0001718512-19-000034.txt : 20191106 0001718512-19-000034.hdr.sgml : 20191106 20191106134906 ACCESSION NUMBER: 0001718512-19-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 113 CONFORMED PERIOD OF REPORT: 20190928 FILED AS OF DATE: 20191106 DATE AS OF CHANGE: 20191106 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: 191195843 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-q3201910xq.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 28, 2019
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 No.)
1144 Fifteenth Street, Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(303) 744-1911
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Ordinary Shares, $0.01 par value per share
GTES
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒ No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Accelerated filer
Non-accelerated filer
☒  
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No  ☒
As of November 4, 2019, there were 290,118,125 ordinary shares of $0.01 par value outstanding.



 
TABLE OF CONTENTS
 




Forward-looking Statements
This Quarterly Report on Form 10-Q (this “quarterly report” or “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those expressed in or implied by our forward-looking statements, including but not limited to the factors described in the section entitled “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (the “annual report”), as filed with the Securities and Exchange Commission (the “SEC”), which include 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, including exchange rate fluctuations; availability of raw materials at favorable prices and in sufficient quantities; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; competition in all areas of our business; pricing pressures from our customers; continued operation of our manufacturing facilities; our ability to forecast demand or meet significant increases in demand; market acceptance of new product introductions and product innovations; our cost-reduction actions; litigation, legal or regulatory proceedings brought against us; enforcement of our intellectual property rights; recalls, product liability claims or product warranties claims; anti-corruption laws and other laws governing our international operations; existing or new laws and regulations that may prohibit, restrict or burden the sale of aftermarket products; our decentralized information technology systems and any interruptions to our computer and IT systems; environmental, health and safety laws and regulations; insurance coverage of future losses we may incur; lives of products used in our end markets as well as the development of replacement markets; our ability to successfully integrate acquired businesses or assets; our reliance on senior management or key personnel; our ability to maintain and enhance our brand; work stoppages and other labor matters; our investments in joint ventures; liabilities with respect to businesses that we have divested in the past; terrorist acts, conflicts and wars; losses to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events; additional cash contributions we may be required to make to our defined benefit pension plans; the loss or financial instability of any significant customer or customers; changes in legislative, regulatory and legal developments involving taxes and other matters; our substantial leverage; and the significant influence of our majority shareholder, The Blackstone Group Inc., over us, as such factors may be updated from time to time in the Company’s periodic filings with the SEC. Investors are urged to consider carefully the disclosure in this report and our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. Gates undertakes no obligation to update or supplement any forward-looking statements as a result of new information, future events or otherwise, except as required by law.
ABOUT THIS QUARTERLY REPORT
Financial Statement Presentation
Gates Industrial Corporation plc is a public limited company that was organized under the laws of England and Wales on September 25, 2017.
Certain monetary amounts, percentages and other figures included elsewhere in this quarterly report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
All amounts in this quarterly report are expressed in United States of America (the “United States” or “U.S.”) dollars, unless indicated otherwise.

1


Certain Definitions
As used in this quarterly report, unless otherwise noted or the context requires otherwise:
“Gates,” the “Company,” “we,” “us” and “our” refer, unless the context requires otherwise, to Gates Industrial Corporation plc and its consolidated subsidiaries; and
“Blackstone” or “our Sponsor” refer to investment funds affiliated with The Blackstone Group Inc., which, although no individual fund owns a controlling interest in us, together represent our current majority owners.

2


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 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales
$
746.6

 
$
828.4

 
$
2,361.4

 
$
2,555.5

Cost of sales
474.2

 
501.2

 
1,480.3

 
1,534.9

Gross profit
272.4

 
327.2

 
881.1

 
1,020.6

Selling, general and administrative expenses
191.9

 
202.7

 
590.4

 
621.1

Transaction-related expenses
1.0

 
0.2

 
0.7

 
6.2

Impairment of intangibles and other assets
0.7

 
0.2

 
0.7

 
0.6

Restructuring expenses
0.3

 
1.2

 
3.9

 
3.2

Other operating expenses
1.8

 
5.1

 
6.6

 
12.5

Operating income from continuing operations
76.7

 
117.8

 
278.8


377.0

Interest expense
37.2

 
40.2

 
114.5

 
139.8

Other (income) expenses
(2.4
)
 
3.4

 
(7.2
)
 
17.5

Income from continuing operations before taxes
41.9

 
74.2

 
171.5


219.7

Income tax expense (benefit)
4.4

 
7.2

 
(497.8
)
 
30.4

Net income from continuing operations
37.5

 
67.0

 
669.3

 
189.3

Loss on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0
0.1

 
0.3

 
0.6

 
0.7

Net income
37.4

 
66.7

 
668.7

 
188.6

Less: non-controlling interests
1.9

 
6.8

 
(2.0
)
 
18.9

Net income attributable to shareholders
$
35.5

 
$
59.9

 
$
670.7


$
169.7

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
0.12

 
$
0.21

 
$
2.31

 
$
0.60

Earnings per share from discontinued operations

 

 

 

Earnings per share
$
0.12

 
$
0.21

 
$
2.31


$
0.60

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
0.12

 
$
0.20

 
$
2.30

 
$
0.58

Earnings per share from discontinued operations

 

 

 

Earnings per share
$
0.12

 
$
0.20

 
$
2.30


$
0.58

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

3


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income
$
37.4

 
$
66.7

 
$
668.7

 
$
188.6

Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
—Net translation loss on foreign operations, net of tax expense, respectively, of $0.3, $1.3, $0.6 and $0.5
(94.7
)
 
(2.2
)
 
(49.6
)
 
(83.4
)
—Gain on net investment hedges, net of tax expense, respectively, of $0, $0.2, $0 and $0.2
13.3

 
3.8

 
14.1

 
4.7

Total foreign currency translation movements
(81.4
)
 
1.6

 
(35.5
)

(78.7
)
Cash flow hedges (Interest rate derivatives):
 
 
 
 
 
 
 
—(Loss) gain arising in the period, net of tax benefit, respectively, of $0.9, $0, $5.2 and $0
(4.0
)
 
3.6

 
(27.6
)
 
13.3

—Reclassification to net income, net of tax benefit, respectively, of $0, $3.3, $0 and $2.0
0.9

 
4.3

 
1.2

 
6.5

Total cash flow hedges movements
(3.1
)
 
7.9

 
(26.4
)

19.8

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

 
(0.5
)
 

 
(0.5
)
Total available-for-sale investments:

 
(0.5
)
 

 
(0.5
)
Post-retirement benefits:
 
 
 
 
 
 
 
—Current year actuarial movements, net of tax benefit, respectively, of $0, $0, $0 and $0.1

 

 

 
(0.1
)
—Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0, $0, $0.1 and $0
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.4
)
Total post-retirement benefit movements
(0.1
)
 
(0.1
)
 
(0.2
)

(0.5
)
Other comprehensive (loss) income
(84.6
)
 
8.9

 
(62.1
)
 
(59.9
)
Comprehensive (loss) income for the period
$
(47.2
)
 
$
75.6

 
$
606.6

 
$
128.7

 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to shareholders:
 
 
 
 
 
 
 
—(Loss) income arising from continuing operations
$
(37.4
)
 
$
82.2

 
$
617.0

 
$
130.6

—Loss arising from discontinued operations
(0.1
)
 
(0.3
)
 
(0.6
)
 
(0.7
)
 
(37.5
)
 
81.9

 
616.4


129.9

Comprehensive loss attributable to non-controlling interests
(9.7
)
 
(6.3
)
 
(9.8
)
 
(1.2
)
 
$
(47.2
)
 
$
75.6

 
$
606.6


$
128.7

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


4


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Balance Sheets
(dollars in millions, except share numbers and per share amounts)
As of
September 28,
2019
 
As of
December 29,
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
456.1

 
$
423.4

Trade accounts receivable, net
733.2

 
742.3

Inventories
507.8

 
537.6

Taxes receivable
24.8

 
7.2

Prepaid expenses and other assets
142.0

 
104.1

Total current assets
1,863.9

 
1,814.6

Non-current assets
 
 
 
Property, plant and equipment, net
721.1

 
756.3

Goodwill
2,024.1

 
2,045.9

Pension surplus
52.8

 
52.6

Intangible assets, net
1,888.2

 
1,990.6

Operating lease right-of-use assets
117.3

 

Taxes receivable
34.2

 
27.9

Deferred income taxes
552.6

 
5.1

Other non-current assets
31.7

 
29.6

Total assets
$
7,285.9

 
$
6,722.6

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Debt, current portion
$
43.5

 
$
51.6

Trade accounts payable
328.5

 
424.0

Taxes payable
17.4

 
19.2

Accrued expenses and other current liabilities
193.8

 
184.2

Total current liabilities
583.2


679.0

Non-current liabilities
 
 
 
Debt, less current portion
2,909.8

 
2,953.4

Post-retirement benefit obligations
151.0

 
155.9

Lease liabilities
109.3

 

Taxes payable
155.3

 
81.9

Deferred income taxes
360.8

 
439.5

Other non-current liabilities
86.5

 
79.2

Total liabilities
4,355.9


4,388.9

Commitments and contingencies (note 20)

 

Shareholders’ equity
 
 
 
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 290,118,125 (December 29, 2018: authorized shares: 3,000,000,000; outstanding shares: 289,847,574)
2.9

 
2.9

—Additional paid-in capital
2,430.5

 
2,416.9

—Accumulated other comprehensive loss
(908.6
)
 
(854.3
)
—Retained earnings
1,052.6

 
381.9

Total shareholders’ equity
2,577.4


1,947.4

Non-controlling interests
352.6

 
386.3

Total equity
2,930.0


2,333.7

Total liabilities and equity
$
7,285.9

 
$
6,722.6

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

5


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
Cash flows from operating activities
 
 
 
Net income
$
668.7

 
$
188.6

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation and amortization
167.4

 
163.3

Non-cash currency transaction gain on net debt and hedging instruments
(29.2
)
 
(35.0
)
Premium paid on redemption of long-term debt

 
27.0

Other net non-cash financing costs
31.2

 
54.9

Share-based compensation expense
10.5

 
5.5

Decrease in post-employment benefit obligations, net
(6.4
)
 
(2.5
)
Deferred income taxes
(635.6
)
 
(44.0
)
Other operating activities
3.4

 
1.5

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
—Increase in accounts receivable
(4.0
)
 
(82.6
)
—Decrease (increase) in inventories
25.2

 
(81.0
)
—(Decrease) increase in accounts payable
(90.4
)
 
16.4

—Increase in prepaid expenses and other assets
(29.8
)
 
(24.6
)
—Increase (decrease) in taxes payable
48.2

 
(6.4
)
—Decrease in other liabilities
(14.0
)
 
(38.8
)
Net cash provided by operations
145.2


142.3

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(50.5
)
 
(143.0
)
Purchases of intangible assets
(8.0
)
 
(11.9
)
Purchases of investments
(11.7
)
 

Net cash received (paid) under corporate-owned life insurance policies
0.3

 
(7.4
)
Purchase of businesses, net of cash acquired

 
(50.9
)
Other investing activities
0.3

 
(0.9
)
Net cash used in investing activities
(69.6
)

(214.1
)
Cash flows from financing activities
 
 
 
Issuance of shares, net of underwriting costs
1.7

 
799.6

Other offering costs

 
(8.6
)
Payments of long-term debt
(18.9
)
 
(933.5
)
Premium paid on redemption of long-term debt

 
(27.0
)
Dividends paid to non-controlling interests
(24.5
)
 
(23.3
)
Other financing activities
1.6

 
5.7

Net cash used in financing activities
(40.1
)
 
(187.1
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(2.8
)
 
(9.2
)
Net increase (decrease) in cash and cash equivalents and restricted cash
32.7

 
(268.1
)
Cash and cash equivalents and restricted cash at the beginning of the period
424.6

 
566.0

Cash and cash equivalents and restricted cash at the end of the period
$
457.3


$
297.9

Supplemental schedule of cash flow information
 
 
 
Interest paid, net of amount capitalized
$
112.5

 
$
142.4

Income taxes paid, net
$
90.4

 
$
83.7

Accrued capital expenditures
$
1.6

 
$
2.5

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

6


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
 
Three months ended September 28, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in millions)
Share
capital
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
loss
 
Retained
earnings
 
Total
shareholders’
equity
 
Non-
controlling
interests
 
Total
equity 
As of June 29, 2019
$
2.9

 
$
2,426.4

 
$
(835.6
)
 
$
1,017.1

 
$
2,610.8

 
$
371.8

 
$
2,982.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
35.5

 
35.5

 
1.9

 
37.4

Other comprehensive loss

 

 
(73.0
)
 

 
(73.0
)
 
(11.6
)
 
(84.6
)
Total comprehensive (loss) income

 

 
(73.0
)
 
35.5

 
(37.5
)
 
(9.7
)
 
(47.2
)
Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
—Issuance of shares

 
0.1

 

 

 
0.1

 

 
0.1

—Share-based compensation

 
4.0

 

 

 
4.0

 

 
4.0

—Dividends paid to non-controlling
interests

 

 

 

 

 
(9.5
)
 
(9.5
)
As of September 28, 2019
$
2.9

 
$
2,430.5

 
$
(908.6
)
 
$
1,052.6

 
$
2,577.4

 
$
352.6

 
$
2,930.0

 
Three months ended September 29, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in millions)
Share
capital
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
loss
 
Retained
earnings
 
Total
shareholders’
equity
 
Non-
controlling
interests
 
Total
equity 
As of June 30, 2018
$
2.9

 
$
2,413.4

 
$
(809.2
)
 
$
246.7

 
$
1,853.8

 
$
402.7

 
$
2,256.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
59.9

 
59.9

 
6.8

 
66.7

Other comprehensive income (loss)

 

 
22.0

 

 
22.0

 
(13.1
)
 
8.9

Total comprehensive income (loss)

 

 
22.0

 
59.9

 
81.9

 
(6.3
)
 
75.6

Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
—Issuance of shares

 
0.4

 

 

 
0.4

 

 
0.4

—Share-based compensation

 
1.7

 

 

 
1.7

 

 
1.7

—Dividends paid to non-controlling
interests

 

 

 

 

 
(7.1
)
 
(7.1
)
As of September 29, 2018
$
2.9

 
$
2,415.5

 
$
(787.2
)
 
$
306.6

 
$
1,937.8

 
$
389.3

 
$
2,327.1


7


Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Continued)
 
Nine months ended September 28, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in millions)
Share
capital
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
loss
 
Retained
earnings
 
Total
shareholders’
equity
 
Non-
controlling
interests
 
Total
equity 
As of December 29, 2018
$
2.9

 
$
2,416.9

 
$
(854.3
)
 
$
381.9

 
$
1,947.4

 
$
386.3

 
$
2,333.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
670.7

 
670.7

 
(2.0
)
 
668.7

Other comprehensive loss

 

 
(54.3
)
 

 
(54.3
)
 
(7.8
)
 
(62.1
)
Total comprehensive (loss) income

 

 
(54.3
)
 
670.7

 
616.4

 
(9.8
)
 
606.6

Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
—Issuance of shares

 
1.7

 

 

 
1.7

 

 
1.7

—Share-based compensation

 
10.7

 

 

 
10.7

 

 
10.7

—Change in ownership of a controlled subsidiary

 
1.2

 

 

 
1.2

 
(1.2
)
 

—Shares issued by a subsidiary to a non-controlling interest

 

 

 

 

 
1.8

 
1.8

—Dividends paid to non-controlling
interests

 

 

 

 

 
(24.5
)
 
(24.5
)
As of September 28, 2019
$
2.9

 
$
2,430.5

 
$
(908.6
)
 
$
1,052.6

 
$
2,577.4

 
$
352.6

 
$
2,930.0

 
Nine months ended September 29, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in millions)
Share
capital
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
loss
 
Retained
earnings
 
Total
shareholders’
equity
 
Non-
controlling
interests
 
Total
equity
As of December 30, 2017
$
2.5

 
$
1,622.6

 
$
(747.4
)
 
$
136.9

 
$
1,014.6

 
$
413.8

 
$
1,428.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
169.7

 
169.7

 
18.9

 
188.6

Other comprehensive loss

 

 
(39.8
)
 

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




(39.8
)

169.7


129.9


(1.2
)
 
128.7

Other changes in equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
—Issuance of shares
0.4

 
841.2

 

 

 
841.6

 

 
841.6

—Share-based compensation

 
4.7

 

 

 
4.7

 

 
4.7

—Dividends paid to non-controlling
interests

 

 

 

 

 
(23.3
)
 
(23.3
)
—Cost of shares issued

 
(53.0
)
 

 

 
(53.0
)
 

 
(53.0
)
As of September 29, 2018
$
2.9

 
$
2,415.5

 
$
(787.2
)
 
$
306.6

 
$
1,937.8

 
$
389.3

 
$
2,327.1

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

8


Gates Industrial Corporation plc
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Introduction
A. Background
Gates Industrial Corporation plc (the “Company”) is a public limited company that was organized under the laws of England and Wales on September 25, 2017. Prior to the completion of the initial public offering of the Company’s shares in January 2018, the Company undertook certain reorganization transactions such that Gates Industrial Corporation plc became the indirect owner of all of the equity interests in Omaha Topco Ltd. (“Omaha Topco”), and has become the holding company of the Gates business. The previous owners of Omaha Topco were various investment funds managed by affiliates of The Blackstone Group Inc. (“Blackstone” or our “Sponsor”), and Gates management equity holders. These equity owners of Omaha Topco received depositary receipts representing ordinary shares in the Company in consideration for their equity in Omaha Topco, at a ratio of 0.76293 of our ordinary shares for each outstanding ordinary share of Omaha Topco. All share and per share amounts in these condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of this ratio. The reorganization was accounted for as a transaction between entities under common control and the net assets were recorded on the historical cost basis, in a manner similar to a pooling of interests, when Omaha Topco was contributed into the Company. Gates Industrial Corporation plc had no significant business transactions or activities prior to the date of the reorganization transactions, and as a result, the historical financial information for periods prior to those transactions reflects that of Omaha Topco.
In these condensed consolidated financial statements and related notes, all references to “Gates,” “we,” “us,” and “our” refer, unless the context requires otherwise, to Gates Industrial Corporation plc and its consolidated subsidiaries.
B. Accounting periods
The Company prepares its annual consolidated financial statements for the period ending on the Saturday nearest December 31. Accordingly, the condensed consolidated balance sheet is presented as of September 28, 2019 and December 29, 2018 and the related condensed consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity are presented, where relevant, for the 91 day period from June 30, 2019 to September 28, 2019, with comparative information for the 91 day period from July 1, 2018 to September 29, 2018 and for the 273 day period from December 30, 2018 to September 28, 2019, with comparative information for the 273 day period from December 31, 2017 to September 29, 2018.
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 28, 2019 and the results of its operations and cash flows for the periods ended September 28, 2019 and September 29, 2018. 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, except as noted below, have been prepared on substantially the same basis as Gates’ audited annual consolidated financial statements and related notes for the year ended December 29, 2018. The condensed consolidated balance sheet as of December 29, 2018 has been derived from those audited financial statements.
These condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended December 29, 2018 included in the Company’s Annual Report on Form 10-K.
The accounting policies used in preparing these condensed consolidated financial statements are the same as those applied in the prior year, except for the adoption on the first day of the 2019 fiscal year of the following new Accounting Standard Updates (each, an “ASU”):
ASU 2016-02 “Leases” (Topic 842)
ASU 2018-10 “Leases” (Topic 842): Codification Improvements to Topic 842, Leases

9


ASU 2018-11 “Leases” (Topic 842): Targeted Improvements
ASU 2019-01 “Leases” (Topic 842): Codification Improvements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued an ASU which introduces a lessee model that will bring most leases of property, plant and equipment onto the balance sheet. It requires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right-of-use asset” for all leases. The ASU introduces two models for the subsequent measurement of the lease asset and liability, depending on whether the lease qualifies as a “finance lease” or an “operating lease.” This distinction focuses on whether or not effective control of the asset is being transferred from the lessor to the lessee.
The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, which allows entities an additional, optional transition method of applying the new leases standard at the adoption date with comparative periods continuing to be presented in accordance with prior GAAP (Topic 840 “Leases”). We have adopted Topic 842 using this practical expedient, and, consequently, comparative information in these condensed consolidated financial statements has not been restated.
We applied the following additional practical expedients on transition to Topic 842:
(i)
we did not reassess whether or not any expired or existing contracts were or contained leases;
(ii)
we did not reassess the lease classification for any expired or existing leases (i.e., all existing leases that were classified as operating leases continued to be classified as such under Topic 842, and all existing leases that were classified as capital leases continued to be classified as finance leases); and
(iii)
we did not reassess any initial direct costs for leases existing on the date of adoption of Topic 842.
On transition, we recognized a right-of-use asset of $126.0 million and a lease liability of $132.9 million, with the difference relating primarily to reclassifying deferred rent liabilities that existed under Topic 840 into the new right-of-use asset. Note 11 sets out disclosures related to Topic 842.
The following ASUs that were also adopted on the first day of the 2019 fiscal year did not have a significant impact on our results, financial position or disclosures:
ASU 2018-07 “Compensation - Stock Compensation” (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
ASU 2018-16 “Derivatives and Hedging” (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
In addition, we adopted ASU 2018-02 “Income Statement - Reporting Comprehensive Income” (Topic 220): Reclassification of Certain Tax Effects from Accumulated OCI; however, we have not adopted the policy election outlined therein regarding the reclassification from accumulated other comprehensive income (“OCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The remaining stranded tax effects in OCI will be released upon recognition of the related deferred tax basis differences.
2. Recent accounting pronouncements not yet adopted
The following recent accounting pronouncements are relevant to Gates’ operations but have not yet been adopted.
ASU 2016-13 “Financial Instruments” (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.

10


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 ASU and delay adoption of the additional disclosures until their effective date. The impact on our consolidated financial statements of adopting this ASU, which will affect our fair value disclosures, is still being evaluated.
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.
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.
Goodwill of $34.4 million arose from this acquisition and related 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.
Pro forma information has not been presented for this acquisition because it is not material.

11


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).
Certain amounts relating to prior periods have been reclassified in this footnote to conform to the current year presentation.
B. Operating segments and segment assets
Gates manufactures a wide range of power transmission and fluid power products and components for a large variety of industrial and automotive applications, both in the aftermarket and first-fit channels, throughout the world.
Our reportable segments are identified on the basis of our primary product lines, as this is the basis on which information is provided to the CEO for the purposes of allocating resources and assessing the performance of Gates’ businesses. Our operating and reporting segments are therefore Power Transmission and Fluid Power.
Segment asset information is not provided to the chief operating decision maker and therefore segment asset information has not been presented. Due to the nature of Gates’ operations, cash generation and profitability are viewed as the key measures rather than an asset base measure.
C. Segment net sales and disaggregated net sales
Sales between reporting segments and the impact of such sales on Adjusted EBITDA for each segment are not included in internal reports presented to the CEO and have therefore not been included below.
 
Net Sales
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Power Transmission
$
474.4

 
$
512.5

 
$
1,475.4

 
$
1,608.1

Fluid Power
272.2

 
315.9

 
886.0

 
947.4

Continuing operations
$
746.6

 
$
828.4

 
$
2,361.4

 
$
2,555.5

The following table summarizes our net sales by key geographic region of origin:
 
Net Sales
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
U.S.
$
284.3

 
$
326.0

 
$
909.6

 
$
973.5

North America, excluding the U.S.
85.1

 
85.5

 
263.3

 
260.4

United Kingdom (“U.K.”)
18.7

 
23.3

 
62.6

 
73.8

Europe, Middle East and Africa (“EMEA”), excluding the U.K.
164.1

 
183.8

 
521.7

 
591.5

East Asia and India
87.9

 
95.9

 
274.2

 
296.9

Greater China
80.6

 
90.2

 
253.4

 
281.7

South America
25.9

 
23.7

 
76.6

 
77.7

Net Sales
$
746.6

 
$
828.4

 
$
2,361.4

 
$
2,555.5


12


The following table summarizes our net sales into emerging and developed markets:
 
Net Sales
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Developed
$
486.6

 
$
558.4

 
$
1,564.4

 
$
1,671.1

Emerging
260.0

 
270.0

 
797.0

 
884.4

Net Sales
$
746.6

 
$
828.4

 
$
2,361.4

 
$
2,555.5

D. Measure of segment profit or loss
The CEO uses Adjusted EBITDA, as defined below, to measure the profitability of each segment. Adjusted EBITDA is, therefore, the measure of segment profit or loss presented in Gates’ segment disclosures.
“EBITDA” represents net income for the period before net interest and other (income) expenses, income taxes, depreciation and amortization derived from financial information prepared in accordance with U.S. GAAP.
Adjusted EBITDA represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, the items excluded from EBITDA in computing Adjusted EBITDA primarily included:
the non-cash charges in relation to share-based compensation;
transaction-related expenses incurred in relation to business combinations and major corporate transactions, including acquisition integration activities;
impairments, comprising impairments of goodwill and significant impairments or write downs of other assets;
restructuring expenses;
the net gain or loss on disposals and on the exit of businesses; and
fees paid to our private equity sponsor for monitoring, advisory and consulting services.
Adjusted EBITDA by segment was as follows:
 
Adjusted EBITDA
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Power Transmission
$
99.7

 
$
119.0

 
$
315.2

 
$
377.6

Fluid Power
45.3

 
62.2

 
160.7

 
192.4

Continuing operations
$
145.0

 
$
181.2

 
$
475.9


$
570.0


13


Reconciliation of net income from continuing operations to Adjusted EBITDA:
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income from continuing operations
$
37.5

 
$
67.0

 
$
669.3

 
$
189.3

Income tax expense (benefit)
4.4

 
7.2

 
(497.8
)
 
30.4

Income from continuing operations before taxes
41.9

 
74.2

 
171.5

 
219.7

Interest expense
37.2

 
40.2

 
114.5

 
139.8

Other (income) expenses
(2.4
)
 
3.4

 
(7.2
)
 
17.5

Operating income from continuing operations
76.7

 
117.8

 
278.8

 
377.0

Depreciation and amortization
55.1

 
53.7

 
167.4

 
163.3

Transaction-related expenses (1)
1.0

 
0.2

 
0.7

 
6.2

Impairment of intangibles and other assets
0.7

 
0.2

 
0.7

 
0.6

Restructuring expenses
0.3

 
1.2

 
3.9

 
3.2

Share-based compensation expense
4.1

 
2.3

 
10.5


5.5

Sponsor fees (included in other operating expenses)
1.1

 
1.9

 
4.9

 
5.9

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

 

 


0.3

Inventory impairments and adjustments (included in cost of sales)
1.0

 

 
1.3

 
0.8

Duplicate expenses incurred on facility relocation

 
1.5

 

 
4.6

Severance-related expenses (included in cost of sales)
2.5

 

 
3.0

 

Other primarily severance-related expenses (included in SG&A)
1.8

 
0.7

 
3.0

 
0.6

Other operating expenses
0.7

 
1.7

 
1.7

 
2.0

Adjusted EBITDA
$
145.0

 
$
181.2

 
$
475.9


$
570.0

(1) 
Transaction-related expenses relate primarily to advisory fees recognized in respect of our initial public offering, the acquisition of businesses and costs related to other corporate transactions such as debt refinancings.
5. Restructuring and other strategic initiatives
Gates continues to undertake various restructuring and other strategic initiatives to drive increased productivity in all aspects of our operations. These actions include efforts to consolidate our manufacturing and distribution footprint, scale operations to current demand levels, combine back-office workgroups and relocate certain operations to lower cost locations. Our recently completed manufacturing footprint investments and other productivity improvements in recent years have helped to position us to accelerate and expand upon our previously announced restructuring program, which is primarily intended to optimize our manufacturing and distribution footprint over the mid-term by removing structural fixed costs, and, to a lesser degree, to streamline our selling, general and administrative (“SG&A”) back-office functions.
Overall costs associated with our restructuring and other strategic initiatives have been recognized in the condensed consolidated statements as set forth below. Expenses incurred in relation to certain of these actions qualify as restructuring expenses under U.S. GAAP.

14


 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Restructuring expenses:
 
 
 
 
 
 
 
—Severance
$
0.4

 
$
0.1

 
$
3.3

 
$

—Professional fees
0.1

 
0.8

 
1.4

 
3.0

—Other restructuring (benefits) expenses
(0.2
)
 
0.3

 
(0.8
)
 
0.2

 
0.3

 
1.2

 
3.9

 
3.2

Restructuring expenses in cost of sales:
 
 
 
 
 
 
 
—Impairment of inventory
1.0

 

 
1.3

 

Total restructuring expenses
$
1.3

 
$
1.2

 
$
5.2

 
$
3.2

 
 
 
 
 
 
 
 
Expenses related to other strategic initiatives:
 
 
 
 
 
 
 
—Severance costs included in cost of sales
$
2.5

 
$

 
$
3.0

 
$

—Severance costs included in SG&A
1.8

 
0.9

 
3.0

 
0.3

—Impairment of fixed assets
0.7

 

 
0.7

 

Total expenses related to other strategic initiatives
$
5.0

 
$
0.9

 
$
6.7

 
$
0.3

Restructuring and other strategic initiatives undertaken during the three months ended September 28, 2019 related primarily to reductions in force, particularly in the U.S. and Asia, and impacts from facility closures and consolidations, primarily the impairment of inventory and fixed assets. Expenses incurred during the prior year period in connection with our restructuring and other strategic initiatives related primarily to the reorganization of our European corporate center and a strategic restructuring of part of our Asian business.
Restructuring and other strategic initiatives undertaken during the nine months ended September 28, 2019 related primarily to reductions in force, across all regions and impairments of inventory and fixed assets related to facility closures in countries including France, the U.S., Turkey and Australia. An additional $1.4 million of professional fees were incurred during the current period, relating primarily to the closure of one of our facilities in France, the reorganization of our European corporate center, and a strategic restructuring of part of our Asian business. Expenses incurred during the prior year period in connection with our restructuring and other strategic initiatives also related primarily to the items described above.
Restructuring activities
As indicated above, restructuring expenses, as defined under U.S. GAAP, form a subset of our total expenses related to restructuring and other strategic initiatives. These expenses include the impairment of inventory, which is recognized in cost of sales. Analyzed by segment, our restructuring expenses were as follows:
 
Three months ended
 
Nine months ended
(dollars in millions)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Power Transmission
$
0.3

 
$
0.9

 
$
3.5

 
$
2.1

Fluid Power
1.0

 
0.3

 
1.7

 
1.1

Continuing operations
$
1.3

 
$
1.2

 
$
5.2

 
$
3.2


15


The following summarizes the reserve for restructuring expenses for the nine month periods ended September 28, 2019 and September 29, 2018, respectively:
 
Nine months ended
(dollars in millions)
September 28,
2019
 
September 29,
2018
Balance as of the beginning of the period
$
2.6

 
$
8.6

Utilized during the period
(4.0
)
 
(8.3
)
Net charge for the period
3.9

 
3.5

Released during the period

 
(0.3
)
Foreign currency translation
(0.1
)
 
0.1

Balance as of the end of the period
$
2.4

 
$
3.6

Restructuring reserves, the majority of which are expected to be utilized during the remainder of 2019 and in 2020, are included in the condensed consolidated balance sheet as follows:
(dollars in millions)
As of
September 28,
2019
 
As of
September 29,
2018
Accrued expenses and other current liabilities
$
2.4

 
$
3.4

Other non-current liabilities

 
0.2

 
$
2.4

 
$
3.6

6. Income taxes
We compute the year-to-date income tax provision by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust for discrete tax items in the period in which they occur.
For the three months ended September 28, 2019, we had an income tax expense of $4.4 million on pre-tax income of $41.9 million, which resulted in an effective tax rate of 10.5%, compared with 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% for the three months ended September 29, 2018. For the nine months ended September 28, 2019, we had an income tax benefit of $497.8 million on pre-tax income of $171.5 million, which resulted in an effective tax rate of (290.3%) compared with an income tax expense of $30.4 million on pre-tax income of $219.7 million, which resulted in an effective tax rate of 13.8% for the nine months ended September 29, 2018.
The increase in the effective tax rate for the three months ended September 28, 2019 compared with the prior year period was primarily the result of a $5.3 million increase in discrete tax expense related to changes in previously released valuation allowances during the year, offset by an $8.0 million reduction in tax on ordinary operations.
The decrease in the effective tax rate for the nine months ended September 28, 2019 compared with the prior year period was due primarily to the recognition of a discrete benefit of $605.1 million related to the release of valuation allowances, which occurred during the first quarter, in certain jurisdictions where it was determined that the realization of deferred tax assets was more likely than not. This benefit was offset partially by a discrete expense of $25.1 million related to the reduction in the Luxembourg corporate tax rate, which occurred during the second quarter, as well as a discrete expense of $65.6 million related to unrecognized tax benefits resulting primarily from the European business reorganization (the “Reorganization”), which occurred during the first quarter. In addition, during the prior year period, there was $21.1 million of non-operating costs for which no tax benefit was recognized, and there were no similar costs in the current period, which also contributed to the comparative reduction in the effective tax rate.
Deferred Tax Assets and Liabilities
We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.

16


Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including:
taxable income in prior carry back years if carry back is permitted under the relevant tax law;
future reversal of existing temporary differences;
tax-planning strategies that are prudent and feasible; and
future taxable income exclusive of reversing temporary differences and carryforwards.
After weighing all of the evidence, giving more weight to the evidence that was objectively verifiable, we determined that, as of March 30, 2019, it was more likely than not that deferred tax assets in Luxembourg, the U.K., and the U.S. totaling $627.6 million were realizable. Accordingly, we discretely recognized $617.3 million of our deferred tax asset in the first quarter of 2019, while the remaining $10.3 million was to be recognized either during the year through the effective tax rate or in accumulated OCI as a cumulative translation adjustment.
For the period ended September 28, 2019 as a result of changes in the Luxembourg statutory tax rate, which occurred during the second quarter, further refinement of current year estimates and foreign currency movements, we reduced the recognition from $627.6 million to $570.1 million.
Included within the $570.1 million total deferred tax assets are deferred tax assets totaling $564.0 million related to €2.1 billion of indefinite lived net operating losses in Luxembourg for which our evaluation of the positive and negative evidence changed during the first quarter of 2019 due to the implementation of the Reorganization. The Reorganization was implemented in the first quarter of 2019 to centralize and strengthen regional operations in Europe, which thereafter became centrally managed from Luxembourg.
The positive evidence that existed in favor of releasing the allowance as of March 30, 2019 and ultimately outweighed the negative evidence included the following:
our profitability in Europe in 2018 and prior years and for the three months ended March 30, 2019, as well as our expectations regarding the sustainability of these profits;
the impact of the implementation in the quarter of the Reorganization, which created an expectation of future income in Luxembourg and, thereby, removed negative evidence that supported maintaining the valuation allowance against our deferred tax assets as of December 29, 2018; and
the fact that our net operating loss carryforwards in Luxembourg are indefinite lived.
For the period ended September 28, 2019, the recognition of deferred tax assets in Luxembourg was reduced from $615.6 million to $564.0 million primarily as a result of the reduction in the Luxembourg corporate tax rate from 18% to 17%, which occurred during the second quarter. This resulted in a $25.1 million reduction in the previously reported value of our deferred tax asset. The remaining $26.5 million reduction is the result of changes in foreign currency translation during the current period.
Further, as a result of additional financing income realized in the first quarter of 2019 that created taxable profits in the U.K., combined with our estimate that the financing income is likely to remain as a source of income through 2024, our judgment changed regarding valuation allowances totaling $6.2 million related to indefinite lived net operating losses in the U.K. For the period ended September 28, 2019, further refinement of estimated U.K. taxable profits resulted in a reduction of the valuation allowance release related to indefinite lived net operating losses from $6.2 million to $3.4 million.
Finally, as a result of changes in estimates of future taxable profits in the first quarter of 2019, our judgment changed regarding the realizability of $4.3 million of U.S. foreign tax credits with related recorded valuation allowances. For the period ended September 28, 2019, further refinement of estimated U.S. foreign tax credits expected to be utilized in the current year reduced the realizability of U.S. foreign tax credit carry forwards from $4.3 million to $2.7 million, as U.S. foreign tax credits generated in the current year must be utilized before U.S. foreign tax credit carry forwards.
As of each reporting date, management considers new evidence, both positive and negative, that could impact our view with regard to the future realization of deferred tax assets. We will maintain our positions with regard to future realization of deferred tax assets, including those with respect to which we continue maintaining valuation allowances, until there is sufficient new evidence to support a change in expectations. Such a change in expectations could arise due to many factors, including those impacting our forecasts of future earnings, as well as changes in the international tax laws under which we operate and tax planning. It is not reasonably possible to forecast any such changes at the present time, but it is possible that, should they arise, our view of their effect on the future realization of deferred tax assets may impact materially our consolidated financial statements.

17


7. Earnings per share
Basic earnings per share represents net income attributable to shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share considers the dilutive effect of potential shares, unless the inclusion of the potential shares would have an anti-dilutive effect. The treasury stock method is used to determine the potential dilutive shares resulting from assumed exercises of equity-related instruments.
The computation of earnings per share is presented below:
 
Three months ended
 
Nine months ended
(dollars in millions, except share numbers and per share amounts)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income attributable to shareholders
$
35.5

 
$
59.9

 
$
670.7

 
$
169.7

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
290,109,231

 
289,783,061

 
290,032,416

 
284,750,794

Dilutive effect of share-based awards
1,003,871

 
8,670,885

 
1,634,515

 
8,705,430

Diluted weighted average number of shares outstanding
291,113,102

 
298,453,946

 
291,666,931

 
293,456,224

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.12

 
$
0.21

 
$
2.31

 
$
0.60

Diluted earnings per share
$
0.12

 
$
0.20

 
$
2.30

 
$
0.58

For the three months ended September 28, 2019 and September 29, 2018, shares totaling 3,623,701 and 605,164, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. For the nine months ended September 28, 2019 and September 29, 2018, shares totaling 3,686,986 and 610,039 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.
8. Inventories
(dollars in millions)
As of
September 28,
2019
 
As of
December 29,
2018
Raw materials and supplies
$
129.3

 
$
152.1

Work in progress
36.6

 
38.4

Finished goods
341.9

 
347.1

Total inventories
$
507.8


$
537.6

9. Goodwill
(dollars in millions)
Power
Transmission
 
Fluid
Power
 
Total
Cost and carrying amount
 
 
 
 
 
As of December 29, 2018
$
1,374.1

 
$
671.8

 
$
2,045.9

Foreign currency translation
(18.4
)
 
(3.4
)
 
(21.8
)
As of September 28, 2019
$
1,355.7

 
$
668.4

 
$
2,024.1


18


10. Intangible assets
 
As of September 28, 2019
 
As of December 29, 2018
(dollars in millions)
Cost
 
Accumulated
amortization and
impairment
 
Net
 
Cost
 
Accumulated
amortization and
impairment
 
Net
Finite-lived:
 
 
 
 
 
 
 
 
 
 
 
—Customer relationships
$
1,998.4

 
$
(618.8
)
 
$
1,379.6

 
$
2,017.4

 
$
(534.8
)
 
$
1,482.6

—Technology
90.5

 
(87.5
)
 
3.0

 
90.6

 
(87.0
)
 
3.6

—Capitalized software
71.6

 
(35.4
)
 
36.2

 
64.2

 
(29.2
)
 
35.0

 
2,160.5


(741.7
)

1,418.8


2,172.2


(651.0
)

1,521.2

Indefinite-lived:
 
 
 
 
 
 
 
 
 
 
 
—Brands and trade names
513.4

 
(44.0
)
 
469.4

 
513.4

 
(44.0
)
 
469.4

Total intangible assets
$
2,673.9


$
(785.7
)

$
1,888.2


$
2,685.6


$
(695.0
)

$
1,990.6

During the three months ended September 28, 2019, the amortization expense recognized in respect of intangible assets was $32.4 million, compared with $32.3 million for the three months ended September 29, 2018. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $21.0 million for the three months ended September 28, 2019, compared with a decrease of $0.2 million for the three months ended September 29, 2018.
During the nine months ended September 28, 2019, the amortization expense recognized in respect of intangible assets was $97.5 million, compared with $98.0 million for the nine months ended September 29, 2018. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $13.0 million for the nine months ended September 28, 2019, compared with a decrease of $18.9 million for the nine months ended September 29, 2018.
11. Leases
A. Overview
As discussed in note 1, at the beginning of our 2019 fiscal year, we adopted new lease accounting guidance under Topic 842 “Leases”, which brings most leases of property, plant and equipment onto the balance sheet. It requires a lessee to recognize a lease obligation (present value of future lease payments) and also a “right-of-use asset” for all leases, although certain short-term leases are exempted from the standard.
Under Topic 842, we evaluate our contracts and supply arrangements and conclude that they contain a lease at inception where (i) a tangible asset is explicitly or implicitly identified in the contract, (ii) we use the same asset identified over the course of the agreement, (iii) we obtain substantially all of the economic benefits from the use of the underlying asset, and (iv) we direct how and for what purpose the asset is used during the term of the contract. Leases are typically recognized on the balance sheet at their commencement date. However, if we take legal possession and have control over the asset before the commencement date, we would recognize the lease on the balance sheet at the earlier date.
Gates has over 1,000 leases covering a wide variety of tangible assets that are used in our operations across the world. The value of our global leases is concentrated in approximately 80 real estate leases, which accounted for approximately 88% of the lease liability under non-cancellable leases as of September 28, 2019. The remaining leases are predominantly comprised of equipment and vehicle leases.
Options to extend or terminate leases
In determining the lease term, we consider various economic factors, including real estate strategies, the nature, length and underlying terms of the agreement, as well as the uncertainty of the condition of leased equipment at the end of the lease term. Based on these factors, where a contract has a renewal option, we generally assume with reasonable certainty that we will renew real estate leases and will not renew equipment, vehicles or any other leases.

19


Variable payments
We sometimes make payments under our lease agreements that are excluded from the measurement of our right-of-use assets and lease liabilities and are recognized instead as variable payments in the period in which the obligation for those payments is incurred. These costs include common area maintenance, insurance, taxes, utility costs, etc. A number of our leases, particularly real estate leases, include base rent escalation clauses. The majority of these are based on the change in a local consumer price or similar index. Payments that vary based on an index or rate are included in the measurement of our right-of-use assets and lease liabilities at the rate as of the commencement date with any subsequent changes to those payments being recognized as variable payments in the period in which they occur.
Residual value guarantees, restrictions or covenants, and leases that have not yet commenced
Gates does not have any significant leases containing residual value guarantees, restrictions or covenants. Additionally, as of September 28, 2019, there were no significant new leases that have not yet commenced.
B. Significant assumptions and judgments
Discount rate
The discount rate used to calculate the present value of the future minimum lease payments is the rate implicit in the lease, when readily available. As most of our leases do not have a readily determinable implicit rate, we discount the future minimum lease payments using an incremental borrowing rate which represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We determine this rate at a country or lower level and take into account factors including currency, country risk premium, industry risk and adjustments for collateralized debt. Appropriate yield curves are used to derive different debt tenors to approximate the applicable lease term.
The discount rate is reassessed when there is a remeasurement of the lease liability, which happens predominantly when there is a contract modification and that modification does not result in a separate contract.
Elections and practical expedients
The following practical expedients have been adopted as part of our accounting policy on leases:
(i)
we will not separate the lease component from the non-lease component for all asset classes. We have therefore not allocated consideration in a contract between lease and non-lease components; and
(ii)
we recognize the payments on short-term leases (leases with terms at inception of 12 months or fewer) in net income on a straight-line basis over the lease term. No amount is recognized on the balance sheet with respect to these leases.

20


C. Quantitative disclosures
(dollars in millions)
Three months ended September 28, 2019
 
Nine months ended September 28, 2019
Lease expenses
 
 
 
Operating lease expenses
$
7.6

 
$
22.6

Finance lease amortization expenses
0.1

 
0.2

Short-term lease expenses
1.3

 
3.2

Variable lease expenses
2.2

 
4.9

Sublease income

 
(0.1
)
Total lease expenses
$
11.2

 
$
30.8

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

 
$
6.6

 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
—Operating cash flows from operating leases
 
 
$
20.1

—Financing cash flows from finance leases
 
 
0.3

 
 
 
$
20.4

Weighted-average remaining lease term — finance leases
 
 
9.0 years

Weighted-average remaining lease term — operating leases
 
 
10.3 years

Weighted-average discount rate — finance leases
 
 
2.6
%
Weighted-average discount rate — operating leases
 
 
5.7
%
Maturity analysis of liabilities
(dollars in millions)
Operating leases
 
Finance leases (1)
Next 12 months
$
25.3

 
$
0.5

Year 2
21.1

 
0.5

Year 3
17.3

 
0.5

Year 4
14.4

 
0.3

Year 5
12.6

 

Year 6 and beyond
83.7

 

Total lease payments
174.4

 
1.8

Interest
46.7

 
0.1

Total present value of lease liabilities
$
127.7

 
$
1.7

(1) 
Although our finance leases have a weighted average remaining lease term of 9.0 years, the primary lease includes a ten year rent-free period at the end of the contract such that there will be no lease payments made beyond December 2022.
Balance sheet presentation of leases as of September 28, 2019
(dollars in millions)
Operating leases
 
Finance leases
Right-of-use assets
$
117.3

 
$
3.0

 
 
 
 
Short-term lease liabilities (included in “Accrued expenses and other current liabilities”)
$
19.2

 
$
0.9

Long-term lease liabilities
108.5

 
0.8

Total lease liabilities
$
127.7

 
$
1.7


21


Right-of-use assets arising under finance leases are presented in the property, plant and equipment, net line item in the condensed consolidated balance sheet.
Topic 840 Disclosures
Future minimum lease payments under operating and finance leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 29, 2018 were as follows:
(dollars in millions)
Operating leases
 
Finance leases
 
Total
Fiscal year
 
 
 
 
 
2019
$
25.0

 
$
0.3

 
$
25.3

2020
21.3

 
0.3

 
21.6

2021
18.2

 
0.3

 
18.5

2022
14.4

 
0.3

 
14.7

2023
12.6

 
0.4

 
13.0

2024 and beyond
86.5

 
0.4