UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 28, ~~2019~~2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission file number 001-38366

Gates Industrial Corporation plc

(Exact Name of Registrant as Specified in its Charter)


England and Wales						98-1395184
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)



1144 Fifteenth Street, Denver, Colorado						80202
(Address of principal executive offices)						(Zip Code)

(303) 744-1911

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary Shares, $0.01 par value per share	GTES	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:



Large accelerated filer	☐	Accelerated filer	☐☒
Non-accelerated filer	☒ ☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~November 4, 2019,~~May 1, 2020, there were ~~290,118,125~~290,721,974 ordinary shares of $0.01 par value outstanding.

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TABLE OF CONTENTS


Part I – Financial Information

~~Part I – Financial Information~~

Item 1.	Financial Statements (unaudited)		3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		3628
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		5342
Item 4.		Controls and Procedures		5342

Part II – Other Information

Item 1.		Legal Proceedings		5443
Item 1A.		Risk Factors		5443
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		5444
Item 6.		Exhibits		5545
Signatures					5645

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Forward-looking Statements

This Quarterly Report on Form 10-Q (this “quarterly report” or “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those expressed in or implied by our forward-looking statements, including but not limited to the factors described in ~~the section entitled “Item~~Item 1A. ~~Risk~~“Risk Factors” in Part II of this quarterly report, and in Item 1A. “Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December ~~29, 2018~~28, 2019 (the “annual report”), as filed with the Securities and Exchange Commission (the “SEC”), which include the following: the duration and severity of and governmental, market and individual responses to the novel coronavirus (“COVID-19”) pandemic, conditions in the global and regional economy and the major end markets we serve; economic, political and other risks associated with international operations, including exchange rate fluctuations; availability of raw materials at favorable prices and in sufficient quantities; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; competition in all areas of our business; pricing pressures from our customers; continued operation of our manufacturing facilities; our ability to forecast demand or meet significant increases in demand; market acceptance of new product introductions and product innovations; our cost-reduction actions; litigation, legal or regulatory proceedings brought against us; enforcement of our intellectual property rights; recalls, product liability claims or product warranties claims; anti-corruption laws and other laws governing our international operations; existing or new laws and regulations that may prohibit, restrict or burden the sale of aftermarket products; our decentralized information technology systems and any interruptions to our computer and IT systems; environmental, health and safety laws and regulations; insurance coverage of future losses we may incur; lives of products used in our end markets as well as the development of replacement markets; our ability to successfully integrate acquired businesses or assets; our reliance on senior management or key personnel; our ability to maintain and enhance our brand; work stoppages and other labor matters; our investments in joint ventures; liabilities with respect to businesses that we have divested in the past; terrorist acts, conflicts and wars; losses to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events; additional cash contributions we may be required to make to our defined benefit pension plans; the loss or financial instability of any significant customer or customers; changes in legislative, regulatory and legal developments involving taxes and other matters; our substantial leverage; and the significant influence of our majority ~~shareholder,~~shareholders, affiliates of The Blackstone Group Inc., over us, as such factors may be updated from time to time in the Company’s periodic filings with the SEC. Investors are urged to consider carefully the disclosure in this report and our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. Gates undertakes no obligation to update or supplement any forward-looking statements as a result of new information, future events or otherwise, except as required by law.

ABOUT THIS QUARTERLY REPORT

Financial Statement Presentation

Gates Industrial Corporation plc is a public limited company that was organized under the laws of England and Wales on September 25, 2017.

Certain monetary amounts, percentages and other figures included elsewhere in this quarterly 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 quarterly report are expressed in United States of America (the “United States” or “U.S.”) dollars, unless indicated otherwise.

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Certain Definitions

As used in this quarterly report, unless otherwise noted or the context requires otherwise:

•“Gates,” the “Company,” “we,” “us” and “our” refer, unless the context requires otherwise, to Gates Industrial Corporation plc and its consolidated subsidiaries; and

•“Blackstone” or “our Sponsor” refer to investment funds affiliated with The Blackstone Group Inc., which, although no individual fund owns a controlling interest in us, together represent our current majority owners.

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PART I — FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Operations


	Three months ended					Nine months ended						Three months ended
(dollars in millions, except per share amounts)	September 28, 2019			September 29, 2018		September 28, 2019			September 29, 2018		(dollars in millions, except per share amounts)	March 28, 2020		March 30, 2019
Net sales	$	746.6		$	828.4	$	2,361.4		$	2,555.5	Net sales	$	710.1	$	804.9
Cost of sales	474.2			501.2		1,480.3			1,534.9		Cost of sales	454.3		497.6
Gross profit	272.4			327.2		881.1			1,020.6		Gross profit	255.8		307.3
Selling, general and administrative expenses	191.9			202.7		590.4			621.1		Selling, general and administrative expenses	193.4		200.5
Transaction-related expenses	1.0			0.2		0.7			6.2
Impairment of intangibles and other assets	0.7			0.2		0.7			0.6
Transaction-related (income) expenses											Transaction-related (income) expenses	(0.2)		0.4

Restructuring expenses	0.3			1.2		3.9			3.2		Restructuring expenses	1.9		3.3
Other operating expenses	1.8			5.1		6.6			12.5		Other operating expenses	2.3		2.9
Operating income from continuing operations	76.7			117.8		278.8			377.0		Operating income from continuing operations	58.4		100.2
Interest expense	37.2			40.2		114.5			139.8		Interest expense	36.7		38.1
Other (income) expenses	(2.4		)	3.4		(7.2		)	17.5
Other income											Other income	(2.1)		(3.3)
Income from continuing operations before taxes	41.9			74.2		171.5			219.7		Income from continuing operations before taxes	23.8		65.4
Income tax expense (benefit)	4.4			7.2		(497.8		)	30.4
Income tax benefit											Income tax benefit	(16.1)		(539.7)
Net income from continuing operations	37.5			67.0		669.3			189.3		Net income from continuing operations	39.9		605.1
Loss on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0	0.1			0.3		0.6			0.7
Loss on disposal of discontinued operations, net of tax, respectively, of $0 and $0											Loss on disposal of discontinued operations, net of tax, respectively, of $0 and $0	—		0.3
Net income	37.4			66.7		668.7			188.6		Net income	39.9		604.8
Less: non-controlling interests	1.9			6.8		(2.0		)	18.9		Less: non-controlling interests	4.3		(8.9)
Net income attributable to shareholders	$	35.5		$	59.9	$	670.7		$	169.7	Net income attributable to shareholders	$	35.6	$	613.7

Earnings per share											Earnings per share
Basic											Basic
Earnings per share from continuing operations	$	0.12		$	0.21	$	2.31		$	0.60	Earnings per share from continuing operations	$	0.12	$	2.12
Earnings per share from discontinued operations	—			—		—			—		Earnings per share from discontinued operations	—		—
Earnings per share	$	0.12		$	0.21	$	2.31		$	0.60	Earnings per share	$	0.12	$	2.12

Diluted											Diluted
Earnings per share from continuing operations	$	0.12		$	0.20	$	2.30		$	0.58	Earnings per share from continuing operations	$	0.12	$	2.08
Earnings per share from discontinued operations	—			—		—			—		Earnings per share from discontinued operations	—		—
Earnings per share	$	0.12		$	0.20	$	2.30		$	0.58	Earnings per share	$	0.12	$	2.08

The accompanying notes form an integral part of these condensed consolidated financial statements.

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Comprehensive Income


	Three months ended						Nine months ended							Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Net income	$	37.4		$	66.7		$	668.7		$	188.6		Net income	$	39.9	$	604.8
Other comprehensive (loss) income													Other comprehensive (loss) income
Foreign currency translation:													Foreign currency translation:
—Net translation loss on foreign operations, net of tax expense, respectively, of $0.3, $1.3, $0.6 and $0.5	(94.7		)	(2.2		)	(49.6		)	(83.4		)
—Gain on net investment hedges, net of tax expense, respectively, of $0, $0.2, $0 and $0.2	13.3			3.8			14.1			4.7
––Net translation (loss) gain on foreign operations, net of tax expense, respectively, of $0 and $0.2													––Net translation (loss) gain on foreign operations, net of tax expense, respectively, of $0 and $0.2	(207.0)		27.2
––Gain on net investment hedges, net of tax expense, respectively, of $0 and $0													––Gain on net investment hedges, net of tax expense, respectively, of $0 and $0	4.0		5.6
Total foreign currency translation movements	(81.4		)	1.6			(35.5		)	(78.7		)	Total foreign currency translation movements	(203.0)		32.8
Cash flow hedges (Interest rate derivatives):													Cash flow hedges (Interest rate derivatives):
—(Loss) gain arising in the period, net of tax benefit, respectively, of $0.9, $0, $5.2 and $0	(4.0		)	3.6			(27.6		)	13.3
—Reclassification to net income, net of tax benefit, respectively, of $0, $3.3, $0 and $2.0	0.9			4.3			1.2			6.5
––Loss arising in the period, net of tax benefit, respectively, of $2.5 and $2.1													––Loss arising in the period, net of tax benefit, respectively, of $2.5 and $2.1	(13.4)		(11.2)
––Reclassification to net income, net of tax expense, respectively, of $0 and $0													––Reclassification to net income, net of tax expense, respectively, of $0 and $0	1.7		0.1
Total cash flow hedges movements	(3.1		)	7.9			(26.4		)	19.8			Total cash flow hedges movements	(11.7)		(11.1)
Available-for-sale investments:
—Net unrealized loss, net of tax expense, respectively, of $0, $0.1, $0 and $0.1	—			(0.5		)	—			(0.5		)
Total available-for-sale investments:	—			(0.5		)	—			(0.5		)
Post-retirement benefits:													Post-retirement benefits:
—Current year actuarial movements, net of tax benefit, respectively, of $0, $0, $0 and $0.1	—			—			—			(0.1		)
—Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0, $0, $0.1 and $0	(0.1		)	(0.1		)	(0.2		)	(0.4		)

––Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0 and $0.1													––Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0 and $0.1	(0.1)		—
Total post-retirement benefit movements	(0.1		)	(0.1		)	(0.2		)	(0.5		)	Total post-retirement benefit movements	(0.1)		—
Other comprehensive (loss) income	(84.6		)	8.9			(62.1		)	(59.9		)	Other comprehensive (loss) income	(214.8)		21.7
Comprehensive (loss) income for the period	$	(47.2	)	$	75.6		$	606.6		$	128.7		Comprehensive (loss) income for the period	$	(174.9)	$	626.5

Comprehensive (loss) income attributable to shareholders:													Comprehensive (loss) income attributable to shareholders:
—(Loss) income arising from continuing operations	$	(37.4	)	$	82.2		$	617.0		$	130.6		—(Loss) income arising from continuing operations	$	(171.8)	$	628.3
—Loss arising from discontinued operations	(0.1		)	(0.3		)	(0.6		)	(0.7		)	—Loss arising from discontinued operations	—		(0.3)
	(37.5		)	81.9			616.4			129.9				(171.8)		628.0
Comprehensive loss attributable to non-controlling interests	(9.7		)	(6.3		)	(9.8		)	(1.2		)
Comprehensive income attributable to non-controlling interests													Comprehensive income attributable to non-controlling interests	(3.1)		(1.5)
	$	(47.2	)	$	75.6		$	606.6		$	128.7			$	(174.9)	$	626.5

The accompanying notes form an integral part of these condensed consolidated financial statements.

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Balance Sheets


(dollars in millions, except share numbers and per share amounts)	As of September 28, 2019			As of December 29, 2018			(dollars in millions, except share numbers and per share amounts)	As of March 28,2020		As of December 28,2019
Assets							Assets
Current assets							Current assets
Cash and cash equivalents	$	456.1		$	423.4		Cash and cash equivalents	$	626.3	$	635.3
Trade accounts receivable, net	733.2			742.3
Trade accounts receivable							Trade accounts receivable	717.2		694.7
Inventories	507.8			537.6			Inventories	484.4		475.1
Taxes receivable	24.8			7.2			Taxes receivable	32.5		22.1
Prepaid expenses and other assets	142.0			104.1			Prepaid expenses and other assets	137.5		131.4
Total current assets	1,863.9			1,814.6			Total current assets	1,997.9		1,958.6
Non-current assets							Non-current assets
Property, plant and equipment, net	721.1			756.3			Property, plant and equipment, net	683.0		727.9
Goodwill	2,024.1			2,045.9			Goodwill	1,957.7		2,060.5
Pension surplus	52.8			52.6			Pension surplus	36.2		38.1
Intangible assets, net	1,888.2			1,990.6			Intangible assets, net	1,809.9		1,876.0
Operating lease right-of-use assets	117.3			—			Operating lease right-of-use assets	118.3		123.0
Taxes receivable	34.2			27.9			Taxes receivable	24.1		23.0
Deferred income taxes	552.6			5.1			Deferred income taxes	542.4		587.1
Other non-current assets	31.7			29.6			Other non-current assets	15.3		17.1
Total assets	$	7,285.9		$	6,722.6		Total assets	$	7,184.8	$	7,411.3
Liabilities and equity							Liabilities and equity
Current liabilities							Current liabilities
Debt, current portion	$	43.5		$	51.6		Debt, current portion	$	54.9	$	46.1
Trade accounts payable	328.5			424.0			Trade accounts payable	383.0		374.7
Taxes payable	17.4			19.2			Taxes payable	26.5		48.5
Accrued expenses and other current liabilities	193.8			184.2			Accrued expenses and other current liabilities	203.3		188.8
Total current liabilities	583.2			679.0			Total current liabilities	667.7		658.1
Non-current liabilities							Non-current liabilities
Debt, less current portion	2,909.8			2,953.4			Debt, less current portion	2,901.9		2,912.3
Post-retirement benefit obligations	151.0			155.9			Post-retirement benefit obligations	146.8		151.2
Lease liabilities	109.3			—			Lease liabilities	111.8		116.2
Taxes payable	155.3			81.9			Taxes payable	104.8		108.8
Deferred income taxes	360.8			439.5			Deferred income taxes	322.7		369.3
Other non-current liabilities	86.5			79.2			Other non-current liabilities	87.7		84.7
Total liabilities	4,355.9			4,388.9			Total liabilities	4,343.4		4,400.6
Commitments and contingencies (note 20)
Commitments and contingencies (note 18)							Commitments and contingencies (note 18)
Shareholders’ equity							Shareholders’ equity
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 290,118,125 (December 29, 2018: authorized shares: 3,000,000,000; outstanding shares: 289,847,574)	2.9			2.9
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000 ; outstanding shares: 290,666,538 (December 28, 2019: authorized shares: 3,000,000,000; outstanding shares: 290,157,299)							—Shares, par value of $0.01 each - authorized shares: 3,000,000,000 ; outstanding shares: 290,666,538 (December 28, 2019: authorized shares: 3,000,000,000; outstanding shares: 290,157,299)	2.9		2.9
—Additional paid-in capital	2,430.5			2,416.9			—Additional paid-in capital	2,440.1		2,434.5
—Accumulated other comprehensive loss	(908.6		)	(854.3		)	—Accumulated other comprehensive loss	(1,065.8)		(858.4)
—Retained earnings	1,052.6			381.9			—Retained earnings	1,107.6		1,072.0
Total shareholders’ equity	2,577.4			1,947.4			Total shareholders’ equity	2,484.8		2,651.0
Non-controlling interests	352.6			386.3			Non-controlling interests	356.6		359.7
Total equity	2,930.0			2,333.7			Total equity	2,841.4		3,010.7
Total liabilities and equity	$	7,285.9		$	6,722.6		Total liabilities and equity	$	7,184.8	$	7,411.3

The accompanying notes form an integral part of these condensed consolidated financial statements.

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Cash Flows


	Nine months ended							Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Cash flows from operating activities							Cash flows from operating activities
Net income	$	668.7		$	188.6		Net income	$	39.9	$	604.8
Adjustments to reconcile net income to net cash provided by operations:							Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	167.4			163.3			Depreciation and amortization	54.9		56.1
Non-cash currency transaction gain on net debt and hedging instruments	(29.2		)	(35.0		)
Premium paid on redemption of long-term debt	—			27.0
Non-cash currency transaction gain on debt and hedging instruments							Non-cash currency transaction gain on debt and hedging instruments	(5.3)		(13.6)

Other net non-cash financing costs	31.2			54.9			Other net non-cash financing costs	8.2		13.1
Share-based compensation expense	10.5			5.5			Share-based compensation expense	2.9		2.6
Decrease in post-employment benefit obligations, net	(6.4		)	(2.5		)	Decrease in post-employment benefit obligations, net	(1.8)		(2.4)
Deferred income taxes	(635.6		)	(44.0		)	Deferred income taxes	3.7		(624.4)
Other operating activities	3.4			1.5			Other operating activities	2.7		2.4
Changes in operating assets and liabilities, net of effects of acquisitions:							Changes in operating assets and liabilities, net of effects of acquisitions:
—Increase in accounts receivable	(4.0		)	(82.6		)	—Increase in accounts receivable	(42.1)		(46.1)
—Decrease (increase) in inventories	25.2			(81.0		)
—(Decrease) increase in accounts payable	(90.4		)	16.4
—Increase in inventories							—Increase in inventories	(27.5)		(21.3)
—Increase (decrease) in accounts payable							—Increase (decrease) in accounts payable	19.5		(25.8)
—Increase in prepaid expenses and other assets	(29.8		)	(24.6		)	—Increase in prepaid expenses and other assets	(6.1)		(12.4)
—Increase (decrease) in taxes payable	48.2			(6.4		)
—Decrease in other liabilities	(14.0		)	(38.8		)
Net cash provided by operations	145.2			142.3
—(Decrease) increase in taxes payable							—(Decrease) increase in taxes payable	(38.3)		51.7
—Increase (decrease) in other liabilities							—Increase (decrease) in other liabilities	20.4		(32.4)
Net cash provided by (used in) operations							Net cash provided by (used in) operations	31.1		(47.7)
Cash flows from investing activities							Cash flows from investing activities
Purchases of property, plant and equipment	(50.5		)	(143.0		)	Purchases of property, plant and equipment	(12.1)		(21.3)
Purchases of intangible assets	(8.0		)	(11.9		)	Purchases of intangible assets	(2.8)		(1.6)
Purchases of investments	(11.7		)	—
Net cash received (paid) under corporate-owned life insurance policies	0.3			(7.4		)
Purchase of businesses, net of cash acquired	—			(50.9		)

Cash paid under corporate-owned life insurance policies							Cash paid under corporate-owned life insurance policies	(9.8)		(9.5)
Cash received under corporate-owned life insurance policies							Cash received under corporate-owned life insurance policies	—		0.7

Other investing activities	0.3			(0.9		)	Other investing activities	0.1		—
Net cash used in investing activities	(69.6		)	(214.1		)	Net cash used in investing activities	(24.6)		(31.7)
Cash flows from financing activities							Cash flows from financing activities
Issuance of shares, net of underwriting costs	1.7			799.6			Issuance of shares, net of underwriting costs	2.1		1.2
Other offering costs	—			(8.6		)

Payments of long-term debt	(18.9		)	(933.5		)	Payments of long-term debt	(6.2)		(12.7)
Premium paid on redemption of long-term debt	—			(27.0		)

Debt issuance costs paid							Debt issuance costs paid	(0.3)		—
Dividends paid to non-controlling interests	(24.5		)	(23.3		)	Dividends paid to non-controlling interests	—		(1.8)
Other financing activities	1.6			5.7			Other financing activities	1.5		0.2
Net cash used in financing activities	(40.1		)	(187.1		)	Net cash used in financing activities	(2.9)		(13.1)
Effect of exchange rate changes on cash and cash equivalents and restricted cash	(2.8		)	(9.2		)	Effect of exchange rate changes on cash and cash equivalents and restricted cash	(12.9)		2.8
Net increase (decrease) in cash and cash equivalents and restricted cash	32.7			(268.1		)
Net decrease in cash and cash equivalents and restricted cash							Net decrease in cash and cash equivalents and restricted cash	(9.3)		(89.7)
Cash and cash equivalents and restricted cash at the beginning of the period	424.6			566.0			Cash and cash equivalents and restricted cash at the beginning of the period	636.6		424.6
Cash and cash equivalents and restricted cash at the end of the period	$	457.3		$	297.9		Cash and cash equivalents and restricted cash at the end of the period	$	627.3	$	334.9
Supplemental schedule of cash flow information							Supplemental schedule of cash flow information
Interest paid, net of amount capitalized	$	112.5		$	142.4
Interest paid							Interest paid	$	25.5	$	51.4
Income taxes paid, net	$	90.4		$	83.7		Income taxes paid, net	$	18.5	$	33.0
Accrued capital expenditures	$	1.6		$	2.5		Accrued capital expenditures	$	1.9	$	0.4

The accompanying notes form an integral part of these condensed consolidated financial statements.

Table of Contents

Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Shareholders’ Equity


	Three months ended March 28, 2020

(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total equity
As of December 28, 2019	$	2.9	$	2,434.5	$	(858.4)	$	1,072.0	$	2,651.0	$	359.7	$	3,010.7

Net income	—		—		—		35.6		35.6		4.3		39.9
Other comprehensive loss	—		—		(207.4)		—		(207.4)		(7.4)		(214.8)
Total comprehensive (loss) income	—		—		(207.4)		35.6		(171.8)		(3.1)		(174.9)
Other changes in equity:
—Issuance of shares	—		1.9		—		—		1.9		—		1.9

—Share-based compensation	—		3.7		—		—		3.7		—		3.7




As of March 28, 2020	$	2.9	$	2,440.1	$	(1,065.8)	$	1,107.6	$	2,484.8	$	356.6	$	2,841.4

Three months ended September 28, 2019

(dollars in millions) Share
capital
Additional
paid-in capital
Accumulated
other
comprehensive
loss Retained
earnings Total
shareholders’
equity Non-
controlling
interests Total
equity
As of June 29, 2019 $ 2.9
$ 2,426.4
$ (835.6 ) $ 1,017.1
$ 2,610.8
$ 371.8
$ 2,982.6

Net income —
—
—
35.5
35.5
1.9
37.4
Other comprehensive loss —
—
(73.0 ) —
(73.0 ) (11.6 ) (84.6 )
Total comprehensive (loss) income —
—
(73.0 ) 35.5
(37.5 ) (9.7 ) (47.2 )
Other changes in equity:
—Issuance of shares —
0.1
—
—
0.1
—
0.1
—Share-based compensation —
4.0
—
—
4.0
—
4.0
—Dividends paid to non-controlling
interests —
—
—
—
—
(9.5 ) (9.5 )
As of September 28, 2019 $ 2.9
$ 2,430.5
$ (908.6 ) $ 1,052.6
$ 2,577.4
$ 352.6
$ 2,930.0

Three months ended September 29, 2018

(dollars in millions) Share
capital
Additional
paid-in capital
Accumulated
other
comprehensive
loss Retained
earnings Total
shareholders’
equity Non-
controlling
interests Total
equity
As of June 30, 2018 $ 2.9
$ 2,413.4
$ (809.2 ) $ 246.7
$ 1,853.8
$ 402.7
$ 2,256.5

Net income —
—
—
59.9
59.9
6.8
66.7
Other comprehensive income (loss) —
—
22.0
—
22.0
(13.1 ) 8.9
Total comprehensive income (loss) —
—
22.0
59.9
81.9
(6.3 ) 75.6
Other changes in equity:
—Issuance of shares —
0.4
—
—
0.4
—
0.4
—Share-based compensation —
1.7
—
—
1.7
—
1.7
—Dividends paid to non-controlling
interests —
—
—
—
—
(7.1 ) (7.1 )
As of September 29, 2018 $ 2.9
$ 2,415.5
$ (787.2 ) $ 306.6
$ 1,937.8
$ 389.3
$ 2,327.1

~~Gates Industrial Corporation plc~~

~~Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Continued)~~

Nine months ended September 28, 2019

(dollars in millions) Share
capital
Additional
paid-in capital
Accumulated
other
comprehensive
loss Retained
earnings Total
shareholders’
equity Non-
controlling
interests Total
equity
As of December 29, 2018 $ 2.9
$ 2,416.9
$ (854.3 ) $ 381.9
$ 1,947.4
$ 386.3
$ 2,333.7

Net income (loss) —
—
—
670.7
670.7
(2.0 ) 668.7
Other comprehensive loss —
—
(54.3 ) —
(54.3 ) (7.8 ) (62.1 )
Total comprehensive (loss) income —
—
(54.3 ) 670.7
616.4
(9.8 ) 606.6
Other changes in equity:
—Issuance of shares —
1.7
—
—
1.7
—
1.7
—Share-based compensation —
10.7
—
—
10.7
—
10.7
—Change in ownership of a controlled subsidiary —
1.2
—
—
1.2
(1.2 ) —
—Shares issued by a subsidiary to a non-controlling interest —
—
—
—
—
1.8
1.8
—Dividends paid to non-controlling
interests —
—
—
—
—
(24.5 ) (24.5 )
As of September 28, 2019 $ 2.9
$ 2,430.5
$ (908.6 ) $ 1,052.6
$ 2,577.4
$ 352.6
$ 2,930.0

Nine months ended September 29, 2018

(dollars in millions) Share
capital
Additional
paid-in capital
Accumulated
other
comprehensive
loss Retained
earnings Total
shareholders’
equity Non-
controlling
interests Total
equity
As of December 30, 2017 $ 2.5
$ 1,622.6
$ (747.4 ) $ 136.9
$ 1,014.6
$ 413.8
$ 1,428.4

Net income —
—
—
169.7
169.7
18.9
188.6
Other comprehensive loss —
—
(39.8 ) —
(39.8 ) (20.1 ) (59.9 )
Total comprehensive (loss) income —

—

(39.8 )
169.7

129.9

(1.2 ) 128.7
Other changes in equity:
—Issuance of shares 0.4
841.2
—
—
841.6
—
841.6
—Share-based compensation —
4.7
—
—
4.7
—
4.7
—Dividends paid to non-controlling
interests —
—
—
—
—
(23.3 ) (23.3 )
—Cost of shares issued —
(53.0 ) —
—
(53.0 ) —
(53.0 )
As of September 29, 2018 $ 2.9
$ 2,415.5
$ (787.2 ) $ 306.6
$ 1,937.8
$ 389.3
$ 2,327.1


	Three months ended March 30, 2019

(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total equity
As of December 29, 2018	$	2.9	$	2,416.9	$	(854.3)	$	381.9	$	1,947.4	$	386.3	$	2,333.7

Net income (loss)	—		—		—		613.7		613.7		(8.9)		604.8
Other comprehensive income	—		—		14.3		—		14.3		7.4		21.7
Total comprehensive income (loss)	—		—		14.3		613.7		628.0		(1.5)		626.5
Other changes in equity:
—Issuance of shares	—		1.2		—		—		1.2		—		1.2

—Share-based compensation	—		2.5		—		—		2.5		—		2.5


—Dividends paid to non-controlling interests	—		—		—		—		—		(1.8)		(1.8)

As of March 30, 2019	$	2.9	$	2,420.6	$	(840.0)	$	995.6	$	2,579.1	$	383.0	$	2,962.1

The accompanying notes form an integral part of these condensed consolidated financial statements.

Table of Contents

Gates Industrial Corporation plc

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Introduction

A. Background

Gates Industrial Corporation plc (the “Company”) is a public limited company that was organized under the laws of England and Wales on September 25, 2017. Prior to the completion of the initial public offering of the Company’s shares in January 2018, the Company undertook certain reorganization transactions such that Gates Industrial Corporation plc became the indirect owner of all of the equity interests in Omaha Topco Ltd. (“Omaha Topco”), and has become the holding company of the Gates business. The previous owners of Omaha Topco were various investment funds managed by affiliates of The Blackstone Group Inc. (“Blackstone” or our “Sponsor”), and Gates management equity holders. These equity owners of Omaha Topco received depositary receipts representing ordinary shares in the Company in consideration for their equity in Omaha Topco, at a ratio of 0.76293 of our ordinary shares for each outstanding ordinary share of Omaha Topco. All share and per share amounts in these condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of this ratio. The reorganization was accounted for as a transaction between entities under common control and the net assets were recorded on the historical cost basis, in a manner similar to a pooling of interests, when Omaha Topco was contributed into the Company. Gates Industrial Corporation plc had no significant business transactions or activities prior to the date of the reorganization transactions, and as a result, the historical financial information for periods prior to those transactions reflects that of Omaha Topco.

In these condensed consolidated financial statements and related notes, all references to “Gates,” “we,” “us,” and “our” refer, unless the context requires otherwise, to Gates Industrial Corporation plc and its consolidated subsidiaries.

B. Accounting periods

The Company prepares its annual consolidated financial statements for the period ending on the Saturday nearest December 31. Accordingly, the condensed consolidated balance sheet is presented as of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018~~28, 2019 and the related condensed consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity are presented, where relevant, for the 91 day period from ~~June 30,~~December 29, 2019 to ~~September~~March 28, ~~2019,~~2020, with comparative information for the 91 day period from ~~July 1, 2018 to September 29, 2018 and for the 273 day period from~~ December 30, 2018 to ~~September 28, 2019, with comparative information for the 273 day period from December 31, 2017 to September 29, 2018.~~March 30, 2019.

C. Basis of preparation

The condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars unless otherwise indicated. The condensed consolidated financial statements and related notes contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of ~~September~~March 28, ~~2019~~2020 and the results of its operations and cash flows for the periods ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018.~~March 30, 2019. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

The first quarter of 2020 marked the beginning of an unprecedented environment for the global economy, as governments, companies and communities implemented strict measures to minimize the spread of the novel coronavirus (“COVID-19”) pandemic. 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 are unclear at this time, and the adverse impact of the pandemic on the Company’s operations may be material but cannot be reasonably estimated at this time.

The preparation of consolidated financial statements under U.S. GAAP requires us to make assumptions and estimates concerning the future that affect the reported amounts of assets, liabilities, revenue and expenses. Estimates and assumptions are particularly important in accounting for items such as revenue, rebates, impairment of long-lived assets, intangible assets and goodwill, inventory valuation, financial instruments, expected credit losses, product warranties, income taxes and post-retirement benefits.

Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after March 28, 2020, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by our assumptions and estimates.

These condensed consolidated financial statements are unaudited and, except as noted below, have been prepared on substantially the same basis as Gates’ audited annual consolidated financial statements and related notes for the year ended December ~~29, 2018.~~28, 2019. The condensed consolidated balance sheet as of December ~~29, 2018~~28, 2019 has been derived from those audited financial statements.

These condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended December ~~29, 2018~~28, 2019 included in the Company’s Annual Report on Form 10-K.

The accounting policies used in preparing these condensed consolidated financial statements are the same as those applied in the prior year, except for the adoption on the first day of the ~~2019~~2020 fiscal year of the following new Accounting Standard Updates (each, an “ASU”):

~~ASU 2016-02 “Leases” (Topic 842)~~

~~ASU 2018-10 “Leases” (Topic 842): Codification Improvements to Topic 842, Leases~~

~~ASU 2018-11 “Leases” (Topic 842): Targeted Improvements~~

~~ASU 2019-01 “Leases” (Topic 842): Codification Improvements~~

In February 2016, the Financial Accounting Standards Board (“FASB”) issued an ASU which introduces a lessee model that will bring most leases of property, plant and equipment onto the balance sheet. It requires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right-of-use asset” for all leases. The ASU introduces two models for the subsequent measurement of the lease asset and liability, depending on whether the lease qualifies as a “finance lease” or an “operating lease.” This distinction focuses on whether or not effective control of the asset is being transferred from the lessor to the lessee.

The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, which allows entities an additional, optional transition method of applying the new leases standard at the adoption date with comparative periods continuing to be presented in accordance with prior GAAP (Topic 840 “~~Leases”). We have adopted Topic 842 using this practical expedient, and, consequently, comparative information in these condensed consolidated financial statements has not been restated.~~

~~We applied the following additional practical expedients on transition to Topic 842:~~


~~(i)~~	~~we did not reassess whether or not any expired or existing contracts were or contained leases;~~


~~(ii)~~	we did not reassess the lease classification for any expired or existing leases (i.e., all existing leases that were classified as operating leases continued to be classified as such under Topic 842, and all existing leases that were classified as capital leases continued to be classified as finance leases); and


~~(iii)~~	~~we did not reassess any initial direct costs for leases existing on the date of adoption of Topic 842.~~

On transition, we recognized a right-of-use asset of $126.0 million and a lease liability of $132.9 million, with the difference relating primarily to reclassifying deferred rent liabilities that existed under Topic 840 into the new right-of-use asset. Note 11 sets out disclosures related to Topic 842.

~~The following ASUs that were also adopted on the first day of the 2019 fiscal year did not have a significant impact on our results, financial position or disclosures:~~

~~ASU 2018-07 “Compensation - Stock Compensation” (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~

~~ASU 2018-16 “Derivatives and Hedging” (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes~~

~~In addition, we adopted ASU 2018-02 “Income Statement - Reporting Comprehensive Income~~” (Topic 220): Reclassification of Certain Tax Effects from Accumulated OCI; however, we have not adopted the policy election outlined therein regarding the reclassification from accumulated other comprehensive income (“OCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The remaining stranded tax effects in OCI will be released upon recognition of the related deferred tax basis differences.

~~2. Recent accounting pronouncements not yet adopted~~

~~The following recent accounting pronouncements are relevant to Gates’ operations but have not yet been adopted.~~

•ASU 2016-13 “Financial Instruments” - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”

Table of Contents

•ASU 2020-02 “Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)”

In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued an ASU which broadens the information that an entity must consider when developing its expected credit loss estimate for financial assets. The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The financial asset must be measured at the net amount expected to be collected.

The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ~~The~~On transition, no cumulative-effect adjustment was recognized to retained earnings.

Our businesses develop their expected loss estimates based either on the aging profile of outstanding receivables or by applying a preset experience factor (either a percentage of sales or a percentage of open receivables). These methodologies are based primarily on historical trends and experience, but credit controllers also regularly assess individual customer accounts to identify any potential increases or decreases in the level of expected credit loss needed to be applied to each customer based on current circumstances and future expectations.

Before accepting a new customer, we assess their credit quality and establish a credit limit. Credit quality is assessed by using data maintained by reputable credit rating agencies, by checking of references included in credit applications and, where they are available, by reviewing the customer’s recent financial statements. Credit limits are subject to multiple levels of authorization and are reviewed on a regular basis.

Although Gates has a wide variety of customers from multinational original equipment manufacturers and distributors to small family-owned businesses, the majority of our sales are generated from large companies with low credit risk. Recent global developments related to the COVID-19 pandemic and its impact on our ~~consolidated~~customers’ ability to pay us are being closely monitored and taken into account in the determination of our expected credit loss estimates.

The following ASUs that were also adopted on the first day of the 2020 fiscal year did not have a significant impact on our results, financial ~~statements of adopting this ASU, which may affect the recognition, measurement and presentation of financial assets, is still being evaluated.~~position or disclosures:

• ASU 2018-13 “Fair Value Measurement” (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

~~In August 2018, the FASB issued an~~• ASU ~~to modify the disclosure requirements on fair value measurements~~2018-15 “Intangibles - Goodwill and Other - Internal-Use Software” (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in ~~Topic 820 “Fair Value Measurement~~” including the consideration of costs and benefits. The amendments remove certain disclosures, clarify other disclosure requirements, and add new disclosure requirements that have been identified as relevant.a Cloud Computing Arrangement That Is a Service Contract

2. Recent accounting pronouncements not yet adopted

The ~~amendments~~following recent accounting pronouncements are ~~effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Most of the amendments should be applied retrospectively~~relevant to ~~all periods presented,~~Gates’ operations but a few amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Early adoption is permitted and an entity is permitted to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. The impact on our consolidated financial statements of adopting this ASU, which will affect our fair value disclosures, is still being evaluated.have not yet been adopted.

•ASU 2018-14 “Compensation - Retirement Benefits - Defined Benefit Plans - General” (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued an ASU to modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments remove certain disclosures, clarify other disclosure requirements, and add new disclosure requirements that have been identified as relevant.

The amendments are effective for fiscal years ending after December 15, 2020, and should be applied on a retrospective basis to all periods presented. The impact on our consolidated financial statements of adopting this ASU, which will affect our disclosures, is still being evaluated.

•ASU ~~2018-15~~2019-12 “~~Intangibles - Goodwill and Other - Internal-Use Software” (Subtopic 350-40): Customer’s~~Simplifying the Accounting for ~~Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~

Income Taxes” (Topic 740): Income Taxes

In ~~August 2018,~~December 2019, the FASB issued an ASU to ~~help entities evaluate~~simplify and reduce the ~~accounting~~complexity of general principles in Topic 740: Income Taxes. Such simplifications include the elimination of certain exceptions to: 1) the incremental approach for ~~fees paid by~~intraperiod tax allocation, 2) the requirement to recognize a ~~customer~~deferred income tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, 3) the ability not to recognize a deferred income tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and 4) the general methodology for calculating income taxes in an interim period when a ~~cloud computing arrangement (hosting arrangement). The guidance permits capitalization~~year-to-date loss exceeds the anticipated loss for the year.

Table of costs associated with the implementation of cloud-based software arrangements and aligns the criteria for capitalization with those for purchased or internally-generated computer software intangible assets. Implementation costs meeting the criteria for capitalization would not be classified as intangible assets but would instead be classified as prepaid expenses that are then amortized over the period of the arrangement as an additional expense consistent with the ongoing costs under the cloud computing arrangement.Contents

The amendments are effective for fiscal years beginning after December 15, ~~2019,~~2020, and interim periods within those fiscal years. Early adoption is ~~permitted and entities may choose~~permitted. The ASU provides for a number of different approaches to ~~apply~~applying the ~~requirements either retrospectively or prospectively~~changes, depending on the amendment, from full retrospective to ~~all implementation costs incurred after the date of adoption.~~modified retrospective to fully prospective. The impact on our consolidated financial statements of adopting this ASU ~~which may affect the recognition, measurement and presentation of cloud computing software arrangements,~~ is still being evaluated.

•ASU 2020-04 “Reference Rate Reform” (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

~~3. Acquisitions~~

~~Description~~In March 2020, the FASB issued an ASU to provide optional expedients and ~~financial effect of acquisitions~~

~~On April 26, 2018, Gates completed the acquisition of Rapro~~exceptions for ~~$50.9 million, net of cash acquired. Rapro is a Turkey-based business that engineers, manufactures and sells molded and branched hoses~~applying GAAP to contracts, hedging relationships, and other ~~products, the majority~~transactions that reference LIBOR or another reference rate expected to be discontinued because of ~~which~~reference rate reform.

The amendments in this update are ~~sold into replacement markets. Rapro operates out~~effective as of ~~two facilities in Izmir, Turkey, with its products serving heavy-duty, commercial and light-vehicle applications.~~

~~Goodwill of $34.4 million arose from this acquisition and related primarily to the expected benefit from the acceleration~~March 12, 2020 through December 31, 2022. As certain of our ~~growth strategy within~~debt uses LIBOR or EURIBOR as a benchmark for establishing the ~~Fluid Power product line~~rate of interest, and ~~expansion~~we apply hedge accounting in respect of derivatives to manage interest and currency risks associated with our ~~product range and geographic coverage.~~debt, we expect that this ASU will have an impact on our consolidated financial statements, but this is still being evaluated.

~~Pro forma information has not been presented for this acquisition because it is not material.~~

4.3. Segment information

A. Background

~~Topic 280 “Segment Reporting~~” requires segment information provided in the consolidated financial statements to reflect the information that was provided to the chief operating decision maker for the purposes of making decisions about allocating resources and in assessing the performance of each segment. The chief executive officer (“CEO”) of Gates serves as the chief operating decision maker.

The segment information provided in these condensed consolidated financial statements reflects the information that is used by the chief operating decision maker for the purposes of making decisions about allocating resources and in assessing the performance of each segment. The chief executive officer (“CEO”) of Gates serves as the chief operating decision maker. These decisions are based on net sales and Adjusted EBITDA (defined below).

~~Certain amounts relating to prior periods have been reclassified in this footnote to conform to the current year presentation.~~

B. Operating segments and segment assets

Gates manufactures a wide range of power transmission and fluid power products and components for a large variety of industrial and automotive applications, both in the aftermarket and first-fit channels, throughout the world.

Our reportable segments are identified on the basis of our primary product lines, as this is the basis on which information is provided to the CEO for the purposes of allocating resources and assessing the performance of Gates’ businesses. Our operating and reporting segments are therefore Power Transmission and Fluid Power.

Segment asset information is not provided to the chief operating decision maker and therefore segment asset information has not been presented. Due to the nature of Gates’ operations, cash generation and profitability are viewed as the key measures rather than an asset base measure.

C. Segment net sales and disaggregated net sales

Sales between reporting segments and the impact of such sales on Adjusted EBITDA for each segment are not included in internal reports presented to the CEO and have therefore not been included below.


	Net Sales
	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Power Transmission	$	441.2	$	499.5
Fluid Power	268.9		305.4
Continuing operations	$	710.1	$	804.9

Our commercial function is organized by region and therefore, in addition to reviewing net sales by our reporting segments, the CEO also reviews net sales information disaggregated by region, including between emerging and developed markets.

Net Sales
Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Power Transmission $ 474.4
$ 512.5
$ 1,475.4
$ 1,608.1
Fluid Power 272.2
315.9
886.0
947.4
Continuing operations $ 746.6
$ 828.4
$ 2,361.4
$ 2,555.5

Table of Contents

The following table summarizes our net sales by key geographic region of origin:


	Net Sales
	Three months ended
	March 28, 2020						March 30, 2019
(dollars in millions)	Power Transmission		Fluid Power		Power Transmission		Fluid Power
U.S.	$	137.7	$	139.7	$	152.9	$	157.1
North America, excluding U.S.	40.3		41.7		42.0		46.6
United Kingdom (“U.K.”)	11.4		6.9		11.7		10.8
EMEA⁽¹⁾, excluding U.K.	129.2		44.0		133.3		47.2
East Asia and India	65.2		17.4		73.6		20.5
Greater China	44.3		13.0		68.9		15.1
South America	13.1		6.2		17.1		8.1
Net Sales	$	441.2	$	268.9	$	499.5	$	305.4

Net Sales
Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
U.S. $ 284.3
$ 326.0
$ 909.6
$ 973.5
North America, excluding the U.S. 85.1
85.5
263.3
260.4
United Kingdom (“U.K.”) 18.7
23.3
62.6
73.8
Europe, Middle East and Africa (“EMEA”), excluding the U.K. 164.1
183.8
521.7
591.5
East Asia and India 87.9
95.9
274.2
296.9
Greater China 80.6
90.2
253.4
281.7
South America 25.9
23.7
76.6
77.7
Net Sales $ 746.6
$ 828.4
$ 2,361.4
$ 2,555.5

⁽¹⁾Europe, Middle East and Africa (“EMEA”).

The following table summarizes our net sales into emerging and developed markets:


	Net Sales									Net Sales
	Three months ended				Nine months ended					Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		(dollars in millions)	March 28, 2020		March 30, 2019
Developed	$	486.6	$	558.4	$	1,564.4	$	1,671.1	Developed	$	475.8	$	543.7
Emerging	260.0		270.0		797.0		884.4		Emerging	234.3		261.2
Net Sales	$	746.6	$	828.4	$	2,361.4	$	2,555.5	Net Sales	$	710.1	$	804.9

D. Measure of segment profit or loss

The CEO uses Adjusted EBITDA, as defined below, to measure the profitability of each segment. Adjusted EBITDA is, therefore, the measure of segment profit or loss presented in Gates’ segment disclosures.

“EBITDA” represents net income for the period before net interest and other (income) expenses, income taxes, depreciation and amortization derived from financial information prepared in accordance with U.S. GAAP.

Adjusted EBITDA represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, the items excluded from EBITDA in computing Adjusted EBITDA primarily included:

•the non-cash charges in relation to share-based compensation;

•transaction-related (income) expenses incurred in relation to business combinations and major corporate transactions, including acquisition integration activities;

•impairments, comprising impairments of goodwill and significant impairments or write downs of other assets;

•restructuring expenses, including severance-related expenses;

•the net gain or loss on disposals and on the exit of businesses; and

•fees paid to our private equity sponsor for monitoring, advisory and consulting services.

Adjusted EBITDA by segment was as follows:


	Adjusted EBITDA
	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Power Transmission	$	79.5	$	109.9
Fluid Power	41.3		55.6
Continuing operations	$	120.8	$	165.5

Adjusted EBITDA
Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Power Transmission $ 99.7
$ 119.0
$ 315.2
$ 377.6
Fluid Power 45.3
62.2
160.7
192.4
Continuing operations $ 145.0
$ 181.2
$ 475.9

$ 570.0

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Reconciliation of net income from continuing operations to Adjusted EBITDA:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Net income from continuing operations	$	39.9	$	605.1
Income tax benefit	(16.1)		(539.7)
Income from continuing operations before taxes	23.8		65.4
Interest expense	36.7		38.1
Other income	(2.1)		(3.3)
Operating income from continuing operations	58.4		100.2
Depreciation and amortization	54.9		56.1
Transaction-related (income) expenses ⁽¹⁾	(0.2)		0.4

Restructuring expenses	1.9		3.3
Share-based compensation expense	2.9		2.6
Sponsor fees (included in other operating expenses)	1.7		1.8



Severance-related expenses (included in cost of sales)	0.1		—
Severance-related expenses (benefits) (included in SG&A)	0.5		(0.2)
Other items not directly related to current operations	0.6		1.3
Adjusted EBITDA	$	120.8	$	165.5

⁽¹⁾Transaction-related (income) expenses relate primarily to advisory fees and other costs recognized in respect of major corporate transactions, including the acquisition of businesses and debt refinancings.

Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Net income from continuing operations $ 37.5
$ 67.0
$ 669.3
$ 189.3
Income tax expense (benefit) 4.4
7.2
(497.8 ) 30.4
Income from continuing operations before taxes 41.9
74.2
171.5
219.7
Interest expense 37.2
40.2
114.5
139.8
Other (income) expenses (2.4 ) 3.4
(7.2 ) 17.5
Operating income from continuing operations 76.7
117.8
278.8
377.0
Depreciation and amortization 55.1
53.7
167.4
163.3
Transaction-related expenses ⁽¹⁾
1.0
0.2
0.7
6.2
Impairment of intangibles and other assets 0.7
0.2
0.7
0.6
Restructuring expenses 0.3
1.2
3.9
3.2
Share-based compensation expense 4.1
2.3
10.5

5.5
Sponsor fees (included in other operating expenses) 1.1
1.9
4.9
5.9
Impact of fair value adjustment on inventory (included in cost of sales) —
—
—

0.3
Inventory impairments and adjustments (included in cost of sales) 1.0
—
1.3
0.8
Duplicate expenses incurred on facility relocation —
1.5
—
4.6
Severance-related expenses (included in cost of sales) 2.5
—
3.0
—
Other primarily severance-related expenses (included in SG&A) 1.8
0.7
3.0
0.6
Other operating expenses 0.7
1.7
1.7
2.0
Adjusted EBITDA $ 145.0
$ 181.2
$ 475.9

$ 570.0


⁽¹⁾	Transaction-related expenses relate primarily to advisory fees recognized in respect of our initial public offering, the acquisition of businesses and costs related to other corporate transactions such as debt refinancings.

5.4. Restructuring and other strategic initiatives

Gates continues to undertake various restructuring and other strategic initiatives to drive increased productivity in all aspects of our operations. These actions include efforts to consolidate our manufacturing and distribution footprint, scale operations to current demand levels, combine back-office workgroups and relocate certain operations to lower cost locations. Our recently completed manufacturing footprint investments and other productivity improvements in recent years have helped to position us to accelerate and expand 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 streamline our selling, general and administrative (“SG&A”) back-office functions.

Overall costs associated with our restructuring and other strategic initiatives have been recognized in the condensed consolidated statements as set forth below. Expenses incurred in relation to certain of these actions qualify as restructuring expenses under U.S. GAAP.


	Three months ended					Nine months ended						Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018		September 28, 2019			September 29, 2018		(dollars in millions)	March 28, 2020		March 30, 2019
Restructuring expenses:											Restructuring expenses:
—Severance	$	0.4		$	0.1	$	3.3		$	—	—Severance	$	0.2	$	2.6
—Professional fees	0.1			0.8		1.4			3.0		—Professional fees	0.2		0.6
—Other restructuring (benefits) expenses	(0.2		)	0.3		(0.8		)	0.2
—Other restructuring expenses											—Other restructuring expenses	1.5		0.1
	0.3			1.2		3.9			3.2
Restructuring expenses in cost of sales:
—Impairment of inventory	1.0			—		1.3			—

Total restructuring expenses	$	1.3		$	1.2	$	5.2		$	3.2	Total restructuring expenses	$	1.9	$	3.3

Expenses related to other strategic initiatives:											Expenses related to other strategic initiatives:
—Severance costs included in cost of sales	$	2.5		$	—	$	3.0		$	—	—Severance costs included in cost of sales	$	0.1	$	—
—Severance costs included in SG&A	1.8			0.9		3.0			0.3
—Impairment of fixed assets	0.7			—		0.7			—
—Severance costs (benefits) included in SG&A											—Severance costs (benefits) included in SG&A	0.5		(0.2)

Total expenses related to other strategic initiatives	$	5.0		$	0.9	$	6.7		$	0.3	Total expenses related to other strategic initiatives	$	0.6	$	(0.2)

Restructuring and other strategic initiatives undertaken during the three months ended ~~September~~March 28, ~~2019~~2020 related primarily to the closure of two North American manufacturing facilities and reductions in ~~force, particularly~~workforce, primarily in the U.S. and ~~Asia, and impacts from facility closures and consolidations, primarily the impairment of inventory and fixed assets.~~Asia. Expenses incurred during

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the prior year ~~period~~ in connection with our restructuring and other strategic initiatives related primarily to the ~~reorganization~~closure of one of our ~~European corporate center~~facilities in France and a strategic restructuring of part of our Asian business.

Restructuring and other strategic initiatives undertaken during the nine months ended September 28, 2019 related primarily 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. An additional $1.4 million of professional fees were incurred during the current period, relating primarily to the closure of one of our facilities in France, the reorganization of our European corporate center, and a strategic restructuring of part of our Asian business. Expenses incurred during the prior year period in connection with our restructuring and other strategic initiatives also related primarily to the items described above.

Restructuring activities

As indicated above, restructuring expenses, as defined under U.S. GAAP, form a subset of our total expenses related to restructuring and other strategic initiatives. These expenses include the impairment of inventory, which is recognized in cost of sales. Analyzed by segment, our restructuring expenses were as follows:


	Three months ended				Nine months ended					Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		(dollars in millions)	March 28, 2020		March 30, 2019
Power Transmission	$	0.3	$	0.9	$	3.5	$	2.1	Power Transmission	$	0.2	$	2.9
Fluid Power	1.0		0.3		1.7		1.1		Fluid Power	1.7		0.4
Continuing operations	$	1.3	$	1.2	$	5.2	$	3.2	Continuing operations	$	1.9	$	3.3

The following summarizes the reserve for restructuring expenses for the ~~nine month periods~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, respectively:


	Nine months ended							Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Balance as of the beginning of the period	$	2.6		$	8.6		Balance as of the beginning of the period	$	2.9	$	2.6
Utilized during the period	(4.0		)	(8.3		)	Utilized during the period	(2.0)		(2.0)
Net charge for the period	3.9			3.5			Net charge for the period	2.4		3.3
Released during the period	—			(0.3		)	Released during the period	(0.5)		—
Foreign currency translation	(0.1		)	0.1			Foreign currency translation	0.1		(0.1)
Balance as of the end of the period	$	2.4		$	3.6		Balance as of the end of the period	$	2.9	$	3.8

Restructuring reserves, ~~the majority of~~ which are expected to be utilized ~~during the remainder of 2019~~in 2020 and ~~in 2020,~~2021, are included in the condensed consolidated balance sheet ~~as follows:~~within the accrued expenses and other current liabilities line.

(dollars in millions) As of
September 28,
2019 As of
September 29,
2018
Accrued expenses and other current liabilities $ 2.4
$ 3.4
Other non-current liabilities —
0.2
$ 2.4
$ 3.6

6.5. Income taxes

We compute the year-to-date income tax provision by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust for discrete tax items in the period in which they occur.

For the three months ended ~~September~~March 28, ~~2019,~~2020, we had an income tax ~~expense~~benefit of ~~$4.4~~$16.1 million on pre-tax income of ~~$41.9~~$23.8 million, which resulted in an effective tax rate of ~~10.5%~~(67.6)%, compared with an income tax ~~expense~~benefit of ~~$7.2~~$539.7 million on pre-tax income of ~~$74.2~~$65.4 million, which resulted in an effective tax rate of ~~9.7%~~(825.2)% for the three months ended September 29, 2018. For the nine months ended September 28, 2019, we had an income tax benefit of $497.8 million on pre-tax income of $171.5 million, which resulted in an effective tax rate of (290.3%) compared with an income tax expense of $30.4 million on pre-tax income of $219.7 million, which resulted in an effective tax rate of 13.8% for the nine months ended September 29, 2018.March 30, 2019.

The increase in the effective tax rate for the three months ended ~~September~~March 28, 2019 compared with the prior year period was primarily the result of a $5.3 million increase in discrete tax expense related to changes in previously released valuation allowances during the year, offset by an $8.0 million reduction in tax on ordinary operations.

~~The decrease in the effective tax rate for the nine months ended September 28, 2019~~2020 compared with the prior year period was due primarily to the recognition in the prior year of a discrete benefit of ~~$605.1~~$617.3 million related to the release of valuation allowances, ~~which occurred during the first quarter, in certain jurisdictions where it was determined that the realization of deferred tax assets was more likely than not. This benefit was~~mainly related to Luxembourg net operating losses, partially offset ~~partially~~ by a discrete expense of ~~$25.1~~$66.1 million related primarily to unrecognized tax benefits from the European business reorganization. The current year rate is driven mainly by discrete tax benefits of $24.7 million, related to the ~~reduction in the Luxembourg corporate tax rate, which occurred during the second quarter, as well as a discrete expense~~reversal of ~~$65.6 million related to~~ unrecognized tax benefits, ~~resulting primarily~~net of settlement amounts, arising from the ~~European business reorganization (the “Reorganization”), which occurred during~~resolution of audits in Canada and Germany and $3.2 million from law changes in India with respect to the ~~first quarter. In addition, during the prior year~~taxation of dividends. These current period ~~there was $21.1~~benefits were offset partially by $6.3 million of ~~non-operating costs for which no tax benefit was recognized, and there were no similar costs~~discrete expenses arising from the enactment in the ~~current period, which also contributed to~~U.S. of the ~~comparative reduction in the effective tax rate.~~Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

Deferred Tax Assets and Liabilities

We recognize deferred 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 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 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.

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Our framework for assessing the recoverability of deferred 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 that, as of March 30, 2019, it was more likely than not that deferred tax assets in Luxembourg, the U.K., and the U.S. totaling $627.6 million were realizable. Accordingly, we discretely recognized $617.3 million of our deferred tax asset in the first quarter of 2019, while the remaining $10.3 million was to be recognized either during the year through the effective tax rate or in accumulated OCI as a cumulative translation adjustment.

For the period ended September 28, 2019 as a result of changes in the Luxembourg statutory tax rate, which occurred during the second quarter, further refinement of current year estimates and foreign currency movements, we reduced the recognition from $627.6 million to $570.1 million.

Included within the $570.1 million total deferred tax assets are deferred tax assets totaling $564.0 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 2019 due to the implementation of the Reorganization. The Reorganization was implemented in the first quarter of 2019 to centralize and strengthen regional operations in Europe, which thereafter became centrally managed from Luxembourg.

~~The positive evidence that existed in favor of releasing the allowance as of March 30, 2019 and ultimately outweighed the negative evidence included the following:~~

~~our profitability in Europe in 2018 and prior years and for the three months ended March 30, 2019, as well as our expectations regarding the sustainability of these profits;~~

the impact of the implementation in the quarter of the Reorganization, which created an expectation of future income in Luxembourg and, thereby, removed negative evidence that supported maintaining the valuation allowance against our deferred tax assets as of December 29, 2018; and

~~the fact that our net operating loss carryforwards in Luxembourg are indefinite lived.~~

For the period ended September 28, 2019, the recognition of deferred tax assets in Luxembourg was reduced from $615.6 million to $564.0 million primarily as a result of the reduction in the Luxembourg corporate tax rate from 18% to 17%, which occurred during the second quarter. This resulted in a $25.1 million reduction in the previously reported value of our deferred tax asset. The remaining $26.5 million reduction is the result of changes in foreign currency translation during the current period.

Further, as a result of additional financing income realized in the first quarter of 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 regarding valuation allowances totaling $6.2 million related to indefinite lived net operating losses in the U.K. For the period ended September 28, 2019, further refinement of estimated U.K. taxable profits resulted in a reduction of the valuation allowance release related to indefinite lived net operating losses from $6.2 million to $3.4 million.

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 $4.3 million of U.S. foreign tax credits with related recorded valuation allowances. For the period ended September 28, 2019, further refinement of estimated U.S. foreign tax credits expected to be utilized in the current year reduced the realizability of U.S. foreign tax credit carry forwards from $4.3 million to $2.7 million, as U.S. foreign tax credits generated in the current year must be utilized before U.S. foreign tax credit carry forwards.

As of each reporting date, management considers new evidence, both positive and negative, that could impact our view with regard to the future realization of deferred tax assets. We will maintain our positions with regard to future realization of deferred 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 tax assets may impact materially our ~~consolidated~~ financial statements.

Significant Events

7.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.

6. Earnings per share

Basic earnings per share represents net income attributable to shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share considers the dilutive effect of potential shares, unless the inclusion of the potential shares would have an anti-dilutive effect. The treasury stock method is used to determine the potential dilutive shares resulting from assumed exercises of equity-related instruments.

The computation of earnings per share is presented below:


	Three months ended				Nine months ended					Three months ended
(dollars in millions, except share numbers and per share amounts)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		(dollars in millions, except share numbers and per share amounts)	March 28, 2020		March 30, 2019
Net income attributable to shareholders	$	35.5	$	59.9	$	670.7	$	169.7	Net income attributable to shareholders	$	35.6	$	613.7

Weighted average number of shares outstanding	290,109,231		289,783,061		290,032,416		284,750,794		Weighted average number of shares outstanding	290,609,974		289,928,526
Dilutive effect of share-based awards	1,003,871		8,670,885		1,634,515		8,705,430		Dilutive effect of share-based awards	1,501,279		4,733,387
Diluted weighted average number of shares outstanding	291,113,102		298,453,946		291,666,931		293,456,224		Diluted weighted average number of shares outstanding	292,111,253		294,661,913

Basic earnings per share	$	0.12	$	0.21	$	2.31	$	0.60	Basic earnings per share	$	0.12	$	2.12
Diluted earnings per share	$	0.12	$	0.20	$	2.30	$	0.58	Diluted earnings per share	$	0.12	$	2.08

For the three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, shares totaling ~~3,623,701~~5,508,174 and 605,164, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. For the nine months ended September 28, 2019 and September 29, 2018, shares totaling 3,686,986 and 610,0393,809,508 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

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7. Inventories


(dollars in millions)	As of March 28,2020		As of December 28, 2019
Raw materials and supplies	$	120.6	$	118.9
Work in progress	36.9		33.6
Finished goods	326.9		322.6
Total inventories	$	484.4	$	475.1

8. ~~Inventories~~Goodwill


(dollars in millions)	Power Transmission		Fluid Power		Total
Cost and carrying amount
As of December 28, 2019	$	1,377.5	$	683.0	$	2,060.5

Foreign currency translation	(53.0)		(49.8)		(102.8)
As of March 28, 2020	$	1,324.5	$	633.2	$	1,957.7

(dollars in millions) As of
September 28,
2019 As of
December 29,
2018
Raw materials and supplies $ 129.3
$ 152.1
Work in progress 36.6
38.4
Finished goods 341.9
347.1
Total inventories $ 507.8

$ 537.6

9. ~~Goodwill~~

(dollars in millions) Power
Transmission Fluid
Power Total
Cost and carrying amount
As of December 29, 2018 $ 1,374.1
$ 671.8
$ 2,045.9
Foreign currency translation (18.4 ) (3.4 ) (21.8 )
As of September 28, 2019 $ 1,355.7
$ 668.4
$ 2,024.1

~~10.~~ Intangible assets


	As of September 28, 2019							As of December 29, 2018								As of March 28, 2020										As of December 28, 2019
(dollars in millions)	Cost		Accumulated amortization and impairment			Net		Cost		Accumulated amortization and impairment			Net		(dollars in millions)	Cost		Accumulated amortization and impairment		Net		Cost		Accumulated amortization and impairment		Net
Finite-lived:															Finite-lived:
—Customer relationships	$	1,998.4	$	(618.8	)	$	1,379.6	$	2,017.4	$	(534.8	)	$	1,482.6	—Customer relationships	$	1,964.8	$	(667.2)	$	1,297.6	$	2,021.8	$	(656.3)	$	1,365.5
—Technology	90.5		(87.5		)	3.0		90.6		(87.0		)	3.6		—Technology	90.4		(87.8)		2.6		90.8		(87.8)		3.0
—Capitalized software	71.6		(35.4		)	36.2		64.2		(29.2		)	35.0		—Capitalized software	81.8		(41.5)		40.3		76.1		(38.0)		38.1
	2,160.5		(741.7		)	1,418.8		2,172.2		(651.0		)	1,521.2			2,137.0		(796.5)		1,340.5		2,188.7		(782.1)		1,406.6
Indefinite-lived:															Indefinite-lived:
—Brands and trade names	513.4		(44.0		)	469.4		513.4		(44.0		)	469.4		—Brands and trade names	513.4		(44.0)		469.4		513.4		(44.0)		469.4
Total intangible assets	$	2,673.9	$	(785.7	)	$	1,888.2	$	2,685.6	$	(695.0	)	$	1,990.6	Total intangible assets	$	2,650.4	$	(840.5)	$	1,809.9	$	2,702.1	$	(826.1)	$	1,876.0

During the three months ended ~~September~~March 28, ~~2019,~~2020, the amortization expense recognized in respect of intangible assets was ~~$32.4~~$32.2 million, compared with ~~$32.3~~$32.6 million for the three months ended ~~September 29, 2018.~~March 30, 2019. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of ~~$21.0~~$38.4 million for the three months ended ~~September~~March 28, ~~2019,~~2020, compared with ~~a decrease~~an increase of ~~$0.2~~$3.3 million for the three months ended ~~September 29, 2018.~~March 30, 2019.

During the nine months ended September 28, 2019, the amortization expense recognized in respect of intangible assets was $97.5 million, compared with $98.0 million for the nine months ended September 29, 2018. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $13.0 million for the nine months ended September 28, 2019, compared with a decrease of $18.9 million for the nine months ended September 29, 2018.

~~11. Leases~~

~~A. Overview~~

~~As discussed in note 1, at the beginning of our 2019 fiscal year, we adopted new lease accounting guidance under Topic 842 “Leases~~”, which brings most leases of property, plant and equipment onto the balance sheet. It requires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right-of-use asset” for all leases, although certain short-term leases are exempted from the standard.

Under Topic 842, we evaluate our contracts and supply arrangements and conclude that they contain a lease at inception where (i) a tangible asset is explicitly or implicitly identified in the contract, (ii) we use the same asset identified over the course of the agreement, (iii) we obtain substantially all of the economic benefits from the use of the underlying asset, and (iv) we direct how and for what purpose the asset is used during the term of the contract. Leases are typically recognized on the balance sheet at their commencement date. However, if we take legal possession and have control over the asset before the commencement date, we would recognize the lease on the balance sheet at the earlier date.

Gates has over 1,000 leases covering a wide variety of tangible assets that are used in our operations across the world. The value of our global leases is concentrated in approximately 80 real estate leases, which accounted for approximately 88% of the lease liability under non-cancellable leases as of September 28, 2019. The remaining leases are predominantly comprised of equipment and vehicle leases.

~~Options to extend or terminate leases~~

In determining the lease term, we consider various economic factors, including real estate strategies, the nature, length and underlying terms of the agreement, as well as the uncertainty of the condition of leased equipment at the end of the lease term. Based on these factors, where a contract has a renewal option, we generally assume with reasonable certainty that we will renew real estate leases and will not renew equipment, vehicles or any other leases.

~~Variable payments~~

We sometimes make payments under our lease agreements that are excluded from the measurement of our right-of-use assets and lease liabilities and are recognized instead as variable payments in the period in which the obligation for those payments is incurred. These costs include common area maintenance, insurance, taxes, utility costs, etc. A number of our leases, particularly real estate leases, include base rent escalation clauses. The majority of these are based on the change in a local consumer price or similar index. Payments that vary based on an index or rate are included in the measurement of our right-of-use assets and lease liabilities at the rate as of the commencement date with any subsequent changes to those payments being recognized as variable payments in the period in which they occur.

~~Residual value guarantees, restrictions or covenants, and leases that have not yet commenced~~

Gates does not have any significant leases containing residual value guarantees, restrictions or covenants. Additionally, as of September 28, 2019, there were no significant new leases that have not yet commenced.

~~B. Significant assumptions and judgments~~

~~Discount rate~~

The discount rate used to calculate the present value of the future minimum lease payments is the rate implicit in the lease, when readily available. As most of our leases do not have a readily determinable implicit rate, we discount the future minimum lease payments using an incremental borrowing rate which represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We determine this rate at a country or lower level and take into account factors including currency, country risk premium, industry risk and adjustments for collateralized debt. Appropriate yield curves are used to derive different debt tenors to approximate the applicable lease term.

The discount rate is reassessed when there is a remeasurement of the lease liability, which happens predominantly when there is a contract modification and that modification does not result in a separate contract.

~~Elections and practical expedients~~

~~The following practical expedients have been adopted as part of our accounting policy on leases:~~


~~(i)~~	~~we will not separate the lease component from the non-lease component for all asset classes. We have therefore not allocated consideration in a contract between lease and non-lease components; and~~


~~(ii)~~	we recognize the payments on short-term leases (leases with terms at inception of 12 months or fewer) in net income on a straight-line basis over the lease term. No amount is recognized on the balance sheet with respect to these leases.

~~C. Quantitative disclosures~~

(dollars in millions)
Three months ended September 28, 2019 Nine months ended September 28, 2019
Lease expenses
Operating lease expenses $ 7.6
$ 22.6
Finance lease amortization expenses 0.1
0.2
Short-term lease expenses 1.3
3.2
Variable lease expenses 2.2
4.9
Sublease income —
(0.1 )
Total lease expenses $ 11.2
$ 30.8

Other information
Right-of-use assets obtained in exchange for new operating lease liabilities $ 4.6
$ 6.6

Cash paid for amounts included in the measurement of lease liabilities:
—Operating cash flows from operating leases $ 20.1
—Financing cash flows from finance leases 0.3
$ 20.4
Weighted-average remaining lease term — finance leases 9.0 years
Weighted-average remaining lease term — operating leases 10.3 years
Weighted-average discount rate — finance leases 2.6 %
Weighted-average discount rate — operating leases 5.7 %

~~Maturity analysis of liabilities~~

(dollars in millions)
Operating leases
Finance leases ⁽¹⁾
Next 12 months $ 25.3
$ 0.5
Year 2 21.1
0.5
Year 3 17.3
0.5
Year 4 14.4
0.3
Year 5 12.6
—
Year 6 and beyond 83.7
—
Total lease payments 174.4
1.8
Interest 46.7
0.1
Total present value of lease liabilities $ 127.7
$ 1.7


⁽¹⁾	Although our finance leases have a weighted average remaining lease term of 9.0 years, the primary lease includes a ten year rent-free period at the end of the contract such that there will be no lease payments made beyond December 2022.

~~Balance sheet presentation of leases as of September 28, 2019~~

(dollars in millions)
Operating leases Finance leases
Right-of-use assets $ 117.3
$ 3.0

Short-term lease liabilities (included in “Accrued expenses and other current liabilities”) $ 19.2
$ 0.9
Long-term lease liabilities 108.5
0.8
Total lease liabilities $ 127.7
$ 1.7

~~Right-of-use assets arising under finance leases are presented in the property, plant and equipment, net line item in the condensed consolidated balance sheet.~~

~~Topic 840 Disclosures~~

~~Future minimum lease payments under operating and finance leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 29, 2018 were as follows:~~

(dollars in millions)
Operating leases Finance leases Total
Fiscal year
2019 $ 25.0
$ 0.3
$ 25.3
2020 21.3
0.3
21.6
2021 18.2
0.3
18.5
2022 14.4
0.3
14.7
2023 12.6
0.4
13.0
2024 and beyond 86.5
0.4
86.9
Total $ 178.0
$ 2.0
$ 180.0

~~12.~~10. Derivative financial instruments

We are exposed to certain risks relating to our ongoing business operations. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts, interest rate caps (options) and interest rate swaps, to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact.

We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheet. We designate certain of our currency swaps as net investment hedges and designate our interest rate caps and interest rate swaps as cash flow hedges. The gain or loss on the designated derivative instrument is recognized in ~~OCI~~other comprehensive income (“OCI”) and reclassified into net income in the same period or periods during which the hedged transaction affects earnings.

Derivative instruments that have not been designated in an effective hedging relationship are considered economic hedges, and their change in fair value is recognized in net income in each period.

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The period end fair values of derivative financial instruments were as follows:


	As of September 28, 2019													As of December 29, 2018														As of March 28, 2020																		As of December 28, 2019
(dollars in millions)	Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities			Other non- current liabilities			Net			Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities			Other non- current liabilities			Net			(dollars in millions)	Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net		Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net
Derivatives designated as hedging instruments:																											Derivatives designated as hedging instruments:
—Currency swaps	$	4.6	$	—	$	—		$	(14.1	)	$	(9.5	)	$	5.4	$	—	$	—		$	(27.5	)	$	(22.1	)	—Currency swaps	$	2.2	$	—	$	—	$	(14.8)	$	(12.6)	$	4.2	$	—	$	—	$	(19.3)	$	(15.1)
—Interest rate caps	—		—		(4.8		)	(3.2		)	(8.0		)	3.5		1.6		—			(10.9		)	(5.8		)	—Interest rate caps	—		—		(2.5)		(2.6)		(5.1)		—		—		(4.0)		(3.0)		(7.0)
—Interest rate swaps	—		—		(2.0		)	(33.8		)	(35.8		)	—		—		(0.3		)	(2.6		)	(2.9		)	—Interest rate swaps	—		—		(11.8)		(38.5)		(50.3)		—		—		(5.3)		(29.0)		(34.3)

Derivatives not designated as hedging instruments:																											Derivatives not designated as hedging instruments:
—Currency swaps	0.1		—		—			—			0.1			—		—		—			—			—			—Currency swaps	0.1		—		(0.7)		—		(0.6)		—		—		(0.1)		—		(0.1)
—Currency forward contracts	1.3		—		(0.5		)	—			0.8			1.3		—		(0.4		)	—			0.9			—Currency forward contracts	0.6		—		(0.3)		—		0.3		1.2		—		(0.2)		—		1.0
	$	6.0	$	—	$	(7.3	)	$	(51.1	)	$	(52.4	)	$	10.2	$	1.6	$	(0.7	)	$	(41.0	)	$	(29.9	)		$	2.9	$	—	$	(15.3)	$	(55.9)	$	(68.3)	$	5.4	$	—	$	(9.6)	$	(51.3)	$	(55.5)

A. Instruments designated as net investment hedges

We hold cross currency swaps that have been designated as net investment hedges of certain of our European operations. As of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, the notional principal amount of these contracts was $270.0 million. During July 2019, we extended the maturity of these contracts from March 2020 to March 2022. In addition, we have designated ~~€75.5~~€147.0 million of our Euro-denominated debt as a net investment hedge of certain of our European operations.

The fair value gains ~~(losses)~~ before tax recognized in OCI in relation to the instruments designated as net investment hedging instruments were as follows:


	Three months ended				Nine months ended						Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Net fair value gains (losses) recognized in OCI in relation to:
Net fair value gains recognized in OCI in relation to:										Net fair value gains recognized in OCI in relation to:
—Euro-denominated debt	$	3.2	$	0.3	$	2.5	$	(11.5	)	—Euro-denominated debt	$	1.5	$	0.7
—Designated cross currency swaps	10.1		3.5		11.6		16.2			—Designated cross currency swaps	2.5		4.9
Total net fair value gains	$	13.3	$	3.8	$	14.1	$	4.7		Total net fair value gains	$	4.0	$	5.6

During the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, a net ~~gain~~loss of ~~$1.9~~$1.6 million ~~and a net gain of $6.1 million, respectively,~~ was recognized in interest expense in relation to our cross currency swaps that have been designated as net investment hedges, compared with a net gain of ~~$0.7~~$2.2 million during the three ~~and nine~~ months ended ~~September 29, 2018.~~March 30, 2019.

B. Instruments designated as cash flow hedges

We use interest rate swaps and interest rate caps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. These instruments are all designated as cash flow hedges. As of ~~September~~March 28, 2020 and December 28, 2019, ~~and December 29, 2018,~~ we held ~~three~~3 pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $870.0 million, which run from June 30, 2020 through June 30, 2023. Our interest rate caps involve the receipt of variable rate payments from a counterparty if interest rates rise above the strike rate on the contract in exchange for a premium. As of ~~September~~both March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, the notional amount of the interest rate cap contracts outstanding was $1.7 ~~billion and $2.7 billion, respectively.~~billion.

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The periods covered by our interest rate caps and their notional values are as follows:

(in millions) Notional value
June 30, 2017 to June 30, 2020 $ 200.0
June 28, 2019 to June 30, 2020 $ 1,000.0
July 1, 2019 to June 30, 2023 € 425.0


(in millions)	Notional value
June 30, 2017 to June 30, 2020	$	200.0
June 28, 2019 to June 30, 2020	$	1,000.0
July 1, 2019 to June 30, 2023	€	425.0

The movements before tax recognized in OCI in relation to our cash flow hedges were as follows:


	Three months ended					Nine months ended						Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018		September 28, 2019			September 29, 2018		(dollars in millions)	March 28, 2020		March 30, 2019
Movement recognized in OCI in relation to:											Movement recognized in OCI in relation to:
—Fair value (loss) gain on cash flow hedges	$	(4.9	)	$	3.6	$	(32.8	)	$	13.3
—Fair value loss on cash flow hedges											—Fair value loss on cash flow hedges	$	(15.9)	$	(13.3)
—Deferred premium reclassified from OCI to net income	0.9			1.0		1.2			4.5		—Deferred premium reclassified from OCI to net income	1.7		0.1
Total movement	$	(4.0	)	$	4.6	$	(31.6	)	$	17.8	Total movement	$	(14.2)	$	(13.2)

During the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, a net expense of ~~$0.4~~$1.7 million ~~and net expense of $1.2 million, respectively,~~ was reclassified to interest expense in relation to our cash flow hedges, compared with net expense of ~~$1.0~~$0.1 million ~~and net expense of $4.5 million, respectively,~~ during the three ~~and nine~~ months ended ~~September 29, 2018.~~

March 30, 2019.

C. Derivative instruments not designated as hedging instruments

We do not designate our currency forward contracts, which are used primarily in respect of operational currency exposures related to payables, receivables and material procurement, or the currency swap contracts that are used to manage the currency profile of Gates’ cash as hedging instruments for the purposes of hedge accounting.

As of ~~September~~March 28, ~~2019,~~2020, the notional principal amount of outstanding currency swaps that are used to manage the currency profile of Gates’ cash was ~~$26.4~~$32.3 million, compared with $0$16.7 million as of December ~~29, 2018.~~28, 2019.

As of ~~September~~March 28, ~~2019,~~2020, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was ~~$71.6~~$64.3 million, compared with ~~$108.0~~$82.5 million as of December ~~29, 2018.~~28, 2019.

The fair value gains recognized in net income in relation to derivative instruments that have not been designated as hedging instruments were as follows:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Fair value gains recognized in relation to:
—Currency forward contracts recognized in SG&A	$	0.3	$	2.7
—Currency swaps recognized in other income	0.5		0.2
Total	$	0.8	$	2.9

Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Fair value gains recognized in relation to:
—Currency forward contracts recognized in SG&A $ 0.3
$ 0.9
$ 2.0
$ 1.7
—Currency swaps recognized in other expenses 1.0
0.1
1.0
0.6
Total $ 1.3
$ 1.0
$ 3.0
$ 2.3

~~13.~~11. Fair value measurement

A. Fair value hierarchy

We account for certain assets and liabilities at fair value. Topic 820 “Fair Value Measurements and Disclosures” establishes the following hierarchy for the inputs that are used in fair value measurement:

•“Level 1” inputs are unadjusted quoted prices in active markets for identical assets or liabilities;

•“Level 2” inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

•“Level 3” inputs are not based on observable market data (unobservable inputs).

Assets and liabilities that are measured at fair value are categorized in one of the three levels on the basis of the lowest-level input that is significant to its valuation.

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B. Financial instruments not held at fair value

Certain financial assets and liabilities are not measured at fair value; however, items such as cash and cash equivalents, restricted cash, revolving credit facilities and bank overdrafts generally attract interest at floating rates and accordingly their carrying amounts are considered to approximate fair value. Due to their short maturities, the carrying amounts of accounts receivable and accounts payable are also considered to approximate their fair values.

The carrying amount and fair value of our debt are set out below:


	As of September 28, 2019				As of December 29, 2018					As of March 28, 2020						As of December 28, 2019
(dollars in millions)	Carrying amount		Fair value		Carrying amount		Fair value		(dollars in millions)	Carrying amount		Fair value		Carrying amount		Fair value
Current	$	43.5	$	43.0	$	51.6	$	50.4	Current	$	54.9	$	44.8	$	46.1	$	45.9
Non-current	2,909.8		2,903.2		2,953.4		2,873.2		Non-current	2,901.9		2,490.5		2,912.3		2,946.8
	$	2,953.3	$	2,946.2	$	3,005.0	$	2,923.6		$	2,956.8	$	2,535.3	$	2,958.4	$	2,992.7

Debt is comprised principally of borrowings under the secured credit facilities and the unsecured senior notes. Loans under the secured credit facilities pay interest at floating rates, subject to a 1% LIBOR floor on the Dollar Term Loan and a 0% EURIBOR floor on the Euro Term Loan. ~~Their principal amounts,~~The fair values of the term loans are derived from a market price, discounted for ~~illiquidity, are considered to approximate fair value.~~illiquidity. The unsecured senior notes have fixed interest rates, are traded by “Qualified Institutional Buyers” and certain other eligible investors, and their fair value is derived from their quoted market ~~prices.~~price.

C. Assets and liabilities measured at fair value on a recurring basis

The following table categorizes the assets and liabilities that are measured at fair value on a recurring basis:


(dollars in millions)	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)			Total			(dollars in millions)	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Total
As of September 28, 2019
Available-for-sale securities	$	1.0	$	—		$	1.0
As of March 28, 2020									As of March 28, 2020
Equity investments									Equity investments	$	1.0	$	—	$	1.0
Derivative assets	$	—	$	6.0		$	6.0		Derivative assets	$	—	$	2.9	$	2.9
Derivative liabilities	$	—	$	(58.4	)	$	(58.4	)	Derivative liabilities	$	—	$	(71.2)	$	(71.2)

As of December 29, 2018
Available-for-sale securities	$	0.8	$	—		$	0.8
As of December 28, 2019									As of December 28, 2019
Equity investments									Equity investments	$	1.1	$	—	$	1.1
Derivative assets	$	—	$	11.8		$	11.8		Derivative assets	$	—	$	5.4	$	5.4
Derivative liabilities	$	—	$	(41.7	)	$	(41.7	)	Derivative liabilities	$	—	$	(60.9)	$	(60.9)

Available-for-sale securities represent equity securities that are traded in an active market and therefore are measured using quoted prices in an active market. Derivative assets and liabilities included in Level 2 represent foreign currency exchange forward and swap contracts, and interest rate derivative contracts.

We value our foreign currency exchange derivatives using models consistent with those used by a market participant that maximize the use of market observable inputs including forward prices for currencies.

We value our interest rate derivative contracts using a widely accepted discounted cash flow valuation methodology that reflects the contractual terms of each derivative, including the period to maturity. The methodology derives the fair values of the derivatives using the market standard methodology of netting the discounted future cash payments and the discounted expected receipts. The inputs used in the calculation are based on observable market-based inputs, including interest rate curves, implied volatilities and credit spreads.

We incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Transfers between levels of the fair value hierarchy

During the periods presented, there were no transfers between Levels 1 and 2, and Gates had no assets or liabilities measured at fair value on a recurring basis using Level 3 inputs.

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D. Assets measured at fair value on a non-recurring basis

Gates has non-recurring fair value measurements related to certain assets, including goodwill, intangible assets, and property, plant, and equipment. No significant impairment was recognized during either the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 or the ~~year~~three months ended ~~December 29, 2018.~~March 30, 2019.

~~14.~~12. Debt


(dollars in millions)	As of September 28, 2019			As of December 29, 2018			(dollars in millions)	As of March 28,2020		As of December 28,2019
Secured debt:							Secured debt:
—Dollar Term Loan	$	1,703.4		$	1,716.4		—Dollar Term Loan	$	1,694.8	$	1,699.1
—Euro Term Loan	704.3			742.1			—Euro Term Loan	709.5		717.7
Unsecured debt:							Unsecured debt:
—Dollar Senior Notes	568.0			568.0
—6.25% Dollar Senior Notes due 2026							—6.25% Dollar Senior Notes due 2026	568.0		568.0
—Other loans	0.2			0.6			—Other loans	0.1		0.2
Total principal of debt	2,975.9			3,027.1			Total principal of debt	2,972.4		2,985.0
Deferred issuance costs	(41.5		)	(48.7		)	Deferred issuance costs	(39.7)		(41.8)
Accrued interest	18.9			26.6			Accrued interest	24.1		15.2
Total carrying value of debt	2,953.3			3,005.0			Total carrying value of debt	2,956.8		2,958.4
Debt, current portion	43.5			51.6			Debt, current portion	54.9		46.1
Debt, less current portion	$	2,909.8		$	2,953.4		Debt, less current portion	$	2,901.9	$	2,912.3

Gates’ secured debt is jointly and severally, irrevocably and fully and unconditionally guaranteed by certain of its subsidiaries and is secured by liens on substantially all of their assets.

Gates is subject to covenants, representations and warranties under certain of its debt facilities. During the periods covered by these condensed consolidated financial statements, we were in compliance with the applicable financial covenants. Also under the agreements governing our debt facilities, our ability to engage in activities such as incurring certain additional indebtedness, making certain investments and paying certain dividends is dependent, in part, on our ability to satisfy tests based on measures determined under those agreements.

~~Debt redemptions~~

On January 31, 2018, we redeemed in full our outstanding €235.0 million Euro Senior Notes, plus interest accrued up to and including the redemption date of $0.7 million. The Euro Senior Notes were redeemed at a price of 102.875% and a redemption premium of $8.4 million was therefore paid in addition to the principal of $291.7 million.

In addition, on February 8 and February 9, 2018, we redeemed Dollar Senior Notes with a principal of $522.0 million and $100.0 million, respectively. Both of these calls were made at a price of 103.0%, incurring redemption premiums of $15.6 million and $3.0 million, respectively. Interest accrued of $2.0 million and $0.4 million, respectively, was also paid on these dates.

All of the above prepayments, totaling $913.7 million in principal, $27.0 million in redemption premiums and $3.1 million in accrued interest, were funded primarily by the net proceeds from our initial public offering, with the remainder of the funds coming from cash on hand. As a result of these redemptions, the recognition of $15.4 million of deferred financing costs was accelerated and recognized in interest expense in the first three months of 2018.

In addition, in connection with certain reorganization transactions, a wholly-owned U.S. subsidiary of Gates Global LLC, has entered into intercompany agreements pursuant to which it became the principal obligor under the Term Loans and Senior Notes for U.S. federal income tax purposes and agreed to make future payments due on these tranches of debt. As a result, interest received by lenders of these debt tranches is U.S. source income.

Dollar and Euro Term Loans

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. The maturity date for each of the term loan facilities is March 31, ~~2024, with a springing maturity of April 15, 2022 if more than $500.0 million of the Dollar Senior Notes remain in issue at that time.~~2024. These term loan facilities bear interest at a floating rate, which for U.S. dollar debt can be either a base rate as defined in the credit agreement plus an applicable margin, or at our option, LIBOR plus an applicable margin. ~~The Euro Term Loan bears interest at Euro LIBOR subject to a floor of 0%, plus a margin of 3.00%.~~

~~On January 29, 2018, the applicable margin on each of the term loans was lowered by 0.25% following the successful completion of our initial public offering.~~ The Dollar Term Loan interest rate is currently LIBOR, subject to a floor of 1.00%, plus a margin of 2.75%, and as of ~~September~~March 28, ~~2019,~~2020, borrowings under this facility bore interest at a rate of ~~4.79%~~4.35% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of ~~September~~March 28, ~~2019,~~2020, the Euro Term Loan bore interest at ~~Euro LIBOR,~~EURIBOR, which is currently below 0%, subject to a floor of 0%, plus a margin of 3.00%. 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 the ~~nine~~three months ended ~~September~~March 28, 2020, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $4.3 million and $1.8 million, respectively. During the three months ended March 30, 2019, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of ~~$13.0~~$8.7 million and ~~$5.5 million, respectively. During the nine months ended September 29, 2018, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $13.0 million and $5.8~~$3.6 million, respectively.

Under the terms of the credit agreement, we are ~~obliged~~obligated to offer annually to the term loan lenders an “excess cash flow” amount as defined under the agreement, based on the preceding year’s final results. Based on our ~~2018~~2019 results, the leverage ratio as defined under the credit agreement was below the threshold above which payments are required, and therefore no excess cash flow payment is required to be made in ~~2019.~~2020.

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During the periods presented, foreign exchange gains were recognized in respect of the Euro Term Loans as summarized in the table below. As a portion of the facility was designated as a net investment hedge of certain of our Euro investments, a corresponding portion of the foreign exchange gains (losses) were recognized in OCI.


	Three months ended				Nine months ended						Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Gain recognized in statement of operations	$	24.5	$	3.5	$	29.8	$	32.6		Gain recognized in statement of operations	$	4.9	$	13.4
Gain (loss) recognized in OCI	3.2		0.3		2.5		(6.5		)
Total gains	$	27.7	$	3.8	$	32.3	$	26.1
Gain recognized in OCI										Gain recognized in OCI	1.5		0.7
Total gain										Total gain	$	6.4	$	14.1

~~Subsequent to our initial public offering, the~~The above net ~~transactional~~ foreign exchange gains recognized in the other expenses (income) ~~expenses~~ line of the condensed consolidated statement of operations have been substantially offset by net foreign exchange movements on Euro-denominated intercompany loans as part of our overall hedging strategy.

A wholly-owned U.S. subsidiary of Gates Global LLC is the principal obligor under the Term Loans for U.S. federal income tax purposes and makes the payments due on this tranche of debt. As a result, interest received by lenders of this tranche of debt is U.S. source income.

Unsecured Senior Notes

As of ~~September~~March 28, ~~2019, there were~~2020, we had $568.0 million of Dollar Senior Notes ~~outstanding.~~outstanding that were issued in November 2019. These notes are scheduled to mature on ~~July~~January 15, ~~2022~~2026 and bear interest at an annual fixed rate of ~~6.00%~~6.25% with semi-annual interest payments. ~~As noted above, on~~

On and after January ~~31, 2018,~~15, 2022, we ~~redeemed in full our outstanding €235.0 million Euro Senior Notes and made partial redemptions of the Dollar Senior Notes totaling $622.0 million.~~

Up to the date of their redemption, foreign exchange losses of $9.2 million were recognized in respect of the Euro Senior Notes. Of these losses, $5.0 million was recognized in OCI for the period during which the facility was designated as a net investment hedge of certain of our Euro investments, and $4.2 million was recognized in the statement of operations.

We may redeem the Dollar Senior Notes, at our option, in whole at any time or in part from time to time, at ~~100%~~the following redemption prices (expressed as a percentage of ~~their~~the principal ~~value,~~amount), plus accrued and unpaid interest to the redemption ~~date.~~date:


	Redemption Price
During the year commencing:
—2023	103.125	%
—2024	101.563	%
—2025 and thereafter	100.000	%

Additionally, net cash proceeds from an equity offering can be utilized at any time prior to January 15, 2022, to redeem up to 40% of the ~~event of a change of control over the Company, each holder will have the right to require Gates to repurchase all of such holder’s~~ notes at a ~~purchase~~redemption price ~~in cash~~ equal to ~~101%~~106.250% of the principal amount thereof, plus accrued and unpaid interest through to the ~~date~~redemption date.

Upon the occurrence of a change of control or a certain qualifying asset sale, the holders of the notes will have the right to require us to make an offer to repurchase ~~except~~each holder's notes at a price equal to 101% (in the ~~extent that Gates has previously elected to redeem~~case of a change of control) or 100% (in the ~~notes.~~case of an asset sale) of their principal amount, plus accrued and unpaid interest.

Revolving credit facility

We also have a secured revolving credit facility ~~maturing on January 29, 2023,~~ that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million, with a letter of credit sub-facility of $20.0 million. The facility matures on January 29, ~~2023, with a springing maturity of April 15, 2022 if more than $500.0 million of the Dollar Senior Notes remain in issue at that time.~~

2023.

As of both ~~September~~March 28, 2020 and December 28, 2019, ~~and December 29, 2018,~~ there were no0 drawings for cash under the revolving credit facility and there were no0 letters of credit outstanding.

Debt under the revolving credit facility bears interest at a floating rate, which can be either a base rate as defined in the credit agreement plus an applicable margin or, at our option, LIBOR, plus an applicable margin.

Asset-backed revolver

We have a revolving credit facility backed by certain of our assets in North America. The facility allows for loans of up to a maximum of $325.0 million ($~~309.2~~301.2 million as of ~~September~~March 28, ~~2019,~~2020, compared with ~~$325.0~~$294.6 million as of December ~~29, 2018,~~28, 2019, based on the values of the secured assets on those dates) with a letter of credit sub-facility of $150.0 million within this maximum. The facility matures on January 29, ~~2023, with a springing maturity~~2023.

Table of ~~April 15, 2022 if more than $500.0 million of the Dollar Senior Notes remain in issue at that time.~~Contents

As of both ~~September~~March 28, 2020 and December 28, 2019, ~~and December 29, 2018,~~ there were no0 drawings for cash under the asset-backed revolver, but there were letters of credit outstanding of ~~$50.2~~$45.9 million and ~~$57.8~~$50.1 million, respectively.

Debt under the facility bears interest at a floating rate, which can be either a base rate as defined in the credit agreement plus an applicable margin or, at our option, LIBOR, plus an applicable margin.

~~15.~~13. Post-retirement benefits

Gates provides defined benefit pension plans in certain of the countries in which it operates, in particular, in the U.S. and U.K. All of the defined benefit pension plans are closed to new entrants. In addition to the funded defined benefit pension plans, Gates has unfunded defined benefit obligations to certain current and former employees.

Gates also provides other post-retirement benefits, principally health and life insurance coverage, on an unfunded basis to certain of its employees in the U.S. and Canada.

Net periodic benefit cost

The components of the net periodic benefit cost for pensions and other post-retirement benefits were as follows:

Three months ended September 28, 2019 Three months ended September 29, 2018
(dollars in millions) Pensions Other post-retirement benefits Total Pensions Other post-retirement benefits Total
Reported in operating income:
—Employer service cost $ 1.3
$ —
$ 1.3
$ 1.3
$ —
$ 1.3
Reported outside of operating income:
—Interest cost 5.8
0.6
6.4
5.8
0.6
6.4
—Expected return on plan assets (7.0 ) —
(7.0 ) (5.6 ) —
(5.6 )
—Net amortization of prior period losses (gains) 0.2
(0.3 ) (0.1 ) —
(0.1 ) (0.1 )
—Settlements and curtailments —
—
—
0.1
—
0.1
Net periodic benefit cost $ 0.3

$ 0.3

$ 0.6

$ 1.6

$ 0.5

$ 2.1

Contributions $ 1.9
$ 0.8
$ 2.7
$ 1.7
$ 1.2
$ 2.9


	Nine months ended September 28, 2019									Nine months ended September 29, 2018										Three months ended March 28, 2020										Three months ended March 30, 2019
(dollars in millions)	Pensions			Other post-retirement benefits			Total			Pensions			Other post-retirement benefits			Total			(dollars in millions)	Pensions		Other post-retirement benefits		Total		Pensions		Other post-retirement benefits		Total
Reported in operating income:																			Reported in operating income:
—Employer service cost	$	4.1		$	—		$	4.1		$	4.0		$	—		$	4.0		—Employer service cost	$	1.4	$	—	$	1.4	$	1.4	$	—	$	1.4
Reported outside of operating income:																			Reported outside of operating income:
—Interest cost	17.6			1.7			19.3			17.7			1.7			19.4			—Interest cost	4.6		0.4		5.0		5.9		0.6		6.5
—Expected return on plan assets	(20.9		)	—			(20.9		)	(17.0		)	—			(17.0		)	—Expected return on plan assets	(5.5)		—		(5.5)		(7.0)		—		(7.0)
—Net amortization of prior period losses (gains)	0.6			(0.9		)	(0.3		)	0.1			(0.5		)	(0.4		)	—Net amortization of prior period losses (gains)	0.3		(0.3)		—		0.2		(0.3)		(0.1)
—Settlements and curtailments	(0.7		)	—			(0.7		)	0.4			—			0.4			—Settlements and curtailments	—		—		—		(0.7)		—		(0.7)
Net periodic benefit cost	$	0.7		$	0.8		$	1.5		$	5.2		$	1.2		$	6.4		Net periodic benefit cost	$	0.8	$	0.1	$	0.9	$	(0.2)	$	0.3	$	0.1

Contributions	$	5.3		$	2.8		$	8.1		$	5.7		$	3.2		$	8.9		Contributions	$	1.7	$	1.2	$	2.9	$	1.5	$	1.0	$	2.5

The components of the above net periodic benefit cost for pensions and other post-retirement benefits that are reported outside of operating income are all included in the other expenses (income) ~~expenses~~ line in the condensed consolidated statement of operations.

For ~~2019~~2020 as a whole, we expect to contribute approximately ~~$4.6~~$4.3 million to our defined benefit pension plans and approximately ~~$6.7~~$5.5 million to our other post-retirement benefit plans.

~~16.~~14. Share-based compensation

The Company operates a share-based incentive plan over its shares to provide incentives to Gates’ senior executives and other eligible employees. During the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, we recognized a charge of ~~$4.1 million and $10.5~~$2.9 million, compared with ~~$2.3~~$2.6 million ~~and $5.5 million, respectively, in~~during the ~~prior year period.~~three months ended March 30, 2019.

Share-based incentive awards issued under the 2014 Omaha Topco Ltd. Stock Incentive Plan

Gates has a number of awards ~~in issue~~issued under the 2014 Omaha Topco Ltd. Stock Incentive Plan, which was assumed by the Company and renamed the Gates Industrial Corporation plc Stock Incentive Plan in connection with our initial public offering in January 2018. No new awards have been granted under this plan since 2017. The options are split equally into four tiers, each with specific vesting conditions. Tier I options vest evenly over 5 years from the grant date, subject to the ~~participant’s~~participant continuing to provide service to Gates on the vesting date. Tier II, III and IV options vest on achievement of specified investment returns by our majority owners, who are various investment funds managed by affiliates of The Blackstone Group Inc. (“Blackstone” or our “Sponsor”), at the time of a defined liquidity event, which is also subject to the participant’s continued provision of service to Gates on the vesting date. The performance conditions associated with Tiers II, III and IV must be achieved on or prior to July 3, 2022 in order for vesting to occur. All the options expire ten years after the date of grant.

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Due to Chinese regulatory restrictions on foreign stock ownership, awards granted under this plan to Chinese employees have been issued as stock appreciation rights (“SARs”). The terms of these SARs are identical to those of the options described above with the exception that no share is issued on exercise; instead, cash equivalent to the increase in the value of the shares from the date of grant to the date of exercise is paid to the employee. These awards are therefore treated as liability awards under Topic 718 “Compensation - Stock Compensation” and are revalued to their fair value at each period end.

In addition to the above, in 2017, under the same plan, the Company issued 76,293 restricted stock units (“RSUs”). These RSUs vest evenly over three years from the date of grant, subject to the participant’s continued provision of service to Gates on the vesting date. The awards expire ten years after the date of grant, in December 2027. ~~There were no movements in these RSUs during the current period.~~

Changes in the awards granted under this plan are summarized in the tables below.

Share-based incentive awards issued under the Gates Industrial Corporation plc 2018 Omnibus Incentive Plan

In conjunction with the initial public offering in January 2018, Gates adopted a new equity-based compensation plan, which is a market-based long-term incentive program that allows for the issue of a variety of equity-based and cash-based awards, including stock options, SARs and RSUs.

The SARs and the majority of the share options issued under this plan vest evenly over either three years or four years from the grant date. The remainder of the options, the premium-priced options, vest evenly over a three year period, starting two years from the grant date. All options vest subject to the participant’s continued employment by Gates on the vesting date and expire ten years after the date of grant.

The RSUs issued under the plan consist of time-vesting RSUs and performance-based RSUs (“PRSUs”). The time-vesting RSUs vest evenly over either one or three years from the date of grant, subject to the participant’s continued provision of service to Gates on the vesting date. The PRSUs provide that 50% of the award will generally vest if Gates achieves a certain level of average annual adjusted return on invested capital as defined in the plan (“Adjusted ROIC”) and the remaining 50% of the PRSUs will generally vest if Gates achieves certain relative total shareholder return (“Relative TSR”) goals, in each case, measured over a three year performance period and subject to the participant’s continued employment through the end of the performance period. The total number of PRSUs that vest at the end of the performance period will range from 0% to 200% of the target based on actual performance against a pre-established scale.

New awards and movements in existing awards granted under this plan are summarized in the tables below.

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Summary of movements in options outstanding


						Three months ended
	Nine months ended September 28, 2019					March 28, 2020
	Number of options		Weighted average exercise price $			Number of options	Weighted average exercise price $
Outstanding at the beginning of the period:					Outstanding at the beginning of the period:
—Tier I	4,212,537		$	7.03	—Tier I	3,825,855	$	7.07
—Tier II	4,837,780		$	6.97	—Tier II	4,405,340	$	7.01
—Tier III	4,837,780		$	6.97	—Tier III	4,405,340	$	7.01
—Tier IV	4,837,780		$	10.46	—Tier IV	4,405,340	$	10.52
—SARs	724,372		$	8.17	—SARs	772,450	$	8.72
—Share options	582,717		$	17.14	—Share options	1,610,485	$	16.69
—Premium-priced options					—Premium-priced options	796,460	$	19.00
	20,032,966		$	8.16		20,221,270	$	9.09
Granted during the period:					Granted during the period:

—SARs	71,150		$	16.46	—SARs	69,361	$	12.08
—Share options	1,099,505		$	16.46	—Share options	1,193,114	$	12.55
—Premium-priced options	796,460		$	19.00

	1,967,115		$	17.49		1,262,475	$	12.52
Forfeited during the period:					Forfeited during the period:
—Tier I	(102,135	)	$	6.62	—Tier I	(86,581)	$	6.74
—Tier II	(391,792	)	$	6.59	—Tier II	(404,446)	$	6.63
—Tier III	(391,792	)	$	6.59	—Tier III	(404,446)	$	6.63
—Tier IV	(391,792	)	$	9.88	—Tier IV	(404,446)	$	9.94

—Share options	(44,895	)	$	17.03	—Share options	(89,803)	$	16.46
	(1,322,406	)	$	7.92
Expired during the period:
—Share options	(1,250	)	$	17.72
						(1,389,722)	$	8.24

	(1,250	)	$	17.72
Exercised during the period:					Exercised during the period:
—Tier I	(257,322	)	$	6.58	—Tier I	(318,607)	$	6.60

	(257,322	)	$	6.58		(318,607)	$	6.60
Outstanding at the end of the period:					Outstanding at the end of the period:
—Tier I	3,853,080		$	7.07	—Tier I	3,420,667	$	7.12
—Tier II	4,445,988		$	7.00	—Tier II	4,000,894	$	7.05
—Tier III	4,445,988		$	7.00	—Tier III	4,000,894	$	7.05
—Tier IV	4,445,988		$	10.51	—Tier IV	4,000,894	$	10.58
—SARs	795,522		$	8.91	—SARs	841,811	$	9.00
—Share options	1,636,077		$	16.69	—Share options	2,713,796	$	14.88
—Premium-priced options	796,460		$	19.00	—Premium-priced options	796,460	$	19.00
	20,419,103		$	9.10		19,775,416	$	9.42

Exercisable at the end of the period	2,838,515		$	7.36	Exercisable at the end of the period	3,080,858	$	8.79
Vested and expected to vest at the end of the period					Vested and expected to vest at the end of the period	7,714,079	$	11.24

As of ~~September~~March 28, ~~2019,~~2020, the aggregate intrinsic value of options that were vested or expected to vest was $2.5 million and these options had a weighted average remaining contractual term of 7.3 years. As of March 28, 2020, the aggregate intrinsic value of options that were exercisable was $1.9 million and these options had a weighted average remaining contractual term of 6.0 years.

As of March 28, 2020, the unrecognized compensation charge relating to the nonvested options other than Tier II, Tier III and Tier IV options, was ~~$11.2~~$12.7 million, which is expected to be recognized over a weighted-average period of ~~2.7~~2.5 years. The unrecognized compensation charge relating to the nonvested Tier II, Tier III and Tier IV options was ~~$29.0~~$26.3 million, which will be recognized on occurrence of a liquidity event as described above.

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During the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, cash of ~~$0 and $1.6~~$2.1 million ~~respectively,~~ was received in relation to the exercise of vested ~~options.~~options, compared with $1.2 million during the three months ended March 30, 2019. The aggregate intrinsic value of options exercised during the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 was ~~$0 and~~ $2.0 million, ~~respectively.~~compared with $1.7 million during the three months ended March 30, 2019.

Summary of movements in RSUs and PRSUs outstanding


						Three months ended
	Nine months ended September 28, 2019					March 28, 2020
	Number of awards		Weighted average grant date fair value $			Number of awards	Weighted average grant date fair value $
Outstanding at the beginning of the period:					Outstanding at the beginning of the period:
—RSUs	81,800		$	17.13	—RSUs	718,269	$	16.20
—PRSUs					—PRSUs	248,550	20.07
	81,800		$	17.13		966,819	$	17.20
Granted during the period:					Granted during the period:
—RSUs	728,436		$	16.28	—RSUs	1,126,523	$	12.01
—PRSUs	248,550		20.07		—PRSUs	365,258	14.41
	976,986		$	17.25		1,491,781	$	12.60
Forfeited during the period:					Forfeited during the period:
—RSUs	(34,573	)	$	16.67	—RSUs	(35,135)	$	16.46
—PRSUs					—PRSUs	(28,552)	20.07
						(63,687)	$	18.08

	(34,573	)	$	16.67
Vested during the period:					Vested during the period:
—RSUs	(19,250	)	$	17.21	—RSUs	(218,556)	$	16.41

	(19,250	)	$	17.21		(218,556)	$	16.41
Outstanding at the end of the period:					Outstanding at the end of the period:
—RSUs	756,413		$	16.33	—RSUs	1,591,101	$	13.20
—PRSUs	248,550		20.07		—PRSUs	585,256	16.53
	1,004,963		$	17.25		2,176,357	$	14.10

As of ~~September~~March 28, ~~2019,~~2020, the unrecognized compensation charge relating to nonvested RSUs and PRSUs was ~~$11.3~~$24.3 million, which is expected to be recognized over a weighted average period of ~~2.3~~2.5 years, subject, where relevant, to the achievement of the performance conditions described above. The ~~aggregate intrinsic~~total fair value of RSUs and PRSUs vested during the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 was ~~$0.1~~$2.7 million, ~~and $0.3~~compared with $0.2 million ~~respectively.~~during the three months ended March 30, 2019.

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Valuation of awards granted during the period

The grant date fair value of the options ~~at their grant date~~and SARs was measured using a Black-Scholes valuation ~~model in the case of SARs and share options.~~model. RSUs are valued at the share price on the date of grant. The premium-priced options and PRSUs were valued using Monte Carlo simulations. As Gates only has volatility data for its shares for the period since its initial public offering, this volatility has been weighted with the debt-levered volatility of a peer group of public companies in order to determine the expected volatility over the expected option life. The expected option life represents the period of time for which the options are expected to be outstanding and is based on consideration of the contractual life of the option, option vesting period, and historical exercise patterns. The weighted average fair values and relevant assumptions were as follows:


	Three months ended
	March 28, 2020			March 30, 2019
Grant date fair value:
—SARs	$	4.59		$	5.88
—Share options	$	4.78		$	5.88
—Premium-priced options	n/a			$	5.65
—RSUs	$	12.01		$	16.46
—PRSUs	$	14.41		$	20.07

Inputs to the model:
—Expected volatility - SARs	37.7		%	31.9		%
—Expected volatility - share options	37.6		%	31.9		%
—Expected volatility - premium-priced options	n/a			31.9		%
—Expected volatility - PRSUs	40.4		%	32.8		%

—Expected option life for SARs	6.0			6.0
—Expected option life for share options	6.0			6.0
—Expected option life for premium-priced options	n/a			7.0



—Risk-free interest rate:
SARs	1.25		%	2.51		%
Share options	1.33		%	2.51		%
Premium-priced options	n/a			2.53		%
PRSUs	1.29		%	2.48		%

Nine months ended September 28, 2019
Fair value:
—SARs $ 5.88
—Share options $ 5.88
—Premium-priced options $ 5.65
—RSUs $ 16.28
—PRSUs $ 20.07

Inputs to the model:
—Expected volatility - SARs, share options and premium-priced options 31.9 %
—Expected volatility - PRSUs 32.8 %
—Expected option life for SARs and share options 6.0
—Expected option life for premium-priced options 7.0
—Risk-free interest rate:
SARs and share options 2.51 %
Premium-priced options 2.53 %
PRSUs 2.48 %
—Expected dividends —

~~17.~~15. Equity

In January 2018, Gates completed an initial public offering of 38,500,000 shares at $19.00 each. Shortly thereafter, the underwriters of the initial public offering exercised their over-allotment option for a further 5,775,000 shares, also at $19.00 each. Movements in the Company’s number of shares in issue for the ~~nine month periods~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, respectively, were as follows:


	Nine months ended			Three months ended
(number of shares)	September 28, 2019	September 29, 2018	(number of shares)	March 28, 2020	March 30, 2019
Balance as of the beginning of the fiscal year	289,847,574	245,474,605
Issuance of shares	—	44,275,000
Balance as of the beginning of the period			Balance as of the beginning of the period	290,157,299	289,847,574

Exercise of share options	257,322	58,545	Exercise of share options	318,607	190,034
Vesting of restricted stock units, net of withholding taxes	13,229	—	Vesting of restricted stock units, net of withholding taxes	190,632	5,812
Balance as of the end of the period	290,118,125	289,808,150	Balance as of the end of the period	290,666,538	290,043,420

The Company has one class of authorized and issued shares, with a par value of $0.01, and each share has equal voting rights.

~~18.~~

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16. Analysis of accumulated other comprehensive (loss) income

Changes in accumulated other comprehensive (loss) income by component, net of tax, were as follows:


(dollars in millions)	Post- retirement benefit		Cumulative translation adjustment		Cash flow hedges		Accumulated OCI attributable to shareholders		Non- controlling interests		Accumulated OCI
As of December 28, 2019	$	(9.3)	$	(812.3)	$	(36.8)	$	(858.4)	$	(46.0)	$	(904.4)
Foreign currency translation	1.2		(196.8)		—		(195.6)		(7.4)		(203.0)
Cash flow hedges movements	—		—		(11.7)		(11.7)		—		(11.7)
Post-retirement benefit movements	(0.1)		—		—		(0.1)		—		(0.1)
Other comprehensive income (loss)	1.1		(196.8)		(11.7)		(207.4)		(7.4)		(214.8)
As of March 28, 2020	$	(8.2)	$	(1009.1)	$	(48.5)	$	(1065.8)	$	(53.4)	$	(1119.2)


(dollars in millions)	Post- retirement benefit		Cumulative translation adjustment		Cash flow hedges		Accumulated OCI attributable to shareholders		Non- controlling interests		Accumulated OCI
As of December 29, 2018	$	7.6	$	(850.0)	$	(11.9)	$	(854.3)	$	(43.6)	$	(897.9)
Foreign currency translation	—		25.4		—		25.4		7.4		32.8
Cash flow hedges movements	—		—		(11.1)		(11.1)		—		(11.1)

Other comprehensive income (loss)	—		25.4		(11.1)		14.3		7.4		21.7
As of March 30, 2019	$	7.6	$	(824.6)	$	(23.0)	$	(840.0)	$	(36.2)	$	(876.2)

(dollars in millions) Available-for-
sale investments Post-
retirement
benefit Cumulative
translation
adjustment Cash flow
hedges Accumulated OCI attributable to
shareholders Non-
controlling
interests Accumulated OCI
As of December 30, 2017 $ (0.3 ) $ 13.2
$ (742.8 ) $ (17.5 ) $ (747.4 ) $ (25.5 ) $ (772.9 )
  Foreign currency translation —
—
(58.7 ) —
(58.7 ) (20.0 ) (78.7 )
  Cash flow hedges movements —
—
—
19.8
19.8
—
19.8
  Available-for-sale investment movements (0.4 ) —
—
—
(0.4 ) (0.1 ) (0.5 )
  Post-retirement benefit movements —
(0.5 ) —
—
(0.5 ) —
(0.5 )
Other comprehensive (loss) income (0.4 ) (0.5 ) (58.7 )
19.8

(39.8 )
(20.1 )
(59.9 )
As of September 29, 2018 $ (0.7 )
$ 12.7

$ (801.5 )
$ 2.3

$ (787.2 )
$ (45.6 )
$ (832.8 )

(dollars in millions) Available-for-
sale investments Post-
retirement
benefit Cumulative
translation
adjustment Cash flow
hedges Accumulated OCI attributable to
shareholders Non-
controlling
interests Accumulated OCI
As of December 29, 2018 $ —
$ 7.6
$ (850.0 ) $ (11.9 ) $ (854.3 ) $ (43.6 ) $ (897.9 )
  Foreign currency translation —
—
(27.7 ) —
(27.7 ) (7.8 ) (35.5 )
  Cash flow hedges movements —
—
—
(26.4 ) (26.4 ) —
(26.4 )
  Post-retirement benefit movements —
(0.2 ) —
—
(0.2 ) —
(0.2 )
Other comprehensive loss —

(0.2 )
(27.7 )
(26.4 )
(54.3 )
(7.8 )
(62.1 )
As of September 28, 2019 $ —

$ 7.4

$ (877.7 )
$ (38.3 )
$ (908.6 )
$ (51.4 )
$ (960.0 )

~~19.~~17. Related party transactions

A. Entities affiliated with Blackstone

In January 2018, Gates and Blackstone Management Partners L.L.C. (“BMP”) and Blackstone Tactical Opportunities Advisors L.L.C., each affiliates of our Sponsor (the “Managers”), entered into a new Transaction and Monitoring Fee Agreement (the “New Monitoring Fee Agreement”). Under this agreement, Gates Industrial Corporation plc and certain of its direct and indirect subsidiaries (collectively the “Monitoring Service Recipients”) engaged the Managers to provide certain monitoring, advisory and consulting services in the following areas:

•advice regarding financings and relationships with lenders and bankers;

•advice regarding the selection, retention and supervision of independent auditors, outside legal counsel, investment bankers and other advisors or consultants;

•advice regarding environmental, social and governance issues pertinent to our affairs;

•advice regarding the strategic direction of our business; and

•such other advice directly related to or ancillary to the above advisory services as we may reasonably request.

In consideration of these oversight services, Gates agreed to pay BMP an annual fee of 1% of a covenant EBITDA measure defined under the agreements governing our senior secured credit facilities. In addition, the Monitoring Service Recipients agreed to reimburse the Managers for any related out-of-pocket expenses incurred by the Managers and their affiliates. During the three months ended ~~September~~March 28, ~~2019,~~2020, Gates incurred ~~$1.1~~$1.7 million, compared with ~~$1.9 million during the prior year period, and during the nine months ended September 28, 2019, Gates incurred $4.9 million, compared with $5.9~~$1.8 million during the prior year period, in respect of these oversight services and out-of-pocket expenses, of which there was no amount owing at ~~September~~March 28, ~~2019~~2020 or December ~~29, 2018.~~28, 2019.

~~The~~Monitoring fee obligations under the New Monitoring Fee Agreement ~~terminates~~terminated in January 2020 upon ~~the earlier to occur of (i)~~ the second anniversary of the closing date of the initial public offering of ~~Gates or (ii) the date our Sponsor beneficially owns less than 5%~~Gates.

Table of our ordinary shares and such shares have a fair market value of less than $25.0 million. Following termination of the New Monitoring Fee Agreement, the Managers will refund us any portion of the monitoring fee previously paid in respect of fiscal quarters that follow the termination date.Contents

In addition, in connection with the initial public offering, we entered into a new Support and Services Agreement with BMP, under which Gates Industrial Corporation plc and certain of its direct and indirect subsidiaries reimburse BMP for customary support services provided by Blackstone’s portfolio operations group to the Company at BMP’s direction. BMP will invoice the Company for such services based on the time spent by the relevant personnel providing such services during the applicable period and Blackstone’s allocated costs of such personnel. During the periods presented, no amounts were paid or outstanding under this agreement. This agreement terminates on the date our Sponsor beneficially owns less than 5% of our ordinary shares and such shares have a fair market value of less than $25.0 million, or such earlier date as may be chosen by Blackstone.

~~In connection with our initial public offering in January 2018, Blackstone Advisory Partners L.P., an affiliate of Blackstone, received underwriting fees of $3.2 million.~~

B. Equity method investees

Sales to and purchases from equity method investees were as follows:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Sales	$	0.3	$	0.3
Purchases	$	(3.6)	$	(4.1)

Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Sales $ 0.4
$ 0.3
$ 1.1
$ 1.4
Purchases $ (3.9 ) $ (4.8 ) $ (11.9 ) $ (11.3 )

Amounts outstanding in respect of these transactions were payables of $0.2 million as of ~~September~~March 28, ~~2019,~~2020, compared with ~~$0.1~~$0.2 million as of December ~~29, 2018.~~28, 2019. During the three months ended ~~September~~March 28, ~~2019~~,2020, we received dividends of $0 from our equity method investees, compared with $0 in the prior year period. ~~During the nine months ended~~ ~~September 28, 2019, we received dividends of $0 from our equity method investees, compared with $0.4 million in the prior year period.~~

C. Non-Gates entities controlled by non-controlling shareholders

Sales to and purchases from non-Gates entities controlled by non-controlling shareholders were as follows:


	Three months ended						Nine months ended							Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Sales	$	12.7		$	13.7		$	38.5		$	45.4		Sales	$	12.5	$	13.4
Purchases	$	(5.0	)	$	(5.5	)	$	(15.3	)	$	(16.0	)	Purchases	$	(5.1)	$	(5.4)

Amounts outstanding in respect of these transactions were as follows:


(dollars in millions)	As of September 28, 2019			As of December 29, 2018			(dollars in millions)	As of March 28,2020		As of December 28,2019
Receivables	$	4.4		$	0.6		Receivables	$	4.6	$	4.2
Payables	$	(5.4	)	$	(0.3	)	Payables	$	(5.3)	$	(5.9)

D. Majority-owned subsidiaries

WeDuring 2019, we finalized an agreement with the non-controlling interest holder in certain of our consolidated, majority-owned subsidiaries, regarding the scope of business of such subsidiaries, which ~~will result~~resulted in a smaller share of net income allocated to non-controlling interests. This change iswas retrospectively effective from the beginning of 2019 and ~~includes~~included a one-time adjustment of $15.0 million, which ~~has been~~was recorded in the first quarter of 2019.

~~20.~~18. Commitments and contingencies

A. Performance bonds, letters of credit and bank guarantees

As of ~~September~~March 28, ~~2019,~~2020, letters of credit totaling ~~$50.2~~$45.9 million were outstanding against the asset-backed revolving facility, compared with ~~$57.8~~$50.1 million as of December ~~29, 2018.~~28, 2019. Gates had additional outstanding performance bonds, letters of credit and bank guarantees amounting to ~~$3.8~~$3.9 million, compared with ~~$3.4~~$4.1 million as of December ~~29, 2018.~~28, 2019.

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B. Contingencies

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 Gates has meritorious defenses 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 materially affect Gates’ financial position, results of operations or cash flows.

C. Warranties

The following summarizes the movements in the warranty liability for the ~~nine month periods~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, respectively:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Balance as of the beginning of the fiscal year	$	17.7	$	14.3
Charge for the period	4.2		2.6
Payments made	(2.6)		(2.2)

Released during the period	(0.8)		—
Foreign currency translation	(0.2)		0.1
Balance as of the end of the period	$	18.3	$	14.8

Nine months ended
(dollars in millions) September 28,
2019 September 29,
2018
Balance as of the beginning of the fiscal year $ 14.3
$ 14.1
Charge for the period 10.2
9.2
Payments made (7.4 ) (7.3 )
Released during the period (1.0 ) (0.6 )
Foreign currency translation (0.1 ) (0.2 )
Balance as of the end of the period $ 16.0
$ 15.2

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Item 2: Management’s Discussion and Analysis

of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report. 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” ~~above.~~above, Part I, Item 1A. “Risk Factors” in our annual report and Part II, Item 1A. “Risk Factors” below.

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 ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, sales into replacement channels accounted for approximately 63% 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 ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, sales into first-fit channels accounted for approximately 37% 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 ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, with first-fit automotive sales in North America contributing less than 3% of total 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.

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Our recently completed manufacturing footprint investments and other productivity improvements in recent years have helped to position us to ~~accelerate and expand upon~~continue to make progress on 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 streamline our selling, general and administrative (“SG&A&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, as governments, companies and communities implemented strict measures to minimize the spread of the COVID-19 pandemic. We are prioritizing the health and safety of our employees and the communities around the world in which we operate, taking additional protective measures in our plants to safely maintain operational continuity in support of our global customer base.

In early February, 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 to implement 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 of our 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. We may continue to experience these production disruptions, which could place constraints on our ability to produce our products and meet customer demand. Of these temporary closures in the first quarter, the most significant for us was in Greater China, where we closed all of our production facilities for approximately three 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. With large portions of the economies in these regions having effectively been shut down since the beginning of April, we expect the second quarter to be the most difficult of the year, with core revenue likely to sequentially decline in the range of 15-25% compared with the first quarter.

As shelter-in-place requirements ease and there is continued progress in the fight against COVID-19, we expect the second half of the year to improve sequentially from the second quarter. Given the magnitude of the decline we expect to experience in the first half of the year and the different rates of demand recovery we believe we will see across different end markets and geographies, we expect the full year to result in a revenue decline compared with the prior year. Reflecting the progress we made last year in right-sizing the business, we would expect our full-year decremental margin to be an improvement from what we saw in 2019, despite the relatively unexpected and significant decline in revenue as a result of the pandemic.

We have strength and flexibility in our liquidity position, which includes committed borrowing headroom of $440.3 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 $626.3 million as of March 28, 2020. 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 are unclear at this time, and the adverse impact of the pandemic on Gates’ operations may be material. In addition, see Item 1A. “Risk Factors” in Part II of this quarterly report for updates to our risk factors regarding risks associated with the COVID-19 pandemic.

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Despite this highly uncertain environment, our experience in China and subsequently has helped frame our response to this crisis and our focus in 2020 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 spending 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 three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 compared with the results for the three ~~and nine~~ months ended ~~September 29, 2018~~March 30, 2019

Summary Gates Performance


	Three months ended
(dollars in millions)	March 28, 2020			March 30, 2019
Net sales	$	710.1		$	804.9
Cost of sales	454.3			497.6
Gross profit	255.8			307.3
Selling, general and administrative expenses	193.4			200.5
Transaction-related (income) expenses	(0.2)			0.4

Restructuring expenses	1.9			3.3
Other operating expenses	2.3			2.9
Operating income from continuing operations	58.4			100.2
Interest expense	36.7			38.1
Other income	(2.1)			(3.3)
Income from continuing operations before taxes	23.8			65.4
Income tax benefit	(16.1)			(539.7)
Net income from continuing operations	$	39.9		$	605.1

Adjusted EBITDA⁽¹⁾	$	120.8		$	165.5
Adjusted EBITDA margin	17.0		%	20.6		%

Three months ended Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Net sales $ 746.6
$ 828.4
$ 2,361.4
$ 2,555.5
Cost of sales 474.2
501.2
1,480.3
1,534.9
Gross profit 272.4
327.2
881.1

1,020.6
Selling, general and administrative expenses 191.9
202.7
590.4
621.1
Transaction-related expenses 1.0
0.2
0.7
6.2
Impairment of intangibles and other assets 0.7
0.2
0.7
0.6
Restructuring expenses 0.3
1.2
3.9
3.2
Other operating expenses 1.8
5.1
6.6
12.5
Operating income from continuing operations 76.7
117.8
278.8

377.0
Interest expense 37.2
40.2
114.5
139.8
Other (income) expenses (2.4 ) 3.4
(7.2 ) 17.5
Income from continuing operations before taxes 41.9
74.2
171.5

219.7
Income tax expense (benefit) 4.4
7.2
(497.8 ) 30.4
Net income from continuing operations $ 37.5
$ 67.0
$ 669.3

$ 189.3

Adjusted EBITDA⁽¹⁾
$ 145.0
$ 181.2
$ 475.9
$ 570.0
Adjusted EBITDA margin 19.4 % 21.9 % 20.2 % 22.3 %
⁽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 three months ended ~~September~~March 28, ~~2019~~2020 were ~~$746.6~~$710.1 million, down by ~~9.9%~~11.8%, or ~~$81.8~~$94.8 million, compared with net sales during the prior year period of ~~$828.4~~$804.9 million. Please see “—Analysis by Operating Segment” for a discussion of changes in net sales for each of our segments. Our net sales infor the three months ended ~~September~~March 28, ~~2019~~2020 were adversely impacted by movements in average currency exchange rates of $11.1 million compared with the prior year period, due principally to the strengthening of the U.S. dollar against a number of currencies, in particular the Euro ($5.4 million) and the Chinese Renminbi ($2.3 million). ~~Excluding this impact, core salesdecreased~~ by $70.7 million, or 8.5%, during the three months ended September 28, 2019 compared with the prior year period. Of this decrease, $86.1 million was driven by lower volumes, offset partially by a $15.4 million benefit from favorable, inflation-mitigating pricing actions.

Core sales in our Power Transmission and Fluid Power businesses declined by 6.0% and 12.7%, respectively, in the three months ended September 28, 2019. The majority of the total decline was driven by continued weakness in the industrial channels with sales to industrial replacement and industrial first-fit customers declining by 13.0% and 12.5%, respectively, in the three months ended September 28, 2019 compared with the prior year period. This weak industrial demand was most significant in North America, where sales to industrial end markets declined by 12.7%, or $35.0 million, during the three months ended September 28, 2019 compared with the prior year period, impacting both our first-fit and replacement channels. We saw particular end market weakenss in mobile equipment driven by the construction and agriculture end markets, as well as the general industrial end market. China and East Asia & India industrial end markets also continued to decelerate during the quarter, particularly in the construction end market, impacted by the ongoing trade tensions with the U.S. and broader market softness in Asia, declining by 16.1% and 12.8%, respectively, during the current quarter compared with the prior year period. Sales into the automotive replacement channel declined globally by 2.8%, primarily in North America and EMEA, offsetting solid growth in China and South America. Automotive first-fit sales declined by 7.4% globally during the three months ended September 28, 2019 compared with the prior year period, with declines in EMEA and China of 16.3% and 13.5%, respectively, offsetting growth of 8.2% in North America.

Overall, core sales into emerging and developed markets were lower by 5.4% and 10.1% in the three months ended September 28, 2019, respectively, compared with the prior year period, driven in both cases by declines in sales to the automotive and construction end markets. Developed markets were also impacted by a 13.5%, or $16.4 million, decline in sales to the general industrial end market, predominantly in North America.

Net sales during the nine months ended September 28, 2019 were $2,361.4 million, down by 7.6%, or $194.1 million, compared with net sales during the prior year period of $2,555.5 million. Our net sales for the nine months ended September 28, 2019 were adversely impacted by movements in average currency exchange rates of $70.8$13.7 million compared with the prior year period, due principally to the strengthening of the U.S. dollar against a number of currencies, including the Euro ~~($26.9 million), the Chinese Renminbi ($13.3 million), the Canadian dollar ($5.7 million)~~ and the Brazilian ~~Real ($5.7 million). In addition, the acquisition of~~ ~~Rapro in April 2018 contributed $7.5 million to our net~~Real. Excluding this impact, core sales ~~for the nine months ended September 28, 2019. Excluding these impacts, core sales~~decreased by ~~$130.8~~$81.1 million, or ~~5.1%~~10.1%, during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 compared with the prior year period. This decrease was due primarily to lower ~~volumes~~volumes.

Table of ~~$181.0 million, offset partially by a $50.1 million benefit from favorable, inflation-mitigating pricing actions.~~Contents

Core sales in our Power Transmission and Fluid Power businesses declined by ~~5.0%~~9.8% and ~~5.4%~~10.6%, respectively, for the ~~nine~~three months ended ~~September~~March 28, ~~2019. Globally, these~~2020. These declines came ~~broadly equally~~ from sales to both our industrial and automotive customers, ~~but Power Transmission was particularly impacted~~and in almost every region, due to slowing demand driven by ~~decelerating~~the impact of the COVID-19 pandemic. These declines were primarily concentrated in sales to ~~the automotive end markets, particularly in EMEA, and Fluid Power’s declines were focused in industrial~~ first-fit ~~sales, particularly to the construction and agriculture end markets. Global industrial first-fit and replacement sales~~customers, which declined globally by ~~4.9% and 5.1%, respectively,~~14.9% during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 compared with the prior year period, while sales into the replacement channels declined by 7.0% during the same period. During the three months ended March 28, 2020, sales in North America were down by 9.2%, driven ~~most notably~~ by an 18.3% decrease in sales to industrial first-fit customers, while overall sales in Greater China were lower by 30.1%, primarily the result of a 44.5% decline in automotive first-fit sales. Industrial sales were particularly weak in the construction and general industrial end markets, which declined globally by 15.3% and 11.0%, respectively, during the three months ended March 28, 2020 compared with the prior year period, primarily in North America. Greater China sales into the automotive end market were down by 38.9% during the three months ended March 28, 2020 compared with the prior year period, primarily due to the impact of approximately three weeks of production shutdown as a result of the measures taken in response to the COVID-19 pandemic. Automotive end market sales in EMEA were 3.7% higher during the three months ended March 28, 2020 compared with the prior year period, but declines in sales into the ~~agriculture~~construction and general industrial end markets in North America. Sales to industrial end markets in China were down by 9.0% during the nine months ended September 28, 2019 compared with the prior year period, driven by the general industrial and transportation end markets, with increasing weakness in construction equipment sales as the year has progressed. This wasEMEA more than offset by growth in sales to industrial end markets in EMEA, with growth across all end markets except for agriculture. Sales to the automotive end markets declined by 7.5% during the nine months ended September 28, 2019 compared with the prior year period, driven by sales to first-fit customers, which declined by 10.5%. The decline in automotive end market sales was driven mostly by the broad economic softness in EMEA, with sales from this region declining by 17.3%, or $70.6 million, during the nine months ended September 28, 2019 compared with the prior year period. Growth in all other regions declined by low single digits on a percentage basis as compared with the prior year period.growth.

Cost of sales

Cost of sales for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~$474.2~~$454.3 million, a decrease of ~~5.4%~~8.7%, or ~~$27.0~~$43.3 million, compared with ~~$501.2~~$497.6 million for the prior year period. The decrease was driven primarily by lower volumes of ~~$38.4~~$39.4 million and a $9.8 million benefit from our procurement initiatives. These decreases were offset partially by $13.1 million of unfavorable wage and material inflation and an impact of $8.1 million from lower manufacturing performance driven by the lower absorption of fixed costs on lower production volumes and some variable costs as we continued to adjust our production costs to the current demand levels.

Cost of sales for the nine months ended September 28, 2019 was $1,480.3 million, a decrease of 3.6%, or $54.6 million, compared with $1,534.9 million for the prior year period. The decrease was driven primarily by lower volumes of $80.4 million, favorable movements in average currency exchange rates of ~~$46.4 million, and $23.7 million of benefits from our procurement initiatives. Similar to the quarter, these~~$9.2 million. These decreases were offset primarily by ~~$43.0 million of a combination of wage and material inflation and $35.0~~$12.9 million from lower manufacturing performance driven by the lower absorption of fixed costs on lower production volumes and some excess variable costs as we continued to adjust our production costs to the current demand levels. Beginning in the second quarter of 2019, and continuing through the current quarter, we reduced our variable production costs to align these resource levels to the current demand outlook. In addition, cost of sales for the nine months ended September 28, 2019 were adversely impacted by $8.2 million of increases in tariffs and $6.3 million of higher depreciation relating primarily to the new facilities opened in 2018, compared with the prior year period.

Gross profit

~~Gross~~As a result of the factors described above, gross profit for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~$272.4~~$255.8 million, down ~~16.7%~~16.8% from $327.2 million for the prior year period. The decrease was driven primarily by the decreases in volumes of $47.7 million, combined with unfavorable net impacts of movements in average currency exchange rates of $3.5 million and $13.1 million of unfavorable wage and material inflation. In addition, as discussed above, cost of sales was impacted by lower manufacturing performance of $8.1 million, driven by lower fixed cost absorption on lower production volumes, and some excess variable costs, reducing gross profit. This was offset partially by a $15.4 million benefit from favorable, inflation-mitigating pricing actions. Our gross profit margin dropped by 300 basis points to 36.5% for the three months ended September 28, 2019. Excluding the impact of facility closure-related inventory impairments of $1.0 million and $2.5 million of involuntary termination benefits paid in relation to permanent reductions in force, primarily in Asia and North America, gross margin was 37.0%, down from 39.5% for the prior year period. The decline in gross margin is a result of the decelerating demand environment through the quarter discussed above and the lag in our ability to reduce manufacturing costs in the same timeframe, leading to the under absorption of manufacturing costs. We believe that the lower demand environment with which we exited the third quarter will remain for the foreseeable future and we therefore continue to implement cost reduction actions.

~~Gross profit for the nine months ended September 28, 2019 was $881.1 million, down 13.7% from $1,020.6~~$307.3 million for the prior year period. Our gross profit margin accordingly dropped by ~~260~~220 basis points to ~~37.3%~~36.0% for the ~~nine~~three months ended ~~September~~March 28, 2019. Excluding the impact of facility closure-related inventory impairments of $1.3 million and $3.0 million of involuntary termination benefits paid in relation to permanent reductions in force, primarily in Asia and North America, gross margin was 37.5%,2020, down from ~~39.9%~~38.2% for the prior year period. ~~In both cases, these decreases were driven broadly by the same factors described above.~~

Selling, general and administrative expenses

SG&A expenses for the three months ended ~~September~~March 28, ~~2019~~2020 were ~~$191.9~~$193.4 million compared with ~~$202.7~~$200.5 million for the prior year period. This decrease of ~~$10.8~~$7.1 million was driven primarily by ~~$6.3~~favorable legal settlements of $4.5 million ~~of labor-related benefits~~as well as lower outbound freight due to lower volumes, and travel cost ~~reductions and $2.3 million of favorable impacts from movements~~savings due to measures put in ~~average currency exchange rates.~~place in response to the COVID-19 pandemic.

~~SG&A~~Transaction-related (income) expenses

Transaction-related income for the ~~nine~~three months ended ~~September~~March 28, ~~2019 were $590.4~~2020 was $0.2 million compared with ~~$621.1~~an expense of $0.4 million for the prior year period. This decrease of $30.7 million was driven primarily by $17.6 million of favorable impacts from movements in average currency exchange rates and $13.5 million of labor-related benefits and cost reductions.

~~Transaction-related expenses~~

~~Transaction-related expenses~~The net income for the three months ended ~~September~~March 28, ~~2019 were $1.0 million,~~2020 related primarily to ~~corporate filings and transactions completed during the quarter~~discounts on professional services in relation to ~~provide the Company with flexibility for future raising of capital and debt, share buybacks and dividend payments, compared with an expense of $0.2 million for the prior year period.~~

Transaction-related expenses for the nine months ended September 28, 2019 were $0.7 million compared with an expense of $6.2 million for the prior year period. Net expenses for the nine months ended September 28, 2019 related primarily to the corporate filings and transactions described above, offset partially by the release of an accrual from a ~~prior period acquisition.~~terminated acquisition project. The transaction-related expenses incurred in the prior year period ~~included $4.2 million~~ related primarily 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 period related to the recent business acquisitions.corporate transactions.

Restructuring expenses

As described further under the “Business Trends” section of this report, we are accelerating and expanding 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 streamline our SG&A back-office functions.

Restructuring expenses of ~~$1.3~~$1.9 million were recognized during the three months ended ~~September~~March 28, ~~2019, relating~~2020, related primarily to ~~an impairment~~the closure of ~~inventory of $1.0 million due to facility closures~~two North American manufacturing facilities and ~~consolidations, which is included~~reductions in ~~cost of sales.~~workforce, primarily in the U.S. and Asia. Restructuring expenses of ~~$1.2~~$3.3 million were recognized during the prior year period, relating primarily ~~to the reorganization of our European corporate center and a strategic restructuring of part of our Asian business.~~

Restructuring expenses of $5.2 million were recognized during the nine months ended September 28, 2019, including an impairment of inventory of $1.3 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 the closure of one of our facilities in France and a strategic restructuring of part of our Asian business. ~~Restructuring expenses~~

Table of ~~$3.2 million were recognized during the prior year period, relating primarily to the items described above.~~Contents

Interest expense

Our interest expense was as follows:


	Three months ended				Nine months ended					Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018		(dollars in millions)	March 28, 2020		March 30, 2019
Debt:									Debt:
Dollar Term Loan	$	20.1	$	23.0	$	62.0	$	67.5	Dollar Term Loan	$	18.8	$	20.7
Euro Term Loan	5.6		5.5		16.7		17.3		Euro Term Loan	5.7		5.6
Dollar Senior Notes	8.5		8.1		25.5		28.4		Dollar Senior Notes	8.8		8.6
Euro Senior Notes	—		—		—		1.3
Other loans	—		—		0.3		—

	34.2		36.6		104.5		114.5			33.3		34.9
Amortization of deferred issuance costs	2.5		2.5		8.0		23.1		Amortization of deferred issuance costs	2.4		2.5
Other interest expense	0.5		1.1		2.0		2.2		Other interest expense	1.0		0.7
	$	37.2	$	40.2	$	114.5	$	139.8		$	36.7	$	38.1

Details of our long-term debt are presented in note 1412 to the condensed consolidated financial statements included elsewhere in this report.

Interest on debt for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 decreased when compared with the equivalent prior year ~~periods~~period due primarily to the lower interest ~~savings from debt repayments, in particular, for~~rates applicable on the nine month period, the repayment of $913.7 million of senior notes in the first quarter of 2018 in conjunction with our initial public offering, in addition to margin reductions that came into effect partway during the prior year period. The amortization of deferred issuance costs was significantly lower in the nine months ended September 28, 2019, due to the acceleration in the prior year period of $15.4 million of deferred issuance cost amortization as a consequence of the repayment of debt during the first quarter of 2018.floating rate Dollar Term Loan.

Other ~~(income) expenses~~income

Our other ~~(income) expenses~~income were as follows:


	Three months ended						Nine months ended							Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Interest income on bank deposits	$	(1.2	)	$	(1.0	)	$	(3.4	)	$	(2.7	)	Interest income on bank deposits	$	(2.0)	$	(1.1)
Foreign currency (gain) loss on net debt and hedging instruments	(0.4		)	3.9			(1.0		)	(8.4		)
Premiums paid on debt redemptions	—			—			—			27.0
Foreign currency loss (gain) on net debt and hedging instruments													Foreign currency loss (gain) on net debt and hedging instruments	0.3		(0.9)

Net adjustments related to post-retirement benefits	(0.7		)	0.8			(2.6		)	2.4			Net adjustments related to post-retirement benefits	(0.5)		(1.3)
Other	(0.1		)	(0.3		)	(0.2		)	(0.8		)	Other	0.1		—
	$	(2.4	)	$	3.4		$	(7.2	)	$	17.5			$	(2.1)	$	(3.3)

Other income for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~$2.4~~$2.1 million, compared with an expense of $3.4 million in the prior year period. This change was driven primarily by net foreign currency gains of $0.4 million on net debt and hedging instruments for the three months ended September 28, 2019, compared with net losses of $3.9 million in the prior year period. Higher expected returns on plan assets based on the most recent actuarial valuations drove a further $1.5 million increase in other income during the three months ended September 28, 2019 compared with the prior year period.

~~Other income for the nine months ended September 28, 2019 was $7.2 million, compared with an expense of $17.5~~$3.3 million in the prior year period. This change was driven primarily by the ~~payment~~impact on our net debt of movements in the ~~prior year period of $27.0 million of redemption premiums on repayment of~~Euro relative to the Euro Senior Notes and Dollar Senior Notes in January and February of 2018. Partially offsetting this cost in the prior year period was a $5.8 million gain on a derivative used to lock in the exchange rate used to repay the Euro Senior Notes. HigherU.S. dollar. Lower expected returns on plan assets based on the most recent actuarial valuations also drove ~~the majority~~some of the ~~remaining increase~~decrease in other income during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 compared with the prior year ~~period.~~period, but this was offset by higher interest income on bank deposits due to the higher average cash balance on hand.

Income tax expense

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Deferred Tax Assets and Liabilities

Our framework for assessing the recoverability of deferred 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.

~~The positive evidence that existed in favor of releasing the allowance as of March 30, 2019 and ultimately outweighed the negative evidence included the following:~~

~~our profitability in Europe in 2018 and prior years and for the three months ended March 30, 2019, as well as our expectations regarding the sustainability of these profits;~~

~~the fact that our net operating loss carryforwards in Luxembourg are indefinite lived.~~

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 three months ended ~~September~~March 28, ~~2019~~2020 was ~~$145.0~~$120.8 million, a decrease of ~~20.0%~~27.0% or ~~$36.2~~$44.7 million, compared with Adjusted EBITDA of $165.5 million for the prior year ~~period Adjusted EBITDA of $181.2 million. The~~period. Adjusted EBITDA margin was ~~19.4%~~17.0% for the three months ended ~~September~~March 28, ~~2019,~~2020, a ~~250~~360 basis point decrease from the prior year period margin of ~~21.9%~~20.6%. The decrease in Adjusted EBITDA was driven primarily by reduced gross profit of ~~$54.8~~$51.5 million, which was the result of lower sales of ~~$81.8 million as described above. Partially offsetting this decrease were SG&A savings as noted above.~~

Adjusted EBITDA for the nine months ended September 28, 2019 was $475.9 million, a decrease of 16.5% or $94.1 million, compared with Adjusted EBITDA of $570.0 million for the prior year period. Adjusted EBITDA margin was 20.2% for the nine months ended September 28, 2019, a 210 basis point decrease from the prior year period margin of 22.3%. Similar to the quarter, the decrease in Adjusted EBITDA was driven primarily by reduced gross profit of $139.5 million, which was the result of lower sales of $194.1$94.8 million, as well as the impact of lower fixed cost absorption on cost of sales as described above. Partially offsetting this decrease were lower SG&A expenses as noted above.

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 ~~(63.5% and 62.5%, respectively,~~(62.1% of Gates’ net sales for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019)~~2020)


	Three months ended
(dollars in millions)	March 28, 2020			March 30, 2019			Period over Period Change
Net sales	$	441.2		$	499.5		(11.7	%)
Adjusted EBITDA	$	79.5		$	109.9		(27.7	%)
Adjusted EBITDA margin	18.0		%	22.0		%

Three months ended
(dollars in millions) September 28, 2019 September 29, 2018 Period over Period Change
Net sales $ 474.4
$ 512.5
(7.4 %)
Adjusted EBITDA $ 99.7
$ 119.0
(16.2 %)
Adjusted EBITDA margin 21.0 % 23.2 %

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Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 Period over Period Change
Net sales $ 1,475.4
$ 1,608.1
(8.3 %)
Adjusted EBITDA $ 315.2
$ 377.6
(16.5 %)
Adjusted EBITDA margin 21.4 % 23.5 %

Net sales in Power Transmission for the three months ended ~~September~~March 28, ~~2019~~2020 were ~~$474.4~~$441.2 million, a decrease of ~~7.4%~~11.7%, or ~~$38.1~~$58.3 million, when compared with the prior year period net sales of ~~$512.5~~$499.5 million. Excluding the adverse impact of movements in average currency exchange rates of ~~$7.6~~$9.5 million, core sales decreased by ~~6.0%~~9.8%, or ~~$30.5~~$48.8 million, compared with the prior year period. The majority of this decrease was due to lower sales ~~volumes of $36.6 million, offset partially~~volumes.

Power Transmission’s core sales decline was driven by ~~benefits from favorable, inflation-mitigating pricing actions.~~

~~Net~~lower sales ~~in Power Transmission for~~to automotive first-fit and industrial replacement customers, which declined by 15.3% and 13.9%, respectively, during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 compared with the prior year period. These declines were ~~$1,475.4 million,~~due primarily to weak demand in Greater China resulting from a ~~decrease~~combination of ~~8.3%, or $132.7 million, when~~market softness and widespread shutdowns resulting from measures put in place in response to the COVID-19 pandemic. Sales to automotive replacement customers declined by 10.3% and 40.6% in North America and Greater China, respectively, during the three months ended March 28, 2020 compared with the prior year period, but this was offset partially by strong growth of 12.6% in EMEA. Industrial sales declined across all end markets during the three months ended March 28, 2020 compared with the prior year period, predominantly in the construction and general industrial end markets, driven by weakness in North America and Greater China.

Our Power Transmission Adjusted EBITDA for the three months ended March 28, 2020 was $79.5 million, a decrease of 27.7% or $30.4 million, compared with the prior year period Adjusted EBITDA of $109.9 million. The decrease in Adjusted EBITDA was driven by lower volumes and lower manufacturing performance resulting in decreases in Adjusted EBITDA of $25.9 million and $6.3 million, respectively. Adjusted EBITDA margin for the three months ended March 28, 2020 was 18.0%, a 400 basis point decline from the prior year period Adjusted EBITDA margin of 22.0%, driven by the impacts described above.

Fluid Power (37.9% of Gates’ net sales for the three months ended March 28, 2020)


	Three months ended
(dollars in millions)	March 28, 2020			March 30, 2019			Period over Period Change
Net sales	$	268.9		$	305.4		(12.0	%)
Adjusted EBITDA	$	41.3		$	55.6		(25.7	%)
Adjusted EBITDA margin	15.4		%	18.2		%

Net sales in Fluid Power for the three months ended March 28, 2020 were $268.9 million, a decrease of ~~$1,608.1~~12.0%, or $36.5 million, compared with net sales during the prior year period of $305.4 million. Excluding the adverse impact of movements in average currency exchange rates of ~~$52.6~~$4.2 million, core sales decreased by ~~5.0%~~10.6%, or $80.1 million, compared with the prior year period. The majority of this decrease was due to lower sales volumes of $102.3 million, offset partially by benefits from favorable, inflation-mitigating pricing actions.

Power Transmission’s lower core growth was driven by sales to automotive first-fit customers, which declined by 7.4% and 10.4% during the three and nine months ended September 28, 2019 compared with the prior year periods, due primarily to weak demand in Europe, North America and China resulting from a combination of market softness, macroeconomic headwinds and continuing trade tensions. Sales to automotive replacement customers also contributed to the decline, but less significantly, with core growth lower by 3.2% and 3.5% during the three and nine months ended September 28, 2019 compared with the prior year periods. Sales to industrial first-fit customers were relatively flat during the three months ended September 28, 2019, but grew by 5.5% during the nine months ended September 28, 2019, compared with the prior year periods. Sales to industrial replacement customers declined by 12.6% and 7.1% during both the three and nine months ended September 28, 2019 compared with the prior year periods.

Overall, industrial sales declined across most end markets during the three months ended September 28, 2019 compared with the prior year period, predominantly in the general industrial and energy end markets, driven by weakness in North America, EMEA and China. Agricultural end markets were broadly flat for the quarter, with growth in North and South America offsetting most of the declines in Europe and China. Conversely, during the nine months ended September 28, 2019, sales to most industrial end markets grew compared with the prior year period.

Our Power Transmission Adjusted EBITDA for the three months ended September 28, 2019 was $99.7 million, a decrease of 16.2% or $19.3 million, compared with prior year period Adjusted EBITDA of $119.0 million. The decrease in Adjusted EBITDA was driven primarily by lower volumes of $19.3 million, $9.5 million related to lower manufacturing performance, in particular, lower fixed cost absorption on lower production volumes and some excess variable costs, as well as $8.1 million of inflation. These decreases were offset partially by $8.8 million of benefits from our procurement initiatives and lower SG&A expenses of $6.4 million. Adjusted EBITDA margin for the three months ended September 28, 2019 was 21.0%, a 220 basis point decline from the prior year period Adjusted EBITDA margin of 23.2%, driven by the impacts described above.

Our Power Transmission Adjusted EBITDA for the nine months ended September 28, 2019 was $315.2 million, a decrease of 16.5% or $62.4 million, compared with the prior year period Adjusted EBITDA of $377.6 million. Movements in average currency exchange rates drove $10.0 million of this decrease. Excluding this impact, the decrease in Adjusted EBITDA was driven by similar factors as for the quarter as described above with lower volumes and lower manufacturing performance resulting in decreases in Adjusted EBITDA of $53.7 million and $22.1 million, respectively. Raw material and labor inflation contributed a further $27.1 million of the decrease in Adjusted EBITDA as compared with the prior year period. Partially offsetting these decreases were benefits from favorable, inflation-mitigating pricing actions of $22.3 million, lower SG&A spending of $15.2 million and benefits from procurement initiatives of $16.7 million. Adjusted EBITDA margin for the nine months ended September 28, 2019 was 21.4%, a 210 basis point decline from the prior year period Adjusted EBITDA margin of 23.5%, driven by the impacts described above.

~~Fluid Power (36.5% and 37.5%, respectively, of Gates’ net sales for the three and nine months ended September 28, 2019)~~

Three months ended
(dollars in millions) September 28, 2019 September 29, 2018 Period over
Period Change
Net sales $ 272.2
$ 315.9
(13.8 %)
Adjusted EBITDA $ 45.3
$ 62.2
(27.2 %)
Adjusted EBITDA margin 16.6 % 19.7 %

Nine months ended
(dollars in millions) September 28, 2019 September 29, 2018 Period over
Period Change
Net sales $ 886.0
$ 947.4
(6.5 %)
Adjusted EBITDA $ 160.7
$ 192.4
(16.5 %)
Adjusted EBITDA margin 18.1 % 20.3 %

Net sales in Fluid Power for the three months ended September 28, 2019 were $272.2 million, a decrease of 13.8%, or $43.7 million, compared with net sales during the prior year period of $315.9 million. Excluding the adverse impact of movements in average currency exchange rates of $3.5 million, core sales decreased by 12.7%, or $40.2 million, compared with the prior year period. This decrease was driven primarily by lower volumes of $49.4 million, offset partially by benefits from favorable, inflation-mitigating pricing actions.

Net sales in Fluid Power for the nine months ended September 28, 2019 were $886.0 million, a decrease of 6.5%, or $61.4 million, compared with net sales during the prior year period of $947.4 million. Excluding the adverse impact of movements in average currency exchange rates of $18.2 million and the benefit of $7.5 million from the acquisition of Rapro in April 2018, core sales decreased by 5.4%, or $50.7$32.3 million, compared with the prior year period. This decrease was due primarily to lower ~~volumes of $78.7 million, offset partially by benefits from favorable, inflation-mitigating pricing actions.~~volumes.

The ~~lower~~ core sales ~~growth~~decline in ~~both~~ the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 was driven almost exclusively by lower sales to industrial ~~end markets,~~first-fit customers, which declined by ~~14.9%~~19.6% compared with the prior year period. Industrial sales into the construction and ~~6.4%~~general industrial end markets were particularly weak, declining by 14.2% and 14.9%, respectively, during the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020, compared with the prior year ~~periods. Industrial sales into the agriculture~~period. This was driven primarily by North America, but construction end ~~market~~markets in EMEA were ~~particularly~~also weak, declining by 18.1% during ~~both~~ the three ~~and nine~~ months ended ~~September~~March 28, ~~2019, declining by 18.6% and 18.5%, respectively,~~2020, compared with the prior year periods, driven primarily by North America. As expected, global construction end markets have continued to be challenging, with sales declining during both the quarter and the nine months ended September 28, 2019, compared with the prior year periods, in both cases driven by North America and China. Fluid Power’s sales to automotive end markets were broadly stable during both the three and nine months ended September 28, 2019 compared with the prior year periods, with mid-single digit growth on a percentage basis in emerging markets during both periods.period.

Adjusted EBITDA for the three months ended ~~September~~March 28, ~~2019~~2020 was ~~$45.3~~$41.3 million, a decrease of ~~27.2%~~25.7%, or ~~$16.9~~$14.3 million, compared with the prior year period Adjusted EBITDA of ~~$62.2~~$55.6 million. The decrease in Adjusted EBITDA was driven primarily by lower volumes of $26.7 million and a $5.0 million adverse impact from inflation. Partially offsetting these declines were benefits from favorable, inflation-mitigating pricing actions of $9.2 million, lower SG&A expenses of $3.2 million and decreased inbound freight costs. The Adjusted EBITDA margin consequently decreased by 310 basis points.

Adjusted EBITDA for the nine months ended September 28, 2019 was $160.7 million, a decrease of 16.5%, or $31.7 million, compared with the prior year period Adjusted EBITDA of $192.4 million. Similar to the quarter, the decrease in Adjusted EBITDA was driven primarily lower volumes of ~~$42.8~~$20.4 million ~~a $15.9 million adverse impact from inflation~~ and manufacturing performance impacts of ~~$12.9~~$6.6 million driven by lower fixed cost absorption on lower volumes and some excess variable costs. These impacts were offset partially by a ~~$27.9~~$5.2 million benefit from favorable, inflation-mitigating pricing actions and a ~~$6.9~~$5.4 million benefit from ~~our procurement initiatives.~~lower SG&A expenses. The Adjusted EBITDA margin consequently decreased by ~~220~~280 basis points.

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.

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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 in the first quarter of 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 ~~September~~March 28, ~~2019,~~2020, we have adequate liquidity and capital resources for the next twelve months.

Cash Flow

~~Nine~~Three months ended ~~September~~March 28, ~~2019~~2020 compared with the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019

Cash provided by operations was ~~$145.2~~$31.1 million during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 compared with cash ~~provided by~~used in operations of ~~$142.3~~$47.7 million during the prior ~~year period. Operating cash inflow before movements~~year. This increase was driven primarily by an increase of $19.5 million in operating assets and liabilities was $210.0 million during the nine months ended September 28, 2019 compared with $359.3 million during the prior year period, a decrease of $149.3 million which was due largely to the lower operational performance which adversely impacted operating income. The movement in taxes payable, which was $54.6 million higher during the nine months ended September 28, 2019 compared with the prior year period, was due primarily to a non-cash increase in tax contingencies associated with our business reorganization in Europe. Movements in operating assets and liabilities other than taxesaccounts payable during the ~~nine months ended September 28, 2019 gave rise to a decrease of $113.0 million in cash~~current year period, compared with a decrease of ~~$210.6~~$25.8 million in the prior year ~~period. The decrease, or further use of cash,~~period, largely due to timing in both periods. Interest paid was lower at $25.5 million during the ~~current period was driven primarily by the decreases~~three months ended March 28, 2020, compared with $51.4 million in ~~trade accounts payable and inventories, both linked to lower production volumes. During~~ the prior year period, ~~the decrease was~~ due primarily to ~~increases~~the timing of quarterly interest payments on the term loans as well as the absence of the usual biannual January interest payment on the Dollar Senior Notes as a result of the refinancing completed in ~~accounts receivable and inventories due to~~November 2019. Net income taxes paid were also lower, with $18.5 million paid during the ~~strong demand environment.~~

three months ended March 28, 2020 compared with $33.0 million in the prior year period, largely a function of the lower operational performance.

Net cash used in investing activities during the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 was ~~$69.6~~$24.6 million, compared with ~~$214.1~~$31.7 million in the prior ~~year period. Capital~~year. This decrease was driven by lower capital expenditures, which decreased by ~~$96.4~~$8.0 million from ~~$154.9~~$22.9 million in the ~~nine~~three months ended ~~September 29, 2018~~March 30, 2019 to ~~$58.5~~$14.9 million in the ~~nine~~three months ended ~~September~~March 28, 2019, driven primarily by expenditures in the prior year period related to the expansion of one of our existing facilities and construction of two new facilities. During the nine months ended September 28, 2019, we invested $11.7 million of cash in interest-bearing investments in order to improve return on available cash. Net cash used in investing activities in the prior year period included $50.9 million of cash paid in relation to the acquisition of Rapro in April 2018.2020.

Net cash used in financing activities was ~~$40.1~~$2.9 million during the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, compared with ~~$187.1~~$13.1 million in the prior ~~year period.~~year. This ~~net outflow~~decrease was driven primarily by an additional quarterly amortization payment on our term loans in the ~~nine months ended September 28, 2019 related primarily~~prior year period due to ~~quarterly amortization~~the timing of our fiscal year end. In addition, dividend payments ~~under the term loans, together with $24.5~~of $1.8 million ~~of dividend payments~~were made to non-controlling shareholders of certain majority-owned ~~subsidiaries. In~~subsidiaries in the prior year period ~~net cash used~~with no similar payments in ~~financing activities related primarily to~~ the ~~net cash received from our initial public offering~~current period.

Table 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 period, we made $23.3 million of dividend payments to non-controlling shareholders of certain majority-owned subsidiaries.Contents

Indebtedness

Our long-term debt, consisting principally of two term loans and ~~two~~U.S. dollar denominated unsecured notes, was as follows:


	Carrying amount				Principal amount					Carrying amount						Principal amount
(dollars in millions)	As of September 28, 2019		As of December 29, 2018		As of September 28, 2019		As of December 29, 2018		(dollars in millions)	As of March 28,2020		As of December 28, 2019		As of March 28,2020		As of December 28, 2019
Debt:									Debt:
—Secured									—Secured
Term Loans (U.S. dollar and Euro denominated)	$	2,384.6	$	2,428.7	$	2,407.7	$	2,458.5	Term Loans (U.S. dollar and Euro denominated)	$	2,384.4	$	2,395.0	$	2,404.3	$	2,416.8
—Unsecured									—Unsecured
Senior Notes (U.S. dollar and Euro denominated)	568.5		575.7		568.0		568.0
Senior Notes (U.S. dollar)									Senior Notes (U.S. dollar)	572.2		563.2		568.0		568.0
Other debt	0.2		0.6		0.2		0.6		Other debt	0.2		0.2		0.1		0.2
	$	2,953.3	$	3,005.0	$	2,975.9	$	3,027.1		$	2,956.8	$	2,958.4	$	2,972.4	$	2,985.0

Details of our long-term debt are presented in note 1412 to the condensed consolidated financial statements included elsewhere in this quarterly report.

During January 2018, upon completion of our initial public offering, the applicable margins on each of the term loans was reduced by a further 0.25%, as agreed as part of the refinancing completed in November 2017.

During the first quarter of 2018, we redeemed in full our outstanding €235.0 million of Euro Senior Notes and made partial redemptions of the Dollar Senior Notes. All of these prepayments, totaling $913.7 million in principal, $27.0 million in redemption premiums and $3.1 million in accrued interest, were funded by the net proceeds from our initial public offering, with the remainder of the funds coming from cash on hand.

Dollar and Euro Term Loans

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, with a springing maturity of April 15, 2022 if more than $500.0 million of the Dollar Senior Notes remain in issue at that time.~~2024. These term loan facilities bear interest at a floating rate. As of ~~September~~March 28, ~~2019,~~2020, 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 ~~4.79%~~4.35% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of ~~September~~March 28, ~~2019,~~2020, the Euro Term Loan bore interest at ~~Euro LIBOR,~~EURIBOR, which is currently below 0%, subject to a floor of 0%, plus a margin of 3.00%. The Euro Term Loan interest rate is re-set on the last business day of each quarter.

Under the terms of the credit agreement, we are obliged to offer annually to the term loan lenders an “excess cash flow” amount as defined under the agreement, based on the preceding year’s final results. Based on our 2018 results, the leverage ratio as defined under the credit agreement was below the threshold above which payments are required, and therefore no excess cash flow payment was required to be made in 2019.

other comprehensive income (“OCI”).


	Three months ended				Nine months ended						Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018			(dollars in millions)	March 28, 2020		March 30, 2019
Gain recognized in statement of operations	$	24.5	$	3.5	$	29.8	$	32.6		Gain recognized in statement of operations	$	4.9	$	13.4
Gain (loss) recognized in OCI	3.2		0.3		2.5		(6.5		)
Total gains	$	27.7	$	3.8	$	32.3	$	26.1
Gain recognized in OCI										Gain recognized in OCI	1.5		0.7
Total gain										Total gain	$	6.4	$	14.1

During the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, the above net ~~transactional~~ foreign exchange gains recognized in the other expenses (income) ~~expenses~~ line have been substantially offset by net foreign exchange movements on Euro-denominated intercompany loans as part of our overall hedging strategy.

Our Term Loans, which mature after 2021, use LIBOR as a benchmark for establishing the rate of interest. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform and is not expected to be maintained after 2021. The transition to alternatives to LIBOR could be modestly disruptive to credit markets, and while we don't believe that the impact would be material to us, we do not yet have insight into what those impacts might be.

Unsecured Senior Notes

~~The Euro Senior Notes were redeemed in full in January 2018 and as~~As of ~~September~~December 28, 2019, ~~there were~~we had $568.0 million of 6.25% Dollar Senior Notes ~~outstanding.~~outstanding that were issued in November 2019. These ~~Dollar Senior Notes~~notes are scheduled to mature on ~~July~~January 15, ~~2022~~2026 and bear interest at an annual fixed rate of ~~6.00%~~6.25% with semi-annual interest payments.

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On and after January 15, 2022, we may redeem the 6.25% Dollar Senior Notes, at our option, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest to the ~~date~~redemption date:


	Redemption Price
During the year commencing:
—2023	103.125	%
—2024	101.563	%
—2025 and thereafter	100.000	%

Additionally, net cash proceeds from an equity offering can be utilized at any time prior to January 15, 2022, to redeem up to 40% of the notes at a redemption price equal to 106.250% of the principal amount thereof, plus accrued and unpaid interest through to the redemption date.

Upon the occurrence of a change of control or a certain qualifying asset sale, the holders of the notes will have the right to require us to make an offer to repurchase each holder's notes at a price equal to 101% (in the case of a change of control) or 100% (in the case of an asset sale) of their redemption, foreign exchange losses of $9.2 million were recognized in respect of the Euro Senior Notes. Of these losses, $5.0 million was recognized in OCI for the period during which the facility was designated as a net investment hedge of certain of our Euro investments,principal amount, plus accrued and ~~$4.2 million was recognized in the statement of operations.~~unpaid interest.

Revolving Credit Facility

We also have a secured revolving credit facility ~~maturing on January 29, 2023,~~ that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million, with a letter of credit sub-facility of $20.0 million. This facility matures on January 29, ~~2023, with a springing maturity of April 15, 2022 if more than $500.0 million of the Dollar Senior Notes remain in issue at that time.~~2023.

As of both ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, there were no drawings for cash under the revolving credit facility and there were no letters of credit outstanding.

Asset-Backed Revolver

As of both ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, there were no drawings for cash under the asset-backed revolver, but there were letters of credit outstanding of ~~$50.2~~$45.9 million and ~~$57.8~~$50.1 million, respectively.

Non-guarantor subsidiaries

The majority of the Company’s U.S. subsidiaries are guarantors of the senior secured credit facilities.

For the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, before intercompany eliminations, our non-guarantor subsidiaries represented approximately ~~69%~~70% of our net sales and ~~61%~~63% of our EBITDA as defined in the financial covenants attaching to the senior secured credit facilities. As of ~~September~~March 28, ~~2019,~~2020, before intercompany eliminations, our non-guarantor subsidiaries represented approximately ~~80%~~52% of our total assets and approximately ~~66%~~20% of our total liabilities. After adjusting for intercompany loans payable and receivable by Finco Omaha Limited, a non-guarantor intermediate holding company, and certain changes in intercompany relationships related to our IPO structure, our non-guarantor subsidiaries represented approximately 69% of our total assets and approximately 21% ~~of our total liabilities. The intercompany loan asset and liability held by Finco Omaha Limited largely offset each other.~~

Net Debt

Net debt is a non-GAAP measure representing the principal amount of our debt less the carrying amount of cash and cash equivalents. During the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, our net debt decreased by ~~$83.9~~$3.6 million from ~~$2,603.7~~$2,349.7 million as of December ~~29, 2018~~28, 2019 to ~~$2,519.8~~$2,346.1 million as of ~~September~~March 28, ~~2019. Excluding changes~~2020. This was primarily due to movements in foreign currency exchange rates, the decrease in net debt during the nine months ended September 28, 2019 was driven primarily by the increase in cash, a function of cash provided by operating activities of $145.2 million, offset partially by capital expenditures of $58.5 million and dividends paid to non-controlling shareholders of $24.5 million.

~~Movements in foreign currency exchange rates~~which had a favorable net impact of ~~$29.5~~$6.5 million on net debt during the ~~nine~~three months ended ~~September~~March 28, ~~2019,~~2020, with the majority of the movement relating to the impact of the weakening of the Euro against the U.S. dollar on our Euro-denominated debt.

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Borrowing Headroom

As of ~~September~~March 28, ~~2019,~~2020, our asset-backed revolving credit facility had a borrowing base of ~~$309.2~~$301.2 million, being the maximum amount we can draw down based on the current value of the secured assets. The facility was undrawn for cash, but there were letters of credit outstanding against the facility amounting to ~~$50.2~~$45.9 million. We also have a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million.

In total, our committed borrowing headroom was ~~$444.0~~$440.3 million, in addition to cash balances of ~~$456.1~~$626.3 million.

~~Distributable Reserves~~

Under the laws of England and Wales, future dividend payments or share repurchases may only be made out of “distributable reserves” on the Company’s statutory balance sheet. During August 2019, the High Court of Justice in London sanctioned a reduction in the Company’s statutory capital for the purpose of creating distributable reserves by approving the cancellation of the deferred shares in issue and the cancellation of the entire amount standing to the credit of the Company’s share premium account, creating $5.5 billion of distributable reserves. These transactions, which have no impact on the consolidated U.S. GAAP financial statements, facilitate the possible future payment of dividends to shareholders of the Company or possible future share repurchases.

Non-GAAP Measures

EBITDA and Adjusted EBITDA

EBITDA is a non-GAAP measure that represents net income or loss for the period before the impact of income taxes, net interest and other expenses, depreciation and amortization. EBITDA is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).

Management uses Adjusted EBITDA as its key profitability measure. This is a non-GAAP measure that represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. We use Adjusted EBITDA as our measure of segment profitability to assess the performance of our businesses, and it is used for total Gates as well because we believe it is important to consider our profitability on a basis that is consistent with that of our operating segments, as well as that of our peer companies with a similar leveraged, private equity ownership history. We believe that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the performance of our businesses.

During the periods presented, the items excluded from EBITDA in computing Adjusted EBITDA primarily included:

•the non-cash charges in relation to share-based compensation;

•transaction-related (income) expenses incurred in relation to business combinations and major corporate transactions, including acquisition integration activities;

•impairments, comprising impairments of goodwill and significant impairments or write downs of other assets;

•restructuring expenses, including severance-related expenses;

•the net gain or loss on disposals and on the exit of businesses; and

•fees paid to our private equity sponsor for monitoring, advisory and consulting services.

Differences exist among our businesses and from period to period in the extent to which their respective employees receive share-based compensation or a charge for such compensation is recognized. We therefore exclude from Adjusted EBITDA the non-cash charges in relation to share-based compensation in order to assess the relative performance of our businesses.

We exclude from Adjusted EBITDA acquisition-related costs that are required to be expensed in accordance with U.S. GAAP. In particular, we exclude the effect on cost of sales of the uplift to the carrying amount of inventory held by entities acquired by Gates. We also exclude costs associated with major corporate transactions because we do not believe that they relate to our performance. Other items are excluded from Adjusted EBITDA because they are individually or collectively significant items that are not considered to be representative of the performance of our businesses. During the periods presented, we excluded restructuring (income) expenses and severance-related expenses that reflect specific, strategic actions taken by management to shutdown, downsize, or otherwise fundamentally reorganize areas of Gates’ business; the net gain or loss on disposals of assets other than in the ordinary course of operations and gains and losses incurred in relation to non-Gates businesses disposed of in prior periods; ~~and~~ significant impairments of intangibles and of other assets, representing the excess of their carrying amounts over the amounts that are expected to be recovered from them in the ~~future.~~future; and fees paid to our private equity sponsor.

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EBITDA and Adjusted EBITDA exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with, not as substitutes for, profit or loss for the period. Management compensates for these limitations by separately monitoring net income from continuing operations for the period.

The following table reconciles net income from continuing operations, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:


	Three months ended				Nine months ended						Three months ended
(dollars in millions)	September 28, 2019		September 29, 2018		September 28, 2019			September 29, 2018		(dollars in millions)	March 28, 2020		March 30, 2019
Net income from continuing operations	$	37.5	$	67.0	$	669.3		$	189.3	Net income from continuing operations	$	39.9	$	605.1
Income tax expense (benefit)	4.4		7.2		(497.8		)	30.4
Income tax benefit										Income tax benefit	(16.1)		(539.7)
Net interest and other expenses	34.8		43.6		107.3			157.3		Net interest and other expenses	34.6		34.8
Depreciation and amortization	55.1		53.7		167.4			163.3		Depreciation and amortization	54.9		56.1
EBITDA	131.8		171.5		446.2			540.3		EBITDA	113.3		156.3
Transaction-related expenses	1.0		0.2		0.7			6.2
Impairment of intangibles and other assets	0.7		0.2		0.7			0.6
Transaction-related (income) expenses										Transaction-related (income) expenses	(0.2)		0.4

Restructuring expenses	0.3		1.2		3.9			3.2		Restructuring expenses	1.9		3.3
Share-based compensation expense	4.1		2.3		10.5			5.5		Share-based compensation expense	2.9		2.6
Sponsor fees (included in other operating expenses)	1.1		1.9		4.9			5.9		Sponsor fees (included in other operating expenses)	1.7		1.8
Impact of fair value adjustment on inventory (included in cost of sales)	—		—		—			0.3
Inventory impairments and adjustments (included in cost of sales)	1.0		—		1.3			0.8
Duplicate expenses incurred on facility relocation	—		1.5		—			4.6

Severance-related expenses (included in cost of sales)	2.5		—		3.0			—		Severance-related expenses (included in cost of sales)	0.1		—
Other primarily severance-related expenses (included in SG&A)	1.8		0.7		3.0			0.6
Other operating expenses	0.7		1.7		1.7			2.0
Severance-related expenses (benefits) (included in SG&A)										Severance-related expenses (benefits) (included in SG&A)	0.5		(0.2)
Other items not directly related to current operations										Other items not directly related to current operations	0.6		1.3
Adjusted EBITDA	$	145.0	$	181.2	$	475.9		$	570.0	Adjusted EBITDA	$	120.8	$	165.5

Adjusted EBITDA Margin

Adjusted EBITDA margin is a non-GAAP measure that represents Adjusted EBITDA expressed as a percentage of net sales. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.


	Three months ended						Nine months ended							Three months ended
(dollars in millions)	September 28, 2019			September 29, 2018			September 28, 2019			September 29, 2018			(dollars in millions)	March 28, 2020			March 30, 2019
Net sales	$	746.6		$	828.4		$	2,361.4		$	2,555.5		Net sales	$	710.1		$	804.9
Adjusted EBITDA	$	145.0		$	181.2		$	475.9		$	570.0		Adjusted EBITDA	$	120.8		$	165.5
Adjusted EBITDA margin	19.4		%	21.9		%	20.2		%	22.3		%	Adjusted EBITDA margin	17.0		%	20.6		%

Core growth reconciliations

Core ~~sales~~revenue growth is a non-GAAP measure that represents net sales for the period excluding the impacts of movements in average currency exchange rates and the first-year impacts of acquisitions and ~~disposals.~~disposals, when applicable. We present core growth because it allows for a meaningful comparison of year-over-year performance without the volatility caused by foreign currency gains or losses or the incomparability that would be caused by impacts of acquisitions or disposals. Management believes that this measure is therefore useful for securities analysts, investors and other interested parties to assist in their assessment of the operating performance of our businesses. The closest GAAP measure is net sales.


	Three months ended March 28, 2020

(dollars in millions)	Power Transmission			Fluid Power			Total
Net sales for the three months ended March 28, 2020	$	441.2		$	268.9		$	710.1
Impact on net sales of movements in currency rates	9.5			4.2			13.7

Core revenue for the three months ended March 28, 2020	$	450.7		$	273.1		$	723.8

Net sales for the three months ended March 30, 2019	499.5			305.4			804.9
Decrease in net sales on a core basis (core revenue)	$	(48.8)		$	(32.3)		$	(81.1)

Core revenue growth	(9.8		%)	(10.6		%)	(10.1		%)

Three months ended September 28, 2019

(dollars in millions) Power Transmission Fluid Power Total
Net sales $ 474.4
$ 272.2
$ 746.6
Impact on net sales of movements in currency rates 7.6
3.5
11.1
Core revenue $ 482.0

$ 275.7

$ 757.7

Net sales for the three months ended September 29, 2018 512.5
315.9
828.4
Decrease in net sales on a core basis (core revenue) $ (30.5 )
$ (40.2 )
$ (70.7 )

Core revenue growth (6.0 %) (12.7 %) (8.5 %)

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Nine months ended September 28, 2019

(dollars in millions) Power Transmission Fluid Power Total
Net sales $ 1,475.4
$ 886.0
$ 2,361.4
Impact on net sales of movements in currency rates 52.6
18.2
70.8
Impact on net sales from recent acquisitions —
(7.5 ) (7.5 )
Core revenue $ 1,528.0
$ 896.7
$ 2,424.7

Net sales for the nine months ended September 29, 2018 1,608.1
947.4
2,555.5
Decrease in net sales on a core basis (core revenue) $ (80.1 ) $ (50.7 ) $ (130.8 )

Core revenue growth (5.0 %) (5.4 %) (5.1 %)

Net Debt

Management uses net debt, rather than the narrower measure of cash and cash equivalents and restricted cash which forms the basis for the condensed consolidated statement of cash flows, as a measure of our liquidity and in assessing the strength of our balance sheet.

Management analyzes the key cash flow items driving the movement in net debt to better understand and assess Gates’ cash performance and utilization in order to maximize the efficiency with which resources are allocated. The analysis of cash movements in net debt also allows management to more clearly identify the level of cash generated from operations that remains available for distribution after servicing our debt and post-employment benefit obligations and after the cash impacts of acquisitions and disposals.

Net debt represents the net total of:

• the principal amount of our debt; and

• the carrying amount of cash and cash equivalents.

Net debt was as follows:


(dollars in millions)	As of September 28, 2019		As of December 29, 2018		(dollars in millions)	As of March 28,2020		As of December 28, 2019
Principal amount of debt	$	2,975.9	$	3,027.1	Principal amount of debt	$	2,972.4	$	2,985.0
Cash and cash equivalents	456.1		423.4
Less: Cash and cash equivalents					Less: Cash and cash equivalents	(626.3)		(635.3)
Net debt	$	2,519.8	$	2,603.7	Net debt	$	2,346.1	$	2,349.7

The principal amount of debt is reconciled to the carrying amount of debt as follows:


(dollars in millions)	As of September 28, 2019			As of December 29, 2018			(dollars in millions)	As of March 28,2020		As of December 28, 2019
Principal amount of debt	$	2,975.9		$	3,027.1		Principal amount of debt	$	2,972.4	$	2,985.0
Accrued interest	18.9			26.6			Accrued interest	24.1		15.2
Deferred issuance costs	(41.5		)	(48.7		)	Deferred issuance costs	(39.7)		(41.8)
Carrying amount of debt	$	2,953.3		$	3,005.0		Carrying amount of debt	$	2,956.8	$	2,958.4

Adjusted EBITDA adjustments for ratio calculation purposes

The financial maintenance ratio in our revolving credit agreement and other ratios related to incurrence-based covenants (measured only upon the taking of certain actions, including the incurrence of additional indebtedness) under our revolving credit facility, our term loan facility and the indenture governing our outstanding notes are calculated in part based on financial measures similar to Adjusted EBITDA as presented elsewhere in this ~~quarterly~~ report, which financial measures are determined at the Gates Global LLC level and adjust for certain additional items such as severance costs, the pro forma impacts of acquisitions and the pro forma impacts of cost-saving initiatives. These additional adjustments during the last 12 months, as calculated pursuant to such agreements, resulted in a net benefit to Adjusted EBITDA for ratio calculation purposesof ~~$15.0~~$12.1 million.

Gates Industrial Corporation plc is not an obligor under our revolving credit facility, our term loan facility or the indenture governing our outstanding notes. Gates Global LLC, an indirect subsidiary of Gates Industrial Corporation plc, is the borrower under our revolving credit facility and our term loan facility and the issuer of our outstanding notes. The only significant difference between the results of operations and net assets that would be shown in the consolidated financial statements of Gates Global LLC and those for the Company that are included elsewhere in this ~~quarterly~~ report is a receivable of ~~$8.7~~$0.6 million and ~~$11.8~~$9.2 million as of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, respectively, due to Gates Global LLC and its subsidiaries from indirect parent entities of Gates Global LLC and additional cash and cash equivalents held by the Company of $1.3 million and ~~$1.1~~$2.0 million as of ~~September~~March 28, 2020 and December 28, 2019, ~~and December 29, 2018,~~ respectively.

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Item 3: Quantitative and Qualitative Disclosures about Market Risk

Our market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity ~~prices.~~prices, and the credit risk of our customers and third party depository institutions that hold our cash and short term deposits. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts, interest rate caps (options), and interest rate swaps to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact. Our objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates and interest rate movements. For a discussion of quantitative and qualitative disclosures about market risk, please refer to our annual report from which our exposure to market risk has not materially changed.

Item 4: Controls and Procedures

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of ~~September~~March 28, ~~2019,~~2020, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1: Legal Proceedings

Information regarding legal proceedings is incorporated into this Part II, Item 1 from note 2018 of the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A: Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in ~~the section entitled~~Item 1A “Risk Factors” in Part I of Gates’ annual report, which could materially affect the Company’s business, financial condition, operating results or liquidity or future results. The risks described in the annual report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its results of operations, financial condition or liquidity. ~~There~~Apart from the additional risk factor described below, there have been no material changes to the risk factors disclosed in the annual report.

In light of developments relating to the COVID-19 pandemic occurring subsequent to the filing of our annual report, the Company is supplementing the risk factors discussed in that report with the following risk factor, which should be read in conjunction with the risk factors contained in our annual report:

The current COVID-19 pandemic has caused severe disruption in the global economy and had and is expected to continue to have an adverse impact on our business, operating results, cash flows and/or financial condition, and that impact may be material.

In late December 2019, a novel coronavirus disease was first reported and over the next few months the number of cases and affected countries increased rapidly. In March 2020, the World Health Organization designated COVID-19 as a pandemic and numerous countries have declared national emergencies with respect to COVID-19. The global impact of the pandemic has been rapidly evolving, and many countries have reacted by instituting quarantines and restrictions on travel, and limiting operations of non-essential businesses. Such actions are creating disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries and may trigger a period of global economic slowdown. The extent to which this may impact our future results of operations and overall financial performance remains uncertain.

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 the risk factors contained in our annual report 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.While most of our facilities are still operating, 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;

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•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, the development 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 could be material and could result in asset impairment charges, including impairments of property, plant and equipment, goodwill or other intangible assets.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Purchases of Equity Securities by Affiliated Purchasers⁽¹⁾
Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽²⁾	Maximum number of shares that may yet be purchased under the plans or programs
12/29/2019 - 1/31/2020	—	$	—	N/A	N/A
2/1/2020 - 2/29/2020	—	$	—	N/A	N/A
3/1/2020 - 3/28/2020	520,400	$	8.77	N/A	N/A
Total	520,400	$	8.77	N/A	N/A

⁽¹⁾The table reflects open market purchases of our common stock by Omaha Aggregator (Cayman) L.P. (“Omaha”), an entity affiliated with Blackstone, and is based upon Omaha’s filings with the SEC. Under Exchange Act Rule 10b-18, Omaha may be deemed to be an “affiliated purchaser” because it may be considered to be under common control with us. We did not repurchase any shares of our common stock during the periods reflected in the table.

⁽²⁾No purchases reflected in the table were made pursuant to a publicly announced plan or program.

Purchases of Equity Securities by Affiliated Purchasers⁽¹⁾
Period Total number of shares purchased Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs⁽²⁾
Maximum number of shares that may yet be purchased under the plans or programs
6/30/2019 - 7/31/2019 —
$ —
N/A N/A
8/1/2019 - 8/31/2019 1,161,708
$ 8.18
N/A N/A
9/1/2019 - 9/28/2019 117,100
$ 8.65
N/A N/A
Total 1,278,808
$ 8.22
N/A N/A

⁽¹⁾

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The table reflects open market purchases of our common stock by Omaha Aggregator (Cayman) L.P. (“Omaha”), an entity affiliated with Blackstone, and is based upon Omaha’s filings with the SEC. Under Exchange Act Rule 10b-18, Omaha may be deemed to be an “affiliated purchaser” because it may be considered to be under common control with us. We did not repurchase any shares of our common stock during the periods reflected in the table.


⁽²⁾	~~No purchases reflected in the table were made pursuant to a publicly announced plan or program.~~

Item 6: Exhibits



Exhibit No.			Description
3.1			Certificate of Incorporation of Gates Industrial Corporation plc (incorporated by reference from Exhibit 3.1 to the registrant’s Amendment No. 1 to its Registration Statement on Form S-1, filed on January 8, 2018 (File No. 333-222310)).
3.2			Articles of Association of Gates Industrial Corporation plc, effective October 7, 2019*2019
~~31.1~~10.1			Separation Agreement, effective March 13, 2020, between the Company and Jamey S. Seely (incorporated by reference from Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on March 18, 2020 (File No. 001-38366)).
31.1			Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2			Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1			Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101			The following financial information from Gates Industrial Corporation’s Quarterly Report on Form 10-Q for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019,~~2020, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, (ii) Condensed Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, (iii) Condensed Consolidated Balance Sheets as of ~~September~~March 28, ~~2019~~2020 and December ~~29, 2018,~~28, 2019, (iv) Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September~~March 28, ~~2019~~2020 and ~~September 29, 2018,~~March 30, 2019, (v) Condensed Consolidated Statements of Shareholders’ Equity, and (vi) Notes to the Condensed Consolidated Financial Statements.*

* Filed herewith.

** Furnished herewith.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GATES INDUSTRIAL CORPORATION PLC

(Registrant)

By:

/s/ ~~David H. Naemura~~L. Brooks Mallard

Name:

~~David H. Naemura~~L. Brooks Mallard

Title:

Chief Financial Officer

(Principal Financial ~~Officer and Duly Authorized~~ Officer)

Date: ~~November~~May 6, ~~2019~~

2020



	Three months ended September 28, 2019

(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss			Retained earnings		Total shareholders’ equity			Non- controlling interests			Total equity
As of June 29, 2019	$	2.9	$	2,426.4	$	(835.6	)	$	1,017.1	$	2,610.8		$	371.8		$	2,982.6

Net income	—		—		—			35.5		35.5			1.9			37.4
Other comprehensive loss	—		—		(73.0		)	—		(73.0		)	(11.6		)	(84.6		)
Total comprehensive (loss) income	—		—		(73.0		)	35.5		(37.5		)	(9.7		)	(47.2		)
Other changes in equity:
—Issuance of shares	—		0.1		—			—		0.1			—			0.1
—Share-based compensation	—		4.0		—			—		4.0			—			4.0
—Dividends paid to non-controlling interests	—		—		—			—		—			(9.5		)	(9.5		)
As of September 28, 2019	$	2.9	$	2,430.5	$	(908.6	)	$	1,052.6	$	2,577.4		$	352.6		$	2,930.0



	Three months ended September 29, 2018

(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss			Retained earnings		Total shareholders’ equity		Non- controlling interests			Total equity
As of June 30, 2018	$	2.9	$	2,413.4	$	(809.2	)	$	246.7	$	1,853.8	$	402.7		$	2,256.5

Net income	—		—		—			59.9		59.9		6.8			66.7
Other comprehensive income (loss)	—		—		22.0			—		22.0		(13.1		)	8.9
Total comprehensive income (loss)	—		—		22.0			59.9		81.9		(6.3		)	75.6
Other changes in equity:
—Issuance of shares	—		0.4		—			—		0.4		—			0.4
—Share-based compensation	—		1.7		—			—		1.7		—			1.7
—Dividends paid to non-controlling interests	—		—		—			—		—		(7.1		)	(7.1		)
As of September 29, 2018	$	2.9	$	2,415.5	$	(787.2	)	$	306.6	$	1,937.8	$	389.3		$	2,327.1



(dollars in millions)	As of September 28, 2019		As of September 29, 2018
Accrued expenses and other current liabilities	$	2.4	$	3.4
Other non-current liabilities	—		0.2
	$	2.4	$	3.6



(dollars in millions)	Operating leases		Finance leases ⁽¹⁾
Next 12 months	$	25.3	$	0.5
Year 2	21.1		0.5
Year 3	17.3		0.5
Year 4	14.4		0.3
Year 5	12.6		—
Year 6 and beyond	83.7		—
Total lease payments	174.4		1.8
Interest	46.7		0.1
Total present value of lease liabilities	$	127.7	$	1.7



(dollars in millions)	Operating leases		Finance leases
Right-of-use assets	$	117.3	$	3.0

Short-term lease liabilities (included in “Accrued expenses and other current liabilities”)	$	19.2	$	0.9
Long-term lease liabilities	108.5		0.8
Total lease liabilities	$	127.7	$	1.7



	Nine months ended September 28, 2019
Fair value:
—SARs	$	5.88
—Share options	$	5.88
—Premium-priced options	$	5.65
—RSUs	$	16.28
—PRSUs	$	20.07

Inputs to the model:
—Expected volatility - SARs, share options and premium-priced options	31.9		%
—Expected volatility - PRSUs	32.8		%
—Expected option life for SARs and share options	6.0
—Expected option life for premium-priced options	7.0
—Risk-free interest rate:
SARs and share options	2.51		%
Premium-priced options	2.53		%
PRSUs	2.48		%
—Expected dividends	—



(dollars in millions)	Available-for- sale investments			Post- retirement benefit			Cumulative translation adjustment			Cash flow hedges			Accumulated OCI attributable to shareholders			Non- controlling interests			Accumulated OCI
As of December 30, 2017	$	(0.3	)	$	13.2		$	(742.8	)	$	(17.5	)	$	(747.4	)	$	(25.5	)	$	(772.9	)
Foreign currency translation	—			—			(58.7		)	—			(58.7		)	(20.0		)	(78.7		)
Cash flow hedges movements	—			—			—			19.8			19.8			—			19.8
Available-for-sale investment movements	(0.4		)	—			—			—			(0.4		)	(0.1		)	(0.5		)
Post-retirement benefit movements	—			(0.5		)	—			—			(0.5		)	—			(0.5		)
Other comprehensive (loss) income	(0.4		)	(0.5		)	(58.7		)	19.8			(39.8		)	(20.1		)	(59.9		)
As of September 29, 2018	$	(0.7	)	$	12.7		$	(801.5	)	$	2.3		$	(787.2	)	$	(45.6	)	$	(832.8	)