FORM10-K
28, 2019
| England and Wales | 98-1395184 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| 80202 | ||
| (Address of principal executive offices) | (Zip Code) | |
(Registrant’s telephone number, including area code)
code)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Ordinary Shares, $0.01 par value per share | GTES | New York Stock Exchange |
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to thisForm 10-K. ☒
| Large accelerated filer | ☐ | Accelerated filer | ||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ | |||||
As of July 1, 2017, the last day of the registrant’s most recently completed second quarter, the registrant’s common stock was not publicly traded.
shareholders are incorporated by reference into Part III.
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Statements
Social Media
We use our website (www.gates.com), our corporate Facebook page @GatesCorporation and our corporate Twitter account @GatesAuto as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.
The last day of the fiscal year for the Post-Acquisition Predecessor’s annual consolidated financial statements is the Saturday nearest December 31. Accordingly, the Post-Acquisition Predecessor’s consolidated financial statements are presented for the periods from January 1, 2017 to December 30, 2017 (“Fiscal 2017”), January 3, 2016 to December 31, 2016 (“Fiscal 2016”) and January 4, 2015 to January 2, 2016 (“Fiscal 2015”).
Gates Industrial Corporation plc is a public limited company that was organized under the laws of England and Wales on September 25, 2017. It is the financial reporting entity following the completion of its initial public offering (the “IPO”) in January 2018. Prior to the completion of the IPO, we undertook certain reorganization transactions (the“pre-IPO reorganization transactions”) so that Gates Industrial Corporation plc now indirectly owns all equity interests in Omaha Topco and is the holding company of our business. In connection with thepre-IPO reorganization transactions, the equity owners of Omaha Topco received depositary receipts representing ordinary shares in Gates Industrial Corporation plc in consideration for their equity in Omaha Topco, at a ratio of 0.76293 of our ordinary shares for each outstanding ordinary share of Omaha Topco. The reorganization was accounted for as a transaction between entities under common control in a manner similar topooling-of-interest and the net assets were recorded at the historical cost basis when the entities were contributed into Gates Industrial Corporation plc.
Gates Industrial Corporation plc is a newly organized entity and had no significant business transactions or activities prior to thepre-IPO reorganization transactions, and, as a result, the historical financial information reflects that of Omaha Topco.
Blackstone Group Inc.
Gates has2014 and in 2015 established a new executive leadership team with Ivo Jurek as Chief Executive Officer.
In addition, we continue to invest organically in new production capacity. During Fiscal 2018, we opened two new facilities located in Poland and in Mexico, and we also expanded our Changzhou facility in China.
2019.
Our hydraulic products and assemblies are used in construction, agricultural and forestry equipment, as well as in food and other processing lines and stationary machinery.
Currently, there is economic uncertainty in the Asia region, particularly China, due to the recent outbreak of the novel coronavirus (2019-nCoV) that was first reported from Wuhan, China, on December 31, 2019.
adversely affected.
facilities or consolidate facilities to align with our strategies.
operations.
U.S.
We operate in industries with respect to which there are many third-party patents. Owners of patents or other intellectual property rights that we need to conduct our business as it evolves may be unwilling to license such intellectual property rights to us on terms we consider reasonable. We cannot assure you that our business operations, products and methods do not or will not infringe, misappropriate or otherwise violate the patents or other intellectual property rights of third parties. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages, if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our products, product candidates or other technology, or those we develop with our R&D partners. If we are sued for intellectual property infringement, we will likely incur significant expenses investigating and defending such claims, even if we prevail. Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our information technology systems are decentralized, which may lead to certain
In general,systems, networks, products, solutions, services and data.
Our business could be materially adversely affected by interruptionsliability to our computer and IT systems.
Most of our business activitiescustomers.
basis. We may be unsuccessful in the development, maintenance and upgrading of our own systems, and we may underestimate the costs and expenses of developing and implementing our own systems. Also, our revenue may be hampered during the period of implementing an alternative system, which period could extend longer than we anticipated.
Despite our implementation of security measures, our computer and IT systems are vulnerablesusceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components;components, power outages, hardware failures;failures or computer viruses, as well as circumstances beyond our reasonable control, including power outages; acts of malfeasance, unauthorized access (“hacking”), acts of terror, acts of government, natural disasters, civil unrest,viruses. If these information technology systems suffer severe damage or disruption and denial of service attacks; any of which may lead to the theft of our intellectual property and trade secrets, the compromising of confidential information, manipulation and destruction of data and production downtimes. This could also impede our ability to record or process orders, manufacture and shipissues are not resolved in a timely manner, account for and collect receivables, protect sensitive data of the Company, our customers, our employees, our suppliers and other business partners, comply with our third-party obligations of confidentiality and care, or otherwise carry on business in the normal course. Any failure of these systems or cybersecurity incidents could require significant costly remediation beyond levels covered by insurance and could cause us to lose customers and/or revenue, require us to incur significant expense to remediate, including as a result of legal or regulatory claims or proceedings, or damage our reputation, any of which could have a material adverse effect on our business, financial condition and results of operations. The regulatory environment related to information security and privacy is constantly changing, and compliance with those requirementsoperations could result in additional costs.
be materially adversely affected.
In addition, new
We could also be responsible for the investigation and remediation of environmental contamination and may be subjectsignificant costs or limit access to associated liabilities and claims for personal injury and property and natural resource damages. We own, lease or operate numerous properties (many of which are sites of long-standing manufacturing operations), have been in business for many years and have acquired and disposed of properties and businesses over that time. Hydrocarbons, chlorinated solvents or other regulated substances or wastes may have been disposed of at or released from properties owned, leased or operated by us or at or from other locations where such substances or wastes were taken for disposal. Such properties may be subject to investigation,clean-up and monitoring requirements. Under some environmental laws, liability for the entire cost of the cleanup of contaminated sites may be imposed jointly and severally upon current or former owners, lessees or operators of a facility, or upon any party who sent waste to a disposal site, regardless of fault or the lawfulness of the activities giving rise to the contamination.
certain markets.
In addition, our products may be subject to EHS regulationsadditional liability for environmental contamination in the markets in whichfuture, regardless of whether we operate;caused such regulations are becoming increasingly common and stringent. These regulations may restrict or prohibit the types of substances that are used or present in our products, or impose labeling or other requirements. For example, some of our products manufactured or sold in the E.U. may potentially be subject to the E.U.’s Registration, Evaluation, Authorisation, and Restriction of Chemical Substances regulation (“REACH”), which regulates the sale of certain hazardous substances, or the Restriction of Hazardous Substances regulation (“RoHS”), which limits the use of certain hazardous substances in electrical and electronic equipment, or similar requirements in other jurisdictions. Any failure by our products to meet such standards could result in significant costs or delays relating to sale of such products, or require product reformulations or removal from those markets as well as the imposition of fines and penalties.
See “—We may be subject to recalls, product liability claims or may incur costs related to product warranties that may materially and adversely affect our business” for additional risks relating to EHS regulations applicable to our products.
contamination.
Our tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in taxThe laws and regulations. We are also subject to examination by taxing authorities of our income tax returns for tax years 2012 to 2016regulations in the United States and for tax years 2007 to 2016 in other major foreign jurisdictions. The
results of audits, examinations and other contests related to previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on our provision for income taxes and cash tax liability. Additionally, tax rates, tax laws or their implementation, and applicable tax authority practices in any particular jurisdiction could change in the future, possibly on a retroactive basis, and any such change could have a material adverse effect on the business, financial condition, results of operation and prospects of the Company.
We are subject to changes in legislative, regulatory and legal developments involving taxes and the interpretation of those laws is subject to challenge by the relevant governmental authorities.
We are subject to U.S. federal and state, and other countries’ and jurisdictions’, income, payroll, property, sales and use, fuel, and other types of taxes. These laws and regulationsthese jurisdictions are inherently complex and the Company and its subsidiaries will be obliged to make judgments and interpretations about the application of these laws and regulations to the Company and its subsidiaries and their operations and businesses. The interpretationbusinesses, including those related to any restructuring of intercompany operations, holdings or financings; the valuation of intercompany services; cross-border payments between affiliated companies; and applicationthe related effects on income tax, VAT and transfer tax. Further, our tax liabilities could be adversely affected by numerous other factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of thesedeferred income tax assets and liabilities, and changes in tax laws and regulations could be challengedregulations. We are regularly under audit by taxing authorities in certain of the relevant governmental authorities,jurisdictions in which we operate. Although we believe our tax estimates are reasonable, including our estimates of reserves for unrecognized tax benefits related to the implementation of our European corporate center in Fiscal 2019, any changes in our judgments and interpretation of tax laws or any material differences as a result of the audits could result in administrative or judicial procedures, actions or sanctions, the ultimate outcome of which couldunfavorable tax adjustments that have a materialan adverse effect on the business, financial condition, results of operation and prospects of the Company.
our overall tax liability.
We Further, we may not qualify for benefits under the tax treaties entered into between the United Kingdom and other countries.
We intend to operate in a manner such that when relevant, we are eligible for benefits under the tax treaties entered into between the U.K. and other countries. However, our ability to qualify and continue to qualify for such benefits will depend upon the requirements contained within each treaty and the applicable domestic laws,Not being treated exclusively as the case may be, on the facts and circumstances surrounding our operations and management, and on the relevant interpretationa resident of the U.K. for tax authorities and courts.
Our failure to qualify for benefits under the tax treaties entered into between the U.K. and other countriespurposes could result in adverse tax consequences to us and could result in certain tax consequences of owning or disposing of our ordinary shares.
The value of our deferred tax assets could become impaired, which could materially and adversely affect our results of operations and financial condition.
In accordance with FASB ASC Topic 740 “Income Taxes,” each quarter we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. This topic requires that the tax effects of a position be recognized only if it is“more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. Themore-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not consideredmore-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, themore-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in materialnon-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations and financial condition. In addition, future changes in laws or regulations could have a material impact on the company’s overall tax position.
Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expenses and benefits are determined separately for each tax paying component (an individual entity) or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions which have valuation allowances against their deferred tax assets provide no current financial statement tax benefit. As a result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.
Restriction on use of tax attributes may result from an “ownership change” under applicable tax law.
Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), limits the ability of a corporation that undergoes an “ownership change” to use its tax attributes, such as net operating losses and tax credits. In general, an “ownership change” occurs if shareholders owning 5% or more (applying certain look-through rules) of an issuer’s outstanding ordinary shares, collectively, increase their ownership percentage by more than 50 percentage points within any three-year period over such shareholders’ lowest percentage ownership during this period. If we were to issue new ordinary shares, such new shares could contribute to such an “ownership change” under U.S. tax law. Moreover, not every event that could contribute to such an “ownership change” is within our control. If an “ownership change” under Section 382 were to occur, our ability to utilize tax attributes in the future may be limited.
us.
Repayment of our debt is dependent on cash flow generated by our subsidiaries, which may be subject to limitations beyond our control.
Our subsidiaries own all of our assets and conduct all of our operations. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to Gates Global LLC, by dividend, debt repayment or otherwise.
Unless they are obligors of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on such indebtedness or to make funds available to the notes issuers for that purpose. Ournon-guarantor subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Eachnon-guarantor subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from ournon-guarantor subsidiaries. While limitations on our subsidiaries restrict their ability to pay dividends or make other intercompany payments to Gates Global LLC, these limitations are subject to certain qualifications and exceptions.
In the event that Gates Global LLC is unable to receive distributions from subsidiaries, it may be unable to make required principal and interest payments on our indebtedness.
Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and market price of the ordinary shares.
Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that eventually we will be required to meet. Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. Additionally, our independent registered public accounting firm will be required to attest to the effectiveness of management’s internal control over financial reporting on an annual basis. If we are not able to complete this initial assessment of our internal controls and otherwise implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting.
Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, which may result in a breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the market price of our ordinary shares.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our ordinary shares, our share price and trading volume could decline.
The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our ordinary shares or publishes inaccurate or unfavorable research about our business, our ordinary share price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our ordinary share price or trading volume to decline and our ordinary shares to be less liquid.
business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of our ordinary shares could decrease significantly.
English law will require that we meet certain additional financial requirements before we declare dividends and repurchase shares.
Under English law, with limited exceptions, Gates Industrial Corporation plc will only be able to declare dividends, make distributions or repurchase shares out of “distributable reserves” on Gates Industrial Corporation plc’s stand-alone balance sheet, without regard to our consolidated financial statements. Distributable reserves are a company’s accumulated, realized profits, to the extent not previously utilized by distribution or capitalization, less its accumulated, realized losses, to the extent not previously written off in a reduction or reorganization of capital duly made.
Gates Industrial Corporation plc does not currently have distributable reserves. We intend to seek the approval of a capital reduction by the English court to create distributable reserves that could be used for future dividend payments or to effect share repurchases. If that approval is not received, Gates Industrial Corporation plc will not have sufficient distributable reserves to declare and pay dividends for the foreseeable future and Gates Industrial Corporation plc would be required to undertake other efforts to allow it to declare dividends or repurchase shares. These efforts may include certain intra-group reorganizations which are established alternatives for the creation of distributable reserves in a U.K. public limited company.
In connection with our IPO, our executive officers, directors and holders
Upon the expiration of thelock-up agreements described above, all of such ordinary shares will be eligible for resale in the public market, subject, in the case of ordinary shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsor will continue to be considered an affiliate following the expiration of thelock-up period based on its expected share ownership and its board nomination rights. Certain other of our shareholders may also be considered affiliates at that time. However, commencing 180 days following our IPO, the holders of theseour ordinary shares, will havea new class or classes of shares, including preference shares, with nominal value in any currency and with, or having attached to them, such powers, designations, preferences, voting rights, rights and terms of redemption, and relative participating, optional or other special rights and qualifications, limitations and restrictions attaching thereto as the right, subjectBoard of Directors may determine, including rights to certain exceptions and conditions,(a) receive dividends (which may include rights to require us to register their ordinary shares under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding ordinary shares would result in such securities becoming freely tradable without compliance with Rule 144 upon effectivenessreceive preferential or cumulative dividends), (b) distributions made on a winding up of the registration statement.
On January 29, 2018, we filed a registration statement on FormS-8 under the Securities Act to register ordinary shares or securitiesCompany and (c) be convertible into, or exchangeable for, ordinary shares issued pursuantof any other class or classes or of any other series of the same or any other class or classes of shares, at such price or prices (subject to the 2014 Incentive Plan,Companies Act 2006 (“Companies Act”)) or at such rates of exchange and with such adjustments as may be determined by our Board of Directors.
As restrictions on resale end, the market pricevoting power of our ordinary shares. For example, we might grant holders of a new class of shares the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions.
shares.
management.
U.K. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in the United KingdomU.K. will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United StatesU.S. and the United KingdomU.K. do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.
Any shareholder whose principal currency is not the U.S. dollar will be subject to exchange rate fluctuations.
Our ordinary shares are traded in, and any cash dividends or other distributions to be declared in respect of them, if any, will be denominated in, U.S. dollars. Shareholders whose principal currency is not the U.S. dollar will be exposed to foreign currency exchange rate risk. Any depreciation of the U.S. dollar in relation to such foreign currency would reduce the value of our ordinary shares held by such shareholders, whereas any appreciation of the U.S. dollar would increase their value in foreign currency terms. In addition, we will not offer our shareholders the option to elect to receive dividends, if any, in any other currency. Consequently, our shareholders may be required to arrange their own foreign currency exchange, either through a brokerage house or otherwise, which could incur additional commissions or expenses.
shares and our access to the capital markets.
Gates leases a further 95
Securities
Recent Sales of Unregistered Securities
In connection with our formation in September 2017, we issued one ordinary share for $0.01 and one redeemable preferred share for £50,000 to Blackstone Capital Partners (Cayman) VI L.P. in exchange for a note due on April 2, 2018. The issuance of such shares was not registered under the Securities Act, because the shares were offered and sold in a transaction by the issuer not involving any public offering exempt from registration under Section 4(a)(2) of the Securities Act.
In connection with the closing of our IPO on January 29, 2018, we issued 245,474,605 ordinary shares in consideration for the ordinary shares and certain indebtedness of a newly formed subsidiary of Omaha Topco and ourpre-IPO owners received depositary receipts representing such ordinary shares. Such securities were issued in reliance on the exemption contained in Section 4(a)(2) of the Securities Act, as transactions by issuers not involving a public offering. No general solicitation or underwriters were involved in such issuances.
Use of Proceeds from Registered Securities
On January 29, 2018, we completed an IPO in which we sold 38,500,000 ordinary shares at a price of $19.00 per share and on February 5, 2018 we issued an additional 5,775,000 ordinary shares pursuant to the exercise in full of the underwriters’ over-allotment option. The shares offered and sold in the IPO were registered under the Securities Act pursuant to our Registration Statement on FormS-1 (FileNo. 333-222310), which was declared effective by the SEC on January 22, 2018. The offering did not terminate until after the sale of all 44,275,000 ordinary shares registered on the registration statement. The aggregate offering price for the shares registered and sold by us was approximately $841.2 million. The underwriters of the offering were led by Citigroup Global Markets Inc, Morgan Stanley & Co. LLC, UBS Securities LLC, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC and RBC Capital Markets, LLC.
The IPO generated net proceeds of approximately $789.6 million to us after net underwriting discounts and commissions of $42.1 million and other offering expenses of approximately $9.5 million. Blackstone Advisory Partners L.P., an underwriter in the offering, is an affiliate of our Sponsor and received underwriting fees of approximately $3.2 million. No other offering expenses were paid directly or indirectly to any of our directors or officers (or their associates), persons owning 10% or more of our ordinary shares or any other affiliates. We used the net proceeds from the offering, together with available cash, to (i) redeem all €235.0 million ($285.8 million equivalent as of the redemption date) principal amount of our euro notes, (ii) redeem approximately $622.0 million principal amount of our dollar notes and (iii) redeem our £50,000 redeemable preferred share issued in connection with thepre-IPO reorganization transactions.
In Fiscal 2017, Fiscal 2016
Affiliated Purchasers
The unaudited consolidated balance sheet as of January 3, 2015 has been prepared on the same basis as the audited consolidated financial statements.
Statement of operations data: Net sales Net income (loss) from continuing operations Gain (loss) on disposal of discontinued operations, net of tax Loss from discontinued operations, net of tax benefit Net income (loss) Non-controlling interests Net income (loss) attributable to shareholders Basic earnings per share data Earnings (loss) per share from continuing operations Earnings (loss) per share from discontinued operations Net income (loss) per share Diluted earnings per share data Earnings (loss) per share from continuing operations Earnings (loss) per share from discontinued operations Net income (loss) per share (dollars in millions) Fiscal
2017Fiscal
2016Fiscal
2015Post-
Acquisition
Predecessor
2014Pre-
Acquisition
Predecessor
2014Fiscal
2013$ 3,041.7 $ 2,747.0 $ 2,745.1 $ 1,445.1 $ 1,597.1 $ 2,947.3 182.0 71.9 50.9 (86.9 ) 14.3 120.7 0.7 12.4 — (2.3 ) (0.1 ) 1.0 — — — — (47.9 ) (6.8 ) 182.7 84.3 50.9 (89.2 ) (33.7 ) 114.9 (31.4 ) (26.6 ) (26.0 ) (7.7 ) (11.5 ) (28.4 ) $ 151.3 $ 57.7 $ 24.9 $ (96.9 ) $ (45.2 ) $ 86.5 $ 0.62 $ 0.18 $ 0.10 $ (0.39 ) — 0.05 — (0.01 ) $ 0.62 $ 0.23 $ 0.10 $ (0.40 ) $ 0.60 $ 0.18 $ 0.10 $ (0.39 ) — 0.05 — (0.01 ) $ 0.60 $ 0.23 $ 0.10 $ (0.40 )
| (dollars in millions) | As of December 30, 2017 | As of December 31, 2016 | As of January 2, 2016 | As of January 3, 2015 | As of December 31, 2013 | ||||||||||||||||||||
Balance sheet data: | |||||||||||||||||||||||||
Total assets | $ | 6,853.7 | $ | 6,383.3 | $ | 6,565.6 | $ | 7,143.5 | $ | 5,164.2 | |||||||||||||||
Debt, long term and current portion | $ | 3,955.7 | $ | 3,836.9 | $ | 3,907.3 | $ | 4,002.3 | $ | 1,718.4 | |||||||||||||||
As discussed further in the consolidated financial statements included elsewhere in this annual report, our net income for the fourth quarter of 2017 includes a provisional benefit of $118.2 million related to the new comprehensive tax legislation enacted in the U.S. in December 2017.
| (dollars in millions) | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | ||||||||||||||
| Statement of operations data: | |||||||||||||||||||
| Net sales | $ | 3,087.1 | $ | 3,347.6 | $ | 3,041.7 | $ | 2,747.0 | $ | 2,745.1 | |||||||||
| Income from continuing operations before taxes | 198.8 | 303.5 | 109.5 | 93.0 | 41.7 | ||||||||||||||
| Income tax (benefit) expense | (495.9 | ) | 31.8 | (72.5 | ) | 21.1 | (9.2 | ) | |||||||||||
| Net income from continuing operations | 694.7 | 271.7 | 182.0 | 71.9 | 50.9 | ||||||||||||||
| Loss (gain) on disposal of discontinued operations, net of tax | 0.6 | 0.6 | (0.7 | ) | (12.4 | ) | — | ||||||||||||
| Net income | 694.1 | 271.1 | 182.7 | 84.3 | 50.9 | ||||||||||||||
| Non-controlling interests | 4.0 | 25.8 | 31.4 | 26.6 | 26.0 | ||||||||||||||
| Net income attributable to shareholders | $ | 690.1 | $ | 245.3 | $ | 151.3 | $ | 57.7 | $ | 24.9 | |||||||||
| Basic earnings per share data | |||||||||||||||||||
| Earnings per share from continuing operations | $ | 2.38 | $ | 0.86 | $ | 0.62 | $ | 0.18 | $ | 0.10 | |||||||||
| Earnings per share from discontinued operations | — | — | — | 0.05 | — | ||||||||||||||
| Net income per share | $ | 2.38 | $ | 0.86 | $ | 0.62 | $ | 0.23 | $ | 0.10 | |||||||||
| Diluted earnings per share data | |||||||||||||||||||
| Earnings per share from continuing operations | $ | 2.37 | $ | 0.84 | $ | 0.60 | $ | 0.18 | $ | 0.10 | |||||||||
| Earnings per share from discontinued operations | — | — | — | 0.05 | — | ||||||||||||||
| Net income per share | $ | 2.37 | $ | 0.84 | $ | 0.60 | $ | 0.23 | $ | 0.10 | |||||||||
(dollars in millions) | As of December 28, 2019 | As of December 29, 2018 | As of December 30, 2017 | As of December 31, 2016 | As of January 2, 2016 | ||||||||||||||
| Balance sheet data: | |||||||||||||||||||
| Total assets | $ | 7,411.3 | $ | 6,722.6 | $ | 6,853.7 | $ | 6,383.3 | $ | 6,565.6 | |||||||||
| Debt, long term and current portion | $ | 2,958.4 | $ | 3,005.0 | $ | 3,955.7 | $ | 3,836.9 | $ | 3,907.3 | |||||||||
Factors” above.
Within the diverse end markets we serve, our highly engineered products are often critical components in applications for which the cost of downtime is high relative to the cost of our products, resulting in the willingness of end users to pay a premium for superior performance and availability. These applications subject our products to normal wear and tear, resulting in a natural replacement cycle that drives high-margin, recurring revenue. Our product portfolio represents one of the broadest ranges of power transmission and fluid power products in the markets we serve, and we maintain long-standing relationships with a diversified group of blue-chip customers throughout the world. As a leading designer, manufacturer and marketer of highly engineered, mission-critical products, we have become an industry leader across most of the regions and end markets in which we operate.
Fiscal 2017 Results Comparedyear ended December 28, 2019 compared with Fiscal 2016 Results
the results for the year ended December 29, 2018
| (dollars in millions) | Fiscal 2017 | Fiscal 2016 | ||||||
Net sales | $ | 3,041.7 | $ | 2,747.0 | ||||
Cost of sales | 1,823.7 | 1,686.2 | ||||||
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Gross profit | 1,218.0 | 1,060.8 | ||||||
Selling, general and administrative expenses | 779.6 | 744.1 | ||||||
Transaction-related costs | 18.1 | 0.4 | ||||||
Impairments | 2.8 | 3.2 | ||||||
Restructuring expenses | 17.4 | 11.4 | ||||||
Other operating (income) expense | (0.3 | ) | 2.8 | |||||
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Operating income | 400.4 | 298.9 | ||||||
Interest expense | 234.6 | 216.3 | ||||||
Other expense (income) | 56.3 | (10.4 | ) | |||||
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Income before taxes | 109.5 | 93.0 | ||||||
Income tax (benefit) expense | (72.5 | ) | 21.1 | |||||
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Net income from continuing operations | $ | 182.0 | $ | 71.9 | ||||
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Adjusted EBITDA(1) | $ | 669.1 | $ | 594.9 | ||||
Adjusted EBITDA margin (%) | 22.0 | % | 21.7 | % | ||||
| For the year ended | |||||||
| (dollars in millions) | December 28, 2019 | December 29, 2018 | |||||
| Net sales | $ | 3,087.1 | $ | 3,347.6 | |||
| Cost of sales | 1,944.6 | 2,017.0 | |||||
| Gross profit | 1,142.5 | 1,330.6 | |||||
| Selling, general and administrative expenses | 777.3 | 805.8 | |||||
| Transaction-related expenses | 2.6 | 6.7 | |||||
| Impairment of intangibles and other assets | 0.7 | 0.6 | |||||
| Restructuring expenses | 6.0 | 6.4 | |||||
| Other operating expenses | 9.1 | 14.3 | |||||
| Operating income from continuing operations | 346.8 | 496.8 | |||||
| Interest expense | 157.8 | 175.9 | |||||
| Other (income) expenses | (9.8 | ) | 17.4 | ||||
| Income from continuing operations before taxes | 198.8 | 303.5 | |||||
| Income tax (benefit) expense | (495.9 | ) | 31.8 | ||||
| Net income from continuing operations | $ | 694.7 | $ | 271.7 | |||
Adjusted EBITDA(1) | $ | 611.0 | $ | 755.8 | |||
| Adjusted EBITDA margin | 19.8 | % | 22.6 | % | |||
(1) | See |
Growth in Greater China and South America was flat, but the other regions declined by low single digits on a percentage basis as compared with the prior year. Debt: Dollar Term Loan Euro Term Loan Dollar notes Euro notes Other loans Other interest expense Interest on bank deposits Foreign currency loss (gain) on net debt and debt hedging instruments Other (income) expenses during the year ended December 28, 2019 compared with the prior year. expenses as noted above. Net sales Adjusted EBITDA Adjusted EBITDA margin (%) the year ended December 28, 2019) Net sales Adjusted EBITDA Adjusted EBITDA margin (%) Net sales Cost of sales Gross profit Selling, general and administrative expenses Transaction-related costs Impairments of intangibles and other assets Restructuring expenses Other operating expense (income) Operating income from continuing operations Interest expense Other income Income from continuing operations before tax Income tax expense (benefit) Net income from continuing operations Adjusted EBITDA(1) Adjusted EBITDA margin (%) Debt: —Interest on bank and other loans: Dollar Term Loan Euro Term Loan Dollar notes Euro notes Other bank loans 2015 Notes Other interest expense Interest earned on bank deposits Currency transaction gain on net debt and hedging instruments Other Net sales Adjusted EBITDA Adjusted EBITDA margin (%) Adjusted EBITDA decline from the prior year Adjusted EBITDA margin of 23.5%, driven by the impacts described above. Net sales Adjusted EBITDA Adjusted EBITDA margin (%) sales for the year ended December 28, 2019) developed markets. points. next twelve months. with the year ended December 29, 2018 time. acquisition of Rapro in April 2018. certain majority-owned subsidiaries. Bank overdrafts Bank and other loans: —Secured Term Loans (U.S. dollar and euro denominated) —Unsecured Senior Notes (U.S. dollar and euro denominated) Other borrowings redemption date of $13.2 million. The majority of the costs totaling approximately $8.6 million related to the refinancing transactions have been deferred and will be amortized to interest expense over the remaining term of the related borrowings using the effective interest method. is U.S. source income. 2024. These term loan facilities bear interest at a floating rate. As of December The Euro Term Loan interest rate is re-set on the last business day of each quarter. 2020. income (“OCI”). statement of operations. 2023. 2023. senior secured credit facilities. cash equivalents. During 29, 2018. disclosed. The table below excludes our gross liability for uncertain tax positions of $108.8 million because the timing of cash settlement, if any, is unknown at this time. Bank overdrafts and debt(1): —Principal —Interest payments(2)(3) Derivative financial instruments: —Payments(4) —Receipts(4) Capital leases Operating leases Post-retirement benefits(5) Indemnified tax liabilities Purchase obligations(6) Total Fiscal 2017the year ended December 28, 2019 were $3,041.7$3,087.1 million, updown by 10.7%7.8%, or $294.7$260.5 million, compared with net sales during the prior year of $2,747.0$3,347.6 million. Our net sales in Fiscal 2017for the year ended December 28, 2019 were positivelyadversely impacted by movements in average currency exchange rates of $13.4$77.0 million compared with the prior year, due principally to the strengthening of the U.S. dollar against a number of currencies, including the Euro against($31.7 million), the U.S. dollar.Chinese Renminbi ($13.6 million), the Brazilian Real ($7.9 million) and the Canadian dollar ($6.7 million). In addition, the acquisitionsacquisition of Techflow Flexibles and Atlas Hydraulics during Fiscal 2017 togetherRapro in April 2018 contributed a further $33.4$7.5 million to the increase inour net sales for the year ended December 28, 2019. Excluding these impacts, core salesdecreased by $191.0 million, or 5.7%, during the year ended December 28, 2019 compared with Fiscal 2016. Techflow Flexibles is based in the United Kingdom and specializes in high-pressure flexible hoses and Atlas Hydraulics is a North American fully-integrated product engineering, manufacturing, and commercial business headquartered in Ontario, Canada.Core sales growth, which both excludes the impact of exchange rate movements and the first year of sales from acquired businesses,prior year. This decrease was 9.0% or $246.7 million. Core growth was drivendue primarily by higher salesto lower volumes of $232.9 million.Sales$249.3 million, offset partially by a $58.3 million benefit from favorable, inflation-mitigating pricing actions.grew on a core basisdeclined by 7.3%4.6% and 12.5%7.6%, respectively, butfor the year ended December 28, 2019. Globally, these declines arose primarily in sales to our industrial customers, with these sales declining by $136.4 million and $110.3 million, respectively, in dollar terms. Core growth in the Power Transmission business was driven primarily by the continued recovery in industrial end markets, particularly in Asia, which grew by 20.4%. Core growth in our Fluid Power business was driven by strong volume growth in the infrastructure and agriculture end markets, which grew by 17.5% or $62.5$113.2 million on a core basis, compared with a $77.8 million decline in core sales to our automotive customers. Industrial first-fit and replacement sales declined by 6.9% and 6.5%, respectively, during Fiscal 2017the year ended December 28, 2019 compared with the prior year, driven primarily by declines in the agriculture and construction end markets in North America. Sales to the industrial end markets in Greater China and East Asia & India both were down during the year ended December 28, 2019 compared with the prior year, driven by a 7.9% decline in the general industrial end markets in both regions, with increasing weakness in construction equipment sales as the year has progressed. This was broadly offset by growth in sales to the industrial end markets in EMEA, with growth across all end markets except for agriculture.majority ofdecline in automotive end market sales was driven mostly by the broad economic softness in EMEA, with sales from this growth came from recovering industrial demand in North America and from China.Cost of salesCost of sales for Fiscal 2017 was $1,823.7 million, an increase of 8.2%region declining by 13.6%, or $137.5 million, compared with $1,686.2 million in the prior year. The increase was driven primarily by higher volumes which accounted for $138.7 million of the year-over-year increase.Gross profitGross profit for Fiscal 2017 was $1,218.0 million, up 14.8% from $1,060.8$70.5 million, during the prior year. Expressed as a percentage of sales, our gross profit margin increased to 40.0% during Fiscal 2017 from 38.6% during the prior year. This 140 basis point improvement over the prior year was driven primarily by the benefit of increased volumes on our partially fixed cost base. During Fiscal 2017, productivity improvements from the implementation of our Gates Operating System initiatives largely offset the impact of wage and raw material inflationended December 28, 2019 compared with the prior year.Selling, general and administrative (“&A”)&A expenses for Fiscal 2017the year ended December 28, 2019 were $779.6$777.3 million compared with $744.1$805.8 million duringfor the prior year. This increasedecrease of $35.5$28.5 million was driven primarily by $17.8 million of favorable impacts from movements in average currency exchange rates and $12.1 million of net labor-related benefits which related primarily to headcount reductions and lower variable compensation, offset partially by higher selling and distributionstock-based compensation. of $28.5 million, which increased broadly in line withhigher net sales during Fiscal 2017 and higher labor and benefits costs of $10.9 million as we continue to invest in our commercial function. These higher costsyear ended December 28, 2019 were partially offset by lower intangible asset amortization of $17.7$2.6 million compared with the prior year.Transaction-related costsTransaction-related costs for Fiscal 2017 were $18.1 million compared with $0.4 million during the prior year. Expenses in Fiscal 2017 included $4.8 millionan expense of costs related to the IPO and a further $6.6 million related to payments made on resolution of certain contingencies that affected the purchase price paid by Blackstone on acquiring Gates in July 2014. The debt refinancings completed in April 2017 and November 2017 cost a further $2.0 million in professional fees. The remainder of the costs incurred during Fiscal 2017 related primarily to acquisition activities, primarily the acquisitions of Techflow Flexibles and Atlas Hydraulics.Restructuring expensesRestructuring costs of $17.4 million were recognized during Fiscal 2017, including $13.6 million in relation to severance costs, primarily in Europe and the U.S. associated with organizational rationalizations.Restructuring costs of $11.4 million were recognized during Fiscal 2016, including $7.3 million in relation to severance costs, largely in North America and Europe.Operating Income from Continuing OperationsOperating income from continuing operations in Fiscal 2017 was $400.4 million, compared with $298.9 million in Fiscal 2016. The increase was driven primarily by increased sales and higher gross profit in Fiscal 2017 compared with Fiscal 2016.Interest expenseInterest expense for Fiscal 2017 was $234.6 million compared with $216.3$6.7 million for the prior year. Net expenses for the year ended December 28, 2019 related primarily to exploratory merger and acquisition activity, as well as to corporate filings and transactions to provide the Company with flexibility for future raising of capital and debt, share buybacks and dividend payments. These expenses were offset partially by the release of an accrual from a prior period acquisition. The transaction-related expenses incurred in the prior year included $4.2 million related to our initial public offering and a further $0.3 million related to the extension in January 2018 of the maturity of our two revolving credit facilities. The remainder of the transaction-related expenses in the prior year related to the recent business acquisitions.may be analyzedwas as follows: Year ended (dollars in millions) December 30, 2017 December 31, 2016 $ 117.8 $ 121.1 23.4 10.5 72.5 64.9 16.7 15.4 1.4 1.7 231.8 213.6 2.8 2.7 $ 234.6 $ 216.3 For the year ended (dollars in millions) December 28, 2019 December 29, 2018 Debt: Dollar Term Loan $ 80.7 $ 86.7 Euro Term Loan 22.4 22.8 Dollar Senior Notes 35.4 36.6 Euro Senior Notes — 1.2 Other loans 0.1 — 138.6 147.3 Amortization of deferred issuance costs 16.6 25.6 Other interest expense 2.6 3.0 $ 157.8 $ 175.9 the bank and other loansour long-term debt are presented in note 1516 to the audited consolidated financial statements included elsewhere in this annual report.expense includeson debt for the year ended December 28, 2019 decreased when compared with the equivalent prior year due primarily to the interest savings from debt repayments, in particular, the repayment of $913.7 million of senior notes in the first quarter of 2018 in conjunction with our initial public offering, in addition to margin reductions that came into effect partway during the prior year. The amortization of issuedeferred issuance costs incurredwas lower in relationthe year ended December 28, 2019, due to the debt and the amortization of the deferred premium on our interest rate caps. Interest expense during Fiscal 2017 increased overacceleration in the prior year due to the debt refinancing completed in April 2017 which caused a $14.2of $15.4 million acceleration of deferred financing costs onissuance cost amortization as a consequence of the Dollar Term Loan due to the $650 million partial repayment of that tranche.debt during the first quarter of 2018. This impactbenefit was offset partially by a lower interest charge incurredthe accelerated amortization of deferred issuance costs of $6.1 million during the current year, due to prepayment of our outstanding 6.00% Senior Notes due 2022 (the “6.00% Dollar Senior Notes”) as part of the partial Dollar Term Loan repayment on April 7, 2017. The interest onrefinancing transactions described further in note 16 to the Euro Term Loan increased from $10.5consolidated financial statements included elsewhere in this report. For the year ended (dollars in millions) December 28, 2019 December 29, 2018 Interest income on bank deposits $ (5.7 ) $ (3.7 ) Foreign currency gain on net debt and hedging instruments (0.8 ) (8.7 ) Premiums paid on debt redemptions — 27.0 Net adjustments related to post-retirement benefits (3.1 ) 3.1 Other (0.2 ) (0.3 ) $ (9.8 ) $ 17.4 year to $23.4 million in Fiscal 2017 as a result ofyear. This change was driven primarily by the additional debt of €466.2 million drawn on April 7, 2017, offset partially by a reduction in the rate of interest on this facility. The interest associated with the dollar notes increased due to the additional $150 million of debt incurred on March 30, 2017 as part of the refinancing.Other expense (income)Other expense for Fiscal 2017 was $56.3 million, which increased from $10.4 million of other incomepayment in the prior year driven primarily by the impacts of movements in currency exchange rates on unhedged net debt and derivative instruments. Included in unhedged debt as of December 30, 2017 is €388.1$27.0 million of redemption premiums on repayment of the additional €466.2Euro Senior Notes and partial repayment of the 6.00% Dollar Senior Notes in January and February of 2018. Partially offsetting this cost in the prior year was a $5.8 million gain on a derivative used to lock in the exchange rate used to repay the Euro Term Loan debt borrowing drawnSenior Notes. Higher expected returns on plan assets based on actuarial valuations drove the majority of the remaining increase in April 2017, which did not qualify for net investment hedging. Our other (expense) income may be analyzed as follows: Year ended (dollars in millions) December 30, 2017 December 31, 2016 $ (4.6 ) $ (3.0 ) 57.4 (7.2 ) 3.5 (0.2 ) $ 56.3 $ (10.4 ) Fiscal 2017,the year ended December 28, 2019, we had an income tax benefit of $72.5$495.9 million onpre-tax income of $109.5$198.8 million, resultingwhich resulted in an effective tax rate of (66.2%(249.4%) compared with an income tax expense of $21.1$31.8 million onpre-tax income of $93.0$303.5 million, which resulted in an effective income tax rate of 22.7%10.5% for the year ended December 29, 2018.The change in the effective tax rate for fiscal year 2017 is primarily the result of the provisional $118.2 million tax benefit related to the impacts of the Tax Cuts and Jobs Act enacted on December 22, 2017. In addition our rate was further reduced by manufacturing incentives, company owned life insurance, andnon-U.S. statutory tax rate adjustments of $24.0 million. These reductions were offset partially by our geographical mix of earnings, U.S. tax on foreign earnings and changes in withholding taxes innon-U.S. jurisdictions where earnings are not considered indefinitely reinvested of $22.0 million.Adjusted EBITDAAdjusted EBITDA for Fiscal 2017 was $669.1 million, an increase of 12.5% or $74.2 million, compared with the prior year Adjusted EBITDA of $594.9 million. The Adjusted EBITDA margin was 22.0%,19.8% for the year ended December 28, 2019, a 30280 basis point increasedecrease from the prior year margin of 21.7%22.6%. Excluding the businesses we acquired during Fiscal 2017, this margin expansion would have been 50 basis points. The increasedecrease in Adjusted EBITDA was driven primarily by higherreduced gross profit of $188.1 million, which was primarily the result of lower sales volumes of $86.8$260.5 million, and productivity improvements in costsas well as the impact of lower fixed cost absorption on cost of sales of $25.7 million, partially offset by wage and raw material inflation of $24.7 million, andas described above. Partially offsetting this decrease were lower SG&A spend of $28.6 million.“— “—Non-GAAP Measures.”(66.1%(63.0% of Gates’ net sales for Fiscal 2017)(dollars in millions) Year ended
December 30, 2017 Year ended
December 31, 2016 Period over
Period Change $ 2,009.4 $ 1,862.1 7.9 % $ 458.1 $ 408.5 12.1 % 22.8 % 21.9 % Power Transmission For the year ended (dollars in millions) December 28, 2019 December 29, 2018 Period over Period Change Net sales $ 1,945.7 $ 2,098.8 (7.3 %) Adjusted EBITDA $ 412.6 $ 492.2 (16.2 %) Adjusted EBITDA margin 21.2 % 23.5 % Fiscal 2017the year ended December 28, 2019 were $2,009.4$1,945.7 million, an increasea decrease of 7.9%7.3%, or $147.3$153.1 million, when compared with the prior year net sales of $1,862.1 million. Excluding the positive impact of movements in average currency exchange rates of $10.9 million, core sales increased by 7.3%, or $136.4 million, compared with the prior year. The increase was due primarily to higher sales volumes, which drove $128.3 million of the growth.Just over half of the volume gains arose from sales to the industrial end markets, with sales to the general industrial end market being the largest driver. Growth in sales to this end market, which comprised 21.0% of Power Transmission sales in Fiscal 2017, was 12.7% or $47.5 million, benefitting from the sustained industrial recovery, particularly in Asia. The remainder of the sales volume growth arose in the automotive end market, which grew by 5.8% compared with the prior year, driven primarily by the continued strong demand in China.Our Power Transmission Adjusted EBITDA for Fiscal 2017 was $458.1 million, an increase of 12.1% or $49.6 million, compared with the prior year Adjusted EBITDA of $408.5 million. The increase in Adjusted EBITDA was driven primarily by higher sales volumes of $41.9 million and productivity improvements of $18.7 million; offset partially by wage and raw material inflation of $18.5 million. Adjusted EBITDA margin for Fiscal 2017 was 22.8%, a 90 basis point improvement from the prior year margin of 21.9% due to the factors discussed above.Fluid Power (33.9% of Gates’ net sales for Fiscal 2017)(dollars in millions) Year ended
December 30, 2017 Year ended
December 31, 2016 Period over
Period Change $ 1,032.3 $ 884.9 16.7 % $ 211.0 $ 186.4 13.2 % 20.4 % 21.1 % Net sales in Fluid Power for Fiscal 2017 were $1,032.3 million, an increase of 16.7%, or $147.4 million, compared with net sales during the prior year period of $884.9 million. Excluding the positive impact of movements in average currency exchange rates of $2.5 million and the benefit from recent acquisitions, core sales increased by 12.5%, or $110.3 million, compared with the prior year. This increase was due primarily to higher volumes.Volumes grew across all of our end markets during Fiscal 2017 compared with the prior year, with almost all of this increase arising from sales to the industrial end markets, which comprise the majority of our Fluid Power net sales, and in particular, the infrastructure and agriculture end markets, which comprised approximately 40% of Fluid Power’s net sales for Fiscal 2017. Sales improved across all regions, but particularly in North America and China, which grew by $63.3 million and $21.9 million, respectively.Adjusted EBITDA for Fiscal 2017 was $211.0 million, an increase of 13.2%, or $24.6 million, compared with the prior year Adjusted EBITDA of $186.4 million. The increase in Adjusted EBITDA was driven by higher sales volumes of $44.9 million, productivity improvements of $7.0 million; offset partially by wage and raw material inflation of $12.3 million and higher labor-related SG&A spend of 12.6 million, related primarily to investment in our commercial and research and development functions. The increase in SG&A spend was driven by a combination of higher selling and distribution costs related to the higher sales volumes and wage inflation. Adjusted EBITDA margin was 20.4%, a 70 basis point decrease from the prior year margin of 21.1% due to the factors discussed above.Fiscal 2016 Results Compared with Fiscal 2015 ResultsGates Summary(dollars in millions) Fiscal 2016 Fiscal 2015 $ 2,747.0 $ 2,745.1 1,686.2 1,709.0 1,060.8 1,036.1 744.1 784.5 0.4 0.7 3.2 51.1 11.4 15.6 2.8 (0.4 ) 298.9 184.6 216.3 212.6 (10.4 ) (69.7 ) 93.0 41.7 21.1 (9.2 ) $ 71.9 $ 50.9 $ 594.9 $ 547.2 21.7 % 19.9 % (1)See“—Non-GAAP Measures” for a reconciliation of Adjusted EBITDA to net income, the closest comparable GAAP measure, for each of the periods presented.Net salesNet sales in Fiscal 2016 were $2,747.0 million, an increase of $1.9 million compared with net sales during Fiscal 2015 of $2,745.1 million. Our net sales for Fiscal 2016 were adversely impacted by movements in average currency translation rates, particularly the Mexican Peso, Chinese Renminbi and Argentine Peso for an aggregate of $67.7 million. Excluding this impact, net sales increased by $69.6 million, or 2.5%, in Fiscal 2016 compared with Fiscal 2015. This increase was driven by higher sales prices of $28.3 million and higher volumes of $26.2 million.The volume increase arose mostly in our Power Transmission business, which grew by $72.4 million, or 5.4%, compared with Fiscal 2015. This growth was predominantly in sales to the automotive end market, and China in particular performed well with a 12.2% growth in sales to the replacement channels. This was partially offset by lower volumes to Power Transmission’s industrial end markets. Volumes contracted in Fluid Power during Fiscal 2016 compared with Fiscal 2015, with sales down by $46.2 million. The automotive end market in Fluid Power also proved resilient, with volume growth of 5.7%, including strong demand from emerging markets such as Russia. This was more than offset by the weaker sales to the industrial end markets, where volumes were down by $54.6 million in Fiscal 2016 compared with Fiscal 2015. Pricing gains were split relatively equally between Power Transmission and Fluid Power and were focused primarily in North America, with approximately $13 million carried over from actions in Fiscal 2015 and $5 million from new actions in Fiscal 2016.Cost of SalesCost of sales in Fiscal 2016 were $1,686.2 million, a decrease of 1.3% or $22.8 million, compared with $1,709.0 million in Fiscal 2015. The decrease was driven by productivity improvements, primarily procurement initiatives of $29.1 million, and favorable impacts from average foreign currency exchange rates of $23.3 million. Partially offsetting the overall decrease in cost of sales were the negative impacts of inventory adjustments of $17.7 million related to changes we made in our accounting convention for expensing maintenance, repair and operations assets below a nominal value threshold. This change was made to bring consistency to our global inventory management. Also increasing cost of sales were volume increases of approximately $16 million.Gross ProfitGross profit for Fiscal 2016 was $1,060.8 million, up $2.4% or $24.7 million, compared with $1,036.1 million in Fiscal 2015. Expressed as a percentage of sales, our gross profit margin increased to 38.6% during Fiscal 2016 from 37.7% during the prior year. This 90 basis point improvement over the prior year was due principally to the benefit of increased volumes on our partially fixed cost base and our productivity improvements, offset partially by the inventory adjustments noted above.Selling, General and Administrative ExpensesTotal SG&A expenses in Fiscal 2016 were $744.1 million, a decrease of 5.1% or $40.4 million, compared with $784.5 million in Fiscal 2015. SG&A expenses are comprised primarily of selling and distribution costs, administrative expenses, the amortization of acquired intangible assets and R&D costs.Selling and distribution costs were $295.0 million in Fiscal 2016, compared with $305.6 million in Fiscal 2015, a decrease of $10.6 million. As a percentage of sales, our Fiscal 2016 costs were flat at 11% compared with the prior year, as labor-related cost inflation was broadly offset by headcount reductions.The remainder of the SG&A expenses in Fiscal 2016 were $449.1 million, compared with $478.9 million in Fiscal 2015, a decrease of $29.8 million. The decrease in these costs in Fiscal 2016 was due principally to labor spending reductions toright-size the business of $12.3 million. The amortization of acquired intangible assets reduced from $158.5 million in Fiscal 2015 to $141.9 million in Fiscal 2016 (a decrease of $16.6 million), due primarily to the majority of our technology intangible assets recognized at the time of the acquisition of Gates by Blackstone becoming fully amortized halfway through Fiscal 2016.Impairment of Goodwill and Other AssetsFor Fiscal 2016, we recognized impairments of $3.2 million, relating primarily to discontinuing the use of software in North America and the impairment of a receivable related to a restructured line of business in the U.S.For Fiscal 2015, we recognized impairments of $51.1 million, including $44.0 million in relation to the U.S. dollar denominated indefinite-lived brands and trade names intangible that was recognized as part of the purchase accounting at the time of the Acquisition. The impairment arose due to the strengthening of the U.S. dollar against the currencies in which the sales supporting the value of this asset were denominated. A further impairment of $6.7 million was recognized in relation to property, plant and equipment in Brazil, as a result of the challenging trading conditions in that region, which were exacerbated by the significant devaluation of the Brazilian Real against the U.S. dollar.Restructuring ExpensesDuring Fiscal 2016, we recognized restructuring expenses of $11.4 million, compared with $15.6 million in Fiscal 2015. In both periods, these costs related primarily to severance expenses incurred across both segments as part of theright-sizing of our operations and the streamlining of our corporate functions.Other Operating ExpenseDuring Fiscal 2016, we recognized other operating expense of $2.8 million, compared with other operating income of $0.4 million in Fiscal 2015. The costs incurred in both periods related primarily to businesses disposed of in prior years. In Fiscal 2016, this expense was offset by a benefit in tax expense, due to the release of a tax contingency that was held in respect of a disposed business.Operating Income from Continuing OperationsOperating income from continuing operations in Fiscal 2016 was $298.9 million, compared with $184.6 million in Fiscal 2015. The increase was driven primarily by increased gross margin, decreased SG&A spend and the higher impairment expense recognized in Fiscal 2015 compared with Fiscal 2016.Interest ExpenseThe interest expense for Fiscal 2016 was $216.3 million, compared with $212.6 million for Fiscal 2015. Our interest expense may be analyzed as follows:(dollars in millions) Fiscal 2016 Fiscal 2015 $ 121.1 $ 116.4 10.5 10.6 64.9 64.9 15.4 15.7 1.7 1.7 — 0.4 213.6 209.7 2.7 2.9 $ 216.3 $ 212.6 Details of our debt are presented in note 15 of our audited consolidated financial statements included elsewhere in this annual report. Interest expense includes the amortization of issue costs incurred in relation to the borrowings.The increase in interest expense during Fiscal 2016 compared with Fiscal 2015 was due largely to an increase of $4.7 million in the amount of the deferred premium on our interest rate caps that is being amortized to interest expense. Partially offsetting the interest expense increase was the impact of the settlement of legacy 2015 notes during September 2015.Other IncomeOther income for Fiscal 2016 was $10.4 million, compared with $69.7 million for Fiscal 2015. Our other income may be analyzed as follows:(dollars in millions) Fiscal 2016 Fiscal 2015 $ (3.0 ) $ (1.8 ) (7.2 ) (67.7 ) (0.2 ) (0.2 ) $ (10.4 ) $ (69.7 ) Other income in Fiscal 2015 included significant currency transaction gains related to Gates’ euro debt, prior to its designation as a net investment hedge during the first quarter of 2015.Income Tax Expense (Benefit)During Fiscal 2016, the income tax expense attributable to continuing operations was $21.1 million on a profit before tax of $93.0 million compared to an income tax benefit attributable to continuing operations of $9.2 million on a profit before tax of $41.7 million in Fiscal 2015.Our effective tax rate for Fiscal 2016 was lower than our statutory rate of 35% as a result of our geographical mix of earnings, manufacturing incentives, and company owned life insurance adjustments of $43.4 million. These reductions in the rate were partially offset by U.S. tax on foreign earnings, tax law changes, and valuation allowances of $32.9 million.Our effective tax rate for Fiscal 2015 was lower than our statutory rate of 35% primarily as a result of our geographical mix of earnings, which included a $26.0 million benefit fromnon-operating gains of $74.2 million not subject to taxation. In addition, our rate was reduced by manufacturing incentives, company owned life insurance, tax law changes, and the release of uncertain tax positions of $32.2 million. These reductions in the rate were partially offset by U.S. tax on foreign earnings and valuation allowances of $35.4 million.Adjusted EBITDAAdjusted EBITDA for Fiscal 2016 was $594.9 million, an increase of 8.7%, or $47.7 million, compared with $547.2 million for Fiscal 2015. The underlying increase was due largely to productivity improvements (in particular procurement sourcing initiatives of $29.1 million), higher pricing of $28.3 million, lower SG&A spend of $12.3 million and the impact of higher volumes of $10.8 million. Partially offsetting these improvements was the unfavorable impact of movements in average foreign currency exchange rates of $14.2 million, labor inflation of $14.0 million and unfavorable product mix of $3.6 million. Adjusted EBITDA margin was 21.7% for Fiscal 2016, a 180 basis point improvement compared with the margin of 19.9% for Fiscal 2015 due to increased productivity and higher prices in Fiscal 2016.For a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods presented and the calculation of the Adjusted EBITDA margin, see“—Non-GAAP Measures.”Analysis by Operating SegmentPower Transmission (67.8% of Gates’ Fiscal 2016 net sales)(dollars in millions) Fiscal 2016 Fiscal 2015 Period over
Period Change $ 1,862.1 $ 1,809.6 2.9 % $ 408.5 $ 378.3 8.0 % 21.9 % 20.9 % Net sales in Power Transmission in Fiscal 2016 were $1,862.1 million, an increase of 2.9%, or $52.5 million, compared with net sales during Fiscal 2015 of $1,809.6$2,098.8 million. Excluding the adverse impact of movements in average currency exchange rates of $43.6$56.5 million, netcore sales increaseddecreased by 5.3%4.6%, or $96.1$96.6 million, compared with Fiscal 2015. Thisthe prior year. The majority of this decrease was due to lower sales volumes of $123.1 million, offset partially by benefits from favorable, inflation-mitigating pricing actions.highera decrease in sales volumesto automotive first-fit customers, which decreased by 9.2% during the year ended December 28, 2019 compared with the prior year, due primarily to weak demand in Europe and Greater China resulting from a combination of $72.4 millionmarket softness, macroeconomic headwinds and continuing trade tensions. A decrease in sales to automotive replacement customers also contributed to the impact of pricing actions of $13.8 million.The volume increase wasdecline, but less significantly, with core sales lower by 3.1% during the year ended December 28, 2019 compared with the prior year. Sales into the industrial end markets were relatively flat during the year ended December 28, 2019. General industrial end market sales declined by 3.4%, driven primarily by our automotive end market, the majority of whichEast Asia & India and Greater China, but this was from the replacement channels. China in particular performed well as our businesses benefitted from government stimulus programs as well as market share gains. Thisdecline was partiallymostly offset by lower volumes togrowth in all other regions, particularly in EMEA.Transmission’s industrial end markets. General industrials droveTransmission Adjusted EBITDA for the majorityyear ended December 28, 2019 was $412.6 million, a decrease of this decline,16.2% or $79.6 million, compared with most other industrial end markets remaining flat or just slightly down from the prior year period. In addition to the net increase in volumes, sales benefitted from favorable pricing actions of $13.8 million, primarily from the replacement channels and particularly in North America.was $408.5of $492.2 million. Movements in average currency exchange rates drove $10.5 million for Fiscal 2016, an increase of 8.0%, or $30.2 million, compared with $378.3 million in Fiscal 2015. The increasethis decrease. Excluding this impact, the decrease in Adjusted EBITDA was driven primarily by higher salessimilar factors as described above with lower volumes of $64.7 million, $39.6 million of unfavorable wage and material inflation and lower manufacturing performance of $25.8 million. Partially offsetting these decreases were benefits from procurement initiatives of $24.7 million, benefits from favorable, inflation-mitigating pricing actions of $13.8 million, productivity improvements of $9.2$26.5 million and lower SG&A spend of $8.1 million; offset partially by unfavorable movements in average foreign currency exchange rates of $9.9 million, inflation of $9.2 million and unfavorable product mix of $7.0 million.spend. Adjusted EBITDA margin increased to 21.9% in Fiscal 2016,for the year ended December 28, 2019 was 21.2%, a 100230 basis point improvement compared with 20.9% in Fiscal 2015 due to higher prices and productivity in Fiscal 2016.(32.2%(37.0% of Gates’ Fiscal 2016 net sales)(dollars in millions) Fiscal 2016 Fiscal 2015 Period over
Period Change $ 884.9 $ 935.5 (5.4 %) $ 186.4 $ 168.9 10.4 % 21.1 % 18.1 % For the year ended (dollars in millions) December 28, 2019 December 29, 2018 Period over
Period ChangeNet sales $ 1,141.4 $ 1,248.8 (8.6 %) Adjusted EBITDA $ 198.4 $ 263.6 (24.7 %) Adjusted EBITDA margin 17.4 % 21.1 % in Fiscal 2016for the year ended December 28, 2019 were $884.9$1,141.4 million, a decrease of $50.68.6%, or $107.4 million, or 5.4%, compared with net sales in Fiscal 2015during the prior year of $935.5$1,248.8 million. Excluding the adverse impact of movements in average currency exchange rates of $24.1$20.5 million netand the benefit of $7.5 million from the acquisition of Rapro in April 2018, core sales decreased by 2.8%7.6%, or $26.5 million. Volumes drove this decrease, declining by almost 5% in Fiscal 2016$94.4 million, compared with Fiscal 2015,the prior year. This decrease was due primarily to lower volumes of $126.2 million, offset partially by benefits from favorable, price impacts of $14.5 million.Sales volumesinflation-mitigating pricing actions.the energy and transportationindustrial end markets, which together accounted for 24.1% ofdeclined by 8.8% during the year ended December 28, 2019 compared with the prior year. This decrease was driven by the agriculture and construction end markets, which have continued to be challenging, declining by 18.8% and 8.2%, respectively, during the year ended December 28, 2019, compared with the prior year, primarily in North America. Fluid Power’s Fiscal 2016 sales declined by 14.4% and 7.4%, respectively. Oil and gas wasto automotive end markets were flat during the largest contributor to this decline, driven by falling energy prices that affected our Middle East and Singapore operations in particular. The lower transportationyear ended December 28, 2019 compared with the prior year, with sales were concentrated in the U.S. Partially offsetting the industrial volume declines were increasedemerging markets outperforming sales to the automotive end market, which had growth of 5.7% in Fiscal 2016. This was driven by solid demand from emerging European markets, benefiting volumes by approximately $14 million, and Western European sales of kits and waterpumps, which grew by approximately $19 million. Softening the overall decline in volumes were favorable pricing actions of $14.5 million in Fiscal 2016 compared with Fiscal 2015, most of which came from the replacement channels.$186.4$198.4 million, an increasea decrease of 10.4%24.7%, or $17.5$65.2 million, compared with $168.9 million in Fiscal 2015.the prior year Adjusted EBITDA of $263.6 million. The increasedecrease in Adjusted EBITDA was driven primarily lower volumes of $68.3 million, a $23.6 million adverse impact from inflation and lower manufacturing performance of $21.4 million driven by productivity improvements of $19.9 million, favorable pricing actions of $14.5 million, lower SG&A spend of $4.2 millionfixed cost absorption on lower volumes and favorable product mix of $3.4 million;some excess variable costs. These impacts were offset partially by lower sales volumes of $15.0a $31.8 million inflation of $4.8benefit from favorable, inflation-mitigating pricing actions and a $10.8 million and unfavorable movements in average foreign currency exchange rates of $4.2 million.benefit from our procurement initiatives. The Adjusted EBITDA margin improved to 21.1% in Fiscal 2016, a 300consequently decreased by 370 basis point improvement compared with 18.1% in Fiscal 2015 driven by a 220 basis point improvement in gross margins discussed above.Our central treasury function is responsible for procuring our financial resources and maintaining an efficient capital structure, together with managing our liquidity, foreign exchange and interest rate exposures. All treasury operations are conducted within strict policies and guidelines that are approved by the Board. Compliance with those policies and guidelines is monitored by the regular reporting of treasury activities to the Board.A key element of our treasury philosophy is that funding, interest rate and currency decisions and the location of cash and debt balances are centrally managed. Our borrowing requirements are met by raising funds in the most favorable markets. Management may retain a portion of net debt in the foreign currencies in which the net assets of our operations are denominated. The desired currency profile of net debt can be achieved by either sourcing debt in the foreign currency or entering into currency derivative contracts.Management monitors closely the credit quality of the institutions with which it holds deposits. Similar considerations are given to our portfolio of derivative financial instruments. As of December 30, 2017, 57.5% of our cash and cash equivalents were held in two highly-rated global financial institutions.Our borrowing facilities are monitored against forecast requirements and timely action is taken to put in place, renew or replace credit lines. Management’s policy is to manage liquidity risk by diversifying our funding sources and by staggering the maturity of our debt. debt securities that we have issued or loans that we have borrowed in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any such purchases may be funded by existing cash balances or the incurrence ofby incurring new secured or unsecured debt, including borrowings under our credit facilities. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may relate to a substantial amount of a particular tranche of debt, with a corresponding reduction, where relevant, in the trading liquidity of that debt. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and result in related adverse tax consequences to us.Subsequent to the end of the fiscal year, Gates used the net proceeds from the IPO to redeem in full the €235.0 million of outstanding Euro Senior Notes and made partial redemptions of the Dollar Senior Notes. See the section entitled “Indebtedness” below for additional details.future. Management believesfuture, and we believe that as of December 28, 2019, we have adequate liquidity and capital resources for the current level of working capital is sufficient for Gates’ present requirements.Fiscal 2017to Fiscal 2016:Fiscal 2017 compared with $371.6 million during Fiscal 2016.the prior year. Operating cash flowinflow before movements in operating assets and liabilities was $340.6$290.1 million during Fiscal 2017the year ended December 28, 2019 compared with $279.9$478.0 million in Fiscal 2016, an increaseduring the prior year, a decrease of $60.7$187.9 million thatwhich was due largely to the improvedlower operational performance of Gates which flowed through toadversely impacted operating income. The movement in taxes payable, which was an increase of $46.2 million during the current year compared with a decrease of $15.3 million in the prior year, was due primarily to a non-cash increase in tax contingencies associated with our business reorganization in Europe. Movements in operating assets and liabilities other than taxes payable during Fiscal 2017the year ended December 28, 2019 gave rise to a decreasean increase of 27.1$12.6 million in cash compared with an increasea decrease of $91.7$149.2 million in the prior year period. This decrease,year. The increase, or further spendsource of cash, during the current period was driven primarily by the builddecreases in trade accounts payable and inventories, both linked to lower production volumes and our continued focus on management of inventoryworking capital. During the prior year, the decrease was due primarily to increases in accounts receivable and inventories due to increased production, with a corresponding increase in trade payables being offset partially by a $24.6 million increase in trade receivable balances linked directly to our increased sales. In addition, the Fiscal 2016 cash provided by operations includesstrong demand environment at the receipt of a tax refund in the United States of $41.3 million related to returns filed in prior periods.Fiscal 2017the year ended December 28, 2019 was $220.6$78.0 million, compared with $60.1$243.6 million in the prior year. Capital expenditure increasedexpenditures decreased by $43.0$99.6 million from $68.1$182.7 million in Fiscal 2016the year ended December 29, 2018 to $111.1$83.1 million in Fiscal 2017,the year ended December 28, 2019, driven primarily by expenditures onin the prior year related to the expansion of one of our existing facilities and construction of two new facilities being built to expand production capacityfacilities. Net cash used in our Fluid Power segment. In addition, during Fiscal 2017, we paid $110.7investing activities in the prior year also included $50.9 million net of cash acquired,paid in relation to purchase the Techflow Flexibles and Atlas Hydraulics businesses.$75.3$59.3 million during Fiscal 2017,the year ended December 28, 2019, compared with $110.8$198.9 million in the prior year. This change in cash outflows was driven primarily by an excess cash flow payment of $38.2 million to our term loan lenders madenet outflow in the first quarteryear ended December 28, 2019 related primarily to quarterly amortization payments of 2016. In addition,$24.7 million under the term loans, together with $28.8 million of dividend payments tonon-controlling shareholders of certain majority-owned subsidiaries. As described further in note 16 to the accompanying consolidated financial statements, during November 2019, we issued and sold $568.0 million of unsecured 6.25% Senior Notes due 2026 (the “6.25% Dollar Senior Notes”) and used the proceeds from this debt issuance in December 2019 to redeem all $568.0 million of our joint venture operationsoutstanding 6.00% Dollar Senior Notes. Costs of approximately $8.6 million were incurred in relation to these transactions, of which $8.3 million was paid during the year ended December 28, 2019.were $14.3 million higher than in Fiscal 2017. Partially offsetting these year-over-year decreasesnet cash used in financing cash outflows was $18.8 million of financing costs incurred in Fiscal 2017 in relationactivities related primarily to the debt refinancings completed in April 2017 and November 2017.Fiscal 2016 compared to Fiscal 2015:Cash provided by operations was $371.6 million in Fiscal 2016 compared with $275.9 million in Fiscal 2015. Operating cash flow before movements in operating assets and liabilities was $279.9 million compared with $246.6 million in Fiscal 2015, an increase of $33.3 million that was due largely to the improvement in operational performance. Movements in operating assets and liabilities during Fiscal 2016 gave rise to an increase of $91.7 million in cash generated from operations compared with $29.3 million in Fiscal 2015. This increase was driven primarily by the receipt of a tax refund in the United States of $41.3 million related to returns filed in prior periods. In addition, accounts receivable increased during Fiscal 2016 compared with Fiscal 2015 as sales rose, partially offset by a decrease in inventory driven primarily by more disciplined inventory management.Net cash outflow from investing activities in Fiscal 2016 was $60.1 million, broadly flat with the net cash outflowreceived from investing activitiesour initial public offering of $60.5$799.1 million in Fiscal 2015. Capital expenditure was lower in Fiscal 2016 at $68.1and the use of those funds (in addition to a portion of cash on hand) to redeem debt of $913.7 million compared with $85.8 million in Fiscal 2015, however Fiscal 2015 benefited from a decrease in restricted cashand to pay premiums thereon of $25.6 million (primarily related to the repayment of legacy debt with escrowed cash) compared with $2.7 million during Fiscal 2016.Net cash outflow from financing activities was $110.8 million in Fiscal 2016, compared with an outflow of $73.9 million in Fiscal 2015. This was driven by $14.8 million higher repayment of debt in Fiscal 2016, primarily related to the Excess Cash Flow payment of $38.2 million made in the first quarter of 2016.$27.0 million. In addition, during the prior year, we made $35.2 million of dividend payments tonon-controlling shareholders in Fiscal 2016 were $10.8 million higher than in Fiscal 2015.As a result of the decreased debt, cash interest paid decreased to $198.8 million in Fiscal 2016 from $208.0 million in Fiscal 2015.As of December 30, 2017, ourconsistedconsisting principally of two term loans twoand U.S. dollar denominated unsecured notes, and two revolving credit facilities.Our Long-term debtwas as of December 30, 2017 and December 31, 2016 may be analyzed as follows: Carrying amount Principal amount (dollars in millions) As of
December 30,
2017 As of
December 31,
2016 As of
December 30,
2017 As of
December 31,
2016 $ — $ 0.3 $ — $ 0.3 2,467.8 2,540.9 2,515.0 2,600.3 1,487.5 1,295.3 1,472.5 1,285.7 0.4 0.4 0.4 0.4 3,955.7 3,836.6 3,987.9 3,886.4 $ 3,955.7 $ 3,836.9 $ 3,987.9 $ 3,886.7 Carrying amount Principal amount (dollars in millions) As of
December 28,
2019 As of
December 29,
2018 As of
December 28,
2019 As of
December 29,
2018Debt: —Secured Term Loans (U.S. dollar and Euro denominated) $ 2,395.0 $ 2,428.7 $ 2,416.8 $ 2,458.5 —Unsecured Senior Notes (U.S. dollar) 563.2 575.7 568.0 568.0 Other debt 0.2 0.6 0.2 0.6 $ 2,958.4 $ 3,005.0 $ 2,985.0 $ 3,027.1 1516 to our auditedthe consolidated financial statements included elsewhere in this annual report.During MarchApril 2017, we completed several refinancing transactions to reprice the Euro Term Loans, extend the maturitiessold $568.0 million of certain debt tranches and to change the currency and interest structure of our debt. An additional $150.0 million was raised as6.25% Dollar Senior Notes, in March 2017 and, in April €466.2 million was raised under the Euro Term Loan facility.described further below. The proceeds from thesethis debt raisingsissuance were used on December 5, 2019 to repay $650.0redeem all $568.0 million of our outstanding 6.00% Dollar Senior Notes, plus interest accrued up to and including the existing Dollar Term Loans.November 2017, we completed a further refinancing to reduceJanuary 2018, upon completion of our initial public offering, the applicable margins on each of the term loans was reduced by 0.25%, with a further 0.25% reduction in the margins contingent on the completion, as agreed as part of the IPO, which occurredrefinancing completed in JanuaryNovember 2017.at which point the additional margin reduction became effective.The majoritywe redeemed in full our outstanding €235.0 million of Euro Senior Notes and made partial redemptions of the costs related to the above refinancing transactions were deferred and are being amortized to net income over the remaining term6.00% Dollar Senior Notes. All of the related2018 prepayments, totaling $913.7 million in principal, $27.0 million in redemption premiums and $3.1 million in accrued interest, were funded primarily by the net proceeds from our IPO, with the remainder of the funds coming from cash on hand.using the effective interest method. During Fiscal 2017, $16.6 million of refinancing costs were deferred on the balance sheet. Those refinancing costs that do not qualify for deferral are recognized in net income as they are incurred. During Fiscal 2017, $2.0 million of refinancing costs were recognized in net income as transaction-related costs.Gates’As part of a refinancing transaction in April 2017, the maturity dates for both of the term loanThese facilities were extended from July 3, 2021 tomature on March 31, 2024, with a springing maturity of April 15, 2022 if more than $500 million of the Dollar Senior Notes remain in issue at that time.30, 2017,28, 2019, borrowings under the Dollar Term Loan facility, which currently bears interest at LIBOR, subject to a floor of 1%1.00%, plus a margin of 3.00%2.75%, bore interest at a rate of 4.69%4.45% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of December 30, 2017,28, 2019, the Euro Term Loan bore interest at Euro LIBOR,EURIBOR, which is currently below 0%, subject to a floor of 0%, plus a margin of 3.25%3.00%.Fiscal 2017,the year ended December 28, 2019, we made quarterly amortization payments against the Dollar Term Loan and the Euro Term Loan of $19.3$17.3 million and $6.3$7.4 million, respectively. During Fiscal 2016,the year ended December 29, 2018, we made quarterly amortization payments against the Dollar Term Loan and the Euro Term Loan of $24.9$13.0 million and $2.2$5.8 million, respectively.Gates iswe are obliged to offer annually to the term loan lenders an ‘excess“excess cash flow’flow” amount as defined under the agreement, based on the preceding year’s final results. Based on the Fiscal 2016 and Fiscal 2017our 2019 results, ourthe leverage ratio as defined under the credit agreement was below the threshold above which payments are required, and therefore no excess cash flow payment waswill be required to be made in respect of either period.Fiscal 2017, a transactionalthe periods presented, foreign exchange loss of $96.7 million wasgains were recognized in respect of the Euro Term Loan, compared with a gain of $8.7 million in Fiscal 2016. Of these losses, $60.2 million was recognized in other (expense) income in Fiscal 2017 and $0Loans as summarized in the prior year period, andtable below. As a $36.5 million loss was recognized in other comprehensive income in Fiscal 2017 in respectportion of the Euro Term Loan as part of this facility has beenwas designated as a net investment hedge of certain of Gates’ euro investments. Inour Euro investments, a corresponding portion of the prior year period, a gain of $8.7 million wasforeign exchange gains (losses) were recognized in other comprehensive income. For the year ended (dollars in millions) December 28, 2019 December 29, 2018 Gain recognized in statement of operations $ 17.3 $ 43.6 Loss recognized in OCI (0.2 ) (6.0 ) Total gain $ 17.1 $ 37.6 30, 2017, the principal amount outstanding under the Dollar Term Loan was $1,729.428, 2019, we had $568.0 million and the Euro Term Loan was $785.6 million (€635.5 million).Unsecured Senior NotesAs of December 30, 2017, Gates had outstanding $1,190.0 million6.25% Dollar Senior Notes and $282.5 million (€235.0 million) Euro Senior Notes, whichoutstanding that were issued in November 2019. These notes are scheduled to mature on JulyJanuary 15, 2022 (the “Notes”). The Dollar Senior Notes2026 and bear interest at an annual fixed rate of 6%6.25% with semi-annual interest payments.Euro6.25% Dollar Senior Notes, carryat our option, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest to the redemption date:Redemption Price During the year commencing: —2022 103.125 % —2023 101.563 % —2024 and thereafter 100.000 % annual fixed interest rate of 5.75%. Interest payments commenced onequity offering can be utilized at any time prior to January 15, 2015 and are made semi-annually.During Fiscal 2017, a transactional foreign exchange loss of $36.8 million, compared with a $10.6 million gain in Fiscal 2016, was recognized in respect2022, to redeem up to 40% of the Euro Senior Notesnotes at a redemption price equal to 106.250% of the principal amount thereof, plus accrued and was recognized in OCI as a net investment hedge of certain of Gates’ Euro investments.Subsequentunpaid interest through to the endredemption date.fiscal year, Gatesnotes will have the right to require us to make an offer to repurchase each holder's notes at a price equal to 101% (in the case of a change of control) or 100% (in the case of an asset sale) of their principal amount, plus accrued and unpaid interest.theall $568.0 million of our outstanding 6.00% Dollar Senior Notes due in 2022, and, on January 31, 2018, we redeemed in full all €235.0 million of our outstanding Euro Senior Notes and made partial redemptions of the Dollar Senior Notes. All of these prepayments, totaling $907.8 million in principal, $26.9 million in redemption premiums and $3.1 million in accrued interest, were funded by the net proceeds from the IPO of approximately $800 million, with the remainder coming from excess cash on hand. Following these redemptions, there are no longer any Euro Senior Notes outstanding and there are $568.0 million of6.00% Dollar Senior Notes outstanding.In addition,due in connection with2022 totaling $622.0 million.pre-IPO reorganization transactions, a wholly-owned U.S. subsidiary date of Gates Global LLC, entered into an intercompany agreement pursuant to which it became an obligor undertheir redemption, foreign exchange losses of $9.2 million were recognized in respect of the Notes for U.S. federal income tax purposes and agreed to make future payments due on the DollarEuro Senior Notes. AsOf these losses, $5.0 million was recognized in OCI for the period during which the facility was designated as a result, interest onnet investment hedge of certain of our Euro investments, and $4.2 million was recognized in the Dollar Senior Notes will be U.S. source income.Gateshashave a secured revolving credit facility, maturing on July 3, 2019,January 29, 2023, that provides for multi-currency revolving loans up to an aggregate principal amount of $125.0$185.0 million, with a letter of creditsub-facility of $20.0 million. In January 2018, the maturity date of thisThis facility was extended from July 3, 2019 tomatures on January 29, 2023, with a springing maturity of April 15, 2022 if more than $500 million of the Dollar Senior Notes remain in issue at that time. In addition, as part of this amendment, the facility size was increased from $125.0 million to $185.0 million.30, 201728, 2019 and December 31, 2016,29, 2018, there were $0no drawings for cash under the revolving credit facility and there were no letters of credit outstanding.Gates hasitsour assets in North America. The facility allows for loans of up to a maximum of $325.0 million ($293.7294.6 million as of December 30, 2017,28, 2019, compared with $288.6$325.0 million as of December 31, 2016,29, 2018, based on the values of the secured assets on those dates) with a letter of creditsub-facility of $150.0 million.In January 2018, the maturity date ofmillion within this maximum. The facility was extended tomatures on January 29, 2023, with a springing maturity of April 15, 2022 if more than $500 million of the Dollar Senior Notes remain in issue at that time.30, 201728, 2019 and December 31, 2016,29, 2018, there were $0no drawings for cash under the asset-backed revolver. Therevolver, but there were letters of credit outstanding under the asset-backed revolver were $58.0of $50.1 million and $54.3$57.8 million, as of December 30, 2017 and December 31, 2016, respectively.USU.S. subsidiaries are guarantors of the Senior Secured Credit Facilities.Fiscal 2017,the year ended December 28, 2019, before intercompany eliminations, ournon-guarantor subsidiaries represented approximately 69%70% of our revenuesnet sales and 64%65% of our EBITDA as defined in the financial covenants attaching to the senior secured credit facilities (“Covenant EBITDA”).facilities. As of December 30, 2017,28, 2019, before intercompany eliminations, ournon-guarantor subsidiaries represented approximately 95%54% of our total assets and approximately 94%21% of our total liabilities. After adjusting for intercompany loans payable and receivable by Finco Omaha Limited,non-guarantor intermediate holding company, ournon-guarantor subsidiaries represented approximately 40% non-GAAP measure representing the principal amount of our total assetsdebt less the carrying amount of cash and approximately 18% of our total liabilities. The intercompany loan asset and liability held by Finco Omaha Limited largely offset each other.Net DebtFiscal 2017,the year ended December 28, 2019, our net debt increaseddecreased by $81.6$254.0 million from $3,309.7$2,603.7 million as of December 31, 201629, 2018 to $3,391.3$2,349.7 million atas of December 30, 2017. We generated28, 2019. Excluding changes in foreign currency exchange rates, the decrease in net debt during the year ended December 28, 2019 was driven primarily by the increase in cash, froma function of cash provided by operating activities of $313.5$348.9 million, offset partially by capital expenditures of $111.1$83.1 million and business acquisition costsdividends paid to non-controlling shareholders of $110.7 million, which related to the purchase of Techflow Flexibles during June 2017 and Atlas Hydraulics during October 2017. During Fiscal 2017, in connection with the refinancing of our debt, we paid financing costs of $18.8$28.8 million. Dividend payments to minority shareholders in our joint ventures (primarily Nitta Corporation) were $24.6 million.an unfavorablea favorable net impact of $113.9$17.5 million on net debt during Fiscal 2017,the year ended December 28, 2019, with the majority of the movement relating to the impact of movements in the euroweakening of the Euro against the U.S. dollar on our euro-denominatedEuro-denominated debt.During Fiscal 2016, our net debt decreased by $262.2 million from $3,571.9 million as of January 2, 2016 to $3,309.7 million at December 31, 2016. We generated cash from operating activities of $371.6 million, offset partially by capital expenditures of $68.1 million and dividend payments of $38.9 million to minority shareholders in our joint ventures (primarily Nitta Corporation).Movements in foreign currency had a favorable impact of $6.7 million on net debt during Fiscal 2016, the majority of the movement relating to the impact of movements in the euro against the U.S. dollar on our euro-denominated debt.30, 2017,28, 2019, our asset-backed revolving credit facility had a borrowing base of $293.7$294.6 million, being the maximum amount the Companywe can draw down based on the current value of the secured assets. The facility was undrawn for cash, but there were letters of credit outstanding against the facility amounting to $58.0$50.1 million. We also have a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $125.0$185.0 million. We had no drawings against uncommitted borrowing facilities (bank overdrafts) but we had outstanding performance bonds, letters of credit and bank guarantees amounting to $3.4 million (in addition to those outstanding under the revolving credit facility).Overall, therefore,$357.3$429.5 million, in addition to cash balances of $564.4$635.3 million.30, 2017,28, 2019, our total cash and cash equivalents were $564.4$635.3 million, compared with $527.2$423.4 million as of December 31, 2016.balances were $1.6was $1.3 million as of both December 30, 201728, 2019, compared to $1.2 million as of December 29, 2018, primarily $1.0 million as of December 28, 2019 and $1.0 million as of December 31, 2016, primarily $1.4 million in both periods that29, 2018 was held in escrow for insurance purposes. Cash held in in ournon-wholly owned Asian subsidiaries was $135.1$141.5 million and $96.5$130.3 million as of December 30, 201728, 2019 and December 31, 2016,29, 2018, respectively.disclosed other than operating lease commitments.30, 201728, 2019 and the periods in which payments are due, based on the earliest date on which we could be required to settle the liabilities.operating leases and purchase obligations are items that we are obligated to pay in the future, but they are not required to be included on the consolidated balance sheet. Earliest period in which payment/(receipt) due (dollars in millions) Total Less than 1
year 1 - 3 years 3 - 5 years After 5 years $ 3,987.9 $ 25.4 $ 50.8 $ 1,523.3 $ 2,388.4 886.3 168.0 292.7 289.5 136.1 46.6 22.1 24.5 — — (54.4 ) (23.8 ) (30.6 ) — — 2.1 0.4 0.7 0.7 0.3 147.2 26.4 29.9 18.4 72.5 12.4 12.4 — — — 3.9 3.9 — — — 57.0 39.3 13.4 4.3 — $ 5,089.0 $ 274.1 $ 381.4 $ 1,836.2 $ 2,597.3 Earliest period in which payments are due (dollars in millions) Total 2020 2021 and 2022 2023 and 2024 2025 and beyond Bank overdrafts and debt: —Principal $ 2,985.0 $ 30.9 $ 49.4 $ 2,336.7 $ 568.0 680.2 138.1 282.6 206.2 53.3 31.7 3.4 25.3 3.0 — Finance leases 1.8 0.6 1.0 0.2 — Operating leases 178.2 25.5 39.8 28.4 84.5 9.8 9.8 — — — Indemnified tax liabilities 3.3 2.8 0.5 — — 40.9 21.2 15.4 4.3 — Total $ 3,930.9 $ 232.3 $ 414.0 $ 2,578.8 $ 705.8 (1)On January 29, 2018, as agreed as part of the refinancing in November 2017, the applicable margins on each of the term loans were lowered by 0.25% following the completion of the IPO. The result of this repricing on the annual expected interest payments set out above is not significant.(2)Future interest payments include payments on fixed and floating rate debt. (3)Floating rate interest payments are estimated based on market interest rates and terms prevailing as of December 30, 2017.28, 2019.(4)Receipts andNet payments on foreigncross currency derivatives,swaps, interest rate caps, interest rate swaps and currency forwardsforward contracts are estimated based on market rates prevailing as of December 30, 2017.28, 2019.(5)Post-retirement benefit obligations represent our expected cash contributions to its defined benefit pension and other post-retirement benefit plans in 2018.2020. It is not practicable to present expected cash contributions for subsequent years because they are determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other regulations.(6)A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
our profitability on a basis that is consistent with that of our operating segments, as well as that of our peer companies with a similar leveraged, private equity ownership history. We believe that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the performance of our businesses. future; and fees paid to our private equity sponsor. Net income Income tax (benefit) expense Net finance costs Amortization Depreciation EBITDA Gain on disposal of discontinued operations Share-based compensation Transaction-related costs Acquisition-related costs included in cost of sales Impact of fair value adjustment on inventory (included in cost of sales) Impairment of inventory (included in cost of sales) Other impairments Benefit from sale of inventory impaired in a prior period Restructuring expenses Adjustments relating to post-retirement benefits Other operating (income) expense Sponsor fees Adjusted EBITDA Continuing operations Net sales Adjusted EBITDA Adjusted EBITDA margin (%) Fiscal 2017 net sales Impact on net sales of movements in currency rates Impact on net sales of acquisitions Fiscal 2017 core sales Fiscal 2016 net sales Increase in net sales on a core basis Core sales growth (%) sales. Long-term debt: —Bank overdrafts —Bank and other loans Cash and cash equivalents Net debt revenues. Where a customer has the right to return goods, future returns are estimated based on historical returns profiles. Settlement discounts that may apply to unpaid invoices are estimated based on the settlement histories of the relevant These estimates, including an analysis for potential constraint on variable consideration, take into account factors such as the nature of the rebate program, historical information and expectations of customer and consumer behavior. Overall, the transaction price is reduced to reflect our estimate of the amount of consideration that is not probable of significant reversal. the carrying value may not be recoverable and is carried at cost less any recognized impairment. Forecasts for the following two years were based on region-specific growth assumptions determined by management, taking into account strategic initiatives. 2017. However, due primarily to the current challenging market conditions and their impact on our near-term outlook, the fair values of each of the Power Transmission and Fluid Power reporting units as calculated on first day of the fourth quarter of Fiscal 2019 were 15.8% and 14.4% lower, respectively, as compared with their fair values as calculated as part of the Fiscal 2018 annual impairment test. This has accordingly reduced the excess of the fair values of our reporting units over their carrying values. A further decline in the fair value of greater than 14% and 8% on our Power Transmission and Fluid Power reporting units, respectively, all else being equal, would result in an impairment of the goodwill allocated to those reporting units. Fiscal 2019 impairment test was 11.5%. As a result of the impairment testing, no impairment was recognized during Fiscal assets as calculated on first day of the fourth quarter of Fiscal 2019 was 23.3% lower than their fair value as calculated as part of the Fiscal 2018 annual impairment test. This has accordingly reduced the excess of the fair value of these assets over their carrying value. A further decline in the fair value of greater than 16%, all else being equal, would result in an impairment of the brand and trade name intangible assets. acquired in business combinationsfinance costs,interest and other expenses, depreciation and amortization. EBITDA is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).impactare considered to hinder comparison of the performance of our businesses eitheron a period-over-period basis 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 considerarriving atcomputing Adjusted EBITDA primarily included:costsexpenses incurred in relation to business combinations and major corporate transactions, including acquisition integration activities;the effect on cost of sales of fair value adjustments to the carrying amount of inventory acquired in business combinations;net interest relating to post-retirement benefit obligations, significantlump-sum settlements and the amortization of prior period actuarial gains and losses;costs;expenses, including severance-related expenses;Similarly,non-cash net interest relating to post-retirement benefit obligations, significantlump-sum settlements and the amortization of prior period actuarial gains and losses may cause differences between our businesses and from period to period when comparing performance. We therefore exclude from Adjusted EBITDA thenon-cash charges in relation to share-based compensation and the above adjustments related to post-retirement benefits in order to assess the relative performance of our businesses. those acquisition-related costs that are required to be expensed in accordance with ASC 805 ‘Business Combinations,’ inU.S. GAAP. In particular, we exclude the effect on cost of sales of the uplift to the carrying amount of inventory held by Gates at the date of the Acquisition, andentities acquired by Gates. We also exclude costs associated with major corporate transactions because we do not believe that they relate to our performance. Other items are excluded from Adjusted EBITDA because they are individually or collectively significant items that are not considered to be representative of the performance of our businesses. During the periods presented, we excluded restructuring costsexpenses and severance-related expenses that reflect specific, strategic actions taken by management to improveshutdown, downsize, or otherwise fundamentally reorganize areas of Gates’ future profitability;business; the net gain or loss on disposals of assets other than in the ordinary course of operations and gains and losses incurred in relation tonon-Gates businesses disposed of in prior periods; andsignificant impairments of goodwillintangibles and significant impairments of other assets, representing the excess of their carrying amounts over the amounts that are expected to be recovered from them in the future.the net income from continuing operations, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:(dollars in millions) Fiscal 2017 Fiscal 2016 Fiscal 2015 $ 182.7 $ 84.3 $ 50.9 (72.5 ) 21.1 (9.2 ) 290.9 205.9 142.9 130.9 149.5 165.6 81.3 91.3 104.3 613.3 552.1 454.5 (0.7 ) (12.4 ) — 5.4 4.2 4.3 18.1 0.4 0.7 0.7 — — 1.2 — — 2.0 21.7 9.6 2.8 3.2 51.1 — (1.0 ) — 17.4 11.4 15.6 2.5 6.4 4.8 (0.3 ) 2.8 (0.4 ) 6.7 6.1 7.0 $ 669.1 $ 594.9 $ 547.2 For the year ended (dollars in millions) December 28, 2019 December 29, 2018 December 30, 2017 Net income from continuing operations $ 694.7 $ 271.7 $ 182.0 Income tax (benefit) expense (495.9 ) 31.8 (72.5 ) Net interest and other expenses 148.0 193.3 293.4 Depreciation and amortization 222.2 218.5 212.2 EBITDA 569.0 715.3 615.1 Transaction-related expenses 2.6 6.7 18.1 Impairment of intangibles and other assets 0.7 0.6 2.8 Restructuring expenses 6.0 6.4 17.4 Share-based compensation expense 15.0 6.0 5.4 Sponsor fees (included in other operating expenses) 6.5 8.0 6.7 Impact of fair value adjustment on inventory (included in cost of sales) — 0.3 1.2 Inventory impairments and adjustments (included in cost of sales) 1.2 1.2 2.0 Duplicate expenses incurred on facility relocation — 5.2 — Severance-related expenses (included in cost of sales) 4.0 1.7 — Other primarily severance-related expenses (included in SG&A) 3.4 4.4 — Other items not directly related to current operations 2.6 — 0.4 Adjusted EBITDA $ 611.0 $ 755.8 $ 669.1 (dollars in millions) Fiscal 2017 Fiscal 2016 Fiscal 2015 $ 3,041.7 $ 2,747.0 $ 2,745.1 $ 669.1 $ 594.9 $ 547.2 22.0 % 21.7 % 19.9 % For the year ended (dollars in millions) December 28, 2019 December 29, 2018 December 30, 2017 Net sales $ 3,087.1 $ 3,347.6 $ 3,041.7 Adjusted EBITDA $ 611.0 $ 755.8 $ 669.1 Adjusted EBITDA margin 19.8 % 22.6 % 22.0 % foreignaverage currency exchange rates and the first-year impacts of acquisitions and disposals. We present core growth because it allows for a meaningful comparison of year-over-year performance without the volatility caused by foreign currency gaingains or losses or the incomparability that would be caused by the impactimpacts of an acquisitionacquisitions or disposal.disposals. Management believes that this measure is therefore useful for securities analysts, investors and other interested parties to assist in their assessment of the tradingoperating performance of our businesses. The closest GAAP measure is net sales, on a segment basis.(dollars in millions) Power
Transmission Fluid Power Total $ 2,009.4 $ 1,032.3 $ 3,041.7 10.9 2.5 13.4 — 33.4 33.4 $ 1,998.5 $ 996.4 $ 2,994.9 $ 1,862.1 $ 884.9 $ 2,747.0 $ 136.4 $ 111.5 $ 247.9 7.3 % 12.6 % 9.0 % For the year ended December 28, 2019 (dollars in millions) Power Transmission Fluid Power Total Net sales for the year ended December 28, 2019 $ 1,945.7 $ 1,141.4 $ 3,087.1 Impact on net sales of movements in currency rates 56.5 20.5 77.0 Impact on net sales from recent acquisitions — (7.5 ) (7.5 ) Core revenue for the year ended December 28, 2019 $ 2,002.2 $ 1,154.4 $ 3,156.6 Net sales for the year ended December 29, 2018 2,098.8 1,248.8 3,347.6 Decrease in net sales on a core basis (core revenue) $ (96.6 ) $ (94.4 ) $ (191.0 ) Core revenue growth (4.6 %) (7.6 %) (5.7 %) For the year ended December 29, 2018 (dollars in millions) Power Transmission Fluid Power Total Net sales for the year ended December 29, 2018 $ 2,098.8 $ 1,248.8 $ 3,347.6 Impact on net sales of movements in currency rates (17.8 ) (1.1 ) (18.9 ) Impact on net sales from recent acquisitions — (107.2 ) (107.2 ) Core revenue for the year ended December 29, 2018 $ 2,081.0 $ 1,140.5 $ 3,221.5 Net sales for the year ended December 30, 2017 2,009.4 1,032.3 3,041.7 Increase in net sales on a core basis (core revenue) $ 71.6 $ 108.2 $ 179.8 Core revenue growth 3.6 % 10.5 % 5.9 % net cash and cash equivalents and restricted cash which forms the basis for the consolidated statement of cash flow statement,flows, as a measure of our liquidity and in assessing the strength of our balance sheet.carryingprincipal amount of our debt (bank overdraftsdebt; and bank and other loans); andmay be analyzedwas as follows:(dollars in millions) As of
December 30,
2017 As of
December 31,
2016 $ — $ 0.3 3,955.7 3,836.6 3,955.7 3,836.9 (564.4 ) (527.2 ) $ 3,391.3 $ 3,309.7 (dollars in millions) As of
December 28,
2019 As of
December 29,
2018Principal amount of debt $ 2,985.0 $ 3,027.1 Less: Cash and cash equivalents 635.3 423.4 Net debt $ 2,349.7 $ 2,603.7 (dollars in millions) As of
December 28,
2019 As of
December 29,
2018Principal amount of debt $ 2,985.0 $ 3,027.1 Accrued interest 15.2 26.6 Deferred issuance costs (41.8 ) (48.7 ) Carrying amount of debt $ 2,958.4 $ 3,005.0 Ourannual report, which financial measures are determined at the Gates Global LLC level and adjust for certain additional items such as severance costs, the pro forma impacts of acquisitions and the pro forma impacts of cost-saving initiatives. These incrementaladditional adjustments during the last 12 months, as calculated pursuant to such agreements, provide us withresulted in a net benefit to Adjusted EBITDA for ratio calculation purposes of $16.3 million during Fiscal 2017.The Company$12.1 million.annual report is a receivable of $9.2 million and $11.8 million as of December 28, 2019 and December 29, 2018, respectively, due to Gates Global LLC and its subsidiaries from indirect parent entities of Gates Global LLC and additional cash and cash equivalents held by the Company of $8.3$2.0 million and $9.8$1.1 million as of December 30, 201728, 2019 and December 31, 2016,29, 2018, respectively.managementwe must make assumptions, judgments and estimates concerning the future that affect the carryingreported amounts of assets, and liabilities, at the balance sheet date, the disclosure of contingencies that existed at the balance sheet date and the amounts of revenue and expenses recognized during the period. Managementexpenses. We makes these assumptions, estimates and judgments based on factors such as historical experience, the observance of trends in the industries in which we operate and information available from our customers and other outside sources. Due to the inherent uncertainty involved in making assumptions, estimates and judgments, the actual outcomes could be different. The policies discussed below are considered by management to be more critical than other policies because their application involves a significant amount of estimation uncertainty that increases the risk of a material adjustment to the carrying amounts of our assets and liabilities.rebates and rebates. Taxes collected from customers relating to product sales tax and is recognized only when: (i) there is persuasive evidence of a sales agreement, typically in the form of a written sale or purchase agreement approved by both parties, (ii) the delivery of goods has occurred—this generally occurs upon passage of title which, depending on the arrangement with the customer, is typically upon release of the goodsremitted to government authorities are excluded from the physical control of the Company or upon receipt of the goods by the customer and, where there are contractual acceptance provisions, when the customer has accepted the goods (or the right to reject them has lapsed); (iii) the sales price is fixed or determinable; and (iv) the collectability of revenue is reasonably assured.Although the majority of our sales agreements contain standard terms and conditions, there may, at times, be agreements with customers that contain multiple elements ornon-standard terms and conditions. As a result, judgment is required to determine the appropriate accounting for transactions under these agreements, including whether the specified deliverables should be treated as separate units of accounting for recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for each element. For delivered elements, sales are generally recognized only when the delivered elements have standalone value and there are no uncertainties regarding customer acceptance. Sales for service contracts generally are recognized as the services are provided.customers and projected market conditionscustomers. Our transaction prices often include variable consideration, usually in the various markets we serve. Rebatesform of discounts and rebates that may apply to issued invoices are estimated based oninvoices. The reduction in the transaction price for variable consideration requires that we make estimates of the expected total qualifying sales to the relevant customers.Long-LivedIndefinite-Lived Assetsand property, plant and equipment are subject to an annual impairment test but are also tested for impairment if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Additionally,other intangiblecomparing the allocated purchase consideration with the fair value of the identifiable assets and liabilities of the reporting unit.have indefinite useful lives are subject to an annual impairment test.GoodwillHistorically, the Company conducted its annual impairment test on the goodwill balance as of the last day of the fiscal year. During Fiscal 2017, this was changed to the first day of the fourth quarter. This change in the date as of which the impairment testing is performed was made in order to better align with the year end process and the timing of forecast preparations. This change is expected to be beneficial in that it allows more time to review and consider the impairment test results before the year end. used were those regarding sales growth rates, selling prices and changes in direct costs.allGates as a whole, this growth rate was 3.7%. The terminal growth rate for both reporting units was set at 2.5%, a rate that does not exceed the expected long-term growth rates in the respective principal end markets.2017,2019, Fiscal 20162018, or Fiscal 2015.Fairbrandsbrand and trade namesname intangible asset isassets was determined using a relief from royalty valuation methodology in which the key assumptions included sales growth rates and an estimated royalty rate. Sales forecasts were determined on the same basis as those used for the annual impairment testing of goodwill.Historically,goodwill (as described above).Company conducted its annual impairment tests on its brands and trade names, an indefinite-lived intangible asset, ascalculated royalty savings that reflect current market assessments of the last daytime value of the fiscal year. During Fiscal 2017, this was changed to the first day of the fourth quarter. This change in the date as of which the impairment testing is performed from the fiscal year end tothe end of the first week of the fourth fiscal quarter, was made in order to better align with the year end processmoney and the timing of forecast preparations and is consistent withrisks specific to each region in which those royalty savings arose. In each case, the timing of the annual impairment testing of goodwill. This change is expected to be beneficial in that it allows more time to review and consider the impairment test results before the year end. The fair value isdiscount rate was determined using a relief from royalty valuation methodologycapital asset pricing model adjusted for a premium to reflect the higher risk specific to the nature of the intangible asset. The discount rates used in which the key assumptions included sales growth rates and an estimated royalty rate.2017 or Fiscal 2016. In Fiscal 2015, an impairment of $44.0 million was recognized in relation2019. However, due primarily to the brandscurrent challenging market conditions and trade names intangible asset, driven almost exclusively bytheir impact on our near-term outlook, the impact of weakening foreign currencies (in which the sales that support thefair value of the intangible asset are denominated) against the US dollar (in which the brandsour brand and trade name intangible asset is denominated.(dollars in millions) As of
December 28,
2019 As of
December 29,
2018Cash and cash equivalents by currency: —U.S. dollar $ 336.9 $ 170.8 —Chinese Yuan Renminbi 81.1 59.8 —Indian Rupee 43.2 30.7 —Euro 28.0 45.0 —Japanese Yen 29.9 35.6 —Other 116.2 81.5 $ 635.3 $ 423.4 Principal amount of debt by currency: —U.S. dollar $ 1,982.7 $ 2,014.4 —Euro 1,002.3 1,012.7 $ 2,985.0 $ 3,027.1 Interest rate Payable Receivable Variable Fixed Variable Fixed Variable rate index As of December 28, 2019 Maturity date: —June 2020 $ 1,200.0 — % 0.5 % — % — % 3 month LIBOR —June 2023 € 425.0 — % 0.3 % — % — % 3 month EURIBOR As of December 29, 2018 Maturity date: —June 2019 $ 1,000.0 — % 1.3 % 1.8 % — % 3 month LIBOR —June 2020 $ 200.0 — % 0.3 % 0.8 % — % 3 month LIBOR As of December 28, 2019 As of December 29, 2018 Interest-bearing Interest-bearing Total Total Financial assets: Available-for-sale investments $ — $ — $ 0.8 $ 0.8 $ — $ — $ 0.8 $ 0.8 Cash and cash equivalents 380.4 — 254.9 635.3 193.7 — 229.7 423.4 Restricted cash — — 1.3 1.3 — — 1.2 1.2 380.4 — 257.0 637.4 193.7 — 231.7 425.4 Financial liabilities: Debt (741.7 ) (2,243.1 ) (0.2 ) (2,985.0 ) (1,258.8 ) (1,768.0 ) (0.3 ) (3,027.1 ) Obligations under finance leases — (1.7 ) — (1.7 ) — (1.1 ) — (1.1 ) (741.7 ) (2,244.8 ) (0.2 ) (2,986.7 ) (1,258.8 ) (1,769.1 ) (0.3 ) (3,028.2 ) $ (361.3 ) $ (2,244.8 ) $ 256.8 $ (2,349.3 ) $ (1,065.1 ) $ (1,769.1 ) $ 231.4 $ (2,602.8 ) Long-LivedInformationAudited Consolidated Financial Statements of Gates Industrial Corporation plc and its subsidiaries: Incorporated by Reference Exhibit No. Description Form Exhibit Filing Date 3.1 S-1 3.1 1/8/2018 3.2 10-Q 3.2 11/6/2019 4.1 4.2 8-K 4.1 11/27/2019 10.1 8-K 10.1 1/29/2018 10.2 8-K 10.2 1/29/2018 10.3 8-K 10.3 1/29/2018 10.4 8-K 10.4 1/29/2018 10.5 8-K 10.5 1/29/2018 10.6 8-K 10.7 1/29/2018 10.7 S-1 10.18 12/27/2017 10.8 S-1 10.19 12/27/2017 10.9 S-1 10.20 12/27/2017 10.10 8-K 10.6 1/29/2018 10.11 S-1 10.23 12/27/2017 10.12 S-1 10.24 12/27/2017 10.13 S-1 10.25 12/27/2017 10.14 S-1 10.26 12/27/2017 10.15 10-K 10.15 2/14/2019 10.16 10-K 10.16 2/14/2019 10.17 10-K 10.17 2/14/2019 10.18 10-K 10.18 2/14/2019 10.19 10-K 10.19 2/14/2019 10.20 10-K 10.20 2/14/2019 10.21 10-K 10.21 2/14/2019 10.22 10-K 10.22 2/14/2019 10.23 10-Q 10.1 11/2/2018 10.24 10-Q 10.2 5/3/2018 10.25 10-Q 10.2 11/2/2018 10.26 10-Q 10.3 11/2/2018 10.27 10-Q 10.4 11/2/2018 10.28 10-Q 10.5 11/2/2018 10.29 10-Q 10.1 5/8/2019 10.30 10-Q 10.2 5/8/2019 10.31 10-Q 10.3 5/8/2019 10.32 10-Q 10.4 5/8/2019 10.33 10-Q 10.5 5/8/2019 10.34 10.35 10.36 10.37 10-Q 10.1 5/3/2018 10.38 S-1 10.12 1/8/2018 10.39 S-1 10.15 12/27/2017 10.40 S-1 10.16 12/27/2017 21.1 23.1 31.1 31.2 32.1 101 The following financial information from Gates Industrial Corporation's Annual Report on Form 10-K for the year ended December 28, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations for the years end ended December 28, 2019, December 29, 2018 and December 30, 2017 (ii) Consolidated Statements of Comprehensive Income for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 (iii) Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018, (iv) Consolidated Statements of Cash Flows for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 (v) Consolidated Statements of Shareholders' Equity for the years ended December 28, 2019, December 29, 2018 and December 30, 2017, and (vi) Notes to the Consolidated Financial Statements.* By: /s/ Ivo Jurek Name: Ivo Jurek Title: Signature Title /s/ Ivo Jurek Chief Executive Officer and Director Ivo Jurek (Principal Executive Officer) /s/ David M. Wisniewski Chief Financial Officer and Chief Accounting Officer David M. Wisniewski (Principal Financial and Accounting Officer) /s/ Neil P. Simpkins Director Neil P. Simpkins /s/ Julia C. Kahr Director Julia C. Kahr /s/ Terry Klebe Director Terry Klebe /s/ James W. Ireland Director James W. Ireland /s/ Stephanie Mains Director Stephanie Mains For the year ended (dollars in millions, except per share amounts) December 28, 2019 December 29, 2018 December 30, 2017 Net sales $ 3,087.1 $ 3,347.6 $ 3,041.7 Cost of sales 1,944.6 2,017.0 1,823.7 Gross profit 1,142.5 1,330.6 1,218.0 Selling, general and administrative expenses 777.3 805.8 777.1 Transaction-related expenses 2.6 6.7 18.1 Impairment of intangibles and other assets 0.7 0.6 2.8 Restructuring expenses 6.0 6.4 17.4 Other operating expenses (income) 9.1 14.3 (0.3 ) Operating income from continuing operations 346.8 496.8 402.9 Interest expense 157.8 175.9 234.6 Other (income) expenses (9.8 ) 17.4 58.8 Income from continuing operations before taxes 198.8 303.5 109.5 Income tax (benefit) expense (495.9 ) 31.8 (72.5 ) Net income from continuing operations 694.7 271.7 182.0 Loss (income) on disposal of discontinued operations, net of tax, respectively, of $0, $0 and $0 0.6 0.6 (0.7 ) Net income 694.1 271.1 182.7 Less: non-controlling interests 4.0 25.8 31.4 Net income attributable to shareholders $ 690.1 $ 245.3 $ 151.3 Earnings per share Basic Earnings per share from continuing operations $ 2.38 $ 0.86 $ 0.62 Earnings per share from discontinued operations — — — Earnings per share $ 2.38 $ 0.86 $ 0.62 Diluted Earnings per share from continuing operations $ 2.37 $ 0.84 $ 0.60 Earnings per share from discontinued operations — — — Earnings per share $ 2.37 $ 0.84 $ 0.60 For the year ended (dollars in millions) December 28, 2019 December 29, 2018 December 30, 2017 Net income $ 694.1 $ 271.1 $ 182.7 Other comprehensive (loss) income Foreign currency translation: —Net translation gain (loss) on foreign operations, net of tax (expense) benefit, respectively, of ($0.8), ($1.2), and $15.0 29.4 (134.9 ) 280.2 —Gain (loss) on net investment hedges, net of tax expense, respectively, of $0, $0 and $0 5.5 9.8 (109.4 ) Total foreign currency translation movements 34.9 (125.1 ) 170.8 Cash flow hedges (Interest rate derivatives): —Loss arising in the period, net of tax benefit, respectively, of $4.5, $0 and $0 (27.2 ) (4.5 ) (2.0 ) —Reclassification to net income, net of tax (expense) benefit, respectively, of ($0.2), $4.7 and ($2.0) 2.3 10.1 9.6 Total cash flow hedges movements (24.9 ) 5.6 7.6 Available-for-sale investments: —Net unrealized loss, net of tax benefit, respectively, of $0, $0 and $0.1 — — (0.2 ) Total available-for-sale investments: — — (0.2 ) Post-retirement benefits: —Current year actuarial movements, net of tax benefit (expense), respectively, of $2.8, $2.2 and ($5.4) (16.7 ) (5.3 ) 20.2 —Reclassification of prior year actuarial movements to net income, net of tax (expense) benefit, respectively, of ($0.2), $0.1 and $0 0.2 (0.5 ) — Total post-retirement benefit movements (16.5 ) (5.8 ) 20.2 Other comprehensive (loss) income (6.5 ) (125.3 ) 198.4 Comprehensive income for the period $ 687.6 $ 145.8 $ 381.1 Comprehensive income attributable to shareholders: —Income arising from continuing operations $ 686.6 $ 138.7 $ 319.1 —(Loss) income arising from discontinued operations (0.6 ) (0.6 ) 0.7 686.0 138.1 319.8 Comprehensive income attributable to non-controlling interests 1.6 7.7 61.3 $ 687.6 $ 145.8 $ 381.1 (dollars in millions, except share numbers and per share amounts) As of
December 28,
2019 As of
December 29,
2018Assets Current assets Cash and cash equivalents $ 635.3 $ 423.4 Trade accounts receivable, net of allowances of $8.6 and $7.4 694.7 742.3 Inventories 475.1 537.6 Taxes receivable 22.1 7.2 Prepaid expenses and other assets 131.4 104.1 Total current assets 1,958.6 1,814.6 Non-current assets Property, plant and equipment, net 727.9 756.3 Goodwill 2,060.5 2,045.9 Pension surplus 38.1 52.6 Intangible assets, net 1,876.0 1,990.6 Operating lease right-of-use assets 123.0 — Taxes receivable 23.0 27.9 Deferred income taxes 587.1 5.1 Other non-current assets 17.1 29.6 Total assets $ 7,411.3 $ 6,722.6 Liabilities and equity Current liabilities Debt, current portion $ 46.1 $ 51.6 Trade accounts payable 374.7 424.0 Taxes payable 48.5 19.2 Accrued expenses and other current liabilities 188.8 184.2 Total current liabilities 658.1 679.0 Non-current liabilities Debt, less current portion 2,912.3 2,953.4 Post-retirement benefit obligations 151.2 155.9 Lease liabilities 116.2 — Taxes payable 108.8 81.9 Deferred income taxes 369.3 439.5 Other non-current liabilities 84.7 79.2 Total liabilities 4,400.6 4,388.9 Commitments and contingencies (note 23) Shareholders’ equity —Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 290,157,299 (December 29, 2018: authorized shares: 3,000,000,000; outstanding shares: 289,847,574) 2.9 2.9 —Additional paid-in capital 2,434.5 2,416.9 —Accumulated other comprehensive loss (858.4 ) (854.3 ) —Retained earnings 1,072.0 381.9 Total shareholders’ equity 2,651.0 1,947.4 Non-controlling interests 359.7 386.3 Total equity 3,010.7 2,333.7 Total liabilities and equity $ 7,411.3 $ 6,722.6 For the year ended (dollars in millions) December 28, 2019 December 29, 2018 December 30, 2017 Cash flows from operating activities Net income $ 694.1 $ 271.1 $ 182.7 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 222.2 218.5 212.2 Non-cash currency transaction (gain) loss on debt and hedging instruments (16.8 ) (45.5 ) 57.4 Premium paid on redemption of long-term debt — 27.0 — Other net non-cash financing costs 27.4 65.6 47.6 Share-based compensation expense 15.0 6.0 5.4 Decrease in post-employment benefit obligations, net (9.4 ) (4.6 ) (7.4 ) Deferred income taxes (648.4 ) (64.9 ) (162.8 ) Other operating activities 6.0 4.8 5.5 Changes in operating assets and liabilities, net of effects of acquisitions: —Decrease (increase) in accounts receivable 41.8 (49.6 ) (24.6 ) —Decrease (increase) in inventories 65.1 (96.1 ) (45.4 ) —(Decrease) increase in accounts payable (48.2 ) 42.1 49.9 —(Increase) decrease in prepaid expenses and other assets (2.6 ) (27.5 ) 2.3 —Increase (decrease) in taxes payable 46.2 (15.3 ) 6.5 —Decrease in other liabilities (43.5 ) (18.1 ) (9.4 ) Net cash provided by operations 348.9 313.5 319.9 Cash flows from investing activities Purchases of property, plant and equipment (72.1 ) (166.1 ) (101.1 ) Purchases of intangible assets (11.0 ) (16.6 ) (10.0 ) Cash paid under corporate-owned life insurance policies (10.7 ) (10.3 ) (9.5 ) Cash received under corporate-owned life insurance policies 12.0 2.9 3.1 Purchase of businesses, net of cash acquired — (50.9 ) (110.7 ) Other investing activities 3.8 (2.6 ) 1.2 Net cash used in investing activities (78.0 ) (243.6 ) (227.0 ) Cash flows from financing activities Issuance of shares, net of underwriting costs 1.8 799.7 0.6 Other offering costs — (8.6 ) (2.3 ) Buy-back of shares — — (1.6 ) Proceeds from long-term debt 568.0 — 644.7 Payments of long-term debt (593.1 ) (933.5 ) (676.9 ) Premium paid on redemption of long-term debt — (27.0 ) — Debt issuance costs paid (8.3 ) — (18.8 ) Dividends paid to non-controlling interests (28.8 ) (35.2 ) (24.6 ) Other financing activities 1.1 5.7 3.6 Net cash used in financing activities (59.3 ) (198.9 ) (75.3 ) Effect of exchange rate changes on cash and cash equivalents and restricted cash 0.4 (12.4 ) 19.6 Net increase (decrease) in cash and cash equivalents and restricted cash 212.0 (141.4 ) 37.2 Cash and cash equivalents and restricted cash at the beginning of the period 424.6 566.0 528.8 Cash and cash equivalents and restricted cash at the end of the period $ 636.6 $ 424.6 $ 566.0 Supplemental schedule of cash flow information Interest paid, net of amount capitalized $ 150.8 $ 157.9 $ 198.0 Income taxes paid, net $ 108.8 $ 114.0 $ 84.8 Accrued capital expenditures $ 1.8 $ 1.0 $ 1.7 (dollars in millions) Share
capital Accumulated
other
comprehensive
loss Retained
(deficit) earnings Total
shareholders’
equity Non-
controlling
interests Total
equityAs of December 31, 2016 $ 2.5 $ 1,619.0 $ (915.9 ) $ (14.3 ) $ 691.3 $ 377.1 $ 1,068.4 Net income — — — 151.3 151.3 31.4 182.7 Other comprehensive income, net — — 168.5 — 168.5 29.9 198.4 Total comprehensive income — — 168.5 151.3 319.8 61.3 381.1 Other changes in equity: —Issuance of shares — 0.6 — — 0.6 — 0.6 —Repurchase of shares — (1.5 ) — (0.1 ) (1.6 ) — (1.6 ) —Share-based compensation — 4.5 — — 4.5 — 4.5 —Dividends paid to non-controlling
interests— — — — — (24.6 ) (24.6 ) As of December 30, 2017 2.5 1,622.6 (747.4 ) 136.9 1,014.6 413.8 1,428.4 Net income — — — 245.3 245.3 25.8 271.1 Other comprehensive loss, net — — (106.9 ) (0.3 ) (107.2 ) (18.1 ) (125.3 ) Total comprehensive (loss) income — — (106.9 ) 245.0 138.1 7.7 145.8 Other changes in equity: —Issuance of shares 0.4 841.3 — — 841.7 — 841.7 —Cost of shares issued — (53.0 ) — — (53.0 ) — (53.0 ) —Share-based compensation — 6.0 — — 6.0 — 6.0 —Dividends paid to non-controlling
interests— — — — — (35.2 ) (35.2 ) As of December 29, 2018 2.9 2,416.9 (854.3 ) 381.9 1,947.4 386.3 2,333.7 Net income — — — 690.1 690.1 4.0 694.1 Other comprehensive loss, net — — (4.1 ) — (4.1 ) (2.4 ) (6.5 ) Total comprehensive (loss) income — — (4.1 ) 690.1 686.0 1.6 687.6 Other changes in equity: —Issuance of shares — 1.8 — — 1.8 — 1.8 —Share-based compensation — 14.6 — — 14.6 — 14.6 —Change in ownership of a controlled subsidiary — 1.2 — — 1.2 (1.2 ) — —Shares issued by a subsidiary to a non-controlling interest — — — — — 1.8 1.8 —Dividends paid to non-controlling
interests— — — — — (28.8 ) (28.8 ) As of December 28, 2019 $ 2.9 $ 2,434.5 $ (858.4 ) $ 1,072.0 $ 2,651.0 $ 359.7 $ 3,010.7 (i) we did not reassess whether or not any expired or existing contracts were or contained leases; (ii) we did not reassess the lease classification for any expired or existing leases (i.e., all existing leases that were classified as operating leases continued to be classified as such under Topic 842, and all existing leases that were classified as capital leases continued to be classified as finance leases); and (iii) we did not reassess any initial direct costs for leases existing on the date of adoption of Topic 842. Customer relationships 15 to 17 years Technology 5 to 7 years Buildings and improvements 30 to 40 years Leasehold improvements Shorter of lease term or useful life Machinery, equipment and vehicles 2 to 20 years As of December 30, 2017, the carrying amount of property, plant and equipment was $686.2 million, excluding assets held for sale, compared with $599.6 million as of December 31, 2016. No significant impairment of plant and equipment was recognized during Fiscal 2017 or Fiscal 2016. An impairment of plant and equipment in Brazil for $6.7 million was recognized during Fiscal 2015.The carrying amount of finite-lived intangible assets at December 30, 2017 was $1,657.4 million compared with $1,674.7 million as of December 31, 2016. During Fiscal 2017, an impairment of $1.0 million was recognized in relation to technology andknow-how, compared with a computer software impairment of $2.0 million and $0.1 million for Fiscal 2016 and Fiscal 2015, respectively.Impairment losses may be recognized on assets within the next financial year if events or circumstances indicate that the carrying amount of an asset may not be recoverable. An asset would be considered impaired if the estimated future net undiscounted cash flows generated are less than the carrying amount of the asset.Share-Based CompensationShare-based compensation has historically been provided to certain of our employees and directors under share option, bonus and other share award plans. A description of the awards granted and the costs recognized by us during the periods presented is set out in note 18 to the audited consolidated financial statements included elsewhere in this annual report.We recognize a compensation expense in respect of these plans that is based on the fair value of the awards, measured at the date of grant using either the Black-Scholes option-pricing formula or a Monte-Carlo valuation model and reflecting market performance conditions and allnon-vesting conditions. Fair value is not subsequently remeasured unless the conditions on which the award was granted are modified.Generally, the compensation expense for each separately vesting portion of the award is recognized on a straight-line basis over the vesting period for that portion of the award subject to continued service with us through each vesting date. A compensation expense is recognized for awards containing performance conditions only to the extent that it is probable that those performance conditions will be met. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions or performance conditions.We expect to continue to grant stock options in the future, and, to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying shares, the expected volatility of the price of our shares, risk-free interest rates, the expected term of the option and the expected dividend yield of our shares. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.•Fair Value of Our Shares.As of December 30, 2017, the Company’s shares were not publicly traded and we therefore estimated the fair value of our shares, as discussed below.•Expected Volatility.As we have not been a public company and do not have a trading history for our shares, the expected stock price volatility for our shares is estimated by taking the average historical price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the share option grants. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case more suitable companies whose share prices are publicly available would be used in the calculation.•Risk-free Interest Rate.The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.•Expected Term.The expected term represents the period that our share-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the share option awards granted, we base our expected term for awards issued on the simplified method, which represents the average period from vesting to the expiration of the stock option.•Expected Dividend Yield.We have never declared or paid any cash dividends to shareholders and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.The fair value of our shares has historically been determined based upon information available at the time of grant. Given the absence of a public trading market for our shares prior to January 2018 and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid, management has exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our shares at each grant date. These factors included:our operating and financial performance;current business conditions and projections;the likelihood of achieving a liquidity event for the shares of shares underlying these stock options, such as an initial public offering or sale of our company, given prevailing market conditions;the lack of marketability of our shares; andthe market performance of comparable publicly traded companies.In valuing our shares, we determined the equity value of our business using a weighted blend of the income and market approaches. The income approach estimates the fair value of a company based on the present value of such company’s future estimated cash flows and the residual value of such company beyond the forecast period.
These future values are discounted to their present values to reflect the risks inherent in such company achieving these estimated cash flows. Significant inputs of the income approach (in addition to our estimated future cash flows themselves) include the long-term growth rate assumed in the residual value, discount rate and normalized long-term operating margin. The terminal value was calculated to estimate our value beyond the forecast period by applying valuation metrics to the final year of our forecasted revenue and discounting that value to the present value using the same weighted average cost of capital applied to the forecasted periods.
Following our IPO, the fair value per share of our shares for purposes of determining stock-based compensation is the closing price of our shares as reported on the applicable grant date.
Taxation
We are subject to income tax in most of the jurisdictions in which we operate. Management is required to exercise significant judgment in determining our provision for income taxes. Management’s judgment is required in relation to uncertain tax positions whereby additional current tax may become payable in the future following the audit by tax authorities of previously-filed tax returns. It is possible that the final outcome of these uncertain tax positions may differ from management’s estimates.
Management assesses uncertain tax positions based upon an evaluation of the facts, circumstances and information available at the balance sheet date. Provision is made for uncertain tax positions to the extent that the amounts previously taken or expected to be taken in tax returns exceeds the tax benefits that are recognized in the consolidated financial statements in respect of the tax positions. A tax benefit is recognized in the consolidated financial statements only if management considers that it is more likely than not that the tax position will be sustained on examination by the relevant tax authority solely on the technical merits of the position and is measured as the largest amount of tax benefit that will more likely than not be realized upon settlement assuming that the tax authority has full knowledge of all relevant information. Provisions for uncertain tax positions are reviewed regularly and are adjusted to reflect events such as the expiration of limitation periods for assessing tax, guidance given by the tax authorities and court decisions.
Deferred tax assets and liabilities are recognized based on the expected future tax consequences of the difference between the financial statement carrying amount and the respective tax basis. Deferred taxes are measured on the enacted rates expected to apply to taxable income at the time the difference is anticipated to reverse. Deferred tax assets are reduced through the establishment of a valuation allowance if it is more likely than not that the deferred tax asset will not be realized taking into account the timing and amount of the reversal of taxable temporary differences, expected future taxable income and tax planning strategies.
Deferred tax is provided on certain taxable temporary differences arising on investments in foreign subsidiaries, except where we intend, and are able, to reinvest such amounts on a permanent basis or to remit such amounts in atax-free manner.
Accounting Pronouncements Not Yet Adopted
Recently-issued accounting pronouncements that may be relevant to our operations but have not yet been adopted are outlined in note 3 to our audited consolidated financial statements included elsewhere in this annual report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts and interest rate caps (options), to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact. Our objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates and interest rate movements.
On a regular basis, we monitor third-party depository institutions that hold our cash and short-term investments, primarily for safety of principal and secondarily for maximizing yield on those funds. We diversify our cash and short-term investments among counterparties to minimize exposure to any one of these entities. We also monitor the creditworthiness of our customers and suppliers to mitigate any adverse impact.
Foreign Currency Exchange Risk
We have global operations and thus make investments and enter into transactions denominated in various foreign currencies. Our operating results are impacted by buying, selling and financing in currencies other than the functional currency of our operating companies. We monitor exposure to transactions denominated in currencies other than the functional currency of each country in which we operate, and enter into forward contracts to mitigate that exposure as needed. We also naturally hedge foreign currency through our production in the countries in which we sell our products.
In addition, we are exposed to currency risk associated with translating our functional currency financial statements into its reporting currency, which is the U.S. dollar. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Translational foreign exchange risks arise predominantly on the potential increase in our significant euro debt when translated to U.S. dollars, as well as on the potential decreases in the value of our earnings, cash balances and other net assets denominated in euro and other currencies when translated to U.S. dollars.
The currency profiles of our cash and debt are centrally managed as are decisions about the location of cash. The currency profile of cash and debt, after taking into account the effect of forward currency swaps used to manage those profiles, were as follows:
| (dollars in millions) | As of December 30, 2017 | As of December 31, 2016 | ||||||
Cash and cash equivalents by currency: | ||||||||
—U.S. dollar | $ | 305.0 | $ | 336.8 | ||||
—Euro | 51.1 | 45.2 | ||||||
—Chinese Yuan Renminbi | 60.4 | 35.5 | ||||||
—Japanese Yen | 33.6 | 20.8 | ||||||
—Other | 114.3 | 88.9 | ||||||
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| $ | 564.4 | $ | 527.2 | |||||
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Principal amount of debt (including bank overdrafts) by currency: | ||||||||
—U.S. dollar | $ | 2,649.4 | $ | 3,168.8 | ||||
—Euro | 1,338.5 | 717.7 | ||||||
—British Pound | — | 0.2 | ||||||
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| $ | 3,987.9 | $ | 3,886.7 | |||||
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As described in note 13 to the audited consolidated financial statements included elsewhere in this annual report, during Fiscal 2016 and Fiscal 2017 we had designated €265.5 million of our Euro Term Loans, €235.0 million of our euro notes and a €254.5 million cross currency swap as hedges of the majority of our net investment in euro-denominated foreign operations. Changes in the value of these instruments resulting from fluctuations in the euro to U.S. dollar exchange rate are accordingly recorded as foreign currency translation adjustments within other comprehensive income.
Interest Rate Risk
Our prevailing market risk on interest rates is the potential fluctuation in interest costs and in the fair value of long-term debt resulting from movements in interest rates.
We use interest rate caps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. The interest rate caps are designated as cash flow hedges and involve the receipt of variable rate payments from a counterparty if interest rates rise above the strike rate on the contract in exchange for a premium. The following table summarizes the key terms of the interest rate derivatives held by the Company:
| Notional principal amount $ million | Interest rate | |||||||||||||||||||||||
| (dollars in millions) | Payable | Receivable | ||||||||||||||||||||||
| Variable | Fixed | Variable | Fixed | Variable rate index | ||||||||||||||||||||
As of December 30, 2017 | ||||||||||||||||||||||||
Maturity date: | ||||||||||||||||||||||||
—June 2019 | 1,000.0 | — | 1.3 | % | 0.7 | % | — | 3 month LIBOR | ||||||||||||||||
—June 2020 | 200.0 | — | 0.3 | % | — | — | 3 month LIBOR | |||||||||||||||||
As of December 31, 2016 | ||||||||||||||||||||||||
Maturity date: | ||||||||||||||||||||||||
—June 2019 | 1,000.0 | — | 1.3 | % | — | — | 3 month LIBOR | |||||||||||||||||
The interest rate profile of the Company’s financial assets and liabilities, after taking into account the effect of the interest rate hedging activities, was as follows:
| As of December 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||||
| Interest-bearing | Interest-bearing | |||||||||||||||||||||||||||||||
| (dollars in millions) | Floating rate | Fixed rate | Non-interest bearing | Total | Floating rate | Fixed rate | Non-interest bearing | Total | ||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Available-for-sale investments | $ | — | $ | — | $ | 2.4 | $ | 2.4 | $ | — | $ | — | $ | 2.6 | $ | 2.6 | ||||||||||||||||
Cash and cash equivalents | 417.8 | — | 146.6 | 564.4 | 337.5 | — | 189.7 | 527.2 | ||||||||||||||||||||||||
Restricted cash | — | — | 1.6 | 1.6 | — | — | 1.6 | 1.6 | ||||||||||||||||||||||||
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| 417.8 | — | 150.6 | 568.4 | 337.5 | — | 193.9 | 531.4 | |||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Debt | (1,315.0 | ) | (2,672.5 | ) | (0.4 | ) | (3,987.9 | ) | (1,600.3 | ) | (2,285.7 | ) | (0.7 | ) | (3,886.7 | ) | ||||||||||||||||
Obligations under finance leases | — | (1.4 | ) | — | (1.4 | ) | — | (1.4 | ) | — | (1.4 | ) | ||||||||||||||||||||
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| (1,315.0 | ) | (2,673.9 | ) | (0.4 | ) | (3,989.3 | ) | (1,600.3 | ) | (2,287.1 | ) | (0.7 | ) | (3,888.1 | ) | |||||||||||||||||
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| $ | (897.2 | ) | $ | (2,673.9 | ) | $ | 150.2 | $ | (3,420.9 | ) | $ | (1,262.8 | ) | $ | (2,287.1 | ) | $ | 193.2 | $ | (3,356.7 | ) | |||||||||||
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Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Our debt facilities are monitored against forecast requirements and timely action is taken to put in place, renew or replace credit lines. We aim to reduce liquidity risk by diversifying our funding sources, maintaining adequate headroom under our debt facilities and by staggering the maturities of our debt.
We have established long-term credit ratings of B3 Stable with Moody’s and B+ Stable with Standard & Poor’s. Credit ratings are subject to regular review by the credit rating agencies and may change in response to economic and commercial developments.
For the expected timing of contractual cash flows relating to the financial liabilities and related financial assets see the table set out above under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Tabular Disclosure of Contractual Obligations.”
Commodity Risk
We source a wide variety of materials and components from a network of global suppliers. While such materials are typically available from numerous suppliers, commodity raw materials such as aluminum, steel and polymers are subject to price fluctuations, which could have a negative impact on our results. We primarily manage these risks through normal operating activities. We strive to pass along such commodity price increases to customers to avoid profit margin erosion and utilize lean initiatives to further mitigate the impact of commodity raw material price fluctuations as we achieve improved efficiencies. We historically have not entered into any derivative commodity instruments to manage the exposure to changing price risk for supplies, but we will continue to evaluate their viability.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included as a separate section in this annual report on Form10-K. See Part IV. Item 15. “Exhibits, Financial Statement Schedules,” which is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form10-K. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of December 30, 2017, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting.
We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As of the filing of the Registration Statement and the IPO prospectus, the Fiscal 2017 Annual Plan bonuses for the Company’s named executive officers had not been determined and, therefore, were omitted from the Summary Compensation Tables included in the Registration Statement and the IPO prospectus. On March 7, 2018, the Company’s compensation committee approved Fiscal 2017 Plan bonuses for the Company’s named executive officers. The Fiscal 2017 Annual Plan award earned by each of our named executive officers and the new total compensation amounts for the named executive officers are reported in the Summary Compensation Table in Item 11 of this Annual Report on Form10-K.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth our directors and executive officers, as well as their ages as of March 8, 2018.
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Ivo Jurek has served as a director of Gates Industrial Corporation plc since its formation in September 2017 and has served as our Chief Executive Officer and a director of Gates entities since May 2015. Mr. Jurek oversees and manages all of Gates’ departments and lines of products and services globally. As Chief Executive Officer, Mr. Jurek has led Gates to expand product lines in fluid power, power transmission, and strategically grow market share through acquisitions and joint ventures, while driving improved financial performance through increased plants efficiency. Mr. Jurek has a deep understanding of new technology development, manufacturing, distribution and international business markets. Prior to joining Gates, Mr. Jurek served as President of Eaton Electrical, Asia Pacific from November 2012. During that time, Mr. Jurek had management oversight of Eaton Electrical’s Asia Pacific portfolio which included optimizing manufacturing plants, identifying new markets, and assisting with the overall performance of the company. Prior to that, Mr. Jurek served as Group President for Cooper Power Systems—Cooper Bussmann with complete oversight of all business activities and in significant general management positions for International Rectifier Corporation and TRW Inc.
David L. Calhoun has served as a director of Gates Industrial Corporation plc since November 2017 and has served as a director of Gates entities since 2014. He is a Senior Managing Director and Head of Private Equity Portfolio Operations of Blackstone and a member of Blackstone’s Management Committee. Mr. Calhoun joined Blackstone in January 2014 and oversees a team within the portfolio operations group focused on creating and driving added value initiatives with Blackstone portfolio company CEOs. From the beginning of 2014 to May 2017, Mr. Calhoun served on the Board for Nielsen, including as Executive Chairman of the Board from January 2014 to January 2016, a company he joined in 2006 as Chief Executive Officer shortly after it was acquired by a consortium of private equity investors including Blackstone. Throughout his seven years’ tenure, Mr. Calhoun led Nielsen’s transformation into a leading global information and measurement company listed on the NYSE (Ticker: NLSN) and Standard & Poor’s 500 Index. Before Nielsen, Mr. Calhoun served as Vice Chairman of The General Electric Company and President and Chief Executive Officer of GE Infrastructure, the company’s largest business unit. During his distinguished26-year tenure at GE, Mr. Calhoun ran multiple business units, including GE Lighting, GE Employers Reinsurance Co., GE Aircraft Engines, and GE Transportation (Aircraft and Rail). Earlier in his career at GE, he held a wide range of operating, finance, and marketing roles across the company, including within GE Plastics and GE Capital. Mr. Calhoun also serves on the Board of Directors of The Boeing Company and Caterpillar and effective April 1, 2017, he became the Chairman of the Board for Caterpillar. He is theco-author with Rick Kash of the book “How Companies Win.”
Mr. Calhoun is a member of Virginia Tech’s Pamplin Advisory Council, which advises the university on student and alumni issues.
Neil P. Simpkins has served as a director of Gates Industrial Corporation plc since November 2017 and has served as a director of Gates entities since 2014. He is a Senior Managing Director of Blackstone’s Corporate Private Equity Group. Since joining Blackstone in 1998, Mr. Simpkins has led the acquisitions of TRW Automotive, Vanguard Health Systems, Team Health, LLC, Apria Healthcare Group, Change Healthcare, Inc., Summit Materials, Inc. and Gates. Before joining Blackstone, Mr. Simpkins was a Principal at Bain Capital. While at Bain Capital, Mr. Simpkins was involved in the execution of investments in the consumer products, industrial, healthcare and information industries. Prior to joining Bain Capital, Mr. Simpkins was a consultant at Bain & Company in the Asia Pacific region and in London. He currently serves as a Director of Apria Healthcare Group, Summit Materials, Inc., Change Healthcare, Inc. and Team Health, Inc.
Julia C. Kahr has served as a director of Gates Industrial Corporation plc since its formation in September 2017 and has served as a director of Gates entities since 2014. She is a Senior Managing Director of Blackstone’s Corporate Private Equity Group. Since joining Blackstone in 2004, she has been involved in the execution of Blackstone’s investments in SunGard Data Systems, Encore Medical Corporation, DJO Global, Summit Materials, Inc. and Gates. Before joining Blackstone, she was a Project Leader at the Boston Consulting Group, where she worked with companies in a variety of industries, including health care, financial services, media and entertainment and consumer goods. She is also the sole author of Working Knowledge, a book published by Simon & Schuster in 1998. She currently serves on the Board of Directors of DJ Orthopedics and Barry-Wehmiller Companies, Inc. and is also a member of the Board of Directors of Episcopal Social Services.
John Plant has served as a director of Gates Industrial Corporation plc since December 2017 and has served as a director of Gates entities since 2015. Mr. Plant is the former Chairman of the Board, President and Chief Executive Officer of TRW Automotive, which was acquired by ZF Friedrichshafen AG in May 2015. He was aco-member of the Chief Executive Office of TRW Inc. from 2001 to 2003 and an Executive Vice President of TRW from its 1999 acquisition of Lucas Varity to 2003. Prior to TRW, Mr. Plant was President of Lucas Variety Automotive and managing director of the Electrical and Electronics division from 1991 through 1997. Mr. Plant currently serves as a director of Masco Corporation and Jabil Circuit Corporation and director and chair of the board of Arconic. He is a board member of the Automotive Safety Council and also a Fellow of the Institute of Chartered Accountants.
Terry Klebe has served as a director of Gates Industrial Corporation plc since December 2017 and has served as a director of Gates entities since 2016. Mr. Klebe was previously Senior Vice President and Chief Financial Officer of Cooper Industries, a multinational industrial manufacturing company with 2010 revenues of $5.1 billion, from 2002 until his retirement in February 2010. Mr. Klebe continued to serve as vice chairman at Cooper through his retirement in April 2011. Mr. Klebe also served on the Board of Directors of Fairchild Semiconductors and as a head of Audit Committee until its sale in September 2016.
Karyn Ovelmenhas served as a director of Gates Industrial Corporation plc since December 2017. Mrs. Ovelmen was previously Executive Vice President and Chief Financial Officer of Flowserve Corp., a provider of flow control products and services for the global infrastructure market, from June 2015 to February 2017. Prior to Flowserve, she served as Chief Financial Officer and Executive Vice President of LyondellBasell Industries NV from 2011 to May 2015. Mrs. Ovelmen also served as Executive Vice President and Chief Financial Officer of Petroplus Holdings AG from May 2006 to September 2010 and as Executive Vice President and Chief Financial Officer of Argus Services Corporation from 2005 to 2006. Prior to Argus Services, she was Vice President of External Reporting and Investor Relations for Premcor Refining Group Inc. She also spent 12 years with PricewaterhouseCoopers, primarily serving energy industry accounts. Mrs. Ovelmen currently serves as a director of ArcelorMittal and as chairman of ArcelorMittal’s audit & risk committee.
David H. Naemura has served as our Chief Financial Officer since March 2015. As Chief Financial Officer, Mr. Naemura manages Gates’ global corporate finance and accounting functions, including capital structure,
resource allocation, financial reporting and the maintenance of our global internal control systems. Mr. Naemura also manages Information Technology and Gates’ mergers and acquisitions function. Previously, Mr. Naemura served as a Group CFO in Danaher Corporation starting in April 2012. While Group CFO, Mr. Naemura maintained responsibility for a diverse group of businesses in a variety of industrial and electronics end markets. Prior to serving in his Group CFO Role at Danaher Corporation, Mr. Naemura served as a Platform CFO in Danaher from June 2009 to March 2012. Mr. Naemura was also previously an operating company CFO in Danaher. Prior to Danaher, Mr. Naemura was employed by Tektronix Corporation since 2000, prior to their acquisition by Danaher Corporation in 2007. Mr. Naemura was also formerly an auditor.
Walter T. Lifsey has served as our Chief Operating Officer since August 2015. As Chief Operating Officer, Mr. Lifsey manages and oversees all manufacturing and operations globally for Gates, including the operations function, health, safety and environmental, quality assurance, procurement and certain new product development. Mr. Lifsey has transformed manufacturing processes and procedures at Gates and is developing critical new assets and infrastructure for Gates globally. Prior to joining Gates, Mr. Lifsey served as Chief Operating Officer of View Inc., a manufacturer of intelligent windows, where Mr. Lifsey was responsible for all aspects of manufacturing, product quality, manufacturing engineering, operational planning, and manufacturing information systems. Before his time at View, Mr. Lifsey served in various roles at Atmel Corporation beginning in 2006 before becoming their Chief Operating Officer where he led global operations from May 2010 to November 2012. Prior to Atmel, he served in various senior management roles at International Rectifier and TRW Inc.
Jamey S. Seely has served as our Executive Vice President, General Counsel and Corporate Secretary since September 2017. Prior to joining Gates, Ms. Seely served as Executive Vice President, General Counsel and Corporate Secretary for ION Geophysical overseeing all corporate matters, securities regulation and disclosure issues, corporate governance, litigation, executive compensation and a broad range of financings, joint ventures and strategic transactions. Prior to ION, Ms. Seely served as Senior Vice President of Alternative Energy for NRG Energy, Inc., with management and legal oversight of multiple new business and startup ventures related to enhanced oil recovery, solar power and nuclear project development. Prior to NRG Energy, Ms. Seely served as Vice President and General Counsel at Direct Energy and as a partner in the corporate and securities law group of Thompson & Knight LLP. Ms. Seely is licensed to practice in Texas and New York.
Roger C. Gaston has served as our Executive Vice President—Human Resources since December 2017 and previously served as our Senior Vice President—Human Resources since August 2016. As Executive Vice President of Human Resources, Mr. Gaston works to build and enhance the Gates human resources function globally. He oversees talent management, recruiting, benefits, labor relations, maintaining a healthy workforce, and talent development. Prior to Gates, Mr. Gaston worked as Senior Vice President—Human Resources for Avaya Inc., a multibillion dollar enterprise telecommunications and solutions company, since 2006. At Avaya, Mr. Gaston oversaw all aspects of human resource management and industrial relations policies, practices and operations. Before Avaya, Mr. Gaston was a Corporate Vice President—Human Resources for Storage Technology Corp. from 2000 to 2005. Prior to Storage Technology Mr. Gaston served as the Senior Vice President, Human Resources for Toys R Us, Inc. from 1996-2000. A Chapter 11 petition for bankruptcy protection was filed by Avaya in January of 2017.
Gregory F. Kirchhoff has served as our Senior Vice President—Corporate Controller since October 2012. As Senior Vice President—Corporate Controller, Mr. Kirchhoff has been responsible for the oversight of external financial reporting, corporate center accounting and policies, and financial internal controls. Prior to joining Gates, Mr. Kirchhoff served as Director of Financial Control & Compliance at Gates Worldwide Limited, a Tomkins Plc company, from August 2004 to September 2012.
Controlled Company Exception
Our Sponsor holds more than a majority of the voting power of our ordinary shares eligible to vote in the election of our directors. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under these NYSE corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards, including the requirements (1) that a majority of our board of directors consist of independent directors, (2) that our board of directors have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) that our board of directors have a nominating and corporate governance committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We currently utilize these exemptions and we intend to continue to utilize these exemptions. As a result, a majority of our directors is not independent and our compensation committee and nominating and corporate governance committee are not comprised entirely of independent directors. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of these corporate governance requirements. In the event that we cease to be a “controlled company” and our ordinary shares continue to be listed on the NYSE, we will be required to comply with these provisions within the applicable transition periods.
Composition of the Board of Directors
Our business and affairs are managed under the direction of our board of directors, which consists of seven directors, of whom Mr. Plant, Mr. Klebe and Mrs. Ovelmen have affirmatively been determined by our board of directors to be independent. We are party to a shareholders agreement with certain affiliates of our Sponsor. This agreement grants our Sponsor the right to designate nominees to our board of directors subject to the maintenance of certain ownership requirements in us. See “Item 13. Certain Relationships and Related Person Transactions—Shareholders Agreement.”
Background and Experience of Directors
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our board of directors to satisfy its oversight responsibilities effectively in light of our business and structure, the board of directors focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. In particular, the members of our board of directors considered the following important characteristics, among others:
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Our board of directors may also establish from time to time any other committees that it deems necessary or desirable. Members serve on these committees until their resignation or until otherwise determined by our board of directors.
Each of the standing committees of the board of directors discussed below operate under written charters, which are available on our website at www.gates.com under About Us: Investor Relations: Governance: Governance Documents. The information contained on, or accessible from, our website is not part of this annual report by reference or otherwise.
Audit Committee
Our audit committee consists of Ms. Kahr, Mr. Klebe and Mrs. Ovelmen, with Mr. Klebe serving as chair. Our audit committee is responsible for, among other things:
The SEC rules and NYSE rules require us to have one independent audit committee member upon the listing of our ordinary shares on the NYSE, a majority of independent directors within 90 days of the effective date of the registration statement and all independent audit committee members within one year of the effective date of the registration statement. The board has affirmatively determined that Mr. Klebe and Mrs. Ovelmen qualify as independent directors under the NYSE listing standards and the independence standards of Rule10A-3 of the Exchange Act. In addition, our board of directors has determined that each of Mr. Klebe and Mrs. Ovelmen is an audit committee financial expert within the meaning of Item 407(d) ofRegulation S-K under the Securities Act.
Compensation Committee
Our compensation committee consists of Mr. Simpkins, and Ms. Kahr, with Mr. Simpkins serving as chair. The compensation committee is responsible for, among other things:
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Mr. Simpkins and Ms. Kahr, with Mr. Simpkins serving as chair. The nominating and corporate governance committee is responsible for, among other things:
Code of Ethics
We maintain a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions, which is posted on our website. Our Code of Business Conduct and Ethics is a “code of ethics,” as defined in Item 406(b) of RegulationS-K. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website. The information contained on, or accessible from, our website is not part of this annual report by reference or otherwise.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires a company’s executive officers, directors, principal accounting officer and persons who beneficially own more than 10% of the company’s common stock (the “Reporting Persons”), to file with the SEC and the NYSE initial reports of ownership and reports of changes in beneficial ownership. Such Reporting Persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Due to the timing of our IPO and when the Reporting Persons became subject to the reporting requirements of Section 16(a) in January 2018, none of the Reporting Persons was subject to Section 16(a) during the year ended December 30, 2017.
Item 11. EXECUTIVE COMPENSATION
The share and option information with respect to Omaha Topco in this “Executive and Director Compensation” section has not been adjusted to give effect to thepre-IPO reorganization transactions.
Compensation Discussion and Analysis
This section contains a discussion of the material elements of compensation awarded to, earned by or paid to our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers serving in such capacities as of December 30, 2017 (collectively referred to as our “Named Executive Officers”) who are listed below:
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Prior to the IPO, executive compensation and related decisions were made by the Board of Directors of Omaha Topco. In connection with the IPO, our Board of Directors established a compensation committee that has assumed responsibility for establishing, maintaining and administering our compensation and benefit policies. Except where the context requires otherwise, the terms “Board” or “Board of Directors” as used in this “Executive and Director Compensation” section refer to the Board of Directors of Omaha Topco.
Transition of Our Executive Compensation Programs
Our compensation approach is tied to our stage of development. Prior to the IPO, we were a privately-held company. As a result, we were not subject to any stock exchange listing or SEC rules related to Board and compensation committee structure and function. Prior to Blackstone’s acquisition of Gates in July 2014, executive compensation practices were tied to immediate business needs relating to hiring and retaining talent and did not tie specifically to market pay practices. Gates’ ownership change in 2014 brought leadership changes as well. As new executives were brought into the organization, compensation decisions took a more market-based pay approach. In 2016, with the Board’s approval, we engaged Aon Hewitt, an independent compensation consulting firm (the “Consultant”), to provide executive compensation consulting services to help align executive pay with market practices for 2017 executive pay decisions and to advise on executive and director compensation in connection with our IPO. The services provided by the Consultant are described more fully in the section entitled “Role of the Independent Compensation Consultant” below.
As our executive compensation program evolves as a public company, it will reflect the belief that the amount earned by our executives must significantly depend on achieving rigorous company and individual performance objectives designed to enhance shareholder value. We have made and intend to continue to make changes to our executive compensation programs with the goal of aligning our programs with our executive compensation philosophy as a public company. Accordingly, the compensation paid to our Named Executive Officers for Fiscal 2017, and the form and manner in which it was paid, is not necessarily indicative of how we will compensate our Named Executive Officers in the future.
The material elements of our executive compensation programs include base salary, an annual, short-term incentive plan that is tied, in part, to company financial performance, long-term incentive opportunities, broad-based employee benefits, limited perquisites and severance coverage, all of which are described below. Key features of these programs include:
We anticipate that we will continue to review our executive compensation programs following the IPO and make such changes as are determined to be necessary or appropriate for our status as a public company. As we gain experience as a public company, we expect that the specific direction, emphasis and components of our executive compensation program will continue to evolve. For more information on changes to our executive compensation program that were made in connection with our IPO, see “Actions Taken in Connection with the IPO” below.
Executive Compensation Philosophy and Determination Process
Compensation Philosophy. Our philosophy is to offer an executive compensation program that will enable us to attract, motivate, reward and retain high-caliber executives who are capable of creating and sustaining value for our shareholders over the long term. In addition, the executive compensation program is designed to provide a fair and competitive compensation opportunity that appropriately rewards executives for their contributions to our success. We also believe that a significant portion of each executive’s compensation should be “at risk” and tied to overall Company and individual performance. As described below, we believe that each element of our executive compensation program aligns with this philosophy.
Role of Board and Management. Our Board has historically taken into account multiple factors, such as considering the responsibilities, performance, contributions and experience of each Named Executive Officer and compensation in relation to other employees and other equivalent roles.
In addition, the Board takes into account our Chief Executive Officer’s judgment and knowledge of our industry when considering recommendations for executive officer compensation. Our Chief Executive Officer annually reviews each executive officer’s and Named Executive Officer’s performance with the Board and recommends an appropriate base salary, annual incentive target opportunity and annual incentive payout and, if applicable, grant of long-term equity incentive award. Based upon the recommendations of our Chief Executive Officer and the other considerations described below and in consideration of the executive compensation philosophy described above, the Board approves the annual compensation packages of our executive officers other than our Chief Executive Officer.
The Board annually reviews our Chief Executive Officer’s performance, base salary, annual incentive target opportunity and outstanding long-term incentive awards and approves any changes to the Chief Executive Officer’s compensation package in light of such review. Our Chief Executive Officer does not participate in deliberations regarding his own compensation.
Role of the Independent Compensation Consultant. As described above, we retained the Consultant to support the oversight and management of our executive compensation program. In late 2016, we compared total direct compensation against market data provided by the Consultant and used it as a reference point to provide a framework for Fiscal 2017 executive compensation decisions.
In Fiscal 2017, in connection with our IPO, the Consultant performed a variety of work, including but not limited to: assisting in the development of a market-based director compensation program, conducting a review of the competitiveness of our executive compensation program,re-evaluating our executive severance andchange-in-control benefit programs, and evaluating apost-IPO long-term equity incentive award program and strategy. See “Change in Control and Severance Benefits” and “Actions Taken in Connection with the IPO” below for additional details on the adoption of our new Executive Severance Plan and Executive Change in Control Plan and executive compensation adjustments made in connection with the IPO. To assist the compensation committee in its review and evaluation of each of these areas, the Consultant provided the Board with data from a peer group composed of the following 15 companies:
Peer Group
The peer group was developed with assistance from the Consultant based on the following factors:
Compensation Committee Interlocks and Insider Participation
During the last completed fiscal year, we did not have a compensation committee. Decisions regarding the compensation of our executive officers have historically been made by the board. Mr. Jurek, who is our Chief Executive Officer, generally participates in discussions and deliberations of the board regarding executive compensation, including during the last completed fiscal year. Other than Mr. Jurek, no member of the board was at any time during the last completed fiscal year, or at any other time, one of our officers or employees. None of our executive officers currently serves, or has served during the last completed fiscal year, as a member of the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more of its executive officers serving on the board. We are party to certain transactions with affiliates of our Sponsor described in “Certain Relationships and Related Person Transactions.”
What We Pay and Why: Elements of Compensation
Our executive compensation programs are designed to recognize an executive’s scope of responsibilities, leadership ability and effectiveness in achieving key performance goals and objectives. As an executive’s level of responsibility within Gates increases, so does the percentage of total compensation that is linked to performance in the form of variable compensation. We also provide various retirement and benefit programs and modest, business-related benefits as discussed below.
Base Salary. Base salaries for our Named Executive Officers in 2017 were determined by the Board after consideration of: (1) the Chief Executive Officer’s recommendations (for all Named Executive Officers other than the Chief Executive Officer); (2) breadth, scope and complexity of the executive’s role; (3) internal equity; (4) current compensation; (5) tenure in position and prior tenure in related roles (excepting Gates); (6) market pay levels; and (7) individual performance. Base salaries are reviewed annually or at other times when appropriate and may be increased from time to time pursuant to such review. During Fiscal 2017, to reward performance as well as to better align their compensation to the market, we adjusted the base salary of Mr. Lifsey (from $522,500 to $548,625) and Mr. Gaston (from $370,000 to $385,000). Mr. Naemura had his total target cash compensation pay
mix adjusted to align with current market practices and, as a result, his base salary was adjusted effective March 2017 from $512,500 to $595,000. Ms. Bhattacharya’s base salary was not increased in 2017. Ms. Seely was hired in September 2017 at a base salary of $425,000. Mr. Jurek’s base salary of $900,000 has not been adjusted since he commenced employment in May 2015. The Summary Compensation Table below shows the base salary earned by each Named Executive Officer during Fiscal 2017.
Annual Incentive Plan. We provide an annual incentive opportunity under the Gates Global Bonus Plan (the “Annual Plan”) to (1) reward certain employees, including our Named Executive Officers, for achieving specific performance goals that would advance our profitability; (2) drive key business results; and (3) recognize individuals based on their contributions to those results.
Payouts under the 2017 Annual Plan were based on a combination of the achievement of our financial performance goals in the fiscal year (the “Gates Financial Performance Factor”), which fund the Annual Plan, and the Named Executive Officer’s performance during the fiscal year against his or her individual performance goals (the “Individual Performance Factor”).
Gates Financial Performance Factor. The Gates Financial Performance Factor sets the funding levels for the Annual Plan. The Board, after an evaluation of possible financial performance measures, determined to continue to use Adjusted EBITDA (50%) and Operating Cash Flow (30%) as well as Revenue (20%) as the financial performance measures for 2017. Revenue was included as a performance measure in 2017 to encourage profitable revenue growth. The Board determined that these financial performance measures were critical indicators of our performance for 2017 and, when combined, contributed to sustainable growth. Financial performance for these measures was determined 100% at a company-wide level. The Annual Plan financial performance measures are described below.
The achievement factor for each of the financial performance measures will be determined by multiplying the weight attributed to each performance measure by the applicable payout percentage for each measure. For each of the performance measures, payout percentages will be determined by calculating actual achievement against the target goal based on apre-established scale. Funding attainment with respect to these performance measures can range from:
If achievement with respect to any performance measure falls between the threshold and target, or between the target and maximum, earned award amounts for that particular performance measure will be interpolated on a straight-line mathematical basis (and rounded to the nearest whole number). If achievement with respect to any performance measure does not reach threshold, then that measure will be deemed to have 0% attainment.
The following table outlines the calculation of the funding attainment based on thepre-established scale associated with our actual results against the targets and the resulting weighted and combined achievement factors.
Measure | Weighting | Target ($ in millions) | Actual ($ in millions) | 2017 Payout Percentage (% of Target) | 2017 Achievement Factor (%) | 2017 Weighted Achievement Factor (%) | ||||||||||||||||||
Adjusted EBITDA | 50 | % | $ | 612.9 | $ | 662.4 | 181 | % | 150 | % | 75 | % | ||||||||||||
Operating Cash Flow | 30 | % | $ | 509.6 | $ | 564.4 | 208 | % | 150 | % | 45 | % | ||||||||||||
Revenue | 20 | % | $ | 2,781.8 | $ | 3,008.3 | 181 | % | 150 | % | 30 | % | ||||||||||||
Attainment | — | — | — | — | — | 150 | % | |||||||||||||||||
Notwithstanding the establishment of the performance components and the formula for determining the funding levels as described above, the compensation committee has the ability to exercise positive or negative discretion and award a greater or lesser amount to fund the Annual Plan than the amount determined by the above formula if, in the exercise of its business judgment, the compensation committee determines that a greater or lesser amount is warranted under the circumstances. The compensation committee did not exercise this discretion with respect to the 2017 Annual Plan bonuses.
After the Gates Financial Performance Factor is calculated and the “pool” is set to fund bonus payouts, our Chief Executive Officer has the discretion to determine how that pool is allocated throughout the organization (excluding with respect to himself). This is done by adjusting the Gates Financial Performance Factor either upward or downward for each functional area or geographic region based on the performance of that specific region or functional area. For Fiscal 2017, our Chief Executive Officer did not exercise his discretion to adjust the Gates Financial Performance Factor for any of the functional areas applicable to the other Named Executive Officers.
Individual Performance Factor. Each Named Executive Officer’s Individual Performance Factor was determined based on both financial andnon-financial objectives appropriate for each Named Executive Officer’s position. For 2017, we selected the following individual performance goals for each of our Named Executive Officers:
Actual amounts paid under the Annual Plan were calculated by multiplying each Named Executive Officer’s base salary in effect on December 30, 2017 (or, with respect to Ms. Bhattacharya, her base salary in effect on the date of her termination of employment) by (i) his or her Annual Plan target bonus opportunity (which is reflected as a percentage of base salary), (ii) the final Gates Financial Performance Factor and (iii) the Individual Performance Factor (other than with respect to Ms. Bhattacharya). There is no maximum on the discretionary components of the Annual Plan. The following table illustrates the calculation of the annual cash incentive awards payable to each of our Named Executive Officers under the 2017 Annual Plan based on 2017 financial performance and individual performance.
Name I. Jurek D. Naemura J. Seely(1) W. Lifsey R. Gaston R.Bhattacharya(2) Base Salary
($) Target
Bonus
(% of Base
Salary) Target Bonus
Opportunity
($) Combined
Performance
Factor (%)* Actual
Payout
($) $ 900,000 150 % $ 1,350,000 150 % $ 2,025,000 $ 595,000 115 % $ 684,250 150 % $ 1,026,375 $ 425,000 70 % $ 99,068 150 % $ 148,601 $ 548,625 100 % $ 548,625 150 % $ 822,938 $ 385,000 60 % $ 231,000 150 % $ 346,500 $ 350,000 136 % $ 238,000 150 % $ 357,000
Sign-on and Discretionary Bonuses. From time to time, we may awardsign-on and discretionary bonuses.Sign-on bonuses are used only when necessary to attract highly skilled officers to the Company. Generally they are used to incentivize candidates to leave their current employers, or may be used to offset the loss of unvested compensation they may forfeit as a result of leaving their current employers. Ms. Seely was provided with an $180,000 guaranteedsign-on bonus in 2017 in connection with the commencement of her employment that is payable at the same time as the 2017 Annual Plan payments. In connection with Mr. Naemura’s total target cash compensation pay mix realignment, Mr. Naemura received aone-time special cash bonus of $22,212 in order to address the fact that his target bonus annual opportunity was reduced effective January 1, 2017 and contemplated a full-year base salary at his increased base salary amount, but his actual base salary adjustment was not effective until March 2017.
Long-Term Incentive. We believe that our Named Executive Officers’ long-term compensation should be directly linked to the value we deliver to stockholders. Equity awards to our Named Executive Officers are designed to provide long-term incentive opportunities over a period of several years. We granted executive awards under the 2014 Omaha Topco Ltd. Stock Incentive Plan, which was assumed by Gates Industrial Corporation plc and renamed the Gates Industrial Corporation plc Stock Incentive Plan in connection with thepre-IPO reorganization (the “2014 Incentive Plan”), permitting our Named Executive Officers to obtain shares in Omaha Topco. Stock options have been our preferred equity award because the stock options will not have any value unless the underlying shares of common stock appreciate in value following the grant date. Accordingly, awarding stock options causes more compensation to be “at risk” and further aligns our executive compensation with our long-term profitability and the creation of shareholder value.
Historically, grants have not been made on an annual basis, and instead are made upon an executive’s commencement of employment with us, when an executive receives a promotion into a more senior-level position or to reward performance. The amounts of each Named Executive Officer’s stock option grant were determined based on several factors, including: (1) each Named Executive Officer’s position and expected contribution to our future growth; (2) dilution effects on stockholders and the need to maintain the availability of an appropriate number of shares for stock option awards tonon-executive employees; and (3) ensuring that our Named Executive Officers were provided with appropriate and competitive total long-term equity compensation.
The stock options have four equally-weighted tiers. Tier I is subject to a five-year pro rata vesting schedule, and the remaining tiers are subject to vesting upon Blackstone’s achievement of specified internal rates of return or multiple of investment targets. Vesting of Tier I may accelerate upon specified events, and, for grants awarded prior to May 2017, vesting of Tiers II – IV may continue past separation of service upon specified events. For more information regarding the stock options, including the vesting criteria, see the section entitled “Narrative Disclosure Relating to the Summary Compensation Table and the Grants of Plan-Based Awards Table” below.
Another key component of our long-term equity incentive program is that our Named Executive Officers and other eligible employees have been provided with the opportunity to invest in Omaha Topco’s common stock. We considered this investment opportunity an important part of our equity program because it encouraged stock ownership and aligned the investing Named Executive Officers’ financial interests with those of Omaha Topco’s stockholders. As of the date of the IPO, Mr. Jurek invested in 195,455 shares; Mr. Naemura invested in 36,365
shares; and Mr. Gaston invested in 18,182 shares. In connection with Ms. Bhattacharya’s departure, her purchased shares were repurchased by Omaha Topco on July 11, 2017 for a purchase price of $180,000, pursuant to the terms of her subscription agreement.
Fiscal 2017 Grants.Messrs. Jurek and Gaston were awarded stock option grants under the 2014 Incentive Plan on May 2, 2017 to reward performance as well as to better align their compensation to the market in the amount of 710,400 and 276,100 stock options respectively. The terms and conditions of these Fiscal 2017 awards were the same as their respective 2016 awards, except that a specified portion of Tiers II – IV will not continue to vest past separation of service upon specified events. Ms. Seely commenced employment as our Executive Vice President and General Counsel on September 5, 2017 and was granted 550,000 stock options under the 2014 Incentive Plan on September 19, 2017. The terms and conditions of Ms. Seely’s option are substantially the same as Mr. Gaston’s 2017 stock option award. No other long-term equity incentive awards were granted to the Named Executive Officers in Fiscal 2017. See “Equity-Based Awards” below for additional details.
Post-IPO Long-Term Incentive Plan. In connection with the IPO, we adopted the Gates Industrial Corporation plc 2018 Omnibus Incentive Plan (the “2018 Omnibus Incentive Plan”), a new market-based long-term incentive program to align our executive compensation package with similarly situated public companies. See “Actions Taken in Connection with the IPO—New Long-Term Incentive Program” below for additional details.
Other Aspects of Our Compensation Programs
Retirement Benefits. We offer the following retirement benefits to eligible U.S.-based employees, including our Named Executive Officers, as specified below. Additional details about the Gates Corporation Supplemental Retirement Plan (the “Supplemental Retirement Plan”), as it applies to our Named Executive Officers, is included in the “2017 Nonqualified Deferred Compensation” section of this annual report.
We offer a defined contribution retirement benefit to all eligible Gates participants through the Gates MatchMaker 401(k) Plan. The Gates MatchMaker 401(k) Plan provides employees with individual retirement accounts funded by (1) an automatic Gates-paid contribution of 3% of employee eligible earnings, and (2) a Gates-paid match on employee contributionsdollar-for-dollar on the first 3% of eligible earnings that the employee contributes. The Code limits employee contributions to the Gates MatchMaker 401(k) Plan to $18,000 ($24,000 for participants over age 50), and earnings upon which employee/employer contributions may be made are limited to $270,000 in 2017.
We currently offer participation in the Supplemental Retirement Plan to specified employees that include the Named Executive Officers. This plan is a nonqualified deferred compensation plan that provides participants with two benefit opportunities:
These deferrals are in addition to amounts participants may defer in the Gates MatchMaker 401(k) Plan.
Also in June 2017, a Rabbi trust to hold plan assets was established. Additional details about the Supplemental Retirement Plan, as it applies to the Named Executive Officers, are included in the “2017 Nonqualified Deferred Compensation” section of this annual report.
Other Benefits. We provide other benefits to the Named Executive Officers that we believe are necessary to compete for executive talent. The additional benefits for the Named Executive Officers generally consist of a carallowance (which has been phased out for newly hired executives and will be phased out entirely in 2018 forexisting participants), a parking subsidy and an executive annual physical examination. Taxgross-ups are provided to our executive officers, including the Named Executive Officers, for certain relocation benefits. The specific amounts attributable to the 2017 other benefits provided to the Named Executive Officers are set forth in the “All Other Compensation” column of the Summary Compensation Table of this annual report.
We also provide other benefits such as medical, dental and short-term disability coverage to each Named Executive Officer, which are identical to the benefits provided to all other eligible U.S.-based employees. Our executive officers, including our Named Executive Officers, also receive enhanced benefits that are not available to other employees, such as relocation assistance, and, effective January 1, 2017, enhanced life, accidental death and dismemberment (“AD&D”) and long-term disability insurance benefits. Specifically, all Named Executive Officers were eligible for enhanced life and AD&D insurance benefits in the following amounts in 2017: 3x base salary up to $2,000,000 (for Messrs Gaston, Naemura and Lifsey and Mses. Seely and Bhattacharya), and 3x base salary up to $3,000,000 (for Mr. Jurek). In addition, all Named Executive Officers were eligible for enhanced long-term disability insurance benefits of 66.7% of their salary. We provide vacation and paid holidays to all employees, including the Named Executive Officers. All of the Named Executive Officers were eligible for four weeks of vacation in 2017 except Mr. Gaston, who was eligible for two weeks of vacation.
Change in Control and Severance Benefits.The Board believes that the Named Executive Officers are better able to perform their duties with respect to any potential proposed corporate transaction without concern for the impact of the transaction on their individual employment with carefully structuredchange-in-control and severance benefits. In addition, the Board believes that the interests of our stockholders are better protected and enhanced by providing greater certainty regarding executive pay obligations in the context of planning and negotiating any potential corporate transactions. We provide limited single-triggerchange-in-control benefits to certain of our Named Executive Officers in their equity grant agreements and pursuant to the Supplemental Retirement Plan.
In connection with the IPO, we developed a new market-competitive Executive Severance Plan and Executive Change in Control Plan. Pursuant to the participation agreements executed by our currently employed Named Executive Officers in connection with the Executive Severance Plan and Change in Control Plan, each of Messrs. Jurek, Naemura and Lifsey agreed to terminate their existing employment agreements with us. Accordingly, the Executive Severance Plan and Change in Control Plan replaces the severance benefits provided under the predecessor Gates Corporation Severance Plan to Mr. Gaston and Ms. Seely and under the employment agreements entered into with Messrs. Jurek, Naemura and Lifsey. Additional details about the Executive Severance Plan and the Executive Change in Control Plan, as it applies to the Named Executive Officers, are included below in the “Actions Taken in Connection with the IPO” section of this annual report.
Departure of Ms. Bhattacharya
Ms. Bhattacharya’s employment terminated in July 2017. Her departure constituted a termination without “cause” pursuant to the terms of her employment agreement entitling her to the severance benefits described therein. See “Potential Payments upon a Termination or Change in Control—Departure of Ms. Bhattacharya” for further details regarding Ms. Bhattacharya’s departure.
Employment Agreements. Upon their commencement of employment, Messrs. Jurek, Naemura and Lifsey and Ms. Bhattacharya entered into employment agreements that contained substantially similar terms. Each of the employment agreements provided for a five-year initial employment term that extended automatically for additionalone-year periods unless either we or the executive elected not to extend the term. Under the employment agreements, each executive was eligible to receive a minimum base salary, as set forth in the applicable agreement, and annual cash incentive compensation opportunity based on the achievement ofspecified financial and individual
goals as defined by the Board each year. If these goals were achieved, each executive was eligible to receive a cash bonus. Each Named Executive Officer was also entitled to participate in all employee benefit plans, programs and arrangements made available to other executive officers generally, except that severance benefits were specifically incorporated into the employment agreement. As discussed above, in connection with the adoption of the Executive Severance Plan and the Executive Change in Control Plan, each of Messrs. Jurek, Naemura and Lifsey agreed to terminate their existing employment agreements with us. For more information regarding the employment agreements, please see the “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” of this annual report.
Other Compensation Practices. In anticipation of becoming a public reporting company, we are in the process of adopting practices that we believe are important components of a public-company executive compensation program, which are generally described below.
Section 162(m). In general, Section 162(m) of the Code (“Section 162(m)”) denies a publicly-held corporation a deduction for U.S. federal income tax purposes for compensation in excess of $1 million per year per person to the executives designated in Section 162(m), including, but not limited to, its chief executive officer, chief financial officer, and the next three most highly compensated executives of such corporation whose compensation is required to be disclosed in its proxy statement. Following our IPO, we may be able to claim the benefit of a special exemption rule that applies to compensation paid (or compensation in respect of equity awards such as stock options or restricted stock granted) during a specified transition period. This transition period may extend until the first annual stockholder meeting held in 2022, unless the transition period is terminated earlier under the post-offering transition rules set forth in Section 162(m).
Accounting for Stock-Based Compensation. We follow FASB ASC Topic 718 (“ASC Topic 718”) for our stock-based compensation awards. ASC Topic 718 requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options, based on the grant date “fair value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any value from their awards. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award.
Actions Taken in Connection with the IPO
Assumption of Existing Plans and Awards. In connection with the IPO, the existing Omaha Topco plans were assumed by Gates Industrial Corporation plc pursuant to thepre-IPO reorganization transactions. In connection with such assumption, (i) Omaha Topco options were converted into Gates Industrial Corporation plc options that (x) reflect an exchange ratio of 0.76293 Gates Industrial Corporation plc ordinary shares for each outstanding Omaha Topco share and (y) have exercise prices that were adjusted to ensure that the options received are of equivalent economic value to the legacy Omaha Topco options and (ii) Omaha Topco restricted stock units were converted into Gates Industrial Corporation plc restricted stock units that reflect an exchange ratio of 0.76293 Gates Industrial Corporation plc ordinary shares for each outstanding Omaha Topco share. In addition, directors and executive officers who held shares of Omaha Topco, like other equity owners of Omaha Topco, received depositary receipts representing ordinary shares of Gates Industrial Corporation plc at the same ratio of 0.76293 Gates Industrial Corporation plc ordinary shares for each outstanding share of Omaha Topco.
Compensation Adjustments.As noted above, in Fiscal 2017, with the assistance of the Consultant, we conducted a review of the competitiveness of our executive compensation program. Specifically, we reviewed market data provided by the Consultant consisting of both our peer group data and data from the Aon Hewitt 2016 Total Compensation Measurement Database® (TCM) (all manufacturing companies with revenues ranging from $1.5 to $6.0 billion). In order to meet our goal of generally setting total target annual cash compensation (i.e., base salary plus target bonus) for our executive officers between the 50th and the 75th percentile of the market data, we determined it was appropriate to increase the base salaries for Messrs. Jurek, Lifsey and Gaston, effective January 1, 2018, as follows: Mr. Jurek (from $900,000 to $945,000), Mr. Lifsey (from $548,625 to $610,000) and Mr. Gaston (from $385,000 to $400,000). Mr. Jurek’s base salary increase also reflects aone-time salary adjustment that was provided to offset the elimination of automobile allowances beginning in 2018. Effective January 1, 2018,
Mr. Nameura also received a similarone-time salary adjustment (from $595,000 to $610,000). In addition, Mr. Gaston’s 2018 Annual Plan target opportunity was increased from 60% to 70% of base salary in order to further align his target annual cash compensation with the targeted range of the market data.
New Long-Term Incentive Program.In connection with the IPO, we approved the 2018 Omnibus Incentive Plan, under which we intend to provide awards of a mix of performance shares, time-based stock options and time-based restricted shares. This long-term equity incentive program is informed by the peer group and broader public company practice and is consistent with our compensation objective of providing a long-term equity incentive opportunity that aligns compensation with the creation of stockholder value and achievement of business goals.
Executive Severance Plan and Executive Change in Control Plan.As noted above, in Fiscal 2017, with the assistance of the Consultant, were-evaluated our executive severance andchange-in-control benefit programs. Specifically, we reviewed both peer group and broader U.S. market data provided by the Consultant. As a result of this review, together with recommendations from the Consultant, we developed a new market-competitive Executive Severance Plan and Executive Change in Control Plan, which became effective in connection with the IPO. Pursuant to the participation agreements executed by our currently employed Named Executive Officers in connection with the Executive Severance Plan and Change in Control Plan, each of Messrs. Jurek, Naemura and Lifsey agreed to terminate their existing employment agreements with us. Accordingly, the Executive Severance Plan and Change in Control Plan replaces the severance benefits provided under the predecessor Gates Corporation Severance Plan to Mr. Gaston and Ms. Seely and under the employment agreements entered into with Messrs. Jurek, Naemura and Lifsey.
The Executive Severance Plan provides for severance payments upon certain terminations of employment to our currently employed Named Executive Officers and other senior executives who are expected to make substantial contributions to our success and thereby provides for stability and continuity of operations. The Named Executive Officers are generally provided with severance payments for a period of two years for Mr. Jurek (who will receive the sum of two times base salary plus two times previous year bonus), one year for Mr. Naemura (who will receive the sum of one times base salary plus one times previous year bonus) and two years for the other Named Executive Officers (who will receive two times base salary) should his or her employment be terminated either by us without “cause” or by the executive for “constructive termination.” The Executive Severance Plan also provides for reimbursement for reasonable outplacement and provides health and dental benefit continuation assistance.
The Executive Change in Control Plan provides double-trigger benefits to Mr. Jurek and all of our executive vice presidents (including each of the Named Executive Officers (other than Ms. Bhattacharya)), regional presidents and select senior vice presidents. The Executive Change in Control Plan serves to encourage these key executives to carry out their duties and provide continuity of management in the event of a “change in control” of Gates. The Named Executive Officers are generally provided with payments in the amount of two andone-half times base salary plus target bonus (for Mr. Jurek) and one andone-half times base salary plus target bonus (for the other participating Named Executive Officers) should his or her employment be terminated either by us without “cause” or by the executive for “constructive termination” within thetwo-year period following a change in control. The Executive Change in Control Plan also provides for reimbursement for reasonable outplacement and provides life and long-term disability insurance and health and dental benefit continuation assistance.
The benefits provided under both the Executive Severance Plan and the Executive Change in Control Plan are contingent upon the affected Named Executive Officer’s execution andnon-revocation of a general release of claims and compliance with specified restrictive covenants. See “Potential Payments upon a Termination or Change in Control,” which describes the payments to which each of the Named Executive Officers may be entitled under the Executive Severance Plan and the Executive Change in Control Plan.
Clawback Policy. We have adopted a clawback policy for incentive compensation. The Compensation Committee determined that it may be appropriate to recover annual and/or long-term incentive compensation in specified situations. Under the policy, if the Compensation Committee determines that incentive compensation of its current and former Section 16 officers (or any other current and former employee designated by the Board or the Compensation Committee) was overpaid, in whole or in part, as a result of a restatement of the reported financial results of the Company or any of its segments due to materialnon-compliance with financial reporting requirements (unless due to a change in accounting policy or applicable law), and such restatement was caused or contributed,
directly or indirectly, by such employee’s fraud, willful misconduct or gross negligence, then the Compensation Committee will determine, in its discretion, whether to seek to recover or cancel any overpayment of incentive compensation paid or awarded based on the inaccurate financial information or restated results. The clawback policy and our Omnibus Incentive Plan also provide that if a covered person engages in any detrimental activity (as defined in our Omnibus Incentive Plan) as determined by the Compensation Committee, the Compensation Committee may, in its sole discretion, provide for one or more of the following: (i) cancellation of any or all of such covered person’s outstanding awards; or (ii) forfeiture by the covered person of any gain realized on the vesting or exercise of awards, and prompt repayment of any such gain to us.
Stock Ownership Guidelines.In connection with the IPO, we adopted an executive stock ownership program for our Named Executive Officers and other executives. Each of our Named Executive Officers is expected to own our ordinary shares in the following amounts:
Any Named Executive Officer who does not meet the threshold will be required to retain 50% of stock acquired through the exercise or vesting of equity awards made by the Company.
Compensation Committee Report
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion with management, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form10-K for the fiscal year ended December 30, 2017.
Submitted by the compensation committee of our Board of Directors:
Neil P. Simpkins, Chair
Julia C. Kahr
Summary Compensation Table
The following table sets forth the compensation for the fiscal years ended December 30, 2017 and December 31, 2016 for our Named Executive Officers.
Name and Principal Position | Year | Salary ($)(1) | Bonus ($)(2) | Stock Awards ($) | Option Awards ($)(3) | Non-Equity Incentive Plan Compensation ($)(4) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($)(5) | Total ($)(6) | |||||||||||||||||||||||||||
Ivo Jurek, Chief Executive Officer | 2017 | $ | 900,000 | — | — | $ | 749,472 | $ | 2,025,000 | — | $ | 195,305 | $ | 3,869,777 | ||||||||||||||||||||||
| 2016 | $ | 900,000 | — | — | $ | 1,750,000 | — | $ | 128,898 | $ | 2,778,898 | |||||||||||||||||||||||||
David Naemura, Chief Financial Officer | 2017 | $ | 572,789 | $ | 22,212 | — | — | $ | 1,026,375 | — | $ | 113,058 | $ | 1,734,434 | ||||||||||||||||||||||
| 2016 | $ | 509,135 | — | — | — | $ | 823,000 | — | $ | 56,373 | $ | 1,388,508 | ||||||||||||||||||||||||
Jamey Seely, EVP, General Counsel and Corporate Secretary | 2017 | $ | 120,962 | $ | 180,000 | — | $ | 635,250 | $ | 148,601 | — | $ | 45,256 | $ | 1,130,069 | |||||||||||||||||||||
Roger Gaston, EVP, Human Resources | 2017 | $ | 380,962 | — | — | $ | 291,286 | $ | 346,500 | — | $ | 52,707 | $ | 1,071,455 | ||||||||||||||||||||||
| 2016 | $ | 135,192 | — | — | $ | 296,592 | $ | 238,000 | — | $ | 470,725 | $ | 1,140,509 | |||||||||||||||||||||||
Walt Lifsey, Chief Operating Officer | 2017 | $ | 541,592 | — | — | $ | 822,938 | — | $ | 80,795 | $ | 1,445,325 | ||||||||||||||||||||||||
| 2016 | $ | 507,885 | — | — | $ | 335,220 | $ | 627,000 | — | $ | 469,575 | $ | 1,939,680 | |||||||||||||||||||||||
Rasmani Bhattacharya, Former EVP and General Counsel | 2017 | $ | 191,154 | — | — | $ | 357,000 | — | $ | 433,891 | $ | 982,045 | ||||||||||||||||||||||||
| 2016 | $ | 350,000 | — | — | $ | 476,000 | — | $ | 47,946 | $ | 873,946 | |||||||||||||||||||||||||
The narrative following the table below describes these components of All Other Compensation:
| Name | Company Contributions to Gates MatchMaker 401 (k)(a) | Company Contributions to Gates Executive Supplemental Retirement Benefit Plan (b) | Relocation (c) | Tax Gross-ups (d) | Severance (e) | Other Benefits (f) | Total | |||||||||||||||||||||
I. Jurek | $ | 16,200 | $ | 142,800 | — | — | — | $ | 36,305 | $ | 195,305 | |||||||||||||||||
D. Naemura | $ | 16,200 | $ | 68,880 | — | — | — | $ | 27,978 | $ | 113,058 | |||||||||||||||||
J. Seely | $ | 6,914 | — | $ | 23,319 | $ | 13,215 | — | $ | 1,808 | $ | 45,256 | ||||||||||||||||
R. Gaston | $ | 16,200 | $ | 20,938 | $ | 6,057 | $ | 2,523 | — | $ | 6,989 | $ | 52,707 | |||||||||||||||
W. Lifsey | $ | 16,200 | $ | 53,915 | — | — | — | $ | 10,680 | $ | 80,795 | |||||||||||||||||
R. Bhattacharya | $ | 16,200 | — | — | — | $ | 405,224 | $ | 12,467 | $ | 433,891 | |||||||||||||||||
2017 Grants of Plan-Based Awards
The following table provides information on bonus opportunity ranges under the 2017 Annual Plan for, and stock options granted in 2017 to, each of our Named Executive Officers.
| Grant Date | Estimated Future Payouts under non-equity incentive plan awards ($) | Estimated future payouts under equity incentive plan awards (#) | All other option awards: number of securities underlying options (#) | Exercise or base price of option awards ($/sh) | Grant date fair value of stock and option awards ($) | |||||||||||||||||||||||||||||||||||||||
Name | Threshold | Target | Maximum | Threshold | Target | Maximum | ||||||||||||||||||||||||||||||||||||||
I. Jurek | (1 | ) | $ | 135,000 | $ | 1,350,000 | — | |||||||||||||||||||||||||||||||||||||
Tier I | (2 | ) | 5/2/2017 | 177,600 | $ | 6.00 | $ | 749,472 | ||||||||||||||||||||||||||||||||||||
Tier II | (2 | ) | 5/2/2017 | 177,600 | $ | 6.00 | — | |||||||||||||||||||||||||||||||||||||
Tier III | (2 | ) | 5/2/2017 | 177,600 | $ | 6.00 | — | |||||||||||||||||||||||||||||||||||||
Tier IV | (2 | ) | 5/2/2017 | 177,600 | $ | 9.00 | — | |||||||||||||||||||||||||||||||||||||
D. Naemura | (1 | ) | $ | 68,425 | $ | 684,250 | — | |||||||||||||||||||||||||||||||||||||
J. Seely | (1 | ) | $ | 9,907 | $ | 99,068 | — | |||||||||||||||||||||||||||||||||||||
Tier I | (2 | ) | 9/19/2017 | 137,500 | $ | 10.25 | $ | 635,250 | ||||||||||||||||||||||||||||||||||||
Tier II | (2 | ) | 9/19/2017 | 137,500 | $ | 10.25 | — | |||||||||||||||||||||||||||||||||||||
Tier III | (2 | ) | 9/19/2017 | 137,500 | $ | 10.25 | — | |||||||||||||||||||||||||||||||||||||
Tier IV | (2 | ) | 9/19/2017 | 137,500 | $ | 15.38 | — | |||||||||||||||||||||||||||||||||||||
R. Gaston | (1 | ) | $ | 23,100 | $ | 231,000 | — | |||||||||||||||||||||||||||||||||||||
Tier I | (2 | ) | 5/2/2017 | 69,025 | $ | 6.00 | $ | 291,286 | ||||||||||||||||||||||||||||||||||||
Tier II | (2 | ) | 5/2/2017 | 69,025 | $ | 6.00 | — | |||||||||||||||||||||||||||||||||||||
Tier III | (2 | ) | 5/2/2017 | 69,025 | $ | 6.00 | — | |||||||||||||||||||||||||||||||||||||
Tier IV | (2 | ) | 5/2/2017 | 69,025 | $ | 9.00 | — | |||||||||||||||||||||||||||||||||||||
W. Lifsey | (1 | ) | $ | 54,863 | $ | 548,625 | — | |||||||||||||||||||||||||||||||||||||
R. Bhattacharya | (1 | ) | $ | 47,600 | $ | 476,000 | — | |||||||||||||||||||||||||||||||||||||
Narrative Disclosure Relating to the Summary Compensation Table and the Grants of Plan-Based Awards Table
Employment Agreements
In connection with their commencement of employment, Messrs. Jurek, Naemura and Lifsey and Ms. Bhattacharya entered into employment agreements that contained substantially similar terms. Each of the employment agreements provided for a five-year initial employment term that extended automatically for successiveone-year periods unless either Gates or the executive elected not to extend the term, by providing at least 60 days’ advance notice.
Each employment agreement established the executive’s (1) initial base salary, subject to discretionary periodic increases and (2) eligibility to receive an annual cash incentive bonus, based on the achievement of specified financial and individual performance targets set by the Board each year. The Annual Plan became effective on January 1, 2016, and all of our Named Executive Officers began participating in the Annual Plan in lieu of the short-term incentive provisions set forth in their respective employment agreements at that time. The employment agreements also contained severance benefits, as described below.
As discussed above, in connection with the adoption of the Executive Severance Plan and the Executive Change in Control Plan, each of Messrs. Jurek, Naemura and Lifsey agreed to terminate their existing employment agreements with us.
The following are the material individual provisions of the employment agreements in effect with Ms. Bhattacharya prior to her departure and with Messrs. Jurek, Naemura and Lifsey during Fiscal 2017. In addition, the terms with respect to grants of stock options are described below for our Named Executive Officers in the section entitled “Equity-Based Awards.” Severance provisions and agreements, including the severance agreement entered into with Ms. Bhattacharya in connection with her departure from the Company, are described below in the section entitled “Potential Payments Upon Termination or Change in Control.”
Mr. Jurek’s Employment Agreement. Mr. Jurek’s employment agreement, dated as of May 18, 2015, provided that he was to serve as our Chief Executive Officer, and was eligible to receive a base salary of $900,000, subject to periodic increases as may be approved by the Board. In addition, Mr. Jurek was entitled to reimbursement in connection with his and his family’s relocation to Denver from Hong Kong, and other assistance to ensure a smooth transition. During the first 12 months of his employment, he was also entitled to reimbursement of reasonable travel expenses for his spouse and children to the extent they were not based in Denver during such period.
Mr. Naemura’s Employment Agreement. Mr. Naemura’s employment agreement, dated as of March 30, 2015, provided that he was to serve as our Chief Financial Officer, and was eligible to receive a base salary of $500,000, subject to periodic increases as may be approved by the Board. In addition, Mr. Naemura was entitled to a vehicle allowance in accordance with Gates’ standard policies in place for its senior executives from time to time, reimbursement for relocation expenses to Denver from Dallas (which were subject to repayment in the event he voluntarily terminated his employment before March 30, 2016), and eligibility to participate in the Supplemental Retirement Plan as in effect from time to time.
Mr. Lifsey’s Employment Agreement. Mr. Lifsey’s employment agreement, dated as of August 24, 2015, provided that he was to serve as our Chief Operating Officer, and was eligible to receive a base salary of $475,000, subject to periodic increases as may be approved by the Board.
Ms. Bhattacharya’s Employment Agreement. Ms. Bhattacharya’s employment agreement, dated as of December 19, 2014, provided that she was to serve as Executive Vice President and General Counsel of the Company, and she was eligible to receive a base salary of $350,000, subject to periodic increases as may be approved by the Board. In addition, Ms. Bhattacharya was entitled to a car/automobile allowance or program in accordance with our standard policies in place for its senior executives from time to time.
Equity-Based Awards
As noted above, upon employment or as granted in the Board’s discretion, Named Executive Officers received grants of stock options and the ability to purchase shares of Omaha Topco common stock under the 2014 Incentive Plan. The stock options are divided into four equally weighted tranches referred to as “Tiers” for vesting purposes. Tier I of the stock options (25% of the total award) is subject to time-based vesting restrictions that vest 20% on each of the first five anniversaries of the grant date or vesting reference date, as applicable. Tiers II, III and IV (each 25% of the total) are subject to exit-based vesting and will vest and become exercisable if either the specified internal rate of return or multiple of investment targets noted below are achieved:
Any part of a Named Executive Officer’s stock option award that is vested upon termination of employment by us without “Cause” or by the Named Executive Officer for “good reason” (as such terms are defined in the stock option agreements), will generally remain outstanding and exercisable for 90 days following the termination of employment. This period is shortened to 30 days if the Named Executive Officer resigns without good reason and no grounds for a termination by us for Cause exists, and is extended to 12 months if employment is terminated due to death or Disability. Vested options will immediately terminate if the Named Executive Officer’s employment is terminated by us for Cause, if the Named Executive Officer resigns without good reason when grounds for Cause exist or if there is a restrictive covenant violation. Any vested options that are not exercised within the applicable post-termination exercise window will terminate. Any part of a Named Executive Officer’s stock option award that
vests following a termination without Cause, for good reason or due to death or Disability, will generally remain outstanding and exercisable for 60 days following the date such option vested. In each case, the exercise period will be shortened to the expiration date of the stock option, if earlier. See “Potential Payments upon a Termination or Change in Control—Long-Term Incentive Awards” below for a description of the potential vesting that each of these Named Executive Officers may be entitled to in connection with a Change in Control or certain terminations of employment.
By accepting a grant of options pursuant to the 2014 Incentive Plan and the stock option award agreement, our Named Executive Officers agreed to certain restrictive covenants, including an indefinite covenant not to disclose confidential information and not to disparage us, and, during each of the executive’s employment and for theone-year period following any termination of employment (or such longer period as the Named Executive Officer is eligible to receive severance payments from us), covenants related tonon-competition andnon-solicitation of employees, customers or suppliers.
In addition, as a condition to receiving his or her equity-based awards and in connection with investments in our common stock, each Named Executive Officer was required to enter into a subscription agreement with us, and to become a party to our shareholders agreement. These agreements generally govern the Named Executive Officers’ rights with respect to any shares of our common stock purchased or acquired on exercise of vested stock options. The subscription agreement also contains certain restrictive covenants.
If a Named Executive Officer materially breaches any of these restrictive covenants contained in the stock option award agreement, then we have the right to “claw back” and recover any gains the Named Executive Officer may have realized with respect to his or her shares acquired under the terms of the stock option agreement or pursuant to the subscription agreement, as applicable. If the Named Executive Officer (i) is terminated for “Cause” (as defined in the respective Named Executive Officer’s employment agreements), (ii) voluntarily resigns when grounds exist for “Cause” or (iii) violates a restrictive covenant, then we have the right to repurchase his or her shares, including any shares issuable or issued upon the exercise of any options for the lesser of (a) fair market value (measured as of the purchase date) and (b) cost.
Outstanding Equity Awards at December 30, 2017
The following table provides information regarding outstanding equity awards held by each Named Executive Officer as of December 30, 2017.
Name | Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable(1) | Number of Securities Underlying Unexercised Options (#) Unexercisable(1) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)(2) | Option Exercise Price ($) | Option Expiration Date | ||||||||||||||||||||||
I. Jurek | 5/18/2015 | Tier I | 533,333 | 800,000 | — | $ | 5.00 | 5/18/2025 | ||||||||||||||||||||
| 5/18/2015 | Tier II | — | — | 1,333,333 | $ | 5.00 | 5/18/2025 | |||||||||||||||||||||
| 5/18/2015 | Tier III | — | — | 1,333,333 | $ | 5.00 | 5/18/2025 | |||||||||||||||||||||
| 5/18/2015 | Tier IV | — | — | 1,333,333 | $ | 7.50 | 5/18/2025 | |||||||||||||||||||||
| 5/2/2017 | Tier I | — | 177,600 | — | $ | 6.00 | 5/2/2027 | |||||||||||||||||||||
| 5/2/2017 | Tier II | — | — | 177,600 | $ | 6.00 | 5/2/2027 | |||||||||||||||||||||
| 5/2/2017 | Tier III | — | — | 177,600 | $ | 6.00 | 5/2/2027 | |||||||||||||||||||||
| 5/2/2017 | Tier IV | — | — | 177,600 | $ | 9.00 | 5/2/2027 | |||||||||||||||||||||
D. Naemura | 3/30/2015 | Tier I | 195,000 | 292,500 | — | $ | 5.00 | 3/30/2025 | ||||||||||||||||||||
| 3/30/2015 | Tier II | — | — | 487,500 | $ | 5.00 | 3/30/2025 | |||||||||||||||||||||
| 3/30/2015 | Tier III | — | — | 487,500 | $ | 5.00 | 3/30/2025 | |||||||||||||||||||||
| 3/30/2015 | Tier IV | — | — | 487,500 | $ | 7.50 | 3/30/2025 | |||||||||||||||||||||
Name J. Seely R. Gaston W. Lifsey R. Bhattacharya (3) Grant Date Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable(1) Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable(1) Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)(2) Option
Exercise
Price
($) Option
Expiration
Date 9/19/2017 Tier I — 137,500 — $ 10.25 9/19/2027 9/19/2017 Tier II — — 137,500 $ 10.25 9/19/2027 9/19/2017 Tier III — — 137,500 $ 10.25 9/19/2027 9/19/2017 Tier IV — — 137,500 $ 15.38 9/19/2027 8/8/2016 Tier I 17,760 71,040 — $ 5.00 8/8/2026 8/8/2016 Tier II — — 88,800 $ 5.00 8/8/2026 8/8/2016 Tier III — — 88,800 $ 5.00 8/8/2026 8/8/2016 Tier IV — — 88,800 $ 7.50 8/8/2026 5/2/2017 Tier I — 69,025 — $ 6.00 5/2/2027 5/2/2017 Tier II — — 69,025 $ 6.00 5/2/2027 5/2/2017 Tier III — — 69,025 $ 6.00 5/2/2027 5/2/2017 Tier IV — — 69,025 $ 9.00 5/2/2027 8/24/2015 Tier I 131,424 197,136 — $ 5.00 8/24/2025 8/24/2015 Tier II — — 328,560 $ 5.00 8/24/2025 8/24/2015 Tier III — — 328,560 $ 5.00 8/24/2025 8/24/2015 Tier IV — — 328,560 $ 7.50 8/24/2025 5/12/2016 Tier I 22,200 88,800 — $ 5.00 5/12/2026 5/12/2016 Tier II — — 111,000 $ 5.00 5/12/2026 5/12/2016 Tier III — — 111,000 $ 5.00 5/12/2026 5/12/2016 Tier IV — — 111,000 $ 7.50 5/12/2026 1/9/2015 Tier II — — 71,040 $ 5.00 1/9/2025 1/9/2015 Tier III — — 71,040 $ 5.00 1/9/2025 1/9/2015 Tier IV — — 71,040 $ 7.50 1/9/2025
2017 Option Exercises and Stock Vested
None of our Named Executive Officer’s exercised stock options in 2017.
2017 Nonqualified Deferred Compensation
The Company offers to its executives, including all of the Named Executive Officers, the opportunity to participate in the Supplemental Retirement Plan. The table below provides information as of December 30, 2017, for those Named Executive Officers who were eligible to participate in this plan.
Name | Executive Contributions in Last FY ($)(1) | Registrant Contributions in Last FY ($)(2) | Aggregate Earnings in Last FY ($)(3) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last FYE ($)(4) | |||||||||||||||
I. Jurek | $ | 202,500 | 142,800 | 16,797 | — | 472,920 | ||||||||||||||
D. Naemura | — | 68,880 | 7,224 | — | 121,443 | |||||||||||||||
J. Seely(5) | — | — | — | — | — | |||||||||||||||
R. Gaston | — | 20,938 | — | — | 20,938 | |||||||||||||||
W. Lifsey | — | 53,915 | 4,064 | — | 87,662 | |||||||||||||||
R. Bhattacharya(6) | — | — | 7,984 | — | 56,912 | |||||||||||||||
Narrative to Nonqualified Deferred Compensation for 2017 Table
We currently offer participation in the Supplemental Retirement Plan to specified employees including the Named Executive Officers. This plan is a nonqualified deferred compensation plan that provides participants with two benefit opportunities:
These deferrals are in addition to amounts participants may defer in the Gates MatchMaker 401(k) Plan. Each Named Executive Officer who participates in the deferral feature of the Supplemental Retirement Plan is 100% vested in that portion of their account that is attributable to elective deferrals. Also in June 2017, a Rabbi trust to hold plan assets was established.
The amounts deferred are credited to accounts selected by the Named Executive Officer that mirror the investment alternatives available in the Gates MatchMaker 401(k) Plan. During Fiscal 2017, participants were permitted to select the investment alternatives in which they wanted their accounts to be deemed to be invested and were credited with earnings and/or losses based on the performance of the relevant investments. Participants were able to change the investment elections for their accounts on a daily basis during Fiscal 2017. For Fiscal 2017, the Named Executive Officers participated in one or more of the following 18 investment options, which had the returns indicated below:
| American Beacon Scap Val Instl | 8.68% | T Rowe Price New America Grth | 34.57% | |||||||
| American Fundamental Invstr R6 | 23.72% | Vanguard Equity Income Admiral | 18.99% | |||||||
| American New Perspective R6 | 29.30% | Vanguard Fed Money Market Fund(2) | 0.10% | |||||||
| Dodge & Cox Balanced | 12.59% | Vanguard Inflation Protect Adm | 2.91% | |||||||
| Europacific Growth R6(1) | 4.23% | Vanguard Institutional Index | 21.79% | |||||||
| Loomis Sayles Core Plus Bond N | 5.31% | Vanguard Midcap Index Instl | 19.29% | |||||||
| Massmutual Slct Mid Cap Grth I(1) | 4.42% | Vanguard Sm Cap Index Instl | 16.25% | |||||||
| MFS Mid Cap Value R6 | 13.84% | Vanguard Total Bd Mkt Idx Inst | 3.43% | |||||||
| Pimco All Asset Instl | 13.98% | Vanguard Total Intl Stk Instl | 27.55% |
A Named Executive Officer’s vested account will commence to be paid at the earliest to occur of the following events: (1) the specified date elected by the participant (provided the date specified is at least two years from the end of the Supplemental Retirement Plan year in which the contribution to the Supplemental Retirement Plan is made); (2) the participant’s Disability (as defined in the Supplemental Retirement Plan); (3) the participant’s termination of employment; (4) the participant’s death; or (5) upon a Change in Control (as defined in the Supplemental Retirement Plan). If the distribution is made on account of a termination of employment (other than death), the vested account will be distributed in accordance with the form of distribution as elected (a singlelump-sum or in annual installments over two, three, four or five years). If a distribution is made on account of death, the participant’s vested account will be distributed to his or her beneficiary in a singlelump-sum as soon as practicable following the participant’s death, regardless of the form of benefit elected. If a distribution is made on account of a termination of employment for any reason other than Disability or death, distribution of alump-sum or the first installment will be made or begin as soon as possible after the first day of the seventh month following the termination of employment. If a distribution is made on account of Disability or death, the distribution will be made or begin as soon as possible on the first day of the month following the payment event. If a distribution is made on account of a specified date or Change in Control, the distribution will be made or begin as soon as is reasonably practical, but in no event later than the last day of the calendar year.
Potential Payments upon a Termination or Change in Control
Summary of Potential Payments
We entered into employment agreements with Messrs. Jurek, Naemura and Lifsey and Ms. Bhattacharya which provided severance benefits to such Named Executive Officers in varying amounts under certain scenarios. Pursuant to the participation agreements executed by our currently employed Named Executive Officers in connection with the Executive Severance Plan and Change in Control Plan, each of Messrs. Jurek, Naemura and Lifsey agreed to terminate their existing employment agreements with us. Accordingly, the Executive Severance Plan and Change in Control Plan will replace the severance benefits provided under the predecessor Gates
Corporation Severance Plan to Mr. Gaston and Ms. Seely and under the employment agreements entered into with Messrs. Jurek, Naemura and Lifsey. In order to receive payment and benefits under the Executive Severance Plan or Executive Change in Control Plan, the Named Executive Officer must execute and not revoke a valid release of claims against us and comply with the restrictive covenants set forth in the Executive Severance Plan or Executive Change in Control Plan, as applicable.
Severance and other benefits that are payable upon a termination of employment or upon a change in control under the Executive Severance Plan and Change in Control Plan are described below. The table following this narrative discussion summarizes the amounts that would have been payable upon termination or a change in control under certain circumstances to Named Executive Officers (other than Ms. Bhattacharya who terminated employment in July 2017), assuming that their employment terminated on December 29, 2017 and assuming the Executive Severance Plan and Change in Control Plan were in effect on such date. Ms. Bhattacharya has already received and is still receiving severance payments under the Bhattacharya Separation Agreement in connection with the termination of her employment, which payments are described further below.
Executive Severance Plan. In connection with our IPO we adopted the Executive Severance Plan. The Executive Severance Plan provides for severance payments upon certain terminations of employment to our Named Executive Officers and other executive officers who are expected to make substantial contributions to our success and thereby provide for stability and continuity of operations. All of our currently employed Named Executive Officers participate in the Executive Severance Plan pursuant to individual participation agreements.
The Executive Severance Plan provides that, if we terminate the employment of a Named Executive Officer for any reason other than “cause”, death or disability, or if the Named Executive Officer terminates other than for a “constructive termination,” then the Named Executive Officer will be entitled to receive:
For these purposes, “cause” and “constructive termination” have the meanings ascribed to such terms in the Executive Severance Plan.
Our Executive Severance Plan contains a“best-of-net” provision. With a“best-of-net” provision, if any of the participants is subject to an excise tax under Code Section 280G and Code Section 4999, then the amount of severance the participant receives may be reduced so that the excise tax does not apply; however, such reduction will only occur if it results in the receipt of a greaterafter-tax severance than would otherwise be provided.
Named Executive Officers are not entitled to payments under the Executive Severance Plan if they are entitled to receive payment under the Executive Change in Control Plan discussed below. In addition, in order to receive payments under the Executive Severance Plan, the Named Executive Officer must execute and not revoke a release of claims against us and continue to comply with confidentiality,non-compete,non-solicitation andnon-disparagement covenants during each of the executive’s employment and for theone-year period following any termination of employment (or such longer period as the Named Executive Officer is eligible to receive severance payments from us).
Executive Change in ControlPlan.In connection with our IPO we adopted the Executive Change in Control Plan in which all of our executive officers, including each of our currently employed Named Executive Officers, participate pursuant to individual participation agreements. The Executive Change in Control Plan serves to encourage these key executives to carry out their duties and provide continuity of management in the event of a “change in control” of Gates.
If a change in control occurs and the Named Executive Officer’s employment is terminated by us or a successor for reasons other than “cause” or is terminated voluntarily by the individual for “constructive termination,” in each case within the period beginning 90 days prior to the consummation of a change in control and ending on the second anniversary of the date of such change in control, then the Executive Change in Control Plan generally provides that the individual would be entitled to receive:
For these purposes, “change in control”, “cause” and “constructive termination” have the meanings ascribed to such terms in the Executive Change in Control Plan.
Neither plan contains a single trigger or a modified single trigger for benefits. In addition, the Executive Change in Control Plan does not provide for benefits upon death or disability following a change in control.
Our Executive Change in Control Plan contains a“best-of-net” provision. With a“best-of-net” provision, if any of the participants is subject to an excise tax under Code Section 280G and Code Section 4999, then the amount of severance the participant receives may be reduced so that the excise tax does not apply; however, such reduction will only occur if it results in the receipt of a greaterafter-tax severance than would otherwise be provided.
To the extent a payment or benefit that is paid or provided under the Executive Change in Control Plan would also be paid or provided under the terms of another plan, program, agreement, arrangement or legal requirement, the executive would be entitled to payment under the Executive Change in Control Plan or such other applicable plan, program, agreement, arrangement or legal requirement, whichever provides for greater benefits, but would not be entitled to benefits under both the Executive Change in Control Plan and such other plan, program, agreement, arrangement or legal requirement.
In addition, in order to receive payment and benefits under the Executive Change in Control Plan, the Named Executive Officer must execute and not revoke a release of claims against Gates and continue to comply with confidentiality,non-compete andnon-solicitation covenants during each of the executive’s employment and for theone-year period following any termination of employment (or such longer period as the Named Executive Officer is eligible to receive severance payments from us).
Annual Plan
Messrs. Jurek, Naemura, Lifsey and Gaston, and Ms. Seely participated in the Annual Plan. For Fiscal 2017, the Annual Plan provided that a participant had to be an employee at the time of a payout in order to receive a payout under the Annual Plan, except (i) in the case of death, Disability (as defined in the Annual Plan) or Retirement (as defined in the Annual Plan), (ii) if such payment was required by local law or individual employment agreement, or (iii) under the terms of a Gates-approved severance arrangement (referred to as “Termination with Severance”). In the case of death, Disability or Retirement, the bonus payout would have been calculated based on the target achievement of annual financial performance targets (without the adjustment for an individual performance factor), and prorated to reflect the number of full months worked for us by the participant in the year of such termination. In the case of Termination with Severance, the bonus payout would have been calculated in accordance with the Executive Severance and Change in Control Plans, as applicable.
Long-Term Incentive Awards
For Messrs. Jurek, Naemura and Lifsey, vesting of one additional “tranche” of the Tier I time-vesting options will accelerate upon termination of employment by (i) the Company without Cause, (ii) by the participant for Good Reason and (iii) death or Disability ((i)–(iii) collectively referred to as a “Good Leaver Termination”). In addition, for all Named Executive Officers with options granted prior to May 2017, with respect to the Tier II, III and IV exit-vesting options, if there is a separation from service due to a Good Leaver Termination prior to July 3, 2022, then a percentage of such options equal to the “Specified Portion” listed below will remain outstanding and eligible to vest for a period ending on the earlier of (x) the date that is 24 months following the date of termination or (y) July 3, 2022.
Date of Good Leaver Termination | Specified Portion (Messrs. Jurek, Naemura, Lifsey and Ms. Bhattacharya) | Specified Portion (Mr. Gaston) | ||||||
Prior to the first anniversary of the date of grant/vesting reference date | 20 | % | 0 | % | ||||
On or after the first anniversary of the date of grant/vesting reference date and prior to the second anniversary of the date of grant/vesting reference date | 40 | % | 20 | % | ||||
On or after the second anniversary of the date of grant/vesting reference date and prior to the third anniversary of the date of grant/vesting reference date | 60 | % | 40 | % | ||||
On or after the third anniversary of the date of grant/vesting reference date and prior to the fourth anniversary of the date of grant/vesting reference date | 80 | % | 60 | % | ||||
On or after the fourth anniversary of the date of grant/vesting reference date and prior to the fifth anniversary of the date of grant/vesting reference date | 100 | % | 80 | % | ||||
On or after the fifth anniversary of the date of grant/vesting reference date | — | 100 | % | |||||
In addition, for options granted prior to May 2017 if the participant retires on or after the third anniversary of the vesting commencement date, is at least age 62 and has completed three years of service, then the Board may, in its discretion, treat such retirement as a Good Leaver Termination with respect to Tiers II, III and IV.
For all option awards, upon a “Change in Control” (as such term is defined in the 2014 Incentive Plan) during the participant’s employment, all unvested Tier I time-vesting options will accelerate and become fully vested. The Tier II, III and IV exit-vesting options would not automatically become fully vested in connection with a Change in Control. However, all or a portion of the Tier II, III and IV exit-vesting options may become vested to the extent a Change in Control occurs prior to July 3, 2022, which results in the applicable vesting conditions being met. If not, then the Tier II, III and IV exit-vesting options would remain outstanding and eligible to vest until July 3, 2022, or until Blackstone ceases to own any of our ordinary shares.
Retirement Benefits
The Supplemental Retirement Plan that is made available to all Named Executive Officers has payment provisions relating to the termination of employment with Gates and a Change in Control (as defined in the Supplemental Retirement Plan), which are described more fully above under “Nonqualified Deferred Compensation for Fiscal 2017.”
Payments and Benefits Upon Termination orChange-in-Control
The following table describes the potential payments and benefits that would have been payable to our Named Executive Officers (other than Ms. Bhattacharya) assuming an eligible termination (as described above under “Summary of Potential Payments”) of their employment on the last business day of 2017 and assuming the Executive Severance and Change in Control Plans were in effect on such date. The data below assumes share price equal to the IPO price of $19.00 per share.
The amounts shown in the table below do not include:
| I. Jurek | D. Naemura | J. Seely | R. Gaston | W. Lifsey | ||||||||||||||||
Termination—Disability or Death | ||||||||||||||||||||
Cash Severance Payments(1) | $ | 1,350,000 | $ | 684,250 | $ | 99,068 | $ | 231,000 | $ | 548,625 | ||||||||||
Option Awards(2) | $ | 2,833,944 | $ | 925,828 | $ | 0 | $ | 0 | $ | 834,783 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,183,944 | $ | 1,610,078 | $ | 99,068 | $ | 231,000 | $ | 1,383,408 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Termination—By the Company without Cause | ||||||||||||||||||||
Cash Severance Payments(3) | $ | 7,325,000 | $ | 2,444,375 | $ | 931,101 | $ | 1,116,500 | $ | 1,920,187 | ||||||||||
Health Plan Continuation(4) | $ | 23,932 | $ | 23,932 | $ | 16,578 | $ | 23,932 | $ | 16,578 | ||||||||||
Outplacement(5) | $ | 7,500 | $ | 7,500 | $ | 7,500 | $ | 7,500 | $ | 7,500 | ||||||||||
Option Awards(2) | $ | 2,833,944 | $ | 925,828 | $ | 0 | $ | 0 | $ | 834,783 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 10,190,376 | $ | 3,401,635 | $ | 1,022,679 | $ | 1,147,932 | $ | 2,779,048 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Change-in-Control—(with Termination) | ||||||||||||||||||||
Cash Severance Payments(6) | $ | 6,975,000 | $ | 2,603,125 | $ | 1,182,818 | $ | 1,155,000 | $ | 2,194,500 | ||||||||||
Health Plan Continuation(4) | $ | 79,556 | $ | 47,941 | $ | 30,153 | $ | 41,549 | $ | 37,827 | ||||||||||
Outplacement(5) | $ | 7,500 | $ | 7,500 | $ | 7,500 | $ | 7,500 | $ | 7,500 | ||||||||||
Option Awards(2) | $ | 9,105,365 | $ | 2,777,483 | $ | 583,780 | $ | 1,260,986 | $ | 2,715,154 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 16,167,421 | $ | 5,436,049 | $ | 1,804,251 | $ | 2,465,035 | $ | 4,954,981 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Change-in-Control—(without Termination) | ||||||||||||||||||||
Option Awards(2) | $ | 9,105,365 | $ | 2,777,483 | $ | 583,780 | $ | 1,260,986 | $ | 2,715,154 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 9,105,365 | $ | 2,777,483 | $ | 583,780 | $ | 1,260,986 | $ | 2,715,154 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Departure of Ms. Bhattacharya
Ms. Bhattacharya’s last day of active service with us was July 4, 2017. In connection with Ms. Bhattacharya’s termination of employment with us, she entered into the Bhattacharya Separation Agreement. Ms. Bhattacharya’s departure from employment with us constituted a termination without “Cause” pursuant to the terms of her employment agreement entitling her to (a) severance pay in the amount of $826,000, which will be paid in equal installments over the 12 months following her termination of employment with us (the severance pay equals (the sum of (i) her annual base salary of $350,000, and (ii) an amount equal to her annual bonus in respect of our 2016 fiscal year of $476,000), (b) $7,563 paid in equal installments over 12 months following her termination of employment with us, which represents the estimated annual cost of our portion of continuation of medical, dental and vision under COBRA, (c) outplacement services up to $10,000, for asix-month consecutive period that ends within or with the12-month period following her termination of employment with us, and (d) a pro rata portion of her annual bonus in respect of our 2017 fiscal year, based on our actual performance (the “2017 Bonus” and together with (a), (b) and (c), the “Bhattacharya Severance Benefits”). Ms. Bhattacharya’s 2017 Bonus was determined to be $357,000 and was paid at the same time annual bonuses in respect of our 2017 fiscal year were determined and paid with respect to our senior executives.
For purposes of her existing option award agreement, her departure constituted a “Good Leaver Termination,” entitling her to vest in an additional 17,760 Tier I time-vesting stock options and to remain eligible to vest in 80% of her unvested Tier II, III and IV exit-vesting stock options for 24 months following her departure date. All other unvested stock options were immediately forfeited. In addition, Ms. Bhattacharya had the right to exercise all of her vested and deemed vested stock options within 90 days of her departure date, which were not exercised and were cancelled. In addition, pursuant to the terms of her subscription agreement, her purchased shares were repurchased by us on July 11, 2017 for a purchase price of $180,000, resulting in a gain of $30,000.
The Bhattacharya Severance Benefits were contingent upon Ms. Bhattacharya’s execution andnon-revocation of a release of claims in our favor (which we received) and her continued compliance with certainnon-competition,non-solicitation,non-disparagement and confidentiality covenants contained in theBhattacharya Separation Agreement. The confidentiality andnon-disparagement covenants each have an indefinite term. Thenon-competition andnon-solicitation covenants each have a term of 12 months. If we believe that Ms. Bhattacharya is in violation of these restrictive covenants after her termination, we may suspend all of the payments described above. However, we also have the right to waive a breach of any covenant by Ms. Bhattacharya.
Director Compensation
Our employee director and Sponsor-affiliated directors receive no additional compensation for serving on the Board. As such, none of our directors, other than Terry Klebe, John Plant and Karyn Ovelmen, received compensation for the year ended December 30, 2017. All of our directors are reimbursed for their reasonableout-of-pocket expenses related to their service as a member of the Board.
Karyn Ovelmen was appointed to our Board effective December 15, 2017. She received a cash retainer of $5,200 for her service as a director in Fiscal 2017.
Messrs. Klebe and Plant each received an annual cash retainer of $150,000 (payable in quarterly installments in arrears). The following stock options have been granted to Mr. Klebe under the 2014 Incentive Plan and Mr. Plant under the 2015Non-Employee Director Incentive Plan:
These stock options vest 20% on each of the first five anniversaries of the grant date. In the event of a change in control (as defined in the 2015Non-Employee Director Incentive Plan), the stock options, to the extent not already vested, will become fully vested and exercisable. If service terminates for any reason, then the stock options, to the extent not then vested and exercisable, will immediately be canceled. The stock options have aten-year term, and will generally remain outstanding and exercisable for 90 days following the termination of service as a director (or, if earlier, the expiration date of the stock option). This period is extended to 12 months if service is terminated due to death or disability.
In 2017, we analyzed competitive market data provided by the Consultant (as defined below) relating to director compensation programs, including both cash retainers, equity awards and stock ownership guidelines. These compensation elements were benchmarked against the same15-company peer group that was used to evaluate executive compensation pay levels and program design and is described in detail below in the section entitled “Role of Independent Compensation Consultant,” as well as a general industry group consisting of comparably sized general industry (excluding financial services) companies with median revenues of approximately Gates’ size. As a result of the analysis, in connection with our IPO, we developed a market-competitive director compensation program for ournon-employee,non-Sponsor affiliated directors. The program provides eligible directors with an annual compensation package of $225,000 consisting of $125,000 as an annual cash retainer (payable in quarterly installments in arrears) and $100,000 in value of restricted stock units (payable annually). Restricted stock units will vest in full on the first anniversary of the grant date. Eligible directors may elect to receive all or a portion of their cash retainer in the form of restricted stock units. Restricted stock units elected in lieu of payments in cash will have the same vesting terms as the annual restricted stock unit grant.
As part of this program, the Lead Director and chairpersons of the following committees will receive the additional fixed annual cash retainers (payable in quarterly installments in arrears) listed below. We reimburse all Directors for expenses associated with each meeting attended.
Role | Annual Cash Retainers Chair | |||
Chair, Audit Committee | $ | 25,000 | ||
Chair, Compensation Committee | $ | 10,000 | ||
Chair, Nominating and Governance Committee | $ | 10,000 | ||
We have adopted stock ownership guidelines for ournon-employee,non-Sponsor affiliated directors in order to better align our eligible directors’ financial interests with those of our shareholders by requiring such directors to own a minimum level of our shares. Each of ournon-employee,non-Sponsor affiliated directors is required to own stock in an amount equal to four times his or her annual cash retainer. Any such director who does not meet the threshold will be required to retain 50% of stock acquired through the exercise or vesting of equity awards made by the Company.
Director Compensation for Fiscal 2017
The following table provides summary information concerning the compensation of our directors, other than our employee director, for Fiscal 2017.
Name | Fees Earned or Paid in Cash ($) | Option Awards ($)(1) | Total ($) | |||||||||
T. Klebe | $ | 150,000 | — | $ | 150,000 | |||||||
K. Ovelmen(2) | $ | 5,200 | — | $ | 5,200 | |||||||
J. Plant | $ | 150,000 | — | $ | 150,000 | |||||||
N. Simpkins | — | — | — | |||||||||
D. Calhoun | — | — | — | |||||||||
J. Kahr | — | — | — | |||||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 8, 2018 after giving effect to thepre-IPO reorganization transactions by (1) each person known to us to beneficially own more than 5% of our outstanding ordinary shares, (2) each of our directors and named executive officers and (3) all of our directors and executive officers as a group.
The amounts and percentages of ordinary shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership
percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated ordinary shares. Unless otherwise noted, the address of each beneficial owner is 1551 Wewatta Street, Denver, Colorado 80202
| Ordinary Shares Beneficially Owned | ||||||||
Name of Beneficial Owner | Number | % | ||||||
5% or greater shareholders: | ||||||||
Blackstone(1) | 243,985,383 | 84.2 | ||||||
Directors and named executive officers: | ||||||||
Ivo Jurek(2) | 583,112 | * | ||||||
David H. Naemura(3) | 250,900 | * | ||||||
Walter T. Lifsey(4) | 117,204 | * | ||||||
Roger C. Gaston(5) | 37,952 | * | ||||||
Jamey S. Seely | — | * | ||||||
Rasmani Bhattacharya | — | * | ||||||
David L. Calhoun(6) | — | * | ||||||
Neil P. Simpkins(7) | — | * | ||||||
Julia C. Kahr(8) | — | * | ||||||
John Plant(9) | 91,550 | * | ||||||
Terry Klebe(10) | 72,477 | * | ||||||
Karyn Ovelmen | — | * | ||||||
Directors and executive officers as a group (13 persons)(11) | 1,200,971 | * | ||||||
The general partner of each of Blackstone Capital Partners (Cayman) VI L.P. and Blackstone GTSCo-Invest L.P. is Blackstone Management Associates (Cayman) VI L.P. The general partners of each of Blackstone Management Associates (Cayman) VI L.P. and Blackstone Family Investment Partnership (Cayman) VI—ESC L.P. are BCP VI GP L.L.C. and Blackstone LR Associates (Cayman) VI Ltd.
The general partner of BTO Omaha Holdings L.P. is BTO Omaha Manager L.L.C. The managing member of BTO Omaha Manager L.L.C. is Blackstone Tactical Opportunities Management Associates (Cayman) L.P. The general partners of Blackstone Tactical Opportunities Management Associates (Cayman) L.P. are BTO GP L.L.C. and Blackstone Tactical Opportunities LR Associates (Cayman) Ltd.
Blackstone Holdings III L.P. is the sole member of each of BCP VI GP L.L.C. and BTO GP L.L.C. and the controlling shareholder of each of Blackstone LR Associates (Cayman) VI Ltd. and Blackstone Tactical Opportunities LR Associates (Cayman) Ltd. The general partner of Blackstone Holdings III L.P. is Blackstone Holdings III GP L.P. The general partner of Blackstone Holdings III GP L.P. is Blackstone Holdings III GP Management L.L.C. The sole member of Blackstone Holdings III GP Management L.L.C. is The Blackstone Group L.P. The general partner of The Blackstone Group L.P. is Blackstone Group Management L.L.C. Blackstone Group Management L.L.C. is wholly-owned by Blackstone’s senior managing directors and controlled by its founder, Stephen A. Schwarzman. Each of such Blackstone entities (other than each of the Blackstone Funds to the extent they directly hold securities reported herein) and Mr. Schwarzman may be deemed to beneficially own the shares beneficially owned by the Blackstone Funds directly or indirectly controlled by it or him, but each disclaims beneficial ownership of such shares. The address of Mr. Schwarzman and each of the other entities listed in this footnote is c/o The Blackstone Group, L.P., 345 Park Avenue, New York, New York 10154.
The following table summarizes our equity compensation plan information as of December 30, 2017:
| Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the 1st Column of This Table) | |||||||||
Equity compensation plans approved by security holders | 26,531,124 | (2) | $ | 6.03 | 12,500,000 | (3) | ||||||
Item 13. Certain Relationships And Related Person Transactions, and Director Independence
Statement of Policy Regarding Transactions with Related Persons
Our board of directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our “related person policy.” Our related person policy requires that a “related person” (as defined in paragraph (a) of Item 404 of RegulationS-K) must promptly disclose to our general counsel any “related person transaction” (defined as any transaction that is anticipated would be reportable by us under Item 404(a) of RegulationS-K in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. Our general counsel will then promptly communicate that information to our board of directors. No related person transaction will be executed without the approval or ratification of our board of directors or a duly authorized committee of our board of directors. It is our policy that directors interested in a related person transaction will recuse themselves from any vote on a related person transaction in which they have an interest.
Other Relationships
Blackstone Advisory Partners L.P. received underwriting fees of $3.2 million in connection with the IPO.
Shareholders Agreement
In connection with thepre-IPO reorganization transactions and the IPO, we entered into a shareholders agreement with our Sponsor. The shareholders agreement requires us to nominate a number of individuals designated by our Sponsor for election as our directors at any meeting of our shareholders (each a “Sponsor Director”) such that, following the election of any directors and taking into account any director continuing to serve as such without the need forre-election, the number of Sponsor Directors serving as directors of our company will be equal to: (1) if ourpre-IPO owners and their affiliates together continue to beneficially own at least 50% of our ordinary shares entitled to vote generally in the election of directors as of the record date for such meeting, the lowest whole number that is greater than 50% of the total number of directors comprising our board of directors; (2) if ourpre-IPO owners and their affiliates together continue to beneficially own at least 40% (but less than 50%) of our ordinary shares entitled to vote generally in the election of directors as of the record date for such meeting, the lowest whole number that is at least 40% of the total number of directors comprising our board of directors; (3) if ourpre-IPO owners and their affiliates together continue to beneficially own at least 30% (but less than 40%) of our ordinary shares entitled to vote generally in the election of directors as of the record date for such meeting, the lowest whole number that is at least 30% of the total number of directors comprising our board of directors; (4) if ourpre-IPO owners and their affiliates together continue to beneficially own at least 20% (but less than 30%) of our ordinary shares entitled to vote generally in the election of directors as of the record date for such meeting, the lowest whole number that is at least 20% of the total number of directors comprising our board of directors; and (5) if ourpre-IPO owners and their affiliates together continue to beneficially own at least 5% (but less than 20%) of our ordinary shares entitled to vote generally in the election of directors as of the record date for such meeting, the lowest whole number that is at least 10% of the total number of directors comprising our board of directors. In the case of a vacancy on our board created by the removal or resignation of a Sponsor Director, the shareholders agreement requires us to nominate an individual designated by our Sponsor for election to fill the vacancy. The above-described provisions of the shareholders agreement will remain in effect until our Sponsor is no longer entitled to nominate a Sponsor Director pursuant to the shareholders agreement, unless our Sponsor requests that it terminate at an earlier date.
The shareholders agreement also provides that, to the fullest extent permitted by law, we renounce any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities that may be presented from time to time to our Sponsor or to members of our board of directors who are not our employees.
Registration Rights Agreement
In connection with the IPO, we entered into a registration rights agreement to provide to our Sponsor an unlimited number of “demand” registration rights. The registration rights agreement also provides our Sponsor customary “piggyback” registration rights and provides that we will pay certain expenses relating to such registrations and indemnify our Sponsor against certain liabilities which may arise under the Securities Act.
Monitoring Fee and Support and Services Agreements
In connection with the Acquisition, Omaha Topco entered into a Transaction and Monitoring Fee Agreement (the “Former Transaction and Monitoring Fee Agreement”) with Blackstone Management Partners L.L.C. (“BMP”) and Blackstone Tactical Opportunities Advisors L.L.C., affiliates of the Sponsor (the “Managers”). Under the Former Transaction and Monitoring Fee Agreement, we paid the Managers, at the closing of the Acquisition, $56.8 million as a transaction fee as consideration for the Managers undertaking due diligence investigations and financial and structural analysis and providing corporate strategy and other advice and negotiation assistance in connection with the Acquisition. In addition, Omaha Topco and certain of its direct and indirect subsidiaries (collectively the “Monitoring Service Recipients”) reimburse the Managers for anyout-of-pocket expenses incurred by the Managers and their affiliates.
In addition, under the Former Transaction and Monitoring Fee Agreement, the Monitoring Service Recipients engaged the Managers to provide certain monitoring, advisory and consulting services in the following areas:
In consideration for the monitoring, advisory and consulting services, the Monitoring Service Recipients paid the Managers a monitoring fee at the closing of the Acquisition and have paid, at the beginning of each subsequent fiscal year, a monitoring fee equal to 1% of a covenant EBITDA measure as defined in accordance with the agreements governing our senior secured credit facilities. The Former Transaction and Monitoring Fee Agreement also contemplates that Monitoring Service Recipients will pay to the Managers a milestone payment upon the consummation of an initial public offering.
In connection with the IPO, we and the Managers terminated the Former Transaction and Monitoring Fee Agreement and we entered into a new Monitoring Fee Agreement (the “New Monitoring Fee Agreement”) with the Managers that is substantially similar to the Former Transaction and Monitoring Fee Agreement, except that the New Monitoring Fee Agreement does not require the payment of a milestone payment in connection with an initial public offering and the New Monitoring Fee Agreement will terminate upon the earlier to occur of (i) the second anniversary of the closing date of our IPO and (ii) the date our Sponsor beneficially owns less than 5% of our ordinary shares and such shares have a fair market value of less than $25 million. Following termination, the Managers will refund us any portion of the monitoring fee previously paid in respect of fiscal quarters that follow the termination date.
In addition, in connection with the Acquisition, Omaha Topco entered into a Support and Services Agreement (the “Former Support and Services Agreement”) with BMP. Under the Former Support and Services Agreement, Omaha Topco and certain of its direct and indirect subsidiaries reimbursed BMP and its affiliates for expenses related to support services customarily provided by Blackstone’s portfolio operations group to Blackstone’s portfolio companies, as well as healthcare-related services provided by Blackstone’s Equity Healthcare group and Blackstone’s group purchasing program. In connection with the IPO, we and BMP terminated the Former Support and Services Agreement and we entered into a new Support and Services Agreement with the Managers that is
Substantially similar to the Former Support and Services Agreement, except that it terminates on the date our Sponsor beneficially owns less than 5% of our ordinary shares and such shares have a fair market value of less than $25 million, or such earlier date as may be chosen by Blackstone.
Pursuant to these agreements, we paid affiliates of our Sponsor $6.7 million, $6.1 million, and $7.0 million during Fiscal 2017, Fiscal 2016, Fiscal 2015, respectively.
Private Placements of Omaha Topco Common Stock
The share information with respect to Omaha Topco in this “—Private Placements of Omaha Topco Common Stock” section has not been adjusted to give effect to thepre-IPO reorganization transactions.
On May 14, 2015, Omaha Topco issued and sold 60,000 shares of its common stock to John Plant, one of our directors, for an aggregate purchase price of $300,000.
On May 18, 2015, Omaha Topco issued and sold 150,000 shares of its common stock to Ivo Jurek, our Chief Executive Officer and one of our directors, for an aggregate purchase price of $750,000.
On May 12, 2016, Omaha Topco issued and sold 75,000 shares of its common stock to Terry Klebe, one of our directors, for an aggregate purchase price of $375,000.
On March 10, 2017, Omaha Topco issued and sold 45,455 shares of its common stock to Ivo Jurek, our Chief Executive Officer and one of our directors, for an aggregate purchase price of $250,002.50.
On March 10, 2017, Omaha Topco issued and sold 36,364 shares of its common stock to David H. Naemura, our Chief Financial Officer, for an aggregate purchase price of $200,002.
On March 10, 2017, Omaha Topco issued and sold 18,182 shares of its common stock to Roger Gaston, our Executive Vice President—Human Resources, for an aggregate purchase price of $100,001.
Commercial Transactions with Sponsor Portfolio Companies
Our Sponsor and its affiliates have ownership interests in a broad range of companies. We have entered and may in the future enter into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services.
During the periods presented, through to November 2, 2017, Blackstone held an interest in Alliance Automotive Group (“Alliance”), a wholesale distributor of automotive parts in France and the United Kingdom. Net sales by Gates to affiliates of Alliance during the portion of Fiscal 2017 in which Blackstone controlled Alliance were $27.2 million, compared with $20.0 million during Fiscal 2016 and $11.1 million during Fiscal 2015.
During Fiscal 2016 and Fiscal 2015, Blackstone also held an interest in Optiv Inc., an entity that supplies Gates with certainIT-related services. During Fiscal 2016 and Fiscal 2015, Gates paid Optiv Inc. $1.2 million and $0.2 million, respectively. Blackstone sold Optiv in December 2016, and it was therefore not a related party to Gates during Fiscal 2017.
Indemnification Agreements
We are party to indemnification agreements with our directors and executive officers to indemnify them to the maximum extent allowed under applicable law. These agreements indemnify these individuals against certain costs, charges, losses, liabilities, damages and expenses incurred by such director or officer in the execution or discharge of his or her duties or the exercise of his or her powers or otherwise in relation to or in connection with his or her duties, powers or office. These agreements do not indemnify our directors against any liability attaching to such individuals in connection with any negligence, default, breach of duty or breach of trust in relation to the company of which he or she is a director, which would be rendered void under the Companies Act 2006.
There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
Depositary Receipt Arrangements
In connection with thepre-IPO reorganization transactions described under “About this Annual Report—Financial Statement Presentation,” our Sponsor and the other equity owners of Omaha Topco received depositary receipts, each representing one ordinary share in Gates Industrial Corporation plc in consideration for their equity in Omaha Topco, at a ratio of 0.76293 of our ordinary shares for each outstanding share of Omaha Topco. The depositary receipts were issued by Computershare Trust Company, N.A., as depositary (the “Depositary”), and a nominee for the Depositary (the “Depositary Nominee”) is the registered holder of the ordinary shares of Gates Industrial Corporation plc issued in exchange for the outstanding shares of Omaha Topco.
The depositary receipts arrangement was established because, as a result of restrictions on transfer on certain of the ordinary shares concerned, those ordinary shares could not be issued directly into DTC at the time of our IPO. The use of the Depositary allows for the shares to be held in the Depositary initially and subsequently transferred into DTC without the application of U.K. stamp duty or SDRT, provided certain conditions are met. The depositary receipts are not registered or listed on the NYSE or any other stock exchange, are not be eligible for DTC, and no trading market for them has developed. Instead, subject to compliance with applicable securities laws and contractual restrictions on transfer, thepre-IPO owners may request of the Depositary that all or a portion of their depositary receipts be cancelled in order to effectuate a transfer of the ordinary shares underlying such depositary receipts to Cede & Co., as nominee/custodian for DTC, which holds the transferred ordinary shares on its customary terms, in order to settle trades of such ordinary shares (in the public market or otherwise), or to otherwise hold or transfer such shares through and within the systems of DTC.
Subject to compliance with applicable securities laws and contractual restrictions on transfer, the holders of the depositary receipts are generally entitled to the same rights as a direct holder of our ordinary shares or an investor holding book-entry interests in our ordinary shares through DTC.
A holder of depositary receipts is entitled to withdraw the ordinary shares underlying its depositary receipts from the Depositary upon the surrender of such depositary receipts to the Depositary and the delivery of applicable transfer documentation.
Item 14. Principal Accounting Fees and Services
The following table sets out the fees payable by Gates to our principal accountant, Deloitte & Touche LLP during the years ended December 30, 2017 and December 31, 2016:
| (dollars in millions) | As of December 30, 2017 | As of December 31, 2016 | ||||||
Audit fees(1) | $ | 5.4 | $ | 3.9 | ||||
Tax fees | 0.9 | 0.7 | ||||||
All other fees(2) | 0.4 | 0.3 | ||||||
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Total fees | $ | 6.7 | $ | 4.9 | ||||
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On December 15, 2017, in anticipation of becoming a public-traded company, the Company adopted an Audit Committee charter that requires the Audit Committee to preapprove the engagement terms and fees of Deloitte LLP for all services. Before the adoption of this charter, the Audit Committee [of Omaha Topco] delegated to management the authority to pre-approve all services from independent auditors, requiring management to report back regularly to the Audit Committee on the terms and fees of such engagement. The fees incurred for 2016 and 2017 in the table above were incurred prior to the adoption of the Company’s new Audit Committee charter.
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report.
(a) Financial Statements and Schedule. See Index to Financial Statements on pageF-1 hereof.
(b) Exhibits
Index to Exhibits
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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March 14, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Gates Industrial Corporation plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Gates Industrial Corporation plc and subsidiaries (the “Company”) as of December 30, 2017 and December 31, 2016, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended December 30, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 14, 2018
We have served as the Company’s auditor since 2014.
Gates Industrial Corporation plc
Consolidated Statements of Operations
| For the year ended | ||||||||||||
(dollars in millions, except per share amounts) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
Net sales | $ | 3,041.7 | $ | 2,747.0 | $ | 2,745.1 | ||||||
Cost of sales | 1,823.7 | 1,686.2 | 1,709.0 | |||||||||
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Gross profit | 1,218.0 | 1,060.8 | 1,036.1 | |||||||||
Selling, general and administrative expenses | 779.6 | 744.1 | 784.5 | |||||||||
Transaction-related costs | 18.1 | 0.4 | 0.7 | |||||||||
Impairment of intangibles and other assets | 2.8 | 3.2 | 51.1 | |||||||||
Restructuring expenses | 17.4 | 11.4 | 15.6 | |||||||||
Other operating (income) expense | (0.3 | ) | 2.8 | (0.4 | ) | |||||||
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Operating income from continuing operations | 400.4 | 298.9 | 184.6 | |||||||||
Interest expense | 234.6 | 216.3 | 212.6 | |||||||||
Other expense (income) | 56.3 | (10.4 | ) | (69.7 | ) | |||||||
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Income from continuing operations before taxes | 109.5 | 93.0 | 41.7 | |||||||||
Income tax (benefit) expense | (72.5 | ) | 21.1 | (9.2 | ) | |||||||
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Net income from continuing operations | 182.0 | 71.9 | 50.9 | |||||||||
Gain on disposal of discontinued operations, net of tax, respectively, of $0, $0 and $0 | 0.7 | 12.4 | — | |||||||||
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Net income | 182.7 | 84.3 | 50.9 | |||||||||
Non-controlling interests | (31.4 | ) | (26.6 | ) | (26.0 | ) | ||||||
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Net income attributable to shareholders | $ | 151.3 | $ | 57.7 | $ | 24.9 | ||||||
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Earnings per share | ||||||||||||
Basic | ||||||||||||
Earnings per share from continuing operations | $ | 0.62 | $ | 0.18 | $ | 0.10 | ||||||
Earnings per share from discontinued operations | — | 0.05 | — | |||||||||
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Net income per share | $ | 0.62 | $ | 0.23 | $ | 0.10 | ||||||
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Diluted | ||||||||||||
Earnings per share from continuing operations | $ | 0.60 | $ | 0.18 | $ | 0.10 | ||||||
Earnings per share from discontinued operations | — | 0.05 | — | |||||||||
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Net income per share | $ | 0.60 | $ | 0.23 | $ | 0.10 | ||||||
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The accompanying notes form an integral part of these consolidated financial statements.
Gates Industrial Corporation plc
Consolidated Statements of Comprehensive Income
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(dollars in millions) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
Net income | $ | 182.7 | $ | 84.3 | $ | 50.9 | ||||||
Other comprehensive income (loss) | ||||||||||||
Foreign currency translation: | ||||||||||||
—Net translation gain (loss) on foreign operations, net of tax benefit (expense) respectively of $15.0, ($5.6), and ($11.1) | 280.2 | (196.3 | ) | (383.7 | ) | |||||||
—(Loss) gain on net investment hedges, net of tax benefit, respectively, of $0, $0.3 and $0 | (109.4 | ) | 33.7 | (27.3 | ) | |||||||
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Total foreign currency translation movements | 170.8 | (162.6 | ) | (411.0 | ) | |||||||
Cash flow hedges (Interest rate caps): | ||||||||||||
—Loss arising in the period, net of tax expense, respectively, of $0, $0 and $0 | (2.0 | ) | (7.0 | ) | (18.4 | ) | ||||||
—Reclassification to net income, net of tax expense, respectively, of $2.0, $1.3 and $0 | 9.6 | 4.1 | 0.7 | |||||||||
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Total cash flow hedges movements | 7.6 | (2.9 | ) | (17.7 | ) | |||||||
Available-for-sale investments: | ||||||||||||
—Net unrealized (loss) gain, net of tax benefit (expense), respectively, of $0.1, $0.1 and ($0.1) | (0.2 | ) | (0.4 | ) | 0.3 | |||||||
—Reclassification to net income of gain on investments sold, net of tax expense, respectively, of $0, $0 and $0 | — | (0.3 | ) | — | ||||||||
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Totalavailable-for-sale investment movements | (0.2 | ) | (0.7 | ) | 0.3 | |||||||
Post-retirement benefits: | ||||||||||||
—Actuarial gain (loss), net of tax (expense) benefit, respectively, of ($5.4), $2.3 and $0.3 | 20.2 | (6.4 | ) | (2.9 | ) | |||||||
—Reclassification of actuarial gain to net income, net of tax benefit, respectively, of $0, $0.2 and $0.4 | — | (0.3 | ) | (0.6 | ) | |||||||
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Total post-retirement benefit movements | 20.2 | (6.7 | ) | (3.5 | ) | |||||||
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Other comprehensive income (loss) | 198.4 | (172.9 | ) | (431.9 | ) | |||||||
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Comprehensive income (loss) for the period | $ | 381.1 | $ | (88.6 | ) | $ | (381.0 | ) | ||||
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Comprehensive income (loss) attributable to shareholders: | ||||||||||||
—Arising from continuing operations | $ | 319.1 | $ | (110.7 | ) | $ | (387.2 | ) | ||||
—Arising from discontinued operations | 0.7 | 12.4 | — | |||||||||
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| 319.8 | (98.3 | ) | (387.2 | ) | ||||||||
Comprehensive income attributable tonon-controlling interests | 61.3 | 9.7 | 6.2 | |||||||||
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| $ | 381.1 | $ | (88.6 | ) | $ | (381.0 | ) | |||||
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The accompanying notes form an integral part of these consolidated financial statements.
Gates Industrial Corporation plc
Consolidated Balance Sheets
(dollars in millions, except share numbers and per share amounts) | As of December 30, 2017 | As of December 31, 2016 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 564.4 | $ | 527.2 | ||||
Trade accounts receivable, net of allowances of $6.8 and $3.4 | 713.8 | 650.5 | ||||||
Inventories | 457.1 | 366.9 | ||||||
Taxes receivable | 14.1 | 8.9 | ||||||
Prepaid expenses and other assets | 76.8 | 71.2 | ||||||
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Total current assets | 1,826.2 | 1,624.7 | ||||||
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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 | ||||||
Taxes receivable | 32.7 | 32.1 | ||||||
Othernon-current assets | 38.6 | 28.4 | ||||||
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Total assets | $ | 6,853.7 | $ | 6,383.3 | ||||
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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 | ||||||
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Total current liabilities | 697.8 | 579.5 | ||||||
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Non-current liabilities | ||||||||
Debt, less current portion | 3,889.3 | 3,790.0 | ||||||
Post-retirement benefit obligations | 157.1 | 171.6 | ||||||
Taxes payable | 100.6 | 95.0 | ||||||
Deferred income taxes | 517.1 | 652.3 | ||||||
Othernon-current liabilities | 63.4 | 26.5 | ||||||
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Total liabilities | 5,425.3 | 5,314.9 | ||||||
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Commitments and contingent liabilities (Note 22) | ||||||||
Shareholders’ equity | ||||||||
—Shares, par value of $0.01 each—authorized shares: 3,000,000,000; outstanding shares: 245,474,605 (December 31, 2016: authorized shares: 3,000,000,000; outstanding shares: 245,627,952) | 2.5 | 2.5 | ||||||
—Additional paid in capital | 1,622.6 | 1,619.0 | ||||||
—Accumulated other comprehensive loss | (747.4 | ) | (915.9 | ) | ||||
—Retained earnings (deficit) | 136.9 | (14.3 | ) | |||||
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Total shareholders’ equity | 1,014.6 | 691.3 | ||||||
Non-controlling interests | 413.8 | 377.1 | ||||||
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Total equity | 1,428.4 | 1,068.4 | ||||||
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Total liabilities and equity | $ | 6,853.7 | $ | 6,383.3 | ||||
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The accompanying notes form an integral part of these consolidated financial statements.
Gates Industrial Corporation plc
Consolidated Statements of Cash Flows
| For the year ended | ||||||||||||
(dollars in millions) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 182.7 | $ | 84.3 | $ | 50.9 | ||||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||||||
Depreciation and amortization | 212.2 | 240.8 | 269.9 | |||||||||
Impairments of intangibles and other assets | 4.8 | 3.2 | 51.3 | |||||||||
Gain on disposal of businesses | (0.9 | ) | (10.1 | ) | (0.4 | ) | ||||||
Non-cash currency transaction loss (gain) on net debt and hedging instruments | 57.4 | 3.1 | (67.9 | ) | ||||||||
Other netnon-cash financing costs | 47.6 | 13.7 | 16.0 | |||||||||
Share-based compensation expense | 5.4 | 4.2 | 4.3 | |||||||||
Decrease in post-employment benefit obligations (net) | (7.4 | ) | (5.8 | ) | (11.6 | ) | ||||||
Deferred income taxes | (162.8 | ) | (54.3 | ) | (67.4 | ) | ||||||
Other operating activities | 1.6 | 0.8 | 1.5 | |||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||
—(Increase) decrease in accounts receivable | (24.6 | ) | (44.8 | ) | 4.3 | |||||||
—(Increase) decrease in inventories | (45.4 | ) | 39.5 | 9.5 | ||||||||
—Increase in accounts payable | 49.9 | 50.2 | 46.5 | |||||||||
—(Increase) decrease in prepaid expenses and other assets | (4.1 | ) | (7.2 | ) | 1.6 | |||||||
—Increase (decrease) in taxes payable | 6.5 | 35.0 | (21.5 | ) | ||||||||
—(Decrease) increase in other liabilities | (9.4 | ) | 19.0 | (11.1 | ) | |||||||
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Net cash provided by operations | 313.5 | 371.6 | 275.9 | |||||||||
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Cash flows from investing activities | ||||||||||||
Purchases of property, plant and equipment | (101.1 | ) | (59.0 | ) | (78.5 | ) | ||||||
Purchases of intangible assets | (10.0 | ) | (9.1 | ) | (7.3 | ) | ||||||
Decrease in restricted cash | 0.1 | 2.7 | 25.6 | |||||||||
Proceeds from the sale of property, plant and equipment | 2.3 | 5.2 | 2.7 | |||||||||
Purchase of subsidiaries, net of cash acquired | (110.7 | ) | — | — | ||||||||
Other investing activities | (1.2 | ) | 0.1 | (3.0 | ) | |||||||
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Net cash used in investing activities | (220.6 | ) | (60.1 | ) | (60.5 | ) | ||||||
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Cash flows from financing activities | ||||||||||||
Issue of shares | 0.6 | 1.1 | 12.2 | |||||||||
Deferred offering costs | (2.3 | ) | — | — | ||||||||
Buy-back of shares | (1.6 | ) | (2.0 | ) | (1.5 | ) | ||||||
Proceeds from long-term debt | 644.7 | 0.1 | 0.8 | |||||||||
Payments of long-term debt | (676.9 | ) | (67.3 | ) | (52.5 | ) | ||||||
Debt issuance costs paid | (18.8 | ) | — | — | ||||||||
Dividends paid tonon-controlling interests | (24.6 | ) | (38.9 | ) | (28.1 | ) | ||||||
Other financing activities | 3.6 | (3.8 | ) | (4.8 | ) | |||||||
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Net cash used in financing activities | (75.3 | ) | (110.8 | ) | (73.9 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 19.6 | (9.2 | ) | (14.2 | ) | |||||||
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Net increase in cash and cash equivalents | 37.2 | 191.5 | 127.3 | |||||||||
Cash and cash equivalents at beginning of period | 527.2 | 335.7 | 208.4 | |||||||||
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Cash and cash equivalents at the end of the period | $ | 564.4 | $ | 527.2 | $ | 335.7 | ||||||
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Supplemental schedule of cash flows | ||||||||||||
Interest paid | $ | 198.0 | $ | 198.8 | $ | 208.0 | ||||||
Income taxes paid, net | $ | 84.8 | $ | 41.7 | $ | 86.4 | ||||||
Non-cash accrued capital expenditures | $ | 1.7 | $ | 3.9 | $ | — | ||||||
Accrued deferred offering costs | $ | 4.1 | $ | — | $ | — | ||||||
The accompanying notes form an integral part of these consolidated financial statements.
Gates Industrial Corporation plc
Consolidated Statements of Shareholders’ Equity
(dollars in millions) | Share capital | Additional paid-in-capital | Accumulated other comprehensive loss | Retained (deficit) earnings | Total shareholders’ equity | Non- controlling interests | Total equity | |||||||||||||||||||||
As of January 3, 2015 | $ | 2.4 | $ | 1,598.5 | $ | (347.8 | ) | $ | (96.9 | ) | $ | 1,156.2 | $ | 428.2 | $ | 1,584.4 | ||||||||||||
Net income | — | — | — | 24.9 | 24.9 | 26.0 | 50.9 | |||||||||||||||||||||
Other comprehensive loss | — | — | (412.1 | ) | — | (412.1 | ) | (19.8 | ) | (431.9 | ) | |||||||||||||||||
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Total comprehensive (loss) income | — | — | (412.1 | ) | 24.9 | (387.2 | ) | 6.2 | (381.0 | ) | ||||||||||||||||||
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Other changes in equity: | ||||||||||||||||||||||||||||
—Issue of shares | 0.1 | 12.1 | — | — | 12.2 | — | 12.2 | |||||||||||||||||||||
—Buy-back of shares | — | (1.5 | ) | — | — | (1.5 | ) | — | (1.5 | ) | ||||||||||||||||||
—Share-based compensation (net of tax benefit of $2.3) | — | 6.6 | — | — | 6.6 | — | 6.6 | |||||||||||||||||||||
—Dividends paid tonon-controlling interests | — | — | — | — | — | (28.1 | ) | (28.1 | ) | |||||||||||||||||||
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As of January 2, 2016 | 2.5 | 1,615.7 | (759.9 | ) | (72.0 | ) | 786.3 | 406.3 | 1,192.6 | |||||||||||||||||||
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Net income | — | — | — | 57.7 | 57.7 | 26.6 | 84.3 | |||||||||||||||||||||
Other comprehensive loss | — | — | (156.0 | ) | — | (156.0 | ) | (16.9 | ) | (172.9 | ) | |||||||||||||||||
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Total comprehensive (loss) income | — | — | (156.0 | ) | 57.7 | (98.3 | ) | 9.7 | (88.6 | ) | ||||||||||||||||||
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Other changes in equity: | ||||||||||||||||||||||||||||
—Issue of shares | — | 1.1 | — | — | 1.1 | — | 1.1 | |||||||||||||||||||||
—Buy-back of shares | — | (2.0 | ) | — | — | (2.0 | ) | — | (2.0 | ) | ||||||||||||||||||
—Share-based compensation (net of tax benefit of $0) | — | 4.2 | — | — | 4.2 | — | 4.2 | |||||||||||||||||||||
—Dividends paid tonon-controlling interests | — | — | — | — | — | (38.9 | ) | (38.9 | ) | |||||||||||||||||||
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As of December 31, 2016 | 2.5 | 1,619.0 | (915.9 | ) | (14.3 | ) | 691.3 | 377.1 | 1,068.4 | |||||||||||||||||||
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Net income | — | — | — | 151.3 | 151.3 | 31.4 | 182.7 | |||||||||||||||||||||
Other comprehensive income | — | — | 168.5 | — | 168.5 | 29.9 | 198.4 | |||||||||||||||||||||
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Total comprehensive income | — | — | 168.5 | 151.3 | 319.8 | 61.3 | 381.1 | |||||||||||||||||||||
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Other changes in equity: | ||||||||||||||||||||||||||||
—Issue of shares | — | 0.6 | — | — | 0.6 | — | 0.6 | |||||||||||||||||||||
—Buy-back of shares | — | (1.5 | ) | — | (0.1 | ) | (1.6 | ) | — | (1.6 | ) | |||||||||||||||||
—Share-based compensation (net of tax benefit of $0) | — | 4.5 | — | — | 4.5 | — | 4.5 | |||||||||||||||||||||
—Dividends paid tonon-controlling interests | — | — | — | — | — | (24.6 | ) | (24.6 | ) | |||||||||||||||||||
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As of December 30, 2017 | $ | 2.5 | $ | 1,622.6 | $ | (747.4 | ) | $ | 136.9 | $ | 1,014.6 | $ | 413.8 | $ | 1,428.4 | |||||||||||||
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The accompanying notes form an integral part of these consolidated financial statements.
Gates Industrial Corporation plc
Notes to the Consolidated Financial Statements
1. Background
Gates Industrial Corporation plc (the “Company”) is a public limited company that was organized under the laws of England and Wales on September 25, 2017. Following the completion of the initial public offering of the Company’s shares in January 2018, the Company undertook certain reorganization transactions (the “Transactions”) such that Gates Industrial Corporation plc now owns indirectly all of the equity interests in Omaha Topco Limited (“Omaha Topco”), which is incorporated in the Cayman Islands, and has become the holding company of the Gates business. The previous owners of Omaha Topco were The Blackstone Group L.P. (“Blackstone” or our “Sponsor”), various investment funds managed by Blackstone, and Gates management equity holders. These equity owners of Omaha Topco received depositary receipts representing ordinary shares in the Company in consideration for their equity in Omaha Topco, at a ratio of 0.76293 of our ordinary shares for each outstanding ordinary share of Omaha Topco. All share and per share amounts in these consolidated financial statements have been retrospectively adjusted to reflect the effect of the split. The reorganization was accounted for as a transaction between entities under common control and the net assets were recorded at the historical cost basis, in a manner similar to a pooling of interests, when Omaha Topco was contributed into the Company. Gates Industrial Corporation plc had no significant business transactions or activities prior to the date of the Transactions, and as a result, the historical financial information reflects that of Omaha Topco.
In these consolidated financial statements and related notes, all references to the “Gates”, “Group”, “we”, “us”, “our” refer, unless the context requires otherwise, to the Company and its subsidiaries.
Gates manufactures a wide range of power transmission and fluid power products and components for a large variety of industrial and automotive applications, both in the aftermarket andfirst-fit channels, throughout the world. Gates is comprised of two operating segments: Power Transmission and Fluid Power.
2. Significant accounting policies
A. Basis of preparation
The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars unless otherwise indicated.
The accounting policies used in preparing these consolidated financial statements and related notes are the same as those applied in the prior period, except for the adoption of the following new Accounting Standard Updates (“ASU”) at the beginning of Fiscal 2017:
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU2017-04 which eliminates step 2 of the Goodwill impairment test. Instead, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value (but the loss recognized may not exceed the total amount of goodwill allocated to that reporting unit). We have early adopted this pronouncement on a prospective basis.
Adoption of the above new ASUs did not have a significant impact on Gates’ results or financial position during Fiscal 2017.
Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.
B. Accounting periods
The Company prepares its annual consolidated financial statements to the Saturday nearest December 31. Accordingly, the consolidated balance sheets are presented as of December 30, 2017 and December 31, 2016 and the related consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity are presented for the years ended December 30, 2017 (“Fiscal 2017”), December 31, 2016 (“Fiscal 2016”) and January 2, 2016 (“Fiscal 2015”).
C. Basis of consolidation
The consolidated financial statements include the results, cash flows and assets and liabilities of Gates and its majority-owned subsidiaries, and Gates’ share of the results of its equity method investees.
Gates consolidates entities in which it has a controlling interest or when it is considered the primary beneficiary of a variable interest entity. The consolidated financial statements reflect the assets, liabilities, revenues and expenses of consolidated subsidiaries and thenon-controlling parties’ ownership interest is presented as anon-controlling interest. Intercompany transactions and balances, and any unrealized profits or losses arising from intercompany transactions, are eliminated on consolidation.
The results of a subsidiary acquired during the period are included in Gates’ results from the effective date of acquisition. The results of a subsidiary sold during the period are included in Gates’ results up to the effective date of disposal.
D. Foreign currency transactions and translation
At an entity level, transactions denominated in currencies other than the entity’s functional currency (foreign currencies) are translated into the entity’s functional currency at the exchange rates prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing on the reporting date. Exchange differences arising from changes in exchange rates are recognized in net income for the period. The net foreign currency transaction loss included in operating income from continuing operations during Fiscal 2017 was $7.6 million, compared with a gain of $3.3 million in Fiscal 2016 and a loss of $4.0 million in Fiscal 2015. We also recognized net financing-related foreign currency transaction losses within other (expense) income of $57.4 million during Fiscal 2017, compared with a loss of $1.9 million in Fiscal 2016 and a gain of $62.7 million in Fiscal 2015.
On consolidation, the results of operations of entities whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the weighted average exchange rate for the period and their assets and liabilities are translated into U.S. dollars at the exchange rate prevailing on the balance sheet date. Currency translation differences are recognized within other comprehensive income (“OCI”) as a separate component of accumulated other comprehensive income. In the event that a foreign operation is sold, or substantially liquidated, the cumulative currency translation differences that are attributable to the operation are reclassified to net income.
In the statement of cash flows, the cash flows of operations whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the weighted average exchange rate for the period.
E. Net sales
Gates derives its net sales primarily from the sale of a wide range of power transmission and fluid power products and components for a large variety of industrial and automotive applications, both in the aftermarket andfirst-fit channels, throughout the world.
Revenue from the sale of goods is measured at the invoiced amount net of estimated returns, early settlement discounts and rebates and is recognized only when: (i) there is persuasive evidence of a sales agreement, typically in the form of a written sale or purchase agreement approved by both parties, (ii) the delivery of goods has occurred—this generally occurs upon passage of title which, depending on the arrangement with the customer, is typically upon release of the goods from the physical control of the Company or upon receipt of the goods by the customer and, where there are contractual acceptance provisions, when the customer has accepted the goods (or the right to reject them has lapsed); (iii) the sales price is fixed or determinable; and (iv) the collectability of revenue is reasonably assured.
Where a customer has the right to return goods, future returns are estimated based on historical returns profiles. Settlement discounts that may apply to unpaid invoices are estimated based on the settlement histories of the relevant customers. Rebates that may apply to issued invoices are estimated based on expected total qualifying sales to the relevant customers.
F. Selling, general and administrative expenses
Shipping and handling costs
Shipping and handling costs billed to customers in relation to goods sold are included in net sales and the related costs are included in selling, general and administrative expenses. During Fiscal 2017, Gates’ continuing operations recognized shipping and handling costs of $147.0 million, compared with $132.8 million in Fiscal 2016 and $133.9 million in Fiscal 2015.
Research and development costs
Research and development costs are charged to net income in the period in which they are incurred. Gates’ research and development expense for its continuing operations was $68.6 million in Fiscal 2017, compared with $68.5 million in Fiscal 2016 and $67.4 million in Fiscal 2015. These costs primarily related to product development and also to technology to enhance manufacturing processes.
G. Restructuring expenses
Restructuring expenses are incurred in major projects undertaken to rationalize and improve the cost competitiveness of Gates. Restructuring costs incurred during the periods presented are analyzed in note 16.
Liabilities in respect of termination benefits provided to employees who are involuntarily terminated under the terms of aone-time benefit arrangement are recognized over the future service period when those employees are required to render services to the entity beyond the minimum retention period. If employees are not required to render service until they are terminated or if they will not be retained to render service beyond 60 days or a longer legal notification period, the liability is recognized on the communication date.
Termination benefits that are covered by a contract or an ongoing benefit arrangement are recognized when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. Benefits that are offered for a short period of time in exchange for voluntary termination are recognized when the employees accept the offer.
Restructuring costs other than termination benefits and lease exit costs are recognized only when the Company has incurred a related liability.
H. Business combinations
A business combination is a transaction or other event in which control is obtained of one or more businesses. Business combinations are accounted for using the purchase method.
Goodwill arising in a business combination is measured as the excess of the aggregate of the consideration transferred, the amount of anynon-controlling interest in the acquired business and, in a business combination achieved in stages, the fair value at the acquisition date of the previously held equity interest in the acquired business, over the net identifiable assets and liabilities of the acquired business at the acquisition date. If the net identifiable assets and liabilities of the acquired business exceed the aggregate of the consideration transferred, the amount of anynon-controlling interest in the acquired business and the fair value at the acquisition date of any previously held equity interest, that excess is recognized as a gain in net income.
Consideration transferred in a business combination is measured at the aggregate of the fair values of the assets acquired, liabilities assumed, debt issued and equity instruments issued in exchange for control over the acquired business. Acquisition-related costs are recognized in net income.
Anynon-controlling interests in the acquired business are measured at their fair value at the acquisition date.
Identifiable assets and liabilities of the acquired business are measured at their fair value at the acquisition date.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, Gates reports provisional amounts for the items for which the accounting is incomplete. If, within a maximum of one year after the acquisition date, new information is obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date, adjustments are made prospectively to the amounts recognized, or new assets and liabilities recognized and recorded in goodwill. Otherwise, any adjustments to the provisional amounts are recognized in net income.
I. Goodwill
Goodwill arising in a business combination is allocated to the reporting unit that is expected to benefit from the synergies of the acquisition.
Where a number of reporting units are acquired in a business combination, the goodwill attributable to each of them is determined by allocating the purchase consideration in proportion to their respective business enterprise values and comparing the allocated purchase consideration with the fair value of the identifiable assets and liabilities of the reporting unit. Goodwill is not amortized but is tested at least annually for impairment or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable and is carried at cost less any recognized impairment.
To identify a potential impairment of goodwill, the fair value of the reporting unit to which the goodwill is allocated is compared with its carrying amount, including goodwill. Gates calculates fair values using a weighted blend of income and market approaches. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. If the fair value is lower than the carrying amount, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the amount of goodwill allocated to that reporting unit.
The process of evaluating the potential impairment of goodwill is subjective and requires estimates and assumptions at various points during the analysis. Gates’ estimated future cash flows are based on assumptions that are consistent with its annual planning process and include estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ from those estimates.
We base our fair value estimates on assumptions we believe to be reasonable at the time but that are unpredictable and inherently uncertain. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of Gates’ reporting units tested. Changes in assumptions or circumstances could result in an additional impairment in the period in which the change occurs and in future years.
J. Other intangible assets
Other intangible assets are stated at cost less accumulated amortization and any recognized impairment.
(i) Assets acquired in business combinations
An acquired intangible asset with a finite useful life is amortized on a straight-line basis so as to charge its cost, which represents its fair value at the date of acquisition, to net income over the Company’s expectation of its useful life, as follows:
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Acquired brands and trade names are considered to have an indefinite useful life and are not amortized but are tested at least annually for impairment and are carried at cost less any recognized impairment.
(ii) Computer software
Computer software that is not integral to an item of property, plant and equipment is recognized separately as an intangible asset. Computer software is amortized on a straight-line basis over its estimated useful life, which ranges from 2 to 6 years.
K. Property, plant and equipment
Property, plant and equipment is recorded at cost less accumulated depreciation and any recognized impairment losses. Major improvements are capitalized. Expenditures for repairs and maintenance that do not significantly extend the useful life of the asset are expensed as incurred.
Land and assets under construction are not depreciated. Depreciation of property, plant and equipment, other than land and assets under construction, is generally expensed on a straight-line basis over their estimated useful lives. The Company’s estimated useful lives of items of property, plant and equipment are in the following ranges:
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L. Impairment of long-lived assets and intangible assets
Long-lived assets and intangible assets to be held and used, except intangible assets with indefinite useful lives, are reviewed for impairment when events or circumstances indicate that the carrying amount of the asset or asset group may not be recoverable.
Intangible assets with indefinite useful lives are tested at least annually for impairment or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. A long-lived asset, or finite lived intangible asset or asset group is considered to be impaired when the undiscounted expected future cash flows from the asset or asset group are less than its
carrying amount. In that event, an impairment loss is recognized to the extent that the carrying amount of the asset or asset group exceeds its fair value. Fair value is estimated as the present value of the expected future cash flows from the asset or asset group discounted at a rate commensurate with the risk involved. An impairment loss for an asset group is allocated to the long-lived and intangible assets of the group on a pro rata basis using the relative carrying amounts of those assets, with the limitation that the carrying amount of an individual asset is not reduced below its fair value.
M. Inventories