Gates Industrial Corp plc [GTES] Filings

10-Q 1 gtes-20220402.htm 10-Q gtes-20220402

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 April 2, 2022

☐ 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 May 2, 2022, there were 289,611,180 ordinary shares of $0.01 par value outstanding.

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TABLE OF CONTENTS


Part I – Financial Information

Item 1.	Financial Statements (unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38

Part II – Other Information

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6.	Exhibits	40
Signatures		41

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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 Item 1A. “Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the “annual report”), as filed with the Securities and Exchange Commission (the “SEC”), which include the following: economic, political and other risks associated with international operations (including those related to the Russia-Ukraine conflict); severe disruptions in the global economy due to the ongoing COVID-19 pandemic; availability of raw materials or other manufacturing inputs at favorable prices in sufficient quantities, or at a given time; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; pricing pressures from our customers; continued operation of our manufacturing facilities, supply chains, distribution systems and information technology systems; our ability to forecast demand or meet significant increases in demand; our ability to maintain and enhance our strong brand; market acceptance of new product introductions and innovations; our cost-reduction actions; longer lives of products used in our end markets may affect demand for some of our replacement markets; development of the replacement market in emerging markets may limit our ability to grow; pursuit of strategic transactions, including acquisitions, divestitures, restructurings, joint ventures, strategic alliances or investments, which could create risks and present unforeseen integration obstacles or costs; our investments in joint ventures; liabilities with respect to businesses that we have divested in the past; loss or financial instability of any significant customer; societal responses to sustainability issues, including those related to climate change; litigation, legal and regulatory proceedings and obligations, and the availability and coverage of insurance; infringement on the intellectual property of others; failure to adequately protect or enforce our intellectual property rights against counterfeiting activities; failure to develop, obtain, enforce and protect our intellectual property rights in all jurisdictions throughout the world; recalls, product liability claims or product warranties claims; failure to comply with anti-corruption laws and other laws governing our international operations; existing or new laws and regulations, including but not limited to those relating to HSE concerns, and the sale of aftermarket products; cyber-security vulnerabilities, threats, and more sophisticated and targeted computer crimes; failure of information systems; highly complex and rapidly evolving global privacy, data protection and data security requirements; loss of senior management or key personnel; work stoppages and other labor matters; potential requirement to make additional cash contributions to our defined benefit pension plans; change in our effective tax rates or additional tax liabilities; change in tax laws; tax authorities may no longer treat us as being exclusively a resident of the U.K. for tax purposes; our substantial leverage; and the significant influence of our majority shareholders, affiliates of Blackstone 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.

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ABOUT THIS QUARTERLY REPORT

Financial Statement Presentation

Gates Industrial Corporation plc is a public limited company that was incorporated under the Companies Act 2006 on September 25, 2017 and is registered in England and Wales.

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 “U.S.”) dollars, unless indicated otherwise.

Certain Definitions

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

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

•“Blackstone” or “our Sponsor” refer to investment funds affiliated with Blackstone 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
(dollars in millions, except per share amounts)	April 2, 2022		April 3, 2021
Net sales	$	893.4	$	881.3
Cost of sales	588.5		535.8
Gross profit	304.9		345.5
Selling, general and administrative expenses	235.2		211.6
Transaction-related expenses	0.8		2.4

Restructuring expenses	0.5		2.9

Operating income from continuing operations	68.4		128.6
Interest expense	32.6		34.4
Other expenses (income)	0.6		(1.2)
Income from continuing operations before taxes	35.2		95.4
Income tax (benefit) expense	(2.2)		18.9
Net income from continuing operations	37.4		76.5
Loss on disposal of discontinued operations, net of tax, respectively, of $0 and $0	0.1		0.1
Net income	37.3		76.4
Less: non-controlling interests	6.4		9.1
Net income attributable to shareholders	$	30.9	$	67.3

Earnings per share
Basic
Earnings per share from continuing operations	$	0.11	$	0.23
Earnings per share from discontinued operations	—		—
Earnings per share	$	0.11	$	0.23

Diluted
Earnings per share from continuing operations	$	0.10	$	0.23
Earnings per share from discontinued operations	—		—
Earnings per share	$	0.10	$	0.23

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
(dollars in millions)	April 2, 2022		April 3, 2021
Net income	$	37.3	$	76.4
Other comprehensive income (loss)
Foreign currency translation:
—Net translation loss on foreign operations, net of tax expense, respectively, of $0 and $0	(27.5)		(68.0)
—Gain on net investment hedges, net of tax benefit, respectively, of $0.9 and $0	11.2		18.2
Total foreign currency translation movements	(16.3)		(49.8)
Cash flow hedges (interest rate derivatives):
—Gain arising in the period, net of tax expense, respectively, of $(8.3) and $(1.9)	25.1		7.8
—Reclassification to net income, net of tax expense, respectively, of $(1.4) and $(1.0)	4.1		4.3
Total cash flow hedges movements	29.2		12.1
Post-retirement benefits:

—Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0.1 and $0	(0.1)		—
Total post-retirement benefits movements	(0.1)		—
Other comprehensive income (loss)	12.8		(37.7)
Comprehensive income for the period	$	50.1	$	38.7

Comprehensive income attributable to shareholders:
—Income arising from continuing operations	$	50.8	$	39.7
—Loss arising from discontinued operations	(0.1)		(0.1)
	50.7		39.6
Comprehensive income attributable to non-controlling interests	(0.6)		(0.9)
	$	50.1	$	38.7

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 April 2, 2022		As of January 1, 2022
Assets
Current assets
Cash and cash equivalents	$	406.8	$	658.2
Trade accounts receivable, net	790.7		708.1
Inventories	718.3		682.6
Taxes receivable	32.8		19.1
Prepaid expenses and other assets	258.0		210.7
Total current assets	2,206.6		2,278.7
Non-current assets
Property, plant and equipment, net	665.4		670.3
Goodwill	2,049.9		2,063.0
Pension surplus	74.0		75.5
Intangible assets, net	1,603.5		1,642.2
Right-of-use assets	122.4		124.2
Taxes receivable	14.7		15.7
Deferred income taxes	610.0		639.3
Other non-current assets	52.6		24.1
Total assets	$	7,399.1	$	7,533.0
Liabilities and equity
Current liabilities
Debt, current portion	$	29.4	$	38.1
Trade accounts payable	494.5		506.6
Taxes payable	27.1		34.1
Accrued expenses and other current liabilities	237.5		277.1
Total current liabilities	788.5		855.9
Non-current liabilities
Debt, less current portion	2,573.2		2,526.5
Post-retirement benefit obligations	102.5		106.2
Lease liabilities	111.9		116.4
Taxes payable	103.4		103.7
Deferred income taxes	267.7		283.7
Other non-current liabilities	75.7		59.2
Total liabilities	4,022.9		4,051.6
Commitments and contingencies (note 18)
Shareholders’ equity
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 288,578,963 (January 1, 2022: authorized shares: 3,000,000,000; outstanding shares: 291,282,137)	2.9		2.9
—Additional paid-in capital	2,504.7		2,484.1
—Accumulated other comprehensive loss	(805.4)		(825.2)
—Treasury shares	(121.9)		—
—Retained earnings	1,414.8		1,437.9
Total shareholders’ equity	2,995.1		3,099.7
Non-controlling interests	381.1		381.7
Total equity	3,376.2		3,481.4
Total liabilities and equity	$	7,399.1	7,533.0

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


	Three months ended
(dollars in millions)	April 2, 2022		April 3, 2021
Cash flows from operating activities
Net income	$	37.3	$	76.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	55.1		55.8
Foreign exchange and other non-cash financing expenses	9.2		7.3


Share-based compensation expense	24.1		6.3
Decrease in post-employment benefit obligations, net	(4.6)		(4.2)
Deferred income taxes	(12.3)		(9.6)

Other operating activities	3.1		2.0
Changes in operating assets and liabilities, net of effects of acquisitions:
—Increase in accounts receivable	(88.4)		(131.8)
—Increase in inventories	(37.8)		(36.2)
—(Decrease) increase in accounts payable	(8.6)		29.2
—Increase in prepaid expenses and other assets	(24.2)		(5.8)
—(Decrease) increase in taxes payable	(19.5)		7.1
—Decrease in other liabilities	(38.8)		(20.5)
Net cash used in operating activities	(105.4)		(24.0)
Cash flows from investing activities
Purchases of property, plant and equipment	(17.4)		(18.1)
Purchases of intangible assets	(0.6)		(2.1)

Cash paid under corporate-owned life insurance policies	(10.3)		(10.1)
Cash received under corporate-owned life insurance policies	3.0		0.9


Other investing activities	0.3		0.2
Net cash used in investing activities	(25.0)		(29.2)
Cash flows from financing activities
Issuance of shares	0.2		1.7

Buy-back of shares	(175.2)		—
Proceeds from long-term debt	70.0		—
Payments of long-term debt	(5.3)		(5.5)

Debt issuance costs paid	(0.1)		(7.8)

Other financing activities	(5.4)		(3.5)
Net cash used in financing activities	(115.8)		(15.1)
Effect of exchange rate changes on cash and cash equivalents and restricted cash	(4.7)		(5.8)
Net decrease in cash and cash equivalents	(250.9)		(74.1)
Cash and cash equivalents and restricted cash at the beginning of the period	660.9		524.1
Cash and cash equivalents and restricted cash at the end of the period	$	410.0	$	450.0
Supplemental schedule of cash flow information
Interest paid	$	37.6	$	39.8
Income taxes paid	$	29.6	$	21.5
Accrued capital expenditures	$	0.5	$	0.4

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 Shareholders’ Equity


	Three months ended April 2, 2022

(dollars in millions)	Share capital		Additional paid-in capital		Treasury Shares		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total equity
As of January 1, 2022	$	2.9	$	2,484.1	$	—	$	(825.2)	$	1,437.9	$	3,099.7	$	381.7	$	3,481.4

Net income	—		—		—		—		30.9		30.9		6.4		37.3
Other comprehensive income (loss)	—		—		—		19.8		—		19.8		(7.0)		12.8
Total comprehensive income (loss)	—		—		—		19.8		30.9		50.7		(0.6)		50.1
Other changes in equity:
—Issuance of shares	—		0.2		—		—		—		0.2		—		0.2
—Shares withheld for employee taxes	—		(1.3)		—		—		—		(1.3)		—		(1.3)
—Buy-back of shares	—		—		(121.9)		—		(54.0)		(175.9)		—		(175.9)
—Share-based compensation	—		21.7		—		—		—		21.7		—		21.7




As of April 2, 2022	$	2.9	$	2,504.7	$	(121.9)	$	(805.4)	$	1,414.8	$	2,995.1	$	381.1	$	3,376.2


	Three months ended April 3, 2021

(dollars in millions)	Share capital		Additional paid-in capital		Treasury Shares		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total equity
As of January 2, 2021	$	2.9	$	2,456.8	$	—	$	(805.4)	$	1,151.4	$	2,805.7	$	379.3	$	3,185.0

Net income	—		—		—		—		67.3		67.3		9.1		76.4
Other comprehensive loss	—		—		—		(27.7)		—		(27.7)		(10.0)		(37.7)
Total comprehensive (loss) income	—		—		—		(27.7)		67.3		39.6		(0.9)		38.7
Other changes in equity:
—Issuance of shares	—		1.7		—		—		—		1.7		—		1.7

—Shares withheld for employee taxes	—		(0.7)		—		—		—		(0.7)		—		(0.7)
—Share-based compensation	—		5.3		—		—		—		5.3		—		5.3




As of April 3, 2021	$	2.9	$	2,463.1	$	—	$	(833.1)	$	1,218.7	$	2,851.6	$	378.4	$	3,230.0

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

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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 registered in England and Wales on September 25, 2017.

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 April 2, 2022 and January 1, 2022 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 January 2, 2022 to April 2, 2022, with comparative information for the 91 day period from January 3, 2021 to April 3, 2021.

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 April 2, 2022 and the results of its operations and cash flows for the periods ended April 2, 2022 and April 3, 2021. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

We continue to contend with the ongoing implications of the novel coronavirus (“COVID-19”) pandemic. While we have generally seen a rebound in demand from the pandemic-induced declines of 2020, the evolving impact of the pandemic, including the emergence of variants, and continuing measures being taken around the world to combat its spread, may have ongoing implications for our business which may vary from time to time. Some of these impacts 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. Estimates and assumptions used are based on factors such as historical experience, observance of trends in the industries in which we operate and information available from our customers and other outside sources.

Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after April 2, 2022, 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 have been prepared on substantially the same basis as Gates’ audited annual consolidated financial statements and related notes for the year ended January 1, 2022. The condensed consolidated balance sheet as of January 1, 2022 has been derived from those audited financial statements.

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During 2021, the Company implemented a program with an unrelated third party under which we may periodically sell trade accounts receivable from one of our aftermarket customers with whom we have extended payment terms as part of a commercial agreement. The purpose of using this program is to generally offset the working capital impact resulting from this terms extension. All eligible accounts receivable from this customer are covered by the program, and any factoring is solely at our option. Following the factoring of a qualifying receivable, because we maintain no continuing involvement in the underlying receivable, and collectability risk is fully transferred to the unrelated third party, we account for these transactions as a sale of a financial asset and derecognize the asset. Cash received under the program is classified as operating cash inflows in the consolidated statement of cash flows. As of April 2, 2022, the collection of $105.4 million of our trade accounts receivable had been accelerated under this program. During the three months ended April 2, 2022, we incurred costs in respect of this program of $0.6 million, which are recorded under other expenses (income).

These condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended January 1, 2022 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 2022 fiscal year of the following new Accounting Standard Update (“ASU”):

•ASU 2021-10 “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”

In November 2021, the Financial Accountant Standards Board (“FASB”) issued this ASU to increase the transparency of government assistance, including the disclosure of (i) the types of assistance, (ii) an entity’s accounting for the assistance, and (iii) the effect of the assistance on an entity’s financial statements. This update requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy, including (i) information about the nature of the transactions and the related accounting policy used to account for them, (ii) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each line item, and (iii) significant terms and conditions of the transactions, including commitments and contingencies.

The amendments are effective for fiscal years beginning after December 15, 2021. The adoption of this ASU did not have any significant impact on our consolidated financial statements.

2. Recent accounting pronouncements not yet adopted

None.

3. Segment information

A. Background

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 principally on net sales and Adjusted EBITDA (defined below).

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-based measure.

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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.


	Three months ended
(dollars in millions)	April 2, 2022		April 3, 2021
Power Transmission	$	555.6	$	559.5
Fluid Power	337.8		321.8
Continuing operations	$	893.4	$	881.3

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.

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


	Three months ended April 2, 2022			Three months ended April 3, 2021
(dollars in millions)		Power Transmission		Fluid Power		Power Transmission		Fluid Power
U.S.		$	159.1	$	167.5	$	155.9	$	152.7
North America, excluding U.S.		49.2		50.9		46.7		49.4
United Kingdom (“U.K.”)		12.0		17.4		12.7		14.7
EMEA(1), excluding U.K.		159.7		55.7		162.8		49.6
East Asia and India		74.4		21.0		82.9		23.5
Greater China		80.0		13.5		81.9		24.0
South America		21.2		11.8		16.6		7.9
Net sales		$	555.6	$	337.8	$	559.5	$	321.8

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

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


	Three months ended
(dollars in millions)	April 2, 2022		April 3, 2021
Developed	$	573.1	$	555.0
Emerging	320.3		326.3
Net sales	$	893.4	$	881.3

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 expenses (income), income taxes, depreciation and amortization.

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:

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

•transaction-related expenses incurred in relation to major corporate transactions, including the acquisition of businesses and related integration activities, and equity and debt transactions;

•restructuring expenses, including severance-related expenses; and

•inventory adjustments related to certain inventories accounted for on a Last-in First-out (“LIFO”) basis.

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Adjusted EBITDA by segment was as follows:


	Three months ended
(dollars in millions)	April 2, 2022		April 3, 2021
Power Transmission	$	97.8	$	132.7
Fluid Power	59.0		63.6
Continuing operations	$	156.8	$	196.3

Reconciliation of net income from continuing operations to Adjusted EBITDA:


	Three months ended
(dollars in millions)	April 2, 2022		April 3, 2021
Net income from continuing operations	$	37.4	$	76.5
Income tax (benefit) expense	(2.2)		18.9
Income from continuing operations before taxes	35.2		95.4
Interest expense	32.6		34.4
Other expenses (income)	0.6		(1.2)
Operating income from continuing operations	68.4		128.6
Depreciation and amortization	55.1		55.8
Transaction-related expenses (1)	0.8		2.4

Restructuring expenses	0.5		2.9

Share-based compensation expense	24.1		6.3


Inventory impairments and adjustments (2) (included in cost of sales)	7.6		—


Severance expenses (included in SG&A)	0.3		0.3

Adjusted EBITDA	$	156.8	$	196.3

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

(2) Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a LIFO basis. The recent inflationary environment has caused LIFO values to drop below First-in, First-out (“FIFO”) values because LIFO measurement results in the more recent inflated costs being matched against current sales while historical, lower costs are retained in inventories.

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, streamline our selling, general and administrative (“SG&A”) back-office functions and relocate certain operations to lower cost locations.

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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
(dollars in millions)	April 2, 2022		April 3, 2021
Restructuring expenses:
—Severance expenses	$	—	$	0.5
—Non-severance labor and benefit expenses	0.1		0.8
—Consulting expenses	—		0.7
—Other net restructuring expenses	0.4		0.9








Total restructuring expenses	$	0.5	$	2.9

Expenses related to other strategic initiatives:

—Severance expenses included in SG&A	0.3		0.3
Total expenses related to other strategic initiatives	$	0.3	$	0.3

Restructuring and other strategic initiatives during the three months ended April 2, 2022 related primarily to severance and other labor and benefit costs, and facility closures or relocations in several countries.

Expenses incurred in connection with our restructuring and other strategic initiatives during the three months ended April 3, 2021 included $1.2 million related to our European reorganization involving office and distribution center closures or downsizings and the implementation of a regional shared service center, $0.9 million related to the optimization of our Middle East business, and $0.8 million of additional costs related to the closure in 2020 of a manufacturing facility in Korea.

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
(dollars in millions)	April 2, 2022		April 3, 2021
Power Transmission	$	0.3	$	1.6
Fluid Power	0.2		1.3
Continuing operations	$	0.5	$	2.9

The following summarizes the reserve for restructuring expenses for the three months ended April 2, 2022 and April 3, 2021, respectively:


	Three months ended
(dollars in millions)	April 2, 2022		April 3, 2021
Balance as of the beginning of the period	$	6.5	$	17.9
Utilized during the period	(2.3)		(7.0)
Charge for the period	0.5		3.8
Released during the period	—		(0.9)
Foreign currency translation	(0.2)		(0.6)
Balance as of the end of the period	$	4.5	$	13.2

Restructuring reserves, which are expected to be utilized during 2022 and 2023, are included in the condensed consolidated balance sheet within the accrued expenses and other current liabilities line.

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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 April 2, 2022, we had an income tax benefit of $2.2 million on pre-tax income of $35.2 million, which resulted in an effective tax rate of (6.3)%, compared to an income tax expense of $18.9 million on pre-tax income of $95.4 million, which resulted in an effective tax rate of 19.8% for the three months ended April 3, 2021.

For the three months ended April 2, 2022 the effective tax rate was driven primarily by discrete tax benefits of $10.7 million, of which $8.2 million related to the partial valuation allowance release on deferred tax assets for U.S. foreign tax credits, offset partially by jurisdictional mix of taxable earnings. For the three months ended April 3, 2021, the effective tax rate was driven primarily by jurisdictional mix of taxable earnings with no significant discrete items.

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.

As of each reporting date, we consider 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 financial statements.

After weighing all of the evidence, giving more weight to the evidence that was objectively verifiable, we determined during the three months ended April 2, 2022, that it is more likely than not that deferred tax assets in the U.S. totaling $8.2 million are realizable. As a result of changes in estimates of future taxable profits against which the foreign tax credits can be utilized, our judgment changed regarding valuation allowances on these deferred tax assets.

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
(dollars in millions, except share numbers and per share amounts)	April 2, 2022		April 3, 2021
Net income attributable to shareholders	$	30.9	$	67.3

Weighted average number of shares outstanding	290,448,906		291,166,994
Dilutive effect of share-based awards	5,789,306		5,196,273
Diluted weighted average number of shares outstanding	296,238,212		296,363,267

Number of anti-dilutive shares excluded from diluted earnings per share calculation	4,683,085		4,387,520

Basic earnings per share	$	0.11	$	0.23
Diluted earnings per share	$	0.10	$	0.23

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7. Inventories


(dollars in millions)	As of April 2, 2022		As of January 1, 2022
Raw materials and supplies	$	211.8	$	199.6
Work in progress	49.4		43.4
Finished goods	457.1		439.6
Total inventories	$	718.3	$	682.6

8. Goodwill


(dollars in millions)	Power Transmission		Fluid Power		Total
Cost and carrying amount
As of January 1, 2022	$	1,388.1	$	674.9	$	2,063.0

Foreign currency translation	(16.0)		2.9		(13.1)
As of April 2, 2022	$	1,372.1	$	677.8	$	2,049.9

9. Intangible assets


	As of April 2, 2022						As of January 1, 2022
(dollars in millions)	Cost		Accumulated amortization and impairment		Net		Cost		Accumulated amortization and impairment		Net
Finite-lived:
—Customer relationships	$	2,020.2	$	(926.3)	$	1,093.9	$	2,031.7	$	(901.6)	$	1,130.1
—Technology	90.8		(89.4)		1.4		90.9		(89.4)		1.5
—Capitalized software	98.1		(59.3)		38.8		97.8		(56.6)		41.2
	2,209.1		(1,075.0)		1,134.1		2,220.4		(1,047.6)		1,172.8
Indefinite-lived:
—Brands and trade names	513.4		(44.0)		469.4		513.4		(44.0)		469.4
Total intangible assets	$	2,722.5	$	(1,119.0)	$	1,603.5

Gates Industrial Corp plc [GTES] Filings
10-Q	[2022-05-04]
10-K	[2022-02-11]
10-Q	[2021-11-08]
10-Q	[2021-08-09]
10-Q	[2021-05-11]
10-K	[2021-02-10]
10-Q	[2020-11-04]
10-Q	[2020-08-05]
10-Q	[2020-05-06]
10-K	[2020-02-21]
10-Q	[2019-11-06]
10-Q	[2019-08-07]
10-Q	[2019-05-08]
10-K	[2019-02-14]
10-Q	[2018-11-02]
10-Q	[2018-08-02]
10-Q	[2018-05-03]
10-K	[2018-03-15]
S-1	[2017-12-27]