Gates Industrial Corp plc - Quarter Report: 2019 June (Form 10-Q)

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 June 29, 2019

☐ 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 August 5, 2019, there were 290,108,870 ordinary shares of $0.01 par value outstanding.

TABLE OF CONTENTS



Part I – Financial Information

Item 1.	Financial Statements (unaudited)	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51
Item 4.	Controls and Procedures	51

Part II – Other Information

Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 6.	Exhibits	53
Signatures		54

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Forward-looking Statements

This Quarterly Report on Form 10-Q (this “quarterly report” or “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those expressed in or implied by our forward-looking statements, including but not limited to the factors described in 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 our 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.

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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.

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PART I — FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Operations



	Three months ended						Six months ended
(dollars in millions, except per share amounts)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Net sales	$	809.9		$	875.1		$	1,614.8		$	1,727.1
Cost of sales	508.5			517.6			1,006.1			1,033.7
Gross profit	301.4			357.5			608.7			693.4
Selling, general and administrative expenses	198.0			209.8			398.5			418.4
Transaction-related (income) expenses	(0.7		)	1.3			(0.3		)	6.0
Impairment of intangibles and other assets	—			0.1			—			0.4
Restructuring expenses	0.3			2.3			3.6			2.0
Other operating expenses	1.9			3.1			4.8			7.4
Operating income from continuing operations	101.9			140.9			202.1			259.2
Interest expense	39.2			39.8			77.3			99.6
Other (income) expenses	(1.5		)	(3.3		)	(4.8		)	14.1
Income from continuing operations before taxes	64.2			104.4			129.6			145.5
Income tax expense (benefit)	37.5			11.5			(502.2		)	23.2
Net income from continuing operations	26.7			92.9			631.8			122.3
Loss on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0	0.2			0.3			0.5			0.4
Net income	26.5			92.6			631.3			121.9
Less: non-controlling interests	5.0			7.0			(3.9		)	12.1
Net income attributable to shareholders	$	21.5		$	85.6		$	635.2		$	109.8

Earnings per share
Basic
Earnings per share from continuing operations	$	0.07		$	0.30		$	2.19		$	0.39
Earnings per share from discontinued operations	—			—			—			—
Earnings per share	$	0.07		$	0.30		$	2.19		$	0.39

Diluted
Earnings per share from continuing operations	$	0.07		$	0.29		$	2.18		$	0.38
Earnings per share from discontinued operations	—			—			—			—
Earnings per share	$	0.07		$	0.29		$	2.18		$	0.38

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Comprehensive Income



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Net income	$	26.5		$	92.6		$	631.3		$	121.9
Other comprehensive income (loss)
Foreign currency translation:
—Net translation gain (loss) on foreign operations, net of tax (expense) benefit, respectively, of ($0.1), ($0.9), ($0.3) and $0.8	17.9			(158.2		)	45.1			(81.2		)
—(Loss) gain on net investment hedges, net of tax expense, respectively, of $0, $0, $0 and $0	(4.8		)	21.8			0.8			0.9
Total foreign currency translation movements	13.1			(136.4		)	45.9			(80.3		)
Cash flow hedges (Interest rate derivatives):
—(Loss) gain arising in the period, net of tax benefit, respectively, of $2.2, $0, $4.3 and $0	(12.4		)	—			(23.6		)	9.7
—Reclassification to net income, net of tax expense, respectively, of $0, $0.9, $0 and $1.3	0.2			0.2			0.3			2.2
Total cash flow hedges movements	(12.2		)	0.2			(23.3		)	11.9
Post-retirement benefits:
—Current year actuarial movements, net of tax benefit, respectively, of $0, $0.1, $0 and $0.1	—			—			—			(0.1		)
—Reclassification of prior year actuarial movements to net income, net of tax expense, respectively, of $0, $0, $0.1 and $0	(0.1		)	(0.1		)	(0.1		)	(0.3		)
Total post-retirement benefit movements	(0.1		)	(0.1		)	(0.1		)	(0.4		)
Other comprehensive income (loss)	0.8			(136.3		)	22.5			(68.8		)
Comprehensive income (loss) for the period	$	27.3		$	(43.7	)	$	653.8		$	53.1

Comprehensive income (loss) attributable to shareholders:
—Income (loss) arising from continuing operations	$	26.1		$	(26.7	)	$	654.4		$	48.4
—Loss arising from discontinued operations	(0.2		)	(0.3		)	(0.5		)	(0.4		)
	25.9			(27.0		)	653.9			48.0
Comprehensive income (loss) attributable to non-controlling interests	1.4			(16.7		)	(0.1		)	5.1
	$	27.3		$	(43.7	)	$	653.8		$	53.1

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Balance Sheets



(dollars in millions, except share numbers and per share amounts)	As of June 29, 2019			As of December 29, 2018
Assets
Current assets
Cash and cash equivalents	$	411.0		$	423.4
Trade accounts receivable, net	777.2			742.3
Inventories	544.5			537.6
Taxes receivable	16.2			7.2
Prepaid expenses and other assets	117.0			104.1
Total current assets	1,865.9			1,814.6
Non-current assets
Property, plant and equipment, net	748.1			756.3
Goodwill	2,067.1			2,045.9
Pension surplus	53.7			52.6
Intangible assets, net	1,938.9			1,990.6
Operating lease right-of-use assets	122.1			—
Taxes receivable	28.8			27.9
Deferred income taxes	576.0			5.1
Other non-current assets	29.5			29.6
Total assets	$	7,430.1		$	6,722.6
Liabilities and equity
Current liabilities
Debt, current portion	$	41.1		$	51.6
Trade accounts payable	378.3			424.0
Taxes payable	15.9			19.2
Accrued expenses and other current liabilities	206.0			184.2
Total current liabilities	641.3			679.0
Non-current liabilities
Debt, less current portion	2,935.0			2,953.4
Post-retirement benefit obligations	153.4			155.9
Lease liabilities	112.4			—
Taxes payable	148.8			81.9
Deferred income taxes	386.0			439.5
Other non-current liabilities	70.6			79.2
Total liabilities	4,447.5			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: 290,101,651 (December 29, 2018: authorized shares: 3,000,000,000; outstanding shares: 289,847,574)	2.9			2.9
—Additional paid-in capital	2,426.4			2,416.9
—Accumulated other comprehensive loss	(835.6		)	(854.3		)
—Retained earnings	1,017.1			381.9
Total shareholders’ equity	2,610.8			1,947.4
Non-controlling interests	371.8			386.3
Total equity	2,982.6			2,333.7
Total liabilities and equity	$	7,430.1		$	6,722.6

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Cash Flows



	Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018
Cash flows from operating activities
Net income	$	631.3		$	121.9
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	112.3			109.6
Non-cash currency transaction gain on net debt and hedging instruments	(4.7		)	(31.6		)
Premium paid on redemption of long-term debt	—			27.0
Other net non-cash financing costs	6.2			43.5
Share-based compensation expense	6.4			3.2
Decrease in post-employment benefit obligations, net	(4.5		)	(1.9		)
Deferred income taxes	(618.2		)	(38.3		)
Other operating activities	3.7			1.4
Changes in operating assets and liabilities, net of effects of acquisitions:
—Increase in accounts receivable	(37.0		)	(108.6		)
—Decrease (increase) in inventories	0.1			(53.0		)
—(Decrease) increase in accounts payable	(47.4		)	48.2
—Increase in prepaid expenses and other assets	(13.3		)	(9.0		)
—Increase in taxes payable	53.8			8.6
—Decrease in other liabilities	(24.9		)	(27.1		)
Net cash provided by operations	63.8			93.9
Cash flows from investing activities
Purchases of property, plant and equipment	(36.9		)	(105.4		)
Purchases of intangible assets	(5.2		)	(8.8		)
Net cash paid under corporate-owned life insurance policies	(5.6		)	(7.4		)
Purchase of businesses, net of cash acquired	—			(50.9		)
Other investing activities	0.2			(1.2		)
Net cash used in investing activities	(47.5		)	(173.7		)
Cash flows from financing activities
Issuance of shares, net of underwriting costs	1.6			799.1
Other offering costs	—			(8.1		)
Payments of long-term debt	(18.9		)	(926.7		)
Premium paid on redemption of long-term debt	—			(27.0		)
Dividends paid to non-controlling interests	(15.0		)	(16.2		)
Other financing activities	1.0			5.9
Net cash used in financing activities	(31.3		)	(173.0		)
Effect of exchange rate changes on cash and cash equivalents and restricted cash	2.6			(6.4		)
Net decrease in cash and cash equivalents and restricted cash	(12.4		)	(259.2		)
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	$	412.2		$	306.8
Supplemental schedule of cash flow information
Interest paid, net of amount capitalized	$	80.0		$	101.5
Income taxes paid, net	$	61.9		$	53.1
Accrued capital expenditures	$	1.1		$	3.3
Accrued deferred offering costs	$	—		$	0.5

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Shareholders’ Equity



	For the three months ended June 29, 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 March 30, 2019	$	2.9	$	2,420.6	$	(840.0	)	$	995.6	$	2,579.1	$	383.0		$	2,962.1

Net income	—		—		—			21.5		21.5		5.0			26.5
Other comprehensive income (loss)	—		—		4.4			—		4.4		(3.6		)	0.8
Total comprehensive income	—		—		4.4			21.5		25.9		1.4			27.3
Other changes in equity:
—Issuance of shares	—		0.4		—			—		0.4		—			0.4
—Share-based compensation	—		4.2		—			—		4.2		—			4.2
—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	—		—		—			—		—		(13.2		)	(13.2		)
As of June 29, 2019	$	2.9	$	2,426.4	$	(835.6	)	$	1,017.1	$	2,610.8	$	371.8		$	2,982.6



	For the three months ended June 30, 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 March 31, 2018	$	2.9	$	2,412.1		$	(696.6	)	$	161.1	$	1,879.5		$	435.6		$	2,315.1

Net income	—		—			—			85.6		85.6			7.0			92.6
Other comprehensive loss	—		—			(112.6		)	—		(112.6		)	(23.7		)	(136.3		)
Total comprehensive (loss) income	—		—			(112.6		)	85.6		(27.0		)	(16.7		)	(43.7		)
Other changes in equity:
—Share-based compensation	—		1.6			—			—		1.6			—			1.6
—Dividends paid to non-controlling interests	—		—			—			—		—			(16.2		)	(16.2		)
—Cost of shares issued	—		(0.3		)	—			—		(0.3		)	—			(0.3		)
As of June 30, 2018	$	2.9	$	2,413.4		$	(809.2	)	$	246.7	$	1,853.8		$	402.7		$	2,256.5

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Continued)



	For the six months ended June 29, 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)	—		—		—			635.2		635.2		(3.9		)	631.3
Other comprehensive income	—		—		18.7			—		18.7		3.8			22.5
Total comprehensive income (loss)	—		—		18.7			635.2		653.9		(0.1		)	653.8
Other changes in equity:
—Issuance of shares	—		1.6		—			—		1.6		—			1.6
—Share-based compensation	—		6.7		—			—		6.7		—			6.7
—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	—		—		—			—		—		(15.0		)	(15.0		)
As of June 29, 2019	$	2.9	$	2,426.4	$	(835.6	)	$	1,017.1	$	2,610.8	$	371.8		$	2,982.6



	For the six months ended June 30, 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	—		—			—			109.8		109.8			12.1			121.9
Other comprehensive loss	—		—			(61.8		)	—		(61.8		)	(7.0		)	(68.8		)
Total comprehensive (loss) income	—		—			(61.8		)	109.8		48.0			5.1			53.1
Other changes in equity:
—Issuance of shares	0.4		840.8			—			—		841.2			—			841.2
—Share-based compensation	—		3.0			—			—		3.0			—			3.0
—Dividends paid to non-controlling interests	—		—			—			—		—			(16.2		)	(16.2		)
—Cost of shares issued	—		(53.0		)	—			—		(53.0		)	—			(53.0		)
As of June 30, 2018	$	2.9	$	2,413.4		$	(809.2	)	$	246.7	$	1,853.8		$	402.7		$	2,256.5

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

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Gates Industrial Corporation plc

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Introduction

A. Background

Gates Industrial Corporation plc (the “Company”) is a public limited company that was 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 June 29, 2019 and December 29, 2018 and the related condensed consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity are presented for the 90 day period from March 31, 2019 to June 29, 2019, with comparative information for the 90 day period from April 1, 2018 to June 30, 2018 and the 181 day period from December 30, 2018 to June 29, 2019, with comparative information for the 181 day period from December 31, 2017 to June 30, 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 June 29, 2019 and the results of its operations and cash flows for the periods ended June 29, 2019 and June 30, 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

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•	ASU 2018-11 “Leases” (Topic 842): Targeted Improvements


•	ASU 2019-01 “Leases” (Topic 842): Codification 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. 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 current 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 have applied the following additional practical expedients on transition to Topic 842:


(i)	we have not reassessed whether or not any expired or existing contracts are or contain leases;


(ii)	we have not reassessed the lease classification for any expired or existing leases (i.e., all existing leases that are currently classified as operating leases will continue to be classified as such under Topic 842, and all existing leases that were classified as capital leases will continue to be classified as finance leases); and


(iii)	we have not reassessed 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, and we believe will 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.

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•	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.

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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				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Power Transmission	$	501.5	$	549.6	$	1,001.0	$	1,095.6
Fluid Power	308.4		325.5		613.8		631.5
Continuing operations	$	809.9	$	875.1	$	1,614.8	$	1,727.1

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



	Net Sales
	Three months ended				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
U.S.	$	315.3	$	331.5	$	625.3	$	647.5
North America, excluding the U.S.	89.6		88.6		178.2		174.9
United Kingdom (“U.K.”)	21.4		24.3		43.9		50.5
Europe, Middle East and Africa (“EMEA”), excluding the U.K.	177.1		202.6		357.6		407.7
East Asia and India	92.2		102.7		186.3		201.0
Greater China	88.8		98.8		172.8		191.5
South America	25.5		26.6		50.7		54.0
Net Sales	$	809.9	$	875.1	$	1,614.8	$	1,727.1

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



	Net Sales
	Three months ended				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Developed	$	534.1	$	550.5	$	1,077.8	$	1,112.7
Emerging	275.8		324.6		537.0		614.4
Net Sales	$	809.9	$	875.1	$	1,614.8	$	1,727.1

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;


•	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				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Power Transmission	$	105.6	$	133.3	$	215.5	$	258.6
Fluid Power	59.8		71.6		115.4		130.2
Continuing operations	$	165.4	$	204.9	$	330.9	$	388.8

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Reconciliation of net income from continuing operations to Adjusted EBITDA:



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Net income from continuing operations	$	26.7		$	92.9		$	631.8		$	122.3
Income tax expense (benefit)	37.5			11.5			(502.2		)	23.2
Income from continuing operations before taxes	64.2			104.4			129.6			145.5
Interest expense	39.2			39.8			77.3			99.6
Other (income) expenses	(1.5		)	(3.3		)	(4.8		)	14.1
Operating income from continuing operations	101.9			140.9			202.1			259.2
Depreciation and amortization	56.2			54.6			112.3			109.6
Transaction-related (income) expenses ⁽¹⁾	(0.7		)	1.3			(0.3		)	6.0
Impairment of intangibles and other assets	—			0.1			—			0.4
Restructuring expenses	0.3			2.3			3.6			2.0
Share-based compensation expense	3.8			1.6			6.4			3.2
Sponsor fees (included in other operating expenses)	2.0			2.1			3.8			4.0
Impact of fair value adjustment on inventory (included in cost of sales)	—			0.3			—			0.3
Inventory adjustments (included in cost of sales)	0.3			0.8			0.3			0.8
Severance-related expenses (included in cost of sales)	0.5			—			0.5			—
Other operating (income) expenses	(0.1		)	1.0			1.0			3.4
Other non-recurring adjustments (included in SG&A)	1.2			(0.1		)	1.2			(0.1		)
Adjusted EBITDA	$	165.4		$	204.9		$	330.9		$	388.8

⁽¹⁾

Transaction-related (income) 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. During the three months ended June 29, 2019, transaction-related (income) expenses included the release of an accrual of $0.7 million relating to a prior period acquisition.

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 expenses is expected to be utilized during 2019 and 2020.

Restructuring expenses of $0.6 million were recognized during the three months ended June 29, 2019 including an impairment of inventory of $0.3 million due to a facility closure, which is included in cost of sales. Restructuring expenses of $2.3 million were recognized during the prior year period, relating primarily to the reorganization of our European corporate center and a strategic restructuring of part of our Asian business.

Restructuring expenses of $3.9 million were recognized during the six months ended June 29, 2019 relating primarily to the closure of one of our facilities in France and a strategic restructuring of part of our Asian business. Restructuring expenses of $2.0 million were recognized during the prior year period, predominantly in the second quarter of 2018, relating to the items described above.

Restructuring expenses recognized in the condensed consolidated statements of operations for each segment were as follows:



	Three months ended				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Power Transmission	$	0.3	$	1.6	$	3.2	$	1.2
Fluid Power	0.3		0.7		0.7		0.8
Continuing operations	$	0.6	$	2.3	$	3.9	$	2.0

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The following summarizes the restructuring activity for the six month periods ended June 29, 2019 and June 30, 2018, respectively:



(dollars in millions)	As of June 29, 2019			As of June 30, 2018
Balance as of the beginning of the period	$	2.6		$	8.6
Utilized during the period	(5.0		)	(6.3		)
Net charge for the period	3.6			2.3
Released during the period	—			(0.3		)
Foreign currency translation	—			(0.1		)
Balance as of the end of the period	$	1.2		$	4.2

Restructuring reserves are included in the condensed consolidated balance sheet as follows:



(dollars in millions)	As of June 29, 2019		As of June 30, 2018
Accrued expenses and other current liabilities	$	0.8	$	4.0
Other non-current liabilities	0.4		0.2
	$	1.2	$	4.2

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 June 29, 2019, we had an income tax expense of $37.5 million on pre-tax income of $64.2 million, which resulted in an effective tax rate of 58.4%, compared with an income tax expense of $11.5 million on pre-tax income of $104.4 million, which resulted in an effective tax rate of 11.0% for the three months ended June 30, 2018. For the six months ended June 29, 2019, we had an income tax benefit of $502.2 million on pre-tax income of $129.6 million, which resulted in an effective tax rate of (387.5)% compared with an income tax expense of $23.2 million on pre-tax income of $145.5 million, which resulted in an effective tax rate of 15.9% for the six months ended June 30, 2018.

The increase in the effective tax rate for the three months ended June 29, 2019 compared with the prior year period was primarily the result of $25.3 million of discrete tax expense related to the revaluing of our deferred tax assets to reflect the reduction in the Luxembourg corporate tax rate from 18% to 17%. In addition, during the prior year period, $5.7 million of discrete tax benefits related to our global restructuring were recognized and no similar benefit was recorded in the current period, contributing to the comparative increase in the effective tax rate.

The decrease in the effective tax rate for the six months ended June 29, 2019 compared with the prior year period was due primarily to the recognition of a discrete benefit of $610.6 million related to the release of valuation allowances 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 $25.3 million related to the reduction in the Luxembourg corporate tax rate, as well as a discrete expense of $65.1 million related to unrecognized tax benefits resulting primarily from the European business reorganization (the “Reorganization”) that occurred during the first quarter of 2019. In addition, during the prior year period, there was $21.1 million of non-operating costs for which no tax benefit was recognized and 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.

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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 June 29, 2019 as a result of changes in the Luxembourg statutory tax rate, further refinement of current year estimates and foreign currency movements, we reduced the recognition from $627.6 million to $593.4 million.

Included within the $593.4 million total deferred tax assets are deferred tax assets totaling $586.2 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 June 29, 2019, the recognition of deferred tax assets in Luxembourg was reduced from $615.6 million to $586.2 million primarily as a result of the reduction in the Luxembourg corporate tax rate from 18% to 17%. This resulted in a $25.3 million reduction in the previously reported value of our deferred tax asset. The remaining $4.1 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 June 29, 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 $3.2 million.

Finally, as a result of changes in estimates of future taxable profits in the first quarter of 2019, our judgment changed regarding realizability of $4.3 million of U.S. foreign tax credits and $1.5 million of U.S. net operating losses with related recorded valuation allowances. For the period ended June 29, 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 $2.3 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.

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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				Six months ended
(dollars in millions, except share numbers and per share amounts)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Net income attributable to shareholders	$	21.5	$	85.6	$	635.2	$	109.8

Weighted average number of shares outstanding	290,059,492		289,756,379		289,993,208		282,275,763
Dilutive effect of share-based awards (number of shares)	1,743,262		7,629,191		1,870,765		8,656,617
Diluted weighted average number of shares outstanding	291,802,754		297,385,570		291,863,973		290,932,380

Basic earnings per share	$	0.07	$	0.30	$	2.19	$	0.39
Diluted earnings per share	$	0.07	$	0.29	$	2.18	$	0.38

For the three months ended June 29, 2019 and June 30, 2018, shares totaling 3,538,711 and 605,283, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. For the six months ended June 29, 2019 and June 30, 2018, shares totaling 3,674,486 and 605,283 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

8. Inventories



(dollars in millions)	As of June 29, 2019		As of December 29, 2018
Raw materials and supplies	$	137.6	$	152.1
Work in progress	38.6		38.4
Finished goods	368.3		347.1
Total inventories	$	544.5	$	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	12.7		8.5		21.2
As of June 29, 2019	$	1,386.8	$	680.3	$	2,067.1

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10. Intangible assets



	As of June 29, 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	$	2,028.3	$	(598.0	)	$	1,430.3	$	2,017.4	$	(534.8	)	$	1,482.6
—Technology	90.7		(87.4		)	3.3		90.6		(87.0		)	3.6
—Capitalized software	69.4		(33.5		)	35.9		64.2		(29.2		)	35.0
	2,188.4		(718.9		)	1,469.5		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	$	2,701.8	$	(762.9	)	$	1,938.9	$	2,685.6	$	(695.0	)	$	1,990.6

During the three months ended June 29, 2019, the amortization expense recognized in respect of intangible assets was $32.5 million, compared with $32.8 million for the three months ended June 30, 2018. In addition, movements in foreign currency exchange rates resulted in an increase in the net carrying value of total intangible assets of $4.7 million for the three months ended June 29, 2019, compared with a decrease of $43.3 million for the three months ended June 30, 2018.

During the six months ended June 29, 2019, the amortization expense recognized in respect of intangible assets was $65.1 million, compared with $65.7 million for the six months ended June 30, 2018. In addition, movements in foreign currency exchange rates resulted in an increase in the net carrying value of total intangible assets of $8.0 million for the six months ended June 29, 2019, compared with a decrease of $18.7 million for the six months ended June 30, 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 100 real estate leases, which accounted for approximately 88% of the lease liability under non-cancellable leases as of June 29, 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.

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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 lease assets and 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 June 29, 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.

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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.

C. Quantitative disclosures



(dollars in millions)	Three months ended June 29, 2019			Six months ended June 29, 2019
Lease expenses
Operating lease expenses	$	7.4		$	15.0
Finance lease amortization expenses	0.1			0.1
Short-term lease expenses	1.2			1.9
Variable lease expenses	2.3			2.7
Sublease income	(0.1		)	(0.1		)
Total lease expenses	$	10.9		$	19.6

Other information
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1.0		$	2.0

Cash paid for amounts included in the measurement of lease liabilities:
—Operating cash flows from operating leases				$	12.6
—Financing cash flows from finance leases				0.2
				$	12.8
Weighted-average remaining lease term — finance leases				13.4 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	$	24.8	$	0.4
Year 2	22.0		0.4
Year 3	17.6		0.3
Year 4	14.9		0.2
Year 5	12.9		—
Year 6 and beyond	86.2		—
Total lease payments	178.4		1.3
Interest	47.1		0.3
Total present value of lease liabilities	$	131.3	$	1.0


⁽¹⁾	Although our finance leases have a weighted average remaining lease term of 13.4 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.

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Balance sheet presentation of leases as of June 29, 2019



(dollars in millions)	Operating leases		Finance leases
Right-of-use assets	$	122.1	$	1.0

Short-term lease liabilities (included in “Accrued expenses and other current liabilities”)	$	19.8	$	0.1
Long-term lease liabilities	111.5		0.9
Total lease liabilities	$	131.3	$	1.0

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		86.9
Total	$	178.0	$	2.0	$	180.0

12. 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 (loss) gain before tax recognized in OCI in relation to the instruments designated as net investment hedging instruments:



	Three months ended					Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018		June 29, 2019			June 30, 2018
Net fair value (loss) gain recognized in OCI in relation to:
—Euro-denominated debt	$	(1.4	)	$	3.4	$	(0.7	)	$	(11.8	)
—Designated cross currency swaps	(3.4		)	18.4		1.5			12.7
Total net fair value (loss) gain	$	(4.8	)	$	21.8	$	0.8		$	0.9

During the three and six months ended June 29, 2019, a net gain of $2.0 million and a net gain of $4.2 million, respectively, was recognized in interest expense in relation to our cross currency swaps that have been designated as net investment hedges, compared with $0 during the three and six months ended June 30, 2018.

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The following table sets out the movement before tax recognized in OCI in relation to the interest rate derivatives:



	Three months ended					Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018		June 29, 2019			June 30, 2018
Movement recognized in OCI in relation to:
—Fair value (loss) gain on interest rate derivatives	$	(14.6	)	$	—	$	(27.9	)	$	9.7
—Deferred premium reclassified from OCI to net income	0.2			1.1		0.3			3.5
Total movement	$	(14.4	)	$	1.1	$	(27.6	)	$	13.2

During the three and six months ended June 29, 2019, a net expense of $0.7 million and net expense of $0.8 million, respectively, was recognized in interest expense in relation to our cash flow hedges, compared with net expense of $1.1 million and net expense of $3.5 million, respectively, during the three and six months ended June 30, 2018.

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 June 29, 2019, a net loss of $1.0 million was recognized in selling, general and administrative expenses on the fair valuation of these currency contracts, compared with a net gain of $0.9 million in the prior year period. During the six months ended June 29, 2019, 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 gain of $0.8 million in the prior year period.

The fair values of derivative financial instruments were as follows:



	As of June 29, 2019													As of December 29, 2018
(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	$	—	$	—	$	(20.0	)	$	—		$	(20.0	)	$	5.4	$	—	$	—		$	(27.5	)	$	(22.1	)
—Interest rate caps	—		—		(3.8		)	(5.0		)	(8.8		)	3.5		1.6		—			(10.9		)	(5.8		)
—Interest rate swaps	—		—		—			(30.9		)	(30.9		)	—		—		(0.3		)	(2.6		)	(2.9		)

Derivatives not designated as hedging instruments:
—Currency forward contracts	1.0		—		(0.3		)	—			0.7			1.3		—		(0.4		)	—			0.9
	$	1.0	$	—	$	(24.1	)	$	(35.9	)	$	(59.0	)	$	10.2	$	1.6	$	(0.7	)	$	(41.0	)	$	(29.9	)

A. Currency derivatives

As of June 29, 2019, the notional principal amount of outstanding foreign exchange contracts that are used to manage the currency profile of Gates’ cash was $20.4 million, compared with $0 as of December 29, 2018, none of which have been designated as hedging instruments during the three and six months ended June 29, 2019. As of June 29, 2019, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was $87.0 million, compared with $108.0 million as of December 29, 2018, none of which have been designated as hedging instruments during the three and six months ended June 29, 2019. In addition, we hold cross currency swaps that have been designated as net investment hedges. As of June 29, 2019 and December 29, 2018, the notional principal amount of these contracts was $270.0 million. During July 2019, we extended the maturity of these contracts from March 2020 to March 2022.

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B. Interest rate derivatives

We use interest rate swaps and interest rate caps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. As of June 29, 2019 and December 29, 2018, we held 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. These swaps have been designated as cash flow hedges. Our interest rate caps, which are also 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. As of June 29, 2019 and December 29, 2018, the notional amount of the interest rate cap contracts outstanding was $2.7 billion and $2.7 billion, respectively.

The periods covered by our interest rate caps and their notional values are as follows:



(in millions)	Notional value
September 30, 2014 to June 30, 2019	$	500.0
September 30, 2016 to June 30, 2019	$	500.0
June 30, 2017 to June 30, 2020	$	200.0
June 28, 2019 to June 30, 2020	$	1,000.0
July 1, 2019 to June 30, 2023	€	425.0

13. 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); and


•	“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 June 29, 2019				As of December 29, 2018
(dollars in millions)	Carrying amount		Fair value		Carrying amount		Fair value
Current	$	41.1	$	40.6	$	51.6	$	50.4
Non-current	2,935.0		2,932.9		2,953.4		2,873.2
	$	2,976.1	$	2,973.5	$	3,005.0	$	2,923.6

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.

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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 June 29, 2019
Available-for-sale securities	$	0.9	$	—		$	0.9
Derivative assets	$	—	$	1.0		$	1.0
Derivative liabilities	$	—	$	(60.0	)	$	(60.0	)

As of December 29, 2018
Available-for-sale securities	$	0.8	$	—		$	0.8
Derivative assets	$	—	$	11.8		$	11.8
Derivative liabilities	$	—	$	(41.7	)	$	(41.7	)

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 six months ended June 29, 2019 or the year ended December 29, 2018.

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14. Debt

Long-term debt, including the current portion and bank overdrafts, was as follows:



(dollars in millions)	As of June 29, 2019			As of December 29, 2018
Secured debt:
—Dollar Term Loan	$	1,703.4		$	1,716.4
—Euro Term Loan	732.0			742.1
Unsecured debt:
—Dollar Senior Notes	568.0			568.0
—Other loans	0.2			0.6
Total principal of debt	3,003.6			3,027.1
Deferred issuance costs	(43.7		)	(48.7		)
Accrued interest	16.2			26.6
Total carrying value of debt	2,976.1			3,005.0
Debt, current portion	41.1			51.6
Debt, less current portion	$	2,935.0		$	2,953.4

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 premiums 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 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 certain reorganization transactions, a wholly-owned U.S. subsidiary of Gates Global LLC, has entered into intercompany agreements pursuant to which it became the principal obligor under the Term Loans and Senior Notes for U.S. federal income tax purposes and agreed to make future payments due on these tranches of debt. As a result, interest on these debt tranches is U.S. source income.

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Dollar and Euro Term Loans

Our secured credit facilities include a Dollar Term Loan credit facility and a Euro Term Loan credit facility that were drawn on July 3, 2014. 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. The Euro Term Loan bears interest at Euro LIBOR subject to a floor of 0%, plus a margin of 3.00%.

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 June 29, 2019, borrowings under this facility bore interest at a rate of 5.15% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of June 29, 2019, the Euro Term Loan bore 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 September 30, 2019.

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 six months ended June 29, 2019, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $13.0 million and $5.5 million, respectively. During the six months ended June 30, 2018, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of $8.6 million and $3.8 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 2018 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 is required to be made in 2019.

During the periods presented, foreign exchange (losses) gains 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 (losses) gains were recognized in OCI.



	Three months ended					Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018		June 29, 2019			June 30, 2018
(Loss) gain recognized in statement of operations	$	(8.1	)	$	36.6	$	5.3		$	29.1
(Loss) gain recognized in OCI	(1.4		)	3.4		(0.7		)	(6.8		)
Total (losses) gains	$	(9.5	)	$	40.0	$	4.6		$	22.3

Subsequent to our initial public offering, the above net transactional foreign exchange gains and losses recognized in the other (income) expenses line of the condensed consolidated statement of operations have been substantially offset by net foreign exchange movements on Euro-denominated intercompany loans as part of our overall hedging strategy.

Unsecured Senior Notes

As of June 29, 2019, there were $568.0 million of Dollar Senior Notes outstanding. These notes are scheduled to mature on July 15, 2022 and bear interest at an annual fixed rate of 6.00% with semi-annual interest payments. As noted above, on January 31, 2018, Gates redeemed in full its outstanding €235.0 million Euro Senior Notes and made partial redemptions of the Dollar Senior Notes totaling $622.0 million.

Up to the date of their redemption, foreign exchange losses were recognized in respect of the Euro Senior Notes as summarized in the table below. A portion of these losses were recognized in OCI for the period during which the facility was designated as a net investment hedge of certain of Gates' Euro investments.



	Three months ended				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Loss recognized in statement of operations	$	—	$	—	$	—	$	(4.2	)
Loss recognized in OCI	—		—		—		(5.0		)
Total losses	$	—	$	—	$	—	$	(9.2	)

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During the year commencing July 15, 2019 and thereafter, Gates may redeem the Dollar Senior Notes, at its option, in whole at any time or in part from time to time, at 100% of their principal value, plus accrued and unpaid interest to the redemption date.

In the event of a change of control over the Company, each holder will have the right to require Gates to repurchase all of such holder’s notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase, except to the extent that Gates has previously elected to redeem the notes.

Revolving credit facility

Gates also has a secured revolving credit facility, maturing on January 29, 2023, that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million, with a letter of credit sub-facility of $20.0 million. The facility matures on January 29, 2023, 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.

As of both June 29, 2019 and December 29, 2018, there were no drawings for cash under the revolving credit facility and there were no letters of credit outstanding.

Debt under the revolving credit facility bears interest at a floating rate, which can be either a base rate as defined in the credit agreement plus an applicable margin or, at Gates’ option LIBOR, plus an applicable margin.

Asset-backed revolver

Gates has a revolving credit facility backed by certain of its assets in North America. The facility allows for loans of up to a maximum of $325.0 million ($321.5 million as of June 29, 2019, compared with $325.0 million as of December 29, 2018, based on the values of the secured assets on those dates) with a letter of credit sub-facility of $150.0 million within this maximum. In January 2018, the maturity date of this facility was extended to January 29, 2023, 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.

As of both June 29, 2019 and December 29, 2018, there were no drawings for cash under the asset-backed revolver. Debt under the facility bears interest at a floating rate, which can be either a base rate as defined in the credit agreement plus an applicable margin or, at Gates’ option, LIBOR, plus an applicable margin. The letters of credit outstanding under the asset-backed revolver as of June 29, 2019 amounted to $50.3 million, compared with $57.8 million as of December 29, 2018.

15. Post-retirement benefits

Gates provides defined benefit pension plans in certain of the countries in which it operates, in particular, in the U.S. and U.K. All of the defined benefit pension plans are closed to new entrants. In addition to the funded defined benefit pension plans, Gates has unfunded defined benefit obligations to certain current and former employees.

Gates also provides other post-retirement benefits, principally health and life insurance coverage, on an unfunded basis to certain of its employees in the U.S. and Canada.

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Net periodic benefit cost

The components of the net periodic benefit cost for pensions and other post-retirement benefits were as follows:



	Three months ended June 29, 2019									Three months ended June 30, 2018
(dollars in millions)	Pensions			Other post-retirement benefits			Total			Pensions			Other post-retirement benefits			Total
Reported in operating income:
—Employer service cost	$	1.4		$	—		$	1.4		$	1.3		$	—		$	1.3
Reported outside of operating income:
—Interest cost	5.9			0.5			6.4			5.9			0.5			6.4
—Expected return on plan assets	(6.9		)	—			(6.9		)	(5.6		)	—			(5.6		)
—Amortization of net actuarial loss (gain)	0.2			(0.3		)	(0.1		)	0.1			(0.2		)	(0.1		)
—Settlements and curtailments	—			—			—			(0.1		)	—			(0.1		)
Net periodic benefit cost	$	0.6		$	0.2		$	0.8		$	1.6		$	0.3		$	1.9

Contributions	$	1.9		$	1.0		$	2.9		$	1.8		$	0.7		$	2.5



	Six months ended June 29, 2019									Six months ended June 30, 2018
(dollars in millions)	Pensions			Other post-retirement benefits			Total			Pensions			Other post-retirement benefits			Total
Reported in operating income:
—Employer service cost	$	2.8		$	—		$	2.8		$	2.7		$	—		$	2.7
Reported outside of operating income:
—Interest cost	11.8			1.1			12.9			11.9			1.1			13.0
—Expected return on plan assets	(13.9		)	—			(13.9		)	(11.4		)	—			(11.4		)
—Amortization of net actuarial loss (gain)	0.4			(0.6		)	(0.2		)	0.1			(0.4		)	(0.3		)
—Settlements and curtailments	(0.7		)	—			(0.7		)	0.3			—			0.3
Net periodic benefit cost	$	0.4		$	0.5		$	0.9		$	3.6		$	0.7		$	4.3

Contributions	$	3.4		$	2.0		$	5.4		$	4.0		$	2.0		$	6.0

The components of the above net periodic benefit cost for pensions and other post-retirement benefits that are reported outside of operating income are all included in the other (income) expenses line in the condensed consolidated statement of operations.

For 2019 as a whole, we expect to contribute approximately $4.6 million to our defined benefit pension plans and approximately $6.7 million to our other post-retirement benefit plans.

16. Share-based compensation

The Company operates a share-based incentive plan over its shares to provide incentives to Gates’ senior executives and other eligible employees. During the three and six months ended June 29, 2019, we recognized a charge of $3.8 million and $6.4 million, compared with $1.6 million and $3.2 million, respectively, in the prior year period.

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Share-based incentive awards issued under the 2014 Omaha Topco Ltd. Stock Incentive Plan

Gates has a number of awards in issue under the 2014 Omaha Topco Ltd. Stock Incentive Plan, which was assumed by the Company and renamed the Gates Industrial Corporation plc Stock Incentive Plan in connection with our initial public offering in January 2018. No new awards have been granted under this plan since 2017. The options are split equally into four tiers, each with specific vesting conditions. Tier I options vest evenly over 5 years from the grant date, subject to the participant’s continuing to provide service to Gates on the vesting date. Tier II, III and IV options vest on achievement of specified investment returns by Blackstone at the time of a defined liquidity event, which is also subject to the participant’s continued provision of service to Gates on the vesting date. The performance conditions associated with Tiers II, III and IV must be achieved on or prior to July 3, 2022 in order for vesting to occur. All the options expire ten years after the date of grant.

Due to Chinese regulatory restrictions on foreign stock ownership, awards granted under this plan to Chinese employees have been issued as stock appreciation rights (“SARs”). The terms of these SARs are identical to those of the options described above with the exception that no share is issued on exercise but cash equivalent to the increase in value of the Company’s share from the date of grant to the date of exercise is paid in cash to the employee. These awards are therefore treated as liability awards under Topic 718 “Compensation - Stock Compensation” and are revalued to their fair value at each period end.

In addition to the above, in 2017, under the same plan, the Company issued 76,293 restricted stock units (“RSUs”). These RSUs vest evenly over three years from the date of grant, subject to the participant’s continued provision of service to Gates on the vesting date. The awards expire ten years after the date of grant, in December 2027. There were no movements in these RSUs during the current period.

Changes in the awards granted under this plan are summarized in the tables below.

Share-based incentive awards issued under the Gates Industrial Corporation plc 2018 Omnibus Incentive Plan

In conjunction with the initial public offering in January 2018, Gates adopted a new equity-based compensation plan, which is a market-based long-term incentive program that allows for the issue of a variety of equity-based and cash-based awards, including stock options, SARs and RSUs.

The SARs and the majority of the share options issued under this plan vest evenly over either three years or four years from the grant date. The remainder of the options, the premium-priced options, vest evenly over a three year period, starting two years from the grant date. All options vest subject to the participant's continued employment by Gates on the vesting date and expire ten years after the date of grant.

The RSUs issued under the plan consist of time-vesting RSUs and performance-based RSUs (“PRSUs”). The time-vesting RSUs vest evenly over either one or three years from the date of grant, subject to the participant’s continued provision of service to Gates on the vesting date. The PRSUs provide that 50% of the award will generally vest if Gates achieves a certain level of average annual adjusted return on invested capital as defined in the plan (“Adjusted ROIC”) and the remaining 50% of the PRSUs will generally vest if Gates achieves certain relative total shareholder return (“Relative TSR”) goals, in each case, measured over a three year performance period and subject to the participant’s continued employment through the end of the performance period. The total number of PRSUs that vest at the end of the performance period will range from 0% to 200% of the target based on actual performance against a pre-established scale.

New awards and movements in existing awards granted under this plan are summarized in the tables below.

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Summary of movements in options outstanding



	Six months ended June 29, 2019
	Number of options		Weighted average exercise price $
Outstanding at the beginning of the period:
—Tier I	4,212,537		$	7.03
—Tier II	4,837,780		$	6.97
—Tier III	4,837,780		$	6.97
—Tier IV	4,837,780		$	10.46
—SARs	724,372		$	8.17
—Share options	582,717		$	17.14
	20,032,966		$	8.16
Granted during the period:
—SARs	71,150		$	16.46
—Share options	1,099,505		$	16.46
—Premium-priced options	796,460		$	19.00
	1,967,115		$	17.49
Forfeited during the period:
—Tier I	(100,419	)	$	6.60
—Tier II	(334,734	)	$	6.58
—Tier III	(334,734	)	$	6.58
—Tier IV	(334,734	)	$	9.87
—Share options	(44,895	)	$	17.03
	(1,149,516	)	$	7.95
Expired during the period:
—Share options	(1,250	)	$	17.72
	(1,250	)	$	17.72
Exercised during the period:
—Tier I	(246,924	)	$	6.57
	(246,924	)	$	6.57
Outstanding at the end of the period:
—Tier I	3,865,194		$	7.07
—Tier II	4,503,046		$	7.00
—Tier III	4,503,046		$	7.00
—Tier IV	4,503,046		$	10.50
—SARs	795,522		$	8.91
—Share options	1,636,077		$	16.69
—Premium-priced options	796,460		$	19.00
	20,602,391		$	9.09

Exercisable at the end of the period	2,573,074		$	7.27

As of June 29, 2019, the unrecognized compensation charge relating to the nonvested options other than Tier II, Tier III and Tier IV options, was $13.3 million, which is expected to be recognized over a weighted-average period of 2.8 years. The unrecognized compensation charge relating to the nonvested Tier II, Tier III and Tier IV options was $29.3 million, which will be recognized on occurrence of a liquidity event as described above.

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During the three and six months ended June 29, 2019, cash of $1.6 million and $0.4 million, respectively, was received in relation to the exercise of vested options. The aggregate intrinsic value of options exercised during the three and six months ended June 29, 2019 was $0.3 million and $2.0 million, respectively.

Summary of movements in RSUs and PRSUs outstanding



	Six months ended June 29, 2019
	Number of awards		Weighted average grant date fair value $
Outstanding at the beginning of the period:
—RSUs	81,800		$	17.13
	81,800		$	17.13
Granted during the period:
—RSUs	715,936		$	16.39
—PRSUs	248,550		20.07
	964,486		$	17.34
Forfeited during the period:
—RSUs	(24,573	)	$	16.75
	(24,573	)	$	16.75
Vested during the period:
—RSUs	(13,175	)	$	17.55
	(13,175	)	$	17.55
Outstanding at the end of the period
—RSUs	759,988		$	16.44
—PRSUs	248,550		20.07
	1,008,538		$	17.33

As of June 29, 2019, the unrecognized compensation charge relating to nonvested RSUs and PRSUs was $13.7 million, which is expected to be recognized over a weighted average period of 2.5 years, subject, where relevant, to the achievement of the performance conditions described above. The aggregate intrinsic value of RSUs and PRSUs vested during the three and six months ended June 29, 2019 was $0 and $0.2 million, respectively.

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Valuation of awards granted during the period

The fair value of the options at their grant date was measured using a Black-Scholes valuation model in the case of SARs and share options. RSUs are valued at the share price on the date of grant. The premium-priced options and PRSUs were valued using Monte Carlo simulations. The weighted average fair values and relevant assumptions were as follows:



	Six months ended June 29, 2019
Fair value:
—SARs	$	5.88
—Share options	$	5.88
—Premium-priced options	$	5.65
—RSUs	$	16.39
—PRSUs	$	20.07

Inputs to the model:
—Expected volatility - SARs, share options and premium-priced options	31.9		%
—Expected volatility - PRSUs	32.8		%
—Expected option life for SARs and share options	6.0
—Expected option life for premium-priced options	7.0
—Risk-free interest rate:
SARs and share options	2.51		%
Premium-priced options	2.53		%
PRSUs	2.48		%
—Expected dividends	—

17. Equity

In January 2018, we completed an initial public offering of 38,500,000 shares at $19.00 each. Shortly thereafter, the underwriters of the initial public offering exercised their over-allotment option for a further 5,775,000 shares, also at $19.00 each. Movements in the Company's number of shares in issue for the six month periods ended June 29, 2019 and June 30, 2018, respectively, were as follows:



(number of shares)	As of June 29, 2019	As of June 30, 2018
Balance as of the beginning of the fiscal year	289,847,574	245,474,605
Issuance of shares	—	44,275,000
Exercise of share options	246,924	6,774
Vesting of restricted stock units	7,153	—
Balance as of the end of the period	290,101,651	289,756,379

The Company has one class of authorized and issued shares, with a par value of $0.01 and each share has equal voting rights.

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18. Analysis of accumulated other comprehensive (loss) income

Changes in accumulated other comprehensive (loss) income by component, net of tax, were as follows:



(dollars in millions)	Available-for- sale investments			Post- retirement benefit			Cumulative translation adjustment			Cash flow hedges			Accumulated OCI attributable to shareholders			Non- controlling interests			Accumulated OCI
As of December 30, 2017	$	(0.3	)	$	13.2		$	(742.8	)	$	(17.5	)	$	(747.4	)	$	(25.5	)	$	(772.9	)
Foreign currency translation	—			—			(73.3		)	—			(73.3		)	(7.0		)	(80.3		)
Cash flow hedges movements	—			—			—			11.9			11.9			—			11.9
Post-retirement benefit movements	—			(0.4		)	—			—			(0.4		)	—			(0.4		)
Other comprehensive (loss) income	—			(0.4		)	(73.3		)	11.9			(61.8		)	(7.0		)	(68.8		)
As of June 30, 2018	$	(0.3	)	$	12.8		$	(816.1	)	$	(5.6	)	$	(809.2	)	$	(32.5	)	$	(841.7	)



(dollars in millions)	Available-for- sale investments		Post- retirement benefit			Cumulative translation adjustment			Cash flow hedges			Accumulated OCI attributable to shareholders			Non- controlling interests			Accumulated OCI
As of December 29, 2018	$	—	$	7.6		$	(850.0	)	$	(11.9	)	$	(854.3	)	$	(43.6	)	$	(897.9	)
Foreign currency translation	—		—			42.1			—			42.1			3.8			45.9
Cash flow hedges movements	—		—			—			(23.3		)	(23.3		)	—			(23.3		)
Post-retirement benefit movements	—		(0.1		)	—			—			(0.1		)	—			(0.1		)
Other comprehensive (loss) income	—		(0.1		)	42.1			(23.3		)	18.7			3.8			22.5
As of June 29, 2019	$	—	$	7.5		$	(807.9	)	$	(35.2	)	$	(835.6	)	$	(39.8	)	$	(875.4	)

19. Related party transactions

A. Entities affiliated with Blackstone

In January 2018, Gates and Blackstone Management Partners L.L.C. (“BMP”) and Blackstone Tactical Opportunities Advisors L.L.C., each affiliates of our Sponsor (the “Managers”), entered into a new Transaction and Monitoring Fee Agreement (the “New Monitoring Fee Agreement”). Under this agreement, Gates Industrial Corporation plc and certain of its direct and indirect subsidiaries (collectively the “Monitoring Service Recipients”) engaged the Managers to provide certain monitoring, advisory and consulting services in the following areas:


•	advice regarding financings and relationships with lenders and bankers;


•	advice regarding the selection, retention and supervision of independent auditors, outside legal counsel, investment bankers and other advisors or consultants;


•	advice regarding environmental, social and governance issues pertinent to our affairs;


•	advice regarding the strategic direction of our business; and


•	such other advice directly related to or ancillary to the above advisory services as we may reasonably request.

In consideration of these oversight services, Gates agreed to pay BMP an annual fee of 1% of a covenant EBITDA measure defined under the agreements governing our senior secured credit facilities. In addition, the Monitoring Service Recipients agreed to reimburse the Managers for any related out-of-pocket expenses incurred by the Managers and their affiliates. During the three months ended June 29, 2019, Gates incurred $2.0 million, compared with $2.1 million during the prior year period, and during the six months ended June 29, 2019, Gates incurred $3.8 million, compared with $4.0 million during the prior year period, in respect of these oversight services and out-of-pocket expenses, of which there was no amount owing at June 29, 2019 or December 29, 2018.

The New Monitoring Fee Agreement terminates upon the earlier to occur of (i) the second anniversary of the closing date of the initial public offering of Gates and (ii) the date our Sponsor beneficially owns less than 5% of our ordinary shares and such shares have a fair market value of less than $25.0 million. Following termination of the New Monitoring Fee Agreement, the Managers will refund us any portion of the monitoring fee previously paid in respect of fiscal quarters that follow the termination date.

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In addition, in connection with the initial public offering, we entered into a new Support and Services Agreement with BMP, under which Gates Industrial Corporation plc and certain of its direct and indirect subsidiaries reimburse BMP for customary support services provided by Blackstone’s portfolio operations group to the Company at BMP’s direction. BMP will invoice the Company for such services based on the time spent by the relevant personnel providing such services during the applicable period and Blackstone’s allocated costs of such personnel. During the periods presented, no amounts were paid or outstanding under this agreement. This agreement terminates on the date our Sponsor beneficially owns less than 5% of our ordinary shares and such shares have a fair market value of less than $25.0 million, or such earlier date as may be chosen by Blackstone.

In connection with our initial public offering in January 2018, Blackstone Advisory Partners L.P., an affiliate of Blackstone, received underwriting fees of $3.2 million.

B. Equity method investees

Sales to and purchases from equity method investees were as follows:



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Sales	$	0.4		$	0.5		$	0.7		$	1.1
Purchases	$	(3.9	)	$	(4.0	)	$	(8.0	)	$	(6.5	)

Amounts outstanding in respect of these transactions were payables of $0.1 million as of June 29, 2019, compared with $0.1 million as of December 29, 2018. During the three months ended June 29, 2019, we received dividends of $0 from our equity method investees, compared with $0 in the prior year period. During the six months ended June 29, 2019, we received dividends of $0 from our equity method investees, compared with $0.4 million in the prior year period.

C. Non-Gates entities controlled by non-controlling shareholders

Sales to and purchases from non-Gates entities controlled by non-controlling shareholders were as follows:



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Sales	$	12.4		$	15.7		$	25.8		$	31.7
Purchases	$	(4.9	)	$	(5.2	)	$	(10.3	)	$	(10.5	)

Amounts outstanding in respect of these transactions were as follows:



(dollars in millions)	As of June 29, 2019			As of December 29, 2018
Receivables	$	4.6		$	0.6
Payables	$	(4.0	)	$	(0.3	)

D. Majority-owned subsidiaries

We finalized an agreement with the non-controlling interest holder in certain of our consolidated, majority-owned subsidiaries, regarding the scope of business of such subsidiaries, which will result in a smaller share of net income allocated to non-controlling interests. This change is retrospectively effective from the beginning of 2019 and includes a one-time adjustment of $15.0 million, which has been recorded in the first quarter of 2019.

20. Commitments and contingencies

A. Performance bonds, letters of credit and bank guarantees

As of June 29, 2019, letters of credit were outstanding against the asset-backed revolving facility amounting to $50.3 million, compared with $57.8 million as of December 29, 2018. Gates had additional outstanding performance bonds, letters of credit and bank guarantees amounting to $3.8 million, compared with $3.4 million as of December 29, 2018.

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B. Contingencies

Gates is, from time to time, party to general legal proceedings and claims, which arise in the ordinary course of business. Gates is also, from time to time, party to legal proceedings and claims in respect of environmental obligations, product liability, intellectual property and other matters which arise in the ordinary course of business and against which management believes Gates has meritorious defenses available.

While it is not possible to quantify the financial impact or predict the outcome of all pending claims and litigation, management does not anticipate that the outcome of any current proceedings or known claims, either individually or in aggregate, will materially affect Gates’ financial position, results of operations or cash flows.

C. Warranties

The following summarizes the movements in the warranty liability for the six month periods ended June 29, 2019 and June 30, 2018, respectively:



(dollars in millions)	As of June 29, 2019			As of June 30, 2018
Balance as of the beginning of the fiscal year	$	14.3		$	14.1
Charge for the period	6.8			8.1
Payments made	(5.8		)	(5.1		)
Released during the period	(0.1		)	(0.3		)
Foreign currency translation	0.1			(0.2		)
Balance as of the end of the period	$	15.3		$	16.6

Item 2: Management’s Discussion and Analysis

of Financial Condition and Results of Operations

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

Our Company

We are a global manufacturer of innovative, highly engineered power transmission and fluid power solutions. We offer a broad portfolio of products to diverse replacement channel customers and to original equipment (“first-fit”) manufacturers as specified components, with the majority of our revenue coming from replacement channels. Our products are used in applications across numerous end markets, which include construction, agriculture, energy, automotive, transportation, general industrial, consumer products and many others. We sell our products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation; this reputation has been built for over a century since Gates’ founding in 1911. Within the diverse end markets we serve, our highly engineered products are often critical components in applications for which the cost of downtime is high relative to the cost of our products, resulting in the willingness of end users to pay a premium for superior performance and availability. These applications subject our products to normal wear and tear, resulting in a natural replacement cycle that drives high-margin, recurring revenue. Our product portfolio represents one of the broadest ranges of power transmission and fluid power products in the markets we serve, and we maintain long-standing relationships with a diversified group of blue-chip customers throughout the world. As a leading designer, manufacturer and marketer of highly engineered, mission-critical products, we have become an industry leader across most of the regions and end markets in which we operate.

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Business Trends

Our net sales have historically been highly correlated with industrial activity and utilization and not with any single end market given the diversification of our business and high exposure to replacement channels. This diversification limits our exposure to trends in any given end market. In addition, a majority of our sales are generated from customers in replacement channels, who serve primarily a large base of installed equipment that follows a natural maintenance cycle that is somewhat less susceptible to various trends that affect our end markets. Such trends include infrastructure investment and construction activity, agricultural production and related commodity prices, commercial and passenger vehicle production, miles driven and fleet age, evolving regulatory requirements related to emissions and fuel economy and oil and gas prices and production. Key indicators of our performance include industrial production, industrial sales and manufacturer shipments.

During the six months ended June 29, 2019, sales into replacement channels accounted for approximately 62% of our total net sales. Our replacement sales cover a very broad range of applications and industries and, accordingly, are highly correlated with industrial activity and utilization and not a single end market. Replacement products are principally sold through distribution partners that may carry a very broad line of products or may specialize in products associated with a smaller set of end market applications.

During the six months ended June 29, 2019, sales into first-fit channels accounted for approximately 38% of our total net sales. First-fit sales are to a variety of industrial and automotive customers. Our industrial first-fit customers cover a diverse range of industries and applications and many of our largest first-fit customers manufacture construction and agricultural equipment. Among our automotive first-fit customers, a majority of our net sales are to emerging market customers, where we believe our first-fit presence provides us with a strategic advantage in developing those markets and ultimately increasing our higher margin replacement channel sales. First-fit automotive sales in developed markets represented approximately 7% of our total net sales for the six months ended June 29, 2019, with first-fit automotive sales in North America contributing less than 3% of total sales. As a result of the foregoing factors, we do not believe that our historical net sales have had any meaningful correlation to global automotive production but are positively correlated to industrial production.

Results for the three and six months ended June 29, 2019 compared with the results for the three and six months ended June 30, 2018

Summary Gates Performance



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Net sales	$	809.9		$	875.1		$	1,614.8		$	1,727.1
Cost of sales	508.5			517.6			1,006.1			1,033.7
Gross profit	301.4			357.5			608.7			693.4
Selling, general and administrative expenses	198.0			209.8			398.5			418.4
Transaction-related (income) expenses	(0.7		)	1.3			(0.3		)	6.0
Impairment of intangibles and other assets	—			0.1			—			0.4
Restructuring expenses	0.3			2.3			3.6			2.0
Other operating expenses	1.9			3.1			4.8			7.4
Operating income from continuing operations	101.9			140.9			202.1			259.2
Interest expense	39.2			39.8			77.3			99.6
Other (income) expenses	(1.5		)	(3.3		)	(4.8		)	14.1
Income from continuing operations before taxes	64.2			104.4			129.6			145.5
Income tax expense (benefit)	37.5			11.5			(502.2		)	23.2
Net income from continuing operations	$	26.7		$	92.9		$	631.8		$	122.3

Adjusted EBITDA⁽¹⁾	$	165.4		$	204.9		$	330.9		$	388.8
Adjusted EBITDA margin (%)	20.4		%	23.4		%	20.5		%	22.5		%


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

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Net sales

Net sales during the three months ended June 29, 2019 were $809.9 million, down by 7.5%, or $65.2 million, compared with net sales during the prior year period of $875.1 million. Our net sales in the three months ended June 29, 2019 were adversely impacted by movements in average currency exchange rates of $25.1 million compared with the prior year period, due principally to the strengthening of the U.S. dollar against a number of currencies, in particular the Euro ($8.8 million) and the Chinese Renminbi ($6.1 million). In addition, the acquisition of Rapro in April 2018 contributed $1.9 million to our second quarter 2018 net sales. Excluding these impacts, core sales decreased by $42.0 million, or 4.8%, during the three months ended June 29, 2019 compared with the prior year period. Of this decrease, $61.4 million was driven by lower volumes, offset partially by a $19.4 million benefit from favorable pricing, a function of our margin protection initiatives in the current inflationary environment.

Core sales in our Power Transmission and Fluid Power businesses declined by 5.3% and 3.9%, respectively, in the three months ended June 29, 2019. The majority of the total decline was driven by slowing demand in the automotive channels, particularly in automotive first-fit, which declined by 11.2% in the three months ended June 29, 2019 compared with the prior year period while automotive replacement declined by 3.2%. Broad market softness in Europe continues to create a challenging environment for us, with EMEA automotive first-fit and automotive replacement sales declining by $11.0 million and $7.9 million, respectively. China automotive first-fit declined by 16.7% in the three months ended June 29, 2019 compared with the prior year period. Net sales to industrial end markets were down by 2.3% globally and demand decelerated as the quarter progressed. This slowing demand environment was driven by weakness in the North America first-fit channel, particularly in agriculture end market applications, and both first-fit and replacement channels in East Asia & India with lower demand from the construction and general industrial end markets. China industrial end markets continued to decelerate during the quarter, impacted by the ongoing trade tensions with the U.S. Automotive first-fit applications remained weak in China and also experienced deceleration through the quarter, offset partially by growth in our China automotive replacement channel. These declines were offset partially by growth in industrial applications in EMEA, where we saw growth in the construction and energy end markets. Overall, core sales into emerging and developed markets were lower by 2.8% and 5.8% in the three months ended June 29, 2019, respectively, compared with the prior year period, driven in both cases by declines in sales to the automotive and agriculture end markets.

Net sales during the six months ended June 29, 2019 were $1,614.8 million, down by 6.5%, or $112.3 million, compared with net sales during the prior year period of $1,727.1 million. Our net sales for the six months ended June 29, 2019 were adversely impacted by movements in average currency exchange rates of $59.7 million compared with the prior year period, due principally to the strengthening of the U.S. dollar against a number of currencies, including the Euro ($21.5 million), the Chinese Renminbi ($11.1 million) and the Brazilian Real ($5.3 million). In addition, the acquisition of Rapro in April 2018 contributed $7.5 million to our net sales for the six months ended June 29, 2019. Excluding these impacts, core sales decreased by $60.1 million, or 3.5%, during the six months ended June 29, 2019 compared with the prior year period. This decrease was due primarily to lower volumes of $94.7 million, offset partially by $34.6 million of benefit from favorable, inflation-mitigating pricing.

Core sales in our Power Transmission and Fluid Power businesses declined by 4.5% and 1.7%, respectively, for the six months ended June 29, 2019. Approximately 80% of the total decline was driven by slower sales into the automotive channel, which were lower across all regions other than East Asia & India during the six months ended June 29, 2019 compared with the prior year period. Similar to the quarter, this decline was driven primarily by a deceleration in automotive first-fit sales, particularly in EMEA and China. During the six months ended June 29, 2019, sales to industrial first-fit and industrial replacement customers declined on a core basis by 1.5% and 1.2%, respectively. North America and East Asia & India were the primary contributors to this lower industrial growth, with negative 2.0% and negative 8.8% core growth, respectively. These declines were offset partially by industrial growth in EMEA and South America, with industrial first-fit sales in EMEA growing on a core basis by 10.9% or $6.2 million. During the six months ended June 29, 2019, industrial sales to all end markets except agriculture grew compared with the prior year period, with the energy end markets up by 9.2% and transportation up by 3.5%. Regionally, most of this industrial end market growth came from EMEA, which grew on a core basis by 10.8%, offset by a decline of 1.9% in North America, driven by the agriculture end market.

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Cost of sales

Cost of sales for the three months ended June 29, 2019 was $508.5 million, a decrease of 1.8%, or $9.1 million, compared with $517.6 million for the prior year period. The decrease was driven primarily by lower volumes of $33.7 million and favorable movements in average currency exchange rates of $17.4 million, offset partially by a $1.3 million increase due to the acquisition of Rapro in April 2018. Also offsetting these decreases was an impact of $43.5 million from lower manufacturing performance driven by the lower absorption of fixed costs on lower production volumes. In addition, a combination of wage and material inflation of $7.4 million increased cost of sales during the three months ended June 29, 2019 compared with the prior year period, though this was more than mitigated by benefits from our procurement initiatives.

Cost of sales for the six months ended June 29, 2019 was $1,006.1 million, a decrease of 2.7%, or $27.6 million, compared with $1,033.7 million for the prior year period. The decrease was driven primarily by lower volumes of $51.9 million and favorable movements in average currency exchange rates which drove a further $40.8 million of the decrease. These decreases were offset partially by a $4.4 million increase in cost of sales due to the acquisition of Rapro in April 2018. Similar to the quarter, lower fixed cost absorption due to reduced production volumes drove the majority of a $47.4 million increase in cost of sales related to manufacturing performance. In addition, cost of sales increased during the six months ended June 29, 2019 due to a combination of wage and material inflation of $22.9 million and $6.0 million of tariff-related cost increases, offset partially by a $13.5 million benefit from procurement initiatives.

Gross profit

Gross profit for the three months ended June 29, 2019 was $301.4 million, down 15.7% from $357.5 million for the prior year period. The decrease was driven primarily by the decreases in volumes of $27.7 million, combined with unfavorable net impacts of movements in average currency exchange rates of $7.7 million. In addition, as discussed above, cost of sales was increased by lower manufacturing performance of $43.5 million, driven by lower fixed cost absorption on lower production volumes, reducing gross profit. This was offset partially by $19.4 million of pricing benefits. Our gross profit margin dropped by 370 basis points to 37.2% for the three months ended June 29, 2019, down from 40.9% for the prior year period. The decline in gross margin is a result of the decelerating demand environment through the quarter discussed above and the lag in our ability to reduce manufacturing costs in the same timeframe. This led to the under absorption of manufacturing costs. We believe that the lower demand environment with which we exited the second quarter will remain for the foreseeable future and therefore we must implement further cost reduction actions to maintain the current gross margin levels.

Gross profit for the six months ended June 29, 2019 was $608.7 million, down 12.2% from $693.4 million for the prior year period. Our gross profit margin dropped by 240 basis points to 37.7% for the six months ended June 29, 2019, down from 40.1% for the prior year period. In both cases, these decreases were driven broadly by the same factors described above.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses for the three months ended June 29, 2019 were $198.0 million compared with $209.8 million for the prior year period. This decrease of $11.8 million was driven primarily by $7.3 million of labor and benefits cost savings and $5.3 million of favorable impacts from movements in average currency exchange rates. These were partially offset by a combination of individually minor items, including expenses associated with operating in a public company environment, increased marketing spend and investments in information and technology improvements.

SG&A expenses for the six months ended June 29, 2019 were $398.5 million compared with $418.4 million for the prior year period. This decrease of $19.9 million was driven primarily $15.3 million of favorable impacts from movements in average currency exchange rates and $5.4 million of labor and benefits cost savings, with minor offsets from increased marketing spend and investments in information and technology improvements.

Transaction-related (income) expenses

Transaction-related income for the three months ended June 29, 2019 was $0.7 million, related to the release of an accrual from a prior period acquisition, compared with an expense of $1.3 million for the prior year period. The transaction-related expenses incurred in the prior year period related primarily to the acquisitions of Techflow Flexibles, Atlas Hydraulics and Rapro.

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Transaction-related income for the six months ended June 29, 2019 was $0.3 million compared with an expense of $6.0 million for the prior year period. Income for the six months ended June 29, 2019 related primarily to the release of an accrual from a prior period acquisition. The transaction-related expenses incurred in the prior year period included $4.2 million related to our initial public offering and a further $0.3 million related to the extension in January 2018 of the maturity of our two revolving credit facilities. The remainder of the transaction-related expenses in the prior year period related to the recent business acquisitions.

Restructuring expenses

Restructuring expenses of $3.9 million, including $0.3 million included in cost of sales, were recognized during the six months ended June 29, 2019 relating primarily to the closure of one of our facilities in France and a strategic restructuring of part of our Asian business. Restructuring expenses of $2.0 million were recognized during the prior year period, predominantly in the second quarter of 2018, relating to the items described above.

Interest expense

Interest expense for the three months ended June 29, 2019 was $39.2 million compared with $39.8 million for the prior year period. Interest expense for the six months ended June 29, 2019 was $77.3 million compared with $99.6 million for the prior year period. Our interest expense was as follows:



	Three months ended				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Debt:
Dollar Term Loan	$	21.2	$	22.7	$	41.9	$	44.5
Euro Term Loan	5.5		5.8		11.1		11.8
Dollar Senior Notes	8.4		8.2		17.0		20.3
Euro Senior Notes	—		—		—		1.3
Other loans	0.3		—		0.3		—
	35.4		36.7		70.3		77.9
Amortization of deferred issuance costs	3.0		2.6		5.5		20.6
Other interest expense	0.8		0.5		1.5		1.1
	$	39.2	$	39.8	$	77.3	$	99.6

Details of our long-term debt are presented in note 14 to the condensed consolidated financial statements included elsewhere in this report.

Interest on debt for the three and six months ended June 29, 2019 decreased when compared with the equivalent prior year periods due primarily to the interest savings from debt repayments, in particular, for the six month period, the repayment of $913.7 million of senior notes in the first quarter of 2018 in conjunction with our initial public offering, in addition to margin reductions that came into effect partway during the prior year period. The amortization of deferred issuance costs was significantly lower in the six months ended June 29, 2019, due to the acceleration in the prior year period of $15.4 million of deferred issuance cost amortization as a consequence of the repayment of debt during the first quarter of 2018.

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Other (income) expenses

Our other (income) expenses were as follows:



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Interest income on bank deposits	$	(1.1	)	$	(0.6	)	$	(2.2	)	$	(1.7	)
Foreign currency loss (gain) on net debt and hedging instruments	0.3			(2.9		)	(0.6		)	(12.3		)
Premiums paid on debt redemptions	—			—			—			27.0
Net adjustments related to post-retirement benefits	(0.6		)	0.6			(1.9		)	1.6
Other	(0.1		)	(0.4		)	(0.1		)	(0.5		)
	$	(1.5	)	$	(3.3	)	$	(4.8	)	$	14.1

Other income for the three months ended June 29, 2019 was $1.5 million, compared with income of $3.3 million in the prior year period. This change was driven primarily by net foreign currency losses of $0.3 million on net debt and hedging instruments for the three months ended June 29, 2019, compared with net gains of $2.9 million in the prior year period.

Net adjustments related to post-retirement benefits were an income of $0.6 million for the three months ended June 29, 2019, compared with an expense of $0.6 million during the prior year period due primarily to the higher expected return on plan assets based on the most recent actuarial valuation.

Other income for the six months ended June 29, 2019 was $4.8 million, which compares with an expense of $14.1 million in the prior year period. This change was driven primarily by the payment in the prior year period of $27.0 million of redemption premiums on repayment of the Euro Senior Notes and Dollar Senior Notes in January and February of 2018. Partially offsetting this cost in the prior year period was a $5.8 million gain on a derivative used to lock in the exchange rate used to repay the Euro Senior Notes.

Net adjustments related to post-retirement benefits were an income of $1.9 million for the six months ended June 29, 2019, compared with an expense of $1.6 million during the prior year period. This was due primarily to the higher expected return on plan assets based on the most recent actuarial valuation. In addition, a $0.7 million settlement gain was recognized in the six months ended June 29, 2019 in relation to the closure of one of our facilities in France.

Income tax expense

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Deferred Tax Assets and Liabilities

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.

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.

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Adjusted EBITDA

Adjusted EBITDA for the three months ended June 29, 2019 was $165.4 million, a decrease of 19.3% or $39.5 million, compared with the prior year period Adjusted EBITDA of $204.9 million. The Adjusted EBITDA margin was 20.4% for the three months ended June 29, 2019, a 300 basis point decrease from the prior year period margin of 23.4%. The decrease in Adjusted EBITDA was driven primarily by lower sales of $65.2 million, which, together with the impact of lower fixed cost absorption on cost of sales, resulted in reduced gross profit of $56.1 million as described above.

Adjusted EBITDA for the six months ended June 29, 2019 was $330.9 million, a decrease of 14.9% or $57.9 million, compared with Adjusted EBITDA of $388.8 million for the prior year period. Adjusted EBITDA margin was 20.5% for the six months ended June 29, 2019, a 200 basis point decrease from the prior year period margin of 22.5%. Similar to the quarter, the decrease in Adjusted EBITDA was driven primarily by lower sales of $112.3 million, which together with the impact of lower fixed cost absorption on cost of sales, resulted in reduced gross profit of $84.7 million as described above. Partially offsetting this decrease were lower SG&A expenses as noted above.

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

Analysis by Operating Segment

Power Transmission (61.9% and 62.0%, respectively, of Gates’ net sales for the three and six months ended June 29, 2019)



	Three months ended
(dollars in millions)	June 29, 2019			June 30, 2018			Period over Period Change
Net sales	$	501.5		$	549.6		(8.8	)%
Adjusted EBITDA	$	105.6		$	133.3		(20.8	)%
Adjusted EBITDA margin (%)	21.1		%	24.3		%



	Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			Period over Period Change
Net sales	$	1,001.0		$	1,095.6		(8.6	)%
Adjusted EBITDA	$	215.5		$	258.6		(16.7	)%
Adjusted EBITDA margin (%)	21.5		%	23.6		%

Net sales in Power Transmission for the three months ended June 29, 2019 were $501.5 million, a decrease of 8.8%, or $48.1 million, when compared with prior year period net sales of $549.6 million. Excluding the adverse impact of movements in average currency exchange rates of $18.9 million, core sales decreased by 5.3%, or $29.2 million, compared with the prior year period. The majority of this decrease was due to lower sales volumes of $38.9 million, offset partially by pricing actions taken in response to inflation.

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Net sales in Power Transmission for the six months ended June 29, 2019 were $1,001.0 million, a decrease of 8.6%, or $94.6 million, when compared with the prior year period net sales of $1,095.6 million. Excluding the adverse impact of movements in average currency exchange rates of $45.0 million, core sales decreased by 4.5%, or $49.6 million, compared with the prior year period. The majority of this decrease was due to lower sales volumes of $65.7 million, offset partially by pricing actions taken in response to inflation.

Power Transmission's lower core growth was driven by sales to automotive first-fit customers, which declined by 10.9% and 11.8% during the three and six months ended June 29, 2019 compared with the prior year periods, due primarily to weak demand in Europe and China resulting from a combination of market softness, macroeconomic headwinds and continuing trade tensions. Sales to automotive replacement customers also contributed to the decline, but less significantly, with core growth lower by 4.5% and 3.7% during the three and six months ended June 29, 2019 compared with the prior year periods. Sales to industrial customers were relatively flat during both the three and six months ended June 29, 2019 compared with the prior year periods, with declining industrial replacement sales being offset by industrial first-fit growth. Industrial sales to the construction and energy end markets grew by 4.6% and 5.7%, respectively, during the three months ended June 29, 2019, offset by weakness in the agriculture end market, particularly in China and Europe, which we expect to continue into the second half of the year. Industrial sales during the six months ended June 29, 2019 grew across all of our end markets, with strong growth in developed markets, particularly in Europe, more than offsetting emerging market weakness, particularly in Asia and South America, although this overall growth in the six months weakened throughout the second quarter.

Our Power Transmission Adjusted EBITDA for the three months ended June 29, 2019 was $105.6 million, a decrease of 20.8% or $27.7 million, compared with prior year period Adjusted EBITDA of $133.3 million. Movements in average currency exchange rates drove $4.1 million of this decrease. Excluding this impact, the decrease in Adjusted EBITDA was driven primarily by lower volumes of $15.9 million, offset partially by the benefits from favorable pricing of $9.6 million. The majority of the remaining decrease was driven by lower manufacturing performance, in particular, lower fixed cost absorption on lower production volumes, offset partially by lower SG&A expenses of $5.5 million. Adjusted EBITDA margin for the three months ended June 29, 2019 was 21.1%, a 320 basis point decline from the prior year period Adjusted EBITDA margin of 24.3%, driven by the impacts described above.

Our Power Transmission Adjusted EBITDA for the six months ended June 29, 2019 was $215.5 million, a decrease of 16.7% or $43.1 million, compared with the prior year period Adjusted EBITDA of $258.6 million. Movements in average currency exchange rates drove $8.6 million of this decrease. Excluding this impact, the decrease in Adjusted EBITDA was driven by similar factors as for the quarter as described above with lower volumes and lower manufacturing performance resulting in decreases in Adjusted EBITDA of $26.6 million and $25.5 million, respectively. Raw material and labor inflation contributed a further $14.2 million of the decrease in Adjusted EBITDA as compared with the prior year period. Partially offsetting these decreases were benefits from pricing of $16.1 million, lower SG&A spending of $8.3 million and benefits from procurement initiatives of $7.5 million. Adjusted EBITDA margin for the six months ended June 29, 2019 was 21.5%, a 210 basis point decline from the prior year period Adjusted EBITDA margin of 23.6%, driven by the impacts described above.

Fluid Power (38.1% and 38.0%, respectively, of Gates’ net sales for the three and six months ended June 29, 2019)



	Three months ended
(dollars in millions)	June 29, 2019			June 30, 2018			Period over Period Change
Net sales	$	308.4		$	325.5		(5.3	)%
Adjusted EBITDA	$	59.8		$	71.6		(16.5	)%
Adjusted EBITDA margin (%)	19.4		%	22.0		%



	Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			Period over Period Change
Net sales	$	613.8		$	631.5		(2.8	)%
Adjusted EBITDA	$	115.4		$	130.2		(11.4	)%
Adjusted EBITDA margin (%)	18.8		%	20.6		%

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Net sales in Fluid Power for the three months ended June 29, 2019 were $308.4 million, a decrease of 5.3%, or $17.1 million, compared with net sales during the prior year period of $325.5 million. Excluding the adverse impact of movements in average currency exchange rates of $6.2 million and the benefit of $1.9 million from the acquisition of Rapro in April 2018, core sales decreased by 3.9%, or $12.8 million, compared with the prior year period. This decrease was driven primarily by lower volumes of $22.5 million, offset partially by pricing actions taken in response to inflation.

Net sales in Fluid Power for the six months ended June 29, 2019 were $613.8 million, a decrease of 2.8%, or $17.7 million, compared with net sales during the prior year period of $631.5 million. Excluding the adverse impact of movements in average currency exchange rates of $14.7 million and the benefit of $7.5 million from the acquisition of Rapro in April 2018, core sales decreased by 1.7%, or $10.5 million, compared with the prior year period. This decrease was due primarily to lower volumes of $29.0 million, offset partially by pricing actions taken in response to inflation.

The lower core sales growth in both the three and six months ended June 29, 2019 was driven primarily by sales to industrial customers, which declined by 5.2% and 2.3%, respectively, during the three and six months ended June 29, 2019 compared with the prior year periods. These declines more than offset the moderate core growth in sales to automotive customers, which grew by approximately 1% in both the three and six months ended June 29, 2019 compared with the prior year periods. Industrial sales into the agriculture end market were particularly weak during both the three and six months ended June 29, 2019, declining by 17.3% and 18.4%, respectively, compared with the prior year periods. Sales to the construction end market were broadly stable for the six months ended June 29, 2019, but declined by 4.0% during the three months June 29, 2019, compared with the prior year periods. Fluid Power had core growth declines across most of its commercial regions in developed markets for the three and six months ended June 29, 2019, particularly North America, more than offsetting core growth in China and South America.

Adjusted EBITDA for the three months ended June 29, 2019 was $59.8 million, a decrease of 16.5%, or $11.8 million, compared with the prior year period Adjusted EBITDA of $71.6 million. The decrease in Adjusted EBITDA was driven primarily by manufacturing performance impacts of $18.7 million (driven by lower fixed cost absorption on lower volumes) together with lower volumes of $8.2 million. Partially offsetting these declines were benefits from pricing actions of $9.7 million, procurement benefits of $3.3 million and lower SG&A expenses of $2.6 million. The Adjusted EBITDA margin consequently decreased by 260 basis points.

Adjusted EBITDA for the six months ended June 29, 2019 was $115.4 million, a decrease of 11.4%, or $14.8 million, compared with the prior year period Adjusted EBITDA of $130.2 million. Similar to the quarter, the decrease in Adjusted EBITDA was driven primarily manufacturing performance impacts of $21.9 million (driven by lower fixed cost absorption on lower volumes), together with lower volumes of $10.4 million and an $8.7 million adverse impact from inflation. These impacts were offset partially by inflation-mitigating pricing and procurement actions. The Adjusted EBITDA margin consequently decreased by 180 basis points.

Liquidity and Capital Resources

Treasury Responsibilities and Philosophy

Our primary liquidity and capital resource needs are for working capital, debt service requirements, capital expenditures, facility expansions and acquisitions. We expect to finance our future cash requirements with cash on hand, cash flows from operations and, where necessary, borrowings under our revolving credit facilities. We have historically relied on our cash flow from operations and various debt and equity financings for liquidity.

From time to time, we enter into currency derivative contracts to manage currency transaction exposures. Similarly from time to time we may enter into interest rate derivatives to maintain the desired mix of floating and fixed rate debt.

As market conditions warrant, we and our majority equity holders, Blackstone and its affiliates, may from time to time, seek to repurchase debt securities that we have issued or loans that we have borrowed in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any such purchases may be funded by existing cash balances or by incurring new secured or unsecured debt, including borrowings under our credit facilities. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may relate to a substantial amount of a particular tranche of debt, with a corresponding reduction, where relevant, in the trading liquidity of that debt. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and result in related adverse tax consequences to us.

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It is our policy to retain sufficient liquidity throughout the capital expenditure cycle to maintain our financial flexibility. We do not anticipate any material long-term deterioration in our overall liquidity position in the foreseeable future, and we believe that as of June 29, 2019 we have adequate liquidity and capital resources for the next twelve months.

Cash Flow

Six months ended June 29, 2019 compared with the six months ended June 30, 2018

Cash provided by operations was $63.8 million during the six months ended June 29, 2019 compared with cash provided by operations of $93.9 million during the prior year period. Operating cash inflow before movements in non-tax operating assets and liabilities was $186.3 million during the six months ended June 29, 2019 compared with $243.4 million during the prior year period, a decrease of $57.1 million which was due largely to the lower operational performance of Gates which flowed through to operating income. Movements in taxes payable were $45.2 million higher during the six months ended June 29, 2019 compared with the prior year period, due primarily to a non-cash increase in tax contingencies associated with the business reorganization in Europe. Movements in non-tax operating assets and liabilities during the six months ended June 29, 2019 gave rise to a decrease of $122.5 million in cash compared with a decrease of $149.5 million in the prior year period. This decrease, or further use of cash, was driven primarily by a combination of a decrease in trade accounts payable linked to lower production volumes and the normal seasonal increases in trade receivables as compared with the beginning of the fiscal year.

Net cash used in investing activities during the six months ended June 29, 2019 was $47.5 million, compared with $173.7 million in the prior year period. Capital expenditures decreased by $72.1 million from $114.2 million in the six months ended June 30, 2018 to $42.1 million in the six months ended June 29, 2019, driven primarily by expenditures in the prior year period related to the expansion of one of our existing facilities and construction of two new facilities. In addition, net cash used in investing activities in the prior year period included $50.9 million of cash paid in relation to the acquisition of Rapro in April 2018.

Net cash used in financing activities was $31.3 million during the six months ended June 29, 2019, compared with $173.0 million net cash used in financing activities in the prior year period. This net outflow in the six months ended June 29, 2019 related primarily to quarterly amortization payments under the term loans, together with $15.0 million of dividend payments to non-controlling shareholders of certain majority-owned subsidiaries. In the prior year period, net cash used in financing activities related primarily to the net cash received from our initial public offering of $799.1 million and the use of those funds (in addition to a portion of cash on hand) to redeem debt of $913.7 million and to pay premiums thereon of $27.0 million. In addition, during the prior year period, we made $16.2 million of dividend payments to non-controlling shareholders of certain majority-owned subsidiaries.

Indebtedness

During the periods presented, our long-term debt in issue consisted principally of two term loans and two unsecured notes. Our long-term debt as of June 29, 2019 and December 29, 2018 was as follows:



	Carrying amount				Principal amount
(dollars in millions)	As of June 29, 2019		As of December 29, 2018		As of June 29, 2019		As of December 29, 2018
Debt:
—Secured
Term Loans (U.S. dollar and Euro denominated)	$	2,399.2	$	2,428.7	$	2,435.4	$	2,458.5
—Unsecured
Senior Notes (U.S. dollar and Euro denominated)	576.7		575.7		568.0		568.0
Other debt	0.2		0.6		0.2		0.6
	$	2,976.1	$	3,005.0	$	3,003.6	$	3,027.1

Details of our long-term debt are presented in note 14 to the condensed consolidated financial statements included elsewhere in this quarterly report.

During January 2018, upon completion of our initial public offering, the applicable margins on each of the term loans was reduced by a further 0.25%, as agreed as part of the refinancing completed in November 2017.

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During the first quarter of 2018, Gates redeemed in full its outstanding €235.0 million of Euro Senior Notes and made partial redemptions of the Dollar Senior Notes. All of these prepayments, totaling $913.7 million in principal, $27.0 million in redemption premiums and $3.1 million in accrued interest, were funded by the net proceeds from our initial public offering of approximately $799.1 million, with the remainder of the funds coming from cash on hand.

Dollar and Euro Term Loans

Our secured credit facilities include a Dollar Term Loan credit facility and a Euro Term Loan credit facility that were drawn on July 3, 2014. These facilities mature on 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. As of June 29, 2019, borrowings under the Dollar Term Loan facility, which currently bears interest at LIBOR, subject to a floor of 1.00%, plus a margin of 2.75%, bore interest at a rate of 5.15% per annum. The Dollar Term Loan interest rate is re-set on the last business day of each month. As of June 29, 2019, the Euro Term Loan bore interest at Euro LIBOR, which is currently below 0%, subject to a floor of 0%, plus a margin of 3.00%.



	Three months ended					Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018		June 29, 2019			June 30, 2018
(Loss) gain recognized in statement of operations	$	(8.1	)	$	36.6	$	5.3		$	29.1
(Loss) gain recognized in OCI	(1.4		)	3.4		(0.7		)	(6.8		)
Total (losses) gains	$	(9.5	)	$	40.0	$	4.6		$	22.3

During the three and six months ended June 29, 2019, the above net transactional foreign exchange gains and losses recognized in the other (income) expenses line have been substantially offset by net foreign exchange movements on Euro-denominated intercompany loans as part of our overall hedging strategy.

Unsecured Senior Notes

The Euro Senior Notes were redeemed in full in January 2018 and as of June 29, 2019, there were $568.0 million of Dollar Senior Notes outstanding. These Dollar Senior Notes are scheduled to mature on July 15, 2022 and bear interest at an annual fixed rate of 6.00% with semi-annual interest payments.

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	Three months ended				Six months ended
(dollars in millions)	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Loss recognized in statement of operations	$	—	$	—	$	—	$	(4.2	)
Loss recognized in OCI	—		—		—		(5.0		)
Total losses	$	—	$	—	$	—	$	(9.2	)

Revolving Credit Facility

Gates also has a secured revolving credit facility, maturing on January 29, 2023, that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million, with a letter of credit sub-facility of $20.0 million. This facility matures on January 29, 2023, 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.

As of both June 29, 2019 and December 29, 2018, there were no drawings for cash under the revolving credit facility and there were no letters of credit outstanding.

Asset-Backed Revolver

Gates has a revolving credit facility backed by certain of its assets in North America. The facility allows for loans of up to a maximum of $325.0 million ($321.5 million as of June 29, 2019, compared with $325.0 million as of December 29, 2018, based on the values of the secured assets on those dates) with a letter of credit sub-facility of $150.0 million within this maximum. This facility matures on January 29, 2023, 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.

As of June 29, 2019 and December 29, 2018, there were no drawings for cash under the asset-backed revolver. The letters of credit outstanding under the asset-backed revolver were $50.3 million and $57.8 million as of June 29, 2019 and December 29, 2018, respectively.

Non-guarantor subsidiaries

The majority of the Company’s U.S. subsidiaries are guarantors of the senior secured credit facilities.

For the six months ended June 29, 2019, before intercompany eliminations, our non-guarantor subsidiaries represented approximately 69% of our net sales and 62% of our EBITDA as defined in the financial covenants attaching to the senior secured credit facilities. As of June 29, 2019, before intercompany eliminations, our non-guarantor subsidiaries represented approximately 81% of our total assets and approximately 67% of our total liabilities. After adjusting for intercompany loans payable and receivable by Finco Omaha Limited, a non-guarantor intermediate holding company, and certain changes in intercompany relationships related to our IPO structure, our non-guarantor subsidiaries represented approximately 70% of our total assets and approximately 23% of our total liabilities. The intercompany loan asset and liability held by Finco Omaha Limited largely offset each other.

Net Debt

During the six months ended June 29, 2019, our net debt decreased by $11.1 million from $2,603.7 million as of December 29, 2018 to $2,592.6 million as of June 29, 2019. Excluding changes in foreign currency exchange rates, the decrease in cash during the six months ended June 29, 2019 broadly offset the decrease in debt resulting from the normal quarterly amortization payments made under the term loans.

Movements in foreign currency exchange rates had a favorable net impact of $7.2 million on net debt during the six months ended June 29, 2019, the majority of the movement relating to the impact on our Euro-denominated debt of the weakening of the Euro against the U.S. dollar.

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Borrowing Headroom

As of June 29, 2019, our asset-backed revolving credit facility had a borrowing base of $321.5 million, being the maximum amount we can draw down based on the current value of the secured assets. The facility was undrawn for cash but there were letters of credit outstanding against the facility amounting to $50.3 million. We also have a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million.

In total, our committed borrowing headroom was $456.2 million, in addition to cash balances of $411.0 million.

Non-GAAP Measures

EBITDA and Adjusted EBITDA

EBITDA is a non-GAAP measure that represents net income or loss for the period before the impact of income taxes, net interest and other expenses, depreciation and amortization. EBITDA is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).

Management uses Adjusted EBITDA as its key profitability measure. This is a non-GAAP measure that represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. We use Adjusted EBITDA as our measure of segment profitability to assess the performance of our businesses and it is used for total Gates as well because we believe it is important to consider our profitability on a basis that is consistent with that of our operating segments, as well as that of our peer companies with a similar leveraged, private equity ownership history. We believe that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the performance of our businesses.

During the periods presented, the items excluded from EBITDA in 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;


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


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

Differences exist among our businesses and from period to period in the extent to which their respective employees receive share-based compensation or a charge for such compensation is recognized. We therefore exclude from Adjusted EBITDA the non-cash charges in relation to share-based compensation in order to assess the relative performance of our businesses.

We exclude from Adjusted EBITDA those acquisition-related costs that are required to be expensed in accordance with U.S. GAAP, in particular, the effect on cost of sales of the uplift to the carrying amount of inventory held by entities acquired by Gates. We also exclude costs associated with major corporate transactions because we do not believe that they relate to our performance. Other items are excluded from Adjusted EBITDA because they are individually or collectively significant items that are not considered to be representative of the performance of our businesses. During the periods presented, we excluded restructuring expenses that reflect specific, strategic actions taken by management to shutdown, downsize, or otherwise fundamentally reorganize areas of Gates' business; the net gain or loss on disposals of assets other than in the ordinary course of operations and gains and losses incurred in relation to non-Gates businesses disposed of in prior periods; and significant impairments of intangibles and of other assets, representing the excess of their carrying amounts over the amounts that are expected to be recovered from them in the future.

EBITDA and Adjusted EBITDA exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with, not as substitutes for, profit or loss for the period. Management compensates for these limitations by separately monitoring net income from continuing operations for the period.

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The following table reconciles net income from continuing operations, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Net income from continuing operations	$	26.7		$	92.9		$	631.8		$	122.3
Income tax expense (benefit)	37.5			11.5			(502.2		)	23.2
Net interest and other expenses	37.7			36.5			72.5			113.7
Depreciation and amortization	56.2			54.6			112.3			109.6
EBITDA	158.1			195.5			314.4			368.8
Transaction-related (income) expenses	(0.7		)	1.3			(0.3		)	6.0
Impairment of intangibles and other assets	—			0.1			—			0.4
Restructuring expenses	0.3			2.3			3.6			2.0
Share-based compensation expense	3.8			1.6			6.4			3.2
Sponsor fees (included in other operating expenses)	2.0			2.1			3.8			4.0
Impact of fair value adjustment on inventory (included in cost of sales)	—			0.3			—			0.3
Inventory adjustments (included in cost of sales)	0.3			0.8			0.3			0.8
Severance-related expenses (included in cost of sales)	0.5			—			0.5			—
Other operating (income) expenses	(0.1		)	1.0			1.0			3.4
Other non-recurring adjustments (included in SG&A)	1.2			(0.1		)	1.2			(0.1		)
Adjusted EBITDA	$	165.4		$	204.9		$	330.9		$	388.8

Adjusted EBITDA Margin

Adjusted EBITDA margin is a non-GAAP measure that represents Adjusted EBITDA expressed as a percentage of net sales. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.



	Three months ended						Six months ended
(dollars in millions)	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Net sales	$	809.9		$	875.1		$	1,614.8		$	1,727.1
Adjusted EBITDA	$	165.4		$	204.9		$	330.9		$	388.8
Adjusted EBITDA margin (%)	20.4		%	23.4		%	20.5		%	22.5		%

Core growth reconciliations

Core sales growth is a non-GAAP measure that represents net sales for the period excluding the impacts of movements in average currency exchange rates and the first-year impacts of acquisitions and disposals. We present core growth because it allows for a meaningful comparison of year-over-year performance without the volatility caused by foreign currency gains or losses or the incomparability that would be caused by the impact of an acquisition or disposal. Management believes that this measure is therefore useful for securities analysts, investors and other interested parties to assist in their assessment of the operating performance of our businesses. The closest GAAP measure is net sales.

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	Three months ended June 29, 2019

(dollars in millions)	Power Transmission			Fluid Power			Total
Net sales	$	501.5		$	308.4		$	809.9
Impact on net sales of movements in currency rates	18.9			6.2			25.1
Impact on net sales from recent acquisitions	—			(1.9		)	(1.9		)
Core revenue	$	520.4		$	312.7		$	833.1

Net sales for the three months ended June 30, 2018	549.6			325.5			875.1
Decrease in net sales on a core basis (core revenue)	$	(29.2	)	$	(12.8	)	$	(42.0	)

Core revenue growth (%)	(5.3		%)	(3.9		%)	(4.8		%)



	Six months ended June 29, 2019

(dollars in millions)	Power Transmission			Fluid Power			Total
Net sales	$	1,001.0		$	613.8		$	1,614.8
Impact on net sales of movements in currency rates	45.0			14.7			59.7
Impact on net sales from recent acquisitions	—			(7.5		)	(7.5		)
Core revenue	$	1,046.0		$	621.0		$	1,667.0

Net sales for the six months ended June 30, 2018	1,095.6			631.5			1,727.1
Decrease in net sales on a core basis (core revenue)	$	(49.6	)	$	(10.5	)	$	(60.1	)

Core revenue growth (%)	(4.5		%)	(1.7		%)	(3.5		%)

Net Debt

Management uses net debt, rather than the narrower measure of cash and cash equivalents and restricted cash which forms the basis for the condensed consolidated statement of cash flows, as a measure of our liquidity and in assessing the strength of our balance sheet.

Management analyzes the key cash flow items driving the movement in net debt to better understand and assess Gates’ cash performance and utilization in order to maximize the efficiency with which resources are allocated. The analysis of cash movements in net debt also allows management to more clearly identify the level of cash generated from operations that remains available for distribution after servicing our debt and post-employment benefit obligations and after the cash impacts of acquisitions and disposals.

Net debt represents the net total of:


•	the principal amount of our debt; and


•	the carrying amount of cash and cash equivalents.

Net debt was as follows:



(dollars in millions)	As of June 29, 2019		As of December 29, 2018
Principal amount of debt	$	3,003.6	$	3,027.1
Cash and cash equivalents	411.0		423.4
Net debt	$	2,592.6	$	2,603.7

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The principal amount of debt is reconciled to the carrying amount of debt as follows:



(dollars in millions)	As of June 29, 2019			As of December 29, 2018
Principal amount of debt	$	3,003.6		$	3,027.1
Accrued interest	16.2			26.6
Deferred issuance costs	(43.7		)	(48.7		)
Carrying amount of debt	$	2,976.1		$	3,005.0

Adjusted EBITDA adjustments for ratio calculation purposes

The financial maintenance ratio in our revolving credit agreement and other ratios related to incurrence-based covenants (measured only upon the taking of certain actions, including the incurrence of additional indebtedness) under our revolving credit facility, our term loan facility and the indenture governing our outstanding notes are calculated in part based on financial measures similar to Adjusted EBITDA as presented elsewhere in this quarterly report, which financial measures are determined at the Gates Global LLC level and adjust for certain additional items such as severance costs, the pro forma impacts of acquisitions and the pro forma impacts of cost-saving initiatives. These additional adjustments during the last 12 months, as calculated pursuant to such agreements, resulted in a net benefit to Adjusted EBITDA for ratio calculation purposes of $7.2 million.

Gates Industrial Corporation plc is not an obligor under our revolving credit facility, our term loan facility or the indenture governing our outstanding notes. Gates Global LLC, an indirect subsidiary of Gates Industrial Corporation plc, is the borrower under our revolving credit facility and our term loan facility and the issuer of our outstanding notes. The only significant difference between the results of operations and net assets that would be shown in the consolidated financial statements of Gates Global LLC and those for the Company that are included elsewhere in this quarterly report is a receivable of $11.8 million and $11.8 million as of June 29, 2019 and December 29, 2018, respectively, due to Gates Global LLC and its subsidiaries from indirect parent entities of Gates Global LLC and additional cash and cash equivalents held by the Company of $4.7 million and $1.1 million as of June 29, 2019 and December 29, 2018, respectively.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Our market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. 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. Our objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates and interest rate movements. For a discussion of quantitative and qualitative disclosures about market risk, please refer to our annual report from which our exposure to market risk has not materially changed.

Item 4: Controls and Procedures

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of June 29, 2019, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

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Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1: Legal Proceedings

Information regarding legal proceedings is incorporated into this Part II, Item 1 from note 20 of the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A: Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in Gates’ annual report, which could materially affect the Company’s business, financial condition, operating results or liquidity or future results. The risks described in the annual report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its results of operations, financial condition or liquidity. There have been no material changes to the risk factors disclosed in the annual report.

Item 6: Exhibits



Exhibit No.	Description
3.1	Certificate of Incorporation of Gates Industrial Corporation plc (incorporated by reference from Exhibit 3.1 to the registrant’s Amendment No. 1 to its Registration Statement on Form S-1, filed on January 8, 2018 (File No. 333-222310)).
3.2	Articles of Association of Gates Industrial Corporation plc, effective May 23, 2019*
31.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101	The following financial information from Gates Industrial Corporation's Quarterly Report on Form 10-Q for the three and six months ended June 29, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2019 and June 30, 2018, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 29, 2019 and June 30, 2018, (iii) Condensed Consolidated Balance Sheets as of June 29, 2019 and December 29, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2019 and June 30, 2018, (v) Condensed Consolidated Statements of Shareholders' Equity, and (vi) Notes to the Condensed Consolidated Financial Statements.*

* Filed herewith.

** Furnished herewith.

† Management contract or compensatory plan or arrangement.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



GATES INDUSTRIAL CORPORATION PLC (Registrant)
By:	/s/ David H. Naemura
	Name:	David H. Naemura
	Title:	Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)

Date: August 7, 2019