Gates Industrial Stock

Gates Industrial Corporation plc (Gates) operates as a global manufacturer of highly engineered power transmission and fluid power solutions.

The company offers a broad portfolio of products to diverse replacement channel customers, and to original equipment manufacturers (‘first-fit’) as specified components, with the majority of its revenue coming from replacement channels.

The company’s products are used in applications across numerous end markets, including automotive replacement and first-fit; diversified industrial; industrial off-highway; industrial on-highway; and personal mobility. The company sells its products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation.

The company’s product portfolio represents one of the broadest ranges of power transmission and fluid power products in the markets the company serves, and the company maintains long-standing relationships with a diversified group of well-known customers throughout the world. As a leading designer, manufacturer and marketer of highly engineered, mission-critical products, the company has become an industry leader across most of its end markets and the regions in which the company operates.

Certain of the company’s businesses sell a significant amount of their products to key channel partners, including distributors, which have valuable relationships with end users. The company relies on information technology networks and systems, including the cloud-computing and third-party service providers, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities.

Solutions

The company operates its business on a product-line basis through the company’s two reporting segments - Power Transmission and Fluid Power.

The company sells its products under the Gates brand in all of the geographies and end markets the company serves, as well as under select customer brands in certain markets.

The company’s Power Transmission segment includes elastomer drive belts and related components used to efficiently transfer power in a broad range of applications. Power transmission products represented approximately 61% of the company’s total net sales for the year ended December 30, 2023 (Fiscal 2023).

The company’s Fluid Power segment includes hoses, tubing and fittings designed to convey hydraulic fluid at high pressures in both mobile and stationary applications, and other high-pressure and fluid transfer hoses. The company’s fluid power products represented approximately 39% of the company’s net sales for Fiscal 2023.

The company has a broad portfolio of both power transmission and fluid power products in the end markets the company serves.

Power Transmission

The company’s power transmission solutions transfer power, convey materials and provide motion control. They are used in applications in which belts, chains, cables, geared transmissions or direct drives transfer power from an engine motor or other source of mechanical power to another part or system. The company’s belts are made of highly engineered polymer formulations, fabrics or textiles (made from a variety of polymer or natural fibers) and embedded cords for reinforcement (which may be made from polymers, such as polyesters or aramids, fiberglass or high performance carbon fibers). Many of these materials are proprietary to Gates. Within the company’s Power Transmission segment, the company offers solutions across the following key application platforms:

Stationary Drives: Fixed drive systems, such as those used in a factory driving a machine or pump, on a grain elevator driving the lift auger or in a distribution center driving automated equipment, such as conveyor lines or robotic picking machines;

Mobile Drives: Drives on a piece of mobile machinery, such as the threshing and separation drives on a combine harvester;

Engine Systems: Synchronous drives and related components for cam shaft drives, auxiliary drives and asynchronous accessory drives for air conditioning (‘A/C’) compressors, power steering, alternators and starter/generator systems; and

Personal Mobility: Drives on motorcycles, scooters, bicycles, both traditional and electric, as well as on snowmobiles and other power sports vehicles that are used to transfer power between the power source and the drive wheel(s) or track.

Belt-based power transmission drives typically consist of either a synchronous belt (such as a timing belt) or an asynchronous belt (such as a V-belt, continuously-variable transmission (‘CVT’) belt or Micro-V belt) and related components (sprockets, pulleys, mechanical water pumps, tensioners, or other accessories). In addition, the company manufactures metal drive components and assemble certain product kits for the automotive replacement channel.

Asynchronous Belts: Asynchronous belts are the company’s highest-volume products and are used in a broad range of applications. The company was a pioneer in the design and manufacturing of V-belts, which draw their name from the shape of their profile. The company also manufactures ‘ribbed’ V-belts, which are belts with lengthwise V-shaped grooves, which the company markets under the Micro-V name. This design results in a thinner belt for the same drive surface, making it more flexible and offering improved efficiency.

In industrial end markets, asynchronous belts have a wide variety of applications, including use in pump drives, manufacturing lines, HVAC systems, industrial, truck, bus and marine engines, forestry and mining equipment and many other applications. CVT systems often found in scooters, power sports vehicles and other applications use a specialized V-belt known as a CVT belt. In automotive applications, the company’s asynchronous belts perform functions that include transferring power from the crankshaft to accessory drive components, such as the alternator, A/C compressor, power steering system, water pump and, in some vehicles, a belt/starter generator system used in start/stop accessory drive systems to improve fuel economy.

Recently, Gates introduced a new Micro-V platform for engine accessory drive systems. The combination of newly developed material compounds and product design utilizes less material, reduces belt weight and results in lower bending stiffness. These improvements enable tighter pulley configurations and reduced drive bending losses as compared to previous belt technologies; lower losses result in benefits, such as reduced energy consumption, CO2 emissions and heat generation.

Synchronous Belts: Synchronous belts, also known as timing belts, are non-slipping mechanical drive belts. They have molded teeth and run over matching toothed pulleys or sprockets. Synchronous belts experience no slippage and are often used to transfer high levels of power or to control motion for indexing or timing purposes, as well as for linear positioning and positive drive conveying. They are typically used instead of chains or gears.

Examples of industrial applications include use in HVAC systems, food processing and bottling plants, mining and agricultural equipment, automated warehouse systems and robotics. The company’s synchronous belts are also utilized in personal mobility vehicles, including both traditional and electric motorcycles, bicycles and scooters, applications in which clean, quiet performance is often valued. In automotive applications, the company’s synchronous belts are used to synchronize the rotation of the engine crankshaft with the camshaft in a valve train system, as well as in electric power steering, parking brake and accessory drive systems, which are present in internal-combustion, hybrid and electric vehicles.

In recent years, Gates also launched the PowerGrip GT4, a high-torque synchronous belt for industrial applications. This new belt leverages Gates’ materials science and process engineering capabilities, to provide a belt construction that replaces chloroprene-based elastomers with an advanced ethylene elastomer formulation that is more environmentally friendly. It has the highest power-carrying capacity in its segment, a wider operating temperature range and increased chemical resistance, allowing for narrower drives and a broad range of applications to be served with both first-fit and replacement channel customers. In recent years, Gates launched the Carbon Drive CDC synchronous belt designed for commuter bicycle applications and in 2022 Gates launched the Carbon Drive Moto X5 synchronous belt designed specifically for mid-motor, sit-down electric scooters and motorcycles typically found in commuting applications in the rapidly evolving Asian market. In 2022, Gates launched an updated version of Gates Design Power, a new digital toolkit consisting of six modules, including four all-new applications and substantially upgraded versions of well-known Gates digital tools, Design IQ and Design Flex Pro. Among the all-new programs is the industry-first Mobility Drive Analysis tool aimed at making it easier for engineers from bicycle, scooter, motorcycle, and power sports Original Equipment Manufacturers (‘OEM’) to design Gates’ clean, quiet, durable and low-maintenance Carbon Drive belt systems into their next-generation vehicles to further accelerating conversion from chain and other technologies. In Fiscal 2023, Gates announced the launch of the mobile version of Gates Design Power, putting advanced digital design tools to support the engineering of belt drive systems on customers’ mobile devices. Additionally, Gates expanded its G-Force product portfolio by introducing the G-Force Workhorse CVT belt for specialty and recreation vehicles. The G-Force Workhorse belt offers more longevity and increased compatibility for end users relative to its predecessor.

Metal Drive Components: The company sources, manufactures, and sells tensioners, idlers, pulleys, sprockets and other components used in belt drive systems. These products are designed and engineered to work efficiently with the company’s belts. Tensioners are devices that maintain a constant tension in the belt drive system, thereby ensuring proper function and preventing loss of power or system failure. Tensioners typically employ a spring-loaded arm and a damping mechanism to help control tension in a belt drive system. Idlers, which sometimes also perform as tensioners, are used to take up extra belt length. Gates’ pulleys and sprockets are precisely engineered for positive press fit, designed to optimize the performance and durable working service life of the belt drive system.

Kits: The company’s kits for the automotive replacement channel include all of the parts needed by an automotive service shop to perform a replacement of one of the company’s products. Kits are created for specific vehicle makes and models and typically include belts, tensioners and idlers, and will sometimes also include water pumps, which are often replaced simultaneously with a timing belt due to the relatively high labor component in the total cost of a typical replacement. The company’s kits are convenient for service technicians as they eliminate the need for more complicated product sourcing. On a comparable quantity basis, kits typically sell at a premium to a loose belt and the individual related components.

The company’s power transmission products are used in a broad range of applications in end markets, including automotive replacement and first-fit, diversified industrial, industrial off-highway, industrial on-highway, energy and resources, and personal mobility. The majority of the company’s Fiscal 2023 net sales came from replacement channels, which provide high-margin, recurring revenue streams and are driven by attractive market trends. The bulk of the company’s power transmission replacement business resides in developed regions, in which a large, aging installed base of equipment follows a natural maintenance cycle and is served by well-established distribution channels. For example, a combine harvester can have over 25 high-performance belts that are typically replaced at regular intervals, depending on wear and tear, with end users having access to replacement parts through a large network of distributors. Similarly, in the mature automotive aftermarkets, such as North America and Europe, maintenance intervals are well defined, and miles (or kilometers) driven per vehicle and the average vehicle age have generally been increasing, leading to more wear and tear on vehicles. A smaller portion of the company’s power transmission replacement business is generated in emerging markets, which generally have a smaller base of installed equipment and relatively nascent distribution channels. As they continue to develop, these replacement channels in emerging markets represent a significant long-term opportunity for growth. In addition to the company’s power transmission replacement business, the company serves a wide variety of well-known first-fit customers across all of the company’s end markets.

Fluid Power: The company’s fluid power solutions 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. Within the company’s Fluid Power segment, the company offers solutions across the following key application platforms:

Stationary Hydraulics: Applications within stationary machinery, such as an injection molding machine or a manufacturing press;

Mobile Hydraulics: Applications used to power various implements in mobile equipment used in construction, agriculture, mining and other heavy industries;

Vehicle Systems: Applications in thermal management, emissions reduction, turbocharger, air intake and other systems for electric, hybrid and internal combustion passenger and commercial vehicles; and

Other Industrial: Applications in which hoses are used to convey fluids, gases or granular material across several industries such as food and beverage, other process industries, and oil and gas drilling and refining.

Customers choose fluid power solutions based on a number of factors, including application-specific product performance parameters, such as pressure and temperature ratings, corrosion and leak resistance, weight, flexibility, abrasion resistance and cleanliness, as well as compliance with standards and product availability. Attributes associated with the supplier, including brand, global footprint and reputation for reliability, quality and service, are also considered.

Hydraulics: The company’s hydraulics product line is consisted of hoses, couplings, tubing and fittings, offered either as standalone products or completed assemblies. The company’s hydraulic products are key components of hydraulic systems in both stationary and mobile equipment applications across end-markets, such as construction, agricultural and forestry equipment, as well as in a wide range of manufacturing applications. The company provides a full selection of hose sizes and construction types for use in a wide variety of operating requirements and conditions. Hydraulic hoses are made of elastomers reinforced with steel wire or a textile-based yarn, and typically operate at very high pressures, often in extreme environmental conditions. These products are designed for applications that require high levels of quality and durability.

The company’s hydraulic couplings, fittings and tubing are engineered to match the product performance of the company’s hydraulic hoses. The high-pressure nature of hydraulic systems requires that these products have high levels of performance similar to those found in the company’s hydraulic hoses. The ultimate performance of a hydraulic assembly, in which the company’s products function as part of a hydraulic circuit, depends not only on how well the components are made, but also on how well they complement each other. The company’s hydraulic fittings are manufactured in a wide assortment of sizes and configurations to ensure the company meets the wide range of installation requirements in these systems. The company also provides Gates-engineered and third-party crimping systems to ensure a proper interface is obtained between the company’s hoses and these metal components to create high-quality, robust hydraulic assemblies.

In recent years, Gates introduced a new premium product family consisting of hydraulic hoses that are lighter weight and more flexible. Made with a high-performance reinforcement and robust, abrasion-resistant cover, the MXT line of hydraulic hose is consisted of universally applicable, high-performance products that meet the needs of a wide range of applications. Subsequently, the company launched the MXG line of hydraulic hose, a flexible, light-weight solution with increased durability and temperature performance, designed to replace conventional spiral hoses typically used in the most demanding applications. The company also launched a smart e-crimper, which is a machine used to attach fittings to hydraulic hoses. In addition to convenient, web-enabled access to training content and product crimp specs, this new crimper can be used with Gates’ intuitive mobile eCrimp app. In 2022, the company launched the ProV hose family in Europe, which is an addition to the company’s Pro Series product portfolio that leverages technologies developed and first launched in the company’s MXT and MXG product lines.

Thermal and Emissions Management: The company’s thermal and emissions management and related products perform a variety of fluid conveyance, emissions reduction and efficiency improvement functions in electric, hybrid and internal combustion passenger and commercial vehicles. In electric applications, Gates offers hose and electric water pump solutions for the thermal management system regulating the battery, inverter, motor(s) and passenger compartment. In internal combustion applications, Gates primarily provides thermal management hose and water pumps for engine cooling, selective catalytic reduction hoses that are part of systems that reduce harmful emissions from diesel engines and hoses for functions that improve air intake and engine efficiency. In 2021, the company launched a new line of ThermalPro electric water pumps for OEM and aftermarket applications, broadening Gates presence in hybrid and battery electric vehicle, as well as other thermal management applications like data center cooling.

Industrial Hose: The company’s industrial hoses are used to transfer a wide range of substances - chemicals, food, beverages, petroleum, fuels, bulk materials, water, steam and air - to meet the requirements of a diverse range of applications, including manufacturing, mining, oil and gas drilling, marine, agriculture, industrial cleaning and construction. The company’s application engineering teams work with customers to assist them in selecting the appropriate hose solution to safely meet their operational needs. The company leverages its materials science expertise to design hoses that perform at varying pressures and levels of resistance to chemicals, oil, abrasion, ozone, flame and both hot and cold temperatures. For performance in extreme environments, many of the company’s industrial hoses feature both crush-resistant and flexible designs. Gates industrial hoses are highly engineered to meet or exceed a multitude of industry standards and certifications, and are offered in a range of diameters, lengths and colors to allow customers to differentiate the hoses in applications. The company also offers a wide range of couplings to provide complete assembly solutions.

The company’s fluid power products are used in numerous applications in end markets including automotive replacement and first-fit; diversified industrial; industrial off-highway; industrial on-highway; energy and resources; and personal mobility. The largest portion of the company’s Fiscal 2023 fluid power revenue came from replacement markets. Within these replacement markets, the majority of the company’s revenue came from industrial applications.

Diverse End Markets

The company’s products play essential roles in a diverse range of applications across a wide variety of end markets, including the following: automotive replacement and first-fit end markets; diversified industrial applications from automated manufacturing and logistics systems to everyday consumer applications, such as printers, power washers, automatic doors and vacuum cleaners; industrial off-highway applications, such as agriculture and construction; industrial on-highway commercial vehicles, such as heavy-duty trucks and buses; energy and resources markets, such as oil, gas and mining; and personal mobility, such as scooters, motorcycles, bicycles, all-terrain vehicles (ATVs) and snowmobiles.

The company’s net sales have historically been, and remain, highly correlated with industrial activity and utilization, and not with any single end market given the diversification of the company’s business and high exposure to replacement markets. Key indicators include industrial production, industrial sales and manufacturer shipments.

The company’s products are sold in over 130 countries across its four commercial regions: the Americas; Europe, the Middle East & Africa (‘EMEA’); Greater China; and East Asia & India. The company has a long-standing presence in each of these regions.

Channels

The company sells its power transmission and fluid power products both as replacement components and as specified components on original equipment to customers worldwide. During Fiscal 2023, approximately 64% of the company’s net sales were generated from replacement channels and 36% from first-fit channels globally.

The company’s mix of replacement channel sales to first-fit sales varies by region based on the company’s market strategy and the maturity of the equipment fleet and channel. For example, in emerging markets, such as China and India, replacement channels are developing. By contrast, in North America and EMEA, where there are long-established replacement markets, approximately 67% and 70% of the company’s Fiscal 2023 net sales, respectively, were derived from these higher-margin replacement channels.

Replacement: The majority of the company’s sales are generated from customers in replacement channels, who primarily serve a large base of end users with installed equipment that follows a natural maintenance cycle.

In addition to the company’s products, it offers digital tools and other content to distributors, installers and end users of equipment containing the company’s products. The company also assists with customer training on product installation and early identification of wear-and-tear on components, which helps drive sales for the company’s channel customers while mitigating the risk of equipment failure for end users.

First-Fit: The company works closely with its first-fit customers (also referred to as OEMs) by providing application engineering expertise to assist them with equipment design and selecting the right products to optimize performance. The company selectively participates in first-fit projects, focusing on opportunities where the company is able to differentiate with technology and innovative solutions.

Customers

The company maintains long-standing relationships with many customers, who range from regional or local distributors to large, global multinational distributors and OEMs.

Sales and Marketing and Distribution Organization

The company’s sales and distribution operations are structured to serve its customers efficiently across the globe. The company has field representatives who possess local knowledge of customers and their product and application requirements, as well as established distribution networks in each region, giving the company the capability to usually meet its customers’ product availability needs on short lead times.

Manufacturing

The company’s commercial capabilities are complemented by its ‘in-region, for region’ manufacturing footprint, which generally allows the company to manufacture products in close proximity to its customers around the world. The company has power transmission and fluid power operations in each commercial region and typically manufactures products for both first-fit customers and replacement customers in the same factory, which provides for sharing of raw material inputs, improved factory loading, and demand leveling. The company operates manufacturing facilities and service centers, as well as several major technical centers giving it a presence in 30 countries throughout the world.

Intellectual Property

As of December 30, 2023, the company held more than 2,100 patents and patent applications and 3,500 trademarks in various jurisdictions.

Research and Development

The company’s research and development expense was $66.0 million for the year ended December 30, 2023.

History

Gates Industrial Corporation plc was founded in 1911. The company was incorporated under the Companies Act 2006 in 2017 and is registered in England and Wales.