S-1 1 d432864ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on December 27, 2017.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Gates Industrial Corporation plc

(Exact Name of Registrant as Specified in its Charter)

 

 

 

England and Wales   3560   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1551 Wewatta Street

Denver, Colorado 80202

Telephone: (303) 744-4876

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Jamey S. Seely

Executive Vice President and General Counsel

1551 Wewatta Street

Denver, Colorado 80202

Telephone: (303) 744-4876

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Edgar J. Lewandowski

Jonathan R. Ozner

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Telephone: (212) 455-2000

 

Clare Gaskell

Simpson Thacher & Bartlett LLP

CityPoint, One Ropemaker Street

London EC2Y 9HU

England

Telephone: +44-(0)20-7275-6500

 

Michael Kaplan

Marcel Fausten

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

Telephone: (212) 450-4000

 

 

Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  

Proposed

Maximum

Aggregate

Offering Price(1)(2)

   Amount of
Registration Fee

Ordinary shares, par value $0.01 per share

   $100,000,000    $12,450

 

 

(1) Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes ordinary shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated December 27, 2017

Preliminary Prospectus

             Shares

 

 

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Gates Industrial Corporation plc

Ordinary Shares

 

 

Gates Industrial Corporation plc is offering              ordinary shares. This is our initial public offering and no public market currently exists for our ordinary shares. We anticipate that the initial public offering price will be between $         and $         per share.

We have applied to list our ordinary shares on the New York Stock Exchange (“NYSE”) under the symbol “GTES.”

After the completion of this offering, affiliates of The Blackstone Group L.P. will continue to own a majority of the voting power of ordinary shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Management—Controlled Company Exception” and “Principal Shareholders.”

 

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 26 to read about factors you should consider before buying our ordinary shares.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                   $               

Underwriting discounts and commissions(1)

   $      $  

Proceeds, before expenses, to us

   $      $  

 

(1) See “Underwriting (Conflicts of Interest)” for additional information regarding underwriting compensation.

We have granted the underwriters the right to purchase up to an additional             ordinary shares to cover over-allotments, if any.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of the securities or determined if the prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ordinary shares to purchasers on or about                 , 2018.

 

 

 

Citigroup    Morgan Stanley       UBS Investment Bank

 

 

 

Barclays   Credit Suisse   Goldman Sachs & Co. LLC       RBC Capital Markets

 

 

 

Blackstone Capital Markets     Deutsche Bank Securities        Wells Fargo Securities
Current Capital Securities LLC    KeyBanc Capital Markets        Siebert Cisneros Shank & Co., L.L.C.

 

SunTrust Robinson Humphrey           Academy Securities   BTIG   Guggenheim Securities

 

 

The date of this prospectus is                 , 2018.


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PREMIER RECOGNIZED BRAND LEADING MARKET POSITIONS
GATES


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GATES
HISTORY OF SUCCESSFUL INNOVATION
Innovation fueled by materials science
OPERATING EXCELLENCE DRIVING MARGIN EXPANSION
Gates Operating System focused on continuous improvement and driving best-practice deployment across all functions
PRODUCT AND CATALOG COVERAGE OF APPLICATION-CRITICAL COMPONENTS
Broad catalog coverage of highly engineered power transmission and fluid power products
PROVEN MANAGEMENT TEAM
Each with long tenures at premier industrial companies


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64% OF FISCAL 2016 NET SALES FROM REPLACEMENT CHANNELS


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STRONG MARGINS AND CASH FLOW FROM OPERATIONS


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GLOBAL PRESENCE, CHANNEL BREADTH AND LONG-STANDING CUSTOMER RELATIONSHIPS OVER 100 LOCATIONS IN 30 COUNTRIES GATES GLOBAL HEADQUARTERS DENVER, COLORADO, EMEA HEADQUARTERS BRUSSELS, BELGIUM GREATER CHINA HEADQUARTERS SHANGHAI, CHINA EAST ASIA & INDIA HEADQUARTERS SINGAPORE
NORTH AMERICA 15 MANUFACTURING FACILITIES 12 SALES OFFICES 14 WAREHOUSES 2 R&D LOCATIONS 2 O&G SERVICE CENTERS SOUTH AMERICA 2 MANUFACTURING FACILITIES 2 SALES OFFICES 2 WAREHOUSES EUROPE, MIDDLE EAST, AFRICA (EMEA) 13 MANUFACTURING FACILITIES 17 SALES OFFICES 9 WAREHOUSES 2 R&D LOCATIONS 8 O&G SERVICE CENTERS GREATER CHINA (GC) 6 MANUFACTURING FACILITIES 5 SALES OFFICES 7 WAREHOUSES 1 R&D LOCATION 1 O&G SERVICE CENTER EAST ASIA & INDIA (EA&I) 7 MANUFACTURING FACILITIES 17 SALES OFFICES 3 WAREHOUSES 2 R&D CENTERS 2 O&G SERVICE CENTERS


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Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, our ordinary shares only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our ordinary shares. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including             , 2018 (the 25th day after the date of this prospectus), all dealers effecting transactions in our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ordinary shares and the distribution of this prospectus outside of the United States.

 

 

Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of their over-allotment option to purchase up to an additional              ordinary shares from us and that the ordinary shares to be sold in this offering are sold at $                 per share, which is the midpoint of the price range indicated on the front cover of this prospectus.

 

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ABOUT THIS PROSPECTUS

Financial Statement Presentation

This prospectus includes certain historical consolidated financial and other data for Omaha Topco Ltd., an exempted company incorporated in the Cayman Islands with limited liability (“Omaha Topco”). Omaha Topco will be considered our predecessor for financial reporting purposes. Omaha Topco was formed by Blackstone (as defined below) primarily as a vehicle to finance the acquisition in July 2014 of the entire equity interest in Pinafore Holdings B.V. for $5.4 billion (the “Acquisition”) by investment funds managed by Blackstone. Following the Acquisition, Pinafore Holdings B.V. and its subsidiaries (the “Pre-Acquisition Predecessor”) is the predecessor to the group comprised of Omaha Topco and its subsidiaries (the “Post-Acquisition Predecessor”). The last day of the fiscal year for the Pre-Acquisition Predecessor’s annual consolidated financial statements is December 31. Comparative information is presented for the Pre-Acquisition Predecessor for the period from January 1, 2014 through July 2, 2014 (“Pre-Acquisition Predecessor 2014”).

The last day of the fiscal year for the Post-Acquisition Predecessor’s annual consolidated financial statements is the Saturday nearest December 31. Accordingly, the Post-Acquisition Predecessor’s consolidated financial statements are presented for the periods from January 3, 2016 to December 31, 2016 (“Fiscal 2016”), January 4, 2015 to January 2, 2016 (“Fiscal 2015”) and July 3, 2014 to January 3, 2015 (“Post-Acquisition Predecessor 2014”). The combination of the Post-Acquisition Predecessor 2014 and Pre-Acquisition Predecessor 2014 periods is referred to as “Full Year 2014.”

The last day of the fiscal quarters for our interim consolidated financial statements is the Saturday nearest March 31, June 30 and September 30, for the fiscal first quarter, second quarter and third quarter, respectively. This prospectus contains unaudited Post-Acquisition Predecessor condensed consolidated financial statements that present the results of Post-Acquisition Predecessor’s operations for the nine months ended September 30, 2017 and the nine months ended October 1, 2016.

Gates Industrial Corporation plc will be the financial reporting entity following this offering. Prior to the completion of this offering, we will undertake certain reorganization transactions (the “pre-IPO reorganization transactions”) so that Gates Industrial Corporation plc will indirectly own all equity interests in Omaha Topco and will become the holding company of our business. In connection with the pre-IPO reorganization transactions, our Sponsor and the other equity owners of Omaha Topco will receive ordinary shares in Gates Industrial Corporation plc in consideration for their equity in Omaha Topco. The reorganization will be accounted for as a transaction between entities under common control and the net assets will be recorded at the historical cost basis when the entities are contributed into Gates Industrial Corporation plc. Other than the inception balance sheet, the financial statements of Gates Industrial Corporation plc have not been included in this prospectus as it is a newly organized entity, has no significant business transactions or activities to date, has no capitalization, and had no assets or liabilities during the periods presented in this prospectus.

Certain monetary amounts, percentages and other figures included elsewhere in this prospectus 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.

Certain Definitions

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

 

    “Gates,” the “Company,” “we,” “us” and “our” refer (1) prior to the consummation of this offering and the pre-IPO reorganization transactions, to Omaha Topco and its consolidated subsidiaries and (2) after the consummation of this offering and the pre-IPO reorganization transactions, to Gates Industrial Corporation plc and its consolidated subsidiaries;

 

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    “Blackstone” or “our Sponsor” refer to investment funds affiliated with The Blackstone Group L.P., our current majority owners;

 

    “car parc” refers to the number of light vehicles in a region, it is typically used to gauge the size of replacement markets within a region;

 

    “notes issuers” refers to Gates Global LLC, a Delaware limited liability company and indirect subsidiary of Omaha Topco, and Gates Global Co., a Delaware corporation and subsidiary of Gates Global LLC, which co-issued our senior notes; and

 

    “Pre-IPO owners” refer to our Sponsor together with the other owners of Omaha Topco prior to this offering and after giving effect to the pre-IPO reorganization transactions.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our ordinary shares. You should read this entire prospectus carefully, including the section entitled “Risk Factors” and the financial statements and the related notes thereto included elsewhere in this prospectus, before you decide to invest in our ordinary shares.

Gates Overview

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. Our revenue has historically been highly correlated with industrial activity and utilization, and not with any single end market given the diversification of our business and high exposure to replacement markets. Key indicators of our performance include industrial production, industrial sales and manufacturer shipments. We sell our products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation; this reputation has been built for over a century since Gates’ founding in 1911. Within the diverse end markets we serve, our highly engineered products are 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.

During Fiscal 2016, we generated $2,747.0 million in net sales to over 8,000 customers in 128 countries, our net income was $84.3 million and our Adjusted EBITDA was $594.9 million, representing an Adjusted EBITDA margin of 21.7%, an increase of 180 basis points from Fiscal 2015. During Fiscal 2015, we generated $2,745.1 million in net sales, our net income was $50.9 million and our Adjusted EBITDA was $547.2 million, representing an Adjusted EBITDA margin of 19.9%. During the nine months ended September 30, 2017, our net sales increased 8.7% to $2,259.9 million compared to $2,079.3 million for the nine months ended October 1, 2016, our net income was $52.5 million for the nine months ended September 30, 2017, compared to $69.0 million in the prior year period, and our Adjusted EBITDA increased 11.0% to $496.1 million, compared to $447.0 million in the prior year period, resulting in an Adjusted EBITDA margin of 22.0%, a 50 basis point increase compared to the prior year period. As of September 30, 2017, our total indebtedness was approximately $3,916.1 million, or $             million on a pro forma basis after giving effect to this offering and the use of proceeds therefrom. For reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), see “—Summary Historical Consolidated Financial Information.”

Financial Metrics for the Nine Months ended September 30, 2017

 

 

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Gates’ business is well-balanced and diversified across products, channels and geographies, which is highlighted in the following charts showing breakdowns of our Fiscal 2016 net sales of $2,747 million.

 

 

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Our History and Recent Developments

Gates was founded in 1911 by Charles C. Gates and since then has been recognized as an innovator in the power transmission and fluid power markets. Gates operated as a family-owned company until 1996, when it was acquired by Tomkins plc, a broad, industrial conglomerate based in the United Kingdom. In 2010, Tomkins was acquired by Onex Partners and the Canada Pension Plan Investment Board, who proceeded to divest the individual Tomkins companies. Gates was acquired by funds affiliated with The Blackstone Group L.P. in July 2014.

In 2015, Gates established a new executive leadership team with the appointment of Ivo Jurek as Chief Executive Officer and David Naemura as Chief Financial Officer. Under the new leadership team, investments have been made to shift the organization from a regional model to a global product-line model by building out a global product-line management function and globalizing our engineering teams into product-line focused groups. This shift has allowed us to develop global, market-facing product strategies and product roadmaps to better align and focus our resources on executing our growth initiatives. We have continued to invest in, upgrade and expand our regionally-based commercial teams. During this time we also implemented a global functional structure across our human resources, information technology, finance, legal, research and development (“R&D”) and operations teams. These global functional teams are driving consistency of best-practice processes across each function, improving our performance and efficiency. These initiatives fall under the Gates Operating System (“GOS”), a philosophy of continuous improvement and standardized best practices which we have deployed across our organization. The implementation of this system has resulted in increased productivity, reduced costs and contributed to margin improvements since 2014.

We have developed an active acquisition pipeline and the organizational capability to integrate acquired companies. In 2017 to date, we have closed two transactions, Techflow Flexibles in the United Kingdom and Atlas Hydraulics in North America, both focused on expanding our presence in industrial markets with new products, capabilities, capacity and geographic reach. We believe that our global functional excellence, product-line focus and strong commercial teams provide a solid foundation to deliver on our continuous improvement and organic growth initiatives, supplemented by our ability to execute on inorganic opportunities.

 



 

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Our Solutions

We operate our business on a product-line basis through our two reporting segments—Power Transmission and Fluid Power—and participate in a diverse set of applications across numerous industrial end markets, as well as many consumer markets. In these markets, widely recognized macro trends such as population growth, urbanization, infrastructure build out, industrial automation and increased energy efficiency, are expected to support long-term demand for our products. Our strengths, combined with the inherent value propositions our products deliver, position us well to serve our customers in these markets.

Our highly engineered power transmission and fluid power products are often critical to the functioning of the equipment, process or system in which they are components, creating a dynamic where the cost of downtime or potential equipment damage is high relative to the cost of our products. For example, on an agricultural harvester, we estimate that the cost of system downtime during harvest season is approximately $5,300 per hour, whereas the cost of a replacement hydraulic hose assembly is approximately $300. Industrial synchronous drives, which can cost an end user as little as $75, are widely used to power key systems in industrial facilities. Failure of these drives can stop production and result in significant downtime costs. Because the cost of our products is low relative to the cost of downtime or equipment damage, our products are not only replaced as a result of normal wear and tear, but also preemptively as part of ongoing maintenance to the broader system.

 

 

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Power Transmission. Our Power Transmission solutions enable and control motion. They are used in applications in which belts, chains, cables, geared transmissions or direct drives transfer power from an engine or motor to another part or system. Belt-based power transmission drives typically consist of either a synchronous belt or an asynchronous belt (V-belt, CVT belt or Micro-V® belt) and related components (sprockets, pulleys, water pumps, tensioners or other accessories). Within our Power Transmission segment, we offer solutions across the following key application platforms:

 

    Stationary drives: fixed drive systems such as those used in a factory driving a machine or pump, or on a grain elevator driving the lift auger.

 

    Mobile drives: drives on a piece of mobile machinery such as a combine harvester or a road compactor, or in applications such as the brush head of a vacuum cleaner.

 



 

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    Engine systems: synchronous drives and related components for cam shafts and auxiliary drives and asynchronous accessory drives for air conditioning (“A/C”) compressors, power steering, alternators and starter/generator systems.

 

    Personal mobility: drives on motorcycles, scooters, bicycles, snowmobiles and other power sports vehicles that are used to transfer power between the power source and the drive wheel(s) or track.

 

    Vertical lift: elevators, cargo lifts and other applications in which a belt, cable, chain or other lifting mechanism is used to carry load.

Customers choose power transmission solutions based on a number of factors, including application requirements such as load, speed, gear ratio, temperature, operating environment, ease of maintenance, noise, efficiency and reliability, as well as the support they receive from their suppliers, including application-specific engineering. Belt-based drive systems have many advantages over other alternatives, as they are typically:

 

•    Clean

 

•    Light-weight

•    Low maintenance

 

•    Compact

•    Lubrication free

 

•    Energy efficient

•    Quiet

 

•    Durable

•    Low vibration

 

•    Reliable

In applications where these advantages are valued, customers typically choose belts over other forms of power transmission solutions.

Fluid Power. Our Fluid Power solutions are used in applications in which hoses and rigid tubing assemblies either transfer power hydraulically or convey fluids, gases or granular materials from one location to another. Within our Fluid Power segment, we offer solutions across the following key application platforms:

 

    Stationary hydraulics: applications within stationary machinery, such as an injection molding machine or a manufacturing press.

 

    Mobile hydraulics: applications used to power various implements in mobile equipment used in construction, agriculture, mining and other heavy industries.

 

    Engine systems: applications for engine systems such as coolant, fuel, A/C, turbocharger, air intake and selective catalytic reduction (“SCR”) for diesel emissions.

 

    Other industrial: applications in which hoses are used to convey fluids, gases or granular material across several industries such as oil and gas drilling and refining, food and beverage and other process industries.

Customers choose fluid power solutions based on a number of factors including application-specific product performance parameters such as pressure and temperature ratings, corrosion and leak resistance, weight, flexibility, abrasion resistance and cleanliness, as well as compliance with standards and product availability. Attributes associated with the supplier, including brand, global footprint and reputation for reliability and quality, are also considered.

 



 

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Our Channels

We sell our high-performance power transmission and fluid power products both as replacement components and as specified components on original equipment to customers worldwide. For Fiscal 2016, approximately 64% of our net sales were generated from replacement markets and 36% from first-fit markets globally. Our mix of replacement sales to first-fit sales varies by region based on our market strategy and the maturity of the equipment fleet and replacement channel. For example, in emerging markets such as China, our business is characterized by a higher first-fit presence, given the relatively underdeveloped replacement channels and newer car parc. In China and East Asia, approximately 40% of our Fiscal 2016 net sales were generated from replacement markets. As these markets mature, we believe that our first-fit market presence will drive growth in our replacement business. By contrast, in North America and Europe, where there are long-established replacement markets, approximately 73% and 68% of our Fiscal 2016 net sales, respectively, were derived from these higher-margin replacement channels.

Replacement. The majority of our sales are generated from customers in replacement channels, who primarily serve a large base of installed equipment that follows a natural maintenance cycle. Our ability to help replacement channel partners maximize revenue is core to our value proposition. These customers miss sales opportunities if a required product cannot be obtained quickly, either from a catalog or on-hand inventory. We believe that our broad product portfolio, which consisted of approximately 370,000 stock-keeping units (“SKUs”) in Fiscal 2016, constitutes the broadest range of power transmission and fluid power products in the markets we serve. Our customers value the ability to easily access this broad product portfolio through our comprehensive range of application-based catalogs. Our product and catalog coverage, combined with our quality and consistently high fill rates, make Gates a preferred supplier for over 6,000 customers in our replacement markets, where timely product availability is crucial.

The total value proposition we provide to replacement channel customers extends beyond the breadth of our product portfolio and catalog coverage, and the quality of our products. Our complementary suite of services, digital tools and other content enhances the value of our products to distributors, installers and end users of equipment containing our products. Our sales and marketing organization offers customer training on product installation and early identification of wear-and-tear on components, which helps drive sales for our channel customers while mitigating the risk of equipment failure for end users. We have a long history of focusing on customer engagement and training, driving product innovation and providing best-in-class inventory management and order fulfillment services. We believe that our ability to maintain a consistently high level of customer satisfaction drives continued loyalty from our customer base.

First-Fit. Our first-fit customers demand high levels of performance, quality and service, and expect that we continuously innovate. We work closely with our customers by providing application engineering expertise to assist them in selecting the right products for their applications. For example, in industrial markets, we provide a variety of application engineering support that ranges from self-service design tools to field application engineers who act as design consultants on projects. In engine systems, we are one of the only suppliers providing application engineering for cam drive and accessory drive applications, and completing all design and manufacturing of the system components in-house. Close interactions between our R&D organization and customer technical teams provide important input into our innovation and product development processes and have resulted in many of our product innovations. We selectively participate in first-fit projects, focusing on opportunities where we are able to differentiate with technology and innovative solutions. Whether or not we are a direct supplier to an equipment manufacturer, we still experience strong pull-through demand from end users who specifically request Gates-branded products in the replacement market.

 



 

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Our Geographies

Our products are sold in 128 countries across our four commercial regions: (1) the Americas; (2) Europe, Middle East & Africa (“EMEA”); (3) Greater China (“China”); and (4) East Asia & India (“East Asia”). We have a long-standing presence in each of these regions, and our commercial teams have demonstrated a track record of growing in emerging markets. These commercial capabilities are complemented by our global manufacturing footprint, which frequently allows us to manufacture products in close proximity to our customers. We have power transmission and fluid power operations in each commercial region and typically manufacture products for both first-fit customers and replacement customers in the same factory, which provides improved factory loading and demand leveling, as well as optimization of capital expenditures. Our “in-region, for-region” footprint and extensive distribution network provide us with a “close-to-customer” local mindset that enables rapid response for our customer base. This combination of capabilities enhances our value proposition and strengthens our customer relationships.

Our Diverse Industries and End Markets

We participate in many sectors of the industrial and consumer markets. Our products play essential roles in a diverse range of applications across a wide variety of end markets ranging from harsh and hazardous industries such as agriculture, construction, manufacturing and energy, to everyday consumer applications such as printers, power washers, automatic doors and vacuum cleaners. Virtually every form of transportation, ranging from trucks, buses and automobiles to personal mobility vehicles such as motorcycles, scooters, bicycles, snowmobiles and other power sports vehicles, uses our products. We believe the large, diverse and global nature of the markets we serve provides attractive opportunities for profitable growth. Based on market research data, as well as our own analysis, we believe that we have a total core addressable market opportunity of approximately $59 billion. Power Transmission accounts for approximately $30 billion of the total core addressable market opportunity, divided approximately among the following product categories: $1.8 billion in synchronous drives, $3.1 billion in asynchronous drives, $7.5 billion in metals and $17.5 billion in other drive systems. Fluid Power represents approximately $29 billion of the total core addressable market opportunity, divided approximately among the following product categories: $11.2 billion in hydraulics, $14.0 billion in engine hose and $3.5 billion in industrial hose.

We believe the end markets we serve benefit from inherent growth provided by several attractive, secular long-term trends that create demand for the applications in which our products are used. Underlying all of the long-term trends is the growth of the world’s population, which is expected to reach 9.7 billion by 2050. Along with population growth comes an increased demand for water and food, the production of which is expected to increase 59% by 2050. This increased level of food production is expected to drive a corresponding increase in demand for both farming and food processing equipment. Related water demand will drive increased needs for water treatment facilities and pumping stations, all of which rely upon our products.

This population growth and a growing middle-class in emerging markets also drive an increased infrastructure build-out, which requires more construction equipment to build roads, bridges, rail systems and buildings. The world’s population also continues to urbanize, with 70% of people expected to live in cities by 2050, up from 50% today. Urbanization leads to more vertical infrastructure, and, with more people living in high rise buildings, there will be an increased need for elevators and other vertical lift systems. These trends also positively impact the transportation markets our products are used in, ranging from trucks, buses and automobiles to personal mobility vehicles such as motorcycles, scooters and bicycles. Additionally, we expect these trends to continue to generate increased demand for energy production over the long term. Oil and gas drilling and refining, alternative energy generation and mining equipment all leverage Gates products.

 



 

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Industries across the globe are also continuously investing in automation and productivity improvements. Energy efficiency, advanced technology and emerging economies are expected to continue to drive growth in the industrial automation market. As an example, new installations of industrial robots are forecast to grow at a 13% compound annual growth rate (“CAGR”) from 2017 to 2019, while the demand for 3D printing technology is also expected to increase. Belt drives generally outperform other forms of mechanical power transmission, giving even more reason to choose a belt drive versus alternatives in all of these applications.

Our revenue has historically been highly correlated with industrial activity and utilization, and not with any single end market given the diversification of our business and high exposure to replacement markets. Key indicators include industrial production, industrial sales and manufacturer shipments. We believe we are well positioned to outpace these indicators by leveraging our competitive strengths to penetrate underserved core markets.

Our Competitive Strengths

Premier Recognized Brand

We offer our products and services under the widely-recognized Gates brand across our broad end markets and geographies. Since 1911, Gates has been recognized by distributors, installers, equipment manufacturers and end users as a premier name for power transmission and fluid power products, services and solutions. We are known for our premium quality, reliability, customer service, global footprint, leading technology and breadth of product offerings. In our replacement businesses, we experience strong pull-through demand from end users who specifically request Gates-branded products from our channel partners. We believe that we are the partner of choice when major customers are developing new platforms or upgrading existing ones.

Global Presence

Our commercial and manufacturing footprint is global. With over 100 sales, R&D and operations locations around the world, we have positioned ourselves close to our customers. Our products are sold in 128 countries with approximately 53% of Fiscal 2016 net sales originating from outside of North America and approximately 26% of our Fiscal 2016 net sales originating from emerging markets. Our broad geographic footprint provides diversification from regional cyclicality and positions us to capitalize on growth opportunities in every region.

Leading Market Positions

The breadth of our catalog, our market share in many product categories and our share of available content with key customers put us in what we believe is a leading market position in most channels, regions and end markets in which we operate. With $1,862.1 million of Fiscal 2016 net sales in Power Transmission and $884.9 million of Fiscal 2016 net sales in Fluid Power, we believe we are the top global player in power transmission belts as well as a top-three global player in industrial hydraulic hose and couplings, engine systems metals and oil and gas drilling hose. In Fiscal 2016, we estimate that 42% of our net sales were generated from leading market positions, while 83% of our net sales were generated from top three market positions. These leading market positions combined with our strong brand serve as platforms from which we can extend our solution coverage in underpenetrated segments and generate sales growth in excess of our end markets.

Channel Breadth and Relationships

We believe that our regional commercial teams have established one of the broadest distribution networks in our industry, across a variety of end market-focused channels. Our distributors range from large corporations with numerous locations to small, individually-owned companies with a single location. Located in 128 countries, our

 



 

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channel partners provide global coverage and stock inventory of our products in close proximity to end users. They are able to generate demand for our products, as well as offer a point of customer service and product knowledge for end users in their local language. Many of them also have the capability to configure or assemble our products to meet diverse end-user requirements where a suitable off-the-shelf solution is not available. We have a demonstrated track record of building our presence in replacement channels in emerging markets such as Eastern Europe and South America. In regions such as Southeast Asia and China, we are leveraging this experience to build out our channel presence utilizing unique programs. These extensive distribution networks give us the ability to access a broad base of end users and to reinforce the Gates brand. We believe that this established channel represents one of the largest replacement footprints in the industry, enabling access to a large addressable market and rapid launches of new products to end users.

Product and Catalog Coverage of Application-Critical Components

Our power transmission and fluid power product portfolios in the first-fit and replacement markets are some of the broadest in our industry. We believe our product breadth simplifies our customers’ purchasing decisions and creates loyalty to us. In the automotive replacement markets, product coverage of the light vehicles in a region, or car parc, is essential for the success of our distributors and installers. Within our core synchronous and Micro-V® belt product lines, our products can be used across 99% of the North American, European and Chinese car parcs. These car parcs comprise over 70% of the global car parc of over 1.3 billion vehicles. We are focused in particular on expanding our catalog coverage in the more-fragmented car parcs in emerging markets. For our industrial markets, we also believe we maintain an industry-leading portfolio of catalogs containing both general purpose and application-specific products for a variety of end markets. We continuously invest in updating our product and catalog coverage to remain at the forefront of our industry and provide end users with convenient access to our comprehensive product portfolio.

Our highly engineered power transmission and fluid power products are often critical to the functioning of the equipment, process or system of which they are components, creating a dynamic where the cost of downtime or potential equipment damage is high relative to the cost of our products. Consequently, our products are typically replaced at regular intervals for preventative maintenance, resulting in high-margin, recurring revenue streams. Our catalog coverage, combined with the mission-critical nature of our products, makes us a valued partner to our customers.

History of Successful Innovation

We have a storied history of successful innovation, from commercializing the V-belt to pioneering the use of certain synthetic elastomers in serpentine belts. We believe that our materials science expertise forms the foundation of our innovation capabilities. Our products must be light-weight, withstand extreme temperature, pressure and load conditions, resist wear, maintain flexibility, avoid corrosion and fulfill other critical application requirements, all of which can only be met using the latest advancements in materials science technologies. For example, we believe our carbon fiber technologies are best-in-class and continue to support our leadership position in several industrial power transmission product categories. Our carbon fiber-based products outperform competitive offerings, further strengthening our leadership position. In addition, we have ongoing programs to develop Internet of Things (“IoT”) solutions enabling remote monitoring and predictive diagnostics. These programs, along with other digital tools, improve the overall value proposition we deliver to our customers.

We hold a substantial patent portfolio consisting of approximately 2,600 issued and filed patents, and have spent approximately 2% of net sales during each of the last three fiscal years on ongoing R&D activities. We employ over 500 engineers globally who are dedicated to product and technology development. Many of these engineers work closely with our customers to design and develop application-specific solutions that not only solve immediate customer needs but also feed into our broader innovation development efforts. Our R&D group

 



 

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works closely with our product line management team to ensure that our product and technology development roadmaps are closely tied to our growth initiatives.

Operating Excellence Driving Margin Enhancement

The Gates Operating System philosophy is our overarching business system that drives a culture of continuous improvement and consistent application of best-practices across all functions of the organization. Within the Gates Operating System, the operations-focused Gates Production System (“GPS”) has been deployed throughout our manufacturing facilities to optimize our production efficiency. We have made significant improvements in factory productivity which have reduced production costs and freed up manufacturing capacity. We have also implemented highly effective sourcing programs that leverage the latest e-auction tools and programs to insource selected components. Our Value Analysis/Value Engineering (“VA/VE”) capability allows us to optimize select product designs for cost and performance to meet broader market requirements and improve profitability. The Gates Program Management System (“GPMS”) has also been deployed to improve how we manage customer programs, new product development projects and advanced technology projects. The implementation of the Gates Operating System has contributed to gross margin expansion of 280 basis points from Fiscal 2015 gross margin to our gross margin of 40.5% for the first nine months of 2017.

Strong Margins and Cash Flows from Operations

Our operating model is designed to generate strong profit margins and cash flows from operations. As a result of our new management team’s operating initiatives and our ongoing focus on continuous improvement, we have demonstrated a track record of margin improvement. Our margins are supported by our premier brand, superior product attributes, high service levels, operational scale and efficiency and our relationships with our customers. We have identified several additional cost-savings opportunities focused on improving productivity in our plants and expanding the scope of central procurement. We also have ongoing initiatives to improve inventory turns through lean manufacturing techniques and common product designs. Our capital expenditures have been strategically deployed to fund innovation and organic growth opportunities. We expect our continued focus on operational excellence and cost discipline to improve profit margins and working capital performance.

Proven Management Team

We have an experienced leadership team comprised of high-caliber individuals, each with long tenures at premier industrial companies. Our executive leadership team is led by Chief Executive Officer, Ivo Jurek, who previously served as President of Eaton’s Electrical business in Asia Pacific, and Chief Financial Officer, David Naemura, who previously served as Group CFO for the Test and Measurement Segment at Danaher Corporation. This new leadership team has transformed the organization from a regional to a global product-line based model, while investing in new talent across all functions of the organization and developing a culture of continuous improvement, innovation and growth.

Our Growth Strategies

Our growth strategies are aimed at penetrating an estimated $59 billion addressable market by leveraging our iconic brand, product portfolio, customer relationships and other competitive strengths.

Further Penetrate Industrial Power Transmission Applications

We are targeting specific opportunities within our existing industrial end markets and product portfolio to further penetrate industrial power transmission applications, particularly those currently driven by competing technologies, including roller chain, direct drive systems, gearboxes and steel cable. We estimate that belt-drives constitute approximately 25% of all industrial drive systems, with the largest portion being driven by chain and steel cable. This presents a significant and attractive opportunity for us to grow by leveraging our brand,

 



 

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distribution channel presence and the fundamental value proposition of belt-drive systems. Industrial belt-drive systems often compare favorably to other types of industrial drive systems in terms of their quiet, low-maintenance and efficient operation, as well as being relatively light-weight.

Materials science-based advances in our product portfolio provide us with opportunities to displace competing drive systems in larger, high-torque applications that belt drives have historically been unable to address. We are also able to utilize our application engineering capabilities to complement our product strength by assisting end users in optimal drive system design.

Extend Product Line in Fluid Power

Gates products compete in the premium segment of the market, where customers value quality, portfolio breadth and design capability. Customers in this segment use our products in numerous, demanding applications with a wide range of performance requirements. For example, there can be different product performance requirements for different hydraulic circuits within the same piece of construction equipment.

Through materials science-based innovation, VA/VE and process engineering we will continue to broaden our portfolio of fit-for-purpose fluid power products, optimizing their performance for different customer applications. This ongoing investment substantially increases the size of our addressable market and enables us to capture even more of the premium segment.

Drive Technical Innovation in Our Markets

We continue to invest in advanced development programs and our core R&D capabilities to ensure that we remain at the forefront of innovation and product performance in our markets. We have established global centers of excellence that specialize in different functional areas of R&D with special emphasis on materials science and advanced modeling techniques. We utilize long-standing relationships with our blue-chip customers to design products that meet or exceed their anticipated future performance requirements. Our commitment to continue to invest in these relationships and our R&D capabilities strengthens our position to serve our core replacement markets with highly innovative and differentiated products to further increase the strength of our brand.

Continue to Grow and Invest in Emerging Markets

We have a long-standing presence in key emerging markets and a track record of driving growth from the early stages of a market’s development. We have successfully entered these markets by focusing on first-fit partnerships to establish our brand while building out our channels to serve the replacement base. Emerging markets continue to exhibit higher growth rates than mature markets due to a number of factors, such as increases in industrial production, mechanization, urbanization, infrastructure development and vehicle ownership. To capitalize on these trends, we will continue to build out our catalog coverage, develop regionally appropriate product portfolios, expand our channel coverage and optimize regional manufacturing capacity.

Pursue Strategic Acquisitions

We intend to continue to strategically pursue and execute acquisitions to accelerate our growth strategies. Our markets are highly fragmented, providing numerous inorganic opportunities for us to expand our reach and capabilities. We maintain a disciplined approach to acquisitions and target strategic opportunities where we can realize synergies by leveraging our brand, channel presence, operating culture, global reach and other core competencies. We recently completed two acquisitions that were aligned with this philosophy: Techflow Flexibles in June 2017 and Atlas Hydraulics in October 2017.

 



 

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Our Organizational Structure

Gates Industrial Corporation plc is a newly formed public limited company that was organized under the laws of England and Wales on September 25, 2017 and currently has no significant business transactions or activities. Prior to the completion of this offering, we will undertake the pre-IPO reorganization transactions so that Gates Industrial Corporation plc will indirectly own all equity interests in Omaha Topco and will become the holding company of our business. In connection with the pre-IPO reorganization transactions, our Sponsor and the other equity owners of Omaha Topco will receive depositary receipts representing ordinary shares in Gates Industrial Corporation plc in consideration for their equity in Omaha Topco, at a ratio of              of our ordinary shares for each outstanding share of Omaha Topco. The reorganization will be accounted for as a transaction between entities under common control and the net assets will be recorded at the historical cost basis when the entities are contributed into Gates Industrial Corporation plc.

The following diagram depicts our organizational structure and equity ownership immediately following the pre-IPO reorganization transactions and after giving effect to this offering and the use of a portion of the proceeds therefrom to redeem our £50,000 redeemable preference share issued in connection with the pre-IPO reorganization transactions. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

 

LOGO

 

(1) After the completion of this offering and the use of a portion of the proceeds therefrom to redeem our £50,000 redeemable preference share issued in connection with the pre-IPO reorganization transactions, our pre-IPO owners will own depositary receipts representing             % of our ordinary shares (or             % if the underwriters exercise their over-allotment option in full) and public shareholders will own             % of our ordinary shares (or             % if the underwriters exercise their over-allotment option in full).

 



 

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Our Sponsor

Blackstone (NYSE: BX) is one of the world’s leading investment firms. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, hedge fund solutions, credit-oriented funds and closed-end mutual funds. Through its different businesses, Blackstone had total assets under management of approximately $387.4 billion as of September 30, 2017.

After the completion of this offering, our Sponsor will beneficially own approximately             % of our ordinary shares (or             % if the underwriters exercise their over-allotment option in full). As a result, we will be a “controlled company” within the meaning of the NYSE corporate governance standards. Under these corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards, including the requirements (1) that a majority of our board of directors consist of independent directors, (2) that our board of directors have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) that our board of directors have a nominating and corporate governance committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. For at least some period following this offering, we intend to utilize these exemptions. As a result, immediately following this offering, we do not expect a majority of our directors will be independent or that any committees of the board will be comprised entirely of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to these corporate governance requirements. In the event that we cease to be a “controlled company” and our ordinary shares continue to be listed on the NYSE, we will be required to comply with these provisions within the applicable transition periods.

Investment Risks

An investment in our ordinary shares involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to an investment in our Company include, among other things, the following:

 

    conditions in the global and regional economy and the major end markets we serve may materially and adversely affect the business and results of operations of our businesses should they deteriorate;

 

    we are subject to economic, political and other risks associated with international operations, and this could adversely affect our business and our strategy to capitalize on our global reach;

 

    if we are unable to obtain raw materials at favorable prices in sufficient quantities, or at the time we require them, our operating margins and results of operations may be materially adversely affected;

 

    adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key channel partners could adversely affect our business, financial condition and results of operations;

 

    we face competition in all areas of our business and may not be able to successfully compete with our competitors, which could adversely affect our revenues and profitability;

 

    pricing pressures from our customers may materially adversely affect our business;

 

    we are dependent on the continued operation of our manufacturing facilities and we may need to make investments in new or existing facilities;

 

    we may not be able to accurately forecast demand or meet significant increases in demand for our products;

 



 

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    we are subject to risks from litigation, legal and regulatory proceedings and obligations that may materially impact our operations;

 

    if we fail to comply with anti-corruption laws in various jurisdictions, as well as other laws governing our international operations, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could materially adversely affect our business, financial condition and results of operations;

 

    failure to develop, obtain, enforce and protect intellectual property rights or liability for intellectual property infringement could adversely affect our competitive position;

 

    our substantial leverage could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry or our ability to pay our debts, and could divert our cash flow from operations to debt payments; and

 

    our Sponsor and its affiliates control us, and their interests may conflict with ours or yours in the future.

Please see “Risk Factors” for a discussion of these and other factors you should consider before making an investment in our ordinary shares.

 

 

Gates Industrial Corporation plc was organized under the laws of England and Wales on September 25, 2017. Our registered address is 35 Great St. Helen’s, London EC3A 6AP, United Kingdom. Our principal executive offices are located at 1551 Wewatta Street, Denver, Colorado 80202 and our telephone number is (303) 744-4876.

Recent Developments

Preliminary Estimated Unaudited Financial Results for the Fiscal Year Ended December 30, 2017

The data presented below reflects our preliminary estimated unaudited financial results for the fiscal year ended December 30, 2017 (“Fiscal 2017”) based upon information available to us as of the date of this prospectus. This data is not a comprehensive statement of our financial results for Fiscal 2017, and our actual results may differ materially from this preliminary estimated data. We have not completed our audit for Fiscal 2017. During the course of the preparation of our financial statements and related notes and the completion of the audit for Fiscal 2017, additional adjustments to the preliminary estimated financial information presented below may be identified. Any such adjustments may be material. Our independent registered public accounting firm, Deloitte & Touche LLP, has not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial data and, accordingly, Deloitte & Touche LLP does not express an opinion or any other form of assurance with respect thereto.

 



 

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Based upon such preliminary estimated financial results, we expect various key metrics for Fiscal 2017 to be between the ranges set out in the following table, as compared to Fiscal 2016:

 

     Preliminary Fiscal 2017      Fiscal 2016  
(dollars in millions, except percentages)    Low      High         

Net sales

   $                   $                   $ 2,747.0  

Gross profit

           1,060.8  

Gross margin

     %        %        38.6

Income from continuing operations before taxes

           92.9  

Adjusted EBITDA

           594.9  

Adjusted EBITDA Margin

     %        %        21.7

The following table sets forth a reconciliation of our income from continuing operations before taxes to EBITDA and Adjusted EBITDA for the periods indicated. EBITDA and Adjusted EBITDA are not GAAP measures and should not be considered in isolation, or as a substitute for our results as reported under GAAP. We believe income from continuing operations before taxes is an appropriate measure for the reconciliation given that we have only recently completed the financial close process for Fiscal 2017 and have not had adequate time to complete our year-end tax accounting procedures, including an analysis of the pending and uncertain effects of the Tax Cuts and Jobs Act. Accordingly, there is a higher degree of complexity and lower visibility with respect to income tax accounting effects on our results for Fiscal 2017, including the need to adjust (or re-measure) deferred tax liabilities and deferred tax assets, as well as evaluate the valuation allowance for Fiscal 2017. We do not have the necessary information available, prepared, or analyzed to develop a reasonable estimate of the tax provisions for Fiscal 2017 and therefore an estimate has not been disclosed at this time. See “—Summary Historical Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for a discussion on how we define and calculate Adjusted EBITDA and a discussion of why we believe this measure is important.

 

     Preliminary Fiscal 2017      Fiscal 2016  
(dollars in millions)    Low      High         

Income from continuing operations before taxes

   $                   $                   $ 92.9  

Equity in net income of equity investees

           0.1  

Gain (loss) on disposal of discontinued operations

           12.4  

Net finance costs

           205.9  

Amortization

           149.5  

Depreciation

           91.3  
  

 

 

    

 

 

    

 

 

 

EBITDA

   $      $      $ 552.1  

(Gain) loss on disposal of discounted operations

           (12.4

Equity in net income of equity method investees, net of tax

           (0.1

Shared-based compensation(a)

           4.2  

Transaction-related costs(b)

           0.4  

Inventory uplift impact on cost of sales related to acquisitions(c)

           —    

Impairment of inventory (included in cost of sales)(d)

           21.7  

Other impairments

           3.2  

Benefit from sale of inventory impaired in prior period

           (1.0

Restructuring expenses(e)

           11.4  

Adjustments relating to post-retirement benefits(f)

           6.4  

Other operating expense (income)(g)

           2.9  

Sponsor fees(h)

           6.1  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $      $      $ 594.9  
  

 

 

    

 

 

    

 

 

 

 



 

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(a) Share-based compensation has historically been provided to certain of our employees under share option, bonus and other share award schemes. We recognize a non-cash compensation expense in respect of these schemes that is based on the fair value of the awards determined at the date of grant.
(b) Transaction-related costs relate to business acquisition activity and major corporate transactions, including costs incurred in Fiscal 2017 in relation to the refinancing of certain of Gates’ indebtedness.
(c) The inventory uplift impact on cost of sales arose as part of the purchase accounting for the acquisition of Techflow Flexibles and Atlas Hydraulics.
(d) Included in this amount in Fiscal 2016 is $17.7 million related to inventory adjustments made in connection with changes Gates has made in its accounting convention for expensing maintenance, repair and operations assets below a nominal value threshold and revisions to its methods for estimating the write down for excess or obsolete raw materials and work in progress in Fiscal 2016. These changes have been made to bring consistency to our global inventory management. In addition, this line item includes the write-off of inventory related to decisions made in Fiscal 2016 to restructure or close certain lines of business in the United States and in Singapore in Fiscal 2016 and in Fiscal 2017.
(e) Restructuring expenses represent costs incurred in relation to specifically defined restructuring projects and include costs related to decisions to close lines of business, plant closures and relocations, strategic organizational rationalizations and related non-recurring employee severance.
(f) Adjustments relating to post-retirement benefits are for the non-cash net interest charge related to those obligations, gains or losses from settlements and curtailments and the non-cash amortization of prior period actuarial gains and losses.
(g) Other operating expense relates to gains and losses incurred on disposals of assets other than in the normal course of operations and gains and losses incurred in relation to non-Gates businesses disposed of in prior periods.
(h) Sponsor fees relate to fees paid to Blackstone for monitoring, advisory and consulting services. The applicable agreements will be replaced upon completion of this offering. See “Certain Relationships and Related Person Transactions—Transaction and Monitoring Fee and Support and Services Agreements.”

The following table sets forth certain preliminary estimated metrics as of and for Fiscal 2017, as compared to Fiscal 2016, Fiscal 2015 and Full Year 2014.

 

     Preliminary
Fiscal 2017
     Fiscal
2016
    Fiscal
2015
    Full
Year
2014
 
(dollars in millions)    Low      High         

Capital expenditures(a)

   $               $               $ (68.1   $ (85.8   $ (103.2

Trade accounts receivable(b)

           650.5       619.5       654.7  

Inventories(b)

           366.9       415.7       458.2  

Trade accounts payable(b)

           313.1       274.0       242.1  

 

(a) Capital expenditures include investments in manufacturing capacity between $                 and $                 for Fiscal 2017.
(b) Preliminary Fiscal 2017 data includes trade accounts receivable, inventories and trade accounts payable with respect to Techflow Flexibles and Atlas Hydraulics, acquisitions that we completed during Fiscal 2017. These line items totaled approximately $         million in the aggregate as of their respective dates of acquisition.

 



 

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THE OFFERING

 

Ordinary shares offered by us

                shares.

 

Over-allotment option to purchase additional ordinary shares from us

                shares.

 

Ordinary shares outstanding after giving effect to this offering

                shares (or                 shares if the underwriters exercise in full their over-allotment option to purchase additional ordinary shares).

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions, will be approximately $             million (or $             million if the underwriters exercise in full their over-allotment option to purchase additional ordinary shares).

 

  We intend to use the net proceeds from this offering (i) to redeem all €235.0 million ($276.5 million equivalent as of September 30, 2017) principal amount of our 5.75% senior notes due 2022 (the “euro notes”), (ii) to redeem approximately $            million principal amount of our 6.00% senior notes due 2022 (the “dollar notes” and together with the euro notes, the “senior notes”), (iii) to redeem our £50,000 redeemable preferred share issued in connection with the pre-IPO reorganization transactions and (iv) the remainder, if any, for general corporate purposes, which may include the repayment of other outstanding indebtedness.

 

Dividend policy

We have no current plans to pay dividends on our ordinary shares. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries. In addition, our ability to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing any indebtedness we or our subsidiaries may incur in the future. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our ordinary shares.

 

Conflicts of Interest

Affiliates of Blackstone Advisory Partners L.P. own in excess of 10% of our issued and outstanding ordinary shares. Because Blackstone Advisory Partners L.P. is an underwriter in this offering and its affiliates own in excess of 10% of our issued and outstanding ordinary shares, Blackstone Advisory Partners L.P. is deemed to have

 



 

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a “conflict of interest” under Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 5121. Accordingly, this offering is being made in compliance with the requirements of Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of Rule 5121. See “Underwriting (Conflicts of Interest).”

 

NYSE trading symbol

“GTES.”

In this prospectus, unless otherwise indicated, the number of ordinary shares outstanding and the other information based thereon is based on              ordinary shares outstanding as of             , 2018, after giving effect to the pre-IPO reorganization transactions, and does not reflect:

 

                 ordinary shares issuable upon exercise of the underwriters’ over-allotment option to purchase additional ordinary shares from us;

 

                 ordinary shares issuable in respect of outstanding options granted under the Gates Industrial Corporation plc 2014 Stock Incentive Plan (the “2014 Incentive Plan”) and the Gates Industrial Corporation plc 2015 Non-Employee Director Stock Incentive Plan (the “2015 Non-Employee Director Incentive Plan”) with a weighted average exercise price of $                 per ordinary share; and

 

                 ordinary shares that may be granted under the Gates Industrial Corporation plc 2018 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). See “Executive and Director Compensation—Equity Incentive Plans—Gates Industrial Corporation plc 2018 Omnibus Incentive Plan”.

 



 

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Summary Historical Consolidated Financial Information

Gates Industrial Corporation plc will be the financial reporting entity following this offering. Other than the inception balance sheet, the financial statements of Gates Industrial Corporation plc have not been included in this prospectus as it is a newly organized entity, has no significant business transactions or activities to date, has no capitalization, and had no assets or liabilities during the periods presented in this prospectus. The following table therefore sets forth the summary historical consolidated financial information of the Post-Acquisition Predecessor to Gates Industrial Corporation plc, Omaha Topco, for the periods and dates indicated. The balance sheet data as of December 31, 2016 and January 2, 2016 and the statement of operations and cash flow data for Fiscal 2016, Fiscal 2015, Post-Acquisition Predecessor 2014 and Pre-Acquisition Predecessor 2014 have been derived from the audited consolidated financial statements of Omaha Topco included elsewhere in this prospectus. The balance sheet data as of September 30, 2017 and the statement of operations and cash flow data for the nine months ended September 30, 2017 and the nine months ended October 1, 2016 have been derived from the unaudited condensed consolidated financial statements of Omaha Topco included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to present fairly the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for the full year and our historical results are not necessarily indicative of the results that should be expected in any future period. You should read the following summary consolidated financial data together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus.

The unaudited combined results of operations for Full Year 2014 represents the mathematical addition of our Pre-Acquisition Predecessor’s results of operations from January 1, 2014 to July 2, 2014, and the Post-Acquisition Predecessor’s results of operations from July 3, 2014 to January 3, 2015. We have included the unaudited combined financial information in order to facilitate a comparison with our other fiscal years. Each of the Pre-Acquisition Predecessor and Post-Acquisition Predecessor results for the period from January 1, 2014 to July 2, 2014, and the period from July 3, 2014 to January 3, 2015, respectively, have been audited and are consistent with GAAP. However, the presentation of unaudited combined financial information for Full Year 2014 is not consistent with GAAP or with the pro forma requirements of Article 11 of Regulation S-X, and may yield results that are not comparable on a period-to-period basis primarily due to (i) the impact of required purchase accounting adjustments and (ii) the new basis of accounting established in connection with the Acquisition. Such results are not necessarily indicative of what the results for the combined period would have been had the Acquisition not occurred. See “About this Prospectus—Financial Statement Presentation.”

 



 

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(dollars in millions)   Nine months
ended

September 30,
2017
    Nine months
ended

October 1,
2016
    Fiscal
2016
    Fiscal
2015
    Full Year
2014
    Post-
Acquisition
Predecessor
2014
    Pre-
Acquisition
Predecessor
2014
 

Statement of operations data:

         

Net sales

  $ 2,259.9     $ 2,079.3     $ 2,747.0     $ 2,745.1     $ 3,042.2     $ 1,445.1     $ 1,597.1  

Cost of sales

    (1,343.9     (1,262.9     (1,686.2     (1,709.0     (2,015.2     (1,028.3     (986.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    916.0       816.4       1,060.8       1,036.1       1,027.0       416.8       610.2  

Selling, general and administrative expenses

    (586.1     (570.0     (744.1     (784.5     (815.7     (415.5     (400.2

Transaction-related costs

    (11.3     —         (0.4     (0.7     (194.6     (97.0     (97.6

Impairment of intangibles and other assets

    —         (1.4     (3.2     (51.1     (0.6     (0.6     —    

Restructuring expenses

    (8.3     (8.0     (11.4     (15.6     (22.0     (8.2     (13.8

Other operating (expense) income

    0.1       0.3       (2.9     0.2       5.5       (0.1     5.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) from continuing operations

    310.4       237.3       298.8       184.4       (0.4     (104.6     104.2  

Interest expense

    (179.0     (162.4     (216.3     (212.6     (173.1     (113.6     (59.5

Other (expense) income

    (46.1     5.3       10.4       69.7       48.5       47.8       0.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before taxes

    85.3       80.2       92.9       41.5       (125.0     (170.4     45.4  

Income tax (expense) benefit

    (32.9     (15.1     (21.1     9.2       51.9       83.2       (31.3

Equity in net income of equity method investees, net of tax(1)

    —         0.1       0.1       0.2       0.5       0.3       0.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    52.4       65.2       71.9       50.9       (72.6     (86.9     14.3  

Gain (loss) on disposal of discontinued operations, net of tax

    0.1       3.8       12.4       —         (2.4     (2.3     (0.1

Loss from discontinued operations, net of tax(2)

    —         —         —         —         (47.9     —         (47.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    52.5       69.0       84.3       50.9       (122.9     (89.2     (33.7

Non-controlling interests

    (20.0     (21.2     (26.6     (26.0     (19.2     (7.7     (11.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to shareholders

  $ 32.5     $ 47.8     $ 57.7     $ 24.9     $ (142.1   $ (96.9   $ (45.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(dollars in millions)    As of 
September 30, 2017
     As of 
December 31, 2016
     As of 
January 2, 2016
 

Balance sheet data:

        

Cash and cash equivalents

   $ 528.4      $ 527.2      $ 335.7  

Property, plant and equipment, net

     637.4        599.6        660.6  

Total assets

     6,756.1        6,383.3        6,565.6  

Debt, long term and current portion

     3,915.5        3,836.6        3,907.3  

Total shareholders’ equity

     898.9        691.3        786.3  

 



 

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(dollars in millions)   Nine months
ended
September 30,
2017
    Nine months
ended

October 1,
2016
    Fiscal
2016
    Fiscal
2015
    Full Year
2014
    Post-
Acquisition
Predecessor
2014
    Pre-
Acquisition
Predecessor
2014
 

Cash flow data:

             

Net cash provided by (used in)

             

Operating activities

  $ 142.6     $ 200.4     $ 371.6     $ 275.9     $ 81.5     $ 6.3     $ 75.2  

Investing activities

    (99.8     (36.0     (60.1     (60.5     (3,801.7     (3,760.0     (41.7

Financing activities

    (58.2     (94.6     (110.8     (73.9     3,742.3       3,973.4       (231.1

 

(dollars in millions, except
percentages)
  Nine months
ended
September 30,
2017
    Nine months
ended

October 1,
2016
    Fiscal
2016
    Fiscal
2015
    Full Year
2014
    Post-
Acquisition
Predecessor
2014
    Pre-
Acquisition
Predecessor
2014
 

Other financial data:

         

Adjusted EBITDA(3)

  $ 496.1     $ 447.0     $ 594.9     $ 547.2     $ 582.9     $ 262.5     $ 320.4  

Adjusted EBITDA Margin(4)

    22.0     21.5     21.7     19.9     19.2     18.2     20.1

Adjusted Net Income(3)

  $ 168.8     $ 137.6     $ 185.0     $ 132.8     $ 199.5     $ 82.3     $ 117.2  

 

(1) Net of tax expense of $0.1 million in Full Year 2014 and Pre-Acquisition Predecessor 2014.
(2) Net of tax benefit of $0.7 million in Full Year 2014 and Pre-Acquisition Predecessor 2014.
(3) EBITDA is a non-GAAP measure that represents net income or loss for the period before the impact of income taxes, net finance costs, 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 impact comparison of the performance of our businesses either period-over-period or with other businesses. We use Adjusted EBITDA as our measure of segment profitability to assess the performance of our businesses and it is used for total Gates as well because we believe it is important to consider our profitability on a basis that is consistent with that of our operating segments. 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.

Management uses Adjusted Net Income as an additional measure of profitability. Adjusted Net Income is a non-GAAP measure that represents net income (loss) attributable to shareholders before certain items that impact comparison of the performance of our businesses either period-over-period or with other businesses. We believe that Adjusted Net Income should 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 arriving at Adjusted EBITDA and from net income (loss) attributable to shareholders in arriving at Adjusted Net Income primarily included:

 

    the effect on cost of sales of the uplift to the carrying amount of inventory held by Gates at the date of the Acquisition;

 

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

 

    transaction-related costs incurred in business combinations and major corporate transactions;

 

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

 



 

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    net interest relating to post-retirement benefit obligations, significant lump-sum settlements and the amortization of prior period actuarial gains and losses;

 

    restructuring costs;

 

    amortization of acquired intangible assets in the case of Adjusted Net Income;

 

    the impact of foreign currency exchange rate movements on financing-related items in the case of Adjusted Net Income;

 

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

 

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

 

    the non-controlling interests’ share in the other adjustments in the case of Adjusted Net Income; and

 

    the tax effects of each of the above items in the case of Adjusted Net Income.

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. Similarly, non-cash net interest relating to post-retirement benefit obligations, significant lump-sum settlements and the amortization of prior period actuarial gains and losses may cause differences between our businesses and from period to period when comparing performance. We therefore exclude from Adjusted EBITDA and Adjusted Net Income the non-cash charges in relation to share-based compensation and the above adjustments related to post-retirement benefits in order to assess the relative performance of our businesses.

We exclude from Adjusted EBITDA and Adjusted Net Income those acquisition-related costs that are required to be expensed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations,” in particular, the effect on cost of sales of the uplift to the carrying amount of inventory held by Gates at the date of the Acquisition and costs associated with major corporate transactions because we do not believe that they relate to our performance. In addition, the amortization of intangible assets recognized in respect of the Acquisition hinders comparability of Gates to similar businesses that, for reasons of not having been recently acquired, do not recognize these acquisition-related intangible assets on their balance sheets and hence do not report any related amortization. Other items are excluded from Adjusted EBITDA and Adjusted Net Income 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 costs that reflect specific actions taken by management to improve Gates’ future profitability; 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; impairments of goodwill and significant impairments of other assets, representing the excess of their carrying amounts over the amounts that are expected to be recovered from them in the future; fees paid to our private equity sponsor; and in the case of Adjusted Net Income, the impact of foreign currency exchange rate movements on financing-related items.

EBITDA, Adjusted EBITDA and Adjusted Net Income 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 (loss) from continuing operations for the period.

 



 

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Adjusted EBITDA

The following table reconciles the net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:

 

(dollars in millions)   Nine months
ended
September 30,
2017
    Nine months
ended

October 1,
2016
    Fiscal
2016
    Fiscal
2015
    Full Year
2014
    Post-
Acquisition
Predecessor
2014
    Pre-
Acquisition
Predecessor
2014
 

Net income (loss)

  $ 52.5     $ 69.0     $ 84.3     $ 50.9     $ (122.9   $ (89.2   $ (33.7

Income tax expense (benefit)

    32.9       15.1       21.1       (9.2     (51.9     (83.2     31.3  

Net finance costs

    225.1       157.1       205.9       142.9       124.6       65.8       58.8  

Amortization

    98.3       116.2       149.5       165.6       148.1       87.6       60.5  

Depreciation

    59.9       72.4       91.3       104.3       96.5       49.5       47.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    468.7       429.8       552.1       454.5       194.4       30.5       163.9  

(Gain) loss on disposal of discontinued operations

    (0.1     (3.8     (12.4     —         2.4       2.3       0.1  

Loss for the period from discontinued operations

    —         —         —         —         47.9       —         47.9  

Equity in net income of equity method investees, net of tax

    —         (0.1     (0.1     (0.2     (0.5     (0.3     (0.2

Share-based compensation(a)

    2.9       3.3       4.2       4.3       11.8       0.9       10.9  

Transaction-related costs(b)

    11.3       —         0.4       0.7       187.1       97.0       90.1  

Inventory uplift impact on cost of sales related to the acquisition of Gates by Blackstone(c)

    —         —         —         —         121.4       121.4       —    

Impairment of inventory (included in cost of sales)(d)

    —         —         21.7       9.6       —         —         —    

Other impairments(e)

    —         1.4       3.2       51.1       0.6       0.6       —    

Benefit from sale of inventory impaired in a prior period

    —         (0.6     (1.0     —         —         —         —    

Restructuring expenses(f)

    8.3       8.0       11.4       15.6       22.0       8.2       13.8  

Adjustments relating to post-retirement benefits(g)

    0.6       4.8       6.4       4.8       (3.3     (1.3     (2.0

Other operating expense (income)(h)

    (0.1     (0.3     2.9       (0.2     (5.5     0.1       (5.6

Sponsor fees(i)

    4.5       4.5       6.1       7.0       4.6       3.1       1.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 496.1     $ 447.0     $ 594.9     $ 547.2     $ 582.9     $ 262.5     $ 320.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Share-based compensation has historically been provided to certain of our employees under share option, bonus and other share award schemes. We recognize a non-cash compensation expense in respect of these schemes that is based on the fair value of the awards determined at the date of grant. During Pre-Acquisition Predecessor 2014, Gates recognized an additional compensation charge of $7.5 million in relation to the early vesting of certain awards as a direct result of the acquisition of Gates by Blackstone.
  (b) Transaction-related costs include, in Full Year 2014, costs recognized in respect of the acquisition of Gates by Blackstone, primarily advisory fees. In other periods, these costs relate to business acquisition activity and major corporate transactions, including costs incurred in the nine months ended September 30, 2017 in relation to the refinancing of certain of Gates’ indebtedness.
  (c)

The inventory uplift impact on cost of sales arose as part of the purchase accounting for the acquisition of Gates by Blackstone in July 2014. The carrying value of inventory on hand was uplifted to its fair

 



 

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  value and, as this inventory was sold during the remainder of 2014, it was reflected in cost of sales at the uplifted value. This distorted gross margin and profitability for the period, impacting comparability between periods.
  (d) Included in this amount in Fiscal 2016 is $17.7 million related to inventory adjustments made in connection with changes Gates has made in its accounting convention for expensing maintenance, repair and operations assets below a nominal value threshold and revisions to its methods for estimating the write down for excess or obsolete finished goods in Fiscal 2015 and raw materials and work in progress in Fiscal 2016. These changes have been made to bring consistency to our global inventory management. In addition, this line item includes the write-off of inventory related to decisions made in Fiscal 2016 to restructure or close certain lines of business in the United States and in Singapore in Fiscal 2016 and in the Middle East in Fiscal 2015.
  (e) Other impairments in Fiscal 2015 included $44.0 million in relation to the indefinite-lived brands and trade names intangible that was recognized as part of the purchase accounting at the time of the Acquisition. A further impairment of $6.7 million was recognized in relation to property, plant and equipment in Brazil, as a result of the challenging trading conditions in that region, which were exacerbated by the significant devaluation of the Brazilian Real against the U.S. dollar.
  (f) Restructuring expenses represent costs incurred in relation to specifically defined restructuring projects and include costs related to decisions to close lines of business, plant closures and relocations, strategic organizational rationalizations and related non-recurring employee severance.
  (g) Adjustments relating to post-retirement benefits are for the non-cash net interest charge related to those obligations and the non-cash amortization of prior period actuarial gains and losses.
  (h) Other operating expense relates to gains and losses incurred on disposals of assets other than in the normal course of operations and gains and losses incurred in relation to non-Gates businesses disposed of in prior periods.
  (i) Sponsor fees relate to fees paid to our private equity sponsor for monitoring, advisory and consulting services. In the case of Blackstone, the applicable agreements will be replaced upon completion of this offering. See “Certain Relationships and Related Person Transactions—Transaction and Monitoring Fee and Support and Services Agreements.”

 



 

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Adjusted Net Income

The following table reconciles the net income (loss) attributable to shareholders, the most directly comparable GAAP measure, to Adjusted Net Income:

 

(dollars in millions)   Nine months
ended
September 30,
2017
    Nine months
ended
October 1,
2016
    Fiscal
2016
    Fiscal
2015
    Full Year
2014
    Post-
Acquisition
Predecessor
2014
    Pre-
Acquisition
Predecessor
2014
 

Net income (loss) attributable to shareholders

  $ 32.5     $ 47.8     $ 57.7     $ 24.9     $ (142.1   $ (96.9   $ (45.2

(Gain) loss on disposal of discontinued operations

    (0.1     (3.8     (12.4     —         2.4       2.3       0.1  

Loss for the period from discontinued operations

    —         —         —         —         47.9       —         47.9  

Share-based compensation(a)

    2.9       3.3       4.2       4.3       11.8       0.9       10.9  

Transaction-related costs(b)

    11.3       —         0.4       0.7       187.1       97.0       90.1  

Inventory uplift impact on cost of sales related to the acquisition of Gates by Blackstone(c)

    —         —         —         —         121.4       121.4       —    

Impairment of inventory (included in cost of sales)(d)

    —         —         21.7       9.6       —         —         —    

Other impairments(e)

    —         1.4       3.2       51.1       0.6       0.6       —    

Benefit from sale of inventory impaired in a prior period

    —         (0.6     (1.0     —         —         —         —    

Restructuring expenses(f)

    8.3       8.0       11.4       15.6       22.0       8.2       13.8  

Adjustments relating to post-retirement benefits(g)

    0.6       4.8       6.4       4.8       (3.3     (1.3     (2.0

Amortization of acquisition-related intangible assets(h)

    93.4       110.3       141.9       158.5       143.3       84.8       58.5  

Non-cash financing-related foreign exchange (gains) losses(i)

    49.5       (3.3     (7.6     (62.8     (63.5     (63.9     0.4  

Sponsor fees(j)

    4.5       4.5       6.1       7.0       4.6       3.1       1.5  

Other adjustments(k)

    (7.4     (7.9     (8.1     (10.9     (12.4     (2.6     (9.8

Tax effect on the above items(l)

    (26.7     (26.9     (38.9     (70.0     (120.3     (71.3     (49.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 168.8     $ 137.6     $ 185.0     $ 132.8     $ 199.5     $ 82.3     $ 117.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Share-based compensation has historically been provided to certain of our employees under share option, bonus and other share award schemes. We recognize a non-cash compensation expense in respect of these schemes that is based on the fair value of the awards determined at the date of grant. During Pre-Acquisition Predecessor 2014, Gates recognized an additional compensation charge of $7.5 million in relation to the early vesting of certain awards as a direct result of the acquisition of Gates by Blackstone.
  (b) Transaction-related costs include, in Full Year 2014, costs recognized in respect of the acquisition of Gates by Blackstone, primarily advisory fees. In other periods, these costs relate to business acquisition activity and major corporate transactions, including costs incurred in the nine months ended September 30, 2017 in relation to the refinancing of certain of Gates’ indebtedness.
  (c)

The inventory uplift impact on cost of sales arose as part of the purchase accounting for the acquisition of Gates by Blackstone in July 2014. The carrying value of inventory on hand was uplifted to its fair

 



 

24


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  value and, as this inventory was sold during the remainder of 2014, it was reflected in cost of sales at the uplifted value. This distorted gross margin and profitability for the period, impacting comparability between periods.
  (d) Included in this amount in Fiscal 2016 is $17.7 million related to inventory adjustments made in connection with changes Gates has made in its accounting convention for expensing maintenance, repair and operations assets below a nominal value threshold and revisions to its methods for estimating the write down for excess or obsolete finished goods in Fiscal 2015 and raw materials and work in progress in Fiscal 2016. These changes have been made to bring consistency to our global inventory management. In addition, this line item includes the write-off of inventory related to decisions made in Fiscal 2016 to restructure or close certain lines of business in the United States and in Singapore in Fiscal 2016 and in the Middle East in Fiscal 2015.
  (e) Other impairments in Fiscal 2015 included $44.0 million in relation to the indefinite-lived brands and trade names intangible that was recognized as part of the purchase accounting at the time of the Acquisition. A further impairment of $6.7 million was recognized in relation to property, plant and equipment in Brazil, as a result of the challenging trading conditions in that region, which were exacerbated by the significant devaluation of the Brazilian Real against the U.S. dollar.
  (f) Restructuring expenses represent costs incurred in relation to specifically defined restructuring projects and include costs related to decisions to close lines of business, plant closures and relocations, strategic organizational rationalizations and related non-recurring employee severance.
  (g) Adjustments relating to post-retirement benefits are for the non-cash net interest charge related to those obligations and the non-cash amortization of prior period actuarial gains and losses.
  (h) The amortization of acquisition-related intangible assets includes the amortization charge associated with customer relationship and technology intangible assets that were recognized as part of the purchase accounting for the Acquisition.
  (i) Non-cash financing-related foreign exchange (gains) losses relate primarily to the retranslation of euro-denominated debt and non-U.S. dollar cash balances into U.S. dollars for reporting purposes.
  (j) Sponsor fees relate to fees paid to our private equity sponsor for monitoring, advisory and consulting services. In the case of Blackstone, the applicable agreements will be replaced upon completion of this offering. See “Certain Relationships and Related Person Transactions—Transaction and Monitoring Fee and Support and Services Agreements.”
  (k) Other adjustments include the adjustment for the non-controlling interests’ share in each of the adjustments made and 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.
  (l) The adjustments above have been tax-effected using the effective tax rate for the relevant period, adjusted for significant items that are not tax deductible, primarily the impact of foreign currency exchange rate movements on financing-related items, significant one-off tax items, and items that are deductible, but at a rate that is significantly different from the applicable effective rate.
(4) Adjusted EBITDA margin is a non-GAAP measure that represents Adjusted EBITDA expressed as a percentage of net sales. We use this metric as a measure of the success of our businesses in managing their cost base and improving profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—Adjusted EBITDA Margin.”

 



 

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RISK FACTORS

An investment in our ordinary shares involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our ordinary shares.

Risks Related to Our Business and Industry

Conditions in the global and regional economy and the major end markets we serve may materially and adversely affect the business and results of operations of our businesses should they deteriorate.

Our business and operating results have been, and will continue to be, affected by worldwide and regional economic conditions, including conditions in the end markets we serve. The level of demand for our products depends, in part, on the general economic conditions that exist in our served end markets. A substantial portion of our revenues are derived from customers in cyclical industries that typically are adversely affected by downward economic cycles. Our customers may experience deterioration of their businesses, cash flow shortages or difficulty obtaining financing as a result of the effects of contraction or low levels of economic growth, disruptions in the financial markets, weak consumer and business confidence, high levels of unemployment, reduced levels of capital expenditures, fluctuating commodity prices, bankruptcies and other challenges affecting the global economy, as happened following the global recession in 2008. For example, our historical results have been highly correlated to global industrial activity and utilization and decreases in such activity or utilization may impact our business, financial condition and results of operations. As a result, existing or potential customers may delay or cancel plans to purchase our products and services and may not be able to fulfill their obligations to us in a timely fashion. Further, our suppliers, distributors and vendors may experience similar conditions, which may impact their ability to fulfill their obligations to us. If conditions in the global economy or in the regions and major end markets that we serve deteriorate, demand for our products and services may be decline and our results of operations, financial position and cash flows could be materially adversely affected.

We are subject to economic, political and other risks associated with international operations, and this could adversely affect our business and our strategy to capitalize on our global reach.

One of our key strategies is to capitalize on our global commercial reach, and a substantial portion of our operations are conducted and located outside the United States. For Fiscal 2016, approximately 61% of our net sales originated from outside of the United States. We have manufacturing, sales and service facilities spanning five continents and sell to customers in over 120 countries. Moreover, a significant amount of our manufacturing functions and sources of our raw materials and components are from emerging markets such as China, India and Eastern Europe. Accordingly, our business and results of operations, as well as the business and results of operations of our vendors, suppliers and customers, are subject to risks associated with doing business internationally, including:

 

    instability in a specific country’s or region’s political, economic or social conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts;

 

    changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;

 

    imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate income or capital in a tax efficient manner;

 

    trade protection measures, such as tariff increases and embargoes, and import and export licensing and control requirements;

 

    the complexities of operating within multiple tax jurisdictions, including potentially negative consequences from changes in tax laws or from tax examinations, which may, in addition, require an extended period of time to resolve;

 

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    partial or total expropriation by local, state or national governments;

 

    uncertainties as to local laws regarding, and enforcement of, contract and intellectual property rights;

 

    the ability to comply with or effect of complying with complex and changing laws, regulations and policies of foreign governments, including differing and, in some cases, more stringent labor and environmental regulations;

 

    differing local product preferences and product requirements; and

 

    difficulties involved in staffing and managing widespread operations, including challenges in administering and enforcing corporate policies, which may be different than the normal business practices of local cultures.

The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. Certain regions, including Latin America, Asia, the Middle East and Africa, are generally more economically and politically volatile and as a result, our operations in these regions could be subject to significant fluctuations in sales and operating income from quarter to quarter. Because a significant percentage of our operating income in recent years has come from these regions, adverse fluctuations in the operating results in these regions could have a disproportionate impact on our results of operations in future periods.

The new U.S. administration has publicly supported certain potential tax and trade proposals, modifications to international trade policy and other changes which may affect U.S. trade relations with other countries. In addition, economic and political uncertainty arose out of the June 23, 2016 vote in the United Kingdom that resulted in the decision to leave the European Union (the “E.U.”). It is possible that these or other changes, if enacted, may impact or require us to modify our current business practices. At the present time, it is unclear as to the ultimate impact of these changes, policies or proposals and, as such, we are unable to determine the effect, if any, that such changes, policies or proposals would have on our business.

Additionally, concerns persist regarding the debt burden of certain European countries and the ability of these countries to meet future financial obligations, as well as concerns regarding the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances of individual euro-area countries. If a country within the euro area were to default on its debt or withdraw from the euro currency, or if the euro were to be dissolved entirely, the impact on markets around the world, and on our global business, could be immediate and material. Such a development could cause financial and capital markets within and outside Europe to constrict, thereby negatively impacting our ability to finance our business, and also could cause a substantial reduction in consumer confidence and spending that could negatively impact sales. Any one of these impacts could have a material adverse effect on our financial condition and results of operations.

If we are unable to obtain raw materials at favorable prices in sufficient quantities, or at the time we require them, our operating margins and results of operations may be materially adversely affected.

We purchase our energy, steel, aluminum, rubber and rubber-based materials, chemicals, polymers and other key manufacturing inputs from outside sources. We do not traditionally have long-term pricing contracts with raw material suppliers. The costs of these raw materials have been volatile historically and are influenced by factors that are outside our control. In recent years, the prices for energy, metal alloys, polymers and certain other of our raw materials have fluctuated significantly. While we strive to avoid this risk by using price escalation mechanisms with respect to our raw materials in certain of our customer contracts and we also seek to offset our increased costs with gains achieved through operational efficiencies, if we are unable to pass increases in the costs of our raw materials on to our customers, we experience a lag in our ability to pass increases to our customers, or operational efficiencies are not achieved, our operating margins and results of operations may be materially adversely.

Additionally, our businesses compete globally for key production inputs. The availability of qualified suppliers and of key inputs may be disrupted by market disturbances or any number of geopolitical factors,

 

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including political unrest and significant weather events. Such disruptions may require additional capital or operating expenditure by us or force reductions in our production volumes. In the event of an industry-wide general shortage of certain raw materials or key inputs, or a shortage or discontinuation of certain raw materials or key inputs from one or more of our suppliers, we may not be able to arrange for alternative sources of certain raw materials or key inputs. Any such shortage may materially adversely affect our competitive position versus companies that are able to better or more cheaply source such raw materials or key inputs.

Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key channel partners could adversely affect our business, financial condition and results of operations.

Certain of our businesses sell a significant amount of their products to key channel partners, including distributors, that have valuable relationships with end users. Some of these channel partners may also sell our competitors’ products, and if they favor competing products for any reason they may fail to market our products effectively. Adverse changes in our relationships with these channel partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our business, financial condition and results of operations. The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can also significantly impact our results of operations in any given period. In addition, the consolidation of channel partners and customers in certain of our end markets could adversely impact our profitability.

We face competition in all areas of our business and may not be able to successfully compete with our competitors, which could adversely affect our revenues and profitability.

We are subject to competition from other producers of products that are similar to ours. We compete on a number of factors, including product performance, quality, value, product availability, brand recognition, customer service and innovation and technology. Our customers often demand delivery of our products on a tight time schedule and in a number of geographic markets. If our quality of service declines or we cannot meet the demands of our customers, they may utilize the services or products of our competitors. Our competitors include manufacturers that may be better capitalized, may have a more extensive low-cost sourcing strategy and presence in low-cost regions or may receive significant governmental support and as a result, may be able to offer more aggressive pricing. Our competitors also may develop products that are superior to our products, or may develop more efficient or effective methods of providing products and services or may adapt more quickly than we do to new technologies or evolving customer requirements. If we are unable to continue to provide technologically superior or better quality products or to price our products competitively, our ability to compete could be harmed and we could lose customers or market share.

Pricing pressures from our customers may materially adversely affect our business.

We generate strong margins by selling premium products at premium prices. Accordingly, our margins could suffer if our customers are no longer willing to pay a premium for our product and service offerings. We face the greatest pricing pressure from our customers in the automotive first-fit end market. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the award. We are also, from time to time, subject to pricing pressures from customers in our other end markets. If we are not able to offset price reductions through improved operating efficiencies and reduced expenditures or new product introduction, those price reductions may have a material adverse effect on our results of operations.

We are dependent on the continued operation of our manufacturing facilities and we may need to make investments in new or existing facilities.

While we are not heavily dependent on any single manufacturing facility, major disruptions at a number of our manufacturing facilities, due to labor unrest, adverse weather, natural disasters, terrorist attacks, significant

 

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mechanical failure of our facilities, or other catastrophic event, could result in significant interruption of our business and a potential loss of customers and sales or could significantly increase our operating costs.

In addition, we may need to make investments in new or existing manufacturing facilities to adapt our production capacity to changing market conditions and to align with our growth strategies. The costs of such investments may be significant and we may not realize the expected benefits on our anticipated timeframe or at all, which may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to accurately forecast demand or meet significant increases in demand for our products.

Certain of our businesses operate with short lead times and we order raw materials and supplies and plan production based on discussions with our customers and internal forecasts of demand. If we are unable to accurately forecast demand for our products, in terms of both volume and specific products, or react appropriately to abrupt changes in demand, we may experience delayed product shipments and customer dissatisfaction. If demand increases significantly from current levels, both we and our suppliers may have difficulty meeting such demand, particularly if such demand increases occur rapidly. Additionally, we may carry excess inventory if demand for our products decreases below projected levels. Failure to accurately forecast demand or meet significant increases in demand could have a material adverse impact on our business, financial condition and operating results.

We are exposed to exchange rate fluctuations in the international markets in which we operate.

We conduct operations in many areas of the world involving transactions denominated in a variety of functional currencies. We are subject to currency exchange rate risk to the extent that our costs may be denominated in currencies other than those in which we earn and report revenues and vice versa. In addition, a decrease in the value of any of these currencies relative to the U.S. dollar could reduce our profits from non-U.S. operations and the translated value of the net assets of our non-U.S. operations when reported in U.S. dollars in our consolidated financial statements. For example, in Fiscal 2016, movements in average currency translation rates adversely affected our sales growth by $67.7 million. Ongoing movements in average currency translation rates in the future could continue to have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. Fluctuations in currencies may also make it more difficult to perform period-to-period comparisons of our reported results of operations.

We anticipate that there will be instances in which costs and revenues will not be exactly matched with respect to currency denomination. As a result, to the extent we continue to expand geographically, we expect that increasing portions of our revenues, costs, assets and liabilities will be subject to fluctuations in foreign currency valuations. We may experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange rate fluctuations. Further, the markets in which we operate could restrict the removal or conversion of the local or foreign currency, resulting in our inability to hedge against these risks.

We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Actions of this nature, if they occur or continue for significant periods of time, could have an adverse effect on our results of operations and financial condition in any given period.

We are dependent on market acceptance of new product introductions and product innovations for continued revenue growth.

The markets in which we operate are subject to technological change. Our long-term operating results depend substantially upon our ability to continually develop, introduce, and market new and innovative products,

 

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to modify existing products, to respond to technological change, and to customize certain products to meet customer requirements and evolving industry standards. The development of new product introductions and product innovations may require significant investment by us. There are numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands. For example, the increased adoption of electric vehicles may affect certain of the end markets that we serve and could alter the application platforms in which we offer solutions.

If we are unable to adapt to technological changes, including by developing and marketing new products, our business and results of operations may be adversely affected.

We have taken, and continue to take, cost-reduction actions, which may expose us to additional risk and we may not be able to maintain the level of cost reductions that we have achieved.

We have been reducing costs in all of our businesses and have discontinued product lines, divested non-core businesses, consolidated manufacturing operations and reduced our employee population. The impact of these cost-reduction actions on our sales and profitability may be influenced by many factors and we may not be able to maintain the level of cost savings that we have achieved depending on our ability to successfully complete these efforts. In connection with the implementation and maintenance of our cost reduction measures, we may face delays in anticipated workforce reductions, a decline in employee morale and a potential inability to meet operational targets due to an inability to retain or recruit key employees.

We are subject to risks from litigation, legal and regulatory proceedings and obligations that may materially impact our operations.

We face an inherent business risk of exposure to various types of claims, lawsuits and proceedings. We are involved in various tax, intellectual property, product liability, product warranty and environmental claims and lawsuits, and other legal, antitrust and regulatory proceedings arising in the ordinary course of our business. Although it is not possible to predict with certainty the outcome of every claim, lawsuit or proceeding and the range of probable loss, we believe these claims, lawsuits and proceedings will not individually or in the aggregate have a material impact on our results. However, we could, in the future, be subject to various claims, lawsuits and proceedings, including, amongst others, tax, intellectual property, product liability, product warranty, environmental claims and antitrust claims, and we may incur judgments or enter into settlements of lawsuits and proceedings that could have a material adverse effect on our results of operations in any particular period.

Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and/or prohibit us from selling our products.

Third parties may assert infringement or other intellectual property claims against us based on their patents or other intellectual property rights. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages, if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our products, product candidates or other technology, or those we develop with our R&D partners. Even if infringement claims against us are without merit, defending these types of lawsuits takes significant time, may be expensive and may divert management attention from other business concerns.

In addition, first-fit and other manufacturers have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of

 

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aftermarket products that are the subject of the claims. First-fit manufacturers have brought such claims in federal court and with the U.S. International Trade Commission and with various foreign government agencies.

To the extent first-fit and other manufacturers are seeking and obtaining more utility and design patents than they have in the past and are successful in asserting infringement of these patents and defending their validity, if any of our products are found to infringe someone’s patent, we could be restricted or prohibited from selling such products, which could have an adverse effect on our business. If we are sued for intellectual property infringement, we will likely incur significant expenses investigating and defending such claims, even if we prevail.

In addition, certification by independent organizations of certain of our aftermarket products may be revoked or adversely affected by first-fit manufacturer claims. Lack of certification may negatively impact us because many major insurance companies recommend or require the use of aftermarket products only if they have been certified by an independent certifying organization.

Failure to adequately protect or enforce our intellectual property rights against counterfeiting activities could adversely affect our business.

Although we routinely conduct anti-counterfeiting activities in multiple jurisdictions, we have encountered counterfeit reproductions of our products or products that otherwise infringe on our intellectual property rights. The actions we take to establish and protect trademarks and other intellectual property rights may not be adequate to prevent such counterfeiting activities by others. If we are unsuccessful in challenging such products on the basis of trademark or other intellectual property infringement, continued sales of such imitating products may adversely affect market share and impact customer perceptions and demand, leading to the shift of consumer preference away from our products and loss of market share.

We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

Filing, prosecuting and defending patents on our products in all countries and jurisdictions throughout the world would be prohibitively expensive, and the laws of certain foreign countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States.

Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but where the ability to enforce our patent rights is not as strong as in the United States. These products may compete with our products, and our intellectual property rights may not be effective or sufficient to prevent such competition. In addition, we may face significant expenses in connection with the protection of our intellectual property rights outside the United States. If we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business, financial condition and results of operations may be adversely affected.

Failure to develop, obtain, enforce and protect intellectual property rights or liability for intellectual property infringement could adversely affect our business.

Our success depends on our ability to develop technologies and inventions used in our products and to brand such products, to obtain intellectual property rights in such technologies, inventions, and brands, and to protect and enforce such intellectual property rights. In this regard, we rely on U.S. and foreign trademark, patent, copyright, and trade secret laws, as well as license agreements, nondisclosure agreements, and confidentiality and other contractual provisions. Nevertheless, the technologies and inventions developed by our engineers in the future may not prove to be as valuable as those of competitors, or competitors may develop similar or identical technologies and inventions independently of us and before we do.

 

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We may not be able to obtain patents or other intellectual property rights in our new technologies and inventions or, if we do, the scope of such rights may not be sufficiently broad to afford us any significant commercial advantage over our competitors. Owners of patents or other intellectual property rights that we need to conduct our business as it evolves may be unwilling to license such intellectual property rights to us on terms we consider reasonable. Competitors and other third parties may challenge the ownership, validity, and/or enforceability of our patents or other intellectual property rights. Further, we expect pirates to continue to counterfeit certain of our products using our trademarks, which has led to, and will likely continue to cause loss of sales. It is difficult to police such counterfeiting, particularly on a worldwide basis, and the efforts we take to stop such counterfeiting may not be effective.

Our other efforts to enforce our intellectual property rights against infringers may not prove successful and will likely be time consuming and expensive and may divert management’s attention from the day-to-day operation of our business. Adequate remedies may not be available in the event of an infringement or unauthorized use or disclosure of our trade secrets and manufacturing expertise. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business, financial condition, results of operations and cash flows. Further, successful assertion of our intellectual property rights depends on the judicial strength and willingness of the issuing jurisdictions to enact and enforce sufficient intellectual property laws. Creation and enforcement of intellectual property rights is a relatively recent development in much of the world, and so some time may be necessary to realize reliable intellectual property systems across all markets and jurisdictions, if this occurs at all.

We operate in industries with respect to which there are many third-party patents. Owners of patents or other intellectual property rights that we need to conduct our business as it evolves may be unwilling to license such intellectual property rights to us on terms we consider reasonable. We cannot assure you that our business operations, products and methods do not or will not infringe, misappropriate or otherwise violate the patents or other intellectual property rights of third parties. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages, if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our products, product candidates or other technology, or those we develop with our R&D partners. If we are sued for intellectual property infringement, we will likely incur significant expenses investigating and defending such claims, even if we prevail. Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may be subject to recalls, product liability claims or may incur costs related to product warranties that may materially and adversely affect our business.

Meeting or exceeding many government-mandated safety standards is costly and requires manufacturers to remedy defects related to product safety through recall campaigns if the products do not comply with safety, health or environmental standards. If we, customers or government regulators determine that a product is defective or does not comply with such standards prior to the start of production, the launch of a product could be delayed until such defect is remedied. The costs associated with any protracted delay of a product launch or a recall campaign to remedy defects in products that have been sold could be substantial.

We face an inherent risk of product liability claims if product failure results in any claim for injury or loss. Supplier consolidation and the increase in low-cost country sourcing may increase the likelihood of receiving defective materials, thereby increasing the risk of product failure and resulting liability claims. Litigation is inherently unpredictable and these claims, regardless of their outcome, may be costly, divert management attention and adversely affect our reputation. Although we have liability insurance, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be adequate. In addition, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.

 

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From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to bear costs of repair or replacement of certain of our products. Vehicle manufacturers are increasingly requiring their outside suppliers to participate in the warranty of their products and to be responsible for the operation of these component products in new vehicles sold to consumers. Warranty claims may range from individual customer claims to full recalls of all products in the field. It cannot be assured that costs associated with providing product warranties will not be material.

We are subject to anti-corruption laws in various jurisdictions, as well as other laws governing our international operations. If we fail to comply with these laws we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could materially adversely affect our business, financial condition and results of operations.

Our international operations are subject to one or more anti-corruption laws in various jurisdictions, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.K. Bribery Act of 2010 and other anti-corruption laws. The FCPA and these other laws generally prohibit employees and intermediaries from bribing or making other prohibited payments to foreign officials or other persons to obtain or retain business or gain some other business advantage. We operate in a number of jurisdictions that pose a high risk of potential FCPA or other anti-corruption violations, and we participate in joint ventures and relationships with third parties whose actions could potentially subject us to liability under the FCPA or other anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Assets Control, and various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons, customs requirements, currency exchange regulations, and transfer pricing regulations (collectively, “Trade Control laws”).

We are also subject to new U.K. corporate criminal offences for failure to prevent the facilitation of tax evasion pursuant to the Criminal Finances Act 2017 (“FTP offences”). The FTP offences impose criminal liability on a company where it has failed to prevent the criminal facilitation of tax evasion by a person associated with the company.

We have instituted policies, procedures and ongoing training of certain employees with regard to business ethics, designed to ensure that we and our employees comply with the FCPA, other anticorruption laws, Trade Control laws and the Criminal Finances Act 2017. However, there is no assurance that our efforts have been and will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA, or other legal requirements. If we are not in compliance with the FCPA, other anti-corruption laws, Trade Control laws or the Criminal Finances Act 2017, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have a material adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or the Criminal Finances Act 2017 by U.S. or foreign authorities could also have a material adverse impact on our reputation, business, financial condition and results of operations.

Existing or new laws and regulations may prohibit, restrict or burden the sale of aftermarket products.

Most states have passed laws that regulate or limit the use of aftermarket products in certain types of repair work. These laws include requirements relating to consumer disclosure, owner’s consent regarding the use of aftermarket products in the repair process, and the requirement to have aftermarket products certified by an independent testing organization. Additional legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business.

 

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Certain organizations test the quality and safety of vehicle replacement products. If these organizations decide not to test a particular vehicle product, or in the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue authorization of repairs using such product. Such events could adversely affect our business.

Our information technology systems are decentralized, which may lead to certain security risks and make access to our applications cumbersome.

In general, our information technology (“IT”) systems are decentralized. This decentralization may lead to security risks and makes access to common applications cumbersome. We are in the midst of several large-scale information technology projects, including with respect to Enterprise Resource Planning systems and consolidation of applications and servers. The costs of such projects may exceed the amounts we have budgeted for them, and any material failures in the execution of such projects may hinder our day-to-day operations.

Our business could be materially adversely affected by interruptions to our computer and IT systems.

Most of our business activities rely on the efficient and uninterrupted operation of our computer and IT systems and those of third parties with which we have contracted. In the event that the providers of these systems terminate their relationships with us or if we suffer prolonged outages of these or our own systems for whatever reason, we could suffer disruptions to our operations. In the event that we decide to switch providers or to implement upgrades or replacements to our own systems, we may also suffer disruptions to our business on this basis. We may be unsuccessful in the development, maintenance and upgrading of our own systems, and we may underestimate the costs and expenses of developing and implementing our own systems. Also, our revenue may be hampered during the period of implementing an alternative system, which period could extend longer than we anticipated.

Despite our implementation of security measures, our computer and IT systems are vulnerable to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; hardware failures; or computer viruses, as well as circumstances beyond our reasonable control, including power outages; acts of malfeasance, unauthorized access (“hacking”), acts of terror, acts of government, natural disasters, civil unrest, and denial of service attacks; any of which may lead to the theft of our intellectual property and trade secrets, the compromising of confidential information, manipulation and destruction of data and production downtimes. This could also impede our ability to record or process orders, manufacture and ship in a timely manner, account for and collect receivables, protect sensitive data of the Company, our customers, our employees, our suppliers and other business partners, comply with our third-party obligations of confidentiality and care, or otherwise carry on business in the normal course. Any failure of these systems or cybersecurity incidents could require significant costly remediation beyond levels covered by insurance and could cause us to lose customers and/or revenue, require us to incur significant expense to remediate, including as a result of legal or regulatory claims or proceedings, or damage our reputation, any of which could have a material adverse effect on our business, financial condition and results of operations. The regulatory environment related to information security and privacy is constantly changing, and compliance with those requirements could result in additional costs.

Our operations are subject to various environmental, health and safety laws and regulations, and we may incur significant costs to comply with these requirements, or be subject to sanctions or held liable for damages resulting from any failure to comply.

Our operations, products and properties are subject to extensive U.S. and foreign, federal, state, local and provincial laws and regulations relating to environmental, health and safety (“EHS”) protection, including laws and regulations governing air emissions, wastewater discharges, waste management and disposal, substances in products, and workplace health and safety, as well as the investigation and clean-up of contaminated sites. EHS

 

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laws and regulations vary by jurisdiction and have become increasingly stringent over time. Failure to comply with EHS laws and regulations could have significant consequences on our business and operations, including the imposition of substantial fines and sanctions for violations, injunctive relief (including requirements that we limit or cease operations at affected facilities), and negative publicity.

In addition, new EHS laws and regulations applicable to our business or stricter interpretation or enforcement of existing EHS laws and regulations could adversely affect our business, financial condition and results of operations. For example, increasing global efforts to control emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”), have the potential to impact us. Certain countries, states, provinces, regulatory agencies and multinational and international authorities with jurisdiction over our operations have implemented measures, or are in the process of evaluating options, including so-called “cap and trade” systems, to regulate GHG emissions. The nature and extent of these measures varies among jurisdictions where we have operations. GHG regulation could increase the price of the energy and raw materials we purchase or require us to purchase allowances to offset our own emissions. It could also negatively impact the demand for our products. For example, if the U.S. EPA continues to focus on GHG regulation, it could adversely affect our customers in the oil and gas industry, which is a key demand driver of our industrial end markets. In addition, efforts to decrease use of fossil fuels in general may result in decreased oil and gas production and impact demand for our products.

We could also be responsible for the investigation and remediation of environmental contamination and may be subject to associated liabilities and claims for personal injury and property and natural resource damages. We own, lease or operate numerous properties (many of which are sites of long-standing manufacturing operations), have been in business for many years and have acquired and disposed of properties and businesses over that time. Hydrocarbons, chlorinated solvents or other regulated substances or wastes may have been disposed of at or released from properties owned, leased or operated by us or at or from other locations where such substances or wastes were taken for disposal. Such properties may be subject to investigation, clean-up and monitoring requirements. Under some environmental laws, liability for the entire cost of the cleanup of contaminated sites may be imposed jointly and severally upon current or former owners, lessees or operators of a facility, or upon any party who sent waste to a disposal site, regardless of fault or the lawfulness of the activities giving rise to the contamination.

We have incurred, and will continue to incur, both operating and capital costs to comply with EHS laws and regulations, including costs associated with the clean-up and investigation of some of our current and former properties and offsite disposal locations. We are currently performing environmental investigations or remediation at a number of former and current facilities in the United States and Canada. We have incurred and will continue to incur costs to investigate and/or remediate conditions at those sites. We are also incurring costs associated with contamination at a number of offsite waste disposal sites. In the future, we may incur similar liabilities in connection with environmental conditions currently unknown to us relating to our existing, prior, or future sites or operations or those of predecessor companies whose liabilities we may have assumed or acquired. In addition, we are subject to personal injury and/or property damage claims alleging losses arising from hazardous materials associated with our current or former operations, facilities or products. The discovery of previously unknown contamination, the imposition of new clean-up requirements, or new claims for property damage, personal injury or damage to natural resources arising from environmental matters or hazardous materials could result in additional costs or liabilities that could have a negative effect on our business, financial condition and results of operations.

In addition, our products may be subject to EHS regulations in the markets in which we operate; such regulations are becoming increasingly common and stringent. These regulations may restrict or prohibit the types of substances that are used or present in our products, or impose labeling or other requirements. For example, some of our products manufactured or sold in the E.U. may potentially be subject to the E.U.’s Registration, Evaluation, Authorisation, and Restriction of Chemical Substances regulation (“REACH”), which regulates the sale of certain hazardous substances, or the Restriction of Hazardous Substances regulation (“RoHS”), which limits the use of certain hazardous substances in electrical and electronic equipment, or similar requirements in

 

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other jurisdictions. Any failure by our products to meet such standards could result in significant costs or delays relating to sale of such products, or require product reformulations or removal from those markets as well as the imposition of fines and penalties.

See “—We may be subject to recalls, product liability claims or may incur costs related to product warranties that may materially and adversely affect our business” for additional risks relating to EHS regulations applicable to our products.

Our insurance may not fully cover all future losses we may incur.

Manufacturers of products such as ours are subject to inherent risks. We maintain an amount of insurance protection that we consider adequate, but we cannot provide any assurance that our insurance will be sufficient or provide effective coverage under all circumstances and against all hazards or liabilities to which we may be subject. Specifically, our insurance may not be sufficient to replace facilities or equipment that are damaged in part or in full. Damages or third-party claims for which we are not fully insured could adversely affect our financial condition and results of operation. Further, due to rising insurance costs and changes in the insurance markets, insurance coverage may not continue to be available at all or at rates or on terms similar to those presently available. Additionally, our insurance may subject us to significant deductibles, self-insured retentions, retrospectively rated premiums or similar costs. Any losses not covered by insurance could have a material adverse effect on us. We typically purchase business interruption insurance for our facilities. However, if we have a stoppage, our insurance policies may not cover every contingency and may not be sufficient to cover all of our lost revenues. In the future, we may be unable to purchase sufficient business interruption insurance at desirable costs.

We supply products to industries that are subject to inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could result in unforeseen and damaging events. These risks may expose us, as an equipment operator and supplier, to liability for personal injury, wrongful death, property damage, and pollution and other environmental damage. The insurance we carry against many of these risks may not be adequate to cover our claims or losses. Further, insurance covering the risks we expect to face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we were not able to obtain liability insurance, our business, results of operations, cash flows and financial condition could be negatively impacted. If our clients suffer damages as a result of the occurrence of such events, they may reduce their business with us.

Longer lives of products used in our end markets may adversely affect demand for some of our replacement products.

The average useful life of certain products in our end markets has increased in recent years due to innovations in technologies and manufacturing processes. The longer product lives allow end users to replace parts less often. As a result, a portion of sales in the replacement markets we serve may be displaced. If this trend continues, it could adversely impact our replacement market sales.

The replacement market in emerging markets may develop in a manner that could limit our ability to grow in those markets.

In emerging markets such as China, India, Eastern Europe and Russia, the replacement markets are still nascent as compared to those in more developed nations. In these markets, we have focused on building a first-fit presence in order to establish brand visibility in the end markets we serve. However, as the replacement markets in these regions grow, our products may not be selected as the replacement product, although we are the first-fit provider. If we are not able to convert our first-fit presence in these emerging markets into sales in the

 

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replacement end market, there may be a material adverse effect on our replacement end market growth potential in these emerging markets.

We may in the future acquire businesses or assets, which we may not be able to successfully integrate, and we may be unable to recoup our investment in these businesses or assets.

We consider strategic acquisitions of complementary businesses or assets to expand our product portfolio and geographic presence on an ongoing basis, and regularly have discussions concerning potential acquisitions, certain of which may be material and which may be consummated following the completion of this offering. Acquisitions, particularly investments in emerging markets, involve legal, economic and political risks. To successfully acquire a significant target, we may need to raise additional equity capital or indebtedness, which may increase our leverage level. We also encounter risks in the selection of appropriate investment and disposal targets, execution of the transactions and integration of acquired businesses or assets.

We may not be able to effectively integrate future acquisitions or successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. As a result, we may not be able to recoup our investment in those acquisitions or achieve the economic benefits that we anticipate from these acquisitions. Our efforts to integrate these businesses or assets could be affected by a number of factors beyond our control, such as general economic conditions and increased competition. In addition, the process of integrating these businesses or assets could cause the interruption of, or loss of momentum in, the activities of our existing business and the diversion of management’s attention. Furthermore:

 

    the key personnel of the acquired company may decide not to work for us;

 

    customers of the acquired company may decide not to purchase products from us;

 

    suppliers of the acquired company may decide not to sell products to us;

 

    the markets may reject the acquired technologies, or they may not integrate with our existing technologies as expected;

 

    we may experience business disruptions as a result of information technology systems conversions;

 

    we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting;

 

    we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;

 

    we may intentionally assume the liabilities of the companies we acquire, which could result in material adverse effects on our business;

 

    our existing business may be disrupted or receive insufficient management attention;

 

    we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect; and

 

    we may incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing shareholders.

These impacts and any delays or difficulties encountered in connection with the integration of these businesses or assets could negatively impact our business and results of operations.

In addition, certain of the businesses that we have acquired and may acquire have unaudited financial statements that have been prepared by the management of such companies and have not been independently reviewed or audited. We cannot assure you that the financial statements of companies we have acquired or will

 

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acquire would not be materially different if such statements were audited. Finally, we cannot assure you that we will continue to acquire businesses at valuations consistent with our prior acquisitions or that we will complete future acquisitions at all. We cannot assure you that there will be attractive acquisition opportunities at reasonable prices, that financing will be available or that we can successfully integrate such acquired businesses into our existing operations. In addition, our results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill, or other long-lived assets, particularly if economic conditions worsen unexpectedly. These changes could materially negatively affect our business, results of operations or financial condition.

If we lose our senior management or key personnel, our business may be materially and adversely affected.

The success of our business is largely dependent on our senior management team, as well as on our ability to attract and retain other qualified key personnel. In addition, there is significant demand in our industry for skilled workers. It cannot be assured that we will be able to retain all of our current senior management personnel and attract and retain other necessary personnel, including skilled workers, necessary for the development of our business. The loss of the services of senior management and other key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and results of operations.

Our business depends on our strong brand, and if we are not able to maintain and enhance our brand we may be unable to sell our products.

Our brand has worldwide recognition and our success depends on our ability to maintain and enhance our brand image and reputation. In particular, we believe that maintaining and enhancing the Gates brand is critical to maintaining and expanding our customer base. Maintaining, promoting and enhancing our brand may require us to make substantial investments in areas such as product innovation, product quality, intellectual property protection, marketing and employee training, and these investments may not have the desired impact on our brand image and reputation. Our business could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of our brand is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If we are unable to maintain or enhance the image of our brand, it could materially adversely affect our business, financial condition and results of operations.

We may be materially adversely impacted by work stoppages and other labor matters.

As of December 31, 2016, we had approximately 13,500 employees worldwide. Certain of our employees are represented by various unions under collective bargaining agreements. While we have no reason to believe that we will be impacted by work stoppages and other labor matters, we cannot assure you that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Increased unionization of our workforce, new labor legislation or changes in regulations could disrupt our operations, reduce our profitability or interfere with the ability of our management to focus on executing our business strategies. Any of these factors may have a materially adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers have unionized workforces. If one or more of our customers experience a material work stoppage, it could similarly have a material adverse effect on our business, results of operations and financial condition.

We have investments in joint ventures, which limits our ability to manage third-party risks associated with these projects.

We have investments in joint ventures which may involve risks such as the possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have economic or

 

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business interests or goals that are inconsistent with our business interests or goals or take actions that are contrary to our instructions or to applicable laws and regulations. Actions by a co-venturer or other third party could expose us to claims for damages, financial penalties and reputational harm, any of which could adversely affect our business and operations. In addition, we may agree to guarantee indebtedness incurred by a joint venture or co-venturer or provide standard indemnifications to lenders for loss liability or damage occurring as a result of our actions or actions of the joint venture or other co-venturers. Such a guarantee or indemnity may be on a joint and several basis with a co-venturer, in which case we may be liable in the event that our co-venturer defaults on its guarantee obligation. The non-performance of a co-venturer’s obligations may cause losses to us in excess of the capital we have invested or committed.

Preparing our financial statements requires us to have access to information regarding the results of operations, financial position and cash flows of our joint ventures. Any deficiencies in our joint ventures’ internal controls over financial reporting may affect our ability to report our financial results accurately or prevent or detect fraud. Such deficiencies also could result in restatements of, or other adjustments to, our previously reported or announced operating results, which could diminish investor confidence and reduce the market price for our ordinary shares. Additionally, if our joint ventures are unable to provide this information for any meaningful period or fail to meet expected deadlines, we may be unable to satisfy our financial reporting obligations or timely file our periodic reports.

Although our joint ventures may generate positive cash flow, in some cases they may be unable to distribute that cash to the joint venture partners. Additionally, in some cases our joint venture partners may control distributions and may choose to leave capital in the joint venture rather than distribute it. Because our ability to generate liquidity from our joint ventures depends in part on their ability to distribute capital to us, our failure to receive distributions from our joint venture partners could reduce our cash flow return on these investments.

We are subject to liabilities with respect to businesses that we have divested in the past.

In recent years, we have divested a number of businesses. With respect to some of these former businesses, we have contractually agreed to indemnify the buyer against liabilities arising prior to the divestiture, including lawsuits, tax liabilities, product liability claims or environmental matters. Even without ongoing contractual indemnification obligations, we could be exposed to liabilities arising out of such divestitures. As a result of these types of arrangements, conditions outside our control could materially adversely affect our future financial results.

Terrorist acts, conflicts and wars may materially adversely affect our business, financial condition and results of operations.

As we have a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, partners, suppliers, distributors, resellers or customers due to terrorist acts, conflicts and wars, wherever located around the world. The potential for future attacks, the national and international responses to attacks or perceived threats to national security, and other actual or potential conflicts or wars have created many economic and political uncertainties. Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive raw materials from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions, and thereby materially adversely affect our business, financial condition, results of operations and cash flows.

If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, it may have a material adverse effect on our business, financial condition and results of operations.

Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crisis, or other natural or man-made

 

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disasters. If any of these facilities, supply chains or systems were to experience a catastrophic loss, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses.

Certain of our defined benefit pension plans are underfunded, and additional cash contributions we may be required to make will reduce the cash available for our business, such as the payment of our interest expense.

Certain of our employees in the United States, the United Kingdom, Canada, Mexico, Germany and Japan are participants in defined benefit pension plans which we sponsor and/or have obligations to contribute to. As of December 31, 2016, the unfunded amount of our defined benefit pension plans on a worldwide basis was approximately $61.7 million on an FASB ASC Topic 715 “Compensation—Retirement Benefits” basis. The amount of our contributions to our underfunded plans will depend upon asset returns, funding assumptions, regulatory requirements and a number of other factors and, as a result, the amount we may be required to contribute to such plans in the future may vary. Such cash contributions to the plans will reduce the cash available for our business such as the payment of interest expense on our notes or our other indebtedness.

The loss or financial instability of any significant customer or customers could adversely affect our business, financial condition, results of operations or cash flows.

A substantial part of our business is concentrated with a few customers, and we have certain customers that are significant to our business. During Fiscal 2016, our top ten customers accounted for approximately 25% of our consolidated net sales, and our largest customer accounted for approximately 9% of our consolidated net sales. The loss of one or more of these customers or other major customers, or a deterioration in our relationship with any of them could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our contracted backlog is comprised of future orders for our products from a broad number of customers. Defaults by any of the customers that have placed significant orders with us could have a significant adverse effect on our net sales, profitability and cash flow. Our customers may in the future default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons deriving from the general economic environment or circumstances affecting those customers in particular. If a customer defaults on its obligations to us, it could have a material adverse effect on our backlog, business, financial condition, results of operations or cash flows.

Changes in our effective tax rate could adversely impact our net income.

We are subject to income taxes in various jurisdictions in which we operate. As a result of Gates Industrial Corporation plc being U.K. tax resident, the Company will be within the scope of U.K. corporation tax including the controlled foreign company regime. We consider that the non U.K. entities held directly or indirectly by the Company would not give rise to a material charge under the U.K. controlled foreign companies rules. However, changes to, or adverse interpretations of, these rules, or changes in the future activities of the group, may alter this position and could impact the group’s effective tax rate. Additionally, we expect that the pre-IPO reorganization transactions will not give rise to material tax costs for the group, but there is no assurance of this position.

Our tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than

 

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anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws and regulations. We are also subject to examination by taxing authorities of our income tax returns for tax years 2012 to 2016 in the United States and for tax years 2007 to 2016 in other major foreign jurisdictions. The results of audits, examinations and other contests related to previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on our provision for income taxes and cash tax liability. Additionally, tax rates, tax laws or their implementation, and applicable tax authority practices in any particular jurisdiction could change in the future, possibly on a retroactive basis, and any such change could have a material adverse effect on the business, financial condition, results of operation and prospects of the Company.

We are subject to changes in legislative, regulatory and legal developments involving taxes and the interpretation of those laws is subject to challenge by the relevant governmental authorities.

We are subject to U.S. federal and state, and other countries’ and jurisdictions’, income, payroll, property, sales and use, fuel, and other types of taxes. These laws and regulations are inherently complex and the Company and its subsidiaries will be obliged to make judgments and interpretations about the application of these laws and regulations to the Company and its subsidiaries and their operations and businesses. The interpretation and application of these laws and regulations could be challenged by the relevant governmental authorities, which could result in administrative or judicial procedures, actions or sanctions, the ultimate outcome of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Company.

Changes in tax rates, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities may require significant judgment in determining the appropriate provision and related accruals for these taxes; and as a result, such changes could result in substantially higher taxes and, therefore, could have a significant adverse effect on our results of operations, financial conditions and liquidity. In this regard, the U.S., the E.U. and member states along with numerous other countries are currently engaged in establishing fundamental changes to tax laws affecting the taxation of multinational corporations including pursuant to the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project. The U.K. has already enacted significant measures in this regard. Further, the United Kingdom’s decision to leave the E.U. may result in changes to the interpretation and application of tax laws and regulations including changes to the interpretations of double tax treaties which could lead to significant changes in the U.K. tax burden of the Company. In addition, it may become more difficult for cash to be repatriated to U.K. companies without the application of withholding tax and the tax treatment of the interest on any intra-group loans may be impacted by these changes, both resulting in significant changes to the tax burden of the Company. Any such developments in the U.S. or in other countries could materially affect our tax burden and/or have a negative impact on our ability to compete in the global marketplace.

We intend to operate so as to be treated exclusively as a resident of the U.K. for tax purposes, but the relevant tax authorities may treat us as also being a resident of another jurisdiction for tax purposes.

We are a company incorporated in the U.K. Current U.K. tax law provides that we will be regarded as being U.K. resident for tax purposes from incorporation and shall remain so unless (i) we were concurrently resident of another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the U.K. and (ii) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction.

Based upon our anticipated management and organizational structure, we believe that we should be regarded solely as resident in the U.K. from our incorporation for tax purposes. However, because this analysis is highly factual and may depend on future changes in our management and organizational structure, there can be no assurance regarding the final determination of our tax residence. Should we be treated as resident in a country or jurisdiction other than the U.K., we could be subject to taxation in that country or jurisdiction on our worldwide

 

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income and may be required to comply with a number of material and formal tax obligations, including withholding tax and/or reporting obligations provided under the relevant tax law, which could result in additional costs and expenses.

We may not qualify for benefits under the tax treaties entered into between the United Kingdom and other countries.

We intend to operate in a manner such that when relevant, we are eligible for benefits under the tax treaties entered into between the U.K. and other countries. However, our ability to qualify and continue to qualify for such benefits will depend upon the requirements contained within each treaty and the applicable domestic laws, as the case may be, on the facts and circumstances surrounding our operations and management, and on the relevant interpretation of the tax authorities and courts.

Our failure to qualify for benefits under the tax treaties entered into between the U.K. and other countries could result in adverse tax consequences to us and could result in certain tax consequences of owning or disposing of our ordinary shares differing from those discussed in this prospectus.

The value of our deferred tax assets could become impaired, which could materially and adversely affect our results of operations and financial condition.

In accordance with FASB ASC Topic 740 “Income Taxes,” each quarter we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. This topic requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations and financial condition. In addition, future changes in laws or regulations could have a material impact on the company’s overall tax position.

Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expenses and benefits are determined separately for each tax paying component (an individual entity) or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions which have valuation allowances against their deferred tax assets provide no current financial statement tax benefit. As a result, changes in the mix of projected earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.

Restriction on use of tax attributes may result from an “ownership change” under applicable tax law.

Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), limits the ability of a corporation that undergoes an “ownership change” to use its tax attributes, such as net operating losses and tax credits. In general, an “ownership change” occurs if shareholders owning 5% or more (applying certain look-through rules) of an issuer’s outstanding ordinary shares, collectively, increase their ownership percentage by more than 50 percentage points within any three-year period over such shareholders’ lowest percentage ownership during this period. If we were to issue new ordinary shares, such new shares could contribute to such an “ownership change” under U.S. tax law. Moreover, not every event that could contribute to such an “ownership change” is within our control. If an “ownership change” under Section 382 were to occur, our ability to utilize tax attributes in the future may be limited.

 

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Risks Related to Our Indebtedness

Our substantial leverage could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry or our ability to pay our debts, and could divert our cash flow from operations to debt payments.

We are highly leveraged. As of September 30, 2017, the total principal amount of our debt was approximately $4.0 billion (equivalent). Subject to the limits contained in the credit agreements that govern our senior secured credit facilities, the indenture that governs our notes and the applicable agreements governing our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase. Specifically, our high level of debt could have important consequences, including the following:

 

    making it more difficult for us to satisfy our obligations with respect to our debt;

 

    limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

    requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

    increasing our vulnerability to general adverse economic and industry conditions;

 

    exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;

 

    limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

    placing us at a disadvantage compared to other, less leveraged competitors; and

 

    increasing our cost of borrowing.

We are a holding company, and our consolidated assets are owned by, and our business is conducted through, our subsidiaries. Revenue from these subsidiaries is our primary source of funds for debt payments and operating expenses. If our subsidiaries are restricted from making distributions, our ability to meet our debt service obligations or otherwise fund our operations may be impaired. Moreover, there may be restrictions on payments by subsidiaries to their parent companies under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make payments to shareholders only from profits. As a result, although a subsidiary of ours may have cash, we may not be able to obtain that cash to satisfy our obligation to service our outstanding debt or fund our operations.

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future. Although certain of the agreements governing our existing indebtedness contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the immediately preceding risk factor would increase.

 

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Interest rates may increase in the future. As a result, interest rates on our revolving credit facility or other variable rate debt offerings could be higher or lower than current levels. As of September 30, 2017, after taking into account our interest rate derivatives, approximately $1,305.7 million (equivalent), or 32.9%, of our outstanding debt had variable interest rates. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.

Certain of our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which could prevent us from capitalizing on business opportunities.

The credit agreements that govern our senior secured term loan facilities and the indenture that governs our notes impose significant operating and financial restrictions on our subsidiaries. These restrictions limit the ability of certain of our subsidiaries to, among other things:

 

    incur or guarantee additional debt or issue disqualified stock or preferred stock;

 

    pay dividends and make other distributions on, or redeem or repurchase, capital stock;

 

    make certain investments;

 

    incur certain liens;

 

    enter into transactions with affiliates;

 

    merge or consolidate;

 

    enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments;

 

    designate restricted subsidiaries as unrestricted subsidiaries; and

 

    transfer or sell assets.

As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include similar or more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or amend the covenants.

Our failure to comply with the restrictive covenants described above as well as other terms of our other indebtedness or the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our results of operations and financial condition could be adversely affected.

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our results of operations and our financial condition.

If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flows would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments.

 

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Repayment of our debt is dependent on cash flow generated by our subsidiaries, which may be subject to limitations beyond our control.

Our subsidiaries own all of our assets and conduct all of our operations. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to Gates Global LLC, by dividend, debt repayment or otherwise.

Unless they are obligors of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on such indebtedness or to make funds available to the notes issuers for that purpose. Our non-guarantor subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the notes. Each non-guarantor subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our non-guarantor subsidiaries. While limitations on our subsidiaries restrict their ability to pay dividends or make other intercompany payments to Gates Global LLC, these limitations are subject to certain qualifications and exceptions.

In the event that Gates Global LLC is unable to receive distributions from subsidiaries, it may be unable to make required principal and interest payments on our indebtedness.

Risks Related to this Offering and Ownership of our Ordinary Shares

Our Sponsor and its affiliates control us and their interests may conflict with ours or yours in the future.

Immediately following this offering, our Sponsor and its affiliates will beneficially own approximately             % of our ordinary shares (or             % if the underwriters exercise their over-allotment option in full). Moreover, under our articles of association (the “Articles”) and the shareholders agreement with our Sponsor that will be in effect by the completion of this offering, for so long as our Sponsor and its affiliates retain significant ownership of us, we will agree to nominate to our board individuals designated by such Sponsor. Even when our Sponsor and its affiliates cease to own ordinary shares representing a majority of the total voting power, for so long as our Sponsor continues to own a significant percentage of our ordinary shares, such Sponsor will still be able to significantly influence the composition of our board of directors and the approval of actions requiring shareholder approval through their voting power. Accordingly, for such period of time, our Sponsor will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as our Sponsor continues to own a significant percentage of our ordinary shares, such Sponsor will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your ordinary shares as part of a sale of our company and ultimately might affect the market price of our ordinary shares.

Our Sponsor and its affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our shareholders. Our shareholders’ agreement will provide that none of our Sponsor, any of its affiliates or any director who is not employed by us or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in our pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to us and our shareholders.

 

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Upon the listing of our ordinary shares on the NYSE, we will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

After completion of this offering, our Sponsor will continue to control a majority of the combined voting power of all classes of our shares entitled to vote generally in the election of directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements. For example, controlled companies, within one year of the date of the listing of their ordinary shares:

 

    are not required to have a board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;

 

    are not required to have a compensation committee that is composed entirely of independent directors; and

 

    are not required to have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we do not expect a majority of the directors on our board will be independent upon the closing of this offering. In addition, we do not expect that any of the committees of the board will consist entirely of independent directors upon the closing of this offering. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also will incur costs associated with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and related rules implemented by the Securities and Exchange Commission (the “SEC”) and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our ordinary shares, fines, sanctions and other regulatory action and potentially civil litigation.

Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and market price of the ordinary shares.

Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that eventually we will be required to meet. Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in

 

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accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. Beginning with our second annual report on Form 10-K, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting on an annual basis. If we are not able to complete our initial assessment of our internal controls and otherwise implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting.

Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, which may result in a breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the market price of our ordinary shares.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our ordinary shares, our share price and trading volume could decline.

The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our ordinary shares or publishes inaccurate or unfavorable research about our business, our ordinary share price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our ordinary share price or trading volume to decline and our ordinary shares to be less liquid.

There may not be an active trading market for our ordinary shares, which may cause our ordinary shares to trade at a discount from their initial offering price and make it difficult to sell the ordinary shares you purchase.

Prior to this offering, there has not been a public trading market for our ordinary shares. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained which would make it difficult for you to sell your ordinary shares at an attractive price or at all. The initial public offering price per ordinary share will be determined by agreement between us and the representatives of the underwriters, and may not be indicative of the price at which the ordinary shares will trade in the public market after this offering.

The market price of our ordinary shares may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our ordinary shares may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our ordinary shares regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to shareholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar

 

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companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of our ordinary shares could decrease significantly. You may be unable to resell your ordinary shares at or above the initial public offering price.

Stock markets and the price of our ordinary shares may experience extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Because we have no current plans to pay dividends on our ordinary shares, you may not receive any return on your investment unless you sell your ordinary shares for a price greater than that which you paid for them.

We have no current plans to pay dividends on our ordinary shares. The declaration, amount and payment of any future dividends on our ordinary shares will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our shareholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by our senior secured credit facilities and notes and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future. As a result, you may not receive any return on an investment in our ordinary shares unless you sell your ordinary shares for a price greater than that which you paid for them.

English law will require that we meet certain additional financial requirements before we declare dividends and repurchase shares.

Under English law, with limited exceptions, Gates Industrial Corporation plc will only be able to declare dividends, make distributions or repurchase shares out of “distributable reserves” on Gates Industrial Corporation plc’s stand-alone balance sheet, without regard to our consolidated financial statements. Distributable reserves are a company’s accumulated, realized profits, to the extent not previously utilized by distribution or capitalization, less its accumulated, realized losses, to the extent not previously written off in a reduction or reorganization of capital duly made.

Immediately following completion of this offering, Gates Industrial Corporation plc will not have distributable reserves. At some point following completion of the offering, we intend to seek the approval of a capital reduction by the English court to create distributable reserves that could be used for future dividend payments or to effect share repurchases. If that approval is not received, Gates Industrial Corporation plc will not have sufficient distributable reserves to declare and pay dividends for the foreseeable future and Gates Industrial Corporation plc would be required to undertake other efforts to allow it to declare dividends or repurchase shares following the offering. These efforts may include certain intra-group reorganizations which are established alternatives for the creation of distributable reserves in a U.K. public limited company.

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per ordinary share will be substantially higher than our net tangible book deficit per ordinary shares immediately prior to the offering. Consequently, if you purchase ordinary shares in this offering at an assumed public offering price of $         per ordinary share, which is the midpoint of the range on the front cover of this prospectus, you will incur immediate and substantial dilution in an amount of $         per ordinary share.

 

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You may be diluted by the future issuance of additional ordinary shares in connection with our incentive plans, acquisitions or otherwise.

Prior to the completion of this offering, a resolution will be adopted by our shareholders to authorize our board of directors to allot our ordinary shares and to grant rights to subscribe for or convert any security into such shares for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Additionally, we have reserved              ordinary shares for issuance under our Omnibus Incentive Plan. See “Executive and Director Compensation—Equity Incentive Plans—Gates Industrial Corporation plc 2018 Omnibus Incentive Plan.” Any ordinary shares that we issue, including under our Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase ordinary shares in this offering.

If we or our pre-IPO owners sell additional ordinary shares after this offering, the market price of our ordinary shares could decline.

The sale of substantial amounts of our ordinary shares in the public market, or the perception that such sales could occur, could harm the prevailing market price of our ordinary shares. These sales, or the possibility that these sales may occur, also might make it more difficult for you to sell your ordinary shares at a time and at a price that you deem appropriate, if at all. Upon completion of this offering, we will have a total of              ordinary shares outstanding (or              outstanding ordinary shares if the underwriters exercise their over-allotment option in full). Of the outstanding ordinary shares, only ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), except that any ordinary shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.

The remaining outstanding              ordinary shares beneficially owned by our pre-IPO owners and management after this offering will be subject to certain restrictions on resale. We, our officers, directors and certain holders of our outstanding ordinary shares immediately prior to this offering, including our Sponsors, that collectively will own depository receipts representing              ordinary shares following this offering, will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the ordinary shares held by them for 180 days following the date of this prospectus. The underwriters may, in their sole discretion, release all or any portion of the ordinary shares subject to lock-up agreements. See “Underwriting (Conflicts of Interest)” for a description of these lock-up agreements. See “Principal Shareholders” and “Shares Eligible for Future Sale—Lock-Up Agreements.

Upon the expiration of the lock-up agreements described above, all of such ordinary shares will be eligible for resale in the public market, subject, in the case of ordinary shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsor will continue to be considered an affiliate following the expiration of the lock-up period based on its expected share ownership and its board nomination rights. Certain other of our shareholders may also be considered affiliates at that time. However, commencing 180 days following this offering, the holders of these ordinary shares will have the right, subject to certain exceptions and conditions, to require us to register their ordinary shares under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding ordinary shares would result in such securities becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register ordinary shares or securities convertible into or exchangeable for ordinary shares issued pursuant to the 2014 Incentive Plan, the 2015 Non-Employee Director Incentive Plan or the Omnibus Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, ordinary shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover              ordinary shares.

 

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As restrictions on resale end, the market price of our ordinary shares could drop significantly if the holders of these restricted ordinary shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our ordinary shares or other securities or to use our ordinary shares as consideration for acquisitions of other businesses, investments or other corporate purposes.

U.S. investors may have difficulty enforcing civil liabilities against our company, our directors or members of senior management and the experts named in this prospectus.

There is doubt as to whether English courts would enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in the United Kingdom will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and the United Kingdom do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.

We are incorporated under English law. The rights of holders of ordinary shares are governed by English law, including the provisions of the Companies Act 2006 (the “Companies Act”), and by our Articles. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. See “Description of Share Capital–Differences in Corporate Law” for a description of certain differences between the provisions of the Companies Act applicable to us and, for example, the Delaware General Corporation Law relating to shareholders’ rights and protections.

The U.K. City Code on Takeovers and Mergers (the “Takeover Code”) applies, among other things, to an offer for a public company whose registered office is in the United Kingdom (or the Channel Islands or the Isle of Man) and whose securities are not admitted to trading on a regulated market in the United Kingdom (or the Channel Islands or the Isle of Man) if the company is considered by the Panel on Takeovers and Mergers (the “Takeover Panel”) to have its place of central management and control in the United Kingdom (or the Channel Islands or the Isle of Man). This is known as the “residency test”. Under the Takeover Code, the Takeover Panel will determine whether we have our place of central management and control in the United Kingdom by looking at various factors, including the structure of our board of directors, the functions of the directors and where they are resident.

If at the time of a takeover offer the Takeover Panel determines that we have our place of central management and control in the United Kingdom, we would be subject to a number of rules and restrictions, including but not limited to the following: (i) our ability to enter into deal protection arrangements with a bidder would be extremely limited; (ii) we might not, without the approval of our shareholders, be able to perform certain actions that could have the effect of frustrating an offer, such as issuing shares or carrying out acquisitions or disposals; and (iii) we would be obliged to provide equality of information to all bona fide competing bidders.

Following the completion of this offering, our Sponsor will have an interest in over 50% of our voting share capital, and therefore, if the Takeover Panel were to determine that we were subject to the Takeover Code, our Sponsor would be able to increase its aggregate holding in us without triggering the requirement under Rule 9 of the Takeover Code to make a cash offer for the outstanding shares in the Issuer.

 

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The Takeover Panel has confirmed to our representatives that, on the basis of our planned board of directors, it does not consider the Takeover Code to apply to the Company, although that position is subject to change if our place of central management and control is subsequently found to move to the U.K.

Any shareholder whose principal currency is not the U.S. dollar will be subject to exchange rate fluctuations.

Our ordinary shares will be traded in, and any cash dividends or other distributions to be declared in respect of them, if any, will be denominated in, U.S. dollars. Shareholders whose principal currency is not the U.S. dollar will be exposed to foreign currency exchange rate risk. Any depreciation of the U.S. dollar in relation to such foreign currency would reduce the value of our ordinary shares held by such shareholders, whereas any appreciation of the U.S. dollar would increase their value in foreign currency terms. In addition, we will not offer our shareholders the option to elect to receive dividends, if any, in any other currency. Consequently, our shareholders may be required to arrange their own foreign currency exchange, either through a brokerage house or otherwise, which could incur additional commissions or expenses.

Transfers of our shares outside DTC may be subject to stamp duty or stamp duty reserve tax in the U.K., which would increase the cost of dealing in our shares.

On completion of this offering, as noted below, it is anticipated that the new ordinary shares will be issued to a nominee for The Depository Trust Company (“DTC”) and corresponding book-entry interests credited in the facilities of DTC. On the basis of current law, no charges to U.K. stamp duty or stamp duty reserve tax (“SDRT”) are expected to arise on the issue of the ordinary shares into DTC’s facilities or on transfers of book-entry interests in ordinary shares within DTC’s facilities and you are strongly encouraged to hold your ordinary shares in book-entry form through the facilities of DTC.

A transfer of title in the ordinary shares from within the DTC system to a purchaser out of DTC and any subsequent transfers that occur entirely outside the DTC system, will attract a charge to stamp duty at a rate of 0.5% of any consideration, which is payable by the transferee of the ordinary shares. Any such duty must be paid (and the relevant transfer document, if any, stamped by HM Revenue & Customs (“HMRC”)) before the transfer can be registered in our company books. However, if those ordinary shares are redeposited into DTC, the redeposit will attract stamp duty or SDRT at the rate of 1.5% to be paid by the transferor.

In connection with the completion of this offering, we expect to put in place arrangements to require that our ordinary shares held in certificated form cannot be transferred into the DTC system until the transferor of the ordinary shares has first delivered the ordinary shares to a depositary specified by us so that stamp duty (and/or SDRT) may be collected in connection with the initial delivery to the depositary. Any such ordinary shares will be evidenced by a receipt issued by the depositary. Before the transfer can be registered in our books, the transferor will also be required to put funds in the depositary to settle the resultant liability to stamp duty (and/or SDRT), which will be charged at a rate of 1.5% of the value of the shares.

For further information about the U.K. stamp duty and SDRT implications of holding ordinary shares, please see the section entitled “Taxation—Material U.K. Tax Considerations” of this prospectus.

If our ordinary shares are not eligible for deposit and clearing within the facilities of DTC, then transactions in our securities may be disrupted.

The facilities of DTC are a widely-used mechanism that allow for rapid electronic transfers of securities between the participants in the DTC system, which include many large banks and brokerage firms. We expect that our ordinary shares will be eligible for deposit and clearing within the DTC system. We expect to enter into arrangements with DTC whereby we will agree to indemnify DTC for any SDRT that may be assessed upon it as a result of its service as a depository and clearing agency for our ordinary shares. We expect these actions, among others, will result in DTC agreeing to accept the ordinary shares for deposit and clearing within its facilities.

 

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DTC is not obligated to accept the ordinary shares for deposit and clearing within its facilities in connection with this offering and, even if DTC does initially accept the ordinary shares, it will generally have discretion to cease to act as a depository and clearing agency for the ordinary shares including to the extent that any changes in U.K. law (including changes as a result of the U.K.’s decision to leave the E.U., which could affect the stamp duty or SDRT position as further discussed in the section entitled “Taxation—Material U.K. Tax Considerations” of this prospectus) changes the stamp duty or SDRT position in relation to the ordinary shares. While we would pursue alternative arrangements to preserve our listing and maintain trading, any such disruption could have a material adverse effect on the market price of our ordinary shares.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements 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 indicated in these statements. These factors include but are not limited to those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

 

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MARKET AND INDUSTRY DATA

This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

Although we believe that these third-party sources are reliable, we do not guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified this information. Some market data and statistical information are also based on our good faith estimates, which are derived from management’s knowledge of our industry and such independent sources referred to above. Certain market, ranking and industry data included elsewhere in this prospectus, including the size of certain markets and our size or position and the positions of our competitors within these markets, including our services relative to our competitors, are based on estimates of our management. These estimates have been derived from our management’s knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate and have not been verified by independent sources. Unless otherwise noted, all of our market share and market position information presented in this prospectus is an approximation. Our market share and market position in each of our businesses, unless otherwise noted, is based on our sales relative to the estimated sales in the markets we served. References herein to our being a leader in a market or product category refer to our belief that we have a leading market share position in each specified market, unless the context otherwise requires. As there are no publicly available sources supporting this belief, it is based solely on our internal analysis of our sales as compared to our estimates of sales of our competitors. In addition, the discussion herein regarding our various end markets is based on how we define the end markets for our products, which products may be either part of larger overall end markets or end markets that include other types of products and services.

 

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TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website domain names and addresses are our service marks or trademarks. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. The trademarks we own or have the right to use include, among others, Gates. We also own or have the rights to copyrights that protect the content of our literature, be it in print or electronic form.

Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names. All trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

 

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USE OF PROCEEDS

We estimate that the net proceeds that we will receive from this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions, will be approximately $         million (or $         million if the underwriters exercise in full their over-allotment option to purchase additional ordinary shares).

We intend to use the net proceeds from this offering (i) to redeem all €235.0 million ($276.5 million equivalent as of September 30, 2017) principal amount of euro notes, (ii) to redeem approximately $         million principal amount of dollar notes, (iii) to redeem our £50,000 redeemable preferred share issued in connection with the pre-IPO reorganization transactions and (iv) the remainder, if any, for general corporate purposes, which may include the repayment of other outstanding indebtedness. As of September 30, 2017, €235.0 million ($276.5 million equivalent as of September 30, 2017) aggregate principal amount of the euro notes and $1,190.0 million aggregate principal amount of the dollar notes were outstanding. The euro notes and dollar notes mature on July 15, 2022 and have interest rates of 5.75% per annum and 6.00% per annum, respectively. For a further description of our senior notes being repaid, see “Description of Indebtedness—Senior Notes.”

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the number of ordinary shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions. An increase or decrease of 1,000,000 ordinary shares from the expected number of ordinary shares to be sold in the offering would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming no change in the assumed initial public offering price per share. We expect any increase or decrease in the net proceeds received to correspondingly increase or decrease the principal amount of dollar notes to be redeemed.

Pending specific application of these proceeds, we expect to invest them primarily in short-term demand deposits at various financial institutions.

 

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DIVIDEND POLICY

We have no current plans to pay dividends on our ordinary shares. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries. In addition, the ability of our subsidiaries to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing any indebtedness we or our subsidiaries may incur in the future.

In the nine months ended September 30, 2017, Fiscal 2016, Fiscal 2015 and Post-Acquisition Predecessor 2014, we did not pay any dividends on Omaha Topco’s shares.

 

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CAPITALIZATION

The following table sets forth consolidated cash and cash equivalents and capitalization as of September 30, 2017 for:

 

    Omaha Topco on a historical basis; and

 

    Gates Industrial Corporation plc on an as adjusted basis to reflect:

 

    the pre-IPO reorganization transactions described under “Summary—Our Organizational Structure”;

 

    the sale by Gates Industrial Corporation plc of             ordinary shares in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and

 

    the application of the net proceeds from this offering as described under “Use of Proceeds” as if this offering and the application of the net proceeds of this offering had occurred on September 30, 2017.

The information below is illustrative only and our capitalization following this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. Cash and cash equivalents are not components of our total capitalization. You should read this table together with the other information contained in this prospectus, including “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes thereto included elsewhere in this prospectus.

 

     September 30, 2017  
(dollars in millions, except share amounts)    Omaha Topco
Actual
    Gates Industrial
Corporation plc
As
Adjusted(1)
 
     (unaudited)  

Cash and cash equivalents(2)

   $ 528.4     $               
  

 

 

   

 

 

 

Debt, long term and current portion:

    

Senior secured credit facilities(3)

   $ 2,457.0     $  

Senior notes and other unsecured debt(4)

     1,458.5    
  

 

 

   

 

 

 

Total debt, long term and current portion

     3,915.5    
  

 

 

   

 

 

 

Equity:

    

Omaha Topco shares, par value $0.0001 per share, authorized shares: 1,000,000,000; outstanding shares, actual basis: 321,752,488

     —      

Gates Industrial Corporation plc ordinary shares, par value $0.01 per share, outstanding ordinary shares, as adjusted basis:        

     —      

Additional paid-in capital

     1,628.5    

Treasury stock, at cost, 1,002,900 shares

     (5.1  

Accumulated other comprehensive loss

     (742.7  

Retained profit

     18.2    
  

 

 

   

 

 

 

Total shareholders’ equity

     898.9    

Non-controlling interests

     398.3    
  

 

 

   

 

 

 

Total equity (deficit)

     1,297.2    
  

 

 

   

 

 

 

Total capitalization

   $ 5,212.7     $  
  

 

 

   

 

 

 

 

(1)

To the extent we change the number of our ordinary shares sold in this offering from the ordinary shares we expect to sell or we change the initial public offering price from the $         per share assumed initial public

 

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  offering price, representing the midpoint of the price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of as adjusted total shareholders’ equity and total capitalization may increase or decrease. A $1.00 increase (decrease) in the assumed initial public offering price per share, assuming no change in the number of ordinary shares to be sold, would increase (decrease) the net proceeds that we receive in this offering and each of total shareholders’ equity and total capitalization by approximately $            . An increase (decrease) of 1,000,000 ordinary shares in the expected number of ordinary shares to be sold in the offering, assuming no change in the assumed initial offering price per share, would increase (decrease) our net proceeds from this offering and our as adjusted total shareholders’ equity and total capitalization by approximately $            .
(2) Actual and as adjusted cash and cash equivalents does not include $1.6 million of restricted cash held in the form of cash given as collateral under letters of credit for insurance and regulatory purposes.
(3) As of September 30, 2017, our senior secured credit facilities consisted of (1) the $125.0 million revolving credit facility, subject to customary borrowing conditions, with no amounts drawn as of September 30, 2017, (2) the $325.0 million ABL Revolving Credit Facility (as defined herein), subject to customary borrowing conditions, with no amounts drawn as of September 30, 2017 and $267.4 million available for borrowings as of September 30, 2017 after giving effect to $57.0 million in outstanding letters of credit, (3) the $1,696.5 million U.S. dollar term loans (the “Dollar Term Loans”), comprised of the principal amount of $1,733.7 million and accrued interest of $0.5 million, partially offset by deferred financing costs of $37.7 million, and (4) the €646.3 million ($760.5 million equivalent) euro term loans (the “Euro Term Loans”), comprised of the principal amount of $771.0 million equivalent and accrued interest of $0.1 million equivalent, partially offset by deferred financing costs of $10.6 million equivalent. See “Description of Certain Indebtedness—Senior Secured Credit Facilities” and “Description of Certain Indebtedness—ABL Revolving Credit Facility.”
(4) Actual represents primarily the $1,190.0 million principal amount of dollar notes and accrued interest of $15.1 million thereon, partially offset by deferred financing costs of $21.5 million, and €235.0 million ($276.5 million equivalent as of September 30, 2017) principal amount of euro notes and accrued interest of $3.4 million equivalent thereon, partially offset by deferred financing costs of $5.4 million equivalent. See “Description of Certain Indebtedness—Senior Notes.”

 

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DILUTION

If you invest in our ordinary shares in this offering, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share and the as adjusted net tangible book deficit per share after this offering. Dilution results from the fact that the per share offering price of the ordinary shares is substantially in excess of the as adjusted net tangible book deficit per share attributable to the ordinary shares held by our pre-IPO owners.

Our net tangible book deficit as of September 30, 2017 was approximately $            , or $             per share. Net tangible book deficit represents the amount of total tangible assets less total liabilities, and net tangible book deficit per share represents net tangible book deficit divided by the number of ordinary shares outstanding following the pre-IPO reorganization transactions.

After giving effect to our sale of the ordinary shares in this offering at an assumed initial public offering price of $         per share, the midpoint range described on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us and the application of the proceeds therefrom as described in “Use of Proceeds,” our net tangible book deficit as of September 30, 2017 would have been $            , or $         per share. This represents an immediate increase in net tangible book value of $         per share to our pre-IPO owners and an immediate dilution in net tangible book value of $         per share to investors in this offering.

The following table illustrates this dilution on a per share basis assuming the underwriters do not exercise their over-allotment option:

 

Assumed initial public offering price per share

      $               

Net tangible book deficit per share as of September 30, 2017

   $                  

Decrease in net tangible book deficit per share attributable to investors in this offering

   $                  
  

 

 

    

As adjusted net tangible book deficit per share after the offering

      $               
     

 

 

 

Dilution per share to investors in this offering

      $               
     

 

 

 

Each $1.00 increase in the assumed offering price of $         per share would decrease our net tangible book deficit after giving effect to the offering by $         million, or by $         per share, assuming the number of ordinary shares offered by us remains the same and after deducting estimated underwriting discounts and commissions. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

The following table summarizes, as of September 30, 2017, the total number of ordinary shares purchased from us, the total cash consideration paid to us, and the average price per share paid by pre-IPO owners and by investors in this offering. As the table shows, new investors purchasing ordinary shares in this offering will pay an average price per share substantially higher than our pre-IPO owners paid. The table below reflects an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, for ordinary shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Ordinary Shares
Purchased
    Total
Consideration
    Average
Price Per
Share
 
(in thousands, except percentages and per share amounts)    Number      Percent     Amount      Percent    

Pre-IPO owners

               $                            $               

Investors in this offering

               $                        $           

Total

               $                        $           

 

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Each $1.00 increase in the assumed offering price of $         per share would increase total consideration paid by investors in this offering and total consideration paid by all shareholders by $         million, assuming the number of ordinary shares offered by us remains the same. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

To the extent that outstanding options are exercised, you will experience further dilution. The table below reflects, on an as adjusted basis as of September 30, 2017, the exercise of          ordinary shares issuable in respect of outstanding options granted under the 2014 Incentive Plan and 2015 Non-Employee Director Incentive Plan and an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, for ordinary shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Ordinary Shares
Purchased
    Total
Consideration
    Average
Price Per
Share
 
(in thousands, except percentages and per share amounts)    Number      Percent     Amount      Percent    

Pre-IPO owners

               $                          $             

Investors in this offering

               $                      $         

Total

               $                      $         

The dilution information above is for illustrative purposes only. Our as adjusted net tangible book deficit following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our ordinary shares and other terms of this offering determined at pricing.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

Gates Industrial Corporation plc will be the financial reporting entity following this offering. Other than the inception balance sheet, the financial statements of Gates Industrial Corporation plc have not been included in this prospectus as it is a newly organized entity, has no significant business transactions or activities to date, has no capitalization, and had no assets or liabilities during the periods presented in this prospectus. The following table therefore sets forth our selected historical consolidated financial information of the Post-Acquisition Predecessor to Gates Industrial Corporation plc, Omaha Topco and Pre-Acquisition Predecessor to Omaha Topco, Pinafore Holdings B.V., for the periods and dates indicated. The balance sheet data as of December 31, 2016 and January 2, 2016 and the statement of operations and cash flow data for Fiscal 2016, Fiscal 2015, Post-Acquisition Predecessor 2014 and Pre-Acquisition Predecessor 2014 have been derived from the audited consolidated financial statements of Omaha Topco included elsewhere in this prospectus. The balance sheet data as of January 3, 2015 has been derived from the unaudited consolidated balance sheet of Omaha Topco that is not included in this prospectus. The balance sheet data as of December 31, 2013 and December 31, 2012 and the statement of operations data for the fiscal year ended December 31, 2013 (“Fiscal 2013”) and the fiscal year ended December 31, 2012 (“Fiscal 2012”) have been derived from the audited consolidated financial statements of Pinafore Holdings B.V. that are not included in this prospectus. The balance sheet data as of September 30, 2017 and the statement of operations and cash flow data for the nine months ended September 30, 2017 and the nine months ended October 1, 2016 have been derived from the unaudited condensed consolidated financial statements of Omaha Topco included elsewhere in this prospectus. The unaudited condensed consolidated financial statements and unaudited consolidated balance sheet as of January 3, 2015 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to present fairly the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for the full year and our historical results are not necessarily indicative of the results that should be expected in any future period.

 

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You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus. See also “About this Prospectus—Financial Statement Presentation.”

 

(dollars in millions)   Nine
months
ended
September 30,
2017
    Nine
months
ended

October 1,
2016
    Fiscal 
2016
    Fiscal 
2015
    Post-
Acquisition
Predecessor

2014
    Pre-
Acquisition
Predecessor

2014
    Fiscal
2013
    Fiscal
2012
 

Statement of operations data:

               

Net sales

  $ 2,259.9     $ 2,079.3     $ 2,747.0     $ 2,745.1     $ 1,445.1     $ 1,597.1     $ 2,947.3     $ 2,922.8  

Operating income (loss) from continuing operations

    310.4       237.3       298.8       184.4       (104.6     104.2       301.0       195.8  

Net income (loss) from continuing operations

    52.4       65.2       71.9       50.9       (86.9     14.3       120.7       (118.2

Gain (loss) on disposal of discontinued operations, net of tax

    0.1       3.8       12.4       —         (2.3     (0.1     1.0       793.0  

(Loss) from discontinued operations, net of tax benefit

    —         —         —         —         —         (47.9     (6.8     79.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    52.5       69.0       84.3       50.9       (89.2     (33.7     114.9       754.4  

Non-controlling interests

    (20.0     (21.2     (26.6     (26.0     (7.7     (11.5     (28.4     (23.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to shareholders

  $ 32.5     $ 47.8     $ 57.7     $ 24.9     $ (96.9   $ (45.2   $ 86.5     $ 731.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(dollars in millions)    As of
September 30,
2017
     As of
December 31,
2016
     As of
January 2,
2016
     As of
January 3,
2015
    As of
December 31,
2013
     As of
December 31,
2012
 

Balance sheet data:

                

Total assets

   $ 6,756.1      $ 6,383.3      $ 6,565.6      $ 7,143.5     $ 5,164.2      $ 5,323.7  

Debt, long term and current portion

   $ 3,915.5      $ 3,836.6      $ 3,907.3      $ 4,002.3     $ 1,718.4      $ 1,845.9  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

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 manufacturers as specified components, with the majority of our revenues 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 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.

During Fiscal 2016, we generated $2,747.0 million in net sales to over 8,000 customers in 128 countries, our net income was $84.3 million and our Adjusted EBITDA was $594.9 million, representing an Adjusted EBITDA margin of 21.7%, an increase of 180 basis points from Fiscal 2015. During Fiscal 2015, we generated $2,745.1 million in net sales, our net income was $50.9 million and our Adjusted EBITDA was $547.2 million, representing an Adjusted EBITDA margin of 19.9%. During the nine months ended September 30, 2017, our net sales increased 8.7% to $2,259.9 million compared to $2,079.3 million for the nine months ended October 1, 2016, our net income was $52.5 million for the nine months ended September 30, 2017, compared to $69.0 million in the prior year period, and our Adjusted EBITDA increased 11.0% to $496.1 million, compared to $447.0 million in the prior year period, resulting in an Adjusted EBITDA margin of 22.0%, a 50 basis point increase compared to the prior year period. As of September 30, 2017, our total indebtedness was approximately $3,916.1 million, or $                 million on a pro forma basis after giving effect to this offering and the use of proceeds therefrom. For reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure prepared in accordance with GAAP, see “Summary—Summary Historical Consolidated Financial Information.”

Business Trends

Our revenue has historically been highly correlated with industrial activity and utilization, and not with any single end market given the diversification of our business and high exposure to replacement markets. Our products are used in applications across numerous end markets across both our replacement and first-fit channels, including construction, agriculture, energy, automotive, transportation, general industrial, consumer products and many others. 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 primarily serve a large base of installed

 

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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 Fiscal 2016 and the nine months ended September 30, 2017, sales into replacement channels accounted for 64.2% and 63.9%, respectively, of our total net sales. Of those sales into replacement channels, in Fiscal 2016 43.8% went into the industrial replacement channel and 56.2% went into the automotive replacement channel. In the nine months ended September 30, 2017, 46.1% of the sales into replacement channels went into the industrial replacement channel and 53.9% went into the automotive replacement channel. 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.

During Fiscal 2016 and the nine months ended September 30, 2017, sales into first-fit channels accounted for 35.8% and 36.1%, respectively, of our total net sales. Further, approximately half of our net sales to first-fit customers in both Fiscal 2016 and the nine months ended September 30, 2017 were to industrial customers and the balance to automotive customers. 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 less than 10% of our total net sales in Fiscal 2016 and nine months ended September 30, 2017. As a result of the foregoing factors, we do not believe that our historical revenues have had any meaningful correlation to global automotive production.

Nine Months Ended September 30, 2017 Results Compared with Nine Months Ended October 1, 2016 Results

Summary Gates Performance

 

(dollars in millions)    Nine months ended
September 30, 2017
    Nine months ended
October 1, 2016
 

Net sales

   $ 2,259.9     $ 2,079.3  

Cost of sales

     (1,343.9     (1,262.9
  

 

 

   

 

 

 

Gross profit

     916.0       816.4  

Selling, general and administrative expenses

     (586.1     (570.0

Transaction-related costs

     (11.3     —  

Impairments

     —       (1.4

Restructuring expenses

     (8.3     (8.0

Other operating income

     0.1       0.3  
  

 

 

   

 

 

 

Operating income

     310.4       237.3  

Interest expense

     (179.0     (162.4

Other (expense) income

     (46.1     5.3  
  

 

 

   

 

 

 

Income before taxes

     85.3       80.2  

Income tax expense

     (32.9     (15.1

Equity in net income of equity method investees, net of tax

     —       0.1  
  

 

 

   

 

 

 

Net income from continuing operations

   $ 52.4     $ 65.2  
  

 

 

   

 

 

 

Adjusted EBITDA(1)

   $ 496.1     $ 447.0  

Adjusted EBITDA margin (%)

     22.0     21.5

 

(1) See “—Non-GAAP Measures” for a reconciliation of Adjusted EBITDA to net income, the closest comparable GAAP measure, for each of the periods presented.

 

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Net sales

Net sales during the first nine months of 2017 were $2,259.9 million, up by 8.7%, or $180.6 million, compared with net sales during the prior year period of $2,079.3 million. Our net sales in the first nine months of 2017 were adversely impacted by movements in average currency exchange rates of $8.2 million compared with the prior year period, due principally to the strengthening of the U.S. dollar against the Chinese Renminbi ($9 million) and British Pound ($6 million), offset partially by the Brazilian Real ($7 million). Excluding this impact, net sales increased by $188.8 million, or 9.1%, during the nine months ended September 30, 2017 compared with the prior year period. This increase was due almost exclusively to higher sales volumes of approximately $180 million, with no significant impact from pricing.

Sales in our Power Transmission and Fluid Power businesses grew by 6.3% and 13.6%, respectively. This growth was focused in the industrial markets, where we continued to see recovery across all regions, and predominantly in the replacement channels. Growth in our construction, agriculture and general industrial end markets was 19.5%, 12.8% and 12.3%, respectively. Industrial demand increased globally, but Asia and North America performed particularly well, with sales to industrial end markets increasing by 24.4% (or $41.1 million) and 12.0% (or $61.7 million), respectively, compared with the prior year period. In Asia, this growth was driven by China, where industrial sales grew by 45.4% compared with the prior year period. The automotive end markets contributed a further $43.8 million in sales growth during the nine months ended September 30, 2017, driving 24.2% of our total growth, primarily in China, which grew by 16.4% compared with the prior year period. Sales in the energy end market, a smaller component of our business comprising approximately 7.0% of our net sales in the nine months of 2017, grew by 15.5%.

Cost of sales

Cost of sales for the first nine months of 2017 was $1,343.9 million, an increase of 6.4%, or $81.0 million, compared with $1,262.9 million in the prior year period. The increase was driven primarily by higher volumes ($110.6 million) and, to a lesser extent, by raw material inflation ($15.8 million), offset partially by productivity improvements of $24.4 million, a decrease of $12.5 million in depreciation, and favorable impacts of $3.7 million from prior period inventory adjustments related to decisions made in 2016 to close certain lines of business in Singapore.

Gross profit

Gross profit for the first nine months of 2017 was $916.0 million, up 12.2% from $816.4 million during the prior year period. The increase reflects the impact of higher net sales driven by volumes as well as manufacturing improvements.

Our gross profit margin increased to 40.5% during the first nine months of 2017 from 39.3% during the prior year period. Gross profit margin increased 120 basis points in the period due to increased sales volumes on our partially fixed cost base and our productivity improvements.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses for the first nine months of 2017 were $586.1 million compared with $570.0 million during the prior year period. This increase of $16.1 million was driven primarily by higher selling and distribution expenses of $23.1 million, which increased broadly in line with the higher net sales in the period and higher labor and benefits costs of $12.3 million as we continue to invest in our commercial function. These higher costs were partially offset by lower intangible asset amortization of $16.9 million compared with the prior year period.

Transaction-related costs

Transaction-related costs for the first nine months of 2017 were $11.3 million compared with zero during the prior year period. Expenses in the first nine months of 2017 included $4.3 million related to payments made

 

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on resolution of certain contingencies that affected the purchase price paid by Blackstone on acquiring Gates in July 2014 and $2.0 million related to professional fees incurred as part of the debt refinancing initiated during March 2017. The remainder of the costs incurred during the current period related primarily to acquisition activities including the acquisition of Techflow Flexibles.

Restructuring expenses

Restructuring costs of $8.3 million were recognized during the first nine months of 2017, including $6.1 million in relation to severance costs, primarily in the U.S., Europe and China associated with organizational rationalizations.

Restructuring costs of $8.0 million were recognized during the prior year period, including $7.3 million in relation to severance costs, largely in North America and Europe.

Interest expense

Interest expense for the first nine months of 2017 was $179.0 million compared with $162.4 million for the prior year period. Our interest expense may be analyzed as follows:

 

     Nine months ended  
(dollars in millions)    September 30, 2017      October 1, 2016  

Debt:

     

Dollar Term Loan

   $ 93.6      $ 90.5  

Euro Term Loan

     16.4        8.0  

Dollar notes

     53.5        48.6  

Euro notes

     12.3        11.9  

Other loans

     1.1        1.3  
  

 

 

    

 

 

 
     176.9        160.3  

Other interest expense

     2.1        2.1  
  

 

 

    

 

 

 
   $ 179.0      $ 162.4  
  

 

 

    

 

 

 

Details of the bank and other loans are presented in note 13 to the unaudited condensed consolidated financial statements included elsewhere in this prospectus. Interest expense includes the amortization of issue costs incurred in relation to the debt and the amortization of the deferred premium on our interest rate caps. Interest expense during the first nine months of 2017 increased over the prior year period due to the debt refinancing completed in April 2017 which caused a $14.2 million acceleration of deferred financing costs on the Dollar Term Loan due to the $650 million partial repayment of that tranche. This impact was offset partially by a lower interest charge incurred due to the partial Dollar Term Loan repayment on April 7, 2017. The interest on the Euro Term Loan increased from $8.0 million in the prior year period to $16.4 million in the first nine months of 2017 as a result of the additional debt of €466.2 million drawn on April 7, 2017, offset partially by a reduction in the rate of interest on this facility. The interest associated with the dollar notes increased due to the additional $150 million of debt incurred on March 30, 2017 as part of the refinancing.

 

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Other (expense) income

Other expense for the first nine months of 2017 was $46.1 million, which changed from $5.3 million of other income in the prior year period driven primarily by the impacts of movements in currency exchange rates on unhedged net debt and derivative instruments. Included in unhedged debt as of September 30, 2017, is €389.7 million of the additional €466.2 million Euro Term Loan debt borrowing drawn in April 2017, which did not qualify for net investment hedging. Our other (expense) income may be analyzed as follows:

 

     Nine months ended  
(dollars in millions)    September 30, 2017      October 1, 2016  

Interest on bank deposits

   $ 3.3      $ 2.0  

Foreign currency (loss) gain on net debt and debt hedging instruments

     (47.6      3.2  

Other

     (1.8      0.1  
  

 

 

    

 

 

 
   $ (46.1    $ 5.3  
  

 

 

    

 

 

 

Income tax expense

For interim income tax reporting we estimate our annual effective tax rate and apply this effective tax rate to our year to date pre-tax income. The tax effects of unusual or infrequently occurring items, including the effects of changes in tax laws or rates, are reported in the interim period in which they occur.

For the first nine months of 2017, the company had income tax expense of $32.9 million on pre-tax income of $85.3 million, resulting in an effective tax rate of 38.6% compared with an income tax expense of $15.1 million on pre-tax income of $80.2 million, which resulted in an effective income tax rate of 18.8% for the prior year period. The increase in the effective tax rate for fiscal year 2017 is primarily the result of our geographical mix of earnings, the buyout of certain U.S. pension plans, and changes in valuation allowances of $14.5 million. In fiscal year 2016, the company recognized tax benefits related to the release of uncertain tax positions, tax law changes, and non-taxable debt forgiveness income of $5.5 million.

Adjusted EBITDA

Adjusted EBITDA for the first nine months of 2017 was $496.1 million, an increase of 11.0% or $49.1 million, compared with the prior year period Adjusted EBITDA of $447.0 million. The Adjusted EBITDA margin was 22.0%, a 50 basis point increase from the prior year period margin of 21.5%. The increase in Adjusted EBITDA was driven primarily by higher sales volumes ($67.9 million) and productivity improvements in costs of sales ($24.4 million), partially offset by raw material inflation of $15.8 million, and SG&A spend ($27.7 million). 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.”

 

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Analysis by Operating Segment

Power Transmission (66.2% of Gates’ net sales for the first nine months of 2017)

 

(dollars in millions)    Nine months ended
September 30, 2017
    Nine months ended
October 1, 2016
    Period over
Period Change
 

Net sales

   $ 1,496.3     $ 1,407.3       6.3

Cost of Sales

     (874.6     (840.6     4.0
  

 

 

   

 

 

   

 

 

 

Gross Profit

     621.7       566.7       9.7

Gross margin (%)

     41.5     40.3  

Other operating expenses

     (394.4     (386.2     2.1
  

 

 

   

 

 

   

 

 

 

Operating income

   $ 227.3     $ 180.5       25.9
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 342.4     $ 313.5       9.2

Adjusted EBITDA margin (%)

     22.9     22.3  

Power Transmission

Net sales in Power Transmission for the first nine months of 2017 were $1,496.3 million, an increase of 6.3%, or $89.0 million, when compared with the prior year period net sales of $1,407.3 million. Excluding the adverse impact of movements in average currency exchange rates of $7.1 million, net sales increased by 6.8%, or $96.1 million, compared with the prior year period. The increase was due almost entirely to higher sales volumes, with no significant impact from pricing.

More than half of the volume gains arose from sales to the industrial end markets, with sales to the general industrial end market being the largest component. Growth in sales to this end market, which comprised 21.1% of Power Transmission sales in the first nine months of 2017, was 11.7%, benefitting from the continuing industrial improvement, particularly in North America. The remainder of the sales volume growth arose in the automotive end market, driven primarily by strong demand in China, particularly in the first-fit channel.

Cost of sales in Power Transmission for the first nine months of 2017 was $874.6 million, an increase of 4.0%, or $34.0 million, compared with $840.6 million in the prior year period. The gross margin of 41.5% for the first nine months of 2017 was up from 40.3% in the prior year period. Cost of sales in the first nine months of 2017 increased primarily due to higher volumes of approximately $51.2 million and inflation of $11.7 million, predominantly on raw materials in North America and Asia. Partially offsetting the cost of sales increases were benefits from our productivity improvements of $19.9 million as compared with the prior year period. These factors drove the 120 basis point improvement in gross margin in the first nine months of 2017 compared with the prior year period.

Other operating expenses in Power Transmission for the first nine months of 2017 were $394.4 million, an increase of $8.2 million compared with $386.2 million in the prior year period. The majority of the increase was driven by higher SG&A costs of $18.8 million, including $10.9 million of increased selling and distribution costs associated with the higher sales volumes. A further increase in other operating expenses was due to the transaction costs of $5.7 million incurred in 2017, including $2.8 million in relation to contingencies that affected the purchase price paid by Blackstone on acquiring Gates in July 2014 and $1.3 million related to professional fees incurred as part of the debt refinancing initiated during March 2017. Offsetting these increases were lower amortization of acquired intangible assets of $9.7 million and lower depreciation of $9.0 million.

Our Power Transmission segment recognized operating income of $227.3 million for the first nine months of 2017, compared with operating income of $180.5 million in the prior year period. Operating income includes depreciation and amortization, which decreased during the first nine months of 2017 by $18.7 million compared with the prior year period. As these items are adjusted out of the segment measure of profitability, Adjusted EBITDA, they resulted in a period-over-period increase in operating income that is not reflected in Adjusted EBITDA.

 

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Our Power Transmission Adjusted EBITDA for the first nine months of 2017 was $342.4 million, an increase of 9.2% or $28.9 million, compared with the prior year period Adjusted EBITDA of $313.5 million. The increase in Adjusted EBITDA was driven primarily by higher sales volumes ($41.7 million) and productivity improvements ($19.9 million); offset partially by inflation ($11.7 million) and increased SG&A spend ($18.8 million). Adjusted EBITDA margin for the first nine months of 2017 was 22.9%, a 60 basis point improvement from the prior year period margin of 22.3% due to the factors discussed above.

Fluid Power (33.8% of Gates’ net sales for the first nine months of 2017)

 

(dollars in millions)    Nine months ended
September 30, 2017
    Nine months ended
October 1, 2016
    Period over
Period Change
 

Net sales

   $ 763.6     $ 672.0       13.6

Cost of Sales

     (469.3     (422.9     11.0
  

 

 

   

 

 

   

 

 

 

Gross Profit

     294.3       249.1       18.1

Gross margin (%)

     38.5     37.1  

Other operating expenses

     (211.2     (192.3     9.8
  

 

 

   

 

 

   

 

 

 

Operating income

   $ 83.1     $ 56.8       46.3
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 153.7     $ 133.5       15.1

Adjusted EBITDA margin (%)

     20.1     19.9  

Net sales in Fluid Power for the first nine months of 2017 were $763.6 million, an increase of 13.6%, or $91.6 million, compared with net sales during the prior year period of $672.0 million. Excluding the adverse impact of movements in average currency exchange rates of $1.1 million, net sales increased by 13.8%, or $92.7 million, compared with the prior year period. This increase was due primarily to higher volumes ($85.5 million) and higher sales prices ($4.1 million).

Volumes grew across all of our end markets during the first nine months of 2017 compared with the prior year period, with almost all of this increase arising from sales to the industrial end markets. Sales to the construction and agriculture end markets, which comprised almost 40% of Fluid Power’s net sales for the first nine months of 2017, improved by 21.1% and 12.4%, respectively. Sales to the energy end market increased by 17.8%, driven by a 23.3% increase in oil & gas sales, particularly in North America.

Cost of sales in Fluid Power for the first nine months of 2017 was $469.3 million, an increase of 11.0%, or $46.4 million, compared with $422.9 million in the prior year period. The gross margin of 38.5% for the first nine months of 2017 was up from 37.1% in the prior year period. The increase in cost of sales was driven primarily by higher volumes. Inflation of $5.6 million, predominantly on raw materials, was mostly offset by productivity improvements of $5.2 million as compared with the prior year period. These factors drove the 140 basis point improvement in gross margin in the first nine months of 2017 compared with the prior year period.

Other operating expenses in Fluid Power for the first nine months of 2017 were $211.2 million, an increase of 9.8% or $18.9 million, compared with $192.3 million in the prior year period. The increase was primarily the result of higher SG&A spend of $9.0 million, which related primarily to the increase in selling and distribution costs incurred on higher sales when compared with the prior year period. Other increases included transaction costs of $5.6 million incurred during the first nine months of 2017. The transaction costs included $3.5 million associated with acquisition related activities, including the acquisition of Techflow Flexibles and, subsequent to September 30, 2017, the acquisition of Atlas Hydraulics. Transaction costs also included $1.4 million in relation to contingencies that affected the purchase price paid by Blackstone on acquiring Gates in July 2014 and $0.7 million related to professional fees incurred as part of the debt refinancing initiated during March 2017. These increases were offset by $8.2 million of lower intangible asset amortization in the first nine months of 2017 compared with the prior year period.

 

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Our Fluid Power segment recognized operating income of $83.1 million for the first nine months of 2017, compared with operating income of $56.8 million in the prior year period. Operating income includes depreciation and amortization, which decreased during the first nine months of 2017 by $11.7 million compared with the prior year period. As these items are adjusted out of the segment measure of profitability, Adjusted EBITDA, they resulted in a period-over-period increase in operating income that is not reflected in Adjusted EBITDA.

Adjusted EBITDA for the first nine months of 2017 was $153.7 million, an increase of 15.1%, or $20.2 million, compared with the prior year period Adjusted EBITDA of $133.5 million. The increase in Adjusted EBITDA was driven by higher sales volumes ($25.4 million), productivity improvements ($5.2 million) and favorable pricing actions ($4.1 million); partially offset by inflation ($5.6 million) and SG&A spend ($9.0 million). Adjusted EBITDA margin was 20.1%, a 20 basis point improvement from the prior year period margin of 19.9% as the benefits from productivity improvements more than offset the abovementioned inflation and mix.

Fiscal 2016 Results Compared with Fiscal 2015 Results

Gates Summary

 

(dollars in millions)    Fiscal 2016     Fiscal 2015  

Net sales

   $ 2,747.0     $ 2,745.1  

Cost of sales

     (1,686.2     (1,709.0
  

 

 

   

 

 

 

Gross profit

     1,060.8       1,036.1  

Selling, general and administrative expenses

     (744.1     (784.5

Impairments of intangibles and other assets

     (3.2     (51.1

Restructuring expenses

     (11.4     (15.6

Other operating expense

     (3.3     (0.5
  

 

 

   

 

 

 

Operating income from continuing operations

     298.8       184.4  

Interest expense

     (216.3     (212.6

Other income

     10.4       69.7  
  

 

 

   

 

 

 

Income from continuing operations before tax

     92.9       41.5  

Income tax (expense) benefit

     (21.1     9.2  

Equity in net income of equity method investees, net of tax

     0.1       0.2  
  

 

 

   

 

 

 

Net income from continuing operations

   $ 71.9     $ 50.9  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 594.9     $ 547.2  

Adjusted EBITDA margin (%)

     21.7     19.9

Net sales

Net sales in Fiscal 2016 were $2,747.0 million, an increase of $1.9 million compared with net sales during Fiscal 2015 of $2,745.1 million. Our net sales for Fiscal 2016 were adversely impacted by movements in average currency translation rates, particularly the Mexican Peso, Chinese Renminbi and Argentine Peso for an aggregate of $67.7 million. Excluding this impact, net sales increased by $69.6 million, or 2.5%, in Fiscal 2016 compared with Fiscal 2015. This increase was driven by higher sales prices ($28.3 million) and higher volumes ($26.2 million).

The volume increase arose mostly in our Power Transmission business, which grew by $72.4 million, or 5.4%, compared with Fiscal 2015. This growth was predominantly in sales to the automotive end market, which grew by 10.4% and grew across all of our regions. China in particular performed well with a 12.2% growth in sales to the replacement channels and 10.0% growth in sales to the first-fit channel as our businesses benefitted

 

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from government automotive stimulus programs as well as market share gains. This was partially offset by lower volumes to Power Transmission’s industrial end markets, split equally between the replacement and first-fit channels. Volumes contracted in Fluid Power during Fiscal 2016 compared with Fiscal 2015, with sales down by $46.2 million as a result. The automotive end market in Fluid Power also proved resilient, with volume growth of 5.7%, including strong demand from emerging markets such as Russia. This was more than offset by the weaker sales to the industrial end markets, concentrated in the replacement channel, where volumes were down by $54.6 million in Fiscal 2016 compared with Fiscal 2015. Driving this decrease were lower sales to the energy and transportation end markets, which together accounted for 30.7% of Fluid Power’s Fiscal 2016 sales and for which core growth fell by 14.4% and 7.4%, respectively. Pricing gains were split relatively equally between Power Transmission and Fluid Power and were focused primarily in North America, with approximately $13 million carried over from actions in Fiscal 2015 and $5 million from new actions in Fiscal 2016.

Cost of Sales

Cost of sales in Fiscal 2016 were $1,686.2 million, a decrease of 1.3% or $22.8 million, compared with $1,709.0 million in Fiscal 2015. The decrease was driven by productivity improvements, primarily procurement initiatives of $29.1 million, and favorable impacts from average foreign currency exchange rates of $23.3 million. Partially offsetting the overall decrease in cost of sales were the negative impacts of inventory adjustments of $17.7 million related to changes we made in our accounting convention for expensing maintenance, repair and operations assets below a nominal value threshold. This change was made to bring consistency to our global inventory management. Also increasing cost of sales were volume increases of approximately $16 million.

Gross Profit

Gross profit for Fiscal 2016 was $1,060.8 million, up $2.4% or $24.7 million, compared with $1,036.1 million in Fiscal 2015. The increase is principally due to increased sales volumes and prices as described above.

Our gross profit margin for Fiscal 2016 was 38.6%, up from 37.7% in Fiscal 2015. The 90 basis point improvement was due to increased sales volumes on our partially fixed cost base and our productivity improvements, offset partially by the labor inflation and inventory adjustments noted above.

Selling, General and Administrative Expenses

Total SG&A expenses in Fiscal 2016 were $744.1 million, a decrease of 5.1% or $40.4 million, compared with $784.5 million in Fiscal 2015. SG&A expenses are comprised primarily of selling and distribution costs, administrative expenses, the amortization of acquired intangible assets and R&D costs.

Selling and distribution costs were $295.0 million in Fiscal 2016, compared with $305.6 million in Fiscal 2015, a decrease of $10.6 million. As a percentage of sales, our Fiscal 2016 costs were flat at 11% compared with the prior year, as labor-related cost inflation was broadly offset by headcount reductions.

The remainder of the SG&A expenses in Fiscal 2016 were $449.1 million, compared with $478.9 million in Fiscal 2015, a decrease of $29.8 million. The decrease in these costs in Fiscal 2016 was due principally to labor spending reductions to right-size the business of $12.3 million. The amortization of acquired intangible assets reduced from $158.5 million in Fiscal 2015 to $141.9 million in Fiscal 2016 (a decrease of $16.6 million), due primarily to the majority of our technology intangible assets recognized at the time of the acquisition of Gates by Blackstone becoming fully amortized halfway through Fiscal 2016.

 

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Impairment of Goodwill and Other Assets

For Fiscal 2016, we recognized impairments of $3.2 million, relating primarily to discontinuing the use of software in North America and the impairment of a receivable related to a restructured line of business in the U.S.

For Fiscal 2015, we recognized impairments of $51.1 million, including $44.0 million in relation to the U.S. dollar denominated indefinite-lived brands and trade names intangible that was recognized as part of the purchase accounting at the time of the Acquisition. The impairment arose due to the strengthening of the U.S. dollar against the currencies in which the sales supporting the value of this asset were denominated. A further impairment of $6.7 million was recognized in relation to property, plant and equipment in Brazil, as a result of the challenging trading conditions in that region, which were exacerbated by the significant devaluation of the Brazilian Real against the U.S. dollar.

Restructuring Expenses

During Fiscal 2016, we recognized restructuring expenses of $11.4 million, compared with $15.6 million in Fiscal 2015. In both periods, these costs related primarily to severance expenses incurred across both segments as part of the right-sizing of our operations and the streamlining of our corporate functions.

Other Operating Expense

During Fiscal 2016, we recognized other operating expense of $3.3 million, primarily in relation to a business disposed of in a prior year. In addition, there were $0.4 million of transaction costs. These combined expenses were offset by a benefit in tax expense, due to the release of a tax contingency that was held in respect of the disposed business.

During Fiscal 2015, we recognized other operating expense of $0.5 million, primarily in relation to transaction costs.

Operating Income from Continuing Operations

Operating income from continuing operations in Fiscal 2016 was $298.8 million, compared with $184.4 million in Fiscal 2015. The increase was driven primarily by increased gross margin, decreased SG&A spend and the higher impairment expense recognized in Fiscal 2015 compared with Fiscal 2016.

Interest Expense

The interest expense for Fiscal 2016 was $216.3 million, compared with $212.6 million for Fiscal 2015. Our interest expense may be analyzed as follows:

 

(dollars in millions)    Fiscal 2016      Fiscal 2015  

Debt:

     

—Interest on bank and other loans:

     

Dollar Term Loan

   $ 121.1      $ 116.4  

Euro Term Loan

     10.5        10.6  

Dollar notes

     64.9        64.9  

Euro notes

     15.4        15.7  

Other bank loans

     1.7        1.7  

2015 Notes

     —          0.4  
  

 

 

    

 

 

 
     213.6        209.7  

Other interest expense

     2.7        2.9  
  

 

 

    

 

 

 
   $ 216.3      $ 212.6  
  

 

 

    

 

 

 

 

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Details of our debt are presented in note 17 of our audited consolidated financial statements included elsewhere in this prospectus. Interest expense includes the amortization of issue costs incurred in relation to the borrowings.

The increase in interest expense during Fiscal 2016 compared with Fiscal 2015 was due largely to an increase of $4.7 million in the amount of the deferred premium on our interest rate caps that is being amortized to interest expense. Partially offsetting the interest expense increase was the impact of the settlement of legacy 2015 Notes during September 2015.

Other Income

Other income for Fiscal 2016 was $10.4 million, compared with $69.7 million for Fiscal 2015. Our other income may be analyzed as follows:

 

(dollars in millions)   Fiscal 2016     Fiscal 2015  

Interest earned on bank deposits

  $ 3.0     $ 1.8  

Currency transaction gain on net debt and hedging instruments

    7.2       67.7  

Other

    0.2       0.2  
 

 

 

   

 

 

 
  $ 10.4     $ 69.7  
 

 

 

   

 

 

 

Other income in Fiscal 2015 included significant currency transaction gains related to Gates’ euro debt, prior to its designation as a net investment hedge during the first quarter of 2015.

Income Tax (Expense) Benefit

During Fiscal 2016, the income tax expense attributable to continuing operations was $21.1 million on a profit before tax of $92.9 million compared to an income tax benefit attributable to continuing operations of $9.2 million on a profit before tax of $41.5 million in Fiscal 2015.

Our effective tax rate for Fiscal 2016 was lower than our statutory rate of 35% as a result of our geographical mix of earnings, manufacturing incentives, and company owned life insurance adjustments of $43.4 million. These reductions in the rate were partially offset by U.S. tax on foreign earnings, tax law changes, and valuation allowances of $32.9 million.

Our effective tax rate for Fiscal 2015 was lower than our statutory rate of 35% primarily as a result of our geographical mix of earnings, which included a $26.0 million benefit from non-operating gains of $74.2 million not subject to taxation. In addition, our rate was reduced by manufacturing incentives, company owned life insurance, tax law changes, and the release of uncertain tax positions of $32.2 million. These reductions in the rate were partially offset by U.S. tax on foreign earnings and valuation allowances of $35.4 million.

Adjusted EBITDA

Adjusted EBITDA for Fiscal 2016 was $594.9 million, an increase of 8.7%, or $47.7 million, compared with $547.2 million for Fiscal 2015. The underlying increase was due largely to productivity improvements (in particular procurement sourcing initiatives of $29.1 million), higher pricing of $28.3 million, lower SG&A spend of $12.3 million and the impact of higher volumes of $10.8 million. Partially offsetting these improvements was the unfavorable impact of movements in average foreign currency exchange rates of $14.2 million, labor inflation of $14.0 million and unfavorable product mix of $3.6 million. Adjusted EBITDA margin was 21.7% for Fiscal 2016, a 180 basis point improvement compared with the margin of 19.9% for Fiscal 2015 due to increased productivity and higher prices in Fiscal 2016.

 

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For a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods presented and the calculation of the Adjusted EBITDA margin, see “—Non-GAAP Measures.”

Analysis by Operating Segment

Power Transmission (67.8% of Gates’ Fiscal 2016 net sales)

 

(dollars in millions)    Fiscal 2016     Fiscal 2015     Year over
Year Change
 

Net sales

   $ 1,862.1     $ 1,809.6       2.9

Cost of Sales

     (1,127.8     (1,097.7     2.7
  

 

 

   

 

 

   

 

 

 

Gross Profit

     734.3       711.9       3.2

Gross margin (%)

     39.4     39.3  

Other operating expenses

     (511.7     (546.0     (6.3 %) 
  

 

 

   

 

 

   

 

 

 

Operating income

   $ 222.6     $ 165.9       34.2
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 408.5     $ 378.3       8.0

Adjusted EBITDA margin (%)

     21.9     20.9  

Net sales in Power Transmission in Fiscal 2016 were $1,862.1 million, an increase of 2.9%, or $52.5 million, compared with net sales during Fiscal 2015 of $1,809.6 million. Excluding the adverse impact of movements in average currency exchange rates of $43.6 million, net sales increased by 5.3%, or $96.1 million, compared with Fiscal 2015. This was driven by higher sales volumes of $72.4 million and the impact of pricing actions of $13.8 million.

The volume increase was driven primarily by our automotive end market, which accounted for 62.3% of our Power Transmission Fiscal 2016 sales. Approximately 65% of this volume growth was from the replacement channels, driving core growth of 10.4% in the automotive end market. China in particular performed well as our businesses benefitted from government automotive stimulus programs as well as market share gains. This was partially offset by lower volumes to Power Transmission’s industrial end markets, split equally between the replacement and first-fit channels. The general industrials end market drove the majority of this decline, with most other industrial end markets remaining flat or just slightly down from the prior year period. In addition to the net increase in volumes, sales benefitted from favorable pricing actions of $13.8 million, primarily from the replacement channels and particularly in North America.

Fiscal 2016 cost of sales in Power Transmission was $1,127.8 million, an increase of 2.7% or $30.1 million, compared with $1,097.7 million in Fiscal 2015. The gross margin of 39.4% for Fiscal 2016 was broadly flat compared with 39.3% in Fiscal 2015. The increase in cost of sales was driven primarily by higher volumes of approximately $47 million, and, to a lesser degree, by inventory adjustments related primarily to our maintenance, repair and operations assets of $11.2 million, labor inflation of $9.2 million and unfavorable product mix of $7.0 million. Partially offsetting the overall cost of sales increase was favorable movements in average currency translation rates of $15.8 million and productivity improvements of $9.2 million in Fiscal 2016 as compared with Fiscal 2015.

Fiscal 2016 other operating expenses in Power Transmission was $511.7 million, compared with $546.0 million in Fiscal 2015. Other operating expenses, primarily SG&A costs, decreased in Fiscal 2016 by $34.3 million compared with Fiscal 2015. This was driven primarily by a decrease in impairments recognized of $27.1 million in Fiscal 2016 compared with Fiscal 2015, which related mostly to currency-driven impairment in Fiscal 2015 of the brands and trade name intangible asset. In addition, we incurred lower amortization of intangible assets of $8.5 million and lower operating SG&A spend of $8.1 million due to labor cost reductions in Fiscal 2016 compared with Fiscal 2015.

 

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Our Power Transmission segment recognized operating income of $222.6 million for Fiscal 2016, compared with operating income of $165.9 million in Fiscal 2015. Operating income includes depreciation and amortization, which decreased during Fiscal 2016 by $15.8 million compared with the prior year period. Operating income also includes the impairments, which decreased by $27.1 million compared with Fiscal 2015, driven by the impairment in Fiscal 2015 of the brands and trade names intangible asset. As these items are adjusted out of the segment measure of profitability, Adjusted EBITDA, they resulted in a year-over-year increase in operating income that is not reflected in Adjusted EBITDA.

Adjusted EBITDA was $408.5 million for Fiscal 2016, an increase of 8.0%, or $30.2 million, compared with $378.3 million in Fiscal 2015. The increase in Adjusted EBITDA was driven primarily by higher sales volumes ($25.8 million), favorable pricing actions ($13.8 million), productivity improvements ($9.2 million) and lower SG&A spend ($8.1 million); partially offset by unfavorable movements in average foreign currency exchange rates ($9.9 million), inflation ($9.2 million) and unfavorable product mix ($7.0 million). Adjusted EBITDA margin increased to 21.9% in Fiscal 2016, a 100 basis point improvement compared with 20.9% in Fiscal 2015 due to higher prices and productivity in Fiscal 2016.

Fluid Power (32.2% Gates’ Fiscal 2016 net sales)

 

(dollars in millions)    Fiscal 2016     Fiscal 2015     Year over
Year Change
 

Net sales

   $ 884.9     $ 935.5       (5.4 %) 

Cost of Sales

     (558.4     (611.3     (8.7 %) 
  

 

 

   

 

 

   

 

 

 

Gross Profit

     326.5       324.2       0.7

Gross margin (%)

     36.9     34.7  

Other operating expenses

     (250.3     (305.7     (18.1 %) 
  

 

 

   

 

 

   

 

 

 

Operating income

     76.2       18.5       311.9
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 186.4     $ 168.9       10.4

Adjusted EBITDA margin (%)

     21.1     18.1  

Net sales in Fluid Power in Fiscal 2016 were $884.9 million, a decrease of $50.6 million, or 5.4%, compared with net sales in Fiscal 2015 of $935.5 million. Excluding the adverse impact of movements in average currency exchange rates of $24.1 million, net sales decreased by 2.8%, or $26.5 million. Volumes drove this decrease, declining by almost 5% in Fiscal 2016 compared with Fiscal 2015, offset partially by favorable price impacts of $14.5 million.

Sales volumes to the energy and transportation end markets, which together accounted for 24.1% of Fluid Power’s Fiscal 2016 sales, declined by 14.4% and 7.4%, respectively. Oil and gas was the largest contributor to this decline, driven by falling energy prices that affected our Middle East and Singapore operations in particular. The lower transportation sales were concentrated in heavy-duty truck and bus sales, which declined by 8.8% in Fiscal 2016 compared with Fiscal 2015, particularly in the U.S. Partially offsetting the industrial volume declines were increased sales to the automotive end market, which comprised 19.7% of Fluid Power’s Fiscal 2016 sales, and had growth of 5.7% in Fiscal 2016. This was driven by solid demand from emerging European markets, benefiting volumes by approximately $14 million, and Western European sales of kits and waterpumps, which grew by approximately $19 million. Softening the overall decline in volumes were favorable pricing actions of $14.5 million in Fiscal 2016 compared with Fiscal 2015, most of which came from the replacement channels.

Fiscal 2016 cost of sales in Fluid Power was $558.4 million, a decrease of 8.7% or $52.9 million, compared with $611.3 million in Fiscal 2015. The gross margin of 36.9% for Fiscal 2016 was up from 34.7% in Fiscal 2015. The decrease in cost of sales was driven primarily by lower volumes of approximately $31 million, productivity improvements of $19.9 million, favorable impacts of $7.5 million from movements in average

 

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currency exchange rates and favorable product mix of $3.4 million in Fiscal 2016 compared with Fiscal 2015. Partially offsetting the cost of sales decreases were inventory adjustments related to our maintenance, repair and operations assets of $10.5 million, and labor inflation of $4.8 million as compared with Fiscal 2015. The 220 basis point improvement in gross margin was driven primarily by productivity improvements.

Fiscal 2016 other operating expenses in Fluid Power was $250.3 million, compared with $305.7 million in Fiscal 2015. Other operating expenses, primarily SG&A costs, decreased in Fiscal 2016 by $55.4 million compared with Fiscal 2015. This was driven primarily by a decrease in impairments recognized of $22.6 million in Fiscal 2016 compared with Fiscal 2015, which related mostly to the currency-driven impairment in Fiscal 2015 of the brands and trade name intangible. In addition, Gates recognized $8.1 million lower amortization of acquired intangible assets, $10.6 million lower selling and distribution costs and incurred lower operating SG&A spend of $4.2 million due to headcount reductions during Fiscal 2016 compared with Fiscal 2015.

Our Fluid Power segment recognized operating income of $76.2 million for Fiscal 2016, compared with operating income of $18.5 million in Fiscal 2015. Operating income includes depreciation and amortization, which decreased during Fiscal 2016 by $13.8 million compared with the prior year period. Operating income also includes the impairments, which decreased by $22.6 million compared with Fiscal 2015, driven by the impairment in Fiscal 2015 of an indefinite-lived brands and trade names intangible that was recognized as part of the purchase accounting at the time of the Acquisition. As these items are adjusted out of the segment measure of profitability, Adjusted EBITDA, they resulted in a year-over-year increase in operating income that is not reflected in Adjusted EBITDA.

Adjusted EBITDA was $186.4 million, an increase of 10.4% or $17.5 million, compared with $168.9 million in Fiscal 2015. The increase in Adjusted EBITDA was driven primarily by productivity improvements ($19.9 million), favorable pricing actions ($14.5 million), lower SG&A spend ($4.2 million) and favorable product mix ($3.4 million); partially offset by lower sales volumes ($15.0 million), inflation ($4.8 million) and unfavorable movements in average foreign currency exchange rates ($4.2 million). Adjusted EBITDA margin improved to 21.1% in Fiscal 2016, a 300 basis point improvement compared with 18.1% in Fiscal 2015 driven by a 220 basis point improvement in gross margins discussed above.

Fiscal 2015 Results Compared with Full Year 2014 Results

As the Company had and has no interest in any operations other than those of Pinafore Holdings B.V. and its subsidiaries, comparison of the results of the Post-Acquisition Predecessor with those of the Pre-Acquisition Predecessor is impacted only by the effects of the accounting for, and the financing of, the Acquisition. For the purposes of facilitating the discussion of Fiscal 2015 with the full year period ended January 3, 2015, we have therefore aggregated the Pre-Acquisition Predecessor and Post-Acquisition Predecessor periods of 2014 (“Full Year 2014”) as a comparable period to Fiscal 2015. In addition, we identify in the discussion where applicable the impact of the purchase accounting related to the Acquisition and the financing of the Acquisition.

 

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To provide additional context to these impacts, the table below sets out the effects of the purchase accounting adjustments on the Post-Acquisition Predecessor 2014 components of operating income (loss) from continuing operations:

 

           Purchase accounting adjustments        
(dollars in millions)    Pre-purchase
accounting
    Inventory
uplift
    Depreciation     Amortization     Other     As reported  

Net sales

   $ 1,445.1     $ —       $ —       $ —       $ —       $ 1,445.1  

Cost of sales

     (900.8     (121.4     (6.1     —         —         (1,028.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     544.3       (121.4     (6.1     —         —         416.8  

Selling, general and administrative expenses

     (382.7     —         (0.2     (31.1     (1.5     (415.5

Transaction-related costs

     (97.0     —         —         —         —         (97.0

Impairments of goodwill and other assets

     (0.6     —         —         —         —         (0.6

Restructuring costs

     (8.2     —         —         —         —         (8.2

Other operating income (expense)

     9.5       —         —         —         (9.6     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) from continuing operations

   $ 65.3     $ (121.4   $ (6.3   $ (31.1   $ (11.1   $ (104.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gates Summary

 

(dollars in millions)    Fiscal 2015     Full Year 2014     Post-Acquisition
Predecessor

2014
          Pre-Acquisition
Predecessor

2014
 

Net sales

   $ 2,745.1     $ 3,042.2     $ 1,445.1       $ 1,597.1  

Cost of sales

     (1,709.0     (2,015.2     (1,028.3       (986.9
  

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

     1,036.1       1,027.0       416.8         610.2  

Selling, general and administrative expenses

     (784.5     (815.7     (415.5       (400.2

Transaction-related costs

     (0.7     (194.6     (97.0       (97.6

Impairments of intangibles and other assets

     (51.1     (0.6     (0.6       —    

Restructuring expenses

     (15.6     (22.0     (8.2       (13.8

Other operating income (expense)

     0.2       5.5       (0.1       5.6  
  

 

 

   

 

 

   

 

 

     

 

 

 

Operating income (loss) from continuing operations

     184.4       (0.4     (104.6       104.2  

Interest expense

     (212.6     (173.1     (113.6       (59.5

Other income

     69.7       48.5       47.8         0.7  
  

 

 

   

 

 

   

 

 

     

 

 

 

Income (loss) from continuing operations before tax

     41.5       (125.0     (170.4       45.4  

Income tax benefit (expense)

     9.2       51.9       83.2         (31.3

Equity in net income of equity method investees, net of tax

     0.2       0.5       0.3         0.2  
  

 

 

   

 

 

   

 

 

     

 

 

 

Net income (loss) from continuing operations

   $ 50.9     $ (72.6   $ (86.9     $ 14.3  
  

 

 

   

 

 

   

 

 

     

 

 

 

Adjusted EBITDA

   $ 547.2     $ 582.9     $ 262.5       $ 320.4  

Adjusted EBITDA margin (%)

     19.9     19.2     18.2       20.1

Net Sales

Net sales in Fiscal 2015 were $2,745.1 million, a decrease of $297.1 million, or 9.8%, compared with net sales during Full Year 2014 of $3,042.2 million. Our net sales for Fiscal 2015 were adversely impacted by

 

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movements in average currency exchange rates of $253.6 million compared with Full Year 2014, due in particular to the strengthening of the U.S. dollar against the euro ($109 million), Mexican Peso ($27 million) and Brazilian Real ($25 million). Excluding this impact, net sales decreased by $43.5 million, or 1.4%, in Fiscal 2015 compared with Full Year 2014. This decrease was driven by lower volumes ($74.1 million), partially offset by higher sales prices ($24.6 million).

The volume decline was driven primarily by a decrease of $110.1 million in Fluid Power sales volumes, offset partially by an increase of $35.9 million in volumes in our Power Transmission business. Sales to the energy, agriculture and construction end markets declined by 11.3%, 12.5% and 5.0%, respectively. This industrial end market weakness was the result of falling energy prices and a global softening in industrial demand, particularly in developed markets such as Europe and North America. Sales into the transportation end market, particularly in Power Transmission, provided some resilience from these industrial headwinds. Also partially offsetting the overall volume declines was solid growth in the automotive end market, driven by a 4.8% growth in sales in Europe. Approximately $15 million of the pricing gains arose from our Power Transmission business, with the remaining approximately $10 million coming from Fluid Power sales. In both segments, the pricing was driven almost entirely by sales to the replacement channels.

Cost of Sales

Cost of sales in Fiscal 2015 were $1,709.0 million, a decrease of 15.2% or $306.2 million, compared with $2,015.2 million in Full Year 2014. The decrease was driven by purchase accounting adjustments related to the uplift of inventory balances of $121.4 million in Post-Acquisition Predecessor 2014, as well as favorable foreign exchange rate movements of approximately $113 million. Also contributing to the decrease were productivity improvements of $35.5 million. Lower production volumes contributed a further $44.3 million of the decrease in cost of sales from Full Year 2014 to Fiscal 2015. Partially offsetting these decreases were higher depreciation costs of $11.8 million (due primarily to purchase accounting adjustments), labor inflation of $8.3 million and unfavorable product mix of $3.1 million arising from a shift in the relative margins of products sold.

Gross Profit

The gross profit for Fiscal 2015 was $1,036.1 million, up 0.9% or $9.1 million, compared with $1,027.0 million in Full Year 2014. Our gross profit margin for Fiscal 2015 was 37.7%, up from 33.8% in Full Year 2014, due principally to the 2014 purchase accounting adjustments associated with inventory and fixed asset uplifts. Excluding these two purchase accounting impacts, our Full Year 2014 gross profit margin would have been 37.9%. The remaining change in the gross profit margin is attributable primarily to the impact of lower sales volumes compared with Full Year 2014 on a partially fixed cost base.

Selling, General and Administrative Expenses

Total SG&A expenses in Fiscal 2015 were $784.5 million, a decrease of 3.8% or $31.2 million, compared with $815.7 million in Full Year 2014. SG&A expenses were comprised primarily of selling and distribution costs, administrative costs, the amortization of acquired intangible assets and R&D costs.

Selling and distribution costs, which tend to move in proportion to sales, were $305.6 million in Fiscal 2015, compared with $338.8 million in Full Year 2014, a decrease of $33.2 million. Selling and distribution costs as a percentage of sales in Fiscal 2015 were flat at 11.1% compared with the prior year, as labor-related inflation costs were offset by headcount reductions.

The remainder of the SG&A expenses in Fiscal 2015 were $478.9 million, compared with $476.9 million in Full Year 2014, an increase of $2.0 million. The increase was due principally to a $15.2 million rise in the amortization charge related to the step-up of intangible assets as part of purchase accounting in the prior year (the acquired intangible asset amortization increased from approximately $146 million in Full Year 2014 to

 

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approximately $161 million in Fiscal 2015). Partially offsetting these increases were the impacts from labor savings of approximately $15 million, largely resulting from the realignment of our expense base globally and by function.

Transaction-Related Costs

Transaction-related costs in Fiscal 2015 were $0.7 million, compared with $194.6 million during Full Year 2014. In both periods, these expenses related primarily to costs recognized primarily in respect of the Acquisition, including advisory fees, change of control costs relating to share based compensation awards and the accelerated vesting of such awards, and payments due to holders of share awards and options to compensate those holders for the loss in value of their interests due to the distribution of certain non-core assets to the Company’s indirect owners. In Pre-Acquisition Predecessor 2014, transaction-related costs also included fees incurred to position the Company, at that time, for an asset sale or to become a public company.

Impairment of Goodwill and Other Assets

For Fiscal 2015, we recognized impairments of $51.1 million, including $44.0 million in relation to the U.S. dollar denominated indefinite-lived brands and trade names intangible, that was recognized as part of the purchase accounting at the time of the Acquisition. The impairment arose due to the strengthening of the U.S. dollar against the currencies in which the sales supporting the value of this asset were denominated. A further impairment of $6.7 million was recognized in relation to property, plant and equipment in Brazil, as a result of the challenging trading conditions in that region, which have been exacerbated by the significant devaluation of the Brazilian Real against the U.S. dollar.

For the Full Year 2014, we recognized impairments of $0.6 million, relating primarily to the discontinuation of a select software system.

Restructuring Expenses

During Fiscal 2015, we recognized restructuring expenses of $15.6 million, which related primarily to severance expenses incurred across both segments as part of the right-sizing of our operations and the streamlining of our global corporate cost functions.

During Full Year 2014, restructuring expenses of $22.0 million were recognized, of which $18.4 million related to the closure of the Ashe County plant within the United States. Also during Full Year 2014, $1.8 million of severance and related costs were incurred in relation to the closure of the London corporate center.

Other Operating Income (Expense)

During Fiscal 2015, we recognized income of $0.2 million, primarily in relation to the closure of a European facility in a prior period.

During Full Year 2014, we recognized income of $5.5 million, primarily in relation to sales of land and buildings in Mexico and the United States.

Operating Income (Loss) from Continuing Operations

Operating income from continuing operations in Fiscal 2015 was $184.4 million, compared with a loss of $0.4 million in Full Year 2014. This loss was driven primarily by the transaction-related costs incurred in connection with the Acquisition.

 

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Interest Expense

The interest expense for Fiscal 2015 was $212.6 million, compared with $173.1 million for Full Year 2014. Our interest expense may be analyzed as follows:

 

(dollars in millions)    Fiscal 2015      Full Year
2014
     Post-
Acquisition
Predecessor
2014
                Pre-
Acquisition
Predecessor
2014
 

Borrowings:

              

—Interest on bank and other loans:

              

Dollar Term Loan

   $ 116.4      $ 61.0      $ 61.0         $ —    

Euro Term Loan

     10.6        6.1        6.1           —    

Dollar notes

     64.9        33.9        33.9           —    

Euro notes

     15.7        9.0        9.0           —    

Term loan A and B

     —          34.4        —             34.4  

Other bank loans

     1.7        2.7        1.3           1.4  

Second Lien Notes

     —          17.1        0.7           16.4  

2015 Notes

     0.4        1.0        0.2           0.8  
  

 

 

    

 

 

    

 

 

       

 

 

 
     209.7        165.2        112.2           53.0  

Net loss on financial liabilities held at amortized cost

     —          4.3        —             4.3  

Other interest expense

     2.9        3.6        1.4           2.2  
  

 

 

    

 

 

    

 

 

       

 

 

 
   $ 212.6      $ 173.1      $ 113.6         $ 59.5  
  

 

 

    

 

 

    

 

 

       

 

 

 

Details of our debt are presented in note 17 of our audited consolidated financial statements included elsewhere in this prospectus. Interest expense includes the amortization of issue costs incurred in relation to the borrowings.

The increase in interest expense during Fiscal 2015 compared with Full Year 2014 was due largely to the new debt structure entered into on July 3, 2014 as a part of the Acquisition financing, partially offset by the impact of the settlement of legacy debt during Pre-Acquisition Predecessor 2014.

Other Income

Other income for Fiscal 2015 was $69.7 million, compared with other income of $48.5 million for Full Year 2014. Our other income may be analyzed as follows:

 

(dollars in millions)    Fiscal
2015
     Full Year
2014
    Post-
Acquisition
Predecessor
2014
                  Pre-
Acquisition
Predecessor
2014
 

Interest on bank deposits

   $ 1.8      $ 2.0     $ 1.0           $ 1.0  

Currency transaction gain (loss) on net debt and hedging instruments

     67.7        63.5       63.9             (0.4

Financing fees related to the Acquisition

     —          (17.1     (17.1           —    

Other

     0.2        0.1       —               0.1  
  

 

 

    

 

 

   

 

 

         

 

 

 
   $ 69.7      $ 48.5     $ 47.8           $ 0.7  
  

 

 

    

 

 

   

 

 

         

 

 

 

Other income in both periods included significant currency transaction gains related to our new euro debt, prior to its designation as a net investment hedge during the first quarter of 2015. In Full Year 2014, this gain was partially offset by bridge financing commitment fees of $17.1 million incurred in relation to the Acquisition.

 

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Income Tax Benefit (Expense)

During Fiscal 2015, the income tax benefit attributable to continuing operations was $9.2 million on a profit before tax of $41.5 million compared to an income tax benefit attributable to continuing operations of $51.9 million on a loss before tax of $125.0 million during Full Year 2014.

Our effective tax rate for Fiscal 2015 was lower than our statutory rate of 35% primarily as a result of our geographical mix of earnings, which included a $26.0 million benefit from non-operating gains of $74.2 million not subject to taxation. In addition, our rate was reduced by manufacturing incentives, company owned life insurance, tax law changes, and the release of uncertain tax positions of $32.2 million. These reductions in the rate were partially offset by U.S. tax on foreign earnings and valuation allowances of $35.4 million.

Our effective tax rate for Full Year 2014 was lower than our statutory rate of 35% as a result of our geographical mix of earnings, affected primarily by the Acquisition, manufacturing incentives, company owned life insurance, and the release of uncertain tax positions of $105.3 million. These reductions in the rate were partially offset by U.S. tax on foreign earnings and non-deductible acquisition-related transaction costs of $99.3 million.

Adjusted EBITDA

Adjusted EBITDA for Fiscal 2015 was $547.2 million, a decrease of 6.1% or $35.7 million, compared with $582.9 million for Full Year 2014. Unfavorable movements in average currency exchange rates impacted Adjusted EBITDA by $77.8 million. Excluding foreign exchange impacts, Adjusted EBITDA grew by 7.2% or $42.1 million in Fiscal 2015 compared with Full Year 2014 due to productivity improvements in cost of sales of $35.5 million, lower SG&A spend of $21.0 million and benefits from higher selling prices of $24.6 million. Partially offsetting the increases in Adjusted EBITDA was the impact of lower sales volumes of $29.9 million incurred in Fiscal 2015. The Adjusted EBITDA margin was 19.9% for Fiscal 2015, a 70 basis point improvement compared with 19.2% for Full Year 2014.

For a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods presented and the calculation of the Adjusted EBITDA margin, see “—Non-GAAP Measures.”

Analysis by Operating Segment

Power Transmission (65.9% of Gates’ Fiscal 2015 net sales)

 

(dollars in millions,
unless otherwise stated)
   Fiscal 2015     Full Year 2014     Post-
Acquisition
Predecessor
2014
                 Pre-
Acquisition
Predecessor
2014
    Year over Year
Change
 

Net sales

   $ 1,809.6     $ 1,945.2     $ 919.4          $ 1,025.8       (7.0 %) 

Cost of Sales

     (1,097.7     (1,231.4     (583.2          (648.2     (10.9 %) 
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Gross Profit

     711.9       713.8       336.2            377.6       (0.3 %) 

Gross margin (%)

     39.3     36.7     36.6          36.8  

Other operating expenses

     (546.0     (658.8     (310.3          (348.5     (17.1 %) 
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Operating income

     165.9       55.0       25.9            29.1       201.6
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Adjusted EBITDA

   $ 378.3     $ 400.0     $ 179.6          $ 220.4       (5.4 %) 

Adjusted EBITDA margin (%)

     20.9     20.6     19.5          21.5  

Net sales in Power Transmission in Fiscal 2015 were $1,809.6 million, decreased by $135.6 million, or 7.0%, compared with net sales during Full Year 2014 of $1,945.2 million. Excluding the adverse impact of movements in average currency exchange rates of $190.1 million, net sales increased by 2.8%, or $54.5 million,

 

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compared to Full Year 2014. This was driven by higher sale volumes ($35.9 million) and favorable pricing actions ($14.7 million). Power Transmission’s sales volumes into the automotive end market, which grew by 5.8% during Fiscal 2015 compared with Full Year 2014, were split roughly equally between replacement and first-fit channels. Partially offsetting this growth was a decline in sales to the agriculture and construction end markets, which decreased by 12.6% and 7.6%, respectively, particularly in North America, in Fiscal 2015 compared with Full Year 2014. Favorable pricing actions of $14.7 million in Fiscal 2015 compared with Full Year 2014, focused in the replacement channels, helped to further drive the overall growth.

Fiscal 2015 cost of sales in Power Transmission was $1,097.7 million, a decrease of 10.9% or $133.7 million, compared with $1,231.4 million in Full Year 2014. The gross margin of 39.3% for Fiscal 2015 was up from 36.7% during Full Year 2014. The decrease in cost of sales was driven primarily by favorable impacts of $84.5 million from movements in average currency exchange rates, the inventory uplift in 2014 relating to the purchase accounting in connection with the Acquisition (a one-time increase to cost of sales in 2014 of $59.9 million) and productivity improvements in 2015 of $9.5 million. Partially offsetting the cost of sales decrease was the impact of higher volumes of approximately $25 million. The 260 basis point improvement in gross margin was driven primarily by the inventory uplift in Full Year 2014 and productivity improvements in Fiscal 2015.

Fiscal 2015 other operating expenses in Power Transmission was $546.0 million, a decrease of $112.8 million, or 17.1%, compared with $658.8 million in Full Year 2014. This decrease was driven primarily by $128.6 million of lower transaction-related costs being incurred in Fiscal 2015 compared with Full Year 2014, relating to the acquisition of Gates by Blackstone in July 2014. Operating SG&A costs decreased due primarily to cost-saving initiatives ($13.4 million) and lower selling and distribution costs ($15.0 million). Share-based compensation costs were reduced during Fiscal 2015 by $5.3 million, due to the closure of legacy share plans in 2014 and establishment of new plans following the acquisition of Gates by Blackstone. Partially offsetting the decrease was a currency driven impairment charge of $28.3 million recognized in Fiscal 2015 related to the brands and trade name intangible asset. Other operating expenses increased by $5.8 million due to the higher amortization charge on acquired intangible assets in Fiscal 2015 compared with Full Year 2014.

Our Power Transmission segment recognized operating income of $165.9 million for Fiscal 2015, compared with operating income for Full Year 2014 of $55.0 million.

Adjusted EBITDA in Fiscal 2015 was $378.3 million, a decrease of $21.7 million, or 5.4%, compared with $400.0 million in Full Year 2014. Unfavorable movements in average currency exchange rates impacted Adjusted EBITDA by $59.7 million. Excluding foreign exchange impacts, Adjusted EBITDA grew by 9.5% ($38.0 million) in Fiscal 2015 compared with Full Year 2014, driven primarily by higher sales volumes ($11.0 million), favorable pricing actions ($14.7 million), lower SG&A spend ($13.4 million) and productivity improvements in cost of sales ($9.5 million), partially offset by unfavorable product mix ($6.9 million) and inflation ($5.3 million). Adjusted EBITDA margin increased to 20.9% in Fiscal 2015 from 20.6% in Full Year 2014.

 

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Fluid Power (34.1% of Gates’ Fiscal 2015 net sales)

 

(dollars in millions, unless otherwise stated)    Fiscal
2015
    Full Year
2014
    Post-Acquisition
Predecessor
2014
    Pre-Acquisition
Predecessor
2014
    Year over Year
Change
 

Net sales

   $ 935.5     $ 1,097.0     $ 525.7     $ 571.3       (14.7 %) 

Cost of Sales

     (611.3     (783.8     (378.2     (405.6     (22.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     324.2       313.2       147.5       165.7       3.5

Gross margin (%)

     34.7     28.6     28.1     29.0  

Other operating expenses

     (305.7     (368.6     (173.7     (194.9     (17.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 18.5     $ (55.4   $ (26.2   $ (29.2     133.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 168.9     $ 182.9     $ 82.9     $ 100.0       (7.7 %) 

Adjusted EBITDA margin (%)

     18.1     16.7     15.8     17.5  
            

Sales in Fluid Power in Fiscal 2015 were $935.5 million, a decrease of 14.7%, or $161.5 million, compared with net sales in Full Year 2014 of $1,097.0 million. Excluding the adverse impact of movements in average currency exchange rates of $63.5 million, net sales decreased by 8.9%, or $98.0 million, compared with Full Year 2014. This was driven by lower sales volumes ($110.1 million) offset partially by higher prices ($9.9 million). Volumes declined across all of our end markets in Fiscal 2015 compared with Full Year 2014. Sales to the energy, general industrial and agriculture end markets, which comprised over half of our Fiscal 2015 sales, declined by 13.3%, 13.3% and 12.4%, respectively. Fluid Power sales across all regions decreased during Fiscal 2015 compared with Full Year 2014, but demand was particularly low in the U.S. Favorable pricing actions of $9.9 million, primarily in the replacement channels, somewhat offset these overall volume decreases.

Fiscal 2015 cost of sales in Fluid Power was $611.3 million, a decrease of 22.0%, or $172.5 million, compared with $783.8 million in Full Year 2014, with a Fiscal 2015 gross margin of 34.7% and a Full Year 2014 gross margin of 28.6%. The decrease in cost of sales was driven primarily by lower volumes of approximately $69 million, impacts of the inventory uplift in 2014 of approximately $61 million, favorable movements in average currency exchange rates of $28.4 million, productivity improvements of $26.0 million and favorable mix of $3.8 million in Fiscal 2015 compared with Full Year 2014. Partially offsetting the cost of sales decreases were labor inflation of $3.0 million and higher depreciation of $7.0 million as compared with Full Year 2014. The 610 basis point improvement in gross margin was driven primarily by the inventory uplift in 2014 and enhanced productivity in 2015.

Fiscal 2015 other operating expenses in Fluid Power was $305.7 million, a decrease of 17.1%, or $62.9 million, compared with $368.6 million in Full Year 2014. This decrease was driven primarily by $65.3 million of lower transaction-related costs being incurred in Fiscal 2015 compared with Full Year 2014, relating to the acquisition of Gates by Blackstone in July 2014. Selling and distribution costs decreased by $18.2 million in Fiscal 2015 compared to Full Year 2014. Operating SG&A costs decreased by $7.6 million from Full Year 2014 to Fiscal 2015, due primarily to labor cost reductions. Partially offsetting these decreases was a currency driven impairment charge of $23.5 million recognized in Fiscal 2015 related to the brands and trade name intangible asset. In addition, there was a $9.4 million higher amortization charge on acquired intangible assets in Fiscal 2015 compared with Full Year 2014.

Our Fluid Power segment recognized operating income of $18.5 million for Fiscal 2015, compared with operating loss for Full Year 2014 of $55.4 million.

Adjusted EBITDA was $168.9 million in Fiscal 2015, a decrease of 7.7%, or $14.0 million, compared with $182.9 million in Full Year 2014. Unfavorable movements in average currency exchange rates impacted Adjusted EBITDA by $18.1 million. Excluding foreign exchange impacts, Adjusted EBITDA grew by 2.2% ($4.1 million) in Fiscal 2015 compared with Full Year 2014 driven primarily by productivity improvements in

 

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cost of sales ($26.0 million), favorable pricing actions ($9.9 million), less SG&A spend ($7.6 million) and favorable product mix ($3.8 million), partially offset by lower sales volumes ($40.9 million) and inflation ($3.0 million). Adjusted EBITDA margin consequently improved to 18.1% in Fiscal 2015 from 16.7% in Full Year 2014.

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.

Our central treasury function is responsible for procuring our financial resources and maintaining an efficient capital structure, together with managing our liquidity, foreign exchange and interest rate exposures. All treasury operations are conducted within strict policies and guidelines that are approved by the Board. Compliance with those policies and guidelines is monitored by the regular reporting of treasury activities to the Board.

A key element of our treasury philosophy is that funding, interest rate and currency decisions and the location of cash and debt balances are centrally managed. Our borrowing requirements are met by raising funds in the most favorable markets. Management may retain a portion of net debt in the foreign currencies in which the net assets of our operations are denominated. The desired currency profile of net debt can be achieved by either sourcing debt in the foreign currency or entering into currency derivative contracts.

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.

Our portfolio of cash and cash equivalents is managed such that there is no significant concentration of credit risk in any one bank or other financial institution. Management monitors closely the credit quality of the institutions with which it holds deposits. Similar considerations are given to our portfolio of derivative financial instruments.

Our borrowing facilities are monitored against forecast requirements and timely action is taken to put in place, renew or replace credit lines. Management’s policy is to manage liquidity risk by diversifying our funding sources and by staggering the maturity of our debt.

As market conditions warrant, we and our majority equity holders, Blackstone and its affiliates, may from time to time, depending upon market conditions, seek to repurchase debt securities that we have issued or loans that we have borrowed in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any such purchases may be funded by existing cash balances or the incurrence of 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 in the trading liquidity of that debt. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and result in related adverse tax consequences to us.

It is our policy to retain sufficient liquidity throughout the capital expenditure cycle to maintain our financial flexibility. We do not anticipate any material long-term deterioration in our overall liquidity position in

 

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the foreseeable future. Management believes that the current level of working capital is sufficient for Gates’ present requirements.

Cash Flow

Nine months ended September 30, 2017 compared to the nine months ended October 1, 2016:

Cash provided by operations was $142.6 million during the first nine months of 2017 compared with $200.4 million during the prior year period. Operating cash flow before movements in operating assets and liabilities was $259.5 million in the first nine months of 2017 compared with $235.1 million in the prior year period, an increase of $24.4 million that was due largely to the improved operational performance of Gates. Movements in operating assets and liabilities during the first nine months of 2017 gave rise to a decrease of $116.9 million in cash generated from operations compared with $34.7 million decrease in the prior year period. This decrease, or further spend of cash, was driven primarily by the build of inventory and higher net trade receivable balances due to increased production and sales volumes.

Net cash outflow from investing activities in the first nine months of 2017 was $99.8 million, compared with the net cash outflow from investing activities of $36.0 million in the prior year period. In addition to a $21.7 million higher net capital expenditure, cash outflow from investing activities increased by $36.7 million due to the purchase by Gates of Techflow Flexibles, a fully integrated engineering, manufacturing and commercial operation.

Net cash outflow from financing activities was $58.2 million in the first nine months of 2017, compared with $94.6 million in the prior year period. The change in cash outflows from the first nine months of 2016 to that for the current year period was driven primarily by an excess cash flow payment of $38.2 million to our term loan lenders made in the first quarter of 2016. In addition, dividend payments to non-controlling shareholders in the prior year period were $13.5 million higher than in the first nine months of 2017. Partially offsetting these year-over-year decreases in financing cash outflows was $17.4 million of financing costs incurred in the first nine months of 2017 in relation to the debt refinancing in March 2017.

Fiscal 2016 compared to Fiscal 2015:

Cash provided by operations was $371.6 million in Fiscal 2016 compared with $275.9 million in Fiscal 2015. Operating cash flow before movements in operating assets and liabilities was $279.9 million compared with $246.6 million in Fiscal 2015, an increase of $33.3 million that was due largely to the improvement in operational performance. Movements in operating assets and liabilities during Fiscal 2016 gave rise to an increase of $91.7 million in cash generated from operations compared with $29.3 million in Fiscal 2015. This increase was driven primarily by the receipt of a tax refund in the United States of $41.3 million related to returns filed in prior periods. In addition, accounts receivable increased during Fiscal 2016 compared with Fiscal 2015 as sales rose, partially offset by a decrease in inventory driven primarily by more disciplined inventory management.

Net cash outflow from investing activities in Fiscal 2016 was $60.1 million, broadly flat with the net cash outflow from investing activities of $60.5 million in Fiscal 2015. Capital expenditure was lower in Fiscal 2016 at $68.1 million, compared with $85.8 million in Fiscal 2015, however Fiscal 2015 benefited from a decrease in restricted cash of $25.6 million (primarily related to the repayment of legacy debt with escrowed cash) compared with $2.7 million during Fiscal 2016.

Net cash outflow from financing activities was $110.8 million in Fiscal 2016, compared with an outflow of $73.9 million in Fiscal 2015. This was driven by $14.8 million higher repayment of debt in Fiscal 2016, primarily related to the Excess Cash Flow payment of $38.2 million made in the first quarter of 2016. In addition, dividend payments to non-controlling shareholders in Fiscal 2016 were $10.8 million higher than in Fiscal 2015.

 

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As a result of the decreased debt, cash interest paid decreased to $198.8 million in Fiscal 2016 from $208.0 million in Fiscal 2015.

Fiscal 2015 compared to Full Year 2014:

Cash provided by operations was $275.9 million in Fiscal 2015 compared with $81.5 million in Full Year 2014. Operating cash flow before movements in operating assets and liabilities was $246.6 million compared with $8.8 million in Full Year 2014, an increase of $237.8 million that was due largely to the impact of transaction-related costs in Full Year 2014. Movements in operating assets and liabilities during Fiscal 2015 gave rise to an increase of $29.3 million in cash generated from operations compared with $72.7 million in Full Year 2014, although Pre-Acquisition Predecessor 2014 included a $121.4 million decrease in inventory as a result of the inventory uplift associated with purchase accounting.

Net cash outflow from investing activities in Fiscal 2015 was $60.5 million, compared with a net cash outflow from investing activities of $3,801.7 million in Full Year 2014, driven by the Acquisition. Capital expenditure was lower in Fiscal 2015 at $85.8 million, compared with $103.2 million in Full Year 2014.

Net cash outflow from financing activities was $73.9 million in Fiscal 2015, compared with an inflow of $3,742.3 million in Full Year 2014. This was driven by an investment by Blackstone in 2014 of $1.6 billion and the draw down of $4.1 billion of new debt to finance the Acquisition, partially offset by the repayment of the majority of the outstanding Pre-Acquisition Predecessor debt. As a result of the decreased debt, cash interest paid increased to $208.0 million in Fiscal 2015 from $116.0 million in Full Year 2014.

Indebtedness

As of September 30, 2017, our borrowings consisted principally of two term loans, two unsecured notes and two revolving credit facilities.

Our borrowings as of September 30, 2017 and December 31, 2016 may be analyzed as follows:

 

    Carrying amount     Principal amount  
(dollars in millions)   As of
September 30,
2017
    As of
December 31,
2016
    As of
September 30,
2017
    As of
December 31,
2016
 

Bank overdrafts

  $ 0.6     $ 0.3     $ 0.6     $ 0.3  

Bank and other loans:

       

—Secured

       

Term Loans (U.S. dollar and euro denominated)

    2,457.0       2,540.9       2,504.7       2,600.3  

—Unsecured

       

Senior Notes (U.S. dollar and euro denominated)

    1,458.1       1,295.3       1,466.5       1,285.7  

Other borrowings

    0.4       0.4       0.4       0.4  
 

 

 

   

 

 

   

 

 

   

 

 

 
    3,915.5       3,836.6       3,971.6       3,886.4  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 3,916.1     $ 3,836.9     $ 3,972.2     $ 3,886.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Details of our borrowings, together with a reconciliation of their carrying amount to their principal amount, are presented in note 17 to our audited consolidated financial statements included elsewhere in this prospectus.

During March and April 2017, we completed several refinancing transactions to re-price the Euro Term Loans, extend the maturities of certain debt tranches and to change the currency and interest structure of our debt.

 

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An additional $150.0 million was raised as dollar notes in March 2017 and, in April €466.2 million was raised under the Euro Term Loan facility. The proceeds from these debt raisings were used to repay $650.0 million of the existing Dollar Term Loans.

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. For the Dollar Term Loan the interest rate as of September 30, 2017 was LIBOR, subject to a floor of 1%, plus a margin of 3.25% and borrowings under the Dollar Term Loan bore interest at a rate of 4.58% per annum. As of September 30, 2017, Euro Term Loan borrowings incurred interest at Euro LIBOR, subject to a floor of 0%, plus a margin of 3.50% and borrowings under the Euro Term Loan bore interest at a rate of 3.50% per annum. In November 2017, we refinanced our Term Loans such that each of the applicable margins were lowered by 0.25%, in each case subject to an additional step-down of 0.25% following a qualifying initial public offering. As part of the April 2017 refinancing transaction, the maturity dates for both of the term loan facilities were extended from July 3, 2021 to March 31, 2024, with a springing maturity of April 15, 2022 if more than $500 million of the dollar notes remain outstanding at that time.

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 first nine months of 2017, we made quarterly amortization payments against the Dollar Term Loan and the Euro Term Loan of $15.0 million and $4.3 million, respectively. During Fiscal 2016, we made quarterly amortization payments against the Dollar Term Loan and the Euro Term Loan of $24.9 million and $2.2 million, respectively.

Under the terms of the credit agreement, we are obliged to offer annually to the term loan lenders, commencing in 2016, an ‘excess cash flow’ amount as defined under the agreement, based on the preceding year’s final results. Based on the Fiscal 2016 results, we did not need to make an excess cash flow payment as our leverage ratio as defined under the credit agreement has dropped below the threshold above which payments are required.

During the first nine months of 2017, a transactional foreign exchange loss of $80.0 million was recognized in respect of the Euro Term Loan, compared with a loss of $6.2 million in the prior year period. Of these losses, $50.3 million was recognized in other (expense) income in the first nine months of 2017 and $0 in the prior year period, and a $29.7 million loss was recognized in other comprehensive income in the first nine months of 2017 in respect of the Euro Term Loan as part of this facility has been designated as a net investment hedge of certain of Gates’ euro investments. In the prior year period, a loss of $6.2 million was recognized in other comprehensive income.

During Fiscal 2016, a transactional foreign exchange gain of $8.7 million was recognized in respect of the Euro Term Loan, compared with a gain of $23.6 million in Fiscal 2015. Of these gains, $0 million was recognized in other (expense) income in Fiscal 2016 and $31.0 million in Fiscal 2015, and an $8.7 million gain was recognized in other comprehensive income in Fiscal 2016 due to the designation of this facility as a net investment hedge of certain of our euro investments. In Fiscal 2015, a loss of $7.4 million was recognized in other comprehensive income.

As of September 30, 2017, the principal amount outstanding under the Dollar Term Loan was $1,733.7 million and the Euro Term Loan was $771.0 million (€655.2 million).

Unsecured Senior Notes

As of September 30, 2017, Gates had outstanding $1,190.0 million dollar notes and $276.5 million (€235.0 million) euro notes (collectively, the “Notes”). This includes $150 million of dollar notes that were issued on March 30, 2017 as part of the broader refinancing transaction (see “—Refinancing” below for further details). The Notes are scheduled to mature on July 15, 2022. The dollar notes bear interest at an annual fixed rate of 6% and the euro notes bear interest at an annual fixed rate of 5.75%. Interest payments are made semi-annually.

 

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During the first nine months of 2017, a transactional foreign exchange loss of $30.8 million was recognized in other comprehensive income in respect of the euro notes as these notes had been designated as a net investment hedge of certain of Gates’ euro investments. During the prior year period, a loss of $7.4 million loss was recognized in other comprehensive income in respect of the euro notes. In Fiscal 2016 the principal on the euro notes was impacted by $10.6 million of favorable foreign exchange rates, compared with gains of $28.0 million in Fiscal 2015.

On and after July 15, 2017, we may redeem the 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 redemption date:

 

     Dollar note
redemption price
    Euro note
redemption price
 

During the year commencing:

    

—July 15, 2017

     103.0     102.875

—July 15, 2018

     101.5     101.438

—July 15, 2019 and thereafter

     100.0     100.000

In the event of a change of control over the Company, each holder will have the right to require us to repurchase all of such holder’s Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase, except to the extent that we have previously elected to redeem the Notes (under the terms outlined above).

Revolving Credit Facility

Gates has a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $125.0 million, with a letter of credit sub-facility of $20.0 million. As of September 30, 2017 and December 31, 2016, there were $0 drawings for cash under the revolving credit facility and there were no 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

Gates has a revolving credit facility backed by certain of its assets in North America. The facility allows for loans of up to a maximum of $325.0 million ($321.7 million as of September 30, 2017 and $288.6 million as of December 31, 2016, based on the values of the secured assets on those dates) with a letter of credit sub-facility of $150.0 million. As of September 30, 2017 and December 31, 2016, there were $0 drawings for cash under the asset-backed revolver. 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. The letters of credit outstanding under the asset-backed revolver were $57.0 million and $54.3 million as of September 30, 2017 and December 31, 2016, respectively.

 

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Refinancing

During March and April 2017, we completed several refinancing transactions to re-price the Euro Term Loans, extend the maturities of certain debt tranches and to raise additional debt to repay existing debt. In March 2017, $150.0 million of new dollar notes was issued and in April an additional €466.2 million was borrowed under the Euro Term Loan facility. The proceeds from these transactions were used in April 2017 to repay $650.0 million of the existing Dollar Term Loan, keeping the refinancing transactions leverage neutral. A summary of the transactions and their effective closing dates are set out below:

 

Date

  Debt Tranche  

Nature of the transaction

  Original position     Refinanced Position  

March 30, 2017

  Dollar notes   $150.0 million debt issued     $1,040.0 million       $1,190.0 million  

Date

  Debt Tranche  

Nature of the transaction

  Original position     Refinanced Position  

April 7, 2017

  Euro Term
Loans
  €466.2 million debt borrowed     €192.3 million       €658.5 million  
    (~$500 million equivalent)    
    Repricing    
Euro LIBOR + 3.25%,
1.00% floor
 
 
   

Euro LIBOR +
3.50%, 0.00%
floor
 
 
 
    Term extension     July 3, 2021       March 31, 2024  
  Dollar Term
Loans
  $650 million debt repayment     $2,392.5 million       $1,742.5 million  
    Term extension     July 3, 2021       March 31, 2024  
  Revolving
Credit
Facility
  Term extension     July 3, 2019       July 3, 2022  
  Asset-backed
Revolver
  Term extension     July 3, 2019       July 3, 2022  

The majority of the costs related to the refinancing transactions will be deferred and amortized to net income over the remaining term of the related debt using the effective interest method. In the first nine months of 2017, $15.4 million of refinancing costs were deferred on the balance sheet. Those refinancing costs that do not qualify for deferral are recognized in net income as they are incurred. In the first nine months of 2017, $2.0 million of refinancing costs were recognized in net income as transaction-related costs.

Net Debt

During the first nine months of 2017, our net debt increased by $78.0 million from $3,308.1 million as of December 31, 2016 to $3,386.1 million at September 30, 2017. We generated cash from operating activities of $142.6 million, offset by capital expenditures of $64.7 million and business acquisition costs of $36.7 million, which related to the purchase of Techflow Flexibles during June 2017. During the first nine months of 2017, in connection with the refinancing of our debt, we paid financing costs of $17.4 million. Dividend payments to minority shareholders in our joint ventures (primarily Nitta Corporation) were $17.9 million.

Movements in foreign currency had an unfavorable impact of $91.1 million on net debt during the first nine months of 2017, the majority of the movement relating to the impact of movements in the euro against the U.S. dollar on our euro-denominated debt.

During Fiscal 2016, our net debt decreased by $259.3 million from $3,567.4 million as of January 2, 2016 to $3,308.1 million at December 31, 2016. We generated cash from operating activities of $371.6 million, offset partially by capital expenditures of $68.1 million and dividend payments of $38.9 million to minority shareholders in our joint ventures (primarily Nitta Corporation).

 

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Movements in foreign currency had a favorable impact of $6.7 million on net debt during Fiscal 2016, the majority of the movement relating to the impact of movements in the euro against the U.S. dollar on our euro-denominated debt.

Borrowing Headroom

As of September 30, 2017, our asset-backed revolving credit facility had a borrowing base of $321.7 million, being the maximum amount the Company 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 $57.0 million. We also have a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $125.0 million. We had drawn $0.6 million against uncommitted borrowing facilities (bank overdrafts) and had outstanding performance bonds, letters of credit and bank guarantees amounting to $3.3 million (in addition to those outstanding under the revolving credit facility).

Overall, therefore, our committed borrowing headroom was $385.8 million, in addition to cash balances of $530.0 million (including restricted cash of $1.6 million).

Cash Balances

Our central treasury function is responsible for maximizing the return on surplus cash balances within the constraints of our liquidity and credit policy. We achieve this, where possible, by controlling directly all surplus cash balances and pooling arrangements on an ongoing basis and by reviewing the efficiency of all other cash balances across our businesses on a weekly basis. Our policy is to apply funds from one part of Gates to meet the obligations of another part wherever possible, in order to ensure maximum efficiency in the use of our funds. No material restrictions apply that limit the application of this policy. We currently intend that earnings by foreign subsidiaries will be indefinitely reinvested in foreign jurisdictions in order to fund strategic initiatives (such as investment, expansion and acquisitions), fund working capital requirements and repay debt (both third-party and intercompany) of our foreign subsidiaries in the normal course of business.

We manage our cash balances such that there is no significant concentration of credit risk in any one bank or other financial institution. We monitor closely the quality of the institutions that hold our deposits. As of December 31, 2016, 91.8% of our cash balances were held with institutions rated at least A-1 by Standard & Poor’s and P-1 by Moody’s, compared with 85.6% as of January 2, 2016.

As of December 31, 2016, our total cash and investments were $528.8 million (including restricted cash), compared with $340.2 million as of January 2, 2016, of which $337.5 million was interest-earning, compared with $249.4 million as of January 2, 2016. All interest-earning deposits attract interest at floating rates. Of the total cash and investments balances, $300.3 million and $105.5 million was invested in short-term deposits by our Treasury department as of December 31, 2016 and January 2, 2016, respectively. $1.6 million and $4.5 million comprised restricted cash as of December 31, 2016 and January 2, 2016, respectively, primarily $1.4 million and $2.0 million held in escrow for insurance purposes as of December 31, 2016 and January 2, 2016, respectively. As of January 2, 2016, an additional $1.8 million was held in escrow for legacy debt purposes.

A further $96.5 million and $108.4 million of the total cash and investments balance was held in our non-wholly owned Asian subsidiaries as of December 31, 2016 and January 2, 2016, respectively. The remaining total cash and investments balances of $130.4 million as of December 31, 2016 and $121.8 million as of January 2, 2016 were held in centrally-controlled pooling arrangements and with local operating companies. As of December 31, 2016, $345.5 million of our cash balance was under the direct control of Gates Treasury, compared with $143.9 million as of January 2, 2016.

 

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Off-Balance Sheet Arrangements

We have not entered into any transaction, agreement or other contractual arrangement that is considered to be an off-balance sheet arrangement that is required to be disclosed other than operating lease commitments.

Tabular Disclosure of Contractual Obligations

Our consolidated contractual obligations and commercial commitments are summarized in the following table which includes aggregate information about our contractual obligations as of December 31, 2016 and the periods in which payments are due, based on the earliest date on which we could be required to settle the liabilities.

Floating interest payments and payments and receipts on interest rate derivatives are estimated based on market interest rates prevailing at the balance sheet date. Amounts in respect of operating leases and purchase obligations are items that we are obligated to pay in the future, but they are not required to be included on the consolidated balance sheet.

 

           Earliest period in which (payment)/receipt due  
(in millions)    Total     Less than 1
year
    1 - 3 years     3 - 5 years     After 5 years  

Bank overdrafts and debt(1):

          

—Principal

   $ (3,886.7   $ (27.4   $ (54.2   $ (2,519.4   $ (1,285.7

—Interest payments(2)(3)

     (980.3     (188.2     (372.3     (343.2     (76.6

Derivative financial instruments:

          

—Payments(4)

     (54.0     (19.7     (29.3     (5.0     —    

—Receipts(4)

     47.6       12.1       27.8       7.7       —    

Capital leases

     (1.8     (0.3     (0.6     (0.6     (0.3

Operating leases

     (142.5     (27.8     (30.5     (16.4     (67.8

Post-retirement benefits(5)

     (16.0     (16.0     —         —         —    

Indemnified tax liabilities

     (3.4     (3.4     —         —         —    

Purchase obligations(6)

     (31.1     (22.7     (6.9     (1.5     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (5,068.2   $ (293.4   $ (466.0   $ (2,878.4   $ (1,430.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During March and April 2017, Gates completed several refinancing transactions to re-price the Euro Term Loans, extend the maturities of certain debt tranches and to raise additional debt to repay existing debt. In March 2017, $150.0 million of new dollar notes was raised and an additional €466.2 million was raised under the Euro Term Loan facility. The proceeds from these transactions were used in April 2017 to repay $650.0 million of the existing Dollar Term Loan, keeping the refinancing transactions leverage neutral.

The result of this refinancing on the annual expected principal and interest payments is not significant; however, the extension of the maturities of certain of the debt tranches has changed the interest expected to be paid in after five years to $291.3 million. In addition, this extension has decreased the expected principal payments in years three through five from $2,519.4 million to $48.6 million and increased the expected principal payments after five years from $1,285.7 million to $3,750.8 million.

In November 2017, we refinanced our Term Loans such that each of the applicable margins were lowered by 0.25%, in each case subject to a step-down of 0.25% following a qualifying initial public offering.

 

(2) Future interest payments include payments on fixed and floating rate debt.
(3) Floating rate interest payments are estimated based on market interest rates and terms prevailing as of December 31, 2016.
(4) Receipts and payments on foreign currency derivatives, interest rate caps and currency forwards are estimated based on market rates prevailing as of December 31, 2016.

 

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(5) Post-retirement benefit obligations represent our expected cash contributions to its defined benefit pension and other post-retirement benefit plans in 2017. It is not practicable to present expected cash contributions for subsequent years because they are determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other regulations.
(6) A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.

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 finance costs, 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 impact comparison of the performance of our businesses either period-over-period or with other businesses. We use Adjusted EBITDA as our measure of segment profitability to assess the performance of our businesses and it is used for total Gates as well because we believe it is important to consider our profitability on a basis that is consistent with that of our operating segments. 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 arriving at Adjusted EBITDA primarily included:

 

    the effect on cost of sales of the uplift to the carrying amount of inventory held by Gates at the date of the Acquisition;

 

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

 

    transaction-related costs incurred in business combinations and major corporate transactions;

 

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

 

    net interest relating to post-retirement benefit obligations, significant lump-sum settlements and the amortization of prior period actuarial gains and losses;

 

    restructuring costs;

 

    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. Similarly, non-cash net interest relating to post-retirement benefit obligations, significant lump-sum settlements and the amortization of prior period actuarial gains and losses may cause differences between our businesses and from period to period when comparing performance. We therefore exclude from Adjusted EBITDA the non-cash charges in relation to share-based compensation and the above adjustments related to post-retirement benefits in order to assess the relative performance of our businesses.

 

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We exclude from Adjusted EBITDA those acquisition-related costs that are required to be expensed in accordance with ASC 805 ‘Business Combinations,’ in particular, the effect on cost of sales of the uplift to the carrying amount of inventory held by Gates at the date of the Acquisition, and 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 costs that reflect specific actions taken by management to improve Gates’ future profitability; 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 impairments of goodwill and significant impairments of other assets, representing the excess of their carrying amounts over the amounts that are expected to be recovered from them in the future.

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 the net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:

 

(dollars in millions)   Nine months
ended

September 30,
2017
    Nine months
ended

October 1,
2016
    Fiscal
2016
    Fiscal
2015
    Full Year
2014
    Post-
Acquisition
Predecessor
2014
          Pre-
Acquisition
Predecessor
2014
 

Net income (loss)

  $ 52.5     $ 69.0     $ 84.3     $ 50.9     $ (122.9   $ (89.2       $ (33.7

Income tax expense (benefit)

    32.9       15.1       21.1       (9.2     (51.9     (83.2         31.3  

Net finance costs

    225.1       157.1       205.9       142.9       124.6       65.8           58.8  

Amortization

    98.3       116.2       149.5       165.6       148.1       87.6           60.5  

Depreciation

    59.9       72.4       91.3       104.3       96.5       49.5           47.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

EBITDA

    468.7       429.8       552.1       454.5       194.4       30.5           163.9  

(Gain) loss on disposal of discontinued operations

    (0.1     (3.8     (12.4     —         2.4       2.3           0.1  

Loss for the period from discontinued operations

    —         —         —         —         47.9       —             47.9  

Equity in net income of investees

    —         (0.1     (0.1     (0.2     (0.5     (0.3         (0.2

Share-based compensation

    2.9       3.3       4.2       4.3       11.8       0.9           10.9  

Transaction-related costs

    11.3       —         0.4       0.7       187.1       97.0           90.1  

Inventory uplift

    —         —         —         —         121.4       121.4           —    

Impairment of inventory (included in cost of sales)

    —         —         21.7       9.6       —         —             —    

Other impairments

    —         1.4       3.2       51.1       0.6       0.6           —    

Benefit from sale of inventory impaired in a prior period

    —         (0.6     (1.0     —         —         —             —    

Restructuring expenses

    8.3       8.0       11.4       15.6       22.0       8.2