Like ADT (ADT) before it, Gates Industrial (GTES) is now re-entering the public markets after being taken private a few years back. Specifically, in 2014 Blackstone (BX) acquired the company for $5.4 billion. With the company pricing its 38.5 million share IPO at $19, inline with the $18-$21 expected range, GTES is valued at virtually the same $5.4 billion figure.
On that note, it is worth noting that Blackstone did not offer any of its 244.0 million shares in this IPO. Instead, the private equity firm is looking for GTES to perform well enough in the public markets before it unloads some or all of its holding. That, of course, means a secondary offering is very likely somewhere down the road.
In regards to this offering, the lead underwriters were Citigroup, Morgan Stanely, and UBS. Shares are slated to open for trading later this morning on the NYSE.
Although a sizable company, GTES may not be a familiar name to many as its products are mostly sold to replacement channel customers in the construction, automotive, industrial, and energy markets. Its business is comprised of two primary segments: Power Transmission (68%) and Fluid Power (32%). Here is a closer look at each:
- Power Transmission: Broadly speaking, products under this category enable control motion. They are used in applications in which belts, chains, cables, and geared transmissions transfer power from an engine to another part or system. Examples include stationary drives used in grain elevators, mobile drives used in road compactors or combines, drives on motorcycles or scooters, and vertical lifts used in cargo lifts.
- Fluid Power: Products in this category are used in applications in which hoses and rigid tubing assemblies either transfer power hydraulically or convey fluids, gases, or granular materials from one location to another. There are three main application platforms in this segment: Stationary Hydraulics (injection molding or manufacturing presses); Mobile Hydraulics (powers mobile equipment in construction, mining, ag); and Engine Systems (coolant, fuel, A/C, turbocharger).
One of the more attractive aspects to GTES is that the applications its customers implement cause significant wear-and-tear, resulting in a natural replacement cycle, driving high-margin recurring revenue. Additionally, the company is an active acquirer of businesses that complement its product portfolio. For instance, in 2017, it closed two transactions, TechFlow Flexibles in the UK, and, Atlas Hydraulics in North America, each of which expanded its presence and geographic reach in the industrial markets.
Taking a look at its results for the nine months ended, revenue was up 9% to $2.26 billion. Sales in its Power Transmission and Fluid Power Businesses were up 6% and 14%, respectively. GTES says that the growth was primarily driven by the industrial markets, where it continues to see recovery across all geographies -- in particular in Asia and North America, where sales to industrial markets were up 24% and 12%.
Revenue was also slightly impacted by movements in currency exchange rates, reducing net sales by $8.2 million for the period.
Gross margin improved to 40.5% from 39.3% in the year ago period, due to increased sales volumes on its partially fixed cost basis, and due to productivity improvements.
By far, its largest expense is SG&A, which GTES contained well, up only $16 million to $586 million. Consequently, the increase in revenue and improvements in margin helped push a 31% jump in operating income to $310.4 million.
And lastly, the company has a significant amount of debt on its books at $3.9 billion, as a result of it being taken private.