Gates Industrial Reports First-Quarter 2024 Results
First-Quarter 2024 Financial Summary
- First-quarter net sales of
$862.6 million , down 3.9% compared to the prior-year period, including core revenue decline of 3.6%. - Net income attributable to shareholders of
$40.0 million , or$0.15 per diluted share. - Adjusted Net Income per diluted share of
$0.31 , inclusive of unfavorable tax impact. - Net income from continuing operations of
$46.2 million , or a margin of 5.4%. - Adjusted EBITDA of
$195.6 million and margin of 22.7%. - Increased full-year 2024 Adjusted EBITDA guidance.
Jurek continued, "We reduced our gross debt during the quarter. We have raised our full year Adjusted EBITDA guidance to reflect our outperformance in the first quarter. We are off to a solid start to the year and recent order improvement points to a more stable business environment."
First -Quarter Financial Results
First-quarter net sales were
Net income attributable to shareholders in the first quarter of 2024 was
First-quarter net income from continuing operations was
First-quarter Adjusted EBITDA was
Power Transmission Segment Results |
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Three months ended |
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(USD in millions) |
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% Change |
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% Core Change |
Net sales |
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(2.8 %) |
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(1.7 %) |
Adjusted EBITDA |
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10.5 % |
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Adjusted EBITDA margin |
22.3 % |
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19.6 % |
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270 bps |
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Power Transmission net sales for the first quarter of 2024 decreased by 2.8% to
Power Transmission Adjusted EBITDA was
Fluid Power Segment Results |
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Three months ended |
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(USD in millions) |
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% Change |
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% Core Change |
Net sales |
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(5.7 %) |
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(6.6 %) |
Adjusted EBITDA |
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14.7 % |
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Adjusted EBITDA margin |
23.2 % |
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19.1 % |
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410 bps |
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Fluid Power Adjusted EBITDA was
Liquidity, Capital Resources and Capital Deployment
During the first quarter of 2024, the Company used
As of
The Company repaid
In
Updated 2024 Guidance
The Company is updating its full year Adjusted EBITDA guidance for 2024. The table below reflects our updated full year 2024 financial guidance.
|
Prior 2024 |
Updated 2024 |
Change (At Midpoint) |
Core Revenue Growth |
(3%) to +1% |
(3%) to +1% |
No Change |
Adjusted EBITDA |
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|
|
Adjusted EPS |
|
|
No Change |
Capital Expenditures |
|
|
No Change |
Free Cash Flow Conversion |
90%+ |
90%+ |
No Change |
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 Revenue 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
About
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 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 more than 130 countries across our four commercial regions: the
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 free cash flow conversion), 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
Condensed Consolidated Statements of Operations (Unaudited) |
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Three months ended |
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(USD in millions, except per share amounts) |
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Net sales |
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$ 862.6 |
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$ 897.7 |
Cost of sales |
|
532.6 |
|
572.6 |
Gross profit |
|
330.0 |
|
325.1 |
Selling, general and administrative expenses |
|
211.7 |
|
232.1 |
Transaction-related expenses |
|
0.4 |
|
0.2 |
Restructuring expenses |
|
1.2 |
|
5.5 |
Operating income from continuing operations |
|
116.7 |
|
87.3 |
Interest expense |
|
37.5 |
|
40.8 |
Other (income) expenses |
|
(1.5) |
|
0.3 |
Income from continuing operations before taxes |
|
80.7 |
|
46.2 |
Income tax expense |
|
34.5 |
|
15.3 |
Net income from continuing operations |
|
46.2 |
|
30.9 |
Loss on disposal of discontinued operations |
|
0.1 |
|
0.3 |
Net income |
|
46.1 |
|
30.6 |
Less: non-controlling interests |
|
6.1 |
|
4.2 |
Net income attributable to shareholders |
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$ 40.0 |
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$ 26.4 |
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Earnings per share |
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Basic |
|
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Earnings per share from continuing operations |
|
$ 0.15 |
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$ 0.09 |
Earnings per share from discontinued operations |
|
— |
|
— |
Earnings per share |
|
$ 0.15 |
|
$ 0.09 |
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Diluted |
|
|
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Earnings per share from continuing operations |
|
$ 0.15 |
|
$ 0.09 |
Earnings per share from discontinued operations |
|
— |
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— |
Earnings per share |
|
$ 0.15 |
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$ 0.09 |
Condensed Consolidated Balance Sheets (Unaudited)
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(USD in millions, except share numbers and per share amounts) |
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As of
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As of
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Assets |
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Current assets |
|
|
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Cash and cash equivalents |
|
$ 522.2 |
|
$ 720.6 |
Trade accounts receivable, net |
|
797.7 |
|
768.2 |
Inventories |
|
677.2 |
|
647.2 |
Taxes receivable |
|
44.2 |
|
30.4 |
Prepaid expenses and other assets |
|
245.8 |
|
234.9 |
Total current assets |
|
2,287.1 |
|
2,401.3 |
Non-current assets |
|
|
|
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Property, plant and equipment, net |
|
619.2 |
|
630.0 |
|
|
2,012.5 |
|
2,038.7 |
Pension surplus |
|
8.4 |
|
8.6 |
Intangible assets, net |
|
1,347.0 |
|
1,386.1 |
Right-of-use assets |
|
120.9 |
|
120.1 |
Taxes receivable |
|
18.3 |
|
18.5 |
Deferred income taxes |
|
607.4 |
|
622.4 |
Other non-current assets |
|
25.1 |
|
28.8 |
Total assets |
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$ 7,045.9 |
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$ 7,254.5 |
Liabilities and equity |
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Current liabilities |
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Debt, current portion |
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$ 27.9 |
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$ 36.5 |
Trade accounts payable |
|
451.4 |
|
457.7 |
Taxes payable |
|
44.9 |
|
36.6 |
Accrued expenses and other current liabilities |
|
223.7 |
|
248.5 |
Total current liabilities |
|
747.9 |
|
779.3 |
Non-current liabilities |
|
|
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Debt, less current portion |
|
2,313.1 |
|
2,415.0 |
Post-retirement benefit obligations |
|
81.6 |
|
83.8 |
Lease liabilities |
|
112.0 |
|
110.6 |
Taxes payable |
|
83.3 |
|
79.4 |
Deferred income taxes |
|
114.3 |
|
119.4 |
Other non-current liabilities |
|
98.3 |
|
123.1 |
Total liabilities |
|
3,550.5 |
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3,710.6 |
Shareholders' equity |
|
|
|
|
—Shares, par value of |
|
2.6 |
|
2.6 |
—Additional paid-in capital |
|
2,590.1 |
|
2,583.8 |
—Accumulated other comprehensive loss |
|
(865.9) |
|
(828.5) |
—Retained earnings |
|
1,451.8 |
|
1,462.3 |
Total shareholders' equity |
|
3,178.6 |
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3,220.2 |
Non-controlling interests |
|
316.8 |
|
323.7 |
Total equity |
|
3,495.4 |
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3,543.9 |
Total liabilities and equity |
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$ 7,045.9 |
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$ 7,254.5 |
Condensed Consolidated Statements of Cash Flows (Unaudited) |
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Three months ended |
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(USD in millions) |
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Cash flows from operating activities |
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Net income |
$ 46.1 |
|
$ 30.6 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
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Depreciation and amortization |
54.6 |
|
54.5 |
Foreign exchange and other non-cash financing (income) expenses |
(11.1) |
|
9.7 |
Share-based compensation expense |
8.6 |
|
9.5 |
Decrease in post-employment benefit obligations, net |
(2.2) |
|
(3.0) |
Deferred income taxes |
(1.1) |
|
(3.1) |
Other operating activities |
(4.8) |
|
1.0 |
Changes in operating assets and liabilities: |
|
|
|
—Accounts receivable |
(38.7) |
|
(27.7) |
—Inventories |
(36.9) |
|
6.5 |
—Accounts payable |
(0.4) |
|
(22.6) |
—Prepaid expenses and other assets |
3.7 |
|
4.8 |
—Taxes payable |
(2.3) |
|
(9.2) |
—Other liabilities |
(36.5) |
|
1.5 |
Net cash (used in) provided by operating activities |
(21.0) |
|
52.5 |
Cash flows from investing activities |
|
|
|
Purchases of property, plant and equipment |
(16.0) |
|
(11.8) |
Purchases of intangible assets |
(2.1) |
|
(2.8) |
Cash paid under corporate-owned life insurance policies |
(4.1) |
|
(17.0) |
Cash received under corporate-owned life insurance policies |
2.7 |
|
1.5 |
Proceeds from the sale of property, plant and equipment |
— |
|
0.2 |
Net cash used in investing activities |
(19.5) |
|
(29.9) |
Cash flows from financing activities |
|
|
|
Issuance of shares |
2.5 |
|
11.3 |
Buy-back of shares |
(50.3) |
|
— |
Payments of long-term debt |
(104.9) |
|
(4.9) |
Debt issuance costs paid |
— |
|
(0.3) |
Other financing activities |
3.8 |
|
(8.2) |
Net cash used in financing activities |
(148.9) |
|
(2.1) |
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
(8.9) |
|
(4.1) |
Net (decrease) increase in cash and cash equivalents and restricted cash |
(198.3) |
|
16.4 |
Cash and cash equivalents and restricted cash at the beginning of the period |
724.0 |
|
581.4 |
Cash and cash equivalents and restricted cash at the end of the period |
$ 525.7 |
|
$ 597.8 |
Supplemental schedule of cash flow information |
|
|
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Interest paid |
$ 45.5 |
|
$ 45.9 |
Income taxes paid |
$ 36.5 |
|
$ 27.3 |
Accrued capital expenditures |
$ 1.6 |
|
$ 2.0 |
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.
Core revenue 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 revenue 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.
Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA (Unaudited) |
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Three months ended |
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(USD in millions) |
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Net income from continuing operations |
$ 46.2 |
|
$ 30.9 |
Adjusted for: |
|
|
|
Income tax expense |
34.5 |
|
15.3 |
Net interest and other expenses |
36.0 |
|
41.1 |
Depreciation and amortization |
54.6 |
|
54.5 |
Transaction-related expenses (1) |
0.4 |
|
0.2 |
Restructuring expenses (2) |
1.2 |
|
5.5 |
Share-based compensation expense |
8.6 |
|
9.5 |
Inventory impairments and adjustments (3) (included in cost of sales) |
13.9 |
|
0.6 |
Severance expenses (included in cost of sales) |
— |
|
0.5 |
Severance expenses (included in SG&A) |
0.1 |
|
0.6 |
Credit loss related to customer bankruptcy (included in SG&A) (4) |
0.1 |
|
10.7 |
Cybersecurity incident expenses (5) |
— |
|
5.1 |
Adjusted EBITDA |
$ 195.6 |
|
$ 174.5 |
|
|
|
|
|
$ 862.6 |
|
$ 897.7 |
Adjusted EBITDA Margin |
22.7 % |
|
19.4 % |
(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 |
(3) |
Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a Last-in-First-out ("LIFO") basis. |
(4) |
On |
(5) |
On |
Reconciliation of Net Income Attributable to Shareholders to Adjusted Net Income (Unaudited) |
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Three months ended |
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(USD in millions, except share numbers and per share amounts) |
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Net income attributable to shareholders |
$ 40.0 |
|
$ 26.4 |
Adjusted for: |
|
|
|
Loss on disposal of discontinued operations |
0.1 |
|
0.3 |
Amortization of intangible assets arising from the 2014 acquisition of Gates |
29.1 |
|
29.0 |
Transaction-related expenses (1) |
0.4 |
|
0.2 |
Restructuring expenses (2) |
1.2 |
|
5.5 |
Share-based compensation expense |
8.6 |
|
9.5 |
Inventory impairments and adjustments (3) (included in cost of sales) |
13.9 |
|
0.6 |
Adjustments relating to post-retirement benefits |
(0.7) |
|
(0.7) |
Financing and other FX related losses |
1.5 |
|
1.6 |
One-time deferred tax benefit from changes in realizability of certain deferred tax |
3.4 |
|
— |
Other adjustments |
(1.7) |
|
(1.8) |
Credit loss related to customer bankruptcy (included in SG&A) (5) |
0.1 |
|
10.7 |
Cybersecurity incident expenses (6) |
— |
|
5.1 |
Estimated tax effect of the above adjustments |
(12.4) |
|
(13.6) |
Adjusted Net Income |
$ 83.5 |
|
$ 72.8 |
|
|
|
|
Diluted weighted-average number of shares outstanding |
267,435,531 |
|
287,878,415 |
Adjusted Net Income per diluted share |
$ 0.31 |
|
$ 0.25 |
(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 |
(3) |
Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a Last-in-First-out ("LIFO") basis. |
(4) |
During the three months ended |
(5) |
On |
(6) |
On |
Reconciliation of (Unaudited) |
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Three Months Ended |
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(USD in millions) |
Power Transmission |
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Total |
Net sales for the three months ended |
$ 532.8 |
|
$ 329.8 |
|
$ 862.6 |
Impact on net sales of movements in currency rates |
5.9 |
|
(3.1) |
|
2.8 |
Core revenue for the three months ended |
$ 538.7 |
|
$ 326.7 |
|
$ 865.4 |
|
|
|
|
|
|
Net sales for the three months ended |
548.1 |
|
349.6 |
|
897.7 |
Decrease in net sales on a core basis (core sales) |
$ (9.4) |
|
$ (22.9) |
|
$ (32.3) |
|
|
|
|
|
|
Core revenue decline |
(1.7 %) |
|
(6.6 %) |
|
(3.6 %) |
(1) |
Throughout this document the terms "net sales" and "revenue" are used interchangeably in reference to the GAAP measure "net sales." |
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