0001718512-18-000017.txt : 20181102 0001718512-18-000017.hdr.sgml : 20181102 20181102141726 ACCESSION NUMBER: 0001718512-18-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 106 CONFORMED PERIOD OF REPORT: 20180929 FILED AS OF DATE: 20181102 DATE AS OF CHANGE: 20181102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Gates Industrial Corp plc CENTRAL INDEX KEY: 0001718512 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38366 FILM NUMBER: 181156510 BUSINESS ADDRESS: STREET 1: 1144 FIFTEENTH STREET CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 303-744-4876 MAIL ADDRESS: STREET 1: 1144 FIFTEENTH STREET CITY: DENVER STATE: CO ZIP: 80202 10-Q 1 gtes-q3201810xq.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
or
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission file number 001-38366
 
Gates Industrial Corporation plc
(Exact Name of Registrant as Specified in its Charter)
 
England and Wales
 
98-1395184
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1144 Fifteenth Street, Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(303) 744-1911
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒ No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Accelerated filer
Non-accelerated filer
☒  
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes  ☐ No  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No  ☒
As of November 1, 2018, there were 289,808,150 ordinary shares of $0.01 par value outstanding.

1


 
TABLE OF CONTENTS
 


2


Forward-looking Statements
This Quarterly Report on Form 10-Q (this “quarterly report” or “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those expressed in our forward-looking statements, including but not limited to the factors described in the section entitled “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017 (the “annual report”), as filed with the Securities and Exchange Commission (the “SEC”), and the following: conditions in the global and regional economy and the major end markets we serve; economic, political and other risks associated with international operations; availability of raw materials at favorable prices and in sufficient quantities; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; competition in all areas of our business; pricing pressures from our customers; continued operation of our manufacturing facilities; our ability to forecast demand or meet significant increases in demand; exchange rate fluctuations; market acceptance of new product introductions and product innovations; our cost-reduction actions; litigation, legal or regulatory proceedings brought against us; enforcement of our intellectual property rights; recalls, product liability claims or product warranties claims; anti-corruption laws and other laws governing our international operations; existing or new laws and regulations that may prohibit, restrict or burden the sale of aftermarket products; our decentralized information technology systems and any interruptions to our computer and IT systems; environmental, health and safety laws and regulations; lives of products used in our end markets as well as the development of replacement markets; our ability to successfully integrate future acquired businesses or assets; our reliance on senior management or key personnel; our ability to maintain and enhance our brand; work stoppages and other labor matters; our investments in joint ventures; liabilities with respect to businesses that we have divested in the past; terrorist acts, conflicts and wars; losses to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events; additional cash contributions we may be required to make to our defined benefit pension plans; the loss or financial instability of any significant customer or customers; changes in legislative, regulatory and legal developments involving taxes and other matters; our substantial leverage; and the significant influence of our majority shareholder, The Blackstone Group L.P., over us, as such factors may be updated from time to time in its periodic filings with the SEC which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. Gates undertakes no obligation to update or supplement any forward-looking statements as a result of new information, future events or otherwise, except as required by law.
ABOUT THIS QUARTERLY REPORT
Financial Statement Presentation
Gates Industrial Corporation plc is a public limited company that was organized under the laws of England and Wales on September 25, 2017. It is the financial reporting entity following the completion of certain reorganization transactions completed prior to its initial public offering in January 2018, as described further in note 1 to the accompanying unaudited condensed consolidated financial statements.
This quarterly report includes certain historical consolidated financial and other data for Omaha Topco Limited (“Omaha Topco”), which was the financial reporting entity prior to the completion of the reorganization transactions referred to above. Omaha Topco was formed by affiliates of The Blackstone Group L.P. primarily as a vehicle to finance the acquisition in July 2014 of the Gates business.
Certain monetary amounts, percentages and other figures included elsewhere in this quarterly report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
All amounts in this quarterly report are expressed in U.S. dollars, unless indicated otherwise.

3


Certain Definitions
As used in this quarterly report, unless otherwise noted or the context requires otherwise:
“Gates,” the “Company,” “we,” “us” and “our” refer (1) prior to the completion of the reorganization transactions completed immediately prior to the initial public offering, to Omaha Topco and its consolidated subsidiaries and (2) after the completion of the reorganization transactions, to Gates Industrial Corporation plc and its consolidated subsidiaries, as the case may be; and
“Blackstone” or “our Sponsor” refer to investment funds affiliated with The Blackstone Group L.P., our current majority owners.


4


PART I — FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)

Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Operations
 
Three months ended
 
Nine months ended
(dollars in millions, except per share amounts)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net sales
$
828.4

 
$
760.6

 
$
2,555.5

 
$
2,259.9

Cost of sales
501.2

 
449.8

 
1,534.9

 
1,343.9

Gross profit
327.2

 
310.8

 
1,020.6

 
916.0

Selling, general and administrative expenses
202.7

 
201.4

 
621.1

 
585.5

Transaction-related expenses
0.2

 
7.2

 
6.2

 
11.3

Impairment of intangibles and other assets
0.2

 

 
0.6

 

Restructuring expense
1.2

 
2.4

 
3.2

 
8.3

Other operating expenses (income)
5.1

 
(0.1
)
 
12.5

 
(0.1
)
Operating income from continuing operations
117.8

 
99.9

 
377.0


311.0

Interest expense
40.2

 
55.0

 
139.8

 
179.0

Other expenses
3.4

 
10.9

 
17.5

 
46.7

Income from continuing operations before taxes
74.2

 
34.0

 
219.7


85.3

Income tax expense
7.2

 
15.9

 
30.4

 
32.9

Net income from continuing operations
67.0

 
18.1

 
189.3

 
52.4

Loss (gain) on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0
0.3

 
(0.1
)
 
0.7

 
(0.1
)
Net income
66.7

 
18.2

 
188.6

 
52.5

Non-controlling interests
(6.8
)
 
(5.0
)
 
(18.9
)
 
(20.0
)
Net income attributable to shareholders
$
59.9

 
$
13.2

 
$
169.7


$
32.5

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
0.21

 
$
0.05

 
$
0.60

 
$
0.13

Earnings per share from discontinued operations

 

 

 

Net income per share
$
0.21

 
$
0.05

 
$
0.60


$
0.13

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
0.20

 
$
0.05

 
$
0.58

 
$
0.13

Earnings per share from discontinued operations

 

 

 

Net income per share
$
0.20

 
$
0.05

 
$
0.58


$
0.13

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

5


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net income
$
66.7

 
$
18.2

 
$
188.6

 
$
52.5

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
—Net translation (loss) gain on foreign operations, net of tax (expense) benefit, respectively, of ($1.3), $4.2, ($0.5) and $13.7
(2.2
)
 
59.9

 
(83.4
)
 
280.4

—Gain (loss) on net investment hedges, net of tax expense, respectively, of $0.2, $0, $0.2 and $0
3.8

 
(26.1
)
 
4.7

 
(90.9
)
Total foreign currency translation movements
1.6

 
33.8

 
(78.7
)

189.5

Cash flow hedges (Interest rate derivatives):
 
 
 
 
 
 
 
—Gain (loss) arising in the period, net of tax expense, respectively, of $0, $0, $0 and $0
3.6

 
(0.2
)
 
13.3

 
(6.4
)
—Reclassification to net income, net of tax benefit (expense), respectively, of $3.3, ($0.4), $2.0 and ($1.4)
4.3

 
2.4

 
6.5

 
7.0

Total cash flow hedges movements
7.9

 
2.2

 
19.8


0.6

Available-for-sale investments:
 
 
 
 
 
 
 
—Net unrealized (loss) gain, net of tax expense, respectively, of $0.1, $0.1, $0.1 and $0
(0.5
)
 
0.3

 
(0.5
)
 
0.1

Total available-for-sale investment movements
(0.5
)
 
0.3

 
(0.5
)
 
0.1

Post-retirement benefits:
 
 
 
 
 
 
 
—Actuarial loss, net of tax benefit, respectively, of $0, $0, $0.1 and $0

 

 
(0.1
)
 

—Reclassification of actuarial (gain) loss to net income, net of tax expense, respectively, of $0, $1.1, $0 and $1.1
(0.1
)
 
2.0

 
(0.4
)
 
2.1

Total post-retirement benefit movements
(0.1
)
 
2.0

 
(0.5
)

2.1

Other comprehensive income (loss)
8.9

 
38.3

 
(59.9
)
 
192.3

Comprehensive income for the period
$
75.6

 
$
56.5

 
$
128.7

 
$
244.8

 
 
 
 
 
 
 
 
Comprehensive income attributable to shareholders:
 
 
 
 
 
 
 
—Income arising from continuing operations
$
82.2

 
$
46.3

 
$
130.6

 
$
205.6

—(Loss) income arising from discontinued operations
(0.3
)
 
0.1

 
(0.7
)
 
0.1

 
81.9

 
46.4

 
129.9


205.7

Comprehensive (loss) income attributable to non-controlling interests
(6.3
)
 
10.1

 
(1.2
)
 
39.1

 
$
75.6

 
$
56.5

 
$
128.7


$
244.8

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


6


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Balance Sheets
(dollars in millions, except share numbers and per share amounts)
As of September 29, 2018
 
As of December 30, 2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
296.3

 
$
564.4

Trade accounts receivable, net
778.2

 
713.8

Inventories
526.8

 
457.1

Taxes receivable
7.3

 
14.1

Prepaid expenses and other assets
108.6

 
76.8

Total current assets
1,717.2

 
1,826.2

Non-current assets
 
 
 
Property, plant and equipment, net
761.7

 
686.2

Goodwill
2,093.8

 
2,085.5

Pension surplus
57.3

 
57.7

Intangible assets, net
2,022.0

 
2,126.8

Taxes receivable
26.0

 
32.7

Other non-current assets
40.7

 
38.6

Total assets
$
6,718.7

 
$
6,853.7

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Debt, current portion
$
32.8

 
$
66.4

Trade accounts payable
402.1

 
392.0

Taxes payable
29.3

 
29.0

Accrued expenses and other current liabilities
190.2

 
210.4

Total current liabilities
654.4


697.8

Non-current liabilities
 
 
 
Debt, less current portion
2,962.7

 
3,889.3

Post-retirement benefit obligations
155.2

 
157.1

Taxes payable
79.0

 
100.6

Deferred income taxes
468.3

 
517.1

Other non-current liabilities
72.0

 
63.4

Total liabilities
4,391.6


5,425.3

Commitments and contingencies (note 18)

 

Shareholders’ equity
 
 
 
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 289,808,150 (December 30, 2017: authorized shares: 3,000,000,000; outstanding shares: 245,474,605)
2.9

 
2.5

—Additional paid-in capital
2,415.5

 
1,622.6

—Accumulated other comprehensive loss
(787.2
)
 
(747.4
)
—Retained earnings
306.6

 
136.9

Total shareholders’ equity
1,937.8


1,014.6

Non-controlling interests
389.3

 
413.8

Total equity
2,327.1


1,428.4

Total liabilities and equity
$
6,718.7

 
$
6,853.7

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

7


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
Cash flows from operating activities
 
 
 
Net income
$
188.6

 
$
52.5

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation and amortization
163.3

 
158.2

Non-cash currency transaction (gain) loss on net debt and hedging instruments
(35.0
)
 
47.6

Premium paid on redemption of long-term debt
27.0

 

Other net non-cash financing costs
54.9

 
39.2

Share-based compensation expense
5.5

 
2.9

Decrease in post-employment benefit obligations, net
(2.5
)
 
(5.6
)
Deferred income taxes
(44.0
)
 
(37.0
)
Other operating activities
1.5

 
1.7

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
—Increase in accounts receivable
(82.6
)
 
(68.6
)
—Increase in inventories
(81.0
)
 
(55.8
)
—Increase in accounts payable
16.4

 
30.1

—(Increase) decrease in prepaid expenses and other assets
(24.6
)
 
2.1

—(Decrease) increase in taxes payable
(6.4
)
 
6.6

—Decrease in other liabilities
(38.8
)
 
(24.0
)
Net cash provided by operations
142.3


149.9

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(143.0
)
 
(57.8
)
Purchases of intangible assets
(11.9
)
 
(6.9
)
Net cash paid under corporate-owned life insurance policies
(7.4
)
 
(7.3
)
Proceeds from the sale of property, plant and equipment
1.6

 
1.9

Purchase of businesses, net of cash acquired
(50.9
)
 
(36.7
)
Other investing activities
(2.5
)
 
(0.3
)
Net cash used in investing activities
(214.1
)

(107.1
)
Cash flows from financing activities
 
 
 
Issue of shares, net of cost of issuance
799.6

 
0.6

Deferred offering costs
(8.6
)
 

Buy-back of shares

 
(1.6
)
Proceeds from long-term debt

 
644.7

Payments of long-term debt
(933.5
)
 
(670.1
)
Premium paid on redemption of long-term debt
(27.0
)
 

Debt issuance costs paid

 
(17.4
)
Dividends paid to non-controlling interests
(23.3
)
 
(17.9
)
Other financing activities
5.7

 
3.5

Net cash used in financing activities
(187.1
)
 
(58.2
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(9.2
)
 
16.6

Net (decrease) increase in cash and cash equivalents and restricted cash
(268.1
)
 
1.2

Cash and cash equivalents and restricted cash at the beginning of the period
566.0

 
528.8

Cash and cash equivalents and restricted cash at the end of the period
$
297.9


$
530.0

Supplemental schedule of cash flow information
 
 
 
Interest paid
$
142.4

 
$
169.2

Income taxes paid, net
$
83.7

 
$
64.9

Accrued capital expenditures
$
2.5

 
$
1.9

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

8


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
(dollars in millions)
Share
capital
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
loss
 
Retained
(deficit) earnings
 
Total
shareholders’
equity
 
Non-
controlling
interests
 
Total
equity
As of December 31, 2016
$
2.5

 
$
1,619.0

 
$
(915.9
)
 
$
(14.3
)
 
$
691.3

 
$
377.1

 
$
1,068.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
32.5

 
32.5

 
20.0

 
52.5

Other comprehensive income

 

 
173.2

 

 
173.2

 
19.1

 
192.3

Total comprehensive income




173.2


32.5


205.7


39.1

 
244.8

Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
—Issue of shares

 
0.6

 

 

 
0.6

 

 
0.6

—Buy-back of shares

 
(1.6
)
 

 

 
(1.6
)
 

 
(1.6
)
—Share-based compensation

 
2.9

 

 

 
2.9

 

 
2.9

—Dividends paid to non-controlling
interests

 

 

 

 

 
(17.9
)
 
(17.9
)
As of September 30, 2017
$
2.5

 
$
1,620.9

 
$
(742.7
)
 
$
18.2

 
$
898.9

 
$
398.3

 
$
1,297.2

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

 
$
1,622.6

 
$
(747.4
)
 
$
136.9

 
$
1,014.6

 
$
413.8

 
$
1,428.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
169.7

 
169.7

 
18.9

 
188.6

Other comprehensive loss

 

 
(39.8
)
 

 
(39.8
)
 
(20.1
)
 
(59.9
)
Total comprehensive (loss) income

 

 
(39.8
)
 
169.7

 
129.9

 
(1.2
)
 
128.7

Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
—Issue of shares
0.4

 
841.2

 

 

 
841.6

 

 
841.6

—Share-based compensation

 
4.7

 

 

 
4.7

 

 
4.7

—Dividends paid to non-controlling
interests

 

 

 

 

 
(23.3
)
 
(23.3
)
—Cost of shares issued

 
(53.0
)
 

 

 
(53.0
)
 

 
(53.0
)
As of September 29, 2018
$
2.9

 
$
2,415.5

 
$
(787.2
)
 
$
306.6

 
$
1,937.8

 
$
389.3

 
$
2,327.1

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


9


Gates Industrial Corporation plc
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Introduction
A. Background
Gates Industrial Corporation plc (the “Company”) is a public limited company that was organized under the laws of England and Wales on September 25, 2017. Prior to the completion of the initial public offering of the Company’s shares in January 2018, the Company undertook certain reorganization transactions such that Gates Industrial Corporation plc became the indirect owner of all of the equity interests in Omaha Topco Limited (“Omaha Topco”), and has become the holding company of the Gates business. The previous owners of Omaha Topco were various investment funds managed by affiliates of The Blackstone Group L.P. (“Blackstone” or our “Sponsor”), and Gates management equity holders. These equity owners of Omaha Topco received depositary receipts representing ordinary shares in the Company in consideration for their equity in Omaha Topco, at a ratio of 0.76293 of our ordinary shares for each outstanding ordinary share of Omaha Topco. All share and per share amounts in these condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of this ratio. The reorganization was accounted for as a transaction between entities under common control and the net assets were recorded on the historical cost basis, in a manner similar to a pooling of interests, when Omaha Topco was contributed into the Company. Gates Industrial Corporation plc had no significant business transactions or activities prior to the date of the reorganization transactions, and as a result, the historical financial information for periods prior to those transactions reflects that of Omaha Topco.
In these condensed consolidated financial statements and related notes, all references to “Gates,” “we,” “us,” and “our” refer, (1) prior to the completion of the reorganization transactions completed immediately prior to the initial public offering, to Omaha Topco and its consolidated subsidiaries and (2) after the completion of the reorganization transactions, to Gates Industrial Corporation plc and its consolidated subsidiaries, as the case may be.
B. Accounting periods
The Company prepares its annual consolidated financial statements for the period ending on the Saturday nearest December 31. Accordingly, the condensed consolidated balance sheet is presented as of September 29, 2018 and December 30, 2017 and the related condensed consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity are presented for the 90 day period from July 1, 2018 to September 29, 2018, with comparative information for the 90 day period from July 2, 2017 to September 30, 2017 and the 272 day period from December 31, 2017 to September 29, 2018, with comparative information for the 272 day period from January 1, 2017 to September 30, 2017.
C. Basis of preparation
The condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars unless otherwise indicated. The condensed consolidated financial statements and related notes contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of September 29, 2018 and the results of its operations and cash flows for the periods ended September 29, 2018 and September 30, 2017. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
These condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as Gates’ audited annual consolidated financial statements and related notes for the year ended December 30, 2017. The condensed consolidated balance sheet as of December 30, 2017 has been derived from those audited financial statements.
These condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended December 30, 2017, prepared in accordance with U.S. GAAP, included in the Company’s Annual Report on Form 10-K.

10


The accounting policies used in preparing these condensed consolidated financial statements are the same as those applied in the prior year, except for the adoption on the first day of the 2018 fiscal year (unless otherwise noted) of the following new Accounting Standard Updates (each, an “ASU”):
ASU 2014-09 “Revenue From Contracts With Customers” (Topic 606): Revenue Recognition
ASU 2016-08 “Revenue from Contracts with Customers” (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-10 “Revenue from Contracts with Customers” (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-12 “Revenue from Contracts with Customers” (Topic 606): Narrow-Scope Improvements and Practical Expedients
ASU 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU 2017-13 “Revenue from Contracts with Customers” (Topic 606): Amendments to SEC Paragraphs
ASU 2017-14 “Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606) (“Topic 606”). Topic 606 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605) (“Topic 605”), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled in exchange for those goods or services. The standards update provides a single, principles-based, five-step model to be applied to all contracts with customers. The five steps are: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The ASU also sets out requirements to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequent to issuing this ASU, the FASB issued several amendments, listed above, which provide clarification, additional guidance, practical expedients and technical corrections.
We adopted the requirements of Topic 606 as of December 31, 2017, the first day of our 2018 fiscal year, utilizing the modified retrospective method of transition. We have therefore not made any changes to the comparative information which continues to be reported under the prior guidance of Topic 605. As part of the implementation process, we comprehensively reviewed our relationships with our customers and analyzed a number of areas of potential change under Topic 606, including the treatment and calculation of warranty expenses, rebates, branded products, and consignment sales. Management concluded that the impact of Topic 606 on each of these areas on the Company's financial statements was not significant for any of the periods presented or for any of the annual periods that will be included in the Company's 2018 annual consolidated financial statements. No significant changes in net sales or other items in the condensed consolidated financial statements have therefore been made for the three and nine months ended September 29, 2018 in relation to the adoption of Topic 606.
Gates derives its net sales primarily from the sale of a wide range of power transmission and fluid power products and components for a large variety of industrial and automotive applications, both in the aftermarket and first-fit channels, throughout the world. Our products are sold in more than 100 countries across our four commercial regions: (1) the Americas; (2) Europe, Middle East & Africa (“EMEA”); (3) Greater China; and (4) East Asia and India. We have a long-standing presence in each of these regions, including our emerging markets, which include China, Southeast Asia, Eastern Europe and South America. We sell to a large variety of customers in many sectors of the industrial and consumer markets, with no significant exposure to any one customer or market.

11


In the substantial majority of our agreements with customers, we consider accepted customer purchase orders, which in some cases are governed by master sales agreements, to represent the contracts with our customers. Revenue from the sale of goods under these contracts is measured at the invoiced amount, net of estimated returns, early settlement discounts and rebates. Taxes collected from customers relating to product sales and remitted to government authorities are excluded from revenues. Where a customer has the right to return goods, future returns are estimated based on historical returns profiles. Settlement discounts that may apply to unpaid invoices are estimated based on the settlement histories of the relevant customers. Our transactions prices often include variable consideration, usually in the form of rebates that may apply to issued invoices. The reduction in the transaction price for variable consideration requires that we make estimations of the expected total qualifying sales to the relevant customers. These estimates, including an analysis for potential constraint on variable consideration, take into account factors such as the nature of the rebate program, historical information and expectations of customer and consumer behavior. Overall, the transaction price is reduced to reflect our estimate of the amount of consideration to which we are entitled based on the terms of the contract.
We allocate the transaction price to each distinct product based on their relative standalone selling price. The product price as specified on the accepted purchase order is considered to be the standalone selling price.
In substantially all of our contracts with customers, our performance obligations are satisfied at a point in time, rather than over a period of time, when control of the product is transferred to the customer. This occurs typically at shipment. In determining whether control has transferred and the customer is consequently able to control the use of the product for their own benefit, we consider if there is a present right to payment, legal title has been transferred, and whether the risks and rewards of ownership have transferred to the customer. The majority of our net sales therefore continues to be recognized consistently with Topic 605, when products are shipped from our manufacturing or distribution facilities.
As part of our adoption of Topic 606, we elected to use the following practical expedients:
(i)
to exclude disclosures of transaction prices allocated to remaining performance obligations when we expect to recognize such revenue for all periods prior to the date of initial application of Topic 606;
(ii)
to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less, which is the case in the substantial majority of our contracts with customers;
(iii)
not to assess whether a contract has a significant financing component (as our standard payment terms are less than one year);
(iv)
not to assess whether promised goods are performance obligations if they are immaterial in the context of the contract with the customer;
(v)
to exclude from the measurement of the transaction price all taxes assessed by a governmental authority and collected by Gates from a customer; and
(vi)
to account for shipping or handling activities occurring after control has passed to the customer as a fulfillment cost rather than as a performance obligation.
ASU 2016-15 “Statement of Cash Flows” (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-18 “Statement of Cash Flows” (Topic 230): Restricted Cash
In 2016, the FASB issued two ASUs that clarify the operating, investing and financing cash flow classifications when receiving or paying cash in certain situations including debt prepayments, distributions from equity method investees and proceeds from settlement of corporate-owned life insurance policies.
In addition, the new requirement states that an entity should include restricted cash in the cash and cash equivalents line when reconciling the beginning-of-period and end-of-period amounts in the statement of cash flows.

12


In accordance with the transition requirements of these ASUs, the presentation changes to the condensed consolidated statement of cash flows have been made retrospectively with comparative information restated accordingly. This resulted in the reclassification of a cash outflow of $7.3 million for the nine months ended September 30, 2017 related to the payment of premiums paid under our corporate-owned life insurance policies from cash flow from operating activities to cash flows from investing activities. A similar amount is presented as an investing cash outflow for the nine months ended September 29, 2018. In addition, cash and cash equivalents for the purposes of the condensed consolidated statement of cash flows included restricted cash of $1.6 million as of both September 29, 2018 and December 30, 2017, and $1.6 million as of both September 30, 2017 and December 31, 2016.
ASU 2017-07 “Compensation-Retirement Benefits” (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Periodic Post-retirement Benefit Cost
In March 2017, the FASB issued an ASU which requires that an employer report the service cost component of its net periodic pension and other post-retirement costs in the same line item as other compensation costs arising from services rendered by the relevant employees during the period. The other components of net periodic benefit cost (which include the interest cost, expected return on plan assets, gains or losses on settlements and curtailments, the amortization of any prior service cost or credit and prior year actuarial gains or losses) are required to be presented in the statement of operations separately from the service cost component and outside of operating income from continuing operations.
Following adoption of this ASU, we continue to present the service cost component of our net periodic pension and other post-retirement benefit cost in the lines within operating income to which the relevant employees' other compensation costs are reported. All other components are now included in the other expenses line, outside of operating income from continuing operations. In accordance with the transition requirements of this ASU, these presentation changes to the statement of operations have been reflected retrospectively. We have adopted the practical expedient of using the amounts disclosed in our historical financial statements as the estimation basis for applying these retrospective presentation requirements. Please refer to note 14 for the components of the net periodic pension and other post-retirement costs that are now reported outside of operating income from continuing operations instead of within selling, general and administrative expenses.
ASU 2017-12 “Derivatives and Hedging” (Topic 815): Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued an ASU with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in ASU 2017-12 require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The new approach no longer separately measures and reports hedge ineffectiveness.
The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2018. Early application is permitted in any interim period after issuance of ASU 2017-12. An entity should apply a cumulative effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income (“OCI”) and retained earnings as of the beginning of the fiscal year that the entity adopts. The amended presentation and disclosure guidance is required only prospectively.
Following an assessment of its impact, we have elected to early adopt this ASU during the third quarter of 2018. On adoption, there was no cumulative effect adjustment on retained earnings.


13


The following ASUs that were also adopted on the first day of the 2018 fiscal year did not have, and we believe will not have, a significant impact on our results, financial position or disclosures:
ASU 2016-01 “Financial Instruments” (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
ASU 2016-16 “Income Taxes” (Topic 740): Intra-entity Transfers of Assets other than Inventory
ASU 2017-01 “Business Combinations” (Topic 805): Clarifying the definition of a business
ASU 2017-09 “Stock Compensation” (Topic 718): Scope of Modification Accounting
ASU 2018-03 “Technical Corrections and Improvements to Financial Instruments - Overall” (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This ASU provides technical corrections and clarifications on various items included in ASU 2016-01, which we have adopted as of the beginning of the 2018 fiscal year. Consistent with our adoption of ASU 2016-01, none of these technical corrections or clarifications have an impact on Gates.
2. Recent accounting pronouncements not yet adopted
The following recent accounting pronouncements are relevant to Gates’ operations but have not yet been adopted.
ASU 2016-02 “Leases” (Topic 842)
ASU 2018-10 “Leases” (Topic 842): Codification Improvements to Topic 842, Leases
ASU 2018-11 “Leases” (Topic 842): Targeted Improvements
In February 2016, the FASB issued an ASU which introduces a lessee model that will bring most leases of property, plant and equipment onto the balance sheet. It requires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right of use asset” for all leases, although certain short-term leases are exempted from the standard. The ASU introduces two models for the subsequent measurement of the lease asset and liability, depending on whether the lease qualifies as a “finance lease” or an “operating lease”. This distinction focuses on whether or not effective control of the asset is being transferred from the lessor to the lessee.
The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The impact on our consolidated financial statements of adopting this ASU, which will affect the recognition, measurement and presentation of leases, is expected to be material given the number and value of leases held. We are gathering and analyzing all relevant lease data and are continuing to evaluate the impact of the ASU.
In July 2018, the FASB issued ASU 2018-11, which allows entities an additional, optional transition method. Previously, Topic 842 was required to be adopted on a modified retrospective basis; however, entities now have the option of initially applying the new leases standard at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, with comparative periods continuing to be presented in accordance with current GAAP (Topic 840, Leases). We currently anticipate adopting Topic 842 using this optional transition method.
ASU 2016-13 “Financial Instruments” (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an ASU which broadens the information that an entity must consider when developing its expected credit loss estimate for financial assets. The financial asset must be measured at the net amount expected to be collected.
The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The impact on our consolidated financial statements of adopting this ASU, which may affect the recognition, measurement and presentation of financial assets, is still being evaluated.

14


ASU 2018-02 “Income Statement – Reporting Comprehensive Income” (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued an ASU to address concerns about the guidance in current U.S. GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This concern stemmed from the U.S. federal government’s enactment of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” known as the Tax Cuts and Jobs Act (the “Tax Act”), on December 22, 2017. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act.
The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the amendments should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The impact on our consolidated financial statements of adopting this ASU, which may affect the recognition, measurement and presentation of taxes, is still being evaluated.
ASU 2018-13 “Fair Value Measurement” (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued an ASU to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the consideration of costs and benefits. The amendments remove certain disclosures, clarify other disclosure requirements, and add new disclosure requirements that have been identified as relevant.
The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Most of the amendments should be applied retrospectively to all periods presented, but a few amendments should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Early adoption is permitted and an entity is permitted to early adopt any removed or modified disclosures upon issuance of the Update and delay adoption of the additional disclosures until their effective date. The impact on our consolidated financial statements of adopting this ASU, which will affect our fair value disclosures, is still being evaluated.
ASU 2018-14 “Compensation - Retirement Benefits - Defined Benefit Plans - General” (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued an ASU to modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments remove certain disclosures, clarify other disclosure requirements, and add new disclosure requirements that have been identified as relevant.
The amendments are effective for fiscal years ending after December 15, 2020, and should be applied on a retrospective basis to all periods presented. The impact on our consolidated financial statements of adopting this ASU, which will affect our disclosures, is still being evaluated.
ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software” (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued an ASU to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement). The guidance permits capitalization of costs associated with the implementation of cloud-based software arrangements and aligns the criteria for capitalization with those for purchased or internally-generated computer software intangible assets. Implementation costs meeting the criteria for capitalization would not be classified as intangible assets but would instead be classified as prepaid expenses that are then amortized over the period of the arrangement as an additional expense consistent with the ongoing costs under the cloud computing arrangement.

15


The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted and entities may choose to apply the requirements either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The impact on our consolidated financial statements of adopting this ASU, which may affect the recognition, measurement and presentation of cloud computing software arrangements, is still being evaluated.
3. Acquisitions
Description and financial effect of acquisitions
On April 26, 2018, Gates completed the acquisition of Rapro for $50.9 million, net of cash acquired. Rapro is a Turkey-based business that engineers, manufactures and sells molded and branched hoses and other products, the majority of which are sold into replacement markets. Rapro operates out of two facilities in Izmir, Turkey, with its products serving heavy-duty, commercial and light-vehicle applications.
On October 2, 2017, Gates completed the acquisition of Atlas Hydraulics for $74.0 million, net of cash acquired. Atlas Hydraulics is a fully-integrated product engineering, manufacturing, and commercial business headquartered in Ontario, Canada. With locations in Canada, the U.S. and Mexico, the company specializes in the design, manufacture, and supply of hydraulic tube and hose assemblies.
In June 2017, Gates purchased 100% of GTF Engineering and Services UK Limited, the owner of the majority of the net assets of Techflow Flexibles, for $36.7 million. Techflow Flexibles is a fully integrated engineering, manufacturing and commercial operation based in the United Kingdom that specializes in high-pressure flexible hoses.
During the nine months ended September 29, 2018 and September 30, 2017, Gates incurred expenses of $1.2 million and $2.9 million, respectively, related directly to these acquisitions, all of which are included in the transaction-related expenses line in the statement of operations.
The fair values of assets acquired and liabilities assumed are as follows:
(dollars in millions)
Rapro
 
Atlas Hydraulics
 
Techflow Flexibles
Assets acquired
 
 
 
 
 
Accounts receivable
$
2.9

 
$
10.3

 
$
1.7

Inventories
5.5

 
21.2

 
4.2

Prepaid expenses and other receivables
1.5

 
0.5

 
1.7

Taxes receivable
0.1

 
2.7

 

Property, plant and equipment
1.8

 
24.5

 
13.0

Intangible assets
0.1

 
23.0

 
3.8

Total assets
11.9


82.2

 
24.4

 
 
 
 
 
 
Liabilities assumed
 
 
 
 
 
Bank loans
1.2

 

 

Accounts payable
3.7

 
5.5

 
2.6

Accrued expenses
0.3

 
2.4

 
4.8

Other current liabilities
1.8

 
11.6

 
0.3

Taxes payable
1.0

 
0.1

 
1.9

Deferred income taxes

 
11.6

 
0.6

Total liabilities
8.0


31.2

 
10.2

Net assets acquired
$
3.9


$
51.0

 
$
14.2


16


Goodwill has been recognized as follows:
(dollars in millions)
Rapro
 
Atlas Hydraulics
 
Techflow Flexibles
Consideration, net of cash acquired
$
50.9

 
$
74.0

 
$
36.7

Net assets acquired
(3.9
)
 
(51.0
)
 
(14.2
)
Goodwill and provisional goodwill
$
47.0


$
23.0

 
$
22.5

The provisional goodwill of $47.0 million arising from the acquisition of Rapro relates primarily to the expected benefit from the acceleration of our growth strategy within the Fluid Power product line and expansion of our product range and geographic coverage. The acquisition is expected to accelerate our growth in replacement channels, particularly in emerging markets. None of the goodwill recognized is expected to be deductible for income tax purposes.
The acquisition accounting for Rapro’s inventories, property, plant and equipment, intangible assets, certain liabilities and related tax balances has not been completed as of September 29, 2018, and the values associated with the acquisition accounting are therefore still subject to change. Accordingly, goodwill is provisional pending the finalization of the valuation of these net assets.
The goodwill of $23.0 million arising from the acquisition of Atlas Hydraulics relates primarily to the expansion of Gates’ presence in industrial markets through increased manufacturing capacity and geographic reach. None of the goodwill recognized is expected to be deductible for income tax purposes.
The goodwill of $22.5 million arising from the acquisition of Techflow Flexibles relates largely to the expected enhancement to Gates’ ability to make and supply long-length and large-diameter hoses, primarily for the oil & gas exploration and production industries. None of the goodwill recognized is expected to be deductible for income tax purposes.
Pro forma information has not been presented for these acquisitions due to their size relative to Gates.
4. Segment information
A. Background
Topic 280 “Segment Reporting” requires segment information provided in the consolidated financial statements to reflect the information that was provided to the chief operating decision maker for the purposes of making decisions about allocating resources and in assessing the performance of each segment. The chief executive officer (“CEO”) of Gates serves as the chief operating decision maker.
The segment information provided in these condensed consolidated financial statements reflects the information that is used by the chief operating decision maker for the purposes of making decisions about allocating resources and in assessing the performance of each segment. These decisions are based on net sales and Adjusted EBITDA (defined below).
B. Operating Segments
Gates manufactures a wide range of power transmission and fluid power products and components for a large variety of industrial and automotive applications, both in the aftermarket and first-fit channels, throughout the world.
Our reportable segments are identified on the basis of our primary product lines, as this is the basis on which information is provided to the CEO for the purposes of allocating resources and assessing the performance of Gates’ businesses. Our operating and reporting segments are therefore Power Transmission and Fluid Power.

17


C. Disaggregated net sales
The following table summarizes our net sales by key geographic region:
 
Net Sales
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
North America
$
404.6

 
$
345.9

 
$
1,213.3

 
$
1,049.0

EMEA
207.1

 
198.3

 
665.3

 
583.1

East Asia and India
95.9

 
98.3

 
296.9

 
287.8

Greater China
90.2

 
83.6

 
281.7

 
239.3

South America
30.6

 
34.5

 
98.3

 
100.7

Net Sales
$
828.4

 
$
760.6

 
$
2,555.5

 
$
2,259.9

The following table summarizes our net sales into emerging and developed markets:
 
Net Sales
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Developed
$
558.4

 
$
493.1

 
$
1,671.1

 
$
1,466.2

Emerging
270.0

 
267.5

 
884.4

 
793.7

Net Sales
$
828.4

 
$
760.6

 
$
2,555.5

 
$
2,259.9

D. Measure of segment profit or loss
The CEO uses Adjusted EBITDA, as defined below, to measure the profitability of each segment. Adjusted EBITDA is, therefore, the measure of segment profit or loss presented in Gates’ segment disclosures.
“EBITDA” represents net income for the period before net interest and other expenses, income taxes, depreciation and amortization derived from financial information prepared in accordance with U.S. GAAP.
Adjusted EBITDA represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, the items excluded from EBITDA in computing Adjusted EBITDA primarily included:
the non-cash charges in relation to share-based compensation;
transaction-related expenses incurred in relation to business combinations and major corporate transactions, including acquisition integration activities;
the effect on cost of sales of fair value adjustments to the carrying amount of inventory acquired in business combinations;
impairments, comprising impairments of goodwill and significant impairments or write downs of other assets;
restructuring expense;
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.

18


E. Net sales and Adjusted EBITDA – continuing operations
Segment asset information is not provided to the chief operating decision maker and therefore segment asset information has not been presented. Due to the nature of Gates’ operations, cash generation and profitability are viewed as the key measures rather than an asset base measure.
 
Net Sales
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Power Transmission
$
512.5

 
$
499.9

 
$
1,608.1

 
$
1,496.3

Fluid Power
315.9

 
260.7

 
947.4

 
763.6

Continuing operations
$
828.4

 
$
760.6

 
$
2,555.5


$
2,259.9

 
Adjusted EBITDA
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Power Transmission
$
119.0

 
$
114.5

 
$
377.6

 
$
342.4

Fluid Power
62.2

 
49.6

 
192.4

 
153.7

Continuing operations
$
181.2

 
$
164.1

 
$
570.0


$
496.1

Sales between reporting segments and the impact of such sales on Adjusted EBITDA for each segment are not included in internal reports presented to the CEO and have therefore not been included above.
Reconciliation of net income from continuing operations to Adjusted EBITDA:
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net income from continuing operations
$
67.0

 
$
18.1

 
$
189.3

 
$
52.4

Income tax expense
7.2

 
15.9

 
30.4

 
32.9

Income from continuing operations before taxes
74.2

 
34.0

 
219.7

 
85.3

Interest expense
40.2

 
55.0

 
139.8

 
179.0

Other expenses
3.4

 
10.9

 
17.5

 
46.7

Operating income from continuing operations
117.8

 
99.9

 
377.0

 
311.0

Depreciation and amortization
53.7

 
52.0

 
163.3

 
158.2

Transaction-related expenses (1)
0.2

 
7.2

 
6.2

 
11.3

Impairment of intangibles and other assets
0.2

 

 
0.6

 

Restructuring expense
1.2

 
2.4

 
3.2

 
8.3

Share-based compensation
2.3

 
1.2

 
5.5


2.9

Sponsor fees (included in other operating expenses)
1.9

 
1.5

 
5.9

 
4.5

Impact of fair value adjustment on inventory (included in cost of sales)

 

 
0.3



Non-recurring inventory adjustments (included in costs of sales)

 

 
0.8

 

Other operating expenses (income)
3.2

 
(0.1
)
 
6.6

 
(0.1
)
Other non-recurring adjustments (included in SG&A)
0.7

 

 
0.6

 

Adjusted EBITDA
$
181.2

 
$
164.1

 
$
570.0


$
496.1

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

19


5. Restructuring initiatives
Gates continues to undertake various restructuring activities to streamline its operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize Gates’ businesses and to relocate certain operations to lower cost locations. A majority of the accrual for restructuring expense is expected to be utilized during 2018 and 2019.
Restructuring expense of $1.2 million was recognized during the three months ended September 29, 2018, relating primarily to the reorganization of our European corporate center and a strategic restructuring of part of our Asian business. Restructuring expense of $2.4 million was recognized during the prior year period, including $1.9 million in relation to severance costs, largely in the U.S. and Europe.
Restructuring expense of $3.2 million was recognized during the nine months ended September 29, 2018, predominantly in the second quarter of 2018, relating to the items described above. Restructuring expense of $8.3 million was recognized during the nine months ended September 30, 2017, including $6.1 million in relation to severance costs, largely in the U.S., Europe and China.
Restructuring expense recognized in the condensed consolidated statements of operations for each segment were as follows:
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Power Transmission
$
0.9

 
$
1.5

 
$
2.1

 
$
5.6

Fluid Power
0.3

 
0.9

 
1.1

 
2.7

Continuing operations
$
1.2

 
$
2.4

 
$
3.2

 
$
8.3

The following summarizes the restructuring activity for the nine month periods ended September 29, 2018 and September 30, 2017, respectively:
(dollars in millions)
As of September 29, 2018
 
As of September 30, 2017
Balance as of the beginning of the period
$
8.6

 
$
5.0

Utilized during the period
(8.3
)
 
(7.1
)
Net charge for the period
3.5

 
6.5

Released during the period
(0.3
)
 
(0.1
)
Foreign currency translation
0.1

 
0.1

Balance as of the end of the period
$
3.6

 
$
4.4

Restructuring reserves are included in the accompanying condensed consolidated balance sheet as follows:
(dollars in millions)
As of September 29, 2018
 
As of September 30, 2017
Accrued expenses and other current liabilities
$
3.4

 
$
3.9

Other non-current liabilities
0.2

 
0.5

 
$
3.6

 
$
4.4


20


6. Income taxes
For interim income tax reporting we estimate our annual effective tax rate and apply it 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 three months ended September 29, 2018, we had an income tax expense of $7.2 million on pre-tax income of $74.2 million, which resulted in an effective tax rate of 9.7%, compared with an income tax expense of $15.9 million on pre-tax income of $34.0 million, which resulted in an effective tax rate of 46.8% for the three months ended September 30, 2017. For the nine months ended September 29, 2018, we had an income tax expense of $30.4 million on pre-tax income of $219.7 million, which resulted in an effective tax rate of 13.8% compared with an income tax expense of $32.9 million on pre-tax income of $85.3 million, which resulted in an effective tax rate of 38.6% for the nine months ended September 30, 2017.
The decrease in the effective tax rate for the three and nine months ended September 29, 2018 compared with the prior year periods was due primarily to the beneficial impact of the change in our geographical mix of earnings, which in 2017 included a non-operating loss that was not subject to tax. In 2018 our effective tax rate included the benefit of global restructuring which helped offset the adverse impacts of the 2017 Tax Cuts and Jobs Act (the "Tax Act”). Primary factors of the Tax Act that increased our effective tax rate include the decrease in the U.S. tax rate, the base erosion anti-abuse tax (“BEAT”) and global intangible low-taxed income (“GILTI”). These increases were partially offset by the incentive for foreign-derived intangible income. The three-month period ending September 29, 2018 was reduced further by $5.7 million of discrete items, which included an adjustment to the measurement period provisional estimate associated with the Tax Act.
On December 22, 2017, the U.S. government enacted comprehensive legislation commonly referred to as the Tax Act. In the fourth quarter of 2017, we recorded a provisional benefit of $118.2 million in accordance with SAB 118 for the income tax effects of the Tax Act. The provisional estimate included $153.7 million deferred tax benefit for revaluing our deferred tax liabilities from the U.S. Corporate tax rate of 35% to 21%. For the three months ended September 29, 2018 we recorded a measurement period adjustment of $0.8 million to income tax expense and deferred tax for the revaluation of our deferred tax liabilities. The provisional estimate also included $33.6 million of tax expense for the estimated cost of the mandatory repatriation of non-U.S. earnings, including changes in the deferred tax liability related to the amount of earnings not indefinitely reinvested. For the three months ended September 29, 2018 we recorded a measurement period adjustment of $3.0 million to income tax benefit for the estimated cost of the mandatory deemed repatriation of non-U.S. earnings. We will continue to update our calculations as additional required information is prepared and analyzed, interpretations and assumptions are refined, and additional guidance is issued.
The Tax Act established new provisions for GILTI and BEAT that taxes certain payments between U.S. corporations and their subsidiaries. We are subject to both the GILTI and BEAT provisions beginning January 1, 2018. For the period ended September 29, 2018, we have included the estimated impacts of both GILTI and BEAT in the annual effective tax rate. However, due to the complexity of these provisions, we continue to monitor additional regulatory and administrative guidance to further refine the impacts.
We have recorded valuation allowances against certain of our deferred tax assets and we intend to continue maintaining such valuation allowances until there is sufficient evidence to support the reduction of all or some portion of these allowances. However, we believe there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to conclude that a portion of these valuation allowances will no longer be required. A reduction in valuation allowances would result in an increase in our net deferred tax assets and a corresponding non-cash decrease in income tax expense in the period in which the reduction is recorded. The exact timing and amount of any such reduction is subject to change based on our continued evaluation of the Tax Act implications and associated tax planning, and may be material.
7. Earnings per share
Basic income per share represents net income attributable to shareholders divided by the weighted average number of shares outstanding during the period. Diluted income per share considers the dilutive effect of potential shares, unless the inclusion of the potential shares would have an anti-dilutive effect. The treasury stock method is used to determine the potential dilutive shares resulting from assumed exercises of equity-related instruments.

21


The computation of net income per share is presented below:
 
Three months ended
 
Nine months ended
(dollars in millions, except share numbers and per share amounts)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net income attributable to shareholders
$
59.9

 
$
13.2

 
$
169.7

 
$
32.5

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
289,783,061

 
245,483,659

 
284,750,794

 
245,535,788

Dilutive effect of share-based awards (number of shares)
8,670,885

 
9,646,966

 
8,705,430

 
7,785,383

Diluted weighted average number of shares outstanding
298,453,946

 
255,130,625

 
293,456,224

 
253,321,171

 
 
 
 
 
 
 
 
Basic net income per share
$
0.21

 
$
0.05

 
$
0.60

 
$
0.13

Diluted net income per share
$
0.20

 
$
0.05

 
$
0.58

 
$
0.13

For the three months ended September 29, 2018 and September 30, 2017, shares totaling 605,164 and 180,540, respectively, were excluded from the diluted income per share calculation because they were anti-dilutive. For the nine months ended September 29, 2018 and September 30, 2017, shares totaling 610,039 and 180,540 shares, respectively, were excluded from the diluted income per share calculation because they were anti-dilutive.
8. Inventories
(dollars in millions)
As of September 29, 2018
 
As of December 30, 2017
Raw materials and supplies
$
156.1

 
$
128.0

Work in progress
38.5

 
32.8

Finished goods
332.2

 
296.3

Total inventories
$
526.8


$
457.1

9. Goodwill
(dollars in millions)
Power
Transmission
 
Fluid
Power
 
Total
Cost and carrying amount
 
 
 
 
 
As of December 30, 2017
$
1,430.2

 
$
655.3

 
$
2,085.5

Acquisitions

 
48.2

 
48.2

Foreign currency translation
(36.5
)
 
(3.4
)
 
(39.9
)
As of September 29, 2018
$
1,393.7

 
$
700.1

 
$
2,093.8

Included in the acquisitions line above is $47.0 million of provisional goodwill arising from the acquisition of Rapro. An additional $1.2 million of goodwill was recognized during the second quarter of 2018 on finalization of the purchase accounting for the Atlas acquisition.

22


10. Intangible assets
 
As of September 29, 2018
 
As of December 30, 2017
(dollars in millions)
Cost
 
Accumulated
amortization and
impairment
 
Net
 
Cost
 
Accumulated
amortization and
impairment
 
Net
Finite-lived:
 
 
 
 
 
 
 
 
 
 
 
—Customer relationships
$
2,025.9

 
$
(509.7
)
 
$
1,516.2

 
$
2,051.1

 
$
(424.4
)
 
$
1,626.7

—Technology
90.7

 
(86.8
)
 
3.9

 
90.8

 
(86.2
)
 
4.6

—Capitalized software
59.6

 
(27.1
)
 
32.5

 
48.3

 
(22.2
)
 
26.1

 
2,176.2


(623.6
)

1,552.6


2,190.2


(532.8
)

1,657.4

Indefinite-lived:
 
 
 
 
 
 
 
 
 
 
 
—Brands and trade names
513.4

 
(44.0
)
 
469.4

 
513.4

 
(44.0
)
 
469.4

Total intangible assets
$
2,689.6


$
(667.6
)

$
2,022.0


$
2,703.6


$
(576.8
)

$
2,126.8

During the three months ended September 29, 2018, the amortization expense recognized in respect of intangible assets was $32.3 million, compared with $31.8 million for the three months ended September 30, 2017. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $0.2 million for the three months ended September 29, 2018, compared with an increase of $16.2 million for the three months ended September 30, 2017.
During the nine months ended September 29, 2018, the amortization expense recognized in respect of intangible assets was $98.0 million, compared with $98.3 million for the nine months ended September 30, 2017. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $18.9 million for the nine months ended September 29, 2018, compared with an increase of $76.4 million for the nine months ended September 30, 2017.
11. Derivative financial instruments
We are exposed to certain risks relating to our ongoing business operations. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts, interest rate caps (options) and interest rate swaps, to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact.
We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheet. We designate certain of our currency swaps as net investment hedges and designate our interest rate caps and interest rate swaps as cash flow hedges. The gain or loss on the designated derivative instrument is recognized in OCI and reclassified into net income in the same period or periods during which the hedged transaction affects earnings.
All other derivative instruments not designated in an effective hedging relationship are considered economic hedges and their change in fair value is recognized in net income in each period.
The following table sets out the fair value gain (loss) before tax recognized in OCI in relation to the instruments designated as net investment hedging instruments:
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net fair value gain (loss) recognized in OCI in relation to:
 
 
 
 
 
 
 
—Euro-denominated debt
$
0.3

 
$
(17.9
)
 
$
(11.5
)
 
$
(60.5
)
—Designated cross currency swaps
3.5

 
(8.2
)
 
16.2

 
(30.4
)
Total net fair value gain (loss)
$
3.8

 
$
(26.1
)
 
$
4.7

 
$
(90.9
)
During the three months ended September 29, 2018 and the nine months ended September 29, 2018, a net gain of $0.7 million was recognized in interest expense in relation to our cross currency swaps that have been designated as net investment hedges.

23


The following table sets out the movement before tax recognized in OCI in relation to the interest rate derivatives:
 
Three months ended
 
Nine months ended
(dollars in millions)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Movement recognized in OCI in relation to:
 
 
 
 
 
 
 
—Fair value gain (loss) on interest rate derivatives
$
3.6

 
$
(0.2
)
 
$
13.3

 
$
(6.4
)
—Deferred premium reclassified from OCI to net income
1.0

 
2.8

 
4.5

 
8.4

Total movement
$
4.6

 
$
2.6

 
$
17.8

 
$
2.0

During the three and nine months ended September 29, 2018, a net expense of $1.0 million and $4.5 million, respectively, was recognized in interest expense in relation to our cash flow hedges.
We do not designate our currency forward contracts, which are used primarily in respect of operational currency exposures related to payables, receivables and material procurement, as hedging instruments for the purposes of hedge accounting under Topic 815 “Derivatives and Hedging”. During the three months ended September 29, 2018, a net gain of $0.9 million was recognized in selling, general and administrative expenses on the fair valuation of these currency contracts, compared with a net loss of $5.4 million in the prior year period. During the nine months ended September 29, 2018, a net gain of $1.7 million was recognized in selling, general and administrative expenses on the fair valuation of these currency contracts, compared with a net loss of $8.4 million in the prior year period.
The fair values of derivative financial instruments were as follows:
 
As of September 29, 2018
 
As of December 30, 2017
(dollars in millions)
Prepaid expenses and other assets
 
Other non-
current
assets
 
Accrued expenses and other
current
liabilities
 
Other
non-
current
liabilities
 
Net
 
Prepaid expenses and other assets
 
Other non-
current
assets
 
Accrued expenses and other
current
liabilities
 
Other 
non-
current
liabilities
 
Net
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—Currency swaps
$
5.0

 
$

 
$

 
$
(32.3
)
 
$
(27.3
)
 
$
3.2

 
$

 
$

 
$
(42.1
)
 
$
(38.9
)
—Interest rate caps
3.3

 
7.2

 

 

 
10.5

 

 
0.6

 
(3.8
)
 
(2.4
)
 
(5.6
)
—Interest rate swaps

 

 

 
(1.6
)
 
(1.6
)
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—Currency forward contracts
1.3

 

 
(0.3
)
 

 
1.0

 
0.5

 

 
(1.6
)
 

 
(1.1
)
 
$
9.6


$
7.2


$
(0.3
)

$
(33.9
)

$
(17.4
)

$
3.7


$
0.6


$
(5.4
)

$
(44.5
)

$
(45.6
)
A. Currency derivatives
As of September 29, 2018, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was $109.4 million, compared with $99.2 million as of December 30, 2017, none of which have been designated as hedging instruments. In addition, we hold cross currency swaps that have been designated as net investment hedges. As of September 29, 2018 and December 30, 2017, the notional principal amount of these contracts was $270.0 million.
B. Interest rate caps and interest rate swaps
We use interest rate caps and interest rate swaps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. Interest rate caps designated as cash flow hedges involve the receipt of variable rate payments from a counterparty if interest rates rise above the strike rate on the contract in exchange for a premium. On June 7, 2018, we entered into two new interest rate caps with a notional amount of €425.0 million which run from July 1, 2019 through June 30, 2023. As of September 29, 2018, the notional amount of the interest rate cap contracts outstanding was $2.7 billion, compared with $2.2 billion as of December 30, 2017.

24


The periods covered by our interest rate caps are as follows:
(in millions)
Notional value
Covering current periods:
 
Through June 30, 2019
$
1,000.0

Through June 30, 2020
$
200.0

Covering future periods:
 
June 28, 2019 to June 30, 2020
$
1,000.0

July 1, 2019 to June 30, 2023
425.0

Also on June 7, 2018, we entered into three pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $870.0 million which run from June 30, 2020 through June 30, 2023.
12. Fair value measurement
A. Fair value hierarchy
We account for certain assets and liabilities at fair value. Topic 820 “Fair Value Measurements and Disclosures” establishes the following hierarchy for the inputs that are used in fair value measurement:
“Level 1” inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
“Level 2” inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
“Level 3” inputs are not based on observable market data (unobservable inputs).
Assets and liabilities that are measured at fair value are categorized in one of the three levels on the basis of the lowest-level input that is significant to its valuation.
B. Financial instruments not held at fair value
Certain financial assets and liabilities are not measured at fair value; however, items such as cash and cash equivalents, restricted cash, revolving credit facilities and bank overdrafts generally attract interest at floating rates and accordingly their carrying amounts are considered to approximate fair value. Due to their short maturities, the carrying amounts of accounts receivable and accounts payable are also considered to approximate their fair values.
The carrying amount and fair value of our debt are set out below:
 
As of September 29, 2018
 
As of December 30, 2017
(dollars in millions)
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Current
$
32.8

 
$
32.6

 
$
66.4

 
$
66.2

Non-current
2,962.7

 
2,997.2

 
3,889.3

 
3,970.7

 
$
2,995.5


$
3,029.8


$
3,955.7


$
4,036.9

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

25


C. Assets and liabilities measured at fair value on a recurring basis
The following table categorizes the assets and liabilities that are measured at fair value on a recurring basis:
(dollars in millions)
Quoted prices in active
markets (Level 1)
 
Significant observable
inputs (Level 2)
 
Total
As of September 29, 2018
 
 
 
 
 
Available-for-sale securities
$
1.1

 
$

 
$
1.1

Derivative assets
$

 
$
16.8

 
$
16.8

Derivative liabilities
$

 
$
(34.2
)
 
$
(34.2
)
 
 
 
 
 

As of December 30, 2017
 
 
 
 

Available-for-sale securities
$
2.4

 
$

 
$
2.4

Derivative assets
$

 
$
4.3

 
$
4.3

Derivative liabilities
$

 
$
(49.9
)
 
$
(49.9
)
Available-for-sale securities represent equity securities that are traded in an active market and therefore are measured using quoted prices in an active market. Derivative assets and liabilities included in Level 2 represent foreign currency exchange forward and swap contracts, and interest rate cap contracts.
We value our foreign currency exchange derivatives using models consistent with those used by a market participant that maximize the use of market observable inputs including forward prices for currencies.
We value our interest rate derivative contracts using a widely accepted discounted cash flow valuation methodology that reflects the contractual terms of each derivative, including the period to maturity. The methodology derives the fair values of the derivatives using the market standard methodology of netting the discounted future cash payments and the discounted expected receipts. The inputs used in the calculation are based on observable market-based inputs, including interest rate curves, implied volatilities and credit spreads.
We incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements.
Transfers between Levels of the Fair Value Hierarchy
During the periods presented, there were no transfers between Levels 1 and 2, and Gates had no assets or liabilities measured at fair value on a recurring basis using Level 3 inputs.
D. Assets measured at fair value on a non-recurring basis
Gates has non-recurring fair value measurements related to certain assets, including goodwill, intangible assets, and property, plant, and equipment. No significant impairment was recognized during either the nine months ended September 29, 2018 or the year ended December 30, 2017.

26


13. Debt
Long-term debt, including the current portion and bank overdrafts, was as follows:
(dollars in millions)
As of September 29, 2018
 
As of December 30, 2017
Secured debt:
 
 
 
—Dollar Term Loan
$
1,716.4

 
$
1,729.4

—Euro Term Loan
753.7

 
785.6

Unsecured debt:
 
 
 
—Dollar Senior Notes
568.0

 
1,190.0

—Euro Senior Notes

 
282.5

—Other loans
0.7

 
0.4

Total principal of debt
3,038.8


3,987.9

Deferred issuance costs
(51.1
)
 
(73.2
)
Accrued interest
7.8

 
41.0

Total carrying value of debt
2,995.5


3,955.7

Debt, current portion
32.8

 
66.4

Debt, less current portion
$
2,962.7


$
3,889.3

Gates’ secured debt is jointly and severally, irrevocably and fully and unconditionally guaranteed by certain of its subsidiaries and are secured by liens on substantially all of their assets.
Gates is subject to covenants, representations and warranties under certain of its debt facilities. During the periods covered by these condensed consolidated financial statements, we were in compliance with the applicable financial covenants. Also under the agreements governing our debt facilities, our ability to engage in activities such as incurring certain additional indebtedness, making certain investments and paying certain dividends is dependent, in part, on our ability to satisfy tests based on measures determined under those agreements.
Debt redemptions
On January 31, 2018, Gates redeemed in full its outstanding €235.0 million Euro Senior Notes, plus interest accrued up to and including the redemption date of $0.7 million. The Euro Senior Notes were redeemed at a price of 102.875% and a redemption premium of $8.4 million was therefore paid in addition to the principal of $291.7 million.
In addition, on February 8 and February 9, 2018, Gates redeemed Dollar Senior Notes with a principal of $522.0 million and $100.0 million, respectively. Both of these calls were made at a price of 103.0%, incurring redemption premiums of $15.6 million and $3.0 million, respectively. Interest accrued of $2.0 million and $0.4 million, respectively, was also paid on these dates.
All of the above prepayments, totaling $913.7 million in principal, $27.0 million in redemption premium and $3.1 million in accrued interest, were funded primarily by the net proceeds from our initial public offering of $799.1 million, with the remainder of the funds coming from excess cash on hand. As a result of these redemptions, the recognition of $15.4 million of deferred financing costs was accelerated and recognized in interest expense in the first three months of 2018.
In addition, in connection with the reorganization transactions completed in connection with our initial public offering, a wholly-owned U.S. subsidiary of Gates Global LLC, entered into an intercompany agreement pursuant to which it became an obligor under the Dollar Senior Notes for U.S. federal income tax purposes and agreed to make future payments due on the Dollar Senior Notes. As a result, interest on the Dollar Senior Notes is U.S. source income.

27


Dollar and Euro Term Loans
Gates’ secured credit facilities include a Dollar Term Loan credit facility and a Euro Term Loan credit facility that were drawn on July 3, 2014. The maturity date for each of the term loan facilities is March 31, 2024, with a springing maturity of April 15, 2022 if more than $500.0 million of the Dollar Senior Notes remain in issue at that time. These term loan facilities bear interest at a floating rate, which for U.S. dollar debt can be either a base rate as defined in the credit agreement plus an applicable margin, or at Gates’ option, LIBOR plus an applicable margin.
On January 29, 2018, the applicable margin on each of the term loans was lowered by 0.25% following the successful completion of our initial public offering. The Dollar Term Loan interest rate is currently LIBOR, subject to a floor of 1.00%, plus a margin of 2.75%, and as of September 29, 2018, borrowings under this facility bore interest at a rate of 4.99% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of September 29, 2018, the Euro Term Loan bears interest at Euro LIBOR, which is currently below 0%, subject to a floor of 0%, plus a margin of 3.00%. The next Euro Term Loan interest rate re-set date is on December 31, 2018.
Both term loans are subject to quarterly amortization payments of 0.25%, based on the original principal amount less certain prepayments with the balance payable on maturity. During the nine months ended September 29, 2018, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $13.0 million and $5.8 million, respectively. During the nine months ended September 30, 2017, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $15.0 million and $4.3 million, respectively.
Under the terms of the credit agreement, Gates is obliged to offer annually to the term loan lenders an “excess cash flow” amount as defined under the agreement, based on the preceding year’s final results. Based on our 2017 results, the leverage ratio as defined under the credit agreement was below the threshold above which payments are required, and therefore no excess cash flow payment was required to be made in 2018.
During the periods presented, foreign exchange gains (losses) were recognized in respect of the Euro Term Loans as summarized in the table below. As a portion of the facility was designated as a net investment hedge of certain of Gates' Euro investments, a corresponding portion of the foreign exchange gains (losses) were recognized in OCI.
 
Three months ended