Gates Industrial Corporation plc is a public limited company that was incorporated under the Companies Act 2006 on September 25, 2017 and is registered in England and Wales. It is the financial reporting entity following the completion of certain reorganization transactions completed prior to its initial public offering (“IPO”) in January 2018, as described further in note 1 to the accompanying consolidated financial statements.
Certain monetary amounts, percentages and other figures included elsewhere in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
All amounts in this annual report are expressed in United States of America (the “U.S.”) dollars, unless indicated otherwise.
As used in this annual report, unless otherwise noted or the context requires otherwise:
“pre-IPO owners” refer to our Sponsor together with the other owners of Omaha Topco, prior to the IPO.
PART I
Item 1. Business
We are a global manufacturer of innovative, highly engineered power transmission and fluid power solutions. We offer a broad portfolio of products to diverse replacement channel customers, and to original equipment (“first-fit”) manufacturers as specified components, with the majority of our revenue coming from replacement channels. Our products are used in applications across numerous end markets, which includeincluding off-highway end markets such as construction and agriculture, on-highway end markets such as transportation, diversified industrial, energy, automotive, transportation, general industrial, consumer products and many others. Our net sales have historically been, and remain, highly correlated with industrial activity and utilization, and not with any single end market given the diversification of our business and high exposure to replacement markets. Key indicators of our performance include industrial production, industrial sales and manufacturer shipments. We sell our products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation; this reputation has been built for over a century110 years since Gates’ founding in 1911.
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, and often preventive, replacement cyclecycles that drivesdrive 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.
Gates’ business is well-balanced and diversified across products, channels and geographies, as highlighted in the following charts showing breakdowns of our Fiscal 20192020 net sales of $3,087.1$2,793.0 million.
Our History and Recent Developments
On October 1, 1911, Charles Gates, Sr. purchased the Colorado Tire and Leather Company, a manufacturer of steel-studded bands of leather that attached to tires to extend their mileage. In 1917, the Company commercialized the V-belt, which used rubber and woven threading instead of rope belts, which were more commonly used at that time. In 1963, we built the first of many international facilities in Erembodegem, Belgium, followed by Jacarei, Brazil, in 1973. In 1986, we acquired the Uniroyal Power Transmission Company, which included an interest in the Unitta joint venture that lay the groundwork for Gates’ growth in the Asia-Pacific region. We have financial and operational control over the joint venture, and as such, consolidate it in our financial statements.
In 1996, Gates was acquired by a publicly held engineering firm based in the United Kingdom (“U.K.”), Tomkins plc, which was itself acquired by Onex Partners and the Canada Pension Plan Investment Board, who proceeded to divest certain of
Tomkins plc’s businesses under a new parent entity, Pinafore Holdings B.V. Gates was acquired by funds affiliated with The Blackstone Group L.P. in July 2014 and in 2015 established a new executive leadership team with Ivo Jurek as Chief Executive Officer.
We have developedmaintain an active acquisition pipeline and the organizational capability to integrate acquired companies.pipeline. In 2018, we acquired Rapro, based in Turkey, and in 2017 we closed two transactions, Techflow Flexibles in the U.K. and Atlas Hydraulics in North America. All three of our recentthese acquisitions have been focused on expanding our presence in industrial markets with new products, capabilities, capacity and geographic reach. 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.
Our Solutions
We operate our business on a product-line basis through our two reporting segments - Power Transmission and Fluid Power. See note 54 of our audited consolidated financial statements included elsewhere in this report for additional information.
We sell our products under the Gates brand in all of the geographies and end markets we serve. Our power transmission segment includes elastomer drive belts and related components used to efficiently transfer motion in a broad range of applications. Power transmission products represented approximately 63%64% of our total net sales for Fiscal 2019.2020. Our fluid power segment includes hoses, tubing and fittings designed to convey hydraulic fluid at high pressures in both mobile and stationary applications, and other high-pressure and fluid transfer hoses used to convey various fluids. Our fluid power products represented approximately 37%36% of our net sales for Fiscal 2019.2020.
Our power transmission and fluid power products are often critical to the functioning of the equipment, process or system in which they are components, such that the cost of downtime or potential equipment damage is high relative to the cost of our products. Our products are therefore replaced not only as a result of normal wear and tear, but also preemptively as part of ongoing maintenance to the broader system.
We have a broad portfolio of both power transmission and fluid power products in the end markets we serve. We have a long history of focusing on customer engagement and training, driving product innovation and providing best-in-class order fulfilment services.
Power Transmission. Our Power Transmission solutions enable and control motion. They are used in applications in which belts, chains, cables, geared transmissions or direct drives transfer power from an engine or motor to another part or system. Belt-based power transmission drives typically consist of either a synchronous belt or an asynchronous belt (V-belt, CVT belt or Micro-V® belt) and related components (sprockets, pulleys, water pumps, tensioners or other accessories). Within our Power Transmission segment, we offer solutions across the following key application platforms:
•Stationary drives: fixed drive systems such as those used in a factory driving a machine or pump, or on a grain elevator driving the lift auger;
auger or in a distribution center driving a conveyor belt or robotic picking machine;•Mobile drives: drives on a piece of mobile machinery such as a combine harvester or a road compactor, or in applications such as the brush head of a vacuum cleaner;
•Engine systems: synchronous drives and related components for cam shafts and auxiliary drives and asynchronous accessory drives for air conditioning (“A/C”) compressors, power steering, alternators and starter/generator systems;
•Personal mobility: drives on motorcycles, scooters, bicycles, both traditional and electric, as well as on snowmobiles and other power sports vehicles that are used to transfer power between the power source and the drive wheel(s) or track; and
•Vertical lift: elevators, cargo lifts and other applications in which a belt, cable, chain or other lifting mechanism is used to carry load.
Customers choose power transmission solutions based on a number of factors, including application requirements such as load, speed, gear ratio, temperature, operating environment, ease of maintenance, noise, efficiency and reliability, as well as the support they receive from their suppliers, including application-specific engineering. Belt-based drive systems have many advantages over other alternatives, as they are typically clean, low-maintenance, lubrication-free, quiet with low-vibration, light-weight,lightweight, compact, energy-efficient, durable and reliable. In applications where these advantages are valued, customers typically choose belts over other forms of power transmission solutions.
Our belts are classified by their general design into asynchronous and synchronous belts; in addition, we also manufacture metal drive productscomponents and assemble certain product kits for the automotive replacement kits.channel.
Asynchronous Belts. Asynchronous belts are our highest-volume products and are used in a broad range of applications. Asynchronous belts are made of proprietary rubber formulations, textiles and embedded cords for reinforcement. We were a pioneer in the design and manufacturing of V-belts, which draw their name from the shape of their profile. We also manufacture “ribbed” V-belts, which are belts with lengthwise V-shaped grooves, which we market under the Micro-V® name. This design results in a thinner belt for the same drive surface, making it more flexible and offering improved efficiency through lower friction losses. Belt starter/generator (“BSG”) belts are used in start/stop accessory drive systems on automobiles and other engine applications used to improve fuel economy. The demanding BSG system functionality, including engine starting, torque boosting and energy recuperation, requires a high-performance belt construction. Continuously-variable transmission (“CVT”) systems found in scooters, power sports vehicles and other applications use a specialized V-belt knows as a CVT belt.
In industrial end markets, asynchronous belts have a wide variety of applications, including use in pump drives, manufacturing lines, HVAC systems, industrial engines, truck, bus and marine engines, forestry and mining equipment and many other applications. Continuously-variable transmission (“CVT”) systems found in scooters, power sports vehicles and other applications use a specialized V-belt known as a CVT belt. In automotive applications, our asynchronous belts perform functions that include transferring power from the crankshaft to accessory drive components such as the alternator, A/C compressor, power steering system, water pump and, in some vehicles, a BSG system.belt/starter generator system used in start/stop accessory drive systems to improve fuel economy.
During Fiscal 2018, Gates introduced a newthe Micro-V® platform for engine accessory drive systems. The combination of newly developed material compounds and product design reduces belt weight and results in lower bending stiffness. These improvements enable tighter pulley configurations and reduced drive bending losses as compared to existing belt technologies; lower losses result in reduced energy consumption, CO2CO2 emissions and heat generation.
Synchronous Belts. Synchronous belts, also known as timing belts, are non-slipping mechanical drive belts. They have teeth molded onto the inner surface and they run over matching toothed pulleys or sprockets. Synchronous belts experience no slippage and are often used to transfer motion for indexing or timing purposes, as well as for linear positioning and positive drive conveying. They are typically used instead of chains or gears and we believe have a number of advantages over these alternatives, including less noise, no need for lubrication, improved durability and performance and a more compact design. Our synchronous belts are made of a flexible polymer over fabric reinforcement and are often built with Kevlar, aramid and carbon fibers.
Examples of industrial applications include use in HVAC systems, food processing and bottling plants, mining and agricultural equipment, automatic doors and robotics. Our synchronous belts are also utilized in personal mobility equipment, including both traditional and electric motorcycles, bicycles and scooters, applications in which clean, quiet performance is often valued. In automotive applications, our synchronous belts are used to synchronize the rotation of the engine crankshaft with the camshaft due to engine combustion in a valve train system, as well as in electric power steering and parking brake systems which are present in gasoline-powered, hybrid and electric vehicles.
During Fiscal 2019, Gates launched a new high-torque synchronous belt for industrial applications, the PowerGrip® GT®4. This new belt leverages Gates’ materials science and process engineering capabilities, utilizing a belt construction that replaces chloroprene with an advanced ethylene elastomer formulation that is more environmentally friendly. It has the highest power-carrying capacity in its segment, a wider operating temperature range and increased chemical resistance, allowing for narrower drives and a broad range of applications to be served with both first-fit and replacement channel customers.
Metal Drive Components. We manufacture and sell the tensioners and idlers used in belt drive systems. These products are designed and engineered to work efficiently with our belts. Tensioners are devices that maintain a constant tension in the belt drive system, thereby ensuring proper function and preventing loss of power or system failure. Tensioners typically employ a spring that places pressure along the belt for an intricate hold, while still allowing enough movement for vibration and to prevent stretching. Idlers, which sometimes also perform as tensioners, are used to take up extra belt length.
Kits. Our kits for the automotive replacement marketchannel include all of the parts needed by an automotive service shop to perform a replacement of one of our products. Kits are created for specific makes and models and typically include belts, tensioners and idlers, and will sometimes also include water pumps, as they are often replaced whensimultaneously with a timing belt is replaced.belt. Our kits are convenient for service technicians as they eliminate the need for more complicated product sourcing. On a comparable quantity basis, kits typically sell at a premium to a loose belt and single tensioner.the individual related components.
Our power transmission products are used in a broad range of applications in end markets including off-highway end markets such as construction and agriculture, on-highway end markets such as transportation, automotive,diversified industrial, energy, general industrialautomotive and consumer products. The majority of our Fiscal 20192020 net sales came from the replacement markets,channels, which provide high-margin, recurring revenue streams and are driven by attractive market trends. The bulk of our power transmission replacement business resides in developed regions, in which a large, aging installed base of equipment follows a natural maintenance cycle and is served by well-developed distribution channels. For example, a combine harvester in North America hascan have over 25 high-performance belts that are typically replaced at regular intervals, depending on wear and tear, with end users having access to replacement parts through an established channel. Similarly, in the North American automotive replacement market, maintenance intervals are well defined, and miles driven per vehicle areand the average vehicle age have generally been increasing, leading to more wear and tear on vehicles. A smaller portion of our power transmission replacement business is generated in emerging markets, which generally have a smaller base of installed equipment and relatively immaturenascent distribution channels. As they continue to develop, these replacement markets represent a significant long-term opportunity for growth.
In addition to our power transmission replacement business, we also serve a wide variety of blue-chip first-fit customers across all of our end markets. The majority of our automotive first-fit revenues in power transmission tend to come from emerging markets. These markets generally are higher-growth and result in higher-margin business than our developed regions. Our selective first-fit presenceparticipation in these markets serves to further strengthen our brand strongly positioning us toand reinforces the strong position from which we serve the growing base of installed equipment, as the nascent replacement channels continue to develop.
Fluid Power. Our Fluid Power solutions are used in applications in which hoses and rigid tubing assemblies either transfer power hydraulically or convey fluids, gases or granular materials from one location to another. Within our Fluid Power segment, we offer solutions across the following key application platforms:
•Stationary hydraulics: applications within stationary machinery, such as an injection molding machine or a manufacturing press;
•Mobile hydraulics: applications used to power various implements in mobile equipment used in construction, agriculture, mining and other heavy industries;
•Engine systems: applications for engine systems such as coolant, fuel, A/C,in thermal management, turbocharger, air intake and selective catalyticother systems for internal combustion, hybrid and electric passenger and commercial vehicles, as well as in diesel engine systems for reduction for dieselof emissions; and
•Other industrial: applications in which hoses are used to convey fluids, gases or granular material across several industries such as food and beverage, other process industries, and oil and gas drilling and refining, food and beverage and other process industries.
refining.Customers choose fluid power solutions based on a number of factors, including application-specific product performance parameters such as pressure and temperature ratings, corrosion and leak resistance, weight, flexibility, abrasion resistance and cleanliness, as well as compliance with standards and product availability. Attributes associated with the supplier, including brand, global footprint and reputation for reliability and quality, are also considered.
Hydraulics. Our hydraulics product line is comprised of hoses, tubing and fittings, as well as assemblies consisting of these products. Our hydraulic products are key components of hydraulic systems in both stationary and mobile equipment applications. We provide a full selection of hose sizes and construction types for use in a wide variety of working requirements and conditions. Hydraulic hoses are made of synthetic rubber and reinforced with steel wire or a textile-based yarn, and typically operate at very high pressures, often in extreme environmental conditions. Hoses are designed for use in specific mechanical applications and require high levels of quality and durability.
Our hydraulic fittings and tubing are engineered to match the product performance of our hydraulic hoses. The high-pressure nature of hydraulic systems requires these products have high levels of performance similar to those found in our hydraulic hoses. The ultimate performance of a hydraulic assembly, in which our products function as part of a hydraulic circuit, depends not only on how well the components are made, but also on how well they complement each other. In order to ensure compatibility with numerous applications, our hydraulic fittings are manufactured in a wide assortment of sizes, crimping systems and materials, and are protected by a range of patents. 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.
During Fiscal 2018, Gates introduced a new premium product family consisting of hydraulic hose familyhoses that isare lighter weight and more flexible. Made with high-performance reinforcement and a robust, abrasion-resistant cover, the MXT line of hydraulic hose is acomprised of universally applicable, high-performance productproducts that meetsmeet the needs of diversifieda wide range of applications. During Fiscal 2019, we launched the MXG line of hydraulic hose, a more flexible, lighter-weightlight-weight solution with increased durability and temperature performance, which is designed to replace conventional spiral hoses typically used in the most demanding applications. Also in Fiscal 2019, we launched a new, smart e-crimper, which is a machine used to attach fittings to hydraulic hoses. In addition to convenient, web-enabled access to training content and product crimp specs, this new crimper can be used with Gates’ intuitive mobile eCrimp app, which underwent a comprehensive update in Fiscal 2020.
Engine Hose. Our engine hose products perform a variety of conveyance functions in engine applications in gasoline-powered,internal combustion, hybrid and electric passenger and commercial vehicles. Engine systemIn internal combustion applications, for which Gates provides hose solutions includefor coolant (radiator, heater), air system (turbocharger, intake, vacuum, crankcase ventilation), fuel, oil (transmission oil cooling, power steering) and emissions/emissions / Diesel Exhaust Filtration (“DEF”) systems. In electric applications, Gates offers hose solutions for the thermal management system regulating the battery, inverter, motor(s) and passenger compartment.
Industrial Hose. Our industrial hoses are capable of transferring a wide range of substances-chemicals,substances - chemicals, food, and beverages, petroleum, fuels, bulk materials, water, steam and air-toair - to meet the requirements of diverse applications, including manufacturing, mining, oil and gas drilling, marine, agriculture, industrial cleaning and construction. Our application engineering teams work with customers to assist them in selecting the appropriate hose solution to safely meet their operational needs. We leverage our materials science expertise to enable hose performance at varying pressures and levels of resistance to chemicals, oil, abrasion, ozone, flame and both hot and cold temperatures. For performance in extreme environments, many of our industrial hoses feature both crush-resistant and flexible designs. Gates industrial hoses are highly engineered to meet or exceed a multitude of industry standards and certifications, and are offered in a range of diameters, lengths and colors to allow customers to differentiate the hoses in applications. We also offer a wide range of couplings to provide complete assembly solutions to our customers.
Our fluid power products are used in numerous applications, including off-highway end markets such as construction and agriculture, on-highway end markets such as transportation, diversified industrial, energy, automotive energy and general industrial.consumer products. The largest portion of our Fiscal 20192020 fluid power revenue came from replacement markets. Within these replacement markets, the majority of our revenue came from industrial applications. Approximately 15%18% of our Fiscal 20192020 fluid power revenue came from products sold into the automotive end market, almost all of which was served through the higher-margin replacement channel.
Our Diverse Markets
We participate in many sectors of the industrial and consumer markets. Our products play essential roles in a diverse range of applications across a wide variety of end markets ranging from harsh and hazardous industriesoff-highway applications such as agriculture and construction, and diversified industrial applications such as manufacturing and energy,logistics, to everyday consumer applications such as printers, power washers, automatic doors and vacuum cleaners. Virtually every form of transportation, ranging from internal combustion and electric trucks, buses, and automobiles, to personal mobility vehicles, such asincluding motorcycles, bicycles, and snowmobiles, uses our products.
Our net sales have historically been, and remain, highly correlated with industrial activity and utilization, and not with any single end market given the diversification of our business and high exposure to replacement markets. Key indicators include industrial production, industrial sales and manufacturer shipments.
Our products are sold in over 120 countries across our four commercial regions: (1) the Americas; (2) Europe, Middle East & Africa (“EMEA”); (3) Greater China; and (4) East Asia & India. We have a long-standing presence in each of these regions.
Our commercial capabilities are complemented by our global manufacturing footprint, which frequentlygenerally allows us to manufacture products in close proximity to our customers. We have power transmission and fluid power operations in each commercial region and typically manufacture products for both first-fit customers and replacement customers in the same factory, which provides improved factory loading and demand leveling, as well as optimization of capital expenditures.
Our Channels
We sell our power transmission and fluid power products both as replacement components and as specified components on original equipment to customers worldwide. During the year ended December 28, 2019,Fiscal 2020, approximately 63%64% of our net sales were generated from replacement marketschannels and 37%36% from first-fit marketschannels globally. Our mix of replacement channel sales to first-fit sales varies by region based on our market strategy and the maturity of the equipment fleet and replacement channel. For example, in emerging markets such as China, our business is characterized by a higher first-fit presence, given the relatively underdeveloped replacement channels and lower average age of cars.channels. We believe that ultimately our first-fit presence in these emerging markets will allow us to better develop the replacement channels as they mature over time. By contrast, in North America and EMEA, where there are long-established replacement markets, approximately 68%70% and 71%72% of our Fiscal 20192020 net sales, respectively, were derived from these higher-margin replacement channels. In the vast majority of the applications we service,serve, we do not need to have been the first-fit provider to serviceserve these applications in the replacement markets.
Replacement. The majority of our sales are generated from customers in replacement channels, who primarily serve a large base of installed equipment that follows a natural maintenance cycle. Our ability to help replacement channel partners maximize revenue is an important part of our value proposition. These customers miss sales opportunities if a required product cannot be obtained quickly, either from a catalogshort-lead time order or on-hand inventory.
In addition to our products, we offer digital tools and other content to distributors, installers and end users of equipment containing our products. We also assist with customer training on product installation and early identification of wear-and-tear on components, which helps drive sales for our channel customers while mitigating the risk of equipment failure for end users.
First-Fit. We work closely with our first-fit customers by providing application engineering expertise to assist them inwith equipment design and selecting the right products for their applications.to optimize performance. In engine systems, we provide application engineering for cam drive and accessory drive applications, and complete all design and manufacturing of the system components in-house. Close interactions between our R&D organization and customer technical teams provide input into our innovation and product development processes. We selectively participate in first-fit projects, focusing on opportunities where we are able to differentiate with technology and innovative solutions.
Customers
We maintain long-standing relationships with many customers, who range from local distributors with one location to large, global manufacturers of equipment. No single customer accounted for more than 10% of our Fiscal 20192020 net sales.
Sales and Marketing and Distribution Organization
Our sales and distribution operations are structured to serve our customers efficiently across the globe. We have field representatives who possess local knowledge of product and application requirements, allowing us to meet our customers’ product availability requirements with short lead times. Our global sales and service support team helps reinforce customer and distributor relationships by focusing on end markets and customers.
Manufacturing
We have a global, “in region, for region” manufacturing footprint and regional service model that enable us to operate efficiently and effectively in proximity to our customers. We operate 6348 manufacturing facilities and service centers as well as several major technical centers giving us a presence in 2930 countries throughout the world. Our in-country deployment of manufacturing and technical resources enables us to meet customer needs rapidly and satisfy regional variations in product preference, while our scale allows us to service global customers on a world-wide basis.
Competition
We operate in competitive markets and industries that are also very fragmented. We offer our products and solutions across numerous and varied end markets and geographies through over 120 locations in 2930 countries. Consequently, we have many competitors across our various markets and product offerings. These competitors and the degree of competition vary by product line, geographic scope, end market and channel. Although each of our markets and product offerings has many competitors, no single competitor competes with us with respect to all of our products, solutions, channels and end markets. Our global presence makesand the importance of product availability make it difficult for smaller regional and low-cost country manufacturers to penetrate our markets. We differentiate ourselves on the basis of product performance and quality, breadth of portfolio, customer support and training, service level, fill rates and product availability.
Research, Development and Intellectual Property
Applied R&D is important to our businesses and integral to our leading market positions. We have engineering teams in the U.S., Canada, the U.K., Germany, Spain, Poland, Turkey, Japan, China, Brazil, India, Mexico, Korea and Thailand that focus on the introduction of new and improved products with a particular emphasis on energy efficiency, and safety, the application of technology to reduce unit and operating costs and improving services to our customers.
As of December 28, 2019,January 2, 2021, we held more than 2,5002,400 patents and patent applications and 3,200 trademarks in various jurisdictions.jurisdictions, and have elected to protect a variety of technologies and processes as trade secrets. While no individual patent or group of patents, taken alone, is considered critical to our business, collectively our patents and trademarks provide meaningful protection for our products and technical innovations.
Materials and Suppliers
We use a wide variety of materials, resulting in a highly diversified mix of inputs, which are sourced from a variety of suppliers around the world. Generally, we seek to obtain materials in the regions where our products are manufactured to minimize transportation and other costs. As of December 28, 2019,January 2, 2021, we had not experienced any significant shortages of raw materials and normally do not carry inventories of raw materials in excess of those required to meet our production schedules.
We continually seek to manage commodity and raw material costs using various strategies, including working with our customers and suppliers to mitigateon pricing and costs, exploring material substitution opportunities, combining purchase requirements across regions and changing suppliers when appropriate.
EnvironmentalGovernment Regulation
Our operations, products and properties are subject to extensive U.S. and foreign federal, state, local, and provincial laws and regulations relating to environmental, health, safety and safetyenvironment (“EHS”HSE”) protection, including laws and regulations governing air emissions, wastewater discharges, waste management and disposal, substances in products, trade control laws, anti-corruption laws, data protection and privacy laws, and workplace health and safety, as well as the investigation and clean-up of contaminated sites. Under certain environmental laws, the obligation to investigate and remediate contamination at a facility may be imposed on current and former owners, lessees or operators or on persons who may have sent waste to that facility for disposal. We are currently performing environmental investigations and/or remediation at a number of former and current facilities in the U.S. and Canada and are incurring costs in relation to a number of offsite waste disposal sites. For more information, see “Item 1A. Risk Factors - Risks Related to Legal and Regulatory Matters”.
Human Capital
As of December 28, 2019,January 2, 2021, we employed approximately 14,70014,300 full time employees worldwide. Approximately 6,7006,500 of our employees wereare located in North America, 3,7003,600 in EMEA, 3,7003,600 in Greater China and East Asia & India, and 600 in South America. Approximately 67% of our work force consists of production employees, while approximately 24% of our global workforce was female and 76% male. Of approximately 1,400 managerial employees, 21% were female.
Some of our employees are members of labor unions, and over many years we have been able to maintain successful relationships with the unions and employment organizations. To date, employee relations have been flexible and constructive as we continue to pursue lean manufacturing improvements in our plants. Gates employs agency contractors, temporary employees and contract employees as a small percentage of our workforce. The number of associates in these categories typically varies with demand on our factories and distribution centers. Gates employs a small number of part-time associates across the globe.
Health and safety
We care about our employees and we believe that our commercial success is linked to a safe and healthy workforce. We are therefore committed to responsible business practices through the establishment, implementation and maintenance of the Gates Global HSE Standards Manual. We strive for zero injuries and an incident-free workplace and have achieved significant progress towards this goal through targeted risk reduction activities, improved case management, increased accountability to corrective action identification and closure, and more effective safety observation programs.
Demonstrating our commitment to safety, beginning in February 2020, we mobilized a centralized crisis response team that urgently developed and implemented our countermeasure actions across the globe for the novel coronavirus (“COVID-19”) pandemic. In addition to adhering to or exceeding local government mandates and guidance provided by health authorities, we proactively implemented quarantine protocols, social distancing policies, working from home arrangements, travel suspensions, frequent and extensive disinfecting of our workspaces, provision of personal protective equipment, mandatory temperature monitoring and periodic COVID-19 testing at our facilities.
Total rewards
Our compensation philosophy is to offer a compensation program that enables us to attract, motivate, reward and retain high-caliber employees who are capable of creating and sustaining value for our shareholders over the long-term and to design compensation and benefit programs that provide a fair and competitive compensation opportunity in order to appropriately reward employees for their contributions to our success. Globally, we offer the opportunity to earn short-term and long-term incentive awards to eligible employees, including a manufacturing incentive program to many of our production employees.
Employee development and training
Gates is committed to developing and unlocking the potential of our people and we make significant investments in training and professional development. Our learning and development framework supports the development of leadership and professional skills in three ways: on-the-job, learning from others, and participating in formal training programs. Some of the specific global and regional development experiences we offer include a global mentoring program that promotes a diverse and inclusive culture and knowledge transfer opportunities between our mentors and mentees; a structured succession planning process that identifies key talent and develops our employees to continue working toward their career goals and early career programs designed to develop talent in different areas of the business; for example, engineering, commercial and human resources. For our production employees, we provide skills-based training and certification opportunities.
Diversity, equity and inclusion
The Gates management team is committed to creating and sustaining a diverse workplace that understands and values individual differences across demographics, experiences and perspectives. We want to ensure that collaborative and respectful business practices in a performance-based, supportive environment enable every employee to realize his/her/their career ambitions. To that end, we have formed a Diversity, Equity & Inclusion (“DE&I”) Steering Committee, consisting of executive leadership, which works closely with our DE&I Leadership Council, consisting of representatives of relevant diversity groups across Gates’ businesses, to develop a DE&I strategy consistent with our corporate values while promoting a culture of inclusion, collaboration, tolerance and equal opportunity.
In 2020, to further develop our policies, programs and processes, we began a partnership with Catalyst, a global non-profit organization, to assess both quantitative and qualitative data and to help us ensure success in our initiatives around DE&I. We believe a diverse environment widens our talent pool as we strive to be an employer of choice for people from all backgrounds.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC.Securities and Exchange Commission (the “SEC”). Our SEC filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website, free of charge, at http://investors.gates.com as soon as reasonably practicable after they are filed with or furnished to the SEC.
We maintain an internet site at http://www.gates.com. Our website and the information contained on or connected to that site are not incorporated into this report.
Item 1A. Risk Factors
The risk factors noted in this section and other factors noted throughout this annual report, describe certain risks and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement and should be considered carefully in evaluating our company and our business.
Summary of Risk Factors
We operate in a changing global environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our business, financial condition and results of operations. The following is a summary of some of these risks and uncertainties. This summary should be read together with the more detailed description of each risk factor below.
Summary of Risks Related to Economic and Market Conditions
•Conditions in the global and regional economy and the major end markets we serve may materially and adversely affect our business should they deteriorate.
•The COVID-19 pandemic has caused severe disruption in the global economy and may continue to have an adverse impact on our business.
•We are subject to economic, political and other risks associated with international operations that could adversely affect our business and our strategy to capitalize on our global reach.
•We may be unable to obtain raw materials at favorable prices in sufficient quantities, or at the time we require them.
•We may experience adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key channel partners.
•We are exposed to exchange rate fluctuations in the international markets in which we operate.
•Terrorist acts, conflicts and wars may materially adversely affect our business.
Summary of Risks Related to Our Business and Industry
•We may not be able to successfully compete with our competitors, which could adversely affect our business.
•Pricing pressures from our customers may materially adversely affect our business.
•We are dependent on the continued operation of our manufacturing facilities and we may need to make investments in new or existing facilities or consolidate facilities to align with our strategies.
•We may not be able to accurately forecast demand or meet significant increases in demand for our products.
•We may not be able to maintain and enhance our strong brand on which we depend.
•We are dependent on market acceptance of new product introductions and innovations for continued revenue growth.
•We have taken, and continue to take, cost-reduction actions that may expose us to additional risk, and we may not be able to maintain the level of cost reductions that we have achieved.
•Longer lives of products used in our end markets may adversely affect demand for some of our replacement products.
•The development of the replacement market in emerging markets may limit our ability to grow in those markets.
•We may acquire businesses or assets that we may not be able to successfully integrate.
•We have investments in joint ventures that limit our ability to manage third-party risks associated with these projects.
•We are subject to liabilities with respect to businesses that we have divested in the past.
•Our insurance may not fully cover all future losses we may incur.
•If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, it may have a material adverse effect on our business.
•The loss or financial instability of any significant customer could adversely affect our business.
Summary of Risks Related to Legal and Regulatory Matters
•We are subject to risks from litigation, legal and regulatory proceedings and obligations.
•Our products could infringe on the intellectual property of others, adversely affecting our business.
•Failure to adequately protect or enforce our intellectual property rights could adversely affect our business.
•Failure to develop, obtain, enforce and protect intellectual property rights could adversely affect our business.
•We may not be able to protect or enforce our intellectual property rights in all jurisdictions throughout the world.
•We may be subject to recalls or product liability claims, or may incur costs related to product warranties.
•We are subject to anti-corruption laws in various jurisdictions, as well as other laws governing our international operations. If we fail to comply with these laws we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could materially adversely affect our business, financial condition and results of operations.
•Existing or new laws and regulations may prohibit, restrict or burden the sale of aftermarket products.
•Existing or new laws and regulations regarding environmental, health and safety matters may prohibit, burden, restrict or make significantly more costly the sale of our products.
Summary of Risks Related to Cybersecurity and Information Systems
•Cyber-security vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data.
•Global privacy, data protection and data security requirements are highly complex, evolving rapidly, and may increase our costs to comply.
•Information systems failure may disrupt our business and result in financial loss and liability to our customers.
Summary of Risks Related to Human Capital Management
•If we lose our senior management or key personnel, our business may be materially and adversely affected.
•We may be materially adversely impacted by work stoppages and other labor matters.
•Certain of our defined benefit pension plans are underfunded, and additional cash contributions may be required.
Summary of Risks Related to Tax Matters
•Changes in our effective tax rate or additional tax liabilities could adversely impact our net income.
•Changes in tax laws could result in additional tax liabilities.
•Relevant tax authorities may no longer treat us as being exclusively a resident of the U.K. for tax purposes.
Summary of Risks Related to Our Indebtedness
•We are subject to risks related to our indebtedness. These include risks related to raising additional capital, paying our debts and meeting our indebtedness service obligations, interest rate risk, operating and financial restrictions on us and our subsidiaries, and the risk of failure to comply with the agreements relating to our outstanding indebtedness.
Summary of Risks Related to the Ownership of our Ordinary Shares
•We are subject to additional risks specific to ownership of our ordinary shares. These risks include those related to being a “controlled company” within the meaning of the rules of the New York Stock Exchange (“NYSE”), adverse changes in the market value of our shares, lack of current plans for dividend payments, risks related to future issuances of shares, and risks specific to holding shares in a U.K. company.
Risks Related to Economic and Market Conditions
Conditions in the global and regional economy and the major end markets we serve may materially and adversely affect theour business and results of operations of our businesses should they deteriorate.
Our business and operating results have been, and will continue to be, affected by worldwide and regional economic conditions, including conditions in the end markets we serve. The level of demand for our products depends, in part, on the general economic conditions that exist in our served end markets. A substantial portion of our revenues are derived from customers in cyclical industries that typically are adversely affected by downward economic cycles. For example, in Fiscal 2019, a downturn in the short-cycle end markets, including sharp declines in agriculture and general industrial end markets, significantly impacted our business. Further, our historical results have been, and remain, highly correlated to global industrial activity and utilization and decreases in such activity or utilization may continue to impact our business, financial condition and results of operations.
During such downturns, our customers may experience deterioration of their businesses, cash flow shortages or difficulty obtaining financing. As a result, the demand for our products may be significantly reduced and existing or potential customers may delay or cancel plans to purchase our products and may not be able to fulfill their obligations to us in a timely fashion. Further, our vendors may experience similar conditions, which may impact their ability to fulfill their obligations to us.
We cannot predict the timing, strength or duration of any economic recovery, including in the short-cycle end markets, or a downturn globally or within our end markets,markets. If conditions in the global economy or in the regions and major end markets that we serve deteriorate, demand for our products may decline and our results of operations, financial position and cash flows could be materially adversely affected.
The COVID-19 pandemic has caused severe disruption in the global economy, and may continue to have an adverse impact on our business.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, operating results, cash flows and/or financial condition described in these risk factors or result in new risks, due to the impact of:
•unfavorable economic conditions on our customers. We are unable to predict the degree to which the pandemic will impact our customers’ businesses, but it has resulted in and could continue to result in customers reducing orders, delaying projects, deferring capital equipment purchases, making late payments or being unable to make payments. Further, travel restrictions and social distancing has reduced or eliminated, and may continue to reduce or eliminate, in-person sales meetings, attendance at trade shows and industry events. As a result, our sales and selling activities have been and may continue to be adversely impacted;
•a significant disruption in service within our operations, among our key suppliers and supply chains, or other third parties. We have experienced instances of suppliers temporarily closing operations, delaying order fulfillment or limiting production due to the pandemic. Continued disruptions, shipping delays or insolvency of key vendors in our supply chain could make it difficult or more costly for us to obtain the raw materials or other inputs we need for our operations;
•facility closures or disruptions. We manufacture and provide essential products to a variety of customers around the globe and intend to continue providing our products to the extent possible. We have experienced temporary disruptions at certain facilities and may continue to experience these due to regulatory shut-downs or other quarantine measures or illness, which could place constraints on our ability to produce our products and meet customer demand;
•challenges in product delivery. We have faced, and may continue to face, increased delays in the delivery of our product to our customers as a result of shipping delays, port closures and congestion, increased border controls and other transportation and shipping constraints, which may increase our costs of doing business and affect our ability to timely meet customer demand;
•compliance with substantial government regulation, including new laws or regulations or changes in existing laws or regulations, which laws or regulations may vary significantly by jurisdiction;
•fluctuations in equity market prices, interest rates and credit spreads limiting our ability to raise or deploy capital and affecting our overall liquidity. The Company continues to generate cash from operations and believes it has adequate liquidity and capital resources at this time; however, unanticipated consequences of the pandemic and resulting economic uncertainty could adversely affect our ability to raise additional funds when and as needed or lead to higher costs of borrowing;
•cyberattacks or other privacy or data security incidents. The Company has experienced and expects to continue to experience an increase in phishing and hacking attempts and other fraudulent schemes due to the pandemic. Such additional cyberattacks increase the Company’s risk of security breaches, and mitigation efforts require an increased investment of time and resources;
•changes and challenges to our workforce, including decreased worker productivity due to remote working arrangements, increased medical, emergency or other leave, redirection of management’s focus on managing and mitigating the impacts of the pandemic, the ability to meet staffing needs in our various facilities and delays in implementation of our organizational efficiency and business continuity plans; and
•delays in responsiveness by governments and other third parties in other matters arising in the ordinary course of business due to their prioritization of matters relating to COVID-19.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, including any variants, the development, distribution and effectiveness of vaccines or other medical advances, the extent and effectiveness of containment actions, the impact of labor market interruptions, the impact of government interventions, the potential of a longer term economic slowdown or recession and the impact of these and other factors on our employees, customers, suppliers and partners. Such impact on our business, operating results, cash flows and/or financial condition is uncertain, could be material and could result in asset impairment charges, including impairments of property, plant and equipment, goodwill or other intangible assets.
We are subject to economic, political and other risks associated with international operations and thisthat could adversely affect our business and our strategy to capitalize on our global reach.
One of our key strategies is to capitalize on our global commercial reach, and a substantial portion of our operations are conducted and located outside the U.S. For Fiscal 2019,2020, approximately 62% of our net sales originated from outside of the U.S. We have manufacturing, sales and service facilities spanning five continents and sell to customers in over 120 countries. Moreover, a significant amount of our manufacturing functions and sources of our raw materials and components are from emerging markets such as China, India and Eastern Europe. Accordingly, our business and results of operations, as well as the business and results of operations of our vendors and customers, are subject to risks associated with doing business internationally, including:
•imposition of new or additional tariffs or other trade restrictions or embargoes, as well as import and export licensing and control requirements;
•political, social or economic instability, civil unrest, natural disasters, public health crises, war or terrorism that may disrupt economic activities in affected countries;
•exchange rate fluctuations, currency restructurings and hyperinflation or deflation in the countries in which we operate;
•imposition of currency restrictions and limitations on repatriation of earnings;
•the complexities of operating within multiple tax jurisdictions;
•partial or total expropriation by local, state or national governments;
•uncertainties as to local laws regarding, and enforcement of, contract and intellectual property rights;
•the ability to comply with or effect of complying with complex and changing laws, regulations and policies of foreign governments, including differing and, in some cases, more stringent labor and environmental regulations;
•differing local product preferences and product requirements; and
•difficulties involved in staffing and managing widespread operations, including challenges in administering and enforcing corporate policies, which may be different than the normal business practices of local cultures.
The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. Certain regions, including Latin America, Asia, the Middle East and Africa, are generally more economically and politically volatile and as a result, our operations in these regions could be subject to more significant fluctuations in sales and operating income. Because a significant percentage of our operating income in recent years has come from these regions, adverse fluctuations in the operating results in these regions could have a disproportionate impact on our results of operations in future periods. 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.
The U.S. administration has publicly supported certain potential tax and trade proposals, modifications to international trade policy and other changes which have and may continue to affect U.S. trade relations with other countries, particularly China. Our industry has been impacted by the ongoing uncertainty surrounding tariffs and international trade relations generally, and it is difficult for us to predict the impact future trade measures may have on our business and results of operations in the future.
In addition, economic and political uncertainty arose out of the June 23, 2016 vote in the U.K. that resulted in the U.K.’s exit from the European Union (the “E.U.”), commonly referred to as “Brexit,” on January 31, 2020. WhileIn order to negotiate a trade agreement and other aspects of their future relationship, the E.U. and the U.K. agreed to participate in a transition period that expired on December 31, 2020. On December 24, 2020, the E.U. and the U.K. announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political issues. We are currently in the process of reviewing the potential impact of the new Brexit trade deal on our business and operations. In addition, we do not know if the E.U. and the U.K. will continue to follow allsucceed in negotiating certain other terms not yet addressed or covered by the new Brexit trade deal. Accordingly, we cannot yet predict the future implications of the E.U.’s rules and will maintain its current trading relationship with the E.U. during an 11-month transition period, the ongoing negotiations between the U.K. and the E.U. as to the terms of the U.K.’s trade agreements and other relationships with the E.U. following the transition period have created political and economic uncertainty, with concern about increased regulatory and legal complexities thatBrexit or whether it could disrupt our operations, and increase our cost of doing business.business or otherwise adversely affect our financial condition or results of operations.
Additionally, concerns persist regarding the debt burden of certain European countries and the ability of these countries to meet future financial obligations, as well as concerns regarding the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances of individual euro-area countries. If a country within the euro area were to default on its debt or withdraw from the euro currency, or if the euro were to be dissolved entirely, the impact on markets around the world, and on our global business, could be immediate and material. Such a development could cause financial and capital markets within and outside Europe to constrict, thereby negatively impacting our ability to finance our business, and also could cause a substantial reduction in consumer confidence and spending that could negatively impact sales.
While we have adopted certain operational and financial measures to reduce the risks associated with doing business internationally, any one of the risks listed above may impact us or require us to modify our business practices beyond what we can anticipate and could have a material adverse effect on our financial condition and results of operations.
If we areWe may be unable to obtain raw materials at favorable prices in sufficient quantities, or at the time we require them, our operating margins and results of operations may be materially adversely affected.them.
We purchase our energy, steel, aluminum, rubber and rubber-based materials, chemicals, polymers and other key manufacturing inputs from outside sources. We do not traditionally have long-term pricing contracts with raw material suppliers. The costs of these raw materials have been volatile historically and are influenced by factors that are outside of our control. In recent years, the prices for energy, metal alloys, polymers and certain other of our raw materials have fluctuated significantly. While we strive to avoid this risk by using price escalation mechanisms with respect to our raw materials in certain of our customer contracts, and we also seek to offset our increased costs with gains achieved through operational efficiencies, if we are unable to pass increases in the costs of our raw materials on to our customers or we experience a lag in our ability to pass increases to our customers, or operational efficiencies are not achieved, our operating margins and results of operations may be materially adversely affected.
Additionally, our businesses compete globally for key production inputs. The availability of qualified suppliers and of key inputs may be disrupted by market disturbances or any number of geopolitical factors, including political unrest and significant weather events. Such disruptions may require additional capital or operating expenditure by us or force reductions in our production volumes. In the event of an industry-wide general shortage of certain raw materials or key inputs, or a shortage or discontinuation of certain raw materials or key inputs from one or more of our suppliers, we may not be able to arrange for alternative sources of certain raw materials or key inputs. Any such shortage may materially adversely affect our competitive position versus companies that are able to better or more cheaply source such raw materials or key inputs.
We may experience adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key channel partners could adversely affect our business, financial condition and results of operations.partners.
Certain of our businesses sell a significant amount of their products to key channel partners, including distributors, which have valuable relationships with end users. Some of these channel partners may also sell our competitors’ products, and if they favor competing products for any reason they may fail to market our products effectively. Adverse changes in our relationships with these channel partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our business, financial condition and results of operations. The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can also significantly impact our results of operations in any given period, such as the destocking we experienced in both the automotive and industrial replacement channels during Fiscal 2019. In addition, the consolidation of channel partners and customers in certain of our end markets could adversely impact our profitability.
We face competition in all areas of our business and may not be able to successfully compete with our competitors, which could adversely affect our revenues and profitability.
We are subject to competition from other producers of products similar to ours. We compete on a number of factors, including product performance, quality, value, product availability, brand recognition, customer service and innovation and technology. Our customers often demand delivery of our products on a tight time schedule and in a number of geographic markets. If our quality of service declines or we cannot meet the demands of our customers, they may utilize the services or products of our competitors. Our competitors include manufacturers that may be better capitalized, may have a more extensive low-cost sourcing strategy and presence in low-cost regions or may receive significant governmental support and as a result, may be able to offer more aggressive pricing. Our competitors also may develop products that are superior to our products, or may develop more efficient or effective methods of providing products and services or may adapt more quickly than we do to new technologies or evolving customer requirements. If we are unable to continue providing technologically superior or better quality products, timely delivery and competitive pricing, our ability to compete could be harmed and we could lose customers or market share.
Pricing pressures from our customers may materially adversely affect our business.
We generate strong margins by selling premium products at premium prices. Accordingly, our margins could suffer if our customers are no longer willing to pay a premium for our product and service offerings. We face the greatest pricing pressure from our customers in the automotive first-fit end market. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the award. We are also, from time to time, subject to pricing pressures from customers in our other end markets. If we are not able to offset price reductions through improved operating efficiencies and reduced expenditures or new product introduction, those price reductions may have a material adverse effect on our results of operations.
We are dependent on the continued operation of our manufacturing facilities and we may need to make investments in new or existing facilities or consolidate facilities to align with our strategies.
While we are not heavily dependent on any single manufacturing facility, major disruptions at a number of our manufacturing facilities, due to labor unrest, adverse weather, natural disasters, terrorist attacks, significant mechanical failure of our facilities, or other catastrophic event, could result in significant interruption of our business and a potential loss of customers and sales or could significantly increase our operating costs.
In addition, we have in the past and may in the future need to make investments in new or existing manufacturing facilities or to consolidate manufacturing facilities to adapt our production capacity to changing market conditions and to align with our growth and efficiency strategies. The costs of such investments or consolidation efforts may be significant and we may not realize the expected benefits on our anticipated timeframe or at all, which may have a material adverse effect on our business, financial condition and results of operations.
We may not be able to accurately forecast demand or meet significant increases in demand for our products.
Certain of our businesses operate with short lead times and we order raw materials and supplies and plan production based on discussions with our customers and internal forecasts of demand. If we are unable to accurately forecast demand for our products, in terms of both volume and specific products, or react appropriately to abrupt changes in demand, we may experience delayed product shipments and customer dissatisfaction. If demand increases significantly from current levels, both we and our suppliers may have difficulty meeting such demand, particularly if such demand increases occur rapidly. Additionally, we may carry excess inventory if demand for our products decreases below projected levels. Failure to accurately forecast demand or meet significant increases in demand could have a material adverse impact on our business, financial condition and operating results.
We are exposed to exchange rate fluctuations in the international markets in which we operate.
We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject to currency exchange rate risk to the extent that our costs may be denominated in currencies other than those in which we earn and report revenues and vice versa. In addition, a decrease in the value of any of these currencies relative to the U.S. dollar could reduce our profits from non-U.S. operations and the translated value of the net assets of our non-U.S. operations when reported in U.S. dollars in our consolidated financial statements. Movements in average currency exchange rates in the future could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. Fluctuations in currencies may also make it more difficult to perform period-to-period comparisons of our reported results of operations.
We anticipate that there will be instances in which costs and revenues will not be exactly matched with respect to currency denomination. As a result, to the extent we continue to expand geographically, we expect that increasing portions of our revenues, costs, assets and liabilities will be subject to fluctuations in foreign currency valuations. We may experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange rate fluctuations. Further, the markets in which we operate could restrict the removal or conversion of the local or foreign currency, resulting in our inability to hedge against these risks.
We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Actions of this nature, if they occur or continue for significant periods of time, could have an adverse effect on our results of operations and financial condition in any given period.
Terrorist acts, conflicts and wars may materially adversely affect our business.
As we have a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, partners, suppliers, distributors, resellers or customers due to terrorist acts, conflicts and wars, wherever located around the world. The potential for future attacks, the national and international responses to attacks or perceived threats to national security, and other actual or potential conflicts or wars have created many economic and political uncertainties. Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive raw materials from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions, and thereby materially adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to Our Business and Industry
We may not be able to successfully compete with our competitors, which could adversely affect our business.
We are subject to competition from other producers of products similar to ours. We compete on a number of factors, including product performance, quality, value, product availability, brand recognition, customer service, innovation and technology. Our customers often demand delivery of our products on a tight time schedule and in a number of geographic markets. If our quality of service declines or we cannot meet the demands of our customers, they may utilize the services or products of our competitors. Our competitors include manufacturers that may be better capitalized, may have a more extensive low-cost sourcing strategy and presence in low-cost regions, or may receive significant governmental support and, as a result, may be able to offer more aggressive pricing. Our competitors also may develop products that are superior to our products, may develop more efficient or effective methods of providing products and services, or may adapt more quickly than we do to new technologies or evolving customer requirements. If we are unable to continue providing technologically superior or better quality products, timely delivery and competitive pricing, our ability to compete could be harmed and we could lose customers or market share.
Pricing pressures from our customers may materially adversely affect our business.
We generate strong margins by selling premium products at premium prices. Accordingly, our margins could suffer if our customers are no longer willing to pay a premium for our product and service offerings. We face the greatest pricing pressure from our customers in the automotive first-fit end market. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the award. We are also, from time to time, subject to pricing pressures from customers in our other end markets. If we are not able to offset price reductions through improved operating efficiencies and reduced expenditures or new product introduction, those price reductions may have a material adverse effect on our results of operations.
We are dependent on the continued operation of our manufacturing facilities and we may need to make investments in new or existing facilities or consolidate facilities to align with our strategies.
While we are not heavily dependent on any single manufacturing facility, major disruptions at a number of our manufacturing facilities, due to labor unrest, adverse weather, natural disasters, terrorist attacks, significant mechanical failure of our facilities, or other catastrophic event, could result in interruption of our business, a potential loss of customers and sales, or significantly increased operating costs.
In addition, we have in the past and may in the future need to make investments in new or existing manufacturing facilities or to consolidate manufacturing facilities to adapt our production capacity to changing market conditions and to align with our growth and efficiency strategies. The costs of such investments or consolidation efforts may be significant and we may not realize the expected benefits on our anticipated timeframe or at all, which may have a material adverse effect on our business, financial condition and results of operations.
We may not be able to accurately forecast demand or meet significant increases in demand for our products.
Certain of our businesses operate with short lead times, and we order raw materials and supplies and plan production based on discussions with our customers and internal forecasts of demand. If we are unable to accurately forecast demand for our products, in terms of both volume and specific products, or react appropriately to abrupt changes in demand, we may experience delayed product shipments and customer dissatisfaction. If demand increases significantly from current levels, both we and our suppliers may have difficulty meeting such demand, particularly if such demand increases occur rapidly. Additionally, we may carry excess inventory if demand for our products decreases below projected levels. Failure to accurately forecast demand or meet significant increases in demand could have a material adverse impact on our business, financial condition and operating results.
We may not be able to maintain and enhance our strong brand on which we depend.
Our brand has worldwide recognition and our success depends on our ability to maintain and enhance our brand image and reputation. In particular, we believe that maintaining and enhancing the Gates brand is critical to maintaining and expanding our customer base. Maintaining, promoting and enhancing our brand may require us to make substantial investments in areas such as product innovation, product quality, intellectual property protection, marketing and employee training, and these investments may not have the desired impact on our brand image and reputation. Our business could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of our brand is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If we are unable to maintain or enhance the image of our brand, it could materially adversely affect our business, financial condition and results of operations.
We are dependent on market acceptance of new product introductions and product innovations for continued revenue growth.
The markets in which we operate are subject to technological change. Our long-term operating results depend substantially upon our ability to continually develop, introduce, and market new and innovative products, to modify existing products, to respond to technological change, and to customize certain products to meet customer requirements and evolving industry standards. The development of new product introductions and product innovations may require significant investment by us. There are numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands. For example, the increased adoption of electric vehicles may affect certain of the end markets that we serve and could alter the application platforms in which we offer solutions.
If we are unable to adapt to technological changes, including by developing and marketing new products, our business and results of operations may be adversely affected.
We have taken, and continue to take, cost-reduction actions whichthat may expose us to additional risk and we may not be able to maintain the level of cost reductions that we have achieved.
We have been implementing cost reduction actions in all of our businesses and have discontinued product lines, divested non-core businesses, consolidated manufacturing operations and reduced our employee population in some locations. The impact of these cost-reduction actions on our sales and profitability may be influenced by many factors and we may not be able to maintain the level of cost savings that we have achieved depending on our ability to successfully complete these efforts. In connection with the implementation and maintenance of our cost reduction measures, we may face delays in anticipated workforce reductions, a decline in employee morale and a potential inability to meet operational targets due to an inability to retain or recruit key employees.
Longer lives of products used in our end markets may adversely affect demand for some of our replacement products.
The average useful life of certain products in our end markets has increased in recent years due to innovations in technologies and manufacturing processes. The longer product lives allow end users to replace parts less often. As a result, a portion of sales in the replacement markets we serve may be displaced. If this trend continues, it could adversely impact our replacement market sales.
The development of the replacement market in emerging markets may limit our ability to grow in those markets.
In emerging markets such as China, India, Eastern Europe and Russia, the replacement markets are still nascent as compared to those in more developed nations. In these markets, we have focused on building a first-fit presence in order to establish brand visibility in the end markets we serve. However, as the replacement markets in these regions grow, our products may not be selected as the replacement product, although we are the first-fit provider. If we are not able to convert our first-fit presence in these emerging markets into sales in the replacement end market, there may be a material adverse effect on our replacement end market growth potential in these emerging markets.
We may acquire businesses or assets that we may not be able to successfully integrate.
We consider strategic acquisitions of complementary businesses or assets to expand our product portfolio and geographic presence on an ongoing basis, and regularly have discussions concerning potential acquisitions, certain of which may be material. Acquisitions, particularly investments in emerging markets, involve legal, economic and political risks. We also encounter risks in the selection of appropriate investment and disposal targets, execution of the transactions and integration of acquired businesses or assets.
We may not be able to effectively integrate acquisitions or successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. As a result, we may not be able to recoup our investment in such acquisitions or achieve the economic benefits that we anticipate from such acquisitions. Our efforts to integrate these businesses or assets could be affected by a number of factors beyond our control, such as general economic conditions and increased competition. In addition, the process of integrating these businesses or assets could cause the interruption of, or loss of momentum in, the activities of our existing business and the diversion of management’s attention. Furthermore:
•the key personnel of the acquired company may decide not to work for us;
•customers of the acquired company may decide not to purchase products from us;
•suppliers of the acquired company may decide not to sell products to us;
•the markets may reject the acquired technologies, or they may not integrate with our existing technologies as expected;
•we may experience business disruptions as a result of information technology systems conversions;
•we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting;
•we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;
•we may intentionally assume the liabilities of the companies we acquire, which could result in material adverse effects on our business;
•our existing business may be disrupted or receive insufficient management attention;
•we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect; and
•we may incur debt or issue equity securities to pay for a future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing shareholders.
These impacts and any delays or difficulties encountered in connection with the integration of these businesses or assets could negatively impact our business and results of operations.
In addition, certain of the businesses that we have acquired and may acquire have unaudited financial statements that have been prepared by the management of such companies and have not been independently reviewed or audited. Such financial statements could be materially different if audited. Further, we may not continue to acquire businesses at valuations consistent with our prior acquisitions or we may not complete future acquisitions at all. There may not be attractive acquisition opportunities at reasonable prices, financing may not be available, or we may not be able to successfully integrate such acquired businesses into our existing operations. In addition, our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long-lived assets, particularly if economic conditions worsen unexpectedly. These changes could materially negatively affect our business, results of operations or financial condition.
We have investments in joint ventures that limit our ability to manage third-party risks associated with these projects.
We have investments in joint ventures which may involve risks such as the possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have economic or business interests or goals that are inconsistent with our business interests or goals, or take actions that are contrary to our instructions or to applicable laws and regulations. Actions by a co-venturer or other third party could expose us to claims for damages, financial penalties and reputational harm, any of which could adversely affect our business and operations. In addition, we may agree to guarantee indebtedness incurred by a joint venture or provide standard indemnifications to lenders for loss liability or damage occurring as a result of our actions or actions of the joint venture. Such a guarantee or indemnity may be on a joint and several basis with a co-venturer, in which case we may be liable in the event that our co-venturer defaults on its guarantee obligation. The non-performance of a co-venturer’s obligations may cause losses to us in excess of the capital we have invested or committed.
Although our joint ventures may generate positive cash flow, in some cases we may choose to leave cash in the joint venture rather than distribute it either to support future investments within the joint venture or because it may be costly to distribute.
We are subject to liabilities with respect to businesses that we have divested in the past.
In recent years, we have divested a number of businesses. With respect to some of these former businesses, we have contractually agreed to indemnify the buyer against liabilities arising prior to the divestiture, including lawsuits, tax liabilities, product liability claims or environmental matters. Even without ongoing contractual indemnification obligations, we could be exposed to liabilities arising out of such divestitures. As a result of these types of arrangements, conditions outside our control could materially adversely affect our future financial results.
Our insurance may not fully cover all future losses we may incur.
Manufacturers of products such as ours are subject to inherent risks. We maintain an amount of insurance protection that we consider adequate, but we cannot provide any assurance that our insurance will be sufficient or provide effective coverage under all circumstances and against all hazards or liabilities to which we may be subject. Specifically, our insurance may not be sufficient to replace facilities or equipment that are damaged in part or in full. Damages or third-party claims for which we are not fully insured could adversely affect our financial condition and results of operations. Further, due to rising insurance costs and changes in the insurance markets, insurance coverage may not continue to be available at all or at rates or on terms similar to those presently available. Additionally, our insurance may subject us to significant deductibles, self-insured retentions, retrospectively rated premiums or similar costs. Any losses not covered by insurance could have a material adverse effect on us. We typically purchase business interruption insurance for our facilities. However, if we have a stoppage, our insurance policies may not cover every contingency and may not be sufficient to cover all of our lost revenues. In the future, we may be unable to purchase sufficient business interruption insurance at desirable costs.
We supply products to industries that are subject to inherent risks, including equipment defects, malfunctions and failures, and natural disasters, which could result in unforeseen and damaging events. These risks may expose us, as an equipment operator and supplier, to liability for personal injury, wrongful death, property damage, pollution and/or other environmental damage. The insurance we carry against many of these risks may not be adequate to cover our claims or losses. Further, insurance covering the risks we expect to face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we were not able to obtain liability insurance, our business, results of operations, cash flows and financial condition could be negatively impacted. If our customers suffer damages as a result of the occurrence of such events, they may reduce their business with us.
If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, it may have a material adverse effect on our business.
Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crises such as the COVID-19 pandemic, or other natural or man-made disasters. If any of these facilities, supply chains or systems were to experience a catastrophic loss or ongoing closure or disruption, it could negatively impact our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation, result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses.
The loss or financial instability of any significant customer or customers could adversely affect our business.
A substantial part of our business is concentrated with a few customers, and we have certain customers that are significant to our business. During Fiscal 2020, our top ten customers accounted for approximately 24% of our consolidated net sales and accounted for approximately 35% of our trade accounts receivable balance as of January 2, 2021, and our largest customer accounted for approximately 9% and 17% of our Fiscal 2020 consolidated net sales and trade accounts receivable balance as of January 2, 2021, respectively. The loss of one or more of these customers or other major customers, a deterioration in our relationship with any of them, or their failure to pay amounts due to us could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our contracted backlog is comprised of future orders for our products from a broad number of customers. Defaults by any of the customers that have placed significant orders with us could have a significant adverse effect on our net sales, profitability and cash flow. Our customers may in the future default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons deriving from the general economic environment or circumstances affecting those customers in particular. If a customer defaults on its obligations to us, it could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Risks Related to Legal and Regulatory Matters
We are subject to risks from litigation, legal and regulatory proceedings and obligations that may materially impact our operations.obligations.
We face an inherent business risk of exposure to various types of claims, lawsuits and proceedings. We are involved in various tax, intellectual property, product liability, product warranty and environmental claims and lawsuits, and other legal, antitrust and regulatory proceedings arising in the ordinary course of our business. Although it is not possible to predict with certainty the outcome of every claim, lawsuit or proceeding and the range of probable loss, we believe these claims, lawsuits and proceedings will not individually or in the aggregate have a material impact on our results. However, we could, in the future, be subject to various claims, lawsuits and proceedings, including, amongst others, tax, intellectual property, product liability, product warranty, environmental claims and antitrust claims, and we may incur judgments or enter into settlements of lawsuits and proceedings that could have a material adverse effect on our business, financial condition and results of operations.
Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and/or prohibit us from selling certain ofadversely affecting our products.business.
Third parties may assert infringement or other intellectual propertymisappropriation claims against us based on their patents or other intellectual property rights. In addition, first-fit manufacturers are seeking and obtaining more utility and design patents than they have in the past to threaten claims of intellectual property infringement against manufacturers and distributors of aftermarket products in efforts to restrict or eliminate the sale of aftermarket products.
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 maycould be forced to stoprestricted or delay developing,prohibited from manufacturing, selling or otherwise commercializing certain of our products, product candidates or other technology, or those we develop with our R&D partners.technology. Even if infringement claims against us are without merit, defending these types of lawsuits takes significant time, may be expensive and may divert management attention from other business concerns.
In addition, first-fit and other manufacturers have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims. First-fit manufacturers have brought such claims in federal court and with the U.S. International Trade Commission and with various foreign government agencies.
To the extent first-fit and other manufacturers are seeking and obtaining more utility and design patents than they have in the past and are successful in asserting infringement of these patents and defending their validity, if any of our products are found to infringe someone’s patent, we could be restricted or prohibited from selling such products, which could have an adverse effect on our business. If we are sued for intellectual property infringement, we will likely incur significant expenses investigating and defending such claims, and even if we prevail.prevail, may divert management attention from other business concerns.
In addition, certification by independent organizations of certain of our aftermarket products may be revoked or adversely affected by first-fit manufacturer claims. Lack of certification may negatively impact us because many major insurance companies recommend or require the use of aftermarket products only if they have been certified by an independent certifying organization.
Failure to adequately protect or enforce our intellectual property rights against counterfeiting activities could adversely affect our business.
Although we routinely conduct anti-counterfeiting activities in multiple jurisdictions, we have encountered counterfeit reproductions of our products or products that otherwise infringe on our intellectual property rights. TheWe expect pirates to continue to encounter counterfeiting of certain of our products using our trademarks, which has led to, and will likely continue to cause loss of sales. It is difficult to police such counterfeiting, particularly on a worldwide basis, and the actions we take to establishstop such counterfeiting and protectto establish trademarks and other intellectual property rights may not be adequate to prevent such counterfeiting activities by others. If we are unsuccessful in challenging such products on the basis of trademark or other intellectual property infringement, continued sales of such imitating products may adversely affect market share and impact customer perceptions and demand, leadingdemand.
Failure to the shift of consumer preference away fromdevelop, obtain, enforce and protect intellectual property rights could adversely affect our business.
Our success depends on our ability to develop technologies and inventions used in our products and lossto brand such products to obtain intellectual property rights and to protect and enforce such intellectual property rights. In this regard, we rely on U.S. and foreign patent, trademark, copyright, and trade secret laws, as well as license agreements, nondisclosure agreements, and confidentiality and other contractual provisions.
However, we may not be able to obtain patents or other intellectual property rights in our new technologies and inventions or, if we do, the scope of such rights may not be sufficiently broad to afford us any significant commercial advantage over our competitors. In addition, the technologies and inventions developed by our engineers in the future may not prove to be as valuable as those of competitors, or competitors may develop similar or identical technologies and inventions independently of us and before we do.
Even if we do obtain intellectual property rights, our efforts to enforce our intellectual property rights against infringers may not prove successful and will likely be time consuming and expensive. Competitors and other third parties may also challenge the ownership, validity, and/or enforceability of our patents or other intellectual property rights.
To the extent we do assert our intellectual property rights against third parties, adequate remedies may not be available in the event of an infringement or unauthorized use or disclosure of our trade secrets. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows.
We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.
Filing,Although we rely on U.S. and foreign intellectual property rights, filing, prosecuting, enforcing, and defending patents on our products in all countries and jurisdictions throughout the world would be prohibitively expensive, and the laws of certain foreign countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the U.S.
Further, successful assertion of our intellectual property rights depends on the judicial strength and willingness of the issuing jurisdictions to enact and enforce sufficient intellectual property laws. Creation and enforcement of intellectual property rights is a relatively recent development in much of the world, and so some time may be necessary to realize reliable intellectual property systems across all markets and jurisdictions, if this occurs at all.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but where the ability to enforce our patent rights is not as strong as in the U.S. These products may compete with our products, and our intellectual property rights may not be effective or sufficient to prevent such competition. In addition, we may face significant expenses in connection with the protection of our intellectual property rights outside the U.S. If we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business, financial condition and results of operations may be adversely affected.
Failure to develop, obtain, enforce and protect intellectual property rights could adversely affect our business.
Our success depends on our ability to develop technologies and inventions used in our products and to brand such products to obtain intellectual property rights in such technologies and inventions, and to protect and enforce such intellectual property rights. In this regard, we rely on U.S. and foreign trademark, patent, copyright, and trade secret laws, as well as license agreements, nondisclosure agreements, and confidentiality and other contractual provisions. Nevertheless, the technologies and inventions developed by our engineers in the future may not prove to be as valuable as those of competitors, or competitors may develop similar or identical technologies and inventions independently of us and before we do.
We may not be able to obtain patents or other intellectual property rights in our new technologies and inventions or, if we do, the scope of such rights may not be sufficiently broad to afford us any significant commercial advantage over our competitors. 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. Competitors and other third parties may challenge the ownership, validity, and/or enforceability of our patents or other intellectual property rights. Further, we expect pirates to continue to counterfeit certain of our products using our trademarks, which has led to, and will likely continue to cause loss of sales. It is difficult to police such counterfeiting, particularly on a worldwide basis, and the efforts we take to stop such counterfeiting may not be effective.
Our efforts to enforce our intellectual property rights against infringers may not prove successful and will likely be time consuming and expensive and may divert management’s attention from the day-to-day operation of our business. Adequate remedies may not be available in the event of an infringement or unauthorized use or disclosure of our trade secrets and manufacturing expertise. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows. Further, successful assertion of our intellectual property rights depends on the judicial strength and willingness of the issuing jurisdictions to enact and enforce sufficient intellectual property laws. Creation and enforcement of intellectual property rights is a relatively recent development in much of the world, and so some time may be necessary to realize reliable intellectual property systems across all markets and jurisdictions, if this occurs at all.
We may be subject to recalls or product liability claims, or may incur costs related to product warranties that may materially and adversely affect our business.warranties.
Meeting or exceeding many government-mandated safety standards is costly and requires manufacturers to remedy defects related to product safety through recall campaigns if the products do not comply with safety, health or environmental standards. If we, our customers or government regulators determine that a product is defective or does not comply with such standards prior to the start of production, the launch of a product could be delayed until such defect is remedied. The costs associated with any protracted delay of a product launch or a recall campaign to remedy defects in products that have been sold could be substantial.
We face an inherent risk of product liability claims if product failure results in any claim for injury or loss. Supplier consolidation and the increase in low-cost country sourcing may increase the likelihood of receiving defective materials, thereby increasing the risk of product failure and resulting liability claims. Litigation is inherently unpredictable and these claims, regardless of their outcome, may be costly, divert management attention and adversely affect our reputation. Although we have liability insurance, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be adequate. In addition, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.
From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to bear costs of repair or replacement of certain of our products. Vehicle manufacturers are increasingly requiring their outside suppliers to participate in the warranty of their products and to be responsible for the operation of these component products in new vehicles sold to consumers. Warranty claims may range from individual customer claims to full recalls of all products in the field. It cannot be assured that costs associated with providing product warranties will not be material.
We are subject to anti-corruption laws in various jurisdictions, as well as other laws governing our international operations. If we fail to comply with these laws we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could materially adversely affect our business, financial condition and results of operations.
Our operations are subject to one or more anti-corruption laws in various jurisdictions, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.K. Bribery Act of 2010 and other anti-corruption laws. The FCPA and these other laws generally prohibit employees and intermediaries from bribing or making other prohibited payments to foreign officials or other persons to obtain or retain business or gain some other business advantage. We operate in a number of jurisdictions that pose a high risk of potential FCPA or other anti-corruption violations, and we participate in joint ventures and relationships with third parties whose actions could potentially subject us to liability under the FCPA or other anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Assets Control, and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations, and transfer pricing regulations (collectively, “Trade Control laws”Laws”).
We are also subject to U.K. corporate criminal offences for failure to prevent the facilitation of tax evasion pursuant to the Criminal Finances Act 2017 (“FTP offences”). The FTP offences impose criminal liability on a company where it has failed to prevent the criminal facilitation of tax evasion by a person associated with the company.
We have instituted policies, procedures and ongoing training of certain employees with regard to business ethics, designed to ensure that we and our employees comply with the FCPA, other anticorruption laws, Trade Control lawsLaws and the Criminal Finances Act 2017. However, there is no assurance that our efforts have been and will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA, or other legal requirements. If we are not in compliance with the FCPA, other anti-corruption laws, Trade Control lawsLaws or the Criminal Finances Act 2017, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have a material adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or the Criminal Finances Act 2017 by U.S. or foreign authorities could also have a material adverse impact on our reputation, business, financial condition and results of operations.
Existing or new laws and regulations may prohibit, restrict or burden the sale of aftermarket products.
Most states have passed laws that regulate or limit the use of aftermarket products in certain types of repair work. These laws include requirements relating to consumer disclosure, owner’s consent regarding the use of aftermarket products in the repair process, and the requirement to have aftermarket products certified by an independent testing organization. Additional legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business.
Certain organizations test the quality and safety of vehicle replacement products. If these organizations decide not to test a particular vehicle product, or in the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue authorization of repairs using such product. Such events could adversely affect our business.
Cyber securityExisting or new laws and regulations regarding environmental, health and safety matters may prohibit, burden, restrict or make significantly more costly the sale of our products.
Our operations, products and properties are subject to extensive foreign, federal, state, local and provincial laws and regulations relating to HSE protection around the world. HSE laws vary by jurisdiction but generally govern air emissions, wastewater discharges, material handling and transportation, waste management and disposal, substances in products, and workplace health and safety, as well as the investigation and clean-up of contaminated sites. Failure to comply with HSE laws and regulations could have significant consequences on our business and operations, including the imposition of substantial fines and sanctions for violations, injunctive relief (including requirements that we limit or cease operations at affected facilities), and negative publicity.
HSE laws have become increasingly stringent and stricter interpretation or enforcement of new and existing HSE laws could adversely affect our business, financial condition and results of our operations and product demand. For example, increasing global interest to control emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”) in an effort to minimize the effect on climate change have the potential to directly impact the price of the energy and raw materials we purchase. In addition, GHGs regulations could impact oil and gas production, a key demand driver of our industrial end markets, and reduce demand for our products by driving down the use of fossil fuels.
The evolution of HSE laws beyond manufacturing operations to restrict specific chemical substances in our products or impose labeling and other requirements, such as California’s Safe Drinking Water and Toxic Enforcement Act (“Proposition 65”), or European Union’s Registration, Evaluation, Authorisation, and Restriction of Chemical Substances (“REACH”) Directive, could result in significant costs or limit access to certain markets.
We have incurred, and will continue to incur, both operating and capital costs to comply with HSE laws, including costs associated with the investigation and clean-up of some of our current and former properties and offsite disposal locations. As the present and former operator of industrial properties that use and generate hazardous materials, we could be subject to additional liability for environmental contamination in the future, regardless of whether we caused such contamination.
Risks Related to Cybersecurity and Information Systems
Cyber-security vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data.
Increased global cyber security vulnerabilities, threats, computer viruses and more sophisticated and targeted cyber relatedcyber-related attacks, as well as cyber securitycyber-security failures resulting from human error and technological errors, pose a risk to our systems, products and data as well as potentially to our employees’, customers', partners', suppliers' and third-party service providers' data. An attack could result in security breaches, theft, lost or corrupted data, misappropriation of sensitive, confidential or personal data or information, loss of trade secrets and commercially valuable information, production downtimes and operational disruptions. We attempt to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, but we remain potentially vulnerable to additional known or unknown threats. There is no assurance the financial or operational impact from such threats will not be material.
Global privacy, data protection and data security requirements are highly complex, evolving rapidly, and evolving rapidly.may increase our costs to comply.
To conduct our operations, we regularly move data across national borders, and consequently we are subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s General Data Protection Regulation (“GDPR”), which greatly increases the jurisdictional reach of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure of significant data breaches, became effective in May 2018. Other countries have enacted or are enacting data localization and privacy laws that require data to stay within their borders. All of theseborders, as well as requiring that data subjects provide clear and concise consent on how collected data will be utilized. These evolving compliance and operational requirements impose significant costs that are likely to increase over time.time as the breadth and complexity of regulations continues to evolve internationally. We continue to monitor these developments and adjust our data handling practice in accordance with applicable law.
Information systems failure may disrupt our business and result in financial loss and liability to our customers.
We rely on information technology networks and systems, including the Cloud and third party service providers, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. These information technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures or computer viruses. If these information technology systems suffer severe damage or disruption and the issues are not resolved in a timely manner, our business, financial condition and operations could be materially adversely affected.
Our operations are subjectRisks Related to various environmental, health and safety laws and regulations, and we may incur significant costs to comply with these requirements, or be subject to sanctions or held liable for damages resulting from any failure to comply.
Our operations, products and properties are subject to extensive foreign, federal, state, local and provincial laws and regulations relating to EHS protection around the world. EHS laws vary by jurisdiction governing air emissions, wastewater discharges, material handling and transportation, waste management and disposal, substances in products, and workplace health and safety, as well as the investigation and clean-up of contaminated sites. Failure to comply with EHS laws and regulations could have significant consequences on our business and operations, including the imposition of substantial fines and sanctions for violations, injunctive relief (including requirements that we limit or cease operations at affected facilities), and negative publicity.
EHS laws have become increasingly stringent and stricter interpretation or enforcement of new and existing EHS laws could adversely affect our business, financial condition and results of our operations and product demand. For example, increasing global efforts to control emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”) have the potential to directly impact the price of the energy and raw materials we purchase. In addition, GHG regulations could impact oil and gas production, a key demand driver of our industrial end markets, and reduce demand for our products by driving down the use of fossil fuels.
The evolution of EHS laws beyond manufacturing operations to restrict specific chemical substances in our products or impose labeling and other requirements, such as California’s Safe Drinking Water and Toxic Enforcement Act (“Proposition 65”) or European Union’s Registration, Evaluation, Authorisation, and Restriction of Chemical Substances (“REACH”) Directive, could result in significant costs or limit access to certain markets.
We have incurred, and will continue to incur, both operating and capital costs to comply with EHS laws, including costs associated with the investigation and clean-up of some of our current and former properties and offsite disposal locations. As the present and former operator of industrial property that use and generate hazardous materials, we could be subject to additional liability for environmental contamination in the future, regardless of whether we caused such contamination.
Our insurance may not fully cover all future losses we may incur.
Manufacturers of products such as ours are subject to inherent risks. We maintain an amount of insurance protection that we consider adequate, but we cannot provide any assurance that our insurance will be sufficient or provide effective coverage under all circumstances and against all hazards or liabilities to which we may be subject. Specifically, our insurance may not be sufficient to replace facilities or equipment that are damaged in part or in full. Damages or third-party claims for which we are not fully insured could adversely affect our financial condition and results of operation. Further, due to rising insurance costs and changes in the insurance markets, insurance coverage may not continue to be available at all or at rates or on terms similar to those presently available. Additionally, our insurance may subject us to significant deductibles, self-insured retentions, retrospectively rated premiums or similar costs. Any losses not covered by insurance could have a material adverse effect on us. We typically purchase business interruption insurance for our facilities. However, if we have a stoppage, our insurance policies may not cover every contingency and may not be sufficient to cover all of our lost revenues. In the future, we may be unable to purchase sufficient business interruption insurance at desirable costs.
We supply products to industries that are subject to inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could result in unforeseen and damaging events. These risks may expose us, as an equipment operator and supplier, to liability for personal injury, wrongful death, property damage, and pollution and other environmental damage. The insurance we carry against many of these risks may not be adequate to cover our claims or losses. Further, insurance covering the risks we expect to face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we were not able to obtain liability insurance, our business, results of operations, cash flows and financial condition could be negatively impacted. If our customers suffer damages as a result of the occurrence of such events, they may reduce their business with us.
Longer lives of products used in our end markets may adversely affect demand for some of our replacement products.
The average useful life of certain products in our end markets has increased in recent years due to innovations in technologies and manufacturing processes. The longer product lives allow end users to replace parts less often. As a result, a portion of sales in the replacement markets we serve may be displaced. If this trend continues, it could adversely impact our replacement market sales.
The replacement market in emerging markets may develop in a manner that could limit our ability to grow in those markets.
In emerging markets such as China, India, Eastern Europe and Russia, the replacement markets are still nascent as compared to those in more developed nations. In these markets, we have focused on building a first-fit presence in order to establish brand visibility in the end markets we serve. However, as the replacement markets in these regions grow, our products may not be selected as the replacement product, although we are the first-fit provider. If we are not able to convert our first-fit presence in these emerging markets into sales in the replacement end market, there may be a material adverse effect on our replacement end market growth potential in these emerging markets.
We may acquire businesses or assets that we may not be able to successfully integrate and we may be unable to recoup our investment in these businesses or assets.
We consider strategic acquisitions of complementary businesses or assets to expand our product portfolio and geographic presence on an ongoing basis, and regularly have discussions concerning potential acquisitions, certain of which may be material. Acquisitions, particularly investments in emerging markets, involve legal, economic and political risks. We also encounter risks in the selection of appropriate investment and disposal targets, execution of the transactions and integration of acquired businesses or assets.
We may not be able to effectively integrate acquisitions or successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. As a result, we may not be able to recoup our investment in those acquisitions or achieve the economic benefits that we anticipate from these acquisitions. Our efforts to integrate these businesses or assets could be affected by a number of factors beyond our control, such as general economic conditions and increased competition. In addition, the process of integrating these businesses or assets could cause the interruption of, or loss of momentum in, the activities of our existing business and the diversion of management’s attention. Furthermore:
the key personnel of the acquired company may decide not to work for us;
customers of the acquired company may decide not to purchase products from us;
suppliers of the acquired company may decide not to sell products to us;
the markets may reject the acquired technologies, or they may not integrate with our existing technologies as expected;
we may experience business disruptions as a result of information technology systems conversions;
we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting;
we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;
we may intentionally assume the liabilities of the companies we acquire, which could result in material adverse effects on our business;
our existing business may be disrupted or receive insufficient management attention;
we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect; and
we may incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing shareholders.
These impacts and any delays or difficulties encountered in connection with the integration of these businesses or assets could negatively impact our business and results of operations.
In addition, certain of the businesses that we have acquired and may acquire have unaudited financial statements that have been prepared by the management of such companies and have not been independently reviewed or audited. We cannot assure you that the financial statements of companies we have acquired or will acquire would not be materially different if such statements were audited. Finally, we cannot assure you that we will continue to acquire businesses at valuations consistent with our prior acquisitions or that we will complete future acquisitions at all. We cannot assure you that there will be attractive acquisition opportunities at reasonable prices, that financing will be available or that we can successfully integrate such acquired businesses into our existing operations. In addition, our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long-lived assets, particularly if economic conditions worsen unexpectedly. These changes could materially negatively affect our business, results of operations or financial condition.Human Capital Management
If we lose our senior management or key personnel, our business may be materially and adversely affected.
The success of our business is largely dependent on our senior management team, as well as on our ability to attract and retain other qualified key personnel. In addition, there is significant demand in our industry for skilled workers. It cannot be assured that we will be able to retain all of our current senior management personnel and attract and retain other necessary personnel, including skilled workers, necessary for the development of our business. Further, in the event we do lose key personnel, the success of our business may depend on whether we have appropriate succession plans in place and can implement on such plans to identify and integrate new personnel. The loss of the services of senior management and other key personnel or the failure to attract additional personnel and implement succession plans as required could have a material adverse effect on our business, financial condition and results of operations.
Our business depends on our strong brand, and if we are not able to maintain and enhance our brand we may be unable to sell our products.
Our brand has worldwide recognition and our success depends on our ability to maintain and enhance our brand image and reputation. In particular, we believe that maintaining and enhancing the Gates brand is critical to maintaining and expanding our customer base. Maintaining, promoting and enhancing our brand may require us to make substantial investments in areas such as product innovation, product quality, intellectual property protection, marketing and employee training, and these investments may not have the desired impact on our brand image and reputation. Our business could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of our brand is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If we are unable to maintain or enhance the image of our brand, it could materially adversely affect our business, financial condition and results of operations.
We may be materially adversely impacted by work stoppages and other labor matters.
As of December 28, 2019,January 2, 2021, we had approximately 14,700 employees worldwide. Certain of our employees are represented by various unions under collective bargaining agreements.agreements, or by various regional works councils. While we have no reason to believe that we will be impacted by work stoppages and other labor matters, we cannot assure youinsure that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Increased unionization of our workforce, new labor legislation or changes in regulations could disrupt our operations, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies. Any of these factors may have a materially adverse effect on us or may limit our flexibility in dealing withmanaging our workforce. In addition, many of our customers and vendors have unionized workforces. If one or more of our customers or vendors experience a material work stoppage, it could similarly have a material adverse effect on our business, results of operations and financial condition.
We have investments in joint ventures, which limits our ability to manage third-party risks associated with these projects.
We have investments in joint ventures which may involve risks such as the possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have economic or business interests or goals that are inconsistent with our business interests or goals or take actions that are contrary to our instructions or to applicable laws and regulations. Actions by a co-venturer or other third party could expose us to claims for damages, financial penalties and reputational harm, any of which could adversely affect our business and operations. In addition, we may agree to guarantee indebtedness incurred by a joint venture or co-venturer or provide standard indemnifications to lenders for loss liability or damage occurring as a result of our actions or actions of the joint venture or other co-venturers. Such a guarantee or indemnity may be on a joint and several basis with a co-venturer, in which case we may be liable in the event that our co-venturer defaults on its guarantee obligation. The non-performance of a co-venturer’s obligations may cause losses to us in excess of the capital we have invested or committed.
Preparing our financial statements requires us to have access to information regarding the results of operations, financial position and cash flows of our joint ventures. Any deficiencies in our joint ventures’ internal controls over financial reporting may affect our ability to report our financial results accurately or prevent or detect fraud. Such deficiencies also could result in restatements of, or other adjustments to, our previously reported or announced operating results, which could diminish investor confidence and reduce the market price for our ordinary shares. Additionally, if our joint ventures are unable to provide this information for any meaningful period or fail to meet expected deadlines, we may be unable to satisfy our financial reporting obligations or timely file our periodic reports.
Although our joint ventures may generate positive cash flow, in some cases they may be unable to distribute that cash to the joint venture partners. Additionally, in some cases our joint venture partners may control distributions and may choose to leave cash in the joint venture rather than distribute it. Because our ability to generate liquidity from our joint ventures depends in part on their ability to distribute cash to us, our failure to receive distributions from our joint venture partners could reduce our cash flow return on these investments.
We are subject to liabilities with respect to businesses that we have divested in the past.
In recent years, we have divested a number of businesses. With respect to some of these former businesses, we have contractually agreed to indemnify the buyer against liabilities arising prior to the divestiture, including lawsuits, tax liabilities, product liability claims or environmental matters. Even without ongoing contractual indemnification obligations, we could be exposed to liabilities arising out of such divestitures. As a result of these types of arrangements, conditions outside our control could materially adversely affect our future financial results.
Terrorist acts, conflicts and wars may materially adversely affect our business, financial condition and results of operations.
As we have a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, partners, suppliers, distributors, resellers or customers due to terrorist acts, conflicts and wars, wherever located around the world. The potential for future attacks, the national and international responses to attacks or perceived threats to national security, and other actual or potential conflicts or wars have created many economic and political uncertainties. Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive raw materials from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions, and thereby materially adversely affect our business, financial condition, results of operations and cash flows.
If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, it may have a material adverse effect on our business, financial condition and results of operations.
Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crisis such as the novel coronavirus (2019-nCoV) that was first reported from Wuhan, China, on December 31, 2019, or other natural or man-made disasters. If any of these facilities, supply chains or systems were to experience a catastrophic loss or ongoing closure or disruption, it could negatively impact our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses.
Certain of our defined benefit pension plans are underfunded, and additional cash contributions we may be required to make will reduce the cash available for our business, such as the payment of our interest expense.required.
Certain of our employees in the U.S., the U.K., Canada, Mexico, Germany and Japan are participants in defined benefit pension plans which we sponsor and/or to which we have obligations to contribute to.contribution obligations. As of December 28, 2019,January 2, 2021, the unfunded amount of our defined benefit pension plans on a worldwide basis was $62.9 million on a Topic 715 “Compensation-Retirement Benefits”“Compensation-Retirement Benefits” basis. The amount of our contributions to our underfunded plans will depend upon asset returns, funding assumptions, regulatory requirements and a number of other factors and, as a result, the amount we may be required to contribute to such plans in the future may vary. Such cash contributions to the plans will reduce the cash available for our business such as the payment of interest expense on our notes or our other indebtedness.
The loss or financial instability of any significant customer or customers could adversely affect our business, financial condition, results of operations or cash flows.
A substantial part of our business is concentrated with a few customers, and we have certain customers that are significantRisks Related to our business. During Fiscal 2019, our top ten customers accounted for approximately 23% of our consolidated net sales and accounted for approximately 36% of our trade accounts receivable balance as of December 28, 2019, and our largest customer accounted for approximately 9% and 19% of our Fiscal 2019 consolidated net sales and trade accounts receivable balance as of December 28, 2019, respectively. The loss of one or more of these customers or other major customers, or a deterioration in our relationship with any of them or their failure to pay amounts due to us could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our contracted backlog is comprised of future orders for our products from a broad number of customers. Defaults by any of the customers that have placed significant orders with us could have a significant adverse effect on our net sales, profitability and cash flow. Our customers may in the future default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons deriving from the general economic environment or circumstances affecting those customers in particular. If a customer defaults on its obligations to us, it could have a material adverse effect on our backlog, business, financial condition, results of operations or cash flows.Tax Matters
Changes in our effective tax rate or additional tax liabilities could adversely impact our net income.
We are subject to income taxes as well as non-income based taxes in the U.K., the U.S. and various other jurisdictions in which we operate. The laws and regulations in these 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, including those related to any restructuring of intercompany operations, holdings or financings; the valuation of intercompany services; cross-border payments between affiliated companies; and the 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 deferred income tax assets and liabilities, and changes in tax laws and regulations. We are regularly under audit by taxing authorities in certain of the 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 unfavorable tax adjustments that have an adverse effect on our overall tax liability.
Changes in tax laws could result in additional tax liabilities.
Changes in tax laws can and do occur. For example, in 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which is complex and continues to be further clarified with supplemental guidance. Changes to tax laws may require the Company to make significant judgment in determining the appropriate provision and related accruals for these taxes; and, as a result, such changes could result in substantially higher taxes and therefore, could have a significant adverse effect on our results of operations, financial conditions and liquidity. In addition, the Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, has recommended fundamental tax reforms affecting the taxation of multinational corporations, including the Base Erosion and Profit Shifting project, which in part aims to address international corporate tax avoidance. Countries have already enacted significant measures in this regard. The OECD has undertaken a new project to address the tax challenges of the digitization of the economy. The proposal seeks to allocate a greater share of taxing rights to countries where consumers are located, regardless of the physical presence of a business, and by implementing a global minimum tax. Such OECD projects are likely to result in further changes to the international tax regime which could adversely impact our effective tax rate and tax liabilities.
Further, the U.K.’s decision to leave the E.U. may result in changes to the interpretation and application of tax laws and regulations including changes to the interpretations of double tax treaties which could lead to significant changes in the U.K. tax burden of the Company. In addition, it may become more difficult for cash to be repatriated to U.K. companies without the application of withholding tax and the tax treatment of the interest on any intra-group loans may be impacted by these changes, both resulting in significant changes to the tax burden of the Company.
Any such developments to the tax regime in the U.K., the U.S. or in other countries in which we operate could materially affect our tax burden and/or have a negative impact on our ability to compete in the global marketplace.
We operate soRelevant tax authorities may no longer treat us as to be treatedbeing exclusively as a resident of the U.K. for tax purposes, but the relevant tax authorities may treat us as also being a resident of another jurisdiction for tax purposes.
We are a company incorporated in the U.K. Current U.K. tax law provides that we will be regarded as being U.K. resident for tax purposes from incorporation and shall remain so unless (i) we were concurrently resident of another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the U.K., and (ii) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction.
Based upon our management and organizational structure, we believe that we should be regarded solely as resident in the U.K. from our incorporation for tax purposes. However, because this analysis is highly factual and may depend on future changes in our management and organizational structure, there can be no assurance regarding the final determination of our tax residence. Should we be treated as resident in a country or jurisdiction other than the U.K., we could be subject to taxation in that country or jurisdiction on our worldwide income and may be required to comply with a number of material and formal tax obligations, including withholding tax and/or reporting obligations provided under the relevant tax law, which could result in additional costs and expenses. Further, we may not qualify for benefits under the tax treaties entered into between the U.K. and other countries. Not being treated exclusively as a resident of the U.K. for tax purposes could result in adverse tax consequences to us.
Risks Related to Our Indebtedness
Our substantial leverage could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy, or our industry or our ability to pay our debts, and could divert our cash flow from operations to debt payments.
We are highly leveraged. As of December 28, 2019,January 2, 2021, the total principal amount of our debt was $2,985.0$2,720.8 million. Subject to the limits contained in the credit agreements that govern our senior secured credit facilities, the indenture that governs our notes and the applicable agreements governing our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase. Specifically, our high level of debt could have important consequences, including the following:
•making it more difficult for us to satisfy our obligations with respect to our debt;
•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
•requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•increasing our vulnerability to general adverse economic and industry conditions;
•exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;
•limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
•placing us at a disadvantage compared to other, less leveraged competitors; and
•increasing our cost of borrowing.
We are a holding company, and our consolidated assets are owned by, and our business is conducted through, our subsidiaries. Earnings from these subsidiaries are our primary source of funds for debt payments and operating expenses. If our subsidiaries are restricted from making distributions, our ability to meet our debt service obligations or otherwise fund our operations may be impaired. Moreover, there may be restrictions on payments by subsidiaries to their parent companies under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make payments to shareholders only from profits. As a result, although a subsidiary of ours may have cash, we may not be able to obtain that cash to satisfy our obligation to service our outstanding debt or fund our operations.
Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions which could further exacerbate the risks to our financial condition described above.
We may be able to incur significant additional indebtedness in the future. Although certain of the agreements governing our existing indebtedness contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the immediately preceding risk factor would increase.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Interest rates may increase in the future. As a result, interest rates on our revolving credit facility or other variable rate debt offerings could be higher or lower than current levels. As of December 28, 2019,January 2, 2021, after taking into account our interest rate derivatives, $741.7$762.9 million (equivalent), or 24.8%28.0%, of our outstanding debt had variable interest rates. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
In addition, we have $2,416.8$2,152.6 million of variable rate indebtedness that uses LIBOR or EURIBOR as a benchmark for establishing the rate of interest. LIBOR and its foreign currency counterparts are the subject of recent national, international and other regulatory guidance and proposals for reform and arewere initially not expected to be maintained after 2021. In November 2020, the Board of Governors of the U.S. Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a joint statement stating that the administrator of LIBOR will consult on its intention to cease publicizing “one week” and “two month” LIBOR following the publication at the end of 2021, but the remaining LIBOR periods would only cease following the publication at the end of June 2023 to allow a greater number of existing contracts to mature prior to any disruption in LIBOR. However, there is no certainty that financial institutions will enter into new contracts, or agree to modify terms of existing contracts, utilizing LIBOR after 2021. We therefore may need to renegotiate certain of our loan agreements that extend past 2021, which could require us to incur significant expense and may subject us to disputes or litigation over the appropriateness or comparability to LIBOR or EURIBOR of the replacement reference rates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative rate for LIBOR. In Europe, a working group in conjunction with the European Central Bank has recommended the euro short-term rate, or €STR as the possible replacement to the Euro OverNight Index Average, which provides the discounting curve for collateralized euro cash flows used in EURIBOR. At this time, it is not possible to predict how markets will respond in coming years to SOFR, €STR, or other alternative reference rates as replacements to the current interbank rates. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness and could challenge our ability to renegotiate our revolving credit facility or other variable rate debt offerings.
Certain of our debt agreements impose significant operating and financial restrictions on us and our subsidiaries whichthat could prevent us from capitalizing on business opportunities.
The credit agreements that govern our senior secured term loan facilities and the indenture that governs our notes impose significant operating and financial restrictions on our subsidiaries. These restrictions limit the ability of certain of our subsidiaries to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends and make other distributions on, or redeem or repurchase, capital stock;
•make certain investments;
•incur certain liens;
•enter into transactions with affiliates;
•merge or consolidate;
•enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments;
•designate restricted subsidiaries as unrestricted subsidiaries; and
•transfer or sell assets.
As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include similar or more restrictive covenants. We cannot assure youensure that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or amend the covenants.
Our failure to comply with the restrictive covenants described above as well as other terms of our other indebtedness or the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our results of operations and financial condition could be adversely affected.
Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our results of operations and our financial condition.
If there is an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flows would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments.
Risks Related to the Ownership of our Ordinary Shares
Our Sponsor and its affiliates control us and their interests may conflict with ours or yours in the future.
Our Sponsor and its affiliates beneficially owned approximately 85.4%84.7% of our outstanding ordinary shares as of December 28, 2019.January 2, 2021. Moreover, under our articles of association (the “Articles”) and our shareholders agreement with our Sponsor, for so long as our Sponsor and its affiliates retain significant ownership of us, we have agreed to nominate to our board individuals designated by such Sponsor. Even when our Sponsor and its affiliates cease to own ordinary shares representing a majority of the total voting power, for so long as our Sponsor continues to own a significant percentage of our ordinary shares, such Sponsor will still be able to significantly influence the composition of our board of directors and the approval of actions requiring shareholder approval through their voting power. Accordingly, for such period of time, our Sponsor will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as our Sponsor continues to own a significant percentage of our ordinary shares, such Sponsor will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive youother shareholders of an opportunity to receive a premium for your ordinary shares as part of a sale of our company and ultimately might affect the market price of our ordinary shares.
Our Sponsor and its affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our shareholders. Our shareholders’ agreement provides that none ofneither our Sponsor nor any of its affiliates or any director who is not employed by us or his or her affiliates, will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in our pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to us and our shareholders.
We are a “controlled company” within the meaning of the rules of the NYSE and, as a result, rely on and intend to continue to rely on, exemptions from certain corporate governance requirements. YouOur shareholders may not have the same protections afforded to shareholders of companies that are subject to such requirements.
Our Sponsor controls a majority of the combined voting power of all classes of our shares entitled to vote generally in the election of directors. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements. For example, controlled companies:
•are not required to have a board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;
•are not required to have a compensation committee that is composed entirely of independent directors; and
•are not required to have a nominating and corporate governance committee that is composed entirely of independent directors.
We intend to continue toBecause we utilize certain of these exemptions. As a result, we currently do not have a majority of the directors on our board that have been affirmatively determined to be independent by our board. In addition,exemptions, our compensation, committee and nominating and governance committees are not comprised entirely of independent directors that have been affirmatively determined to be independent byand accordingly, our board. Accordingly, youshareholders may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.
The market price of our ordinary shares has been and may in the future be volatile, which could cause the value of yourour shareholders’ investment to decline.
The market price of our ordinary shares has been and may in the future be volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. During 2019,2020, the per share trading price of our ordinary shares fluctuated from a low of $6.76$5.42 to a high of $17.60.$14.30. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our ordinary shares regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to shareholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our 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.
Stock markets and the price of our ordinary shares may experience extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Because we have no current plans to pay dividends on our ordinary shares, youour shareholders may not receive any return on your investmenttheir investments unless youthey sell yourtheir ordinary shares for a price greater than that which you paid for them.they paid.
We have no current plans to pay dividends on our ordinary shares. The declaration, amount and payment of any future dividends on our ordinary shares will be at the sole discretion of our board of directors. Our boardBoard of directorsDirectors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our shareholders or by our subsidiaries to us, and such other factors as our boardBoard of directorsDirectors may deem relevant. In addition, our ability to pay dividends is limited by our senior secured credit facilities and notes and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future. As a result, youour shareholders may not receive any return on an investment in our ordinary shares unless you sell your ordinarysuch shares are sold for a price greater than that which youwas paid for them.
YouOur shareholders may be diluted by the future issuance of additional ordinary shares in connection with our incentive plans, acquisitions or otherwise.
Our shareholders adopted a resolution authorizing our board of directors to allot our ordinary shares and to grant rights to subscribe for or convert any security into such shares for the consideration and on the terms and conditions established by our boardBoard of directorsDirectors in its sole discretion, whether in connection with acquisitions or otherwise. Additionally, we have reserved 12,500,000 ordinary shares for issuance under our Omnibus Incentive Plan. Any ordinary shares that we issue, including under our Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the holders of our ordinary shares.
Future issuances of ordinary shares by us, and the availability for resale of shares held by our Sponsor, may cause the market price of our ordinary shares to decline.
Sales of a substantial number of our ordinary shares in the public market, or the perception that these sales could occur, could substantially decrease the market price of our ordinary shares.
Pursuant to a registration rights agreement, we granted our Sponsor the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act covering resales of our ordinary shares held by them or to participate in future registration of securities by us. In Fiscal 2019, the SEC declared effective a registration statement on Form S-3 that, among other things, registers (i) up to a maximum aggregate offering price of $1,000,000,000 of our securities, and (ii) the resale of 243,985,383 shares held by our Sponsor, which represented approximately 85.4%83.9% of our outstanding ordinary shares as of December 28, 2019.January 2, 2021. These shares held by our Sponsor also may be sold pursuant to Rule 144 under the Securities Act subject to certain volume, manner of sale, and other limitations. The market price of our ordinary shares could drop significantly if we or our Sponsor sell these shares or are perceived by the market as intending to sell them.
We may issue a new class or classes of shares whose terms could adversely affect the voting power or value of our ordinary shares.
Our articles of association, as amended, authorize us to issue, subject to the limit therein on the authority of our Board of Directors to allot new shares of the Company, without the approval of the holders of our ordinary shares, a 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 Board of Directors may determine, including rights to (a) receive dividends (which may include rights to receive preferential or cumulative dividends), (b) distributions made on a winding up of the Company and (c) be convertible into, or exchangeable for, shares of 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 Companies Act 2006 (“Companies Act”)) or at such rates of exchange and with such adjustments as may be determined by our Board of Directors.
The terms of one or more classes of shares could adversely impact the voting 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.
Similarly, the repurchase or redemption rights or liquidation preferences we might assign to a new class of shares could affect the residual value of our ordinary shares.
U.S. investors may have difficulty enforcing civil liabilities against our company, our directors or members of senior management.
There is doubt as to whether English courts would enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the U.S. or elsewhere may be unenforceable in the 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 U.K. will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The U.S. and the U.K. do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.
The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated under English law. The rights of holders of ordinary shares are governed by English law, including the provisions of the Companies Act, and by our Articles. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations.
The U.K. City Code on Takeovers and Mergers (the “Takeover Code”) applies, among other things, to an offer for a public company whose registered office is in the U.K. and whose securities are not admitted to trading on a regulated market in the U.K. if the company is considered by the Panel on Takeovers and Mergers (the “Takeover Panel”) to have its place of central management and control in the U.K. This is known as the “residency test”. Under the Takeover Code, the Takeover Panel will determine whether we have our place of central management and control in the U.K. by looking at various factors, including the structure of our board of directors, the functions of the directors and where they are resident.
If at the time of a takeover offer, the Takeover Panel determines that we have our place of central management and control in the U.K., we would be subject to a number of rules and restrictions, including but not limited to the following: (i) our ability to enter into deal protection arrangements with a bidder would be extremely limited; (ii) we might not, without the approval of our shareholders, be able to perform certain actions that could have the effect of frustrating an offer, such as issuing shares or carrying out acquisitions or disposals; and (iii) we would be obliged to provide equality of information to all bona fide competing bidders.
Our Sponsor has an interest in over 50% of our voting share capital, and therefore, if the Takeover Panel were to determine that we were subject to the Takeover Code, our Sponsor would be able to increase its aggregate holding in us without triggering the requirement under Rule 9 of the Takeover Code to make a cash offer for the outstanding shares in the issuer.
The Takeover Panel has confirmed to our representatives that, on the basis of our boardBoard of directors,Directors, it does not consider the Takeover Code to apply to the Company, although that position is subject to change if our place of central management and control is subsequently found to move to the U.K.
Our Articles provide that the courts of England and Wales have exclusive jurisdiction to determine shareholder and derivative disputes, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, former directors, officers or employees.
Our Articles provide that the courts of England and Wales have exclusive jurisdiction to determine any dispute brought by a shareholder in that shareholder’s capacity as such, or related to or connected with any derivative claim in respect of a cause of action vested in the Company or seeking relief on behalf of the Company, against the Company and/or the board and/or any of the directors, former directors, officers or other employees individually, arising out of or in connection with these Articles or (to the maximum extent permitted by applicable law) otherwise. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our directors, former directors, officers or other employees, which may discourage lawsuits against us and our directors, former directors, officers and employees. The rights of stockholders under Delaware law and shareholders under English law in relation to the bringing of shareholder suits differ in several significant respects. Any person or entity purchasing or otherwise acquiring or holding any interest in our ordinary shares shall be deemed to have notice of and to have consented to the provisions of our governing documents described above, as they may be amended from time to time.
Transfers of our shares outside DTC may be subject to stamp duty or stamp duty reserve tax in the U.K., which would increase the cost of dealing in our shares.
On completion of the IPO, as noted below, the new ordinary shares were issued to a nominee for The Depository Trust Company (“DTC”) and corresponding book-entry interests credited in the facilities of DTC. On the basis of current law, no charges to U.K. stamp duty or stamp duty reserve tax (“SDRT”) are expected to arise on the issue of the ordinary shares into DTC’s facilities or on transfers of book-entry interests in ordinary shares within DTC’s facilities and investors are strongly encouraged to hold ordinary shares in book-entry form through the facilities of DTC.
A transfer of title in the ordinary shares from within the DTC system to a purchaser out of DTC and any subsequent transfers that occur entirely outside the DTC system, will attract a charge to stamp duty at a rate of 0.5% of any consideration, which is payable by the transferee of the ordinary shares. Any such duty must be paid and the relevant transfer document, if any, stamped by HM Revenue & Customs (“HMRC”) before the transfer can be registered in our company books. However, if those ordinary shares are redeposited into DTC, the redeposit will attract stamp duty or SDRT at the rate of 1.5% to be paid by the transferor.
We have put in place arrangements to require that our ordinary shares held in certificated form cannot be transferred into the DTC system until the transferor of the ordinary shares has first delivered the ordinary shares to a depositary specified by us so that stamp duty (and/or SDRT) may be collected in connection with the initial delivery to the depositary. Any such ordinary shares will be evidenced by a receipt issued by the depositary. Before the transfer can be registered in our books, the transferor will also be required to put funds in the depositary to settle the resultant liability to stamp duty (and/or SDRT), which will be charged at a rate of 1.5% of the value of the shares.
If our ordinary shares are not eligible for continued deposit and clearing within the facilities of DTC, then transactions in our securities may be disrupted.disrupted and/or our ability to issue shares under our equity compensation plans may be restricted.
The facilities of DTC are a widely-used mechanism that allow for rapid electronic transfers of securities between the participants in the DTC system, which include many large banks and brokerage firms. Our ordinary shares are currently eligible for deposit and clearing within the DTC system. DTC generally has discretion to cease to act as a depository and clearing agency for the ordinary shares including to the extent that any changes in U.K. law (including changes as a result of the U.K.’s decision to leave the E.U.) changes the stamp duty or SDRT position in relation to the ordinary shares. If DTC were to determine that our ordinary shares are not eligible for continued deposit and clearance within its facilities, our ordinary shares may not be eligible for continued listing on the NYSE and trading in our ordinary shares would be disrupted. While we would pursue alternative arrangements to preserve our listing and maintain trading, any such disruption could have a material adverse effect on the market price of our ordinary shares and our access to the capital markets.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We have a presence in over 120 locations in 2930 countries across the Americas, Europe, Asia and Australia. Our corporate operations center is located in Denver, Colorado, and we also maintain regional headquarters in Denver, Colorado, Luxembourg, Shanghai, China and Singapore.
As of December 28, 2019,January 2, 2021, the carrying amount of our property, plant and equipment was $727.9$705.0 million of which $2.8$4.1 million related to assets held under finance leases. This compares to a carrying amount of our property, plant and equipment of $756.3$727.9 million as of December 29, 2018,28, 2019, of which $2.2$2.8 million related to assets held under finance leases.
Included in property, plant and equipment are land and buildings with a total carrying amount of $247.3 million as of January 2, 2021, compared to $249.2 million as of December 28, 2019, compared with $256.3 million as of December 29, 2018, representing manufacturing facilities, service centers, distribution centers and offices located throughout the world, predominantly in North America. As of December 28, 2019,January 2, 2021, Gates owned 33 of these facilities, including 24 manufacturing or service centers.
Additionally, we lease approximately 90101 locations. These leased locations included 3924 manufacturing or service centers as of December 28, 2019.January 2, 2021. Management believes that the Company’s properties are suitable and adequate for its current and anticipated business operations.
Item 3. Legal Proceedings
Gates is, from time to time, party to general legal proceedings and claims, which arise in the ordinary course of business. Gates is also, from time to time, party to legal proceedings and claims in respect of environmental obligations, product liability, intellectual property and other matters which arise in the ordinary course of business and against which management believes meritorious defenses are available.
While it is not possible to quantify the financial impact or predict the outcome of all pending claims and litigation, management does not anticipate that the outcome of any current proceedings or known claims, either individually or in aggregate, will have a material adverse effect upon our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our ordinary shares are traded on the New York Stock Exchange (“NYSE”)NYSE under the symbol “GTES”. As of February 17, 2020,5, 2021, there were three holders of record of our ordinary shares. This stockholder figure does not include a substantially greater number of holders whose ordinary shares are held by these recordholders.recordholders, including through banks, brokers, and other institutions.
Dividends
We have no current plans to pay dividends on our ordinary shares. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We are a holding company and have no direct operations,operations; accordingly, we will only be able to pay dividends from funds we receive from our subsidiaries. In addition, the ability of our subsidiaries to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing any indebtedness we or our subsidiaries may incur in the future.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data
Upon completion of the IPO 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, an exempted limited company incorporated in the Cayman Islands with limited liability and has become the holding company of the Gates business. The reorganization was accounted for as a transaction between entities under common control and the net assets were recorded at the historical cost basis 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.
The following table sets forth the selected historical consolidated financial information of Gates Industrial Corporation plc for the periods and dates indicated, which therefore reflects the historical consolidated financial information of Omaha Topco for the periods prior to the date of the Transactions. The balance sheet data as of December 28, 2019 and December 29, 2018 and the statement of operations data for Fiscal 2019, Fiscal 2018 and Fiscal 2017 have been derived from the audited consolidated financial statements of Gates Industrial Corporation plc included elsewhere in this annual report. The balance sheet data as of December 30, 2017 and the statement of operations data for Fiscal 2016 have been derived from the audited consolidated financial statements of Gates Industrial Corporation plc that are not included in this annual report. The balance sheet data as of December 31, 2016 and January 2, 2016 and the statement of operations data for Fiscal 2015 have been derived from the audited consolidated financial statements of Omaha Topco that are not included in this annual report.
You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes included elsewherepreviously required by Item 301 of Regulation S-K has been omitted in this annual report and the “Management’s Discussion and Analysisreliance on SEC Release No. 33-10890.
|
| | | | | | | | | | | | | | | | | | | |
(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 |
|
Item 7: Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this annual report. This discussion and analysis addresses Fiscal 20192020 and Fiscal 2018.2019. For discussion and analysis of our financial condition and results of operations for Fiscal 20182019 and Fiscal 2017,2018, see the Management's Discussion and Analysis of Financial Condition and Results of Operations, in Part II, Item 7 of our Annual Report on Form 10-K for Fiscal 2018, filed with the Securities and Exchange Commission on February 14, 2019.2019, which is incorporated herein by reference. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors” above.
Our Company
We are a global manufacturer of innovative, highly engineered power transmission and fluid power solutions. We offer a broad portfolio of products to diverse replacement channel customers and to original equipment (“first-fit”) manufacturers as specified components, with the majority of our revenue coming from replacement channels. Our products are used in applications across numerous end markets, which include construction, agriculture, energy, automotive, transportation, general industrial, consumer products and many others. We sell our products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation; this reputation has been built for over a century since Gates’ founding in 1911. 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.
Business Trends
Our net sales have historically been, and remain, highly correlated with industrial activity and utilization and not with any single end market given the diversification of our business and high exposure to replacement channels. This diversification limits our exposure to trends in any given end market. In addition, a majority of our sales are generated from customers in replacement channels, who serve primarily a large base of installed equipment that follows a natural maintenance cycle that is somewhat less susceptible to various trends that affect our end markets. Such trends include infrastructure investment and construction activity, agricultural production and related commodity prices, commercial and passenger vehicle production, miles driven and fleet age, evolving regulatory requirements related to emissions and fuel economy and oil and gas prices and production. Key indicators of our performance include industrial production, industrial sales and manufacturer shipments.
During the year ended December 28, 2019,Fiscal 2020, sales into replacement channels accounted for approximately 63%64% of our total net sales. Our replacement sales cover a very broad range of applications and industries and, accordingly, are highly correlated with industrial activity and utilization and not a single end market. Replacement products are principally sold through distribution partners that may carry a very broad line of products or may specialize in products associated with a smaller set of end market applications.
During the year ended December 28, 2019,Fiscal 2020, sales into first-fit channels accounted for approximately 37%36% of our total net sales. First-fit sales are to a variety of industrial and automotive customers. Our industrial first-fit customers cover a diverse range of industries and applications and many of our largest first-fit customers manufacture construction and agricultural equipment. Among our automotive first-fit customers, a majority of our net sales are to emerging market customers, where we believe our first-fit presence provides us with a strategic advantage in developing those markets and ultimately increasing our higher margin replacement channel sales. First-fit automotive sales in developed markets represented approximately 7% of our total net sales for the year ended December 28, 2019,Fiscal 2020, with first-fit automotive sales in North America contributing less than 3% of total net sales. As a result of the foregoing factors, we do not believe that our historical consolidated net sales have had any meaningful correlation to global automotive production but are positively correlated to industrial production.
Our recently completed manufacturing footprint investments and other productivity improvements in recent years have helped to position us to continue to make progress on our restructuring program, which is primarily intended to optimize our manufacturing and distribution footprint over the mid-term by removing structural fixed costs and, to a lesser degree, to streamlinestreamlining our selling, general and administrative (“SG&A”) back-office functions. We anticipate that most of the costs associated with these actions will be incurred during 2020 and 2021. Some of these costs will, in accordance with U.S. GAAP, be classified in cost of sales, negatively impacting gross margin, but due to their nature and impact of hindering comparison of the performance of our businesses on a period-over-period basis or with other businesses, they will be excluded from Adjusted EBITDA, consistent with the treatment of similar costs in the current and prior years.
Impact of COVID-19 Pandemic
The first quarter of 2020 marked the beginning of an unprecedented environment for the global economy, which has continued into 2021, although to a lessening degree as it impacts our business, as governments, companies and communities implemented strict measures to minimize the spread of COVID-19. We are prioritizing the health and safety of our employees and the communities in which we operate around the world, taking additional protective measures in our plants to safely maintain operational continuity in support of our global customer base.
In early February 2020, as our business in China was being impacted, we mobilized a centralized crisis response team that developed and is tactically engaged in the implementation of our countermeasure actions across our global footprint. We are adhering to local government mandates and guidance provided by health authorities and have proactively implemented quarantine protocols, social distancing policies, working from home arrangements, travel suspensions, frequent and extensive disinfecting of our workspaces, provision of personal protective equipment, and mandatory temperature monitoring at our facilities. We expect to continue implementing these measures and we may take further actions if required or recommended by government authorities or if we determine them to be in the best interests of our employees, customers, and suppliers.
Our operations are supported largely by local supply chains. Where necessary, we have taken steps to qualify additional suppliers to ensure we are able to maintain continuity of supply. Although we have not experienced any significant disruptions to date, certain Gates suppliers have, or may in the future, temporarily close operations, delay order fulfillment or limit production due to the pandemic. Continued disruptions, shipping delays or insolvency of key vendors in our supply chain could make it difficult or more costly for us to obtain the raw materials or other inputs we need for our operations.
Gates employs an in-region, for-region manufacturing strategy, under which local operations primarily support local demand. In those cases where local production supports demand in other regions, contingency plans have been activated as appropriate. In addition to the handful of plants that were temporarily closed by government mandates, we have proactively managed our output to expected demand levels and occasionally suspended production at other plants for short periods of time, predominantly in the first half of 2020. We may continue to experience these production disruptions, which could place constraints on our ability to produce our products and meet customer demand or increase our costs. Of these temporary closures in the first half of 2020, the most significant for us was in Greater China, where we closed all of our production facilities for approximately three weeks, and in India, where our facilities were closed for approximately six weeks. We have since safely returned these plants to more normalized capacity. Our two largest regions of Europe and North America did not begin to see an impact from COVID-19 until late March 2020. With large portions of the economies in these regions having been effectively shut down during April 2020, we experienced significant year-over-year revenue declines most sharply in that month, with significant month-over-month improvements in subsequent months.
As shelter-in-place requirements eased in various jurisdictions, unfortunately accompanied in some cases by a resurgence in cases, there has been continued progress in the fight against COVID-19. We have seen sequential improvements in both the third and fourth quarters of 2020 compared to the second quarter of 2020, and we currently expect the first quarter of 2021 to show further improvement compared to the fourth quarter. During this crisis, we have maintained our ability to respond to demand improvements, and while we have limited new capital expenditures, we continue to fund key initiatives, which we believe will serve us well as our end markets continue to recover.
We have strength and flexibility in our liquidity position, which includes committed borrowing headroom of $386.7 million under our lines of credit (none of which are currently expected to be drawn in the foreseeable future), in addition to cash balances of $521.4 million as of January 2, 2021. In addition, our business also has a demonstrated ability to generate free cash flow even in challenging environments.
As a result of the unpredictable and evolving impact of the pandemic and measures being taken around the world to combat its spread, the timing and trajectory of the recovery remain unclear at this time, and the adverse impact of the pandemic on Gates’ operations may continue to be material.
Despite this highly uncertain environment, our early experience in China, and more recent experience in North America and EMEA, has helped frame our response to this crisis and our focus in 2021 will continue to be on:
•safely supporting our employees, customers and the communities in which we operate;
•actively managing what we can control in terms of our supply chains and operations;
•managing our compressible costs to the prevailing demand conditions by tightly controlling discretionary spending; and
•funding our key growth initiatives to enhance our differentiation in the market and allow us to emerge from this downturn in an even stronger competitive position.
Results for the year ended January 2, 2021 compared to the results for the year ended December 28, 2019 compared with the results for the year ended December 29, 2018
Summary Gates Performance
| | | | | | | | | | | | | | | |
| | | For the year ended |
(dollars in millions) | | | | | January 2, 2021 | | December 28, 2019 |
Net sales | | | | | $ | 2,793.0 | | | $ | 3,087.1 | |
Cost of sales | | | | | 1,758.3 | | | 1,944.6 | |
Gross profit | | | | | 1,034.7 | | | 1,142.5 | |
Selling, general and administrative expenses | | | | | 776.9 | | | 777.3 | |
Transaction-related expenses | | | | | 5.2 | | | 2.6 | |
Asset impairments | | | | | 5.2 | | | 0.7 | |
Restructuring expenses | | | | | 37.3 | | | 6.0 | |
Other operating (income) expenses | | | | | (1.0) | | | 9.1 | |
Operating income from continuing operations | | | | | 211.1 | | | 346.8 | |
Interest expense | | | | | 154.3 | | | 157.8 | |
Other income | | | | | (14.2) | | | (9.8) | |
Income from continuing operations before taxes | | | | | 71.0 | | | 198.8 | |
Income tax benefit | | | | | (19.3) | | | (495.9) | |
Net income from continuing operations | | | | | $ | 90.3 | | | $ | 694.7 | |
| | | | | | | |
Adjusted EBITDA(1) | | | | | $ | 506.6 | | | $ | 611.0 | |
Adjusted EBITDA margin | | | | | 18.1 | % | | 19.8 | % |
|
| | | | | | | |
| 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 “—Non-GAAP Measures” for a reconciliation of Adjusted EBITDA to net income from continuing operations, the closest comparable GAAP measure, for each of the periods presented. | |
(1)
| See “—Non-GAAP Measures” for a reconciliation of Adjusted EBITDA to net income from continuing operations, the closest comparable GAAP measure, for each of the periods presented. |
Net sales
Net sales during the year ended December 28, 2019Fiscal 2020 were $3,087.1 million, down by 7.8%, or $260.5$2,793.0 million, compared with net salesto $3,087.1 million during the prior year, a decrease of $3,347.69.5%, or $294.1 million. Our net sales for the year ended December 28, 2019Fiscal 2020 were adversely impacted by movements in average currency exchange rates of $77.0$34.5 million compared withto the prior year period, due principally to the strengthening of the U.S. dollar against a number of currencies, including the Euro ($31.7 million), the Chinese Renminbi ($13.6 million),in particular the Brazilian Real ($7.9 million) and the Canadian dollar ($6.7 million). In addition, the acquisition of Rapro in April 2018 contributed $7.5 million to our net sales for the year ended December 28, 2019. Mexican Peso. Excluding these impacts,this impact, core salesdecreased by $191.0$259.6 million, or 5.7%8.4%, during the year ended December 28, 2019Fiscal 2020 compared withto the prior year. This decrease was dueyear, driven primarily toby lower volumes, of $249.3 million, offset partially by a $58.3benefit of $16.1 million benefit from favorable inflation-mitigating pricing actions.pricing.
Core sales in our Power Transmission and Fluid Power businesses declined by 4.6%6.5% and 7.6%11.6%, respectively, forduring Fiscal 2020. This decline in core sales was driven by the year ended December 28, 2019.impacts from the COVID-19 pandemic which adversely affected sales to customers across all of our channels, particularly the industrial replacement channel, which declined by $91.1 million compared to the prior year. Globally, these declines arose primarily in sales to our industrial customers with these sales decliningdeclined by $113.2$153.3 million on a core basis, compared withto a $77.8$106.3 million decline in core sales to our automotive customers. Industrial first-fit and replacement sales declined by 6.9% and 6.5%, respectively, during the year ended December 28, 2019customers, compared withto the prior year, driven primarily by declines in the agriculture and construction end markets in North America. Sales toyear. Most of the industrial end markets in Greater China and East Asia & India both were downdecline came from North America, which decreased by $111.0 million during the year ended December 28, 2019Fiscal 2020, compared withto the prior year, driven by lower volumes in the construction, energy and heavy duty vehicle end markets. Industrial sales in EMEA decreased by 10.6% compared to the prior year, buoyed by strong sales in the second half, but reflecting the weakness in the construction end market, and a 7.9% decline of 4.3% in the general industrial end marketsmarket. Industrial sales in both regions, with increasing weaknessGreater China grew by $19.8 million in construction equipment sales asFiscal 2020 compared to the prior year, has progressed. This was broadly offsetdriven almost exclusively by growth in sales to our industrial first-fit customers, primarily in the general industrial and heavy duty vehicle end markets in EMEA, with growth across all end markets except for agriculture.markets.
Global sales to the automotive end markets declined by 6.3%7.6% during the year ended December 28, 2019Fiscal 2020 compared withto the prior year, driven by sales to first-fit customers, which declined by 9.2% during the year ended December 28, 2019 compared with the prior year. The declinedeclines in automotive end market sales was driven mostly by the broad economic softness in EMEA, with sales from this region declining by 13.6%, or $70.5 million, during the year ended December 28, 2019 compared with the prior year. Growth inNorth America, Greater China and South AmericaEast Asia & India. In all of our regions, the decline was focused in the first half of the year and we have seen steady recovery throughout the second half of 2020 with sales broadly flat butin the other regions declinedthird quarter and growing by low single digits on a percentage basis as8.7% in the fourth quarter, compared withto the prior year.
year periods.
Cost of sales
Cost of sales for the year ended December 28, 2019Fiscal 2020 was $1,944.6 million, a decrease of 3.6%, or $72.4$1,758.3 million, compared with $2,017.0to $1,944.6 million for the prior year.year, a decrease of 9.6%, or $186.3 million. The decrease was driven primarily by lower volumes, a function of $110.9 million, favorablelower demand resulting from the COVID-19 pandemic. Favorable movements in average currency exchange rates of $51.8contributed a further $20.6 million and $33.8 million of benefits from our procurement initiatives. These decreases were offset primarily by $63.2 million of a combination of wage and material inflation and $47.2 million from lower manufacturing performance driven byto the lower absorption of fixed costs on lower production volumes and some excess variable costs as we continued to adjust our production costs to align with the demand outlook. In addition,decrease in cost of sales for the year ended December 28, 2019 was adversely impacted by $10.1 million of increases in tariffs and $7.0 million of higher depreciation relating primarilyduring Fiscal 2020 compared to the new facilities opened in 2018, compared with the prior year.
Gross profit
Gross profit for the year ended December 28, 2019Fiscal 2020 was $1,142.5$1,034.7 million, down 14.1%9.4% from $1,330.6$1,142.5 million for the prior year,year. This change was driven primarily by lower volumes, of $138.4 million, $47.2 million of lower manufacturing performance drivenoffset partially by the lower absorption of fixed costs on lower production volumes, $63.2 million of unfavorable wage and material inflation, and $25.2 million of unfavorable movements in average currency exchange rates, offset by a $58.3 million benefit from favorable inflation-mitigating pricing actions and $33.8 million of benefits from our procurement initiatives.$16.1 million.
Our gross profit margin dropped by 270 basis points to 37.0% for the year ended December 28, 2019. Excluding the impact of facility closure-related inventory impairments of $1.2 million and $4.0 million of involuntary termination benefits paid in relation to permanent reductions in force, primarily in Asia and North America, gross marginFiscal 2020 was 37.2%, downunchanged from 39.7% for the prior year. In both cases, these decreases were driven by the factors described above.year at 37.0%.
Selling, general and administrative expenses
SG&A expenses for the year ended December 28, 2019Fiscal 2020 were $777.3$776.9 million compared with $805.8to $777.3 million for the prior year. This decrease of $28.5$0.4 million was driven primarily by $17.8higher labor costs of $24.0 million (including higher severance), offset by savings on most other cost categories, primarily travel, entertainment and marketing, and variable costs related to decreased volumes.
Transaction-related expenses
Transaction-related expenses of favorable impacts from movements in average currency exchange rates and $12.1$5.2 million of net labor-related benefits whichwere incurred during Fiscal 2020, related primarily to headcount reductions and lower variable compensation, offset partiallypayments made on resolution of certain contingencies that affected the purchase price paid by higher stock-based compensation.
Transaction-related expenses
Blackstone upon acquiring Gates in July 2014. Transaction-related expenses for the year ended December 28, 2019 wereof $2.6 million compared with an expense of $6.7 million forwere incurred during the prior year. Net expenses for the year ended December 28, 2019period, 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 year 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.
Restructuring expenses
We continue to make progress on our restructuring program, which, asAs described further under “Business Trends” above, we have accelerated and expanded upon our previously announced restructuring program, which is primarily intended to optimize our manufacturing and distribution footprint over the mid-term by removing structural fixed costs, and, to a lesser degree, to streamlinestreamlining our SG&A back-office functions.
Restructuring expenses, including asset impairments, of $7.2$43.9 million were recognized during Fiscal 2020, related primarily to the closure of a manufacturing facility in Korea, a European reorganization involving office and distribution center closures or downsizings and implementation of a regional shared service center, and the closure of two North American manufacturing facilities. The closure of the Korean facility resulted in severance and other labor and benefit costs of $13.2 million, an impairment of inventory of $1.4 million (recognized in cost of sales) and an impairment of fixed assets of $4.8 million (recognized in asset impairments). Restructuring costs incurred in relation to our European reorganization were $12.6 million, of which $11.4 million related to estimated severance.
Restructuring expenses, including asset impairments, of $7.9 million were recognized during the prior year, ended December 28, 2019, including an impairment of inventory of $1.2 million due to facility closures and consolidations, which is included in cost of sales. The remainder of the expenses related primarily to severance costs, predominantly due to reductions in force across all regions and impairments of inventory and fixed assets related to facility closures in countries including France, the U.S., Turkey and Australia. During Fiscal 2019 we also incurred $1.6 million of professional fees relating primarily to the closure of one of our facilities in France, a refocusing of operations in our Galesburg, Illinois facility, and a strategic restructuring of part of our Asian business. Restructuring expenses of $7.3 million were recognized during the prior year, related primarily to the implementationreorganization of our European corporate center, and a strategic restructuring of part of our Asian business. Also included in restructuring expenses in the prior year was an impairment of inventory of $0.9 million, which was recognized in cost of sales.
Interest expense
Our interest expense was as follows:
| | | For the year ended | | | For the year ended |
(dollars in millions) | December 28, 2019 | | December 29, 2018 | (dollars in millions) | | January 2, 2021 | | December 28, 2019 |
Debt: | | | | Debt: | | | | |
Dollar Term Loan | $ | 80.7 |
| | $ | 86.7 |
| Dollar Term Loan | | $ | 77.2 | | | $ | 80.7 | |
Euro Term Loan | 22.4 |
| | 22.8 |
| Euro Term Loan | | 24.2 | | | 22.4 | |
Dollar Senior Notes | 35.4 |
| | 36.6 |
| Dollar Senior Notes | | 35.9 | | | 35.4 | |
Euro Senior Notes | — |
| | 1.2 |
| |
| Other loans | 0.1 |
| | — |
| Other loans | | 0.1 | | | 0.1 | |
| 138.6 |
| | 147.3 |
| | | 137.4 | | | 138.6 | |
Amortization of deferred issuance costs | 16.6 |
| | 25.6 |
| Amortization of deferred issuance costs | | 13.5 | | | 16.6 | |
Other interest expense | 2.6 |
| | 3.0 |
| Other interest expense | | 3.4 | | | 2.6 | |
| $ | 157.8 |
| | $ | 175.9 |
| | | $ | 154.3 | | | $ | 157.8 | |
Details of our long-term debt are presented in note 1615 to the consolidated financial statements included elsewhere in this report.
Interest on debt for the year ended December 28, 2019Fiscal 2020 decreased when compared withto the equivalent prior year due primarily to the lower interest savings from debt repayments, in particular,rates applicable to the repaymentfloating rate Dollar Term Loan. This decrease was substantially offset by derivative hedging activity on our cross currency and interest rate derivatives of $913.7$16.1 million of senior notes in the first quarter of 2018 in conjunction with our initial public offering, in additionduring Fiscal 2020 compared to margin reductions that came into effect partway during the prior year.
The amortization of deferred issuance costs was lower in the year ended December 28, 2019,Fiscal 2020 includes accelerated amortization of $3.7 million due to the acceleration in the prior yearprepayment of $15.4$300.0 million of deferred issuance cost amortization as a consequence of the repayment of debt during the first quarter of 2018. This benefit was offset partially by theagainst our Dollar Term Loan facility on December 31, 2020, whereas Fiscal 2019 includes accelerated amortization of deferred issuance costs of $6.1 million during the current year, due to prepaymentthe repayment of our outstanding 6.00% Senior Notes due 2022 (the “6.00% Dollar Senior Notes”) as part of the refinancing transactions described further in note 1615 to the consolidated financial statements included elsewhere in this report.
Other (income) expensesincome
Our other (income) expenses were as follows:
| | | For the year ended | | | For the year ended |
(dollars in millions) | December 28, 2019 | | December 29, 2018 | (dollars in millions) | | January 2, 2021 | | December 28, 2019 |
Interest income on bank deposits | $ | (5.7 | ) | | $ | (3.7 | ) | Interest income on bank deposits | | $ | (4.3) | | | $ | (5.7) | |
Foreign currency gain on net debt and hedging instruments | (0.8 | ) | | (8.7 | ) | Foreign currency gain on net debt and hedging instruments | | (5.3) | | | (0.8) | |
Premiums paid on debt redemptions | — |
| | 27.0 |
| |
| Net adjustments related to post-retirement benefits | (3.1 | ) | | 3.1 |
| Net adjustments related to post-retirement benefits | | (4.5) | | | (3.1) | |
Other | (0.2 | ) | | (0.3 | ) | Other | | (0.1) | | | (0.2) | |
| $ | (9.8 | ) | | $ | 17.4 |
| | | $ | (14.2) | | | $ | (9.8) | |
Other income for the year ended December 28, 2019Fiscal 2020 was $9.8$14.2 million, compared with an expense of $17.4to $9.8 million in the prior year. This changeLower interest on bank deposits due to lower interest rates was driven primarilymore than offset by higher gains from movements in foreign currency exchange rates on net debt and hedging instruments during Fiscal 2020 compared to the paymentprior year.
In addition, we recognized net settlement and curtailment gains in relation to our post-retirement benefit plans of $2.1 million during Fiscal 2020, compared to $0.7 million in the prior yearyear.
Income tax (benefit) expensebenefit
For the year ended December 28, 2019,Fiscal 2020, we had an income tax benefit of $19.3 million on pre-tax income of $71.0 million, which resulted in an effective tax rate of (27.2%) compared to an income tax benefit of $495.9 million on pre-tax income of $198.8 million, which resulted in an effective tax rate of (249.4%) compared with an income tax expense of $31.8 million on pre-tax income of $303.5 million, which resulted(249.4)% for Fiscal 2019.
The increase in an effective tax rate of 10.5% for the year ended December 29, 2018.
Our effective tax rate for Fiscal 2020 compared to the prior year ended December 28, 2019 is lower than our effective tax rate forwas due primarily to the recognition in the prior year ended December 29, 2018 primarily due toof a $579.0 million tax benefit fromrelated to the release of valuation allowances, related mainly to Luxembourg net operating losses, offset partially by a valuation allowance against certain deferred tax assets, partially offset byexpense of $59.7 million of tax expense from related unrecognized tax benefits, both of which resultedresulting from the implementation of our European corporate center. Excluding these one-time impactsbusiness reorganization. In addition to the business reorganization, our 2019 effective tax rate would have been 11.8%, which is slightly higher when compared to our 2018 effective rate of 10.5%. This was driven byfor Fiscal 2020 benefited from certain one-time tax benefits in 2018,items including $37.6$32.3 million of tax benefits for manufacturing incentives, unrecognized tax benefits, andaudit settlements, changes in valuation allowances which were partially offset by $16.0and tax law changes. Fiscal 2019 also included $12.0 million of increasenet tax benefits, consisting of a benefit in tax on international operations and U.S. base erosion and anti-abuse tax. In addition, in 2019 our tax on international operations was lower byof $19.9 million, than in 2018, which wasoffset partially offset by an increase of $7.9 million in unrecognized tax benefits.
Deferred Income Tax Assets and Liabilities
We recognize deferred income tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred income tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred income tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.
Our framework for assessing the recoverability of deferred income tax assets requires us to weigh all available evidence, including:
•taxable income in prior carry back years if carry back is permitted under the relevant tax law;
•future reversal of existing temporary differences;
•tax-planning strategies that are prudent and feasible; and
•future taxable income exclusive of reversing temporary differences and carryforwards.
After weighing all of the evidence, giving more weight to the evidence that was objectively verifiable, we determined in Fiscal 2020 that it was more likely than not that deferred tax assets in the U.K., Luxembourg, and Belgium totaling $29.5 million were realizable. Similarly, we determined in Fiscal 2019 that it was more likely than not that deferred income tax assets in Luxembourg, the U.K., and the U.S. totaling $586.2 million were realizable.
In Fiscal 2020, the deferred tax assets above relate primarily to disallowed interest carryforwards of $26 million in these jurisdictions which have no expiration. As a result of changes in estimates of future taxable profits, in the third quarter of Fiscal 2020, due primarily to the impact of anticipated changes to the composition of our intercompany financing arrangements, our judgment changed regarding valuation allowances on these deferred tax assets. The change in estimates and resulting change in judgment relate to the evaluation of proposed international tax law changes advanced during the period.
Included within the $586.2 million total deferred income tax assetsof valuation allowances released in Fiscal 2019 are deferred income tax assets totaling $579.0 million related to €2.1 billion of indefinite lived net operating losses in Luxembourg for which our evaluation of the positive and negative evidence changed during the first quarter of Fiscal 2019 due to the implementation of our European corporate center. Our European corporate center was implemented in Fiscal 2019 to centralize and strengthen regional operations in Europe, which thereafter became centrally managed from Luxembourg.
The positive evidence that existed in favor
our profitability in Europe in 2018 and prior years and for 2019, as well as our expectations regarding the sustainability of these profits;
the impact of the implementation of our European corporate center, which created an expectation of future income in Luxembourg and, thereby, removed negative evidence that supported maintaining the valuation allowance against our deferred income tax assets as of December 29, 2018; and
the fact that our net operating loss carryforwards in Luxembourg are indefinite lived.
Further, as a result of additional financing income realized in 2019 that created taxable profits in the U.K., combined with our estimate that the financing income is likely to remain as a source of income through 2024, our judgment changed in the first quarter of 2019 regarding valuation allowances totaling $6.1 million related to indefinite lived net operating losses in the U.K.
Finally, as a result of changes in estimates of future taxable profits in the first quarter of 2019, our judgment changed regarding the realizability of $1.1 million of U.S. foreign tax credits with related recorded valuation allowances.
As of each reporting date, management considerswe consider new evidence, both positive and negative, that could impact our view with regard to the future realization of deferred income tax assets. We will maintain our positions with regard to future realization of deferred income tax assets, including those with respect to which we continue maintaining valuation allowances, until there is sufficient new evidence to support a change in expectations. Such a change in expectations could arise due to many factors, including those impacting our forecasts of future earnings, as well as changes in the international tax laws under which we operate and tax planning. It is not reasonably possible to forecast any such changes at the present time, but it is possible that, should they arise, our view of their effect on the future realization of deferred income tax assets may impact materially our consolidated financial statements.
Significant Events
On March 27, 2020, the CARES Act was enacted and signed into law in the U.S. in response to the COVID-19 pandemic. One of the provisions of this law is an increase to the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years. This modification significantly increases the current deductible interest expense of the Company for both years, which will result in a cash benefit while increasing our effective tax rate through requirements to allocate and apportion interest expense for certain other tax purposes, including in determining our global intangible low-taxed income inclusion, deduction for foreign derived intangible income, and the utilization of foreign tax credits.
Adjusted EBITDA
Adjusted EBITDA for the year ended December 28, 2019Fiscal 2020 was $506.6 million, compared to $611.0 million in the prior year, a decrease of 19.2%17.1% or $144.8 million, compared with Adjusted EBITDA of $755.8 million for the prior year.$104.4 million. The Adjusted EBITDA margin was 19.8%18.1% for the year ended December 28, 2019,Fiscal 2020, a 280170 basis point decrease from the prior year margin of 22.6%.year. The decrease in Adjusted EBITDA was driven primarily by reduced gross profit of $188.1 million, which was primarily the result of lower sales of $260.5 million, as well as the impact offrom reduced volumes and resulting lower fixed cost absorption on cost of sales as described above. Partially offsetting this decrease were lower SG&A expenses as noted above.absorption.
For a reconciliation of net income to Adjusted EBITDA for each of the periods presented and the calculation of the Adjusted EBITDA margin, see “—Non-GAAP Measures.”
Analysis by Operating Segment
Power Transmission (63.0%(64.5% of Gates’ net sales for the year ended December 28, 2019)January 2, 2021)
| | | For the year ended | | | | For the year ended | |
(dollars in millions) | December 28, 2019 | | December 29, 2018 | | Period over Period Change | (dollars in millions) | January 2, 2021 | | December 28, 2019 | | Period over period change |
Net sales | $ | 1,945.7 |
| | $ | 2,098.8 |
| | (7.3 | %) | Net sales | $ | 1,800.2 | | | $ | 1,945.7 | | | (7.5 | %) |
Adjusted EBITDA | $ | 412.6 |
| | $ | 492.2 |
| | (16.2 | %) | Adjusted EBITDA | $ | 353.0 | | | $ | 412.6 | | | (14.4 | %) |
Adjusted EBITDA margin | 21.2 | % | | 23.5 | % | | | Adjusted EBITDA margin | 19.6 | % | | 21.2 | % | |
Net sales in Power Transmission for the year ended December 28, 2019Fiscal 2020 were $1,800.2 million, compared to $1,945.7 million in the prior year, a decrease of 7.3%7.5%, or $153.1 million, when compared with the prior year net sales of $2,098.8$145.5 million. Excluding the adverse impact of movements in average currency exchange rates of $56.5$18.4 million, core sales decreased by 4.6%6.5%, or $96.6$127.1 million, compared withto the prior year. The majority of this decrease was due toyear, driven primarily by lower sales volumes of $123.1 million, offset partially by benefits from favorable, inflation-mitigating pricing actions.volumes.
Power Transmission’s core growthsales decline was driven primarily by a decreasecombination of weak demand and widespread shutdowns resulting from measures taken in response to the COVID-19 pandemic. These factors impacted sales to our automotive customers in particular, with automotive first-fit and automotive replacement sales decreasing by 14.1% and 4.7%, respectively, during Fiscal 2020 compared to the prior year. Most of this decline came from the automotive replacement channel in North America and the automotive first-fit channels in Greater China and East Asia & India. Partially offsetting these declines was growth of 4.4% in sales to automotiveour industrial first-fit customers, which decreasedprimarily in Greater China and EMEA, driven by 9.2% during the year ended December 28, 2019general industrial and heavy duty vehicle end markets. We also saw modest growth of 5.3% in the construction end market for Fiscal 2020 compared withto the prior year, due primarily to weak demandparticularly in Europe and Greater China resulting from a combination of market softness, macroeconomic headwinds and continuing trade tensions. A decrease in sales to automotive replacement customers also contributedNorth America. Sequentially, all regions grew during the fourth quarter compared to the decline, but less significantly,third quarter, with core sales lowerNorth America growing 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 declined9.3% and EMEA by 3.4%, driven primarily by East Asia & India and Greater China, but this was decline was mostly offset by growth in all other regions, particularly in EMEA.5.5%.
Our Power Transmission Adjusted EBITDA for the year ended December 28, 2019Fiscal 2020 was $353.0 million, compared to $412.6 million in the prior year, a decrease of 16.2%14.4% or $79.6 million, compared with the prior year Adjusted EBITDA of $492.2$59.6 million. Movements in average currency exchange rates drove $10.5 million of this decrease. Excluding this impact, the decrease in Adjusted EBITDA was driven by similar 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 $26.5 million and lower SG&A spend.The Adjusted EBITDA margin for the year ended December 28, 2019Fiscal 2020 was 21.2%19.6%, a 230160 basis point decline from the prior year. The decreases compared to the prior year Adjusted EBITDA marginwere driven primarily by lower volumes and resulting lower fixed cost absorption.
Fluid Power (37.0%(35.5% of Gates’ net sales for the year ended December 28, 2019)January 2, 2021)
| | | For the year ended | | | | For the year ended | |
(dollars in millions) | December 28, 2019 | | December 29, 2018 | | Period over Period Change | (dollars in millions) | January 2, 2021 | | December 28, 2019 | | Period over period change |
Net sales | $ | 1,141.4 |
| | $ | 1,248.8 |
| | (8.6 | %) | Net sales | $ | 992.8 | | | $ | 1,141.4 | | | (13.0 | %) |
Adjusted EBITDA | $ | 198.4 |
| | $ | 263.6 |
| | (24.7 | %) | Adjusted EBITDA | $ | 153.6 | | | $ | 198.4 | | | (22.6 | %) |
Adjusted EBITDA margin | 17.4 | % | | 21.1 | % | | | Adjusted EBITDA margin | 15.5 | % | | 17.4 | % | |
Net sales in Fluid Power for the year ended December 28, 2019Fiscal 2020 were $992.8 million, compared to $1,141.4 million in the prior year, a decrease of 8.6%13.0%, or $107.4 million, compared with net sales during the prior year of $1,248.8$148.6 million. Excluding the adverse impact of movements in average currency exchange rates of $20.5$16.1 million, and the benefit of $7.5 million from the acquisition of Rapro in April 2018, core sales decreased by 7.6%11.6%, or $94.4$132.5 million, compared withto the prior year. This decrease was dueyear, driven primarily toby lower volumes of $126.2 million, offset partially by benefits from favorable, inflation-mitigating pricing actions.volumes.
The lowerFluid Power’s core sales growthdecline in the year ended December 28, 2019Fiscal 2020 was driven almost exclusively by a decrease inlower sales to our industrial customers, across all regions, except for Greater China. The combination of weak demand and widespread shutdowns resulting from measures taken in response to the COVID-19 pandemic impacted almost all of our end markets, but particularly construction, which declined during Fiscal 2020 by 8.8% during the year ended December 28, 201917.4% compared withto the prior year. This decrease was driven bySales to the agriculture and constructionautomotive end markets, which have continuedmarket returned to be challenging, declining by 18.8% and 8.2%, respectively, during the year ended December 28, 2019,growth in Fiscal 2020 compared withto the prior year, growing by 2.2%, driven primarily in North America. Fluid Power’s sales to automotive end markets were flatby EMEA. Sequentially, most regions grew by double-digits during the year ended December 28, 2019fourth quarter, compared to the third quarter, with North America growing by 18.4% and EMEA by 15.5%.
Fluid Power Adjusted EBITDA for Fiscal 2020 was $153.6 million, compared to $198.4 million in the prior year with sales in the emerging markets outperforming sales to the developed markets.
Adjusted EBITDA for the year ended December 28, 2019 was $198.4 million,period, a decrease of 24.7%22.6%, or $65.2 million, compared with the prior year Adjusted EBITDA of $263.6$44.8 million. The decrease 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 lower fixed cost absorption on lower volumes and some excess variable costs. These impacts were offset partially by a $31.8 million benefit from favorable, inflation-mitigating pricing actions and a $10.8 million benefit from our procurement initiatives. The Adjusted EBITDA margin consequently decreasedfor Fiscal 2020 was 15.5%, a 190 basis point decline from the prior year. The decreases compared to the prior year were driven primarily by 370 basis points.lower volumes and resulting lower fixed cost absorption.
Liquidity and Capital Resources
Treasury Responsibilities and Philosophy
Our primary liquidity and capital resource needs are for working capital, debt service requirements, capital expenditures, facility expansions and acquisitions. We expect to finance our future cash requirements with cash on hand, cash flows from operations and, where necessary, borrowings under our revolving credit facilities. We have historically relied on our cash flow from operations and various debt and equity financings for liquidity.
From time to time, we enter into currency derivative contracts to manage currency transaction exposures. Similarly from time to time, we may enter into interest rate derivatives to maintain the desired mix of floating and fixed rate debt.
As market conditions warrant, we and our majority equity holders, Blackstone and its affiliates, may from time to time, seek to repurchase 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 or by 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 may be material, and result in related adverse tax consequences to us.
It is our policy to retain sufficient liquidity throughout the capital expenditure cycle to maintain our financial flexibility. WeWhile we have seen a decline in our business during 2020, and the duration and extent of the impacts of the COVID-19 pandemic on our business are difficult to predict, we do not currently anticipate any material long-term deterioration in our overall liquidity position in the foreseeable future,future. Further, we do not have any meaningful debt maturities until 2024 and we do not currently expect to need to draw down under our committed lines of credit in the foreseeable future. We therefore believe that as of December 28, 2019,January 2, 2021, we have adequate liquidity and capital resources for the next twelve months.
Cash Flow
Year ended December 28, 2019January 2, 2021 compared withto the year ended December 29, 201828, 2019
Cash provided by operations was $348.9$309.0 million during the year ended December 28, 2019Fiscal 2020 compared withto cash provided by operations of $313.5$348.9 million during the prior year. Operating cash inflow before movements inThis decrease was driven primarily by lower operating assets and liabilities was $290.1 million during the year ended December 28, 2019 compared with $478.0 million during the prior year, a decrease of $187.9 million which wasperformance due largely to the lower operational performance which adversely impacted operating income. The movement in taxes payable, which was an increase of $46.2 milliondifficult demand environment during the current year, offset partially by lower cash interest and tax payments. Interest paid was lower at $135.7 million during Fiscal 2020, compared with a decrease of $15.3to $150.8 million in the prior year, was due primarily to a non-cash increase in tax contingencies associatedtiming of interest payments. Net income taxes paid were also lower, with our business reorganization in Europe. Movements in operating assets and liabilities other than taxes payable$60.4 million paid during the year ended December 28, 2019 gave riseFiscal 2020 compared to an increase of $12.6 million in cash compared with a decrease of $149.2$108.8 million in the prior year. The increase, or sourceyear, largely a function of cash, during the current period was driven primarily by the decreases in trade accounts payablerefunds received and inventories, both linked to lower production volumes and our continued focustax payments based on management of working capital. During the prior year, the decrease was due primarily to increases in accounts receivable and inventories due to the strong demand environment at the time.taxable profits.
Net cash used in investing activities during the year ended December 28, 2019Fiscal 2020 was $78.0$77.5 million, compared with $243.6to $78.0 million in the prior year. Capital expenditures decreased by $99.6$15.7 million from $182.7 million in the year ended December 29, 2018 to $83.1 million in the year ended December 28, 2019, driven primarily by expenditures in the prior year related to the expansion$67.4 million in Fiscal 2020, which was mostly offset by lower cash received under corporate-owned life insurance policies of one of our existing facilities$10.5 million and construction of two new facilities. Netlower net cash used inflows from other investing activities inof $4.5 million (primarily lower proceeds from the prior year also included $50.9 millionsale of cash paid in relation to the acquisition of Rapro in April 2018.property, plant and equipment).
Net cash used in financing activities was $59.3$353.8 million during the year ended December 28, 2019,Fiscal 2020, compared with $198.9to $59.3 million in the prior year. This nethigher cash outflow inwas driven primarily by the year ended December 28, 2019 related primarily to quarterly amortization paymentsprepayment of $24.7$300.0 million under the term loans, together with $28.8 million of dividend payments to non-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%against our Dollar Senior Notes”) and used the proceeds from this debt issuanceTerm Loan facility in December 2019 to redeem all $568.0 million of our outstanding 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, 2019.2020.
In the prior year, net cash used in financing activities related primarily to the net cash received from our initial public offering of $799.1 million and the use of those funds (in addition to a portion of cash on hand) to redeem debt of $913.7 million and to pay premiums thereon of $27.0 million. In addition, during the prior year, we made $35.2 million of dividend payments to non-controlling shareholders of certain majority-owned subsidiaries.
Indebtedness
Our long-term debt, consisting principally of two term loans and U.S. dollar denominated unsecured notes, was as follows:
| | | Carrying amount | | Principal amount | | 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, 2018 | (dollars in millions) | As of January 2, 2021 | | As of December 28, 2019 | | As of January 2, 2021 | | As of December 28, 2019 |
Debt: | | | | | | | | Debt: | | | | | | | |
—Secured | | | | | | | | —Secured | |
Term Loans (U.S. dollar and Euro denominated) | $ | 2,395.0 |
| | $ | 2,428.7 |
| | $ | 2,416.8 |
| | $ | 2,458.5 |
| Term Loans (U.S. dollar and Euro denominated) | $ | 2,131.2 | | $ | 2,395.0 | | $ | 2,152.6 | | $ | 2,416.8 |
—Unsecured | | | | | | | | —Unsecured | |
Senior Notes (U.S. dollar) | 563.2 |
| | 575.7 |
| | 568.0 |
| | 568.0 |
| Senior Notes (U.S. dollar) | 577.3 | | 563.2 | | 568.0 | | 568.0 |
Other debt | 0.2 |
| | 0.6 |
| | 0.2 |
| | 0.6 |
| Other debt | 0.2 | | 0.2 | | 0.2 | | 0.2 |
| $ | 2,958.4 |
| | $ | 3,005.0 |
| | $ | 2,985.0 |
| | $ | 3,027.1 |
| | $ | 2,708.7 | | $ | 2,958.4 | | $ | 2,720.8 | | $ | 2,985.0 |
Our secured credit facilities include a Dollar Term Loan credit facility and a Euro Term Loan credit facility that were drawn on July 3, 2014. These facilities mature on March 31, 2024. These term loan facilities bear interest at a floating rate. As of December 28, 2019,January 2, 2021, borrowings under the Dollar Term Loan facility, which currently bears interest at LIBOR, subject to a floor of 1.00%, plus a margin of 2.75%, bore interest at a rate of 4.45%3.75% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of December 28, 2019,January 2, 2021, the Euro Term Loan bore interest at EURIBOR, which is currently below 0%, subject to a floor of 0%, plus a margin of 3.00%. The Euro Term Loan interest rate is re-set on the last business day of each quarter.
Both term loans are subject to quarterly amortization payments of 0.25%, based on the original principal amount less certain prepayments with the balance payable on maturity. During Fiscal 2020, we made amortization payments against the year ended December 28,Dollar Term Loan and the Euro Term Loan of $21.7 million and $9.4 million, respectively. During Fiscal 2019, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $17.3 million and $7.4 million, respectively. During the year ended December 29, 2018, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $13.0 million and $5.8 million, respectively.