double-digit year-over-year growth and continued margin expansion.

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 and Full Year 2017 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 1386669, 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 128 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 certain “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify 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. Such forward-looking statements are subject to various risks and uncertainties. Statements relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. 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 or implied by such forward-looking statements. Important factors could affect our results and could cause results to differ materially from those expressed in our forward-looking statements, including but not limited to the factors discussed in the section entitled “Risk Factors” in Gates' prospectus dated January 24, 2018, as filed with the Securities and Exchange Commission (“SEC”) and 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; 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; continued operation of our manufacturing facilities; exchange rate fluctuations; enforcement of our intellectual property rights; work stoppages and other labor matters; 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 L.P., over us, as such factors may be updated from time to time in its periodic filings with the SEC which are accessible on the SEC's website at www.sec.gov. 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.

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
30, 2017

December
31, 2016

December
30, 2017

December
31, 2016

Net sales

$       781.8

$       667.7

$   3,041.7

$   2,747.0

Cost of sales

479.8

423.3

1,823.7

1,686.2

Gross profit

302.0

244.4

1,218.0

1,060.8

Selling, general and administrative expenses

193.5

174.1

779.6

744.1

Transaction-related costs

6.8

0.4

18.1

0.4

Impairment of intangible and other assets

2.8

1.8

2.8

3.2

Restructuring expenses

9.1

3.4

17.4

11.4

Other operating (income) expense

(0.2)

3.2

(0.3)

2.8

Operating income from continuing operations

90.0

61.5

400.4

298.9

Interest expense

55.6

53.9

234.6

216.3

Other expense (income)

10.2

(5.1)

56.3

(10.4)

Income from continuing operations before taxes

24.2

12.7

109.5

93.0

Income tax (benefit) expense

(105.4)

6.0

(72.5)

21.1

Net income from continuing operations

129.6

6.7

182.0

71.9

Gain on disposal of discontinued operations

0.6

8.6

0.7

12.4

Net income 

130.2

15.3

182.7

84.3

Non-controlling interests

(11.4)

(5.4)

(31.4)

(26.6)

Net income attributable to shareholders

$       118.8

$           9.9

$       151.3

$         57.7

Earnings per share:

Basic

Earnings per share from continuing operations

$         0.49

$              -

$         0.62

$         0.18

Earnings per share from discontinued operations

0.03

0.05

Net income per share

$         0.49

$         0.03

$         0.62

$         0.23

Diluted

Earnings per share from continuing operations

$         0.47

$              -

$         0.60

$         0.18

Earnings per share from discontinued operations

(0.01)

0.03

0.05

Net income per share

$         0.46

$         0.03

$         0.60

$         0.23

GATES INDUSTRIAL CORPORATION PLC

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

As of

As of

(USD in millions)

December 30, 2017

December 31, 2016

Assets

Current assets

Cash and cash equivalents

$                         564.4

$                         527.2

Trade account receivable

713.8

650.5

Inventories

457.1

366.9

Prepaid expenses and other assets

90.9

80.1

Total current assets

1,826.2

1,624.7

Non-current assets

Property, plant and equipment, net

686.2

599.6

Goodwill

2,085.5

1,912.3

Pension surplus

57.7

42.1

Intangible assets, net

2,126.8

2,144.1

Other non-current assets

71.3

60.5

Total assets

$                     6,853.7

$                     6,383.3

Liabilities and equity

Current liabilities

Debt, current portion

$                           66.4

$                           46.9

Trade accounts payable

392.0

313.1

Taxes payable

29.0

20.3

Accrued expenses and other current liabilities

210.4

199.2

Total current liabilities

697.8

579.5

Non-current liabilities

Debt, less current portion

3,889.3

3,790.0

Trade accounts payable

157.1

171.6

Taxes payable

100.6

95.0

Deferred income taxes

517.1

652.3

Other non-current liabilities

63.4

26.5

Total liabilities

5,425.3

5,314.9

Shareholders' equity

Share capital & additional paid in capital

1,625.1

1,621.5

Accumulated other comprehensive loss

(747.4)

(915.9)

Retained earnings (deficit)

136.9

(14.3)

Total shareholders' equity

1,014.6

691.3

Non-controlling interests

413.8

377.1

Total equity

1,428.4

1,068.4

Total liabilities and equity

$                     6,853.7

$                     6,383.3

GATES INDUSTRIAL CORPORATION PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the
Three Months Ended

For the
Year Ended

(USD in millions)

December
30, 2017

December
31, 2016

December
30, 2017

December
31, 2016

Cash flows from operating activities

Net income

$       130.2

$         15.3

$       182.7

$         84.3

Adjustments to reconcile net income to net cash from operations:

Depreciation and amortization

54.0

52.2

212.2

240.8

Impairments of intangibles and other assets

4.7

1.8

4.8

3.2

Gain on disposal of business

(1.0)

(7.0)

(0.9)

(10.1)

Non-cash currency transaction loss (gain)

9.8

3.1

57.4

3.1

Other net non-cash financing costs

8.4

(0.4)

47.6

13.7

Share-based compensation expense

2.5

0.9

5.4

4.2

Decrease in post-employment benefit obligations (net)

(1.8)

(2.2)

(7.4)

(5.8)

Deferred income taxes

(125.8)

(19.5)

(162.8)

(54.3)

Other operating activities

0.1

0.6

1.6

0.8

Changes in operating assets & liabilities, net of acquisitions:

—Decrease (increase) in accounts receivable

44.0

22.1

(24.6)

(44.8)

—Decrease (increase) in inventories

10.4

33.4

(45.4)

39.5

—Increase in accounts payable

19.8

33.8

49.9

50.2

—Decrease (increase) in other assets & liabilities

15.6

37.1

(7.0)

46.8

Net cash provided by operations

170.9

171.2

313.5

371.6

Cash flows from investing activities

Purchases of property, plant and equipment

(43.3)

(18.7)

(101.1)

(59.0)

Purchases of intangible assets

(3.1)

(6.4)

(10.0)

(9.1)

Purchase of subsidiaries, net of cash acquired

(74.0)

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About the Author: Marcus Suban

Marcus is a reporter on the Political Capital team focusing on money in politics. Before joining Canadian Business Tribune, he worked as a researcher and writer for the Institute for Northern Studies at Lakehead University in Thunder Bay Ontario and as a freelance journalist in Toronto, having been published by over 20 outlets including CBC, the Center for Media and Democracy,The Huffington Post, Salon, Truthout and VICE.com.

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