Segment information

3 Months Ended

Mar. 28, 2020

A. Background

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

B. Operating segments and segment assets

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

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

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

C. Segment net sales and disaggregated net sales

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


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

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

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


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

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

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


	Net Sales
	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Developed	$	475.8	$	543.7
Emerging	234.3		261.2
Net Sales	$	710.1	$	804.9

D. Measure of segment profit or loss

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

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

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

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

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

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

•restructuring expenses, including severance-related expenses;

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

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

Adjusted EBITDA by segment was as follows:


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

Reconciliation of net income from continuing operations to Adjusted EBITDA:


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

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



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

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