2021 ANNUAL
REPORT
HIGHLY
ENGINEERED
INDUSTRIAL
COMPONENTS
PERFORMING
MISSION-
CRITICAL
FUNCTIONS.
For more than a century, Gates has pushed the
boundaries of materials science to engineer
products that play essential roles in a diverse
range of applications with natural replacement
cycles. Our innovations in power transmission
and fluid power solutions serve a wide variety of
end markets, including diversified industrial,
personal mobility, automotive, energy and
resources and industrial on/off-highway.
GATES 2021 ANNUAL REPORT
2021
AT A GLANCE
$3.5B
Revenue
21.7% Core Growth
$736M
Adj. EBITDA
21.2% Margin
$295M
Free Cash Flow
22.3% Growth
$1.37
Adj. EPS
95.7% Growth
22.4%
ROIC
720 bps increase
Geographies
Segments
Greater
China
12%
East Asia
& India
11%
South
America
4%
Fluid
Power
$1.3B
Channels
Replacement
63%
Europe,
Middle East
& Africa
27%
North
America
46%
Power
Transmission
$2.2B
First-Fit
(OEM)
37%
This Annual Report includes certain non-GAAP financial measures, which management believes are useful to investors. Non-GAAP financial measures should be considered only
as supplemental to, and not as superior to, financial measures prepared in accordance with GAAP. For additional information, please see the section Non-GAAP Measures in Item
7 of this report as well as the supplemental reconciliations at the end of this document.
GATES 2021 ANNUAL REPORT
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Energy &
Resources
5%
Industrial
On-Highway
9%
Auto OEM
10%
Industrial
Off-Highway
20%
Personal
Mobility
4%
Auto
Replacement
31%
Diversified
Industrial
21%
END MARKETS SUPPORTED
BY SECULAR TAILWINDS.
Numerous secular trends support demand for our products across end markets. Propulsion
technologies in personal mobility and automotive applications are being electrified. A focus on
efficiency and sustainability is driving increasing levels of automation in factories and warehouses
along with an increase in freight transportation. Global infrastructure is broadly outdated and
demand for traditional and renewable energy capabilities is rising. Gates products play mission-
critical roles in all of these trends, enabling reliable, efficient and safe operation across a wide
range of applications.
GATES 2021 ANNUAL REPORT
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We are not just an employer
across the global communities
in which we operate; we live in
these communities and believe
it is our responsibility
to give back
We view our relationships with customers as long-term
partnerships, with many of them extending back over
multiple decades. Our relentless focus on serving our
customers with differentiated technology to solve complex
problems in mission-critical applications and provide world-
class service are key elements of Gates’ DNA.
Finally, to our shareholders, who have entrusted us with
their capital, we are committed to continuous improvements
in our performance to ultimately maximize cash flow
generation and efficiently allocate it across a range of
attractive options. In combination with maximizing value for
all of our stakeholders, we expect this operating philosophy
to deliver solid returns for shareholders.
A key part of our commitment to stakeholders involves
continuing to advance our ESG initiatives under our G-T-E-S
framework through ethical and comprehensive corporate
Governance, innovative Technology solutions, improving
Environmental sustainability and community Stewardship to
enhance the experiences of our employees and advance our
society. Our Eco-Innovation™ efforts, in particular, are
providing tangible benefits for both us and our customers,
with a sustainability focus core to all aspects of our product
and process development. These efforts and our resulting
new products help our customers meet their sustainability
goals by improving the efficiency, uptime and safety of their
factories and equipment. For our own operations, our new
products and processes are also designed to minimize scrap
and waste, reduce energy and water consumption and utilize
more environmentally friendly materials.
WITH RESPECT TO OUR PERFORMANCE IN 2021,
WE MADE GREAT PROGRESS ON OUR STRATEGIC PRIORITIES:
Above-Market
Growth
Margin
Expansion
Putting Capital
to Work
DEAR FELLOW
SHAREHOLDERS,
After an unprecedented year in 2020, 2021 also presented a
number of new challenges to our business in the form of
well-documented constraints with material and labor
availability, logistics disruptions as well as the highest rate of
inflation in nearly 40 years. Despite these challenges, we
delivered a banner year, driven by the resilient nature of our
business and the perseverance shown by our team globally.
Throughout the difficult environments of the past few years,
we’ve relied on our leadership model, which highlights our
operating philosophy and the underlying commitments to all
of our stakeholders.
Our employees, along with their families, have shown
tremendous dedication in overcoming the challenges
presented by the pandemic. It is our responsibility to ensure
they have a safe work environment and an opportunity to
build their careers as part of the global Gates team.
We are not just an employer across the global communities
in which we operate; we live in these communities and
believe it is our responsibility to give back. We accomplish
this through charitable giving by our Gates Industrial
Corporation Foundation and donating our time to worthy
causes with personal and local engagement.
GATES 2021 ANNUAL REPORT
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Live Our Core Values
Environmental Stewardship
Continously Improve
Build Careers
Develop Our Talent
Think Globally
C
O
M
GOVERNANCE
M
U
GG
Be Engaged
Give Back
N
ITI
E
S
E M PLOYEES
SS
STEWARDSHIP
Provide Attractive Returns
H
A
R
E
H
S
Efficiently Allocate Capital
Drive Predictable Results
O
L
D
E
R
S
ENVIRONMENT
EE
Enable Customer Growth
Solve Complex Problems
Differentiate With Technology
TECHNOLOGY
TT
CUSTO M ERS
Given our strengthened
balance sheet, we remain
excited about the opportunities
we have ahead of us to deploy
capital and provide value for
our shareholders
Grow Above The Market
World-Class Delivery & Quality
Above-Market Growth. Both of our product segments saw
strong growth, with total revenue up 24% compared to 2020.
Beyond just our end markets recovering from the pandemic,
this growth was driven by our exposure to key secular trends
from infrastructure build-out to personal mobility and
automation in factories and warehouses, as well as executing
on our focused growth initiatives. Our industrial chain-to-belt,
personal mobility and fluid power initiatives demonstrated
strong growth and benefited from our continued progress on
new product introductions, deploying new and upgraded digital
tools and continuing to invest in our commercial organizations.
We believe the investments we’ve made in our growth
initiatives, combined with accelerating secular tailwinds,
provide opportunity for us to continue our track record of
above-market growth.
Margin Expansion. The Gates Production System, or GPS, is
a core part of the Gates Operating System. GPS focuses on
continuously improving our culture of safety, quality, and
operational efficiency across our global footprint. We relied
upon GPS, as well as our in-region, for-region strategy, to
navigate not only the inflation, supply chain and labor
challenges we faced in 2021, but also the significant increase
in production volumes, particularly in the first half of the year.
In this dynamic environment, we delivered solid Adjusted
EBITDA margin expansion of over 300 basis points. In addition
to margins, our operating performance contributed to strong
earnings growth as well, with Adjusted EPS up nearly 100%
compared to 2020. We also launched a comprehensive
initiative in 2021 to reduce the complexity of our business. Our
product innovation efforts are allowing us to cover a broader
range of customer applications with a reduced number of
different product constructions and our product line and
commercial teams are driving a structured process to reduce
complexity and support greater operational efficiency. This is
just one example of initiatives we have in place to drive
improvement and contribute to future margin expansion.
sheet, combined with the strong cash generation capabilities
of our business, provide us with significant capital allocation
flexibility. We continued to invest in our key organic growth
initiatives through the pandemic, and this will remain a
priority moving forward. Furthermore, we announced a $200
million share repurchase authorization late in the year, which
we immediately began executing on to return capital to our
shareholders. Given our strengthened balance sheet, we
remain excited about the opportunities we have ahead of us
to deploy capital and provide value for our shareholders.
As we look to the future, we are mindful of the geopolitical
uncertainty in Europe and hope for a swift, peaceful end to
the hostilities being perpetrated against Ukraine. Although we
do not have a direct presence in Ukraine, our facilities in the
region have many Ukrainian associates whose safety and
well-being are top of mind, and for whom we are providing
direct monetary and other assistance during this difficult
time - another example of how our employees step up and
demonstrate our core values during times of crisis.
I would like to thank all of our associates globally for their
commitment and flexibility in working together to deliver an
exceptional performance in 2021 under difficult conditions. I
would also like to thank our shareholders for their continued
trust and support. We have delivered during challenging
times based on the investments we have been making and
are committed to continuing to execute on our key strategic
initiatives. While I am quite proud of our results during the
past several years, I also believe that we have much to look
forward to in the future.
Sincerely,
Putting Capital to Work. We exited 2021 with a
strengthened balance sheet, having reduced our net leverage
by 40% during the course of the year. Our current balance
Ivo Jurek
Chief Executive Officer
GATES 2021 ANNUAL REPORT
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2022
or
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
(State or other jurisdiction of
incorporation or organization)
98-1395184
(I.R.S. Employer
Identification Number)
1144 Fifteenth Street, Denver, Colorado 80202
(Address of principal executive offices)
(Zip Code)
(303) 744-1911
(Registrant’s telephone number, including area code)
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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒
Non-accelerated filer ☐
Accelerated filer
☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold as of the last business day of the registrant's most recently completed second fiscal quarter was $1,210.1 million.
As of February 4, 2022, there were 291,345,897 ordinary shares of $0.01 par value outstanding.
Portions of the registrant's definitive Proxy Statement to be delivered to stockholders in connection with its 2022 annual general meeting of shareholders are
incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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5
14
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34
34
34
35
35
35
36
52
54
54
55
55
55
56
56
56
56
56
56
57
57
59
60
3
Forward-looking Statements
This Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (this “annual 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 estimates and expectations with
respect to, among other things, our future 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. You should not place undue reliance on
these forward-looking statements. Although such statements are based on management’s current estimates and expectations and/or
currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain and are subject to
risks and uncertainties that could cause our actual results to differ materially from what may be inferred from such statements. Factors
that could cause or contribute to such differences include those described under “Part I - Item 1A. Risk Factors” of this annual report.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in
this annual report and in our other periodic filings with the Securities and Exchange Commission (the “SEC”). Gates Industrial
Corporation plc 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.
Financial Statement Presentation
ABOUT THIS ANNUAL REPORT
Gates Industrial Corporation plc is a public limited company that was incorporated under the United Kingdom Companies Act
2006 on September 25, 2017 and is registered in England and Wales.
Certain monetary amounts, percentages and other figures included elsewhere in this annual 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 annual report are expressed in United States of America (the “U.S.”) dollars, unless indicated otherwise.
Certain Definitions
As used in this annual report, unless otherwise noted or the context requires otherwise:
•
•
•
“Gates,” the “Company,” “we,” “us” and “our” refer to Gates Industrial Corporation plc and its consolidated subsidiaries;
“Fiscal 2021” refers to the fiscal year ended January 1, 2022, “Fiscal 2020” refers to the fiscal year ended January 2,
2021, “Fiscal 2019” refers to the fiscal year ended December 28, 2019; and
“Blackstone” or “our Sponsor” refer to investment funds affiliated with Blackstone Inc., which, although no individual
fund owns a controlling interest in us, together represent our current majority owners.
4
PART I
Item 1. Business
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, including industrial off-highway end markets such as construction and agriculture, industrial on-highway end
markets such as transportation, diversified industrial, energy and resources, automotive, and mobility and recreation. Our net sales
have historically been, and remain, highly correlated with industrial activity and utilization, and not with any single end market given
the diversification of our business and high exposure to replacement markets. 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 over 110 years 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 natural, and often
preventative, replacement cycles that drive 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.
Gates’ business is well-balanced and diversified across products, channels and geographies, as highlighted in the following
charts showing breakdowns of our Fiscal 2021 net sales of $3,474.4 million.
BY PRODUCT CATEGORY
BY CHANNEL
36%
64%
Power Transmission
Fluid Power
37%
63%
Replacement
First-Fit
BY GEOGRAPHY
4%
11%
12%
27%
46%
North America
Europe, Middle East & Africa
Greater China
East Asia & India
South America
Our History and Recent Developments
On October 1, 1911, Charles Gates, Sr. purchased the Colorado Tire and Leather Company, a manufacturer of steel-studded
bands of leather that attached to tires to extend their mileage. In 1917, the Company commercialized the V-belt, which used rubber
and woven threading instead of rope belts, which were more commonly used at that time. In 1963, we built the first of many
international facilities in Erembodegem, Belgium, followed by Jacarei, Brazil, in 1973. In 1986, we acquired the Uniroyal Power
Transmission Company, which included an interest in the Unitta joint venture that lay the groundwork for Gates’ growth in the Asia-
Pacific region. We have financial and operational control over the joint venture, and as such, consolidate it in our financial statements.
5
In 1996, Gates was acquired by a publicly held engineering firm based in the United Kingdom (“U.K.”), Tomkins plc, which
was itself acquired by Onex Partners and the Canada Pension Plan Investment Board, who proceeded to divest certain of
Tomkins plc’s businesses under a new parent entity, Pinafore Holdings B.V. Gates was acquired by Blackstone in July 2014 and in
2015 established a new executive leadership team with Ivo Jurek as Chief Executive Officer. In January 2018, Gates completed an
initial public offering (“IPO”), listing on the New York Stock Exchange (“NYSE”).
We maintain an active acquisition pipeline. In 2018, we acquired Rapro, based in Turkey, and in 2017 we closed two
transactions, Techflow Flexibles in the U.K. and Atlas Hydraulics in North America. All three of these acquisitions have been focused
on expanding our presence in industrial markets with new products, capabilities, capacity and geographic reach. In addition, we
continue to invest organically in new production capacity. During Fiscal 2018, we opened two new facilities located in Poland and in
Mexico, and we also expanded our Changzhou facility in China.
Our Solutions
We operate our business on a product-line basis through our two reporting segments - Power Transmission and Fluid Power.
See note 4 to our audited consolidated financial statements included elsewhere in this report for additional information.
We sell our products under the Gates brand in all of the geographies and end markets we serve. Our power transmission segment
includes elastomer drive belts and related components used to efficiently transfer motion in a broad range of applications. Power
transmission products represented approximately 64% of our total net sales for Fiscal 2021. Our fluid power segment includes hoses,
tubing and fittings designed to convey hydraulic fluid at high pressures in both mobile and stationary applications, and other high-
pressure and fluid transfer hoses used to regulate the conveyance of various fluids. Our fluid power products represented
approximately 36% of our net sales for Fiscal 2021.
Our power transmission and fluid power products are often critical to the functioning of the equipment, process or system in
which they are components, such that the cost of downtime or potential equipment damage is high relative to the cost of our products.
Our products are therefore replaced not only as a result of normal wear and tear, but also preemptively as part of ongoing, normal
maintenance to the broader system.
We have a broad portfolio of both power transmission and fluid power products in the end markets we serve. We have a long
history of focusing on customer engagement and training, driving product innovation and providing best-in-class order fulfillment
services.
Power Transmission. Our Power Transmission solutions enable and control motion. They are used in applications in which
belts, chains, cables, geared transmissions or direct drives transfer power from an engine or motor to another part or system. Belt-
based power transmission drives typically consist of either a synchronous belt or an asynchronous belt (V-belt, CVT belt or Micro-V®
belt) and related components (sprockets, pulleys, water pumps, tensioners or other accessories). Within our Power Transmission
segment, we offer solutions across the following key application platforms:
•
Stationary drives: fixed drive systems such as those used in a factory driving a machine or pump, on a grain elevator
driving the lift auger or in a distribution center driving automated equipment such as conveyor lines or robotic picking
machines;
• Mobile drives: drives on a piece of mobile machinery such as a combine harvester or a road compactor;
•
•
•
Engine systems: synchronous drives and related components for cam shafts and auxiliary drives and asynchronous
accessory drives for air conditioning (“A/C”) compressors, power steering, alternators and starter/generator systems;
Personal mobility: drives on motorcycles, scooters, bicycles, both traditional and electric, as well as on snowmobiles and
other power sports vehicles that are used to transfer power between the power source and the drive wheel(s) or track; and
Vertical lift: elevators, cargo lifts and other applications in which a belt, cable, chain or other lifting mechanism is used to
carry load.
Customers choose power transmission solutions based on a number of factors, including application requirements such as load,
speed, gear ratio, temperature, operating environment, ease of maintenance, noise, efficiency and reliability, as well as the support
they receive from their suppliers, including application-specific engineering services. Belt-based drive systems have many advantages
over other alternatives, as they are typically clean, low-maintenance, lubrication-free, quiet with low-vibration, lightweight, compact,
6
energy-efficient, durable and reliable. In applications where these advantages are valued, customers frequently choose belts over other
forms of power transmission solutions.
Our belts are classified by their general design into asynchronous and synchronous belts; in addition, we also manufacture metal
drive components and assemble certain product kits for the automotive replacement channel.
Asynchronous Belts. Asynchronous belts are our highest-volume products and are used in a broad range of applications.
Asynchronous belts are made of proprietary rubber formulations, textiles and embedded cords for reinforcement. We were a pioneer in
the design and manufacturing of V-belts, which draw their name from the shape of their profile. We also manufacture “ribbed” V-
belts, which are belts with lengthwise V-shaped grooves, which we market under the Micro-V® name. This design results in a thinner
belt for the same drive surface, making it more flexible and offering improved efficiency through lower friction losses.
In industrial end markets, asynchronous belts have a wide variety of applications, including use in pump drives, manufacturing
lines, HVAC systems, industrial, truck, bus and marine engines, forestry and mining equipment and many other applications.
Continuously-variable transmission (“CVT”) systems often found in scooters, power sports vehicles and other applications use a
specialized V-belt known as a CVT belt. In automotive applications, our asynchronous belts perform functions that include
transferring power from the crankshaft to accessory drive components such as the alternator, A/C compressor, power steering system,
water pump and, in some vehicles, a belt/starter generator system used in start/stop accessory drive systems to improve fuel economy.
During Fiscal 2018, Gates introduced a new Micro-V® platform for engine accessory drive systems. The combination of newly
developed material compounds and product design reduces belt weight and results in lower bending stiffness. These improvements
enable tighter pulley configurations and reduced drive bending losses as compared to existing belt technologies; lower losses result in
reduced energy consumption, CO2 emissions and heat generation.
Synchronous Belts. Synchronous belts, also known as timing belts, are non-slipping mechanical drive belts. They have teeth
molded onto the inner surface and run over matching toothed pulleys or sprockets. Synchronous belts experience no slippage and are
often used to transfer motion for indexing or timing purposes, as well as for linear positioning and positive drive conveying. They are
typically used instead of chains or gears and we believe have a number of advantages over these alternatives, including less noise, no
need for lubrication, improved durability and performance and a more compact design. Our synchronous belts are made of a flexible
polymer over fabric reinforcement, which often consists of Kevlar, aramid or carbon fibers.
Examples of industrial applications include use in HVAC systems, food processing and bottling plants, mining and agricultural
equipment, automated warehouse systems and robotics. Our synchronous belts are also utilized in personal mobility equipment,
including both traditional and electric motorcycles, bicycles and scooters, applications in which clean, quiet performance is often
valued. In automotive applications, our synchronous belts are used to synchronize the rotation of the engine crankshaft with the
camshaft due to engine combustion in a valve train system, as well as in electric power steering and parking brake systems which are
present in internal-combustion, hybrid and electric vehicles.
During Fiscal 2019, Gates launched a new high-torque synchronous belt for industrial applications, the PowerGrip® GT®4. This
new belt leverages Gates’ materials science and process engineering capabilities, utilizing a belt construction that replaces chloroprene
with an advanced ethylene elastomer formulation that is more environmentally friendly. It has the highest power-carrying capacity in
its segment, a wider operating temperature range and increased chemical resistance, allowing for narrower drives and a broad range of
applications to be served with both first-fit and replacement channel customers.
Metal Drive Components. We manufacture and sell the tensioners and idlers used in belt drive systems. These products are
designed and engineered to work efficiently with our belts. Tensioners are devices that maintain a constant tension in the belt drive
system, thereby ensuring proper function and preventing loss of power or system failure. Tensioners typically employ a spring that
places pressure along the belt for an intricate hold, while still allowing enough movement for vibration and preventing stretching.
Idlers, which sometimes also perform as tensioners, are used to take up extra belt length.
Kits. Our kits for the automotive replacement channel include all of the parts needed by an automotive service shop to perform a
replacement of one of our products. Kits are created for specific vehicle makes and models and typically include belts, tensioners and
idlers, and will sometimes also include water pumps, which are often replaced simultaneously with a timing belt due to the relatively
high labor component in the total cost of a typical replacement. Our kits are convenient for service technicians as they eliminate the
need for more complicated product sourcing. On a comparable quantity basis, kits typically sell at a premium to a loose belt and the
individual related components.
7
Our power transmission products are used in a broad range of applications in end markets including off-highway end markets
such as construction and agriculture, on-highway end markets such as transportation, diversified industrial, energy, automotive and
consumer products. The majority of our Fiscal 2021 net sales came from replacement channels, which provide high-margin, recurring
revenue streams and are driven by attractive market trends. The bulk of our power transmission replacement business resides in
developed regions, in which a large, aging installed base of equipment follows a natural maintenance cycle and is served by well-
established distribution channels. For example, a combine harvester in North America can have over 25 high-performance belts that
are typically replaced at regular intervals, depending on wear and tear, with end users having access to replacement parts through a
large network of distributors. Similarly, in the North American automotive replacement market, maintenance intervals are well
defined, and miles driven per vehicle and the average vehicle age have generally been increasing, leading to more wear and tear on
vehicles. A smaller portion of our power transmission replacement business is generated in emerging markets, which generally have a
smaller base of installed equipment and relatively nascent distribution channels. As they continue to develop, these replacement
channels in emerging markets represent a significant long-term opportunity for growth.
In addition to our power transmission replacement business, we also serve a wide variety of blue-chip first-fit customers across
all of our end markets. The majority of our automotive first-fit revenues in power transmission tend to come from emerging markets,
where we selectively participate to further strengthen our brand and reinforce the strong position from which we serve the growing
base of installed equipment, as the nascent replacement channels continue to develop. These markets are generally higher-growth and
result in higher-margin business compared to our developed regions.
Fluid Power. Our Fluid Power solutions are used in applications in which hoses and rigid tubing assemblies either transfer
power hydraulically or convey fluids, gases or granular materials from one location to another. Within our Fluid Power segment, we
offer solutions across the following key application platforms:
•
Stationary hydraulics: applications within stationary machinery, such as an injection molding machine or a manufacturing
press;
• Mobile hydraulics: applications used to power various implements in mobile equipment used in construction, agriculture,
mining and other heavy industries;
•
Vehicle systems: applications in thermal management, emissions reduction, turbocharger, air intake and other systems for
electric, hybrid and internal combustion passenger and commercial vehicles; and
• Other industrial: applications in which hoses are used to convey fluids, gases or granular material across several industries
such as food and beverage, other process industries, and oil and gas drilling and refining.
Customers choose fluid power solutions based on a number of factors, including application-specific product performance
parameters such as pressure and temperature ratings, corrosion and leak resistance, weight, flexibility, abrasion resistance and
cleanliness, as well as compliance with standards and product availability. Attributes associated with the supplier, including brand,
global footprint and reputation for reliability, quality and service, are also considered.
Hydraulics. Our hydraulics product line is comprised of hoses, tubing and fittings, offered either as standalone products or
completed assemblies. Our hydraulic products are key components of hydraulic systems in both stationary and mobile equipment
applications. We provide a full selection of hose sizes and construction types for use in a wide variety of working requirements and
conditions. Hydraulic hoses are made of synthetic rubber and reinforced with steel wire or a textile-based yarn, and typically operate at
very high pressures, often in extreme environmental conditions. Hoses are designed for use in specific mechanical applications and
require high levels of quality and durability.
Our hydraulic fittings and tubing are engineered to match the product performance of our hydraulic hoses. The high-pressure
nature of hydraulic systems requires these products have high levels of performance similar to those found in our hydraulic hoses. The
ultimate performance of a hydraulic assembly, in which our products function as part of a hydraulic circuit, depends not only on how
well the components are made, but also on how well they complement each other. In order to ensure compatibility with numerous
applications, our hydraulic fittings are manufactured in a wide assortment of sizes, crimping systems and materials, and are protected
by a range of patents. Our hydraulic products and assemblies are used in construction, agricultural and forestry equipment, as well as
in food and other processing lines and stationary machinery.
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During Fiscal 2018, Gates introduced a new premium product family consisting of hydraulic hoses that are lighter weight and
more flexible. Made with a high-performance reinforcement and robust, abrasion-resistant cover, the MXT line of hydraulic hose is
comprised of universally applicable, high-performance products that meet the needs of a wide range of applications. During Fiscal
2019, we launched the MXG line of hydraulic hose, a flexible, light-weight solution with increased durability and temperature
performance, designed to replace conventional spiral hoses typically used in the most demanding applications. Also in Fiscal 2019, we
launched a smart e-crimper, which is a machine used to attach fittings to hydraulic hoses. In addition to convenient, web-enabled
access to training content and product crimp specs, this new crimper can be used with Gates’ intuitive mobile eCrimp app, which
underwent a comprehensive update in Fiscal 2020.
Thermal and Emissions Management. Our thermal and emissions management and related products perform a variety of
conveyance, emissions reduction and efficiency improvement functions in electric, hybrid and internal combustion passenger and
commercial vehicles. In electric applications, Gates offers hose and water pump solutions for the thermal management system
regulating the battery, inverter, motor(s) and passenger compartment. In internal combustion applications, Gates primarily provides
thermal management hose and water pumps for engine cooling, exhaust filtration hose to reduce harmful emissions and hoses for
functions that improve air intake and engine efficiency.
Industrial Hose. Our industrial hoses are capable of transferring a wide range of substances - chemicals, food, beverages,
petroleum, fuels, bulk materials, water, steam and air - to meet the requirements of a diverse range of applications, including
manufacturing, mining, oil and gas drilling, marine, agriculture, industrial cleaning and construction. Our application engineering
teams work with customers to assist them in selecting the appropriate hose solution to safely meet their operational needs. We
leverage our materials science expertise to design hoses that perform at varying pressures and levels of resistance to chemicals, oil,
abrasion, ozone, flame and both hot and cold temperatures. For performance in extreme environments, many of our industrial hoses
feature both crush-resistant and flexible designs. Gates industrial hoses are highly engineered to meet or exceed a multitude of industry
standards and certifications, and are offered in a range of diameters, lengths and colors to allow customers to differentiate the hoses in
applications. We also offer a wide range of couplings to provide complete assembly solutions.
Our fluid power products are used in numerous applications, including off-highway end markets such as construction and
agriculture, on-highway end markets such as transportation, diversified industrial, energy, automotive and consumer products. The
largest portion of our Fiscal 2021 fluid power revenue came from replacement markets. Within these replacement markets, the
majority of our revenue came from industrial applications. Approximately 16% of our Fiscal 2021 fluid power revenue came from
products sold into the automotive end market, almost all of which was served through the higher-margin replacement channel.
Our Diverse Markets
We participate in many sectors of the industrial and consumer markets. Our products play essential roles in a diverse range of
applications across a wide variety of end markets ranging from harsh and hazardous off-highway applications such as agriculture and
construction, and diversified industrial applications such as automated manufacturing and logistics systems, to everyday consumer
applications such as printers, power washers, automatic doors and vacuum cleaners. Virtually every form of transportation, ranging
from internal combustion and electric trucks, buses and automobiles, to personal mobility vehicles, including motorcycles, bicycles,
and snowmobiles, uses our products.
Our net sales have historically been, and remain, highly correlated with industrial activity and utilization, and not with any
single end market given the diversification of our business and high exposure to replacement markets. Key indicators include
industrial production, industrial sales and manufacturer shipments.
Our products are sold in over 130 countries across our four commercial regions: (1) the Americas; (2) Europe, Middle East &
Africa (“EMEA”); (3) Greater China; and (4) East Asia & India. We have a long-standing presence in each of these regions.
Our commercial capabilities are complemented by our “in-region, for region” manufacturing footprint, which generally allows
us to manufacture products in close proximity to our customers around the world. We have power transmission and fluid power
operations in each commercial region and typically manufacture products for both first-fit customers and replacement customers in the
same factory, which provides for sharing of raw material inputs, improved factory loading and demand leveling, as well as
optimization of capital expenditures.
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Our Channels
We sell our power transmission and fluid power products both as replacement components and as specified components on
original equipment to customers worldwide. During Fiscal 2021, approximately 63% of our net sales were generated from replacement
channels and 37% from first-fit channels globally. Our mix of replacement channel sales to first-fit sales varies by region based on our
market strategy and the maturity of the equipment fleet and channel. For example, in emerging markets such as China, our business is
characterized by a higher first-fit presence, given the relatively underdeveloped replacement channels. We believe that ultimately our
first-fit presence in these emerging markets will allow us to better develop the replacement channels as they mature over time. By
contrast, in North America and EMEA, where there are long-established replacement markets, approximately 68% and 70% of our
Fiscal 2021 net sales, respectively, were derived from these higher-margin replacement channels. In the vast majority of the
applications we serve, we do not need to have been the first-fit provider to serve these applications in the replacement markets.
Replacement. The majority of our sales are generated from customers in replacement channels, who primarily serve a large base
of end users with installed equipment that follows a natural maintenance cycle. Our ability to help replacement channel partners
maximize revenue is an important part of our value proposition. These customers miss sales opportunities if a required product cannot
be obtained quickly, either from a short-lead time order or on-hand inventory.
In addition to our products, we offer digital tools and other content to distributors, installers and end users of equipment
containing our products. We also assist with customer training on product installation and early identification of wear-and-tear on
components, which helps drive sales for our channel customers while mitigating the risk of equipment failure for end users.
First-Fit. We work closely with our first-fit customers by providing application engineering expertise to assist them with
equipment design and selecting the right products to optimize performance. Close interactions between our R&D organization and
customer technical teams provide input into our innovation and product development processes. We selectively participate in first-fit
projects, focusing on opportunities where we are able to differentiate with technology and innovative solutions.
Customers
We maintain long-standing relationships with many customers, who range from local distributors with one location to large,
global manufacturers of equipment. No single customer accounted for more than 10% of our Fiscal 2021 net sales.
Sales and Marketing and Distribution Organization
Our sales and distribution operations are structured to serve our customers efficiently across the globe. We have field
representatives who possess local knowledge of customers and their product and application requirements, giving us the capability to
meet our customers’ product availability needs on short lead times. Our global sales and service support team helps reinforce customer
and distributor relationships by focusing on end markets and customers.
Manufacturing
We have a global, “in region, for region” manufacturing footprint and regional service model that enable us to operate
efficiently and effectively in proximity to our customers. We operate a large number of manufacturing facilities and service centers as
well as several major technical centers giving us a presence in 30 countries throughout the world. Our in-country deployment of
manufacturing and technical resources gives us the capability to meet customer needs rapidly and satisfy regional variations in product
preference, while our scale allows us to service global customers on a world-wide basis.
Competition
We operate in competitive markets and industries that are also very fragmented. We offer our products and solutions across
numerous and varied end markets and geographies through over 100 locations in 30 countries. Consequently, we have many
competitors across our various markets and product offerings. These competitors and the degree of competition vary by product line,
geographic scope, end market and channel. Although each of our markets and product offerings has many competitors, no single
competitor competes with us across all of our products, solutions, channels and end markets. Our global presence and the importance
of product availability make it difficult for smaller, regional and low-cost country manufacturers to penetrate our markets. We
differentiate ourselves on the basis of product performance and quality, breadth of portfolio, customer support and training, service
level, fill rates and product availability.
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Research, Development and Intellectual Property
Applied R&D is important to our businesses and integral to our leading market positions. We have engineering teams in the
U.S., Canada, the U.K., Germany, Spain, Poland, Turkey, Japan, China, Brazil, India, Mexico, Korea and Thailand that focus on the
introduction of new and improved products with a particular emphasis on energy efficiency, safety, the application of technology to
reduce unit and operating costs and improving services to our customers.
As of January 1, 2022, we held more than 2,500 patents and patent applications and 3,200 trademarks in various jurisdictions,
and have elected to protect a variety of technologies and processes as trade secrets. While no individual patent or group of patents,
taken alone, is considered critical to our business, collectively our patents and trademarks provide meaningful protection for our
products and technical innovations.
Materials and Suppliers
We use a wide variety of materials, resulting in a highly diversified mix of inputs, which are sourced from a variety of suppliers
around the world. Generally, we seek to obtain materials in the regions where our products are manufactured to minimize lead times,
as well as transportation and other costs. During Fiscal 2020 and Fiscal 2021, our teams worked closely with suppliers to ensure
sufficient quantities of materials were available for us to continue to serve our customers. Restrictions and added safety measures
introduced in many regions created pressure on freight costs and availability, which, together with increases in certain input prices due
to constrained supply, created challenges for our supply chain and procurement teams, particularly as demand has grew in the second
half of Fiscal 2020 and during Fiscal 2021. Under normal circumstances, we do not typically carry significant inventories of raw
materials in excess of those required to meet our production schedules.
We continually seek to manage commodity and raw material costs using various strategies, including working with our
customers and suppliers on pricing and costs, exploring material substitution opportunities, combining purchase requirements across
regions and changing or qualifying new suppliers when appropriate.
Government Regulation
Our operations, products and properties are subject to extensive U.S. and foreign federal, state, local, and provincial laws and
regulations relating to health, safety and environment (“HSE”) protection, including laws and regulations governing air emissions,
wastewater discharges, waste management and disposal, substances in products, trade control laws, anti-corruption laws, data
protection and privacy laws, and workplace health and safety, as well as the investigation and clean-up of contaminated sites. Under
certain environmental laws, the obligation to investigate and remediate contamination at a facility may be imposed on current and
former owners, lessees or operators or on persons who may have sent waste to that facility for disposal. We are currently performing
environmental investigations and/or remediation at a number of former and current facilities in the U.S. and Canada and are incurring
costs in relation to a number of offsite waste disposal sites. For more information, see “Item 1A. Risk Factors - Risks Related to Legal
and Regulatory Matters”.
Human Capital
As of January 1, 2022, we employed approximately 15,050 full time employees worldwide. Approximately 7,000 of our
employees are located in North America, 4,100 in EMEA, 3,300 in Greater China and East Asia & India, and 650 in South America.
Approximately 68% of our work force consists of production employees, while approximately 24% of our global workforce was
female and 76% male. Of approximately 1,450 managerial employees, 21% were female.
Some of our employees are members of labor unions, and over many years we have been able to maintain successful
relationships with the unions and employment organizations. To date, employee relations have been flexible and constructive as we
continue to pursue lean manufacturing improvements in our plants. Gates employs agency contractors, temporary employees and
contract employees as a relatively small percentage of our workforce. The number of associates in these categories typically varies
with demand on our factories and distribution centers. Gates employs a small number of part-time associates across the globe.
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Oversight and Governance
Our board of directors is actively engaged in the oversight of the Company’s human capital management, including reviewing
the following topics: the Company’s employee health and well-being programs; the Company’s stock incentive plans; the Company’s
performance relative to the acquisition and retention of talent, leadership and development programs, and other initiatives and plans to
help ensure that we have talent positioned to deliver on our strategy.
Health and safety
We care about our employees and we believe that our commercial success is linked to a safe and healthy workforce. We are
therefore committed to responsible business practices through the establishment, implementation, and maintenance of the Gates
Global HSE Standards Manual. We strive for zero injuries and an incident-free workplace and have achieved significant progress
towards this goal through targeted risk reduction activities, improved case management, increased accountability to corrective action
identification and closure, and more effective safety observation programs.
Demonstrating our commitment to safety, beginning in February 2020, we mobilized a centralized crisis response team that
urgently developed and implemented our countermeasure actions across the globe for the novel coronavirus (“COVID-19”) pandemic.
In addition to adhering to or exceeding local government mandates and guidance provided by health authorities, we proactively
implemented quarantine protocols, social distancing policies, working from home arrangements, travel suspensions, frequent and
extensive disinfecting of our workspaces, provision of personal protective equipment, mandatory temperature monitoring and periodic
COVID-19 testing at our facilities. During 2021, where possible, we have made COVID-19 vaccines available to our employees,
holding on-site vaccination clinics at a number of facilities. We may take further actions if required or recommended by government
authorities or if we determine them to be in the best interests of our employees, customers, and suppliers.
Total rewards
Our compensation philosophy is to offer a compensation program that enables us to attract, motivate, reward and retain high-
caliber employees who are capable of creating and sustaining value for our shareholders over the long-term and to design
compensation and benefit programs that provide a fair and competitive compensation opportunity in order to appropriately reward
employees for their contributions to our success. Globally, we offer the opportunity to earn short-term and long-term incentive awards
to eligible employees, including a manufacturing incentive program to many of our production employees.
Employee development and training
Gates is committed to developing and unlocking the potential of our people and we make significant investments in training and
professional development. Our learning and development framework supports the development of leadership and professional skills in
three ways: on-the-job, learning from others, and participating in formal training programs. Some of the specific global and regional
development experiences we offer include a global mentoring program that promotes a diverse and inclusive culture and knowledge
transfer opportunities between our mentors and mentees; a structured succession planning process that identifies key talent and
develops our employees to continue working toward their career goals and early career programs designed to develop talent in
different areas of the business; for example, engineering, commercial and human resources. For our production employees, we provide
skills-based training and certification opportunities.
Through its Compensation Committee, our board of directors also oversees the management continuity planning process,
including reviewing and evaluating the succession plans relating to our chief executive officer and other executive officer positions
and makes recommendations to the board with respect to the selection of individuals to occupy these positions.
Diversity, equity and inclusion
The Gates management team is committed to creating and sustaining a diverse workplace that understands and values individual
differences across demographics, experiences and perspectives. We want to ensure that collaborative and respectful business practices
in a performance-based, supportive environment enable every employee to realize his/her/their career ambitions. To that end, we have
formed a Diversity, Equity & Inclusion (“DE&I”) Steering Committee, consisting of executive leadership, which works with our
DE&I Leadership Council, consisting of representatives of relevant diversity groups across Gates’ businesses, to develop a DE&I
strategy consistent with our corporate values while promoting a culture of inclusion, collaboration, tolerance and equal opportunity.
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In 2020, to further develop our policies, programs and processes, we began a partnership with Catalyst, a global non-profit
organization, to assess both quantitative and qualitative data and to help us ensure success in our initiatives around DE&I. In 2021, we
began the process of implementing recommendations based on our work with Catalyst and look forward to further development of
programs and initiatives identified through this partnership. We believe a diverse and inclusive environment ensures access to the
broadest talent pool as we strive to be an employer of choice for people from all backgrounds.
Additionally, the charter for the Nominating and Governance Committee of our board of directors requires that such committee
review and make recommendations regarding the composition and size of the board in order to ensure the board has the requisite
expertise and its membership consists of persons with sufficiently diverse and independent backgrounds.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are
available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website,
free of charge, at http://investors.gates.com as soon as reasonably practicable after they are filed with or furnished to the SEC.
We maintain an internet site at http://www.gates.com. We use our website as a channel of distribution of company information.
The information we post through this channel may be deemed material. Accordingly, investors should monitor this channel, in
addition to following our press releases, SEC filings and public conference calls, and webcasts. In addition, you may automatically
receive email alerts and other information about Gates when you enroll your email address by visiting the “Investor Resources—Email
Alerts” section of our website at investors.gates.com/investor-resources. Our website and the information contained on or connected to
that site are not incorporated into this report.
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Item 1A. Risk Factors
The risk factors noted in this section, and other factors noted throughout this annual report, describe certain risks and uncertainties
that could cause our actual results to differ materially from those contained in any forward-looking statement and should be
considered carefully in evaluating our company and our business.
In the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have a
material impact on our business, financial condition and results of operations. We have implemented our Enterprise Risk Management
("ERM") process to identify and address significant risks. Our ERM process is a company-wide initiative that is designed with the
intent of prioritizing risks and allocating appropriate resources to address such risks.
Management has identified and prioritized critical risks based on the severity and likelihood of each risk and assigned risk owners to
address each major identified risk area and lead action plans to monitor and mitigate risks, where possible. Our Board of Directors
provides oversight of the ERM process and regularly reviews identified critical risks. The Audit Committee also reviews major
financial risk exposures and the steps management has taken to monitor and control them.
Our goal is to proactively manage risks in a structured approach and in conjunction with the strategic planning process, with the
intent to preserve and enhance shareholder value. However, these and other risks and uncertainties could cause our results to vary
materially from recent results or from our anticipated future results. The risk factors and uncertainties described below, together with
information incorporated by reference or otherwise included elsewhere in this annual report, should be carefully considered.
Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. Additional risks and
uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect our business.
Summary of Risk Factors
We operate in a changing global environment that involves numerous known and unknown risks and uncertainties that could
materially adversely affect our business, financial condition and results of operations. The following is a summary of some of these
risks and uncertainties. This summary should be read together with the more detailed description of each risk factor below.
Summary of Risks Related to Economic and Market Conditions
• We are subject to economic, political and other risks associated with international operations that could adversely affect
our business and our strategy to capitalize on our global reach.
•
The ongoing COVID-19 pandemic has caused severe disruption in the global economy and may continue to have an
adverse impact on our business.
• We may be unable to obtain raw materials or other manufacturing inputs at favorable prices in sufficient quantities, or at
the time we require them.
• We may experience adverse changes in our relationships with, or the financial condition, performance, purchasing patterns
or inventory levels of, key channel partners.
Summary of Risks Related to Our Business and Industry
•
Pricing pressures from our customers may materially adversely affect our business.
• We are dependent on the continued operation of our manufacturing facilities, supply chains, distribution systems and
information technology systems, and a major disruption or closure could have a material adverse effect on our business.
• We may not be able to accurately forecast demand or meet significant increases in demand for our products.
• We may not be able to maintain and enhance our strong brand on which we depend.
• We are dependent on market acceptance of new product introductions and innovations for continued revenue growth.
• We have taken, and continue to take, cost-reduction actions that may expose us to additional risk, and we may not be able
to maintain the level of cost reductions that we have achieved.
•
•
Longer lives of products used in our end markets may adversely affect demand for some of our replacement products.
The development of the replacement market in emerging markets may limit our ability to grow in those markets.
• We may pursue strategic transactions, including acquisitions, divestitures, restructurings, joint ventures, strategic alliances
or investments, which could create risks and present unforeseen integration obstacles or costs.
• We have investments in joint ventures that limit our ability to manage third-party risks associated with these projects.
• We are subject to liabilities with respect to businesses that we have divested in the past.
14
•
•
The loss or financial instability of any significant customer could adversely affect our business.
Societal responses to sustainability issues, including those related to climate change, could adversely affect our business
and performance, including indirectly through impacts on our customers.
Summary of Risks Related to Legal and Regulatory Matters
• We are subject to risks from litigation, legal and regulatory proceedings and obligations, and our insurance may not
provide coverage or may not fully cover future losses we may incur related to these proceedings and obligations or
otherwise.
• Our products could infringe on the intellectual property of others, adversely affecting our business.
•
•
Failure to adequately protect or enforce our intellectual property rights could adversely affect our business.
Failure to develop, obtain, enforce and protect intellectual property rights could adversely affect our business.
• We may be subject to recalls or product liability claims, or may incur costs related to product warranties.
• We are subject to anti-corruption laws in various jurisdictions, as well as other laws governing our international
operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial
measures, and legal expenses, which could materially adversely affect our business, financial condition and results of
operations.
•
Existing or new laws and regulations, including but not limited to those relating to HSE concerns, and the sale of
aftermarket products, may prohibit, burden, restrict or make significantly more costly the sale of our products.
Summary of Risks Related to Cybersecurity and Information Systems
• Cyber-security vulnerabilities, threats and more sophisticated and targeted computer crimes could pose a risk to our
systems, networks, products, solutions, services and data.
•
Information systems failure may disrupt our business and result in financial loss and liability to our customers.
• Global privacy, data protection and data security requirements are highly complex, evolving rapidly, and may increase our
costs to comply.
Summary of Risks Related to Human Capital Management
•
If we lose our senior management or key personnel, our business may be materially and adversely affected.
• We may be materially adversely impacted by work stoppages and other labor matters, including labor shortages and
turnover.
• Certain of our defined benefit pension plans are underfunded, and additional cash contributions may be required.
Summary of Risks Related to Tax Matters
• Changes in our effective tax rate or additional tax liabilities could adversely impact our net income.
• Changes in tax laws could result in additional tax liabilities.
• Relevant tax authorities may no longer treat us as being exclusively a resident of the U.K. for tax purposes.
Summary of Risks Related to Our Indebtedness
• We are subject to risks related to our indebtedness. These include risks related to raising additional capital, paying our
debts and meeting our indebtedness service obligations, interest rate risk, operating and financial restrictions on us and our
subsidiaries, and the risk of failure to comply with the agreements relating to our outstanding indebtedness.
Summary of Risks Related to the Ownership of our Ordinary Shares
• We are subject to risks specific to ownership of our ordinary shares, including those related to being a “controlled
company” within the meaning of the rules of the New York Stock Exchange (“NYSE”), adverse changes in the market
value of our shares, lack of current plans for dividend payments, risks related to future issuances of shares, and risks
specific to holding shares in a U.K. company.
15
Risks Related to Economic and Market Conditions
We are subject to economic, political and other risks associated with international operations that could adversely affect our
business and our strategy to capitalize on our global reach.
A substantial portion of our operations are conducted and located outside the U.S. For Fiscal 2021, approximately 64% of our
net sales originated from outside of the U.S. We have manufacturing, sales and service facilities spanning five continents and sell to
customers in over 130 countries. Moreover, a significant amount of our manufacturing functions and sources of our raw materials and
components are from emerging markets such as China, India and Eastern Europe. Accordingly, our business and results of operations,
as well as the business and results of operations of our vendors and customers, are subject to risks associated with doing business
internationally, including:
•
changing economic conditions in the global and regional end markets we serve, which could impact the level of demand
for our products, as a substantial portion of our revenues are derived from customers in cyclical industries that typically
are adversely affected by downward economic cycles;
• macroeconomic factors beyond the Company’s control, such as the current volatility around material and logistics
availability, inflation, supply chain and labor challenges;
•
•
•
•
•
•
•
•
political, social or economic instability, civil unrest, terrorist attacks, conflicts or war, public health crises and natural
disasters (including as a result of climate change) that may disrupt economic activities in affected countries;
imposition of new or additional sanctions, tariffs or other trade restrictions or embargoes, as well as import and export
licensing and control requirements;
volatility of global financial markets, including persisting concerns regarding the debt burden of certain European
countries, interest rate fluctuations and hyperinflation or deflation in the countries in which we operate;
exchange rate fluctuations, as well as currency restructurings, the imposition of currency restrictions, and limitations on
repatriation of earnings, that could affect our ability to realize a profit or our ability to readily access global cash balances;
partial or total expropriation by local, state or national governments;
the ability to comply with or effect of complying with complex and changing laws, regulations and policies of foreign
governments, including differing and, in some cases, more stringent labor and environmental regulations;
differing local product preferences and product requirements; and
difficulties involved in staffing and managing widespread operations, including challenges in administering and enforcing
corporate policies, which may be different than the normal business practices of local cultures.
The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable. Certain
regions, including Latin America, Asia, Eastern Europe, the Middle East and Africa, are generally more economically and politically
volatile and as a result, our operations in these regions could be subject to more significant fluctuations in sales and operating income.
Further, our industry has been impacted by the ongoing uncertainty surrounding tariffs and international trade relations, particularly
with China, and it is difficult for us to predict the impact future trade measures will have on our business and operations in the future.
Because a significant percentage of our operating income in recent years has come from these regions, adverse fluctuations in the
operating results in these regions could have a disproportionate impact on our results of operations in future periods.
In December 2020, the United Kingdom and the European Union announced they had entered into a post-Brexit deal on certain
aspects of trade and other strategic and political issues. Following the termination of a transition period, the United Kingdom and the
European Union entered into a trade and cooperation agreement to govern the future relationship between the parties, which was
provisionally applied as of January 1, 2021 and entered into force on May 1, 2021 following ratification by the European Union. There
remains uncertainty around the post-Brexit regulatory environment.
While we have adopted certain operational and financial measures to reduce the risks associated with doing business
internationally, any one of the risks listed above may impact us or require us to modify our business practices beyond what we can
anticipate and could have a material adverse effect on our financial condition and results of operations.
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The ongoing COVID-19 pandemic has caused severe disruption in the global economy, and may continue to have an
adverse impact on our business.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, operating results,
cash flows and/or financial condition described in these risk factors or result in new risks, due to the impact of:
•
•
•
•
•
•
•
•
•
unfavorable economic conditions on our customers. We are unable to predict the degree to which the pandemic will impact
our customers’ businesses, but it has resulted in and could continue to result in customers reducing orders, delaying
projects, deferring capital equipment purchases, making late payments or being unable to make payments. Further, travel
restrictions and social distancing has reduced or eliminated, and may continue to reduce or eliminate, in-person sales
meetings, attendance at trade shows and industry events. As a result, our sales and selling activities have been and may
continue to be adversely impacted;
a significant disruption in service within our operations, among our key suppliers and supply chains, or other third parties.
We have experienced instances of suppliers temporarily closing operations, delaying order fulfillment or limiting
production due to the pandemic. Continued disruptions, shipping delays or insolvency of key vendors in our supply chain
could make it difficult or more costly for us to obtain the raw materials or other inputs we need for our operations;
facility closures or disruptions. We manufacture and provide essential products to a variety of customers around the globe
and intend to continue providing our products to the extent possible. We have experienced temporary disruptions at certain
facilities and may continue to experience these due to regulatory shut-downs or other quarantine measures or illness,
which could place constraints on our ability to produce our products and meet customer demand;
challenges in product delivery. We have faced, and may continue to face, increased delays in the delivery of our product to
our customers as a result of shipping delays, port closures and congestion, increased border controls and other
transportation and shipping constraints, which has had an inflationary effect, increasing our costs of doing business and
affecting our ability to timely meet customer demand;
compliance with substantial government regulation, including new laws or regulations or changes in existing laws or
regulations, which laws or regulations may vary significantly by jurisdiction;
fluctuations in equity market prices, interest rates and credit spreads limiting our ability to raise or deploy capital and
affecting our overall liquidity. The Company continues to generate cash from operations and believes it has adequate
liquidity and capital resources at this time; however, unanticipated consequences of the pandemic and resulting economic
uncertainty could adversely affect our ability to raise additional funds when and as needed or lead to higher costs of
borrowing;
cyberattacks or other privacy or data security incidents. The Company has experienced and expects to continue to
experience an increase in phishing and hacking attempts and other fraudulent schemes due to the pandemic, which risks
may be exacerbated by remote working arrangements. Such additional cyberattacks increase the Company’s risk of
security breaches, and mitigation efforts require an increased investment of time and resources;
changes and challenges to our workforce, including decreased worker productivity due to remote working arrangements,
increased medical, emergency or other leave, redirection of management’s focus on managing and mitigating the impacts
of the pandemic, the ability to meet staffing needs in our various facilities and delays in implementation of our
organizational efficiency and business continuity plans; and
delays in responsiveness by governments and other third parties in other matters arising in the ordinary course of business
due to their prioritization of matters relating to COVID-19.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately
predicted at this time, such as the severity and transmission rate of the virus, including any variants, the development, distribution and
effectiveness of vaccines or other medical advances, the extent and effectiveness of containment actions, the impact of labor market
interruptions, the impact of government interventions, the potential of a longer term economic slowdown or recession and the impact
of these and other factors on our employees, customers, suppliers and partners. Such impact on our business, operating results, cash
flows and/or financial condition is uncertain, could be material and could result in asset impairment charges, including impairments of
property, plant and equipment, goodwill or other intangible assets.
17
We may be unable to obtain raw materials or other manufacturing inputs at favorable prices in sufficient quantities, or at the
time we require them.
We purchase our energy, steel, aluminum, rubber and rubber-based materials, chemicals, polymers and other key manufacturing
inputs from outside sources. We do not traditionally have long-term pricing contracts with raw material suppliers. The costs of these
raw materials have been volatile historically and are influenced by factors that are outside of our control. In recent years, the prices for
energy, metal alloys, polymers and certain other of our raw materials have fluctuated significantly, exacerbated by the current
inflationary environment. While we strive to avoid this risk by using price escalation mechanisms with respect to our raw materials in
certain of our customer contracts, and we also seek to offset our increased costs with gains achieved through operational efficiencies,
if we are unable to pass increases in the costs of our raw materials on to our customers or we experience a lag in our ability to pass
increases to our customers, or operational efficiencies are not achieved, our operating margins and results of operations may be
materially adversely affected.
Additionally, our businesses compete globally for key production inputs. The availability of qualified suppliers and of key
inputs may be disrupted by market disturbances or any number of geopolitical factors, including political unrest and significant
weather events. Such disruptions may require additional capital or operating expenditure by us or force reductions in our production
volumes. In the event of an industry-wide general shortage of certain raw materials or key inputs, or a shortage or discontinuation of
certain raw materials or key inputs from one or more of our suppliers, we may not be able to arrange for alternative sources of certain
raw materials or key inputs. Any such shortage may materially adversely affect our competitive position versus companies that are
able to better or more cheaply source such raw materials or key inputs.
We may experience adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or
inventory levels of, key channel partners.
Certain of our businesses sell a significant amount of their products to key channel partners, including distributors, which have
valuable relationships with end users. Some of these channel partners may also sell our competitors’ products, and if they favor
competing products for any reason they may fail to market our products effectively. Adverse changes in our relationships with these
channel partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our
business, financial condition and results of operations. The levels of inventory maintained by our distributors and other channel
partners, and changes in those levels, such as destocking, can also significantly impact our results of operations in any given period. In
addition, the consolidation of channel partners and customers in certain of our end markets could adversely impact our profitability.
Risks Related to Our Business and Industry
Pricing pressures from our customers may materially adversely affect our business.
We generate strong margins by selling premium products at premium prices. Accordingly, our margins could suffer if our
customers are no longer willing to pay a premium for our product and service offerings. We face the greatest pricing pressure from our
customers in the automotive first-fit end market. Virtually all vehicle manufacturers seek price reductions in both the initial bidding
process and during the term of the award. We are also, from time to time, subject to pricing pressures from customers in our other end
markets. If we are not able to offset price reductions through improved operating efficiencies and reduced expenditures or new product
introductions, those price reductions may have a material adverse effect on our results of operations.
18
We are dependent on the continued operation of our manufacturing facilities, supply chains, distribution systems and
information technology systems, and a major disruption or closure could have a material adverse effect on our business.
If any of our manufacturing facilities, supply chains, distribution systems or technology systems were to experience a
catastrophic loss or ongoing closure or disruption due to adverse weather, natural or man-made disasters (including as a result of
climate change), labor unrest, public health crises such as the COVID-19 pandemic, terrorist attacks, cyberattacks, significant
mechanical failure of our equipment or other catastrophic event, it could result in interruption of our business, a potential loss of
customers and sales, or significantly increased operating costs, including large repair and replacement expenses. The third-party
insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our
decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses. Additionally, we have in the past
and may in the future make investments in new or existing manufacturing facilities that could lead to disruption or closure, or to
consolidate manufacturing facilities to adapt our production capacity to changing market conditions. The costs of such disruptions or
closures may have a material adverse effect on our business, financial condition and results of operations.
We may not be able to accurately forecast demand or meet significant increases in demand for our products.
Certain of our businesses operate with short lead times, and we order raw materials and supplies and plan production based on
discussions with our customers and internal forecasts of demand. If we are unable to accurately forecast demand for our products, in
terms of both volume and specific products, or react appropriately to abrupt changes in demand, we may experience delayed product
shipments and customer dissatisfaction. If demand increases significantly from current levels, both we and our suppliers may have
difficulty meeting such demand, particularly if such demand increases occur rapidly. Additionally, we may carry excess inventory if
demand for our products decreases below projected levels. Failure to accurately forecast demand or meet significant increases in
demand could have a material adverse impact on our business, financial condition and operating results.
We may not be able to maintain and enhance our strong brand on which we depend.
Our brand has worldwide recognition and our success is linked to our ability to maintain and enhance our brand image and
reputation. In particular, we believe that maintaining and enhancing the Gates brand is critical to maintaining and expanding our
customer base. Maintaining, promoting and enhancing our brand may require us to make substantial investments in areas such as
product innovation, product quality, intellectual property protection, marketing and employee training, and these investments may not
have the desired impact on our brand image and reputation. Moreover, environmental, social and governance topics and activities have
been the subject of increased focus by certain investors and regulators. Our business could be adversely impacted if we fail to achieve
any of these objectives or if the reputation or image of our brand is tarnished or receives negative publicity. In addition, adverse
publicity about regulatory or legal action against us could damage our reputation and brand image and reduce long-term demand for
our products, even if the regulatory or legal action is unfounded or not material to our operations. If we are unable to maintain or
enhance the image of our brand, it could materially adversely affect our business, financial condition and results of operations.
We are dependent on market acceptance of new product introductions and product innovations for continued revenue growth.
The markets in which we operate are subject to technological change. Our long-term operating results depend substantially upon
our ability to continually develop, introduce, and market new and innovative products, to modify existing products, to respond to
technological change, and to customize certain products to meet customer requirements and evolving sustainability and industry
standards. The development of new product introductions and product innovations may require significant investment by us. There are
numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or
that we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands. For
example, the increased adoption of electric vehicles may affect certain of the end markets that we serve and could alter the application
platforms in which we offer solutions. If we are unable to adapt to technological changes, including by developing and marketing new
products, our business and results of operations may be adversely affected.
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We have taken, and continue to take, cost-reduction actions that may expose us to additional risk and we may not be able to
maintain the level of cost reductions that we have achieved.
We have been implementing cost reduction actions in all of our businesses and have discontinued product lines, divested non-
core businesses, consolidated manufacturing operations and reduced our employee population in some locations. The impact of these
cost-reduction actions on our sales and profitability may be influenced by many factors and we may not be able to maintain the level
of cost savings that we have achieved depending on our ability to successfully complete these efforts. In connection with the
implementation and maintenance of our cost reduction measures, we may face delays in anticipated workforce reductions, a decline in
employee morale and a potential inability to meet operational targets due to an inability to retain or recruit key employees.
Longer lives of products used in our end markets may adversely affect demand for some of our replacement products.
The average useful life of certain products in our end markets has increased in recent years due to innovations in technologies
and manufacturing processes. The longer product lives allow end users to replace parts less often. As a result, a portion of sales in the
replacement markets we serve may be displaced. If this trend continues, it could adversely impact our replacement market sales.
The development of the replacement market in emerging markets may limit our ability to grow in those markets.
In emerging markets such as China, India, Eastern Europe and Russia, the replacement markets are still nascent as compared to
those in more developed nations. In these markets, we have focused on building a first-fit presence in order to establish brand visibility
in the end markets we serve. However, as the replacement markets in these regions grow, our products may not be selected as the
replacement product, although we are the first-fit provider. If we are not able to convert our first-fit presence in these emerging
markets into sales in the replacement end market, there may be a material adverse effect on our replacement end market growth
potential in these emerging markets.
We may pursue strategic transactions, including acquisitions, divestitures, restructurings, joint ventures, strategic alliances or
investments, which could create risks and present unforeseen integration obstacles or costs.
We consider strategic transactions on an ongoing basis, and regularly discuss potential acquisitions of complementary
businesses or assets to expand our product portfolio and geographic presence, certain of which may be material. Strategic transactions,
particularly investments in emerging markets, involve legal, economic, operational and political risks. We also encounter risks in the
selection of appropriate investment and disposal targets, negotiation and execution of transactions, and integration of acquired
businesses or assets.
Our efforts to integrate acquired businesses or assets could be affected by a number of factors beyond our control, such as
general economic conditions and increased competition. In addition, the process of integrating these businesses or assets could cause
the interruption of, or loss of momentum in, the activities of our existing business, diversion of management’s attention, disruption as
a result of infrastructure and information technology conversions, and other challenges, such as difficulty integrating key personnel
and retaining customers and suppliers.
Pursuing strategic transactions could involve the use of a substantial amount of cash, assumption of liabilities and
indemnification obligations, costly regulatory requirements, incurrence of a substantial amount of debt or issuance of a substantial
amount of equity, and we may not be able to recoup our investment or achieve the synergies and economic benefits that we
anticipated. Failure to successfully identify, consummate or integrate strategic transactions in a timely and cost-effective manner could
have a material adverse effect on our business, financial condition and results of operation.
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We have investments in joint ventures that limit our ability to manage third-party risks associated with these ventures.
We have investments in joint ventures that may involve risks such as the possibility that a co-venturer in an investment might
become bankrupt, be unable to meet its capital contribution obligations, have economic or business interests or goals that are
inconsistent with our business interests or goals, or take actions that are contrary to our instructions or to applicable laws and
regulations. Actions by a co-venturer or other third party could expose us to claims for damages, financial penalties and reputational
harm, any of which could adversely affect our business and operations. In addition, we may agree to guarantee indebtedness incurred
by a joint venture or provide standard indemnifications to lenders for loss liability or damage occurring as a result of our actions or
actions of the joint venture. Such a guarantee or indemnity may be on a joint and several basis with a co-venturer, in which case we
may be liable in the event that our co-venturer defaults on its guarantee obligation. The non-performance of a co-venturer’s obligations
may cause losses to us in excess of the capital we have invested or committed. Although our joint ventures may generate positive cash
flow, in some cases we may choose to leave cash in the joint venture rather than distribute it, either to support future investments
within the joint venture or because it may be costly to distribute.
We are subject to liabilities with respect to businesses that we have divested in the past.
In the past, we have divested a number of businesses. With respect to some of these former businesses, we have contractually
agreed to indemnify the buyer against liabilities arising prior to the divestiture, including lawsuits, tax liabilities, product liability
claims or environmental matters. Even without ongoing contractual indemnification obligations, we could be exposed to liabilities
arising out of such divestitures. As a result of these types of arrangements, conditions outside our control could materially adversely
affect our future financial results.
The loss or financial instability of any significant customer or customers could adversely affect our business.
A substantial part of our business is concentrated with a few customers, and we have certain customers that are significant to our
business. During Fiscal 2021, our top ten customers accounted for approximately 22% of our consolidated net sales and accounted for
approximately 31% of our trade accounts receivable balance as of January 1, 2022, and our largest customer accounted for
approximately 8% and 10% of our Fiscal 2021 consolidated net sales and trade accounts receivable balance as of January 1, 2022,
respectively. The loss of one or more of these customers or other major customers, a deterioration in our relationship with any of them,
or their failure to pay amounts due to us could have a material adverse effect on our business, financial condition, results of operations
or cash flows.
Our contracted backlog is comprised of future orders for our products from a broad number of customers. Defaults by any of the
customers that have placed significant orders with us could have a significant adverse effect on our net sales, profitability and cash
flow. Our customers may in the future default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or
other reasons deriving from the general economic environment or circumstances affecting those customers in particular. If a customer
defaults on its obligations to us, it could have a material adverse effect on our business, financial condition, results of operations or
cash flows.
Societal responses to sustainability issues, including those related to climate change, could adversely affect our business and
performance, including indirectly through impacts on our customers.
Concerns over environmental, safety, social and other sustainability issues, including the long-term impacts of climate change,
have led and will continue to lead to governmental efforts around the world to reduce or mitigate those issues. Consumers and
businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to
new laws and regulations as well as consumer and business preferences resulting from sustainability concerns. The impact on our
customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the
impacts to us could be a drop in demand for our products and services, particularly in certain sectors. There is also a risk that we are
unable to meet our sustainability objectives or the increasing expectations of our customers, suppliers, employees, shareholders, and
other stakeholders. Our efforts to take these risks into account, including by investing in sustainability initiatives, may not be effective
in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
21
Risks Related to Legal and Regulatory Matters
We are subject to risks from litigation, legal and regulatory proceedings and obligations, and our insurance may not provide
coverage or may not fully cover future losses we may incur related to these proceedings and obligations or otherwise.
We face an inherent business risk of exposure to various types of claims, lawsuits and proceedings. We may be involved in
tax, intellectual property, product liability, product warranty and environmental claims and lawsuits, and other legal, antitrust and
regulatory proceedings arising in the ordinary course of our business. Although it is not possible to predict with certainty the outcome
of every claim, lawsuit or proceeding and the range of probable loss, we believe these claims, lawsuits and proceedings will not
individually or in the aggregate have a material impact on our results. However, we could, in the future, be subject to various claims,
lawsuits and proceedings, including, amongst others, tax, intellectual property, product liability, product warranty, environmental
claims and antitrust claims, and we may incur judgments or enter into settlements of lawsuits and proceedings that are not covered or
not sufficiently covered by insurance. Further, the insurance we carry may not be adequate to protect against unforeseen and damaging
events, such as work stoppages and damage to facilities or equipment. We supply products to industries that are subject to inherent
risks, including equipment defects, malfunctions and failures, and natural disasters (including as a result of climate change), which
could expose us to liability. These exposures could have a material adverse effect on our business, financial condition and results of
operations.
Our products could infringe on the intellectual property of others, adversely affecting our business.
Third parties may assert infringement or other misappropriation claims against us based on their patents, trademarks or other
intellectual property rights. In addition, first-fit manufacturers are seeking and obtaining more utility and design patents than they have
in the past to threaten claims of intellectual property infringement against manufacturers and distributors of aftermarket products in
efforts to restrict or eliminate the sale of aftermarket products.
Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial
damages, including treble damages, if we are found to be willfully infringing another party’s patents, for past use of the asserted
intellectual property, and royalties and other consideration going forward if we are forced to take a license. In addition, if any such
claim were successfully asserted against us, we could be restricted or prohibited from manufacturing, selling or otherwise
commercializing certain of our products, product candidates or other technology. Even if infringement claims against us are without
merit, we will likely incur significant expenses investigating and defending such claims and, even if we prevail, may divert
management attention from other business concerns.
In addition, certification by independent organizations of certain of our aftermarket products may be revoked or adversely
affected by first-fit manufacturer claims. Lack of certification may negatively impact us because many major insurance companies
recommend or require the use of aftermarket products only if they have been certified by an independent certifying organization.
Failure to adequately protect or enforce our intellectual property rights against counterfeiting activities and infringing products
could adversely affect our business.
Although we routinely conduct anti-counterfeiting activities in multiple jurisdictions, we have encountered counterfeit
reproductions of our products that infringe on our intellectual property rights. We expect pirates to continue counterfeiting certain of
our products using our trademarks, which has led to, and will likely continue to cause, loss of sales. It is difficult to police such
counterfeiting, particularly on a worldwide basis, and the actions we take to stop such counterfeiting and to establish trademarks and
other intellectual property rights may not be adequate to prevent such counterfeiting activities by others.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own
products and further, may export otherwise infringing products to territories where we have patent protection, but where the ability to
enforce our patent rights is not as strong as in the U.S. These products may compete with our products, and our intellectual property
rights may not be effective or sufficient to prevent such competition.
To the extent we do assert our intellectual property rights against third parties, adequate remedies may not be available in the
event of an infringement or unauthorized use or disclosure of our trade secrets. If we are unsuccessful in challenging such products on
the basis of patent, trademark or other intellectual property misappropriation, continued sales of such imitating products may adversely
affect market share and impact customer perceptions and demand.
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Failure to develop, obtain, enforce and protect intellectual property rights could adversely affect our business.
Our success depends on our ability to develop technologies and inventions used in our products and to brand such products to
obtain intellectual property rights and to protect and enforce such intellectual property rights worldwide. In this regard, we rely on
U.S. and foreign patent, trademark, copyright, and trade secret laws, as well as license agreements, nondisclosure agreements, and
confidentiality and other contractual provisions.
Although we rely on U.S. and foreign intellectual property rights, procuring, enforcing, and defending patents on our products in
all jurisdictions throughout the world would be prohibitively expensive, and the laws of certain foreign countries may not protect or
allow enforcement of intellectual property rights to the same extent as the laws of the U.S.
Even if we do obtain patents or other intellectual property rights in our new technologies and inventions, the scope of such rights
may not be sufficiently broad to afford us any significant commercial advantage over our competitors. In addition, the technologies
and inventions developed by our engineers in the future may not prove to be as valuable as those of competitors, or competitors may
develop similar or identical technologies and inventions independently of us and before we do.
Further, our efforts to enforce our intellectual property rights against infringers may not prove successful and will likely be time
consuming and expensive. Successful assertion of our intellectual property rights depends on the judicial strength and willingness of
the issuing jurisdictions to enact and enforce sufficient intellectual property laws.
Competitors and other third parties may also challenge the ownership, validity, and/or enforceability of our patents or other
intellectual property rights.
We may be subject to recalls or product liability claims, or may incur costs related to product warranties.
Meeting or exceeding many government-mandated safety standards is costly and requires manufacturers to remedy defects
related to product safety through recall campaigns if the products do not comply with safety, health or environmental standards. If we,
our customers or government regulators determine that a product is defective or does not comply with such standards prior to the start
of production, the launch of a product could be delayed until such defect is remedied. The costs associated with any protracted delay
of a product launch or a recall campaign to remedy defects in products that have been sold could be substantial.
We face an inherent risk of product liability claims if alleged product failure results in a claim for injury or loss. Supplier
consolidation and the increase in low-cost country sourcing may increase the likelihood of receiving defective materials, thereby
increasing the risk of alleged product failure and resulting liability claims. Litigation is inherently unpredictable and these claims,
regardless of their outcome, may be costly, divert management attention and adversely affect our reputation. Although we have
liability insurance, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be
adequate. In addition, even if we are successful in defending against a claim relating to our products, claims of this nature could cause
our customers to lose confidence in our products and us.
From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to bear costs
of repair or replacement of certain of our products. Vehicle manufacturers are increasingly requiring their outside suppliers to
participate in the warranty of their products and to be responsible for the operation of these component products in new vehicles sold
to consumers. Warranty claims may range from individual customer claims to full recalls of all products in the field. It cannot be
assured that costs associated with providing product warranties will not be material.
We are subject to anti-corruption laws in various jurisdictions, as well as other laws governing our international operations. If
we fail to comply with these laws we could be subject to civil or criminal penalties, other remedial measures, and legal expenses.
Our operations are subject to one or more anti-corruption laws in various jurisdictions, such as the U.S. Foreign Corrupt
Practices Act of 1977, as amended (the “FCPA”), the U.K. Bribery Act of 2010, and other anti-corruption laws that generally prohibit
employees and intermediaries from making improper payments for the purpose of obtaining or retaining business or gaining some
other business advantage. We operate in a number of jurisdictions that pose a high risk of potential anti-corruption violations, and we
participate in joint ventures and relationships with third parties whose actions could potentially subject us to liability under anti-
corruption laws.
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We are also subject to other laws and regulations governing our operations, including regulations administered by the U.S.
Department of Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Assets Control, and
various non-U.S. government entities, including applicable export control regulations, economic sanctions on countries and persons,
customs requirements, currency exchange regulations, and transfer pricing regulations (collectively, “Trade Control Laws”). We are
also subject to U.K. corporate criminal offences for failure to prevent the facilitation of tax evasion pursuant to the Criminal Finances
Act 2017 (“Criminal Finances Act”).
We have instituted policies, procedures and ongoing training of employees with regard to business ethics, designed to ensure
that we and our employees comply with anti-corruption laws, Trade Control Laws and the Criminal Finances Act. However, there is
no assurance that our efforts have been and will be effective in ensuring our compliance with all applicable anti-corruption laws or
other legal requirements. If we are subject to an investigation of a potential violation or are found not in compliance with anti-
corruption laws, Trade Control Laws or the Criminal Finances Act, we may incur legal expenses and experience reputational harm,
and could be subject to criminal and civil penalties and sanctions that could have a material adverse impact on our business, financial
condition, and results of operations.
Existing or new laws and regulations, including but not limited to those relating to HSE concerns, and the sale of aftermarket
products, may prohibit, burden, restrict or make significantly more costly the sale of our products.
Our operations, products and properties are subject to extensive foreign, federal, state, local and provincial laws and regulations
relating to HSE protection around the world. HSE laws vary by jurisdiction but generally govern air emissions, wastewater discharges,
material handling and transportation, waste management and disposal, substances in products, and workplace health and safety, as
well as the investigation and clean-up of contaminated sites. Failure to comply with HSE laws and regulations could have significant
consequences on our business and operations, including the imposition of substantial fines and sanctions for violations, injunctive
relief (including requirements that we limit or cease operations at affected facilities), and negative publicity.
HSE laws have become increasingly stringent and stricter interpretation or enforcement of new and existing HSE laws could
adversely affect our business, financial condition and results of our operations and product demand. For example, increasing global
interest to control emissions of carbon dioxide, methane and other greenhouse gases (“GHGs”) in an effort to minimize the effect on
climate change have the potential to directly impact the price of the energy and raw materials we purchase. In addition, GHGs
regulations could impact oil and gas production, a key demand driver of our industrial end markets, and reduce demand for our
products by driving down the use of fossil fuels.
The evolution of HSE laws beyond manufacturing operations to restrict specific chemical substances in our products or impose
labeling and other requirements, such as California’s Safe Drinking Water and Toxic Enforcement Act (“Proposition 65”), or
European Union’s Registration, Evaluation, Authorisation, and Restriction of Chemical Substances (“REACH”) Directive, could
result in significant costs or limit access to certain markets.
We have incurred, and will continue to incur, both operating and capital costs to comply with HSE laws, including costs
associated with the investigation and clean-up of some of our current and former properties and offsite disposal locations. As the
present and former operator of industrial properties that use and generate hazardous materials, we could be subject to additional
liability for environmental contamination in the future, regardless of whether we caused such contamination.
Additionally, most states have passed laws that regulate or limit the use of aftermarket products in certain types of repair work.
These laws include requirements relating to consumer disclosure, owner’s consent regarding the use of aftermarket products in the
repair process, and the requirement to have aftermarket products certified by an independent testing organization. Additional
legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the use of aftermarket products are
passed, it could have an adverse impact on our aftermarket products business.
Certain organizations test the quality and safety of vehicle replacement products. If these organizations decide not to test a
particular vehicle product, or in the event that such organizations decide that a particular vehicle product does not meet applicable
quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue
authorization of repairs using such product. Such events could adversely affect our business.
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Risks Related to Cybersecurity and Information Systems
Cyber-security vulnerabilities, threats and more sophisticated and targeted computer crimes could pose a risk to our systems,
networks, products, solutions, services and data.
Increased global cyber security vulnerabilities, threats, computer viruses and more sophisticated and targeted cyber-related
attacks (such as the recent increasing use of “ransomware” and phishing attacks), as well as cyber-security failures resulting from
human error, catastrophic events (such as fires, floods, hurricanes and tornadoes), and technological errors, pose a risk to our systems,
products and data as well as potentially to our employees’, customers', partners', suppliers' and third-party service providers' systems
and data. An attack could result in security breaches, theft, lost or corrupted data, misappropriation of sensitive, confidential or
personal data or information, loss of trade secrets and commercially valuable information, production downtimes and operational
disruptions. We attempt to mitigate these risks by employing a number of measures, including employee training, monitoring and
testing, and maintenance of protective systems and contingency plans, but we remain potentially vulnerable to additional known or
unknown threats. There is no assurance the financial or operational impact from such threats will not be material.
Information systems failure may disrupt our business and result in financial loss and liability to our customers.
We rely on information technology networks and systems, including the Cloud and third party service providers, to process,
transmit and store electronic information, and to manage or support a variety of business processes and activities. These information
technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of
upgrading or replacing software, databases or components, power outages, hardware failures or computer viruses. If these information
technology systems suffer severe damage or disruption and the issues are not resolved in a timely manner, our business, financial
condition and operations could be materially adversely affected.
Global privacy, data protection and data security requirements are highly complex, evolving rapidly, and may increase our costs
to comply.
To conduct our operations, we regularly move data across national borders, and consequently we are subject to a variety of
continuously evolving and developing laws and regulations in the U.S. and abroad regarding privacy, data protection and data security.
The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws.
For example, the European Union’s General Data Protection Regulation (“GDPR”), which greatly increases the jurisdictional reach of
European Union law and adds a broad array of requirements for handling personal data, including the public disclosure of significant
data breaches, became effective in May 2018, and several states in the U.S. have adopted similar legislation. Other countries have
enacted or are enacting data localization and privacy laws that require data to stay within their borders, as well as requiring that data
subjects provide clear and concise consent on how collected data will be utilized. These evolving compliance and operational
requirements impose significant costs that are likely to increase over time as the breadth and complexity of regulations continues to
evolve internationally. We continue to monitor these developments and adjust our data handling practice in accordance with applicable
law.
Risks Related to Human Capital Management
If we lose our senior management or key personnel, our business may be materially and adversely affected.
The success of our business is largely dependent on our senior management team, as well as on our ability to attract and retain
other qualified key personnel. In addition, there is significant demand in our industry for skilled workers. It cannot be assured that we
will be able to retain all of our current senior management personnel and attract and retain other necessary personnel, including skilled
workers, necessary for the development of our business. Further, in the event we do lose key personnel, the success of our business
may depend on whether we have appropriate succession plans in place and can implement such plans to identify and integrate new
personnel. The loss of the services of senior management and other key personnel or the failure to attract additional personnel and
implement succession plans as required could have a material adverse effect on our business, financial condition and results of
operations.
25
We may be materially adversely impacted by work stoppages and other labor matters, including labor shortages and turnover.
Labor is a primary component of operating our business. As of January 1, 2022, we had approximately 15,050 full time
employees worldwide. Certain of our employees are represented by various unions under collective bargaining agreements, or by
various regional works councils. While we have no reason to believe that we will be impacted by work stoppages and other labor
matters, we cannot ensure that future issues with our labor unions or with the labor unions of our customers and vendors will be
resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our
employees. Increased unionization, new labor legislation or changes in regulations could disrupt our operations, reduce our
profitability, or interfere with the ability of our management to focus on executing our business strategies. Additionally, we have
experienced, and may continue to experience, labor shortages, turnover and increased labor costs due to the ongoing pandemic or
general macroeconomic factors. Any of these factors may have a materially adverse effect on us or may limit our flexibility in
managing our workforce.
Certain of our defined benefit pension plans are underfunded, and additional cash contributions may be required.
Certain of our employees in the U.S., the U.K., Canada, Mexico, Germany and Japan are participants in defined benefit pension
plans which we sponsor and/or to which we have contribution obligations. As of January 1, 2022, the net pension obligation of our
underfunded defined benefit pension plans globally was $66.8 million on a Topic 715 “Compensation-Retirement Benefits” basis. The
amount of our contributions to our underfunded plans will depend upon asset returns, funding assumptions, regulatory requirements
and a number of other factors and, as a result, the amount we may be required to contribute to such plans in the future may vary. Such
cash contributions to the plans will reduce the cash available for our business such as the payment of interest expense on our notes or
our other indebtedness.
Risks Related to Tax Matters
Changes in our effective tax rate or additional tax liabilities could adversely impact our net income.
We are subject to income taxes as well as non-income based taxes in the U.K., the U.S. and various other jurisdictions in which
we operate. The laws and regulations in these jurisdictions are inherently complex and the Company and its subsidiaries will be
obliged to make judgments and interpretations about the application of these laws and regulations to the Company and its subsidiaries
and their operations and businesses, including those related to any restructuring of intercompany operations, holdings or financings;
the valuation of intercompany services; cross-border payments between affiliated companies; and the related effects on income tax,
VAT and transfer tax. Further, our tax liabilities could be adversely affected by numerous other factors, including income before taxes
being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory
tax rates, changes in the valuation of deferred income tax assets and liabilities, and changes in tax laws and regulations. We are
regularly under audit by taxing authorities in certain of the jurisdictions in which we operate. Although we believe our tax estimates
are reasonable, including our estimates of reserves for unrecognized tax benefits related to the implementation of our European
corporate center in Fiscal 2019, any changes in our judgments and interpretation of tax laws or any material differences as a result of
the audits could result in unfavorable tax adjustments that have an adverse effect on our overall tax liability. Our U.K. businesses may
also be affected by the planned increase in the U.K. corporation tax rate from 19% to 25% with effect from April 2023.
26
Changes in tax laws could result in additional tax liabilities.
Changes in tax laws can and do occur. For example, in 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which is
complex and continues to be further clarified with supplemental guidance. Changes to tax laws may require the Company to make
significant judgment in determining the appropriate provision and related accruals for these taxes; and, as a result, such changes could
result in substantially higher taxes and a significant adverse effect on our results of operations, financial conditions and liquidity. In
addition, the Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries,
has recommended fundamental tax reforms affecting the taxation of multinational corporations, including the Base Erosion and Profit
Shifting project, which in part aims to address international corporate tax avoidance. Countries have already enacted significant
measures in this regard. The OECD has undertaken a new project to address the tax challenges of the digitization of the economy.
Further work is currently being undertaken by the OECD on its proposal to reform international allocation of taxing rights by
allocating a greater share of taxing rights to countries where consumers are located, regardless of the physical presence of a business
(“Pillar One”), and to implement a global minimum tax (“Pillar Two”). In December 2021, the OECD published its Pillar Two model
rules and the E.U. Commission also proposed a Directive to implement Pillar Two in the E.U., containing detailed rules for top up tax
in respect of certain low taxed entities. Moreover, in January 2022, the U.K. began a consultation on the implementation of the OECD
agreed Pillar Two model rules within the U.K., which is expected to have effect from April 2023. All sets of proposals are subject to
exemptions and exclusions, and are not intended to apply to entities that are not members of a group with an annual revenue of at least
Euro 750 million. However, the detail of the proposals is subject to change and the impact on the Company will need to be determined
by reference to the final rules. Further proposals on Pillar One are expected in the course of 2022.
Additionally, the U.K.’s withdrawal from the E.U. has resulted in changes (which are ongoing) to the interpretation and
application of tax laws and which overall could lead to significant changes in the U.K. tax burden of the Company. Specifically, the
group can no longer benefit from certain EU Directives when repatriating cash or paying interest to U.K. companies. This may lead to
increased tax costs when paying dividends and interest intra-group.
Other developments to the tax regime in the U.K., the U.S. or in other countries in which we operate could materially affect our
tax burden and/or have a negative impact on our ability to compete in the global marketplace.
Relevant tax authorities may no longer treat us as being exclusively a resident of the U.K. for tax purposes.
We are a company incorporated in the U.K. Current U.K. tax law provides that we will be regarded as being U.K. resident for
tax purposes from incorporation and shall remain so unless (i) we are concurrently resident of another jurisdiction (applying the tax
residence rules of that jurisdiction) that has a double tax treaty with the U.K., and (ii) there is a tiebreaker provision in that tax treaty
which allocates exclusive residence to that other jurisdiction.
Based upon our management and organizational structure, we believe that we should be regarded solely as resident in the U.K.
from our incorporation for tax purposes. However, because this analysis is highly factual and may depend on future changes in our
management and organizational structure, there can be no assurance regarding the final determination of our tax residence. Not being
treated exclusively as a resident of the U.K. for tax purposes could result in adverse tax consequences to us.
Risks Related to Our Indebtedness
Our substantial leverage could adversely affect our financial condition, our ability to raise additional capital to fund our
operations, our ability to operate our business, our ability to react to changes in the economy, or our industry or our ability to
pay our debts, and could divert our cash flow from operations to debt payments.
As of January 1, 2022, the total principal amount of our debt was $2,579.2 million. Subject to the limits contained in the credit
agreements that govern our senior secured credit facilities, the indenture that governs our notes and the applicable agreements
governing our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital,
capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could
increase. Specifically, our high level of debt could have important consequences, including the following:
• making it more difficult for us to satisfy our obligations with respect to our debt;
•
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other
general corporate requirements;
27
•
•
•
•
•
•
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes,
thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other
general corporate purposes;
increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
placing us at a disadvantage compared to other, less leveraged competitors; and
increasing our cost of borrowing.
We are a holding company, and our consolidated assets are owned by, and our business is conducted through, our subsidiaries.
Earnings from these subsidiaries are our primary source of funds for debt payments and operating expenses. If our subsidiaries are
restricted from making distributions, our ability to meet our debt service obligations or otherwise fund our operations may be
impaired. Moreover, there may be restrictions on payments by subsidiaries to their parent companies under applicable laws, including
laws that require companies to maintain minimum amounts of capital and to make payments to shareholders only from profits. As a
result, although a subsidiary of ours may have cash, we may not be able to obtain that cash to satisfy our obligation to service our
outstanding debt or fund our operations.
Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions
which could further exacerbate the risks to our financial condition described above.
We may be able to incur significant additional indebtedness in the future. Although certain of the agreements governing our
existing indebtedness contain restrictions on the incurrence of additional indebtedness and entering into certain types of other
transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in
compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as
trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our
current debt levels, the substantial leverage risks described in the immediately preceding risk factor would increase.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to
increase significantly.
Interest rates may increase in the future. As a result, interest rates on our credit facility or other variable rate debt could be
higher or lower than current levels. As of January 1, 2022, after taking into account our interest rate derivatives, $657.3 million
(equivalent), or 25.5%, of our outstanding debt had variable interest rates. If interest rates increase, our debt service obligations on the
variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows,
including cash available for servicing our indebtedness, would correspondingly decrease.
In addition, we have $2,011.2 million of variable rate indebtedness that uses LIBOR or EURIBOR as a benchmark for
establishing the rate of interest. LIBOR and its foreign currency counterparts are the subject of recent national, international and other
regulatory guidance and proposals for reform and were initially not expected to be maintained after 2021, but the U.S. dollar
denominated LIBOR maturity tenors will continue to be published until June 30, 2023 to allow a greater number of existing contracts
to mature prior to any disruptions in LIBOR. The United States Federal Reserve has advised banks to cease entering into new
contracts that use LIBOR as a reference rate. The Alternative Reference Rate Committee, a committee convened by the Federal
Reserve that includes major market participants, has identified the Secured Overnight Financing Rate, or SOFR, a new index
calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative rate for LIBOR. At this
time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from the
LIBOR benchmarks is anticipated in coming years. There continue to be uncertainties regarding the transition from LIBOR, including
but not limited to the need to renegotiate certain terms of our loan agreements with LIBOR or EURIBOR as the referenced rate, which
could require us to incur significant expense and may subject us to disputes or litigation over the appropriateness or comparability to
LIBOR or EURIBOR of the replacement reference rates. The consequences of these developments cannot be entirely predicted, but
could include an increase in the cost of our variable rate indebtedness and could challenge our ability to renegotiate our revolving
credit facility or other variable rate debt offerings.
28
Certain of our debt agreements impose significant operating and financial restrictions on our subsidiaries and us that could
prevent us from capitalizing on business opportunities.
The credit agreements that govern our senior secured term loan facilities and the indenture that governs our notes impose
significant operating and financial restrictions on our subsidiaries. These restrictions limit the ability of certain of our subsidiaries to,
among other things:
•
•
incur or guarantee additional debt or issue disqualified stock or preferred stock;
pay dividends and make other distributions on, or redeem or repurchase, capital stock;
• make certain investments;
•
•
incur certain liens;
enter into transactions with affiliates;
• merge or consolidate;
•
•
•
enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments;
designate restricted subsidiaries as unrestricted subsidiaries; and
transfer or sell assets.
As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt
or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness
we may incur could include similar or more restrictive covenants. We cannot ensure that we will be able to maintain compliance with
these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or amend the covenants.
Our failure to comply with the restrictive covenants described above as well as other terms of our other indebtedness or the
terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in
our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable
terms or are unable to refinance these borrowings, our results of operations and financial condition could be adversely affected.
Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our
control, could result in an event of default that could materially and adversely affect our results of operations and our financial
condition.
If there is an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted
debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our
assets or cash flows would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event
of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt
could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under
one debt instrument could also result in an event of default under one or more of our other debt instruments.
29
Risks Related to the Ownership of our Ordinary Shares
Our Sponsor and its affiliates control us and their interests may conflict with ours in the future.
Our Sponsor and its affiliates beneficially owned approximately 66% of our outstanding ordinary shares as of January 1, 2022.
Moreover, under our articles of association (the “Articles”) and our shareholders agreement with our Sponsor, for so long as our
Sponsor and its affiliates retain significant ownership of us, we have agreed to nominate to our board individuals designated by such
Sponsor. Even when our Sponsor and its affiliates cease to own ordinary shares representing a majority of the total voting power, for
so long as our Sponsor continues to own a significant percentage of our ordinary shares, such Sponsor will still be able to significantly
influence the composition of our board of directors and the approval of actions requiring shareholder approval through their voting
power. Accordingly, for such period of time, our Sponsor will have significant influence with respect to our management, business
plans and policies, including the appointment and removal of our officers. In particular, for so long as our Sponsor continues to own a
significant percentage of our ordinary shares, such Sponsor will be able to cause or prevent a change of control of our company or a
change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration
of ownership could deprive other shareholders of an opportunity to receive a premium for ordinary shares as part of a sale of our
company and ultimately might affect the market price of our ordinary shares.
Our Sponsor and its affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, our
Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our shareholders. Our
shareholders’ agreement provides that neither our Sponsor nor any of its affiliates will have any duty to refrain from engaging, directly
or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also
may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may
not be available to us. In addition, our Sponsor may have an interest in our pursuing acquisitions, divestitures and other transactions
that, in their judgment, could enhance their investment, even though such transactions might involve risks to us and our shareholders.
We are a “controlled company” within the meaning of the rules of the NYSE and, as a result, may rely on exemptions from
certain corporate governance requirements. Our shareholders may not have the same protections afforded to shareholders of
companies that are subject to such requirements.
Our Sponsor controls a majority of the combined voting power of all classes of our shares entitled to vote generally in the
election of directors. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the
NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual,
group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements.
For example, controlled companies are (i) not required to have a board that is composed of a majority of “independent directors,” as
defined under the rules of such exchange; (ii) not required to have a compensation committee that is composed entirely of independent
directors; and (iii) not required to have a nominating and corporate governance committee that is composed entirely of independent
directors.
We have previously utilized such exemptions, but beginning in 2020, a majority of our Board of Directors consists of
independent directors, and beginning in 2021, each of our Compensation Committee and Nominating and Governance Committee
consist entirely of independent directors with written charters addressing each such committee’s purpose and responsibilities. While at
this time, we do not rely on the controlled company exemptions, we are still eligible to do so, in which case our shareholders may not
have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the
NYSE.
30
The market price of our ordinary shares has been and may in the future be volatile, which could cause the value of our
shareholders’ investment to decline.
The market price of our ordinary shares has been and may in the future be volatile and could be subject to wide fluctuations.
Securities markets worldwide experience significant price and volume fluctuations. During Fiscal 2021, the per share trading price of
our ordinary shares fluctuated from a low of $12.50 to a high of $18.80. This market volatility, as well as general economic, market or
political conditions, could reduce the market price of our ordinary shares regardless of our operating performance. In addition, our
operating results could be below the expectations of public market analysts and investors due to a number of potential factors,
including variations in our quarterly operating results or dividends, if any, to shareholders, additions or departures of key management
personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government
investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our
business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market
valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant
contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the
industries in which we participate, general macroeconomic factors or individual scandals and in response, the market price of our
ordinary shares could decrease significantly.
Stock markets and the price of our ordinary shares may experience extreme price and volume fluctuations. In the past, following
periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often
been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our
management’s attention and resources.
Because we have no current plans to pay dividends on our ordinary shares, our shareholders may not receive any return on
their investments unless they sell their ordinary shares for a price greater than that which they paid.
We have no current plans to pay dividends on our ordinary shares. The declaration, amount and payment of any future dividends
on our ordinary shares will be at the sole discretion of our board of directors. Our Board of Directors may take into account general
economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs,
capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our
shareholders or by our subsidiaries to us, and such other factors as our Board of Directors may deem relevant. In addition, our ability
to pay dividends is limited by our senior secured credit facilities and notes and may be limited by covenants of other indebtedness we
or our subsidiaries incur in the future. As a result, our shareholders may not receive any return on an investment in our ordinary shares
unless such shares are sold for a price greater than that which was paid for them.
Our shareholders may be diluted by the future issuance of additional ordinary shares in connection with our incentive plans,
acquisitions or otherwise.
Our shareholders adopted a resolution authorizing our Board of Directors to allot our ordinary shares and to grant rights to
subscribe for or convert any security into such shares for the consideration and on the terms and conditions established by our Board
of Directors in its sole discretion, whether in connection with acquisitions or otherwise. Additionally, we have reserved
12,500,000 ordinary shares for issuance under our Omnibus Incentive Plan. Any ordinary shares that we issue, including under our
Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by
the holders of our ordinary shares.
Future issuances of ordinary shares by us, and the availability for resale of shares held by our Sponsor, may cause the market
price of our ordinary shares to decline.
Sales of a substantial number of our ordinary shares in the public market, or the perception that these sales could occur, could
substantially decrease the market price of our ordinary shares.
31
Pursuant to a registration rights agreement, we granted our Sponsor the right to cause us, in certain instances, at our expense, to
file registration statements under the Securities Act covering resales of our ordinary shares held by them or to participate in future
registration of securities by us. In Fiscal 2019, the SEC declared effective a registration statement on Form S-3 that, among other
things, registered (i) up to a maximum aggregate offering price of $1,000,000,000 of our securities, and (ii) the resale of shares held by
our Sponsor. These shares held by our Sponsor also may be sold pursuant to Rule 144 under the Securities Act subject to certain
volume, manner of sale, and other limitations. The market price of our ordinary shares could drop significantly if we or our Sponsor
sell these shares or are perceived by the market as intending to sell them.
We may issue a new class or classes of shares whose terms could adversely affect the voting power or value of our ordinary
shares.
Our articles of association, as amended, authorize us to issue, subject to the limit therein on the authority of our Board of
Directors to allot new shares of the Company, without the approval of the holders of our ordinary shares, a new class or classes of
shares, including preference shares, with nominal value in any currency. Such shares may be issued with, or have attached to them,
such powers, designations, preferences, voting rights, rights and terms of redemption, and relative participating, optional or other
special rights and qualifications, limitations and restrictions as the Board of Directors may determine, including rights to (a) receive
dividends (which may include rights to receive preferential or cumulative dividends), (b) distributions made on a winding up of the
Company, and (c) be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or
any other class or classes of shares, at such price or prices (subject to the Companies Act 2006 (“Companies Act”)) or at such rates of
exchange and with such adjustments as may be determined by our Board of Directors.
The terms of one or more classes of shares could adversely impact the voting power of our ordinary shares. For example, we
might grant holders of a new class of shares the right to elect some number of our directors in all events or on the happening of
specified events or the right to veto specified transactions.
Similarly, the repurchase or redemption rights or liquidation preferences we might assign to a new class of shares could affect
the residual value of our ordinary shares.
U.S. investors may have difficulty enforcing civil liabilities against our Company, our directors or members of our senior
management.
There is doubt as to whether English courts would enforce certain civil liabilities under U.S. securities laws in original actions or
in judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in
the U.S. or elsewhere may be unenforceable in the U.K. An award for monetary damages under the U.S. securities laws would be
considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant.
The enforceability of any judgment in the U.K. will depend on the particular facts of the case as well as the laws and treaties in effect
at the time. The U.S. and the U.K. do not currently have a treaty providing for recognition and enforcement of judgments (other than
arbitration awards) in civil and commercial matters.
The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated under English law. The rights of holders of our ordinary shares are governed by English law, including the
provisions of the Companies Act, and by our Articles. These rights differ in certain respects from the rights of shareholders in typical
U.S. corporations.
The U.K. City Code on Takeovers and Mergers (the “Takeover Code”) applies, among other things, to an offer for a public
company whose registered office is in the U.K. and whose securities are not admitted to trading on a regulated market in the U.K. if
the company is considered by the Panel on Takeovers and Mergers (the “Takeover Panel”) to have its place of central management
and control in the U.K. This is known as the “residency test.” Under the Takeover Code, the Takeover Panel will determine whether
we have our place of central management and control in the U.K. by looking at various factors, including the structure of our Board of
Directors, the functions of the directors and where they are resident.
32
If at the time of a takeover offer, the Takeover Panel determines that we have our place of central management and control in
the U.K., we would be subject to a number of rules and restrictions, including but not limited to the following: (i) our ability to enter
into deal protection arrangements with a bidder would be extremely limited; (ii) we might not, without the approval of our
shareholders, be able to perform certain actions that could have the effect of frustrating an offer, such as issuing shares or carrying out
acquisitions or disposals; and (iii) we would be obliged to provide equality of information to all bona fide competing bidders.
Our Sponsor has an interest in over 50% of our voting share capital, and therefore, if the Takeover Panel were to determine that
we were subject to the Takeover Code, our Sponsor would be able to increase its aggregate holding in us without triggering the
requirement under Rule 9 of the Takeover Code to make a cash offer for the outstanding shares in the issuer.
The Takeover Panel has confirmed to our representatives that, on the basis of our Board of Directors, it does not consider the
Takeover Code to apply to the Company, although that position is subject to change if our place of central management and control is
subsequently found to move to the U.K.
Our Articles provide that the courts of England and Wales have exclusive jurisdiction to determine shareholder and derivative
disputes, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
former directors, officers or employees.
Our Articles provide that the courts of England and Wales have exclusive jurisdiction to determine any dispute brought by a
shareholder in that shareholder’s capacity as such, or related to or connected with any derivative claim in respect of a cause of action
vested in the Company or seeking relief on behalf of the Company, against the Company and/or the Board and/or any of the directors,
former directors, officers or other employees individually, arising out of or in connection with these Articles or (to the maximum
extent permitted by applicable law) otherwise. This choice of forum provision may limit a shareholder’s ability to bring a claim in a
judicial forum that the shareholder believes is favorable for disputes with us or our directors, former directors, officers or other
employees, which may discourage lawsuits against us and our directors, former directors, officers and employees. The rights of
stockholders under Delaware law and shareholders under English law in relation to the bringing of shareholder suits differ in several
significant respects. Any person or entity purchasing or otherwise acquiring or holding any interest in our ordinary shares shall be
deemed to have notice of and to have consented to the provisions of our governing documents described above, as they may be
amended from time to time.
Transfers of our shares outside DTC may be subject to stamp duty or stamp duty reserve tax in the U.K., which would increase
the cost of dealing in our shares.
On completion of our initial public offering, the new ordinary shares were issued to a nominee for The Depository Trust
Company (“DTC”) and corresponding book-entry interests in respect of such ordinary shares credited in the facilities of DTC. On the
basis of current law, no charges to U.K. stamp duty or stamp duty reserve tax (“SDRT”) are expected to arise on transfers of book-
entry interests in ordinary shares within DTC’s facilities (provided that no written instrument of transfer is entered into in respect of
such transfer and DTC does not make an election under section 97A Finance Act 1986) and investors are strongly encouraged to
continue to hold ordinary shares in book-entry form through the facilities of DTC.
A transfer of title in the ordinary shares from within the DTC system to a purchaser out of DTC and any subsequent transfers
that occur entirely outside the DTC system, will generally attract a charge to stamp duty or SDRT at a rate of 0.5% of any
consideration payable for such transfer, which is payable by the transferee of the ordinary shares. Any such duty must be paid and the
relevant transfer document, if any, stamped by HM Revenue & Customs (“HMRC”) before the transfer can be registered in our
company books. However, if those ordinary shares are redeposited into DTC or any other depositary receipt system or clearance
service, the redeposit will attract stamp duty or SDRT at the rate of 1.5%, which is generally to be paid by the transferor.
We have put in place arrangements to require that our ordinary shares held in certificated form cannot be transferred into the
DTC system until the transferor of the ordinary shares has first delivered the ordinary shares to a depositary specified by us so that
stamp duty (and/or SDRT) may be collected in connection with the initial delivery to the depositary. Any such ordinary shares will be
evidenced by a receipt issued by the depositary. Before the transfer can be registered in our books, the transferor will also be required
to put the depositary in funds to settle the resultant liability to stamp duty (and/or SDRT), which will be charged at a rate of 1.5% of
the value of the shares.
33
If our ordinary shares are not eligible for continued deposit and clearing within the facilities of DTC, then transactions in our
securities may be disrupted and/or our ability to issue shares under our equity compensation plans may be restricted.
The facilities of DTC are a widely-used mechanism that allow for rapid electronic transfers of securities between the
participants in the DTC system, which include many large banks and brokerage firms. Our ordinary shares are currently eligible for
deposit and clearing within the DTC system. DTC generally has discretion to cease to act as a depository and clearing agency for the
ordinary shares including to the extent that any changes in U.K. law (including changes as a result of the U.K.’s decision to leave the
E.U.) changes the stamp duty or SDRT position in relation to the ordinary shares. If DTC were to determine that our ordinary shares
are not eligible for continued deposit and clearance within its facilities, our ordinary shares may not be eligible for continued listing on
the NYSE and trading in our ordinary shares would be disrupted. While we would pursue alternative arrangements to preserve our
listing and maintain trading, any such disruption could have a material adverse effect on the market price of our ordinary shares and
our access to the capital markets.
None.
Item 1B. Unresolved Staff Comments
Item 2. Properties
We operate from over 100 locations in 30 countries across the Americas, Europe, Asia and Australia. Our corporate operations
center is located in Denver, Colorado, and we also maintain regional headquarters in Denver, Luxembourg, Shanghai, and Singapore.
Included in our property, plant and equipment are land and buildings with a total carrying amount of $229.7 million as of
January 1, 2022, compared to $247.3 million as of January 2, 2021, representing manufacturing facilities, service centers, distribution
centers and offices located throughout the world, but predominantly in North America. As of January 1, 2022, Gates owned 30 of
these facilities, including 23 manufacturing or service centers.
We also lease a number of locations around the world, primarily distribution centers and offices, none of which is individually
material to our operations. Refer to note 12 to the audited consolidated financial statements included elsewhere in this report for
additional information regarding our lease commitments.
Management believes that the Company’s properties are suitable and adequate for its current and anticipated business
operations.
Item 3. Legal Proceedings
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 meritorious defenses
are 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 have a
material adverse effect upon our financial position, results of operations or cash flows.
Not applicable.
Item 4. Mine Safety Disclosures
34
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our ordinary shares are traded on the NYSE under the symbol “GTES”. As of February 4, 2022, there were three holders of
record of our ordinary shares. This does not include a substantially greater number of holders whose ordinary shares are held by these
recordholders, including through banks, brokers, and other institutions.
Dividends
We have no current plans to pay dividends on our ordinary shares. Any decision to declare and pay dividends in the future will
be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash
requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We are a
holding company and have no direct operations; accordingly, we will only be able to pay dividends from funds we receive from our
subsidiaries. In addition, the ability of our subsidiaries to pay dividends will be limited by covenants in our existing indebtedness and
may be limited by the agreements governing any indebtedness we or our subsidiaries may incur in the future.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following information relates to the repurchases of equity securities by Gates during each of the fiscal periods of the fourth
quarter of the current year:
Period
Oct 3, 2021 - Oct 30, 2021
Oct 31, 2021 - Nov 27, 2021
Nov 28, 2021 - Jan 1, 2022
Total
Purchases of Equity Securities by Affiliated Purchasers(1)
Total number of shares
purchased
Average price paid per
share
Total number of shares
purchased as part of
publicly announced plans
or programs(2)
Maximum number of shares
that may yet be purchased
under the plans or
programs(3)
— $
— $
656,451 $
656,451 $
—
—
16.07
16.07
N/A
N/A
656,451
656,451
N/A
N/A
11,907,749
11,907,749
(1)
The table reflects open market purchases of our ordinary shares by the Company and does not include commissions or other
costs paid to repurchase shares. All shares repurchased were cancelled.
(2)
The repurchase program was established in November 2021, allowing for up to $200 million in authorized share repurchases of
our ordinary shares, exclusive of commissions, through December 31, 2022. Under this publicly announced program, we are
authorized to repurchase ordinary shares using a variety of methods, including but not limited to open market purchases and
privately-negotiated transactions, all in compliance with the rules and regulations of the SEC and other applicable legal
requirements. The repurchase program does not obligate us to acquire any specific dollar amount or number of ordinary shares,
and the repurchase program may be suspended or discontinued at any time.
(3) Based on the closing price of our ordinary shares on January 1, 2022 of $15.91.
Item 6. [Reserved]
35
Item 7: Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto
included elsewhere in this annual report. This discussion and analysis addresses Fiscal 2021 and Fiscal 2020. For discussion and
analysis of our financial condition and results of operations for Fiscal 2020 and Fiscal 2019, see Management's Discussion and
Analysis of Financial Condition and Results of Operations, in Part II, Item 7 of our Annual Report on Form 10-K for Fiscal 2020,
which is incorporated herein by reference. In addition to historical information, this discussion contains forward-looking statements
that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations.
Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors” 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, including industrial off-highway end markets such as construction and agriculture, industrial on-highway end
markets such as transportation, diversified industrial, energy and resources, automotive, and mobility and recreation. Our net sales
have historically been, and remain, highly correlated with industrial activity and utilization, and not with any single end market given
the diversification of our business and high exposure to replacement markets. 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 over 110 years 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 natural, and often
preventative, replacement cycles that drive 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.
Business Trends
Our net sales have historically been, and remain, 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 Fiscal 2021, sales into replacement channels accounted for approximately 63% 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 Fiscal 2021, sales into first-fit channels accounted for approximately 37% 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.
36
We continue to make progress on our restructuring program, which is primarily intended to optimize our manufacturing and
distribution footprint over the mid-term by removing structural fixed costs and, to a lesser degree, streamlining our selling, general and
administrative (“SG&A”) back-office functions. We anticipate that most of the remaining costs associated with these actions will be
incurred during 2022. Some of these costs will, in accordance with U.S. GAAP, be classified in cost of sales, negatively impacting
gross margin, but due to their nature and impact of hindering comparison of the performance of our businesses on a period-over-period
basis or with other businesses, they will be excluded from Adjusted EBITDA, consistent with the treatment of similar costs in prior
periods.
During 2021, we experienced challenges from raw material and freight inflation, which we expect to continue in the near term.
We have remained price/cost neutral on a dollar basis relative to these impacts in Fiscal 2021 and expect this to continue in 2022. In
addition, we have experienced production disruptions and input shortages on labor, raw materials and freight. We continue to
prioritize supporting our customers and anticipate that the margin impact of incremental costs incurred as a result of doing so will be
temporary. While we believe we can continue to manage through these challenges, this may impact our ability to deliver products to
our customers.
Impact of COVID-19 Pandemic
The first quarter of 2020 marked the beginning of an unprecedented environment for the global economy, which has continued
throughout 2021, though impacting our business in different ways at different times. We continue to prioritize the health and safety of
our employees and the communities in which we operate around the world, taking additional protective measures in our plants to
safely maintain operational continuity in support of our global customer base.
We are adhering to local government mandates and guidance provided by health authorities and, where necessary, continue to
implement quarantine protocols, social distancing policies, working from home arrangements, travel limitations, frequent and
extensive disinfecting of our workspaces, provision of personal protective equipment, and mandatory temperature monitoring at our
facilities. Where possible, we have made COVID-19 vaccines available to our employees, holding on-site vaccination clinics at a
number of facilities. We may take further actions if required or recommended by government authorities or if we determine them to be
in the best interests of our employees, customers, and suppliers.
Our operations are supported largely by local supply chains. Where necessary, we have taken steps to qualify additional
suppliers to ensure we are able to maintain continuity of supply. Although we have not experienced any significant disruptions to date,
certain Gates suppliers have, or may in the future, temporarily close operations, delay order fulfillment or limit production due to the
pandemic. Continued disruptions, shipping delays or insolvency of key vendors in our supply chain could make it difficult or more
costly for us to obtain the raw materials or other inputs we need for our operations, or to deliver products to our customers.
Gates employs an in-region, for-region manufacturing strategy, under which local operations primarily support local demand. In
those cases where local production supports demand in other regions, contingency plans have been activated as appropriate. In
addition to the handful of plants that were temporarily closed by government mandates, we have proactively managed our output to
expected demand levels and occasionally suspended production at other plants for short periods of time, predominantly in the first half
of 2020. We may experience future production disruptions where plants are temporarily closed, or productivity is reduced, by
government mandates or as a result of supply chain or labor disruptions, which could place constraints on our ability to produce or
deliver our products and meet customer demand or increase our costs.
As shelter-in-place requirements eased in various jurisdictions, we saw sequential quarterly improvements in the second half of
2020 and this continued during the first half of 2021. We expect the pace of these improvements to slow as the global economy
continues to normalize, which we began to experience during the second half of 2021. During this crisis, we have maintained our
ability to respond to demand improvements and we continue to fund key initiatives, which we believe will serve us well as our end
markets continue to recover.
We have strength and flexibility in our liquidity position, which includes committed borrowing headroom of $445.1 million
under our lines of credit, in addition to cash balances of $658.2 million as of January 1, 2022. In addition, our business has a
demonstrated ability to generate free cash flow even in challenging environments.
While we have generally seen a rebound in demand from the pandemic-induced declines of 2020, the evolving impact of the
pandemic, including the emergence of variants, and continuing measures being taken around the world to combat its spread, may have
ongoing implications for our business which may vary from time to time. Some of these impacts may be material but cannot be
reasonably estimated at this time.
37
Results for the year ended January 1, 2022 compared to the results for the year ended January 2, 2021
Summary Gates Performance
(dollars in millions)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Transaction-related expenses
Asset impairments
Restructuring expenses
Other operating income
Operating income from continuing operations
Interest expense
Other expense (income)
Income from continuing operations before taxes
Income tax expense (benefit)
Net income from continuing operations
Adjusted EBITDA(1)
Adjusted EBITDA margin
For the year ended
January 1,
2022
3,474.4
2,135.2
1,339.2
852.7
3.7
0.6
7.4
(9.3)
484.1
133.5
0.9
349.7
18.4
331.3
735.8
21.2 %
$
$
$
$
$
$
January 2,
2021
2,793.0
1,758.3
1,034.7
776.9
5.2
5.2
37.3
(1.0)
211.1
154.3
(14.2)
71.0
(19.3)
90.3
506.6
18.1 %
(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.
Net sales
Net sales during Fiscal 2021 were $3,474.4 million, compared to $2,793.0 million during the prior year, an increase of 24.4%, or
$681.4 million. Our net sales for Fiscal 2021 were favorably impacted by movements in average currency exchange rates of
$76.3 million compared to the prior year, due principally to the weakening of the U.S. dollar against a number of currencies, in
particular the Euro, Chinese Renminbi and the Canadian Dollar. Excluding this impact, core sales increased by $605.1 million, or
21.7%, during Fiscal 2021 compared to the prior year, driven primarily by higher volumes, but with a $103.7 million benefit from
favorable pricing.
Core sales in our Power Transmission and Fluid Power businesses increased by 20.4% and 24.0%, respectively, during
Fiscal 2021 compared to the prior year. These improvements, predominantly a function of the significant economic impact from the
COVID-19 pandemic in the prior year, were driven primarily by increases in sales to customers in our industrial channels, with
industrial first-fit sales up by 34.1% and industrial replacement sales up by 30.7%. The majority of this growth was focused in North
America and EMEA, where industrial sales grew by 27.1% and 42.7%, respectively, during Fiscal 2021 compared to the prior year.
The diversified industrial end markets, which grew strongly in all regions, but particularly in North America and EMEA, drove most
of the industrial channel growth during Fiscal 2021, compared to the prior year, increasing by 35.8% globally. Sales to industrial off-
highway end markets grew by 26.7% during Fiscal 2021 compared to the prior year, primarily in North America. Sales to automotive
replacement customers increased across all regions, growing globally by 15.0% during Fiscal 2021 compared to the prior year, with
over half of this growth coming from EMEA. Sales growth in the automotive first-fit channel was more muted at 2.4% during
Fiscal 2021 compared to the prior year, due primarily to a stronger prior year performance in Greater China due to the earlier start to
the recovery in this region in 2020, and 2021 impacts from softening customer demand resulting from the global semiconductor chip
shortage, and the impact of government-mandated power outages in Greater China.
38
Cost of sales
Cost of sales for Fiscal 2021 was $2,135.2 million, compared to $1,758.3 million for the prior year, an increase of 21.4%, or
$376.9 million. Higher volumes contributed $308.5 million of this increase, with higher inflation-related costs, including higher
inbound freight costs, driving an additional $100.9 million of the increase. Unfavorable movements in average currency exchange
rates added a further $41.6 million to cost of sales during Fiscal 2021 compared to the prior year. These increases were offset partially
by the improved manufacturing performance due to the higher absorption of fixed costs on higher volumes.
Gross profit
Gross profit for Fiscal 2021 was $1,339.2 million, up by $304.5 million or 29.4% from $1,034.7 million for the prior year. As
described above, this change was driven primarily by higher volumes, improved manufacturing performance, and a benefit from
favorable pricing, offset by higher inflation-related costs.
Our gross profit margin for Fiscal 2021 improved by 150 basis points from prior year to 38.5%.
Selling, general and administrative expenses
SG&A expenses for Fiscal 2021 were $852.7 million compared to $776.9 million for the prior year. This increase of
$75.8 million was driven primarily by higher labor costs of $30.4 million and unfavorable movements in average currency exchange
rates of $13.7 million. The remainder of the increase resulted largely from various volume-related increases driven by the rebound in
demand during the current period compared to the prior year.
Transaction-related expenses
Transaction-related expenses of $3.7 million were incurred during Fiscal 2021, related primarily to the amendment to our Dollar
Term Loan credit facility completed in February 2021, as well as certain other corporate transactions during the year. Transaction-
related expenses of $5.2 million were incurred during the prior year, related primarily to payments made on resolution of certain
contingencies that affected the purchase price paid by Blackstone upon acquiring Gates in July 2014.
Restructuring expenses
As described further under the “Business Trends” section above, we continue to make progress on our previously announced
restructuring program, which is primarily intended to optimize our manufacturing and distribution footprint over the mid-term by
removing structural fixed costs, and to streamline our SG&A back-office functions.
Restructuring and other strategic initiative costs, including asset impairments, of $9.4 million were recognized during
Fiscal 2021, including $3.4 million of primarily severance and other labor-related expenses related to our European reorganization
involving office and distribution center closures or downsizings and the implementation of a regional shared service center, and
$3.7 million of additional costs related to the closure in 2020 of a manufacturing facility in Korea, including impairment of fixed
assets of $0.6 million. Also during Fiscal 2021, we incurred $1.4 million of inventory impairments (recognized in cost of sales),
predominantly in North America as part of a strategic product line shift, and we recognized $1.0 million of expenses related to the
consolidation of certain of our Middle East businesses. Partially offsetting these costs were gains of $3.1 million on the disposal of
buildings in Korea and France that were no longer needed following the completion of certain restructuring initiatives.
Restructuring and other strategic initiative costs, including asset impairments, of $43.9 million were recognized during the prior
year, related primarily to the closure of a manufacturing facility in Korea, our European reorganization involving office and
distribution center closures or downsizings and implementation of a regional shared service center, the closure of two North American
manufacturing facilities, and reductions in workforce, primarily in EMEA and North America. The closure of the Korean facility
resulted in an accrual for severance and other labor costs of $13.2 million, an impairment of inventory of $1.4 million (recognized in
cost of sales) and an impairment of fixed assets of $4.8 million (included in asset impairments). Restructuring costs related to our
European reorganization were $12.6 million, of which $11.4 million related to estimated severance.
Other operating income
Other operating income of $9.3 million was recognized during Fiscal 2021, related primarily to a net gain on the sale of a
purchase option on a building that we lease in Europe.
39
Interest expense
(dollars in millions)
Debt:
—Dollar Term Loan
—Euro Term Loan
—Dollar Senior Notes
—Other loans
Amortization of deferred issuance costs
Other interest expense
For the year ended
January 1,
2022
January 2,
2021
$
65.0 $
24.1
35.4
—
124.5
5.9
3.1
133.5 $
$
77.2
24.2
35.9
0.1
137.4
13.5
3.4
154.3
Details of our long-term debt are presented in note 15 to the consolidated financial statements included elsewhere in this report.
Interest on debt for Fiscal 2021 decreased by $12.9 million when compared to the prior year due primarily to interest savings on
debt repayments and the benefit from lower interest rates on the Dollar Term Loan, offset partially by the impact of derivatives. The
benefit from the repayment of €58.7 million ($69.5 million) of our Euro Term Loan during June 2021 was offset by a combination of
the impact of derivatives and an increase in interest caused by unfavorable movements in average currency exchange rates.
Amortization of deferred issuance costs has decreased during Fiscal 2021 due primarily to the extension of the maturity of the
Dollar Term Loan completed in February 2021, in addition to the accelerated amortization of $3.7 million incurred in Fiscal 2020 due
to the repayment of $300.0 million of our Dollar Term Loan facility on December 31, 2020.
Other expense (income)
(dollars in millions)
Interest income on bank deposits
Foreign currency loss (gain) on net debt and hedging instruments
Net adjustments related to post-retirement benefits
Other
For the year ended
January 1,
2022
January 2,
2021
$
$
(3.2) $
7.6
(4.6)
1.1
0.9 $
(4.3)
(5.3)
(4.5)
(0.1)
(14.2)
Other expense for Fiscal 2021 was $0.9 million, compared to an income of $14.2 million in the prior year. This change was
driven primarily by the impact of net movements in foreign currency exchange rates on net debt and hedging instruments in addition
to lower interest income on cash balances, and fees incurred in relation to our trade accounts receivable factoring program.
Income tax expense (benefit)
For Fiscal 2021, we had an income tax expense of $18.4 million on pre-tax income of $349.7 million, which resulted in an
effective tax rate of 5.3% compared to an income tax benefit of $19.3 million on pre-tax income of $71.0 million, which resulted in an
effective tax rate of (27.2)% for Fiscal 2020.
The effective tax rate for Fiscal 2021 was driven primarily by tax benefits of $26.4 million related to the partial valuation
allowance release on deferred tax assets for U.S. foreign tax credits, $16.1 million for deferred taxes on unremitted earnings of our
subsidiaries, and $14.0 million from deferred tax rate changes.
The effective tax rate for Fiscal 2020 was driven primarily by tax benefits of $32.3 million related to audit settlements, changes
in valuation allowance and tax law changes.
40
Deferred Income 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.
As of each reporting date, we consider 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 financial statements.
After weighing all of the evidence, giving more weight to the evidence that was objectively verifiable, we determined in
Fiscal 2021 that it was more likely than not that deferred income tax assets in the U.S. related to foreign tax credits totaling
$53.4 million are realizable as a result of changes in estimates of taxable profits against which these credits can be utilized. Similarly,
we determined that it was more likely than not that deferred income tax assets in Fiscal 2020 primarily related to disallowed interest
carryforwards in the U.K., Luxembourg, and Belgium totaling $29.5 million were realizable.
In Fiscal 2020, the deferred tax assets above include $26.0 million of assets which have no expiration in these jurisdictions. As a
result of changes in estimates of future taxable profits in the third quarter of Fiscal 2020, due primarily to anticipated changes to the
composition of our intercompany financing arrangements related to proposed international tax law changes, our judgment changed
regarding valuation allowances on these deferred tax assets.
Significant Events
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into
law in the U.S. in response to the COVID-19 pandemic. One of the provisions of this law is an increase to the allowable business
interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years. This
modification significantly increased the current deductible interest expense of the Company for both years, which resulted in a cash
benefit while increasing our effective tax rate through requirements to allocate and apportion interest expense for certain other tax
purposes, including in determining our global intangible low-taxed income inclusion, deduction for foreign derived intangible income,
and the utilization of foreign tax credits.
Adjusted EBITDA
Adjusted EBITDA for Fiscal 2021 was $735.8 million, compared to $506.6 million in the prior year, an increase of 45.2% or
$229.2 million. The Adjusted EBITDA margin was 21.2% for Fiscal 2021, a 310 basis point increase from the prior year. The increase
in Adjusted EBITDA was driven primarily by the increase in volumes, pricing benefits and improvement in manufacturing
performance, as described above, together driving an increase in gross profit of $359.4 million, which was offset partially by higher
inflation-related costs, including inbound freight, and higher 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.”
41
Analysis by Operating Segment
Power Transmission (63.8% of Gates’ net sales for the year ended January 1, 2022)
(dollars in millions)
Net sales
Adjusted EBITDA
Adjusted EBITDA margin
For the year ended
January 1,
2022
January 2,
2021
Period over
period change
$
$
2,216.3
500.6
$
$
1,800.2
353.0
22.6 %
19.6 %
23.1%
41.8%
Net sales in Power Transmission for Fiscal 2021 increased by 23.1%, or $416.1 million, compared to the prior year. Excluding
the favorable impact of movements in average currency exchange rates of $49.2 million, core sales increased by 20.4%, or
$366.9 million, compared to the prior year, driven primarily by higher volumes, but with a $57.5 million benefit from favorable
pricing.
Power Transmission’s core sales to industrial customers grew by 33.8% during Fiscal 2021, compared to the prior year, driven
by growth in industrial first-fit sales, particularly in North America and EMEA, and strong industrial replacement growth in East Asia
& India. This industrial growth was predominantly focused in the diversified industrial end market, which grew by 35.9% during
Fiscal 2021 compared to the prior year, primarily in North America, EMEA and Greater China. Industrial on-highway end market
sales increased globally by 19.7% compared to the prior year, driven by growth in North America and EMEA, while industrial off-
highway end market sales were more mixed, with strong growth in North America offset partially by moderate declines in Greater
China, due primarily to the stronger prior year performance in Greater China due to the earlier start to the recovery in this region in
2020. Automotive replacement sales also drove growth during Fiscal 2021, increasing by 18.4% globally, compared to the prior year,
with strong growth in all regions, but primarily in EMEA, which grew by 24.7% in Fiscal 2021 compared to the prior year. Sales to
automotive first-fit customers grew more modestly at 2.8% compared to the prior year, with strong growth in East Asia & India
largely offset by declines in Greater China, due to softening customer demand resulting from the global semiconductor chip shortage,
and the impact of government-mandated power outages.
Power Transmission Adjusted EBITDA for Fiscal 2021 increased by 41.8% or $147.6 million compared to the prior year, driven
primarily by a combination of higher volumes, improved manufacturing performance and pricing benefits. These increases were offset
partially by higher inflation-related costs and increased SG&A spending, related primarily to labor. As a result, the Adjusted EBITDA
margin for Fiscal 2021 was 22.6%, a 300 basis point improvement from the prior year.
Fluid Power (36.2% of Gates’ net sales for the year ended January 1, 2022)
(dollars in millions)
Net sales
Adjusted EBITDA
Adjusted EBITDA margin
For the year ended
January 1,
2022
1,258.1
235.2
18.7 %
$
$
$
$
January 2,
2021
Period over
period change
992.8
153.6
15.5 %
26.7%
53.1%
Net sales in Fluid Power for Fiscal 2021 increased by 26.7%, or $265.3 million, compared to the prior year. Excluding the
favorable impact of movements in average currency exchange rates of $27.1 million, core sales increased by 24.0%, or $238.2 million,
compared to the prior year, driven primarily by higher volumes, but with a $46.2 million benefit from favorable pricing.
Fluid Power’s core sales growth in Fiscal 2021 was driven almost entirely by increased sales to industrial customers, which
grew by 30.8% compared to the prior year, with industrial replacement sales outperforming sales to industrial first-fit customers. This
growth was driven primarily by sales to the industrial off-highway end market, which grew across most regions, but predominantly in
EMEA and North America, and in the construction end market in particular, which grew by 62.8% and 25.3%, respectively, in these
two regions. Growth in sales to the diversified industrial end market, which grew by 35.6% globally, primarily in North America, also
contributed to the overall industrial sales growth in Fiscal 2021 compared to the prior year. Growth in automotive replacement sales
was more modest during Fiscal 2021 at 4.7% compared to the prior year, driven primarily by EMEA.
42
Fluid Power Adjusted EBITDA for Fiscal 2021 increased by 53.1%, or $81.6 million compared to the prior year, driven
primarily by a combination of higher volumes, improved manufacturing performance and pricing benefits. These increases were offset
partially by higher inflation-related costs and increased SG&A spending, related primarily to labor. As a result, the Adjusted EBITDA
margin for Fiscal 2021 was 18.7%, a 320 basis point improvement from the prior year.
Liquidity and Capital Resources
Treasury Responsibilities and Philosophy
Our primary liquidity and capital resource needs are for working capital, debt service requirements, capital expenditures, share
repurchases, 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 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 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 may be material, and result in
related adverse tax consequences to us.
It is our policy to retain sufficient liquidity throughout the capital expenditure cycle to maintain our financial flexibility. We do
not have any meaningful debt maturities until 2024; however, we regularly evaluate market conditions, our liquidity profile, and
various financing alternatives for opportunities to enhance our capital structure, and may refinance all or a portion of our indebtedness
on or before maturity. We do not anticipate any material long-term deterioration in our overall liquidity position in the foreseeable
future, and believe that we have adequate liquidity and capital resources for the next twelve months.
Cash Flow
Year ended January 1, 2022 compared to the year ended January 2, 2021
Cash provided by operating activities was $382.4 million during Fiscal 2021 compared to cash provided by operating activities
of $309.0 million during the prior year. This increase was driven primarily by higher operating performance during the current year,
offset partially by an increase in trade working capital of $131.3 million more than in the prior year, driven by the increase in
production and sales, and an increase of $22.6 million in cash taxes paid.
Net cash used in investing activities during Fiscal 2021 was $86.0 million, compared to $77.5 million in the prior year. This
increase was driven primarily by higher capital expenditures, which increased by $19.6 million from $67.4 million in the prior year to
$87.0 million in Fiscal 2021, offset partially by proceeds of $8.4 million on disposal of fixed assets.
Net cash used in financing activities was $148.6 million during Fiscal 2021, compared to $353.8 million in the prior year. This
lower cash outflow was driven primarily by the $300.0 million repayment of our Dollar Term Loan facility in December 2020, offset
partially by the $69.5 million repayment made in June 2021 against our Euro Term Loan facility, $11.4 million of higher debt issuance
costs, related primarily to the amendments made to the credit agreement during February 2021, and $10.6 million paid to acquire
shares under our share repurchase program.
43
Indebtedness
Our long-term debt, consisting principally of two term loans and U.S. dollar denominated unsecured notes, was as follows:
(dollars in millions)
Debt:
—Secured
Carrying amount
Principal amount
As of
January 1, 2022
As of
January 2, 2021
As of
January 1, 2022
As of
January 2, 2021
Term Loans (U.S. dollar and Euro denominated)
$
1,986.1 $
2,131.2 $
2,011.2 $
2,152.6
—Unsecured
Senior Notes (U.S. dollar)
Other debt
578.5
—
577.3
0.2
568.0
—
568.0
0.2
$
2,564.6 $
2,708.7 $
2,579.2 $
2,720.8
Details of our long-term debt are presented in note 15 to the consolidated financial statements included elsewhere in this annual
report.
Debt redemptions
During June 2021, we made a principal debt repayment of €58.7 million ($69.5 million) against our Euro Term Loan facility. As
a result of this repayment, we accelerated the recognition of $0.4 million of deferred issuance costs (recognized in interest expense).
Dollar Term Loan credit agreement amendments
On February 24, 2021, we made amendments to the Dollar Term Loan credit agreement, including extending its maturity date
from March 31, 2024 to March 31, 2027, reducing the floor applicable to the Dollar Term Loan from 1.00% to 0.75% and modifying
the applicable interest rate margin for the Dollar Term Loan to include a 0.25% reduction if our consolidated total net leverage ratio
(as defined in the credit agreement) is less than or equal to 3.75 times. In connection with these amendments, we paid accrued interest
up to the date of the amendments of $3.7 million, in addition to fees of approximately $8.6 million, of which $6.9 million qualified for
deferral and will be amortized to interest expense over the new remaining term of the Dollar Term Loan using the effective interest
method.
During the third quarter, as a consequence of the amendments described above, the margin on the Dollar Term Loan was
reduced by 0.25% as the consolidated total net leverage ratio (as defined in the credit agreement) dropped below 3.75 times.
Revolver extensions
On November 18, 2021, we amended the credit agreements governing both of our revolving credit facilities to, among other
things, increase the size of the cash flow revolving credit facility from $185.0 million to $250.0 million, and decrease the maximum
commitments available under the asset-backed revolver from $325.0 million to $250.0 million. In addition, the letter of credit sub-
facility under the cash flow revolving credit facility was increased from $20.0 million to $75.0 million. The maturity dates of both
revolving credit facilities were also extended from January 29, 2023 to November 18, 2026 (subject to certain springing maturities
related to our Euro Term Loan and Unsecured Senior Notes if more than $500.0 million is outstanding in respect of either such facility
91 days prior to their respective maturities).
In connection with these amendments, we paid fees of $3.3 million, which have been deferred and will, together with existing
deferred issuance costs related to these facilities, be amortized to interest expense over the new term of the facilities on a straight-line
basis.
Non-guarantor subsidiaries
The majority of the Company’s U.S. subsidiaries are guarantors of the senior secured credit facilities.
For the twelve months ended January 1, 2022, before intercompany eliminations, our non-guarantor subsidiaries represented
approximately 74% of our net sales and 69% of our EBITDA as defined in the financial covenants attaching to the senior secured
credit facilities. As of January 1, 2022, before intercompany eliminations, our non-guarantor subsidiaries represented approximately
62% of our total assets and approximately 28% of our total liabilities.
44
Net Debt
Net debt is a non-GAAP measure representing the principal amount of our debt less the carrying amount of cash and cash
equivalents. During Fiscal 2021, our net debt decreased by $278.4 million from $2,199.4 million as of January 2, 2021 to
$1,921.0 million as of January 1, 2022. Net debt was impacted favorably by $39.6 million due to movements in currency exchange
rates, related primarily to the impact of the weakening of the Euro against the U.S. dollar on our Euro-denominated debt. Excluding
this impact, net debt decreased by $238.8 million, which was driven primarily by cash provided by operating activities of
$382.4 million, offset partially by a number of cash outflows, including capital expenditures of $87.0 million, dividends paid to non-
controlling shareholders of $26.6 million, debt issuance costs of $11.7 million paid primarily in respect of the amendments to the
credit agreement in February 2021, and $10.6 million paid to acquire shares under our share repurchase program.
Borrowing Headroom
As of January 1, 2022, our asset-backed revolving credit facility had a borrowing base of $240.4 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 $45.3 million. We also have a secured revolving credit facility that provides for
multi-currency revolving loans up to an aggregate principal amount of $250.0 million.
In total, our committed borrowing headroom was $445.1 million, in addition to cash balances of $658.2 million.
Tabular Disclosure of Contractual Obligations
Our consolidated contractual obligations and commercial commitments are summarized in the following table which includes
aggregate information about our contractual obligations as of January 1, 2022 and the periods in which payments are due, based on the
earliest date on which we could be required to settle the liabilities. The table below excludes our gross liability for uncertain tax
positions of $103.7 million because the timing of cash settlement, if any, is unknown at this time.
Floating interest payments and payments and receipts on interest rate derivatives are estimated based on market interest rates
prevailing at the balance sheet date. Amounts in respect of purchase obligations are items that we are obligated to pay in the future, but
they are not required to be included on the consolidated balance sheet.
(dollars in millions)
Bank overdrafts and debt:
—Principal
—Interest payments(1)
Derivative financial instruments(2)
Finance leases
Operating leases
Post-retirement benefits(3)
Indemnified tax liabilities
Purchase obligations(4)
Total
Total
2022
2023 and 2024
2025 and 2026
2027 and beyond
Earliest period in which payments are due
$
$
2,579.2 $
469.9
62.4
3.4
170.0
14.1
0.2
37.1
3,336.3 $
21.2 $
99.7
34.0
1.4
24.8
14.1
0.2
20.3
215.7 $
664.2 $
191.2
22.6
1.6
42.4
—
—
15.2
937.2 $
599.0 $
161.7
5.8
0.4
32.6
—
—
1.6
801.1 $
1,294.8
17.3
—
—
70.2
—
—
—
1,382.3
(1)
Future interest payments include payments on fixed and floating rate debt. Floating rate interest payments are estimated based
on forward market interest rates and terms prevailing as of January 1, 2022.
(2) Net payments on cross currency swaps, interest rate caps, interest rate swaps and currency forward contracts are estimated based
on forward market rates prevailing as of January 1, 2022.
(3)
Post-retirement benefit obligations represent our expected cash contributions to defined benefit pension and other post-
retirement benefit plans in 2022. It is not practicable to present expected cash contributions for subsequent years because they
are determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other
regulations.
(4) A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and
that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction.
45
Cash Balances
As of January 1, 2022, our total cash and cash equivalents were $658.2 million, compared to $521.4 million as of January 2,
2021.
Restricted cash was $2.7 million as of January 1, 2022, compared to $2.7 million as of January 2, 2021, including $1.0 million
as of January 1, 2022 and $1.0 million as of January 2, 2021, which was held in escrow for insurance purposes. Cash held in our non-
wholly owned Asian subsidiaries was $168.4 million and $152.7 million as of January 1, 2022 and January 2, 2021, respectively.
Distributable Reserves
Under the laws of England and Wales, future dividend payments or share repurchases may only be made out of “distributable
reserves” on the Company’s statutory balance sheet. During August 2019, the High Court of Justice in London sanctioned a reduction
in the Company’s statutory capital for the purpose of creating distributable reserves by approving the cancellation of the deferred
shares in issue and the cancellation of the entire amount standing to the credit of the Company’s share premium account, creating
$5.5 billion of distributable reserves. These transactions, which have no impact on the consolidated U.S. GAAP financial statements,
facilitate the possible future payment of dividends to shareholders of the Company or possible future share repurchases.
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:
•
•
•
•
•
non-cash charges in relation to share-based compensation;
transaction-related expenses incurred in relation to major corporate transactions, including the acquisition of businesses,
and equity and debt transactions;
asset impairments;
restructuring expenses, including severance-related expenses; 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.
46
We exclude from Adjusted EBITDA acquisition-related costs that are required to be expensed in accordance with U.S. GAAP.
In particular, we exclude 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 underlying performance of our businesses. During the periods presented, we excluded
restructuring expenses and severance-related expenses that reflect specific, strategic actions taken by management to shutdown,
downsize, or otherwise fundamentally reorganize areas of Gates’ business; 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; and fees paid to our
private equity sponsor.
EBITDA and Adjusted EBITDA exclude items that can have a significant effect on our profit or loss and should, therefore, be
used in conjunction with, not as substitutes for, profit or loss for the period. Management compensates for these limitations by
separately monitoring net income from continuing operations for the period.
The following table reconciles net income from continuing operations, the most directly comparable GAAP measure, to
EBITDA and Adjusted EBITDA:
(dollars in millions)
Net income from continuing operations
Income tax expense (benefit)
Net interest and other expenses
Depreciation and amortization
EBITDA
Transaction-related expenses (1)
Asset impairments
Restructuring expenses
Share-based compensation expense
Sponsor fees (included in other operating expense)
Inventory impairments (included in cost of sales)
Severance expenses (included in cost of sales)
Severance expenses (included in SG&A)
Other items not directly related to current operations (2)
Adjusted EBITDA
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
331.3 $
18.4
134.4
222.6
706.7
3.7
0.6
7.4
24.6
—
1.4
—
0.7
(9.3)
735.8 $
90.3 $
(19.3)
140.1
218.6
429.7
5.2
5.2
37.3
19.8
1.9
1.4
1.0
8.0
(2.9)
506.6 $
694.7
(495.9)
148.0
222.2
569.0
2.6
0.7
6.0
15.0
6.5
1.2
4.0
3.4
2.6
611.0
(1)
Transaction-related expenses relate primarily to advisory fees and other costs recognized in respect of major corporate
transactions, including the acquisition of businesses, and equity and debt transactions.
(2) During Fiscal 2021, we realized a net gain of $9.3 million related to the sale of a purchase option on a building that we lease in
Europe.
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.
(dollars in millions)
Net sales
Adjusted EBITDA
Adjusted EBITDA margin
For the year ended
January 1,
2022
January 2,
2021
$
$
3,474.4
735.8
$
$
2,793.0
506.6
December 28,
2019
$
$
3,087.1
611.0
21.2 %
18.1 %
19.8 %
47
Core growth reconciliations
Core revenue 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, when applicable. 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 impacts of acquisitions or disposals. 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.
(dollars in millions)
Net sales for the year ended January 1, 2022
Impact on net sales of movements in currency rates
Core revenue for the year ended January 1, 2022
For the year ended January 1, 2022
$
Power
Transmission
2,216.3
(49.2)
2,167.1
$
Fluid Power
1,258.1
(27.1)
1,231.0
$
Total
3,474.4
(76.3)
3,398.1
Net sales for the year ended January 2, 2021
Increase in net sales on a core basis (core revenue)
1,800.2
366.9
$
$
992.8
238.2
2,793.0
605.1
$
Core revenue growth
20.4 %
24.0 %
21.7 %
(dollars in millions)
Net sales for the year ended January 2, 2021
Impact on net sales of movements in currency rates
Core revenue for the year ended January 2, 2021
For the year ended January 2, 2021
$
Power
Transmission
1,800.2
18.4
1,818.6
$
Fluid Power
992.8
16.1
1,008.9
$
Total
2,793.0
34.5
2,827.5
Net sales for the year ended December 28, 2019
Decrease in net sales on a core basis (core revenue)
1,945.7
(127.1)
$
1,141.4
(132.5)
3,087.1
(259.6)
$
$
Core revenue decline
Net Debt
(6.5) %
(11.6) %
(8.4) %
Management uses net debt, rather than the narrower measure of cash and cash equivalents and restricted cash which forms the
basis for the 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)
Principal amount of debt
Less: Cash and cash equivalents
Net debt
48
As of January 1,
2022
As of January 2,
2021
$
$
2,579.2 $
(658.2)
1,921.0 $
2,720.8
(521.4)
2,199.4
The principal amount of debt is reconciled to the carrying amount of debt as follows:
(dollars in millions)
Principal amount of debt
Accrued interest
Deferred issuance costs
Carrying amount of debt
As of January 1,
2022
As of January 2,
2021
$
2,579.2 $
16.9
(31.5)
2,720.8
17.3
(29.4)
$
2,564.6 $
2,708.7
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 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 $4.7 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 report is a receivable of $0.9 million due to Gates Global LLC and its subsidiaries
from indirect parent entities of Gates Global LLC as of January 1, 2022, compared to a receivable of $0.6 million as of January 2,
2021, and additional cash and cash equivalents held by the Company and other indirect parents of Gates Global LLC of $12.7 million
and $4.2 million as of January 1, 2022 and January 2, 2021, respectively.
Critical Accounting Estimates and Judgments
Details of our significant accounting policies are set out in note 2 to our audited consolidated financial statements included
elsewhere in this annual report.
When applying our accounting policies, we must make assumptions, judgments and estimates concerning the future that affect
reported amounts of assets, liabilities, revenue and expenses. We make these assumptions, estimates and judgments based on factors
such as historical experience, the observance of trends in the industries in which we operate and information available from our
customers and other outside sources. Due to the inherent uncertainty involved in making assumptions, estimates and judgments, the
actual outcomes could be different. The policies discussed below are considered by management to be more critical than other policies
because their application involves a significant amount of estimation uncertainty that increases the risk of a material adjustment to the
carrying amounts of our assets and liabilities.
Net Sales
We derive our net sales primarily from the sale of a wide range of power transmission and fluid power products and components
for a large variety of industrial and automotive applications, both in the aftermarket and first-fit channels, throughout the world.
In most of our agreements with customers, we consider accepted customer purchase orders, which in some cases are governed
by master sales agreements, to represent the contracts with our customers. Revenue from the sale of goods under these contracts is
measured at the invoiced amount, net of estimated returns, early settlement discounts and rebates. Taxes collected from customers
relating to product sales and remitted to government authorities are excluded from revenues. Where a customer has the right to return
goods, future returns are estimated based on historical returns profiles. Settlement discounts that may apply to unpaid invoices are
estimated based on the settlement histories of the relevant customers.
49
Our transaction prices often include variable consideration, usually in the form of discounts and rebates that may apply to issued
invoices. The reduction in the transaction price for variable consideration requires that we make estimates of the expected total
qualifying sales to the relevant customers. These estimates, including an analysis for potential constraint on variable consideration,
take into account factors such as the nature of the rebate program, historical information and expectations of customer and consumer
behavior. Overall, the transaction price is reduced to reflect our estimate of the amount of consideration that is not probable of
significant reversal.
We allocate the transaction price to each distinct performance obligation based on their relative standalone selling price. The
product price as specified on the accepted purchase order or similar binding contract is considered to be the standalone selling price. In
substantially all of our contracts with customers, our performance obligations are satisfied at a point in time, rather than over a period
of time, when control of the product is transferred to the customer. This occurs typically at shipment. In determining whether control
has transferred and the customer is consequently able to control the use of the product for their own benefit, we consider if there is a
present right to payment, legal title and physical possession has been transferred, whether the risks and rewards of ownership have
transferred to the customer, and if acceptance of the asset by the customer is more than perfunctory.
Impairment of Goodwill and Other Indefinite-Lived Assets
Goodwill and other indefinite-lived intangible assets are subject to an annual impairment test but are also tested for impairment
if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount.
Goodwill
Goodwill arising in a business combination is allocated to the reporting unit that is expected to benefit from the synergies of the
acquisition. Where goodwill is attributable to more than one reporting unit, the goodwill is determined by allocating the purchase
consideration in proportion to their respective business enterprise values and comparing the allocated purchase consideration with the
fair value of the identifiable assets and liabilities of the reporting unit.
Goodwill is not amortized but is tested for impairment on the first day of the fourth quarter or more frequently whenever events
or changes in circumstances indicate that the carrying value may not be recoverable and is carried at cost less any recognized
impairment.
To identify a potential impairment of goodwill, the fair value of the reporting unit to which the goodwill is allocated is
compared to its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill
of the reporting unit is not considered impaired. If the fair value is lower than the carrying amount, an impairment charge is recognized
for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the amount of goodwill allocated to
that reporting unit.
Management based the fair value calculations on a weighted blend of the income and market approaches. The income approach
was based on cash flow forecasts derived from the most recent financial plans approved by the board of directors, in which the
principal assumptions were those regarding sales growth rates, selling prices and changes in direct costs. Forecasts for the following
two years were based on region-specific growth assumptions determined by management, taking into account strategic initiatives.
Cash flows for each of the reporting units for the years beyond this period were projected to grow at compound annual growth
rates reflecting annual changes over the next seven years from the 2024 growth rates to the terminal growth rate. For Gates as a whole,
this growth rate was calculated to be 1.6%. The terminal growth rate for both reporting units was set at 2.5%, a rate that does not
exceed the expected long-term growth rates in the respective principal end markets.
Management applied discount rates to the resulting cash flow projections that reflect current market assessments of the time
value of money and the risks specific to each reporting unit. In each case, the discount rate was determined using a capital asset
pricing model. The discount rates used in the impairment tests of goodwill during Fiscal 2021 were 9.0% for both reporting units.
For both reporting units, the fair values exceeded the carrying values and no goodwill impairments were therefore recognized
during Fiscal 2021.
We base our fair value estimates on assumptions we believe to be reasonable at the time but that are unpredictable and
inherently uncertain. In addition, we make certain judgments and assumptions in allocating goodwill between reporting units and in
allocating shared assets and liabilities to determine the carrying values for each of our reporting units tested. Changes in assumptions
or circumstances could result in an additional impairment in the period in which the change occurs and in future years.
50
Indefinite-Lived Assets Other than Goodwill
To identify a potential impairment of indefinite-lived assets other than goodwill, the fair value of the asset is compared to its
carrying amount. If the fair value of the indefinite-lived asset exceeds its carrying amount, it is not considered impaired. Fair value is
calculated based on the anticipated net cash inflows and outflows related to the indefinite-lived asset.
During the periods covered by this annual report, we held an indefinite-lived brand and trade name intangible asset. We test the
intangible for impairment on the first day of the fourth quarter or more frequently whenever events or changes in circumstances
indicate that the carrying value may not be recoverable and is carried at cost less any recognized impairment.
The fair value for our indefinite-lived brand and trade name intangible asset was determined using a relief from royalty
valuation methodology in which the key assumptions included sales growth rates and an estimated royalty rate. Sales forecasts were
determined on the same basis as those used for the annual impairment testing of goodwill (as described above).
Management applied discount rates to the calculated royalty savings that reflect current market assessments of the time value of
money and the risks specific to each region in which those royalty savings arose. In each case, the discount rate was determined using
a capital asset pricing model adjusted for a premium to reflect the higher risk specific to the nature of the intangible asset. The
discount rate used in Fiscal 2021 impairment test was 10.0%. As a result of the impairment testing, no impairment was recognized
during Fiscal 2021.
We base our fair value estimates on assumptions we believe to be reasonable at the time but that are unpredictable and
inherently uncertain. Changes in assumptions or circumstances could result in an additional impairment in the period in which the
change occurs and in future years.
Taxation
We are subject to income tax in most of the jurisdictions in which we operate. Management is required to exercise significant
judgment in determining our provision for income taxes. Management’s judgment is required in relation to unrecognized income tax
benefits whereby additional current tax may become payable in the future following the audit by tax authorities of previously-filed tax
returns. It is possible that the final outcome of these unrecognized income tax benefits may differ from management’s estimates.
Management assesses unrecognized income tax benefits based upon an evaluation of the facts, circumstances and information
available at the balance sheet date. Provision is made for unrecognized tax benefits to the extent that the amounts previously taken or
expected to be taken in tax returns exceeds the tax benefits that are recognized in the consolidated financial statements in respect of the
tax positions. A tax benefit is recognized in the consolidated financial statements only if management considers that it is more likely
than not that the tax position will be sustained on examination by the relevant tax authority solely on the technical merits of the
position and is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement
assuming that the tax authority has full knowledge of all relevant information. Provisions for unrecognized income tax benefits are
reviewed regularly and are adjusted to reflect events such as the expiration of limitation periods for assessing tax, guidance given by
the tax authorities and court decisions.
Deferred income tax assets and liabilities are recognized based on the expected future tax consequences of the difference
between the financial statement carrying amount and the respective tax basis. Deferred income taxes are measured on the enacted rates
expected to apply to taxable income at the time the difference is anticipated to reverse. Deferred income tax assets are reduced through
the establishment of a valuation allowance if it is more likely than not that the deferred income tax asset will not be realized taking
into account the timing and amount of the reversal of taxable temporary differences, expected future taxable income and tax planning
strategies.
Deferred income tax is provided on certain taxable temporary differences arising on investments in foreign subsidiaries, except
where we intend, and are able, to reinvest such amounts on a permanent basis or to remit such amounts in a tax-free manner.
We have recorded valuation allowances against certain of our deferred income tax assets and we intend to continue maintaining
such valuation allowances until there is sufficient evidence to support the reduction of all or some portion of these allowances. During
Fiscal 2021, we determined that it was more likely than not that certain deferred income tax assets in the U.S. totaling $53.4 million
were realizable. During Fiscal 2020, we determined that it was more likely than not that certain deferred income tax assets in the U.K.,
Luxembourg and Belgium totaling $29.5 million were realizable.
51
Accounting Pronouncements Not Yet Adopted
Recently issued accounting pronouncements that may be relevant to our operations but have not yet been adopted are outlined in
note 3 to our audited consolidated financial statements included elsewhere in this annual report.
Item 7A. 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,
commodity prices, and the credit risk of our customers and third-party depository institutions that hold our cash and short-term
deposits. 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.
On a regular basis, we monitor third-party depository institutions that hold our cash and short-term investments and we diversify
these assets among counterparties to minimize exposure to any one of these entities. We also monitor the creditworthiness of our
customers and suppliers to mitigate any adverse impact.
Foreign Currency Exchange Risk
We have global operations and thus make investments and enter into transactions denominated in various foreign currencies.
Our operating results are impacted by buying, selling and financing in currencies other than the functional currency of our operating
companies. We monitor exposure to transactions denominated in currencies other than the functional currency of each country in
which we operate, and enter into forward contracts to mitigate that exposure as needed. We also naturally hedge foreign currency
through our production in the countries in which we sell our products.
In addition, we are exposed to currency risk associated with translating our non-U.S. dollar financial statements into
U.S. dollars, which is our reporting currency. As a result, we are exposed to movements in the exchange rates of various currencies
against the U.S. dollar. Translational foreign exchange risks arise predominantly on the potential increase in our significant euro debt
when translated to U.S. dollars, as well as on the potential decreases in the value of our earnings, cash balances and other net assets
denominated in euro and other currencies when translated to U.S. dollars.
The currency profiles of our cash and debt are centrally managed as are decisions about the location of cash. The currency
profile of cash and debt, after taking into account the effect of the currency swaps and forwards used to manage those profiles, were as
follows:
(dollars in millions)
Cash and cash equivalents by currency:
—U.S. dollar
—Chinese Yuan Renminbi
—Indian Rupee
—Euro
—Japanese Yen
—Other
Principal amount of debt by currency:
—U.S. dollar
—Euro
As of January 1,
2022
As of January 2,
2021
$
$
$
$
346.2 $
109.7
14.9
32.5
42.1
112.8
658.2 $
199.5
94.8
49.6
37.8
30.6
109.1
521.4
1,641.9 $
937.3
2,579.2 $
1,634.2
1,086.6
2,720.8
As described in note 13 to the audited consolidated financial statements included elsewhere in this annual report, during
Fiscal 2021 and Fiscal 2020 we had designated a portion of our Euro Term Loans, as well as a €254.5 million cross currency swap, as
hedges of a portion of our net investment in euro-denominated foreign operations. Changes in the value of these instruments resulting
from fluctuations in the euro to U.S. dollar exchange rate are accordingly recorded as foreign currency translation adjustments within
other comprehensive income.
52
Interest Rate Risk
Our prevailing market risk on interest rates is the potential fluctuation in interest costs and in the fair value of long-term debt
resulting from movements in interest rates.
We use interest rate derivatives as part of our interest rate risk management strategy to add stability to interest expense and to
manage our exposure to interest rate movements. The interest rate caps are designated as cash flow hedges and 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. The
following table summarizes the key terms of the active interest rate derivatives held by the Company:
Notional
principal
amount
(millions)
Payable
Interest rate
Receivable
Variable
Fixed
Variable
Fixed
Variable rate index
As of January 1, 2022
Maturity date:
—June 2025
—June 2023
As of January 2, 2021
Maturity date:
—June 2025
—June 2023
$
€
$
€
870.0
425.0
— %
— %
2.5 %
0.3 %
— %
— %
1.0 %
1 month LIBOR
— % 3 month EURIBOR
870.0
425.0
— %
— %
2.5 %
0.3 %
— %
— %
1 month LIBOR
1.0 %
— % 3 month EURIBOR
The interest rate profile of the Company’s financial assets and liabilities, after taking into account the effect of the interest rate
hedging activities, was as follows:
(dollars in millions)
Financial assets:
Available-for-sale investments $
Cash and cash equivalents
Restricted cash
As of January 1, 2022
As of January 2, 2021
Interest-bearing
Interest-bearing
Floating
rate
Fixed
rate
Non-interest
bearing
Total
Floating
rate
Fixed
rate
Non-interest
bearing
Total
— $
203.5
—
203.5
— $
—
—
—
0.6 $
0.6 $
— $
454.7
2.7
458.0
658.2
2.7
661.5
214.1
—
214.1
— $
—
—
—
2.1 $
307.3
2.7
312.1
2.1
521.4
2.7
526.2
Financial liabilities:
Debt
Obligations under finance
leases
Liquidity risk
(657.3) (1,921.9)
—
(2,579.2)
(762.9) (1,957.7)
(0.2) (2,720.8)
—
(3.3)
(657.3) (1,925.2)
(453.8) $ (1,925.2) $
—
—
(3.3)
(2,582.5)
458.0 $ (1,921.0) $
—
(3.0)
(762.9) (1,960.7)
(548.8) $ (1,960.7) $
—
(3.0)
(0.2) (2,723.8)
311.9 $ (2,197.6)
$
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Our
debt facilities are monitored against forecast requirements and timely action is taken to put in place, renew or replace credit lines. We
aim to reduce liquidity risk by diversifying our funding sources, maintaining adequate headroom under our debt facilities and by
staggering the maturities of our debt.
We have established long-term credit ratings of B2 Stable with Moody’s and B+ Stable with Standard & Poor’s. Credit ratings
are subject to regular review by the credit rating agencies and may change in response to economic and commercial developments.
For the expected timing of contractual cash flows relating to our financing arrangements, see the table set out above under
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations under
Financing Arrangements and Other Commitments.”
53
Commodity Risk
We source a wide variety of materials and components from a network of global suppliers. While such materials are typically
available from numerous suppliers, commodity raw materials such as aluminum, steel and polymers are subject to price fluctuations,
which could have a negative impact on our results. We primarily manage these risks through normal operating activities. We strive to
pass along such commodity price increases to customers to avoid profit margin erosion and utilize lean initiatives and materials
science capabilities to further mitigate the impact of commodity raw material price fluctuations as we achieve improved efficiencies.
We historically have not entered into any derivative commodity instruments to manage the exposure to changing price risk for
supplies, but we will continue to evaluate their viability.
Credit risk
Our principal financial assets are cash and cash equivalents, derivatives, trade and other receivables and investments.
We regularly monitor third-party depository institutions that hold our cash and short-term investments, primarily for safety of
principal and secondarily for maximizing yield on those funds. We diversify our cash and short-term investments among
counterparties to minimize exposure to any one of these entities.
The credit risk on derivative financial instruments is limited because the counterparties are financial institutions with high
credit-ratings assigned by international credit-rating agencies.
To mitigate the credit risk attributable to our trade receivables we perform credit verifications and monitor closely the
creditworthiness of new and existing customers. The amounts presented in the balance sheet for trade receivables are net of allowances
for expected credit losses. We develop expected loss estimates based either on the aging profile of outstanding receivables or by
applying an experience factor (either a percentage of sales or a percentage of open receivables). These methodologies are based
primarily on historical trends and experience, but credit controllers also regularly assess individual customer accounts to identify any
potential increases or decreases in the level of expected credit loss needed to be applied to each customer based on current
circumstances and future expectations.
Two customers of our North America businesses accounted for 13.9% and 10.0%, respectively, of our total trade accounts
receivable balance as of January 1, 2022, compared to 11.9% and 16.5%, respectively, as of January 2, 2021. These concentrations are
due to the extended payment terms common in the industry in which these businesses operate.
We have no other significant concentrations of credit risk as our exposure is spread over a large number of customers and
counterparties.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included as a separate section in this annual report. See Part IV. Item 15. “Exhibits,
Financial Statement Schedules,” which is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
54
Disclosure Controls and Procedures
Item 9A. Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance 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 and accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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 Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this annual report. Based
upon that evaluation required by paragraph (b) of Rules 13a-15 or 15d-15, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that, as of January 1, 2022, the Company’s disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S.
GAAP. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, misstatements due to error or fraud may not be prevented or detected on a timely basis.
Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an
assessment of the effectiveness of the Company’s internal control over financial reporting at January 1, 2022, utilizing the criteria
discussed in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was
effective at January 1, 2022. Based on management’s assessment, we have concluded that our internal control over financial reporting
was effective at January 1, 2022.
Deloitte & Touche LLP (PCAOB ID No. 34), the independent registered public accounting firm that audited the Company’s
consolidated financial statements included elsewhere in this report, has issued an attestation report on our internal control over
financial reporting as of January 1, 2022, as stated in its report which is included herein.
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.
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Not applicable.
55
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The information called for by this Item 10 is incorporated by reference to our definitive proxy statement for our 2022 annual
general meeting of shareholders (our “2022 Proxy Statement”), anticipated to be filed with the Securities and Exchange Commission
within 120 days of January 1, 2022, under the headings “Proposal 1- Election of Directors,” “Corporate Governance,” and, if
applicable, “Delinquent Section 16(a) Reports.”
Code of Ethics
We maintain a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees, including our
principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar
functions, which is posted on our website at www.gates.com under “About Us: Investor Relations: Governance: Governance
Documents.” Our Code of Business Conduct and Ethics is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. We will
make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website. The
information contained on, or accessible from, our website is not part of this annual report by reference or otherwise.
Item 11. Executive Compensation
The information called for by this Item 11 is incorporated by reference to our 2022 Proxy Statement anticipated to be filed with
the Securities and Exchange Commission within 120 days of January 1, 2022, under the headings “Executive Compensation” and
“Corporate Governance - Compensation Interlocks and Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by this Item 12 is incorporated by reference to our 2022 Proxy Statement anticipated to be filed with
the Securities and Exchange Commission within 120 days of January 1, 2022, under the headings “Security Ownership of Certain
Beneficial Owners and Management” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by this Item 13 is incorporated by reference to our 2022 Proxy Statement anticipated to be filed with
the Securities and Exchange Commission within 120 days of January 1, 2022, under the headings “Corporate Governance” and
“Related-Person Transactions Policies and Procedures.”
Item 14. Principal Accountant Fees and Services
The information called for by this Item 14 is incorporated by reference to our 2022 Proxy Statement anticipated to be filed with
the Securities and Exchange Commission within 120 days of January 1, 2022, under the heading “Independent Registered Public
Accounting Firm.”
56
PART IV
Item 15. Exhibits and Financial Statement Schedules
The financial statements filed as part of this report are indexed below. Financial statement schedules have been omitted since
they either are not required, not applicable, or the information is otherwise included.
Audited Consolidated Financial Statements of Gates Industrial Corporation plc and its subsidiaries:
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019
Consolidated Statements of Comprehensive Income for the fiscal years ended January 1, 2022, January 2, 2021, and
December 28, 2019
Consolidated Balance Sheets as of January 1, 2022 and January 2, 2021
Consolidated Statements of Cash Flows for the fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019
Consolidated Statements of Shareholders’ Equity for the fiscal years ended January 1, 2022, January 2, 2021, and
December 28, 2019
Notes to the Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
F-8
Exhibits
Incorporated by Reference
Exhibit No. Description
Certificate of Incorporation of Gates Industrial Corporation plc
Articles of Association of Gates Industrial Corporation plc, effective October 7,
2019
Description of Securities of Gates Industrial Corporation plc
Indenture, dated as of November 22, 2019, by and among Gates Global LLC,
Gates Corporation, the subsidiary guarantors named on the signature pages thereto
and U.S. Bank National Association, as trustee, which includes the Form of 6.25%
Senior Notes due 2026
Shareholders Agreement
Registration Rights Agreement
Support and Services Agreement
Agreement for the Provision of Depositary Services and Custody Services in
respect of Gates Industrial Corporation plc Depositary Receipts
Second Amended and Restated Credit Agreement, dated as of November 18,
2021, among the U.S. Borrower, the Canadian Borrower, the other guarantors
party thereto, Citibank, N.A., as administrative agent and collateral agent and the
other parties and lenders party thereto.
10.1
10.2
10.3 Monitoring Fee Agreement
10.4
10.5
Form
S-1
10-Q
10-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
Exhibit
3.1
3.2
4.1
4.1
10.1
10.2
10.3
10.4
10.5
10.2
Filing Date
1/8/2018
11/6/2019
2/10/2021
11/27/2019
1/29/2018
1/29/2018
1/29/2018
1/29/2018
1/29/2018
11/22/2021
Credit Agreement, dated as of July 3, 2014, among Omaha Holdings LLC, Gates
Global LLC, the guarantors party thereto, Credit Suisse AG, Cayman Islands
Branch, as administrative agent, collateral agent, swing line lender and L/C issuer,
and the lenders party thereto
Amendment No. 1 to Credit Agreement, dated as of April 7, 2017, among Omaha
Holdings LLC, Gates Global LLC, the guarantors party thereto, Credit Suisse AG,
Cayman Islands Branch, as administrative agent and collateral agent, the lenders
party thereto and Credit Suisse AG, Cayman Islands Branch, as the additional B-1
euro term lender and additional B-1 dollar term lender
Amendment No. 2 to Credit Agreement, dated as of November 22, 2017, among
Omaha Holdings LLC, Gates Global LLC, the guarantors party thereto, Credit
Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent,
the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as the
additional B-2 euro term lender and additional B-2 dollar term lender
S-1
10.18
12/27/2017
S-1
10.19
12/27/2017
S-1
10.20
12/27/2017
57
3.1
3.2
4.1
4.2
10.6
10.7
10.8
10.9
10.10 Amendment No. 3, dated as of January 24, 2018, to the Credit Agreement dated as
8-K
10.6
1/29/2018
of July 3, 2014, among Omaha Holdings LLC, Gates Global LLC, the guarantors
party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent
and collateral agent, and the lenders party thereto
10.11 Amendment No. 4, dated as of February 24, 2021, to the Credit Agreement dated
as of July 3, 2014 (as amended by Amendment No. 1 thereto, dated as of April 7,
2017, Amendment No. 2 thereto, dated as of November 22, 2017, and Amendment
No. 3 thereto, dated as of January 24, 2018) among the Borrower, Omaha
Holdings LLC, the other guarantors party thereto, Credit Suisse AG, Cayman
Islands Branch, as administrative agent and collateral agent and the other parties
and lenders party thereto.
8-K
10.1
3/1/2021
10.12 Amendment No. 5, dated as of November 18, 2021, to the Credit Agreement,
8-K
10.1
11/22/2021
dated as of July 3, 2014 (as amended by Amendment No. 1 thereto, dated as of
April 7, 2017, Amendment No. 2 thereto, dated as of November 22, 2017,
Amendment No. 3 thereto, dated as of January 24, 2018, and Amendment No. 4
thereto, dated as of February 24, 2021) among the U.S. Borrower, Omaha
Holdings LLC, the other guarantors party thereto, Credit Suisse AG, Cayman
Islands Branch, as administrative agent and collateral agent and the other parties
and lenders party thereto.
10.13 ABL Intercreditor Agreement, dated as of July 3, 2014, among Citibank, N.A., as
ABL agent, Credit Suisse AG, Cayman Islands Branch, as cash flow agent, Gates
Global LLC, Omaha Holdings LLC and the other grantors party thereto
10.14 Security Agreement, dated as of July 3, 2014, among Omaha Holdings LLC,
Gates Global LLC, the other grantors party thereto and Citibank, N.A., as
collateral agent for the secured parties
S-1
S-1
10.23
12/27/2017
10.24
12/27/2017
10.15 Security Agreement, dated as of July 3, 2014, among Tomkins Automotive
S-1
10.25
12/27/2017
Canada Limited, Gates Canada Inc. and Citibank, N.A., as collateral agent for the
secured parties
10.16 Security Agreement, dated as of July 3, 2014, among Omaha Holdings LLC,
Gates Global LLC, the other grantors party thereto and Credit Suisse AG, Cayman
Islands Branch, as collateral agent for the secured parties
10.17 Gates Industrial Corporation plc 2014 Stock Incentive Plan†
10.18 Form of Nonqualified Stock Option Agreement under the Gates Industrial
Corporation plc 2014 Stock Incentive Plan (Pre-2017 grants to Ivo Jurek and
Walter Lifsey)†
10.19 Form of Nonqualified Stock Option Agreement under the Gates Industrial
Corporation plc 2014 Stock Incentive Plan (Pre-2017 grant to Roger Gaston and
Tom Pitstick)†
10.20 Form of Nonqualified Stock Option Agreement under the Gates Industrial
Corporation plc 2014 Stock Incentive Plan (2017 grant to Ivo Jurek)†
10.21 Form of Nonqualified Stock Option Agreement under the Gates Industrial
Corporation plc 2014 Stock Incentive Plan (2017 grant to Roger Gaston and Tom
Pitstick)†
S-1
10.26
12/27/2017
10-K
10-K
10.15
10.16
2/14/2019
2/14/2019
10-K
10.17
2/14/2019
10-K
10-K
10.18
2/14/2019
10.19
2/14/2019
10.22 Form of Management Equity Subscription Agreement under the Gates Industrial
10-K
10.20
2/14/2019
Corporation plc 2014 Stock Incentive Plan†
10.23 Gates Industrial Corporation plc 2015 Non-Employee Director Stock Incentive
10-K
10.21
2/14/2019
Plan†
10.24 Form of Nonqualified Stock Option Agreement under the Gates Industrial
Corporation plc 2015 Non-Employee Director Stock Incentive Plan†
10.25 Gates Industrial Corporation plc 2018 Omnibus Incentive Plan†
10.26 Form of Option Agreement under the Gates Industrial Corporation plc 2018
10-K
10-Q
10-Q
Omnibus Incentive Plan†
10.27 Form of Time-Based Restricted Stock Agreement under the Gates Industrial
10-Q
Corporation plc 2018 Omnibus Incentive Plan†
10.28 Form of Time-Based Restricted Stock Unit Agreement under the Gates Industrial
Corporation plc 2018 Omnibus Incentive Plan (Non-Employee Director)†
10.29 Form of Time-Based Restricted Stock Unit Agreement under the Gates Industrial
Corporation plc 2018 Omnibus Incentive Plan (Employee)†
10.30 Form of Stock Appreciation Right Agreement under the Gates Industrial
Corporation plc 2018 Omnibus Incentive Plan†
10-Q
10-Q
10-Q
10.22
2/14/2019
10.1
10.2
10.2
10.3
10.4
10.5
11/2/2018
5/3/2018
11/2/2018
11/2/2018
11/2/2018
11/2/2018
58
10.31 Form of Option Agreement under the Gates Industrial Corporation plc 2018
10-Q
Omnibus Incentive Plan (3 yr.)†
10.32 Form of Time-Based Restricted Stock Unit Agreement under the Gates Industrial
10-Q
Corporation plc 2018 Omnibus Incentive Plan (Employee)†
10.33 Form of Time-Based Restricted Stock Unit Agreement under the Gates Industrial
Corporation plc 2018 Omnibus Incentive Plan (Non-Employee Director)†
10-Q
10.34 Form of Performance-Based Restricted Stock Unit Agreement under the Gates
10-Q
Industrial Corporation plc 2018 Omnibus Incentive Plan†
10.35 Special Option Agreement under the Gates Industrial Corporation plc 2018
10-Q
Omnibus Incentive Plan (5 yr.)†
10.1
10.2
10.3
10.4
10.5
5/8/2019
5/8/2019
5/8/2019
5/8/2019
5/8/2019
10.36 Form of Time-Based Restricted Stock Unit Agreement under the Gates Industrial
10-K
10.34
2/21/2020
Corporation plc 2018 Omnibus Incentive Plan (Executive Officer), effective
January 1, 2020.†
10.37 Form of Option Agreement under the Gates Industrial Corporation plc 2018
Omnibus Incentive Plan (Executive Officer), effective January 1, 2020.†
10.38 Form of Performance-Based Restricted Stock Unit Agreement under the Gates
10-K
10-K
10.35
2/21/2020
10.36
2/21/2020
Industrial Corporation plc 2018 Omnibus Incentive Plan, effective January 1,
2020.†
10.39 Gates Corporation Supplemental Retirement Plan, amended and restated effective
10-Q
10.1
5/3/2018
March 8, 2018†
10.40 Form of Director and Officer Deed of Indemnity†
10.41 Form of Executive Severance Plan†
10.42 Form of Executive Change in Control Plan†
10.43 Retirement, Transition and Consulting Agreement, effective May 7, 2021,
S-1
S-1
S-1
10-Q
10.12
10.15
10.16
10.2
1/8/2018
12/27/2017
12/27/2017
5/11/2021
21.1
23.1
31.1
31.2
32.1
101
between the Company and Mr. Gaston†
Subsidiaries of the Registrant*
Consent of Deloitte & Touche LLP*
Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
Certification by the Chief Executive Officer and Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002**
The following financial information from Gates Industrial Corporation's Annual
Report on Form 10-K for the year ended January 1, 2022, formatted in Extensible
Business Reporting Language (XBRL): (i) Consolidated Statements of Operations
for the years end ended January 1, 2022, January 2, 2021 and December 28, 2019
(ii) Consolidated Statements of Comprehensive Income for the years ended
January 1, 2022, January 2, 2021 and December 28, 2019 (iii) Consolidated
Balance Sheets as of January 1, 2022 and January 2, 2021, (iv) Consolidated
Statements of Cash Flows for the years ended January 1, 2022, January 2, 2021
and December 28, 2019 (v) Consolidated Statements of Shareholders' Equity for
the years ended January 1, 2022, January 2, 2021 and December 28, 2019, and (vi)
Notes to the Consolidated Financial Statements.*
104
Cover Page Interactive Data File (embedded within the Inline XBRL document
and included in Exhibit 101)
*
**
†
Filed herewith.
Furnished herewith.
Management contract or compensatory plan or arrangement.
Not applicable.
Item 16. Form 10-K Summary
59
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
GATES INDUSTRIAL CORPORATION PLC
(Registrant)
By:
/s/ L. Brooks Mallard
Name: L. Brooks Mallard
Title:
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial Officer)
Date: February 11, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on February 11, 2022.
Signature
/s/ Ivo Jurek
Ivo Jurek
/s/ L. Brooks Mallard
L. Brooks Mallard
/s/ David M. Wisniewski
David M. Wisniewski
/s/ Neil P. Simpkins
Neil P. Simpkins
/s/ Julia C. Kahr
Julia C. Kahr
/s/ Terry Klebe
Terry Klebe
/s/ James W. Ireland, III
James W. Ireland, III
/s/ Stephanie K. Mains
Stephanie K. Mains
/s/ Wilson S. Neely
Wilson S. Neely
/s/ Alicia Tillman
Alicia Tillman
/s/ Peifang Zhang
Peifang Zhang
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Gates Industrial Corporation plc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Gates Industrial Corporation plc and subsidiaries (the "Company")
as of January 1, 2022 and January 2, 2021, the related consolidated statements of operations, comprehensive income, cash flows, and
shareholders' equity, for each of the three years in the period ended January 1, 2022, and the related notes (collectively referred to as
the "financial statements"). We also have audited the Company’s internal control over financial reporting as of January 1, 2022, based
on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for each of the three years in the period
ended January 1, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2022,
based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-1
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Goodwill and Intangible Assets - Refer to Notes 2, 10 and 11 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying
value. The Company determined the fair value of its reporting units using a weighted blend of the income and the market approaches.
Similarly, the Company’s evaluation of its brands and trade names intangible asset involves the comparison of the fair value of the
brands and trade names intangible asset to its carrying value. The Company determined the fair value of the brands and trade names
intangible asset using a relief from royalty valuation methodology. The determination of the fair value for both the goodwill and
brands and trade names intangible asset impairment analyses required management to make significant estimates and assumptions
related to forecasts of sales growth rates. The goodwill balance was $2,063.0 million as of January 1, 2022, of which $674.9 million
and $1,388.1 million was allocated to the Fluid Power and Power Transmission reporting units, respectively. The fair values of the
Fluid Power and Power Transmission reporting units exceeded their carrying values as of the measurement date and, therefore, no
goodwill impairments were recognized. The brands and trade names intangible asset balance was $469.4 million as of January 1,
2022. The fair value of the brands and trade names intangible asset exceeded its carrying value as of the measurement date and,
therefore, no impairment was recognized.
Given the significant estimates and assumptions management makes to estimate the fair value of goodwill and the brands and trade
names intangible asset for its impairment analyses and the uncertainty in the current economic environment, performing audit
procedures to evaluate the reasonableness of management’s forecasts of sales growth rates through 2024 (“sales growth rates”)
required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of sales growth rates used by management to estimate the fair value of goodwill and the
brands and trade names intangible asset included the following, among others:
• We tested the effectiveness of controls over management’s goodwill and brands and trade names intangible asset impairment
evaluations, including those over the determination of the fair value of goodwill and the brands and trade names intangible
asset, including controls related to management’s forecasts of sales growth rates.
• We evaluated management’s ability to accurately forecast sales growth rates by comparing actual results to management’s
historical forecasts to determine if the difference between historical forecast and actual results would have a material impact
on the goodwill and brands and trade names intangible asset impairment analyses.
• With the assistance of our fair value specialists, we evaluated the reasonableness of management’s forecasts of sales growth
rates by comparing the forecasts to (1) historical and projected financial information of peer companies and other industry
participants from external market sources and (2) macroeconomic data on projected growth.
• We evaluated the reasonableness of management’s forecasts of sales growth rates by comparing forecasts to (1) historical
results, (2) internal communications to management and the Board of Directors, and (3) forecast information included in
Company press releases as well as in analyst reports of the Company.
/s/ Deloitte & Touche LLP
Denver, Colorado
February 11, 2022
We have served as the Company’s auditor since 2014.
F-2
Gates Industrial Corporation plc
Consolidated Statements of Operations
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
3,474.4 $
2,793.0 $
2,135.2
1,339.2
852.7
3.7
0.6
7.4
1,758.3
1,034.7
776.9
5.2
5.2
37.3
(9.3)
(1.0)
484.1
133.5
0.9
349.7
18.4
331.3
—
331.3
34.2
297.1 $
1.02 $
— $
1.02 $
1.00 $
— $
1.00 $
211.1
154.3
(14.2)
71.0
(19.3)
90.3
0.3
90.0
10.6
79.4 $
0.27 $
— $
0.27 $
0.27 $
— $
0.27 $
3,087.1
1,944.6
1,142.5
777.3
2.6
0.7
6.0
9.1
346.8
157.8
(9.8)
198.8
(495.9)
694.7
0.6
694.1
4.0
690.1
2.38
—
2.38
2.37
—
2.37
(dollars in millions, except per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Transaction-related expenses
Asset impairments
Restructuring expenses
Other operating (income) expenses
Operating income from continuing operations
Interest expense
Other expenses (income)
Income from continuing operations before taxes
Income tax expense (benefit)
Net income from continuing operations
Loss on disposal of discontinued operations, net of tax, respectively, of $0, $0 and $0
Net income
Less: non-controlling interests
Net income attributable to shareholders
$
Earnings per share
Basic
Earnings per share from continuing operations
Earnings per share from discontinued operations
Earnings per share
Diluted
Earnings per share from continuing operations
Earnings per share from discontinued operations
Earnings per share
$
$
$
$
$
$
The accompanying notes form an integral part of these consolidated financial statements.
F-3
Gates Industrial Corporation plc
Consolidated Statements of Comprehensive Income
(dollars in millions)
Net income
Other comprehensive (loss) income
Foreign currency translation:
—Net translation (loss) gain on foreign operations, net of tax expense, respectively,
of $0, $0 and $(0.8)
—Gain (loss) on net investment hedges, net of tax expense, respectively, of $0,
$(0.1) and $0
Total foreign currency translation movements
Cash flow hedges (interest rate derivatives):
—Gain (loss) arising in the period, net of tax (expense) benefit, respectively, of
$(2.9) and $5.6, and $4.5
—Reclassification to net income, net of tax expense, respectively, of $(5.4), $(2.5),
and $(0.2)
Total cash flow hedges movements
Post-retirement benefits:
—Current year actuarial movements, net of tax (expense) benefit, respectively, of
$(5.9), $(5.8) and $2.8
—Reclassification of prior year actuarial movements to net income, net of tax
benefit (expense), respectively, of $0, $0.5, and $(0.2)
Total post-retirement benefits movements
Other comprehensive (loss) income
Comprehensive income for the period
Comprehensive income attributable to shareholders:
—Income arising from continuing operations
—Loss arising from discontinued operations
Comprehensive income attributable to non-controlling interests
Comprehensive income for the period
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
331.3 $
90.0 $
694.1
(105.6)
113.1
33.8
(71.8)
(41.9)
71.2
29.4
5.5
34.9
8.8
16.2
25.0
(23.5)
(27.2)
10.2
(13.3)
2.3
(24.9)
21.6
24.8
(16.7)
0.1
21.7
(25.1)
306.2 $
277.3 $
—
277.3
28.9
306.2 $
(1.8)
23.0
80.9
170.9 $
132.7 $
(0.3)
132.4
38.5
170.9 $
0.2
(16.5)
(6.5)
687.6
686.6
(0.6)
686.0
1.6
687.6
$
$
$
The accompanying notes form an integral part of these consolidated financial statements.
F-4
Gates Industrial Corporation plc
Consolidated Balance Sheets
(dollars in millions, except share numbers and per share amounts)
Assets
Current assets
Cash and cash equivalents
Trade accounts receivable, net
Inventories
Taxes receivable
Prepaid expenses and other assets
Total current assets
Non-current assets
Property, plant and equipment, net
Goodwill
Pension surplus
Intangible assets, net
Right-of-use assets
Taxes receivable
Deferred income taxes
Other non-current assets
Total assets
Liabilities and equity
Current liabilities
Debt, current portion
Trade accounts payable
Taxes payable
Accrued expenses and other current liabilities
Total current liabilities
Non-current liabilities
Debt, less current portion
Post-retirement benefit obligations
Lease liabilities
Taxes payable
Deferred income taxes
Other non-current liabilities
Total liabilities
Commitments and contingencies (note 22)
Shareholders’ equity
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares:
291,282,137 (January 2, 2021: authorized shares: 3,000,000,000; outstanding shares: 290,853,067)
—Additional paid-in capital
—Accumulated other comprehensive loss
—Retained earnings
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
The accompanying notes form an integral part of these consolidated financial statements.
F-5
As of
January 1, 2022
As of
January 2, 2021
$
$
$
$
658.2 $
708.1
682.6
19.1
210.7
2,278.7
670.3
2,063.0
75.5
1,642.2
124.2
15.7
639.3
24.1
7,533.0 $
38.1 $
506.6
34.1
277.1
855.9
2,526.5
106.2
116.4
103.7
283.7
59.2
4,051.6
521.4
695.0
508.2
28.6
153.4
1,906.6
705.0
2,120.2
69.3
1,788.6
120.9
26.5
672.6
16.6
7,426.3
42.7
417.4
14.0
252.2
726.3
2,666.0
142.5
113.6
111.5
360.4
121.0
4,241.3
2.9
2,484.1
(825.2)
1,437.9
3,099.7
381.7
3,481.4
7,533.0 $
2.9
2,456.8
(805.4)
1,151.4
2,805.7
379.3
3,185.0
7,426.3
Gates Industrial Corporation plc
Consolidated Statements of Cash Flows
(dollars in millions)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
331.3 $
90.0 $
694.1
Depreciation and amortization
Foreign exchange and other non-cash financing expenses
Share-based compensation expense
Decrease in post-employment benefit obligations, net
Deferred income taxes
Asset impairments
Other operating activities
Changes in operating assets and liabilities:
—(Increase) decrease in accounts receivable
—(Increase) decrease in inventories
—Increase (decrease) in accounts payable
—(Increase) decrease in prepaid expenses and other assets
—Increase (decrease) in taxes payable
—(Decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Purchases of intangible assets
Cash paid under corporate-owned life insurance policies
Cash received under corporate-owned life insurance policies
Other investing activities
Net cash used in investing activities
Cash flows from financing activities
Issuance of shares
Repurchase of shares
Proceeds from long-term debt
Payments of long-term debt
Debt issuance costs paid
Dividends paid to non-controlling interests
Other financing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents and restricted cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents and restricted cash at the beginning of the period
Cash and cash equivalents and restricted cash at the end of the period
Supplemental schedule of cash flow information
Interest paid
Income taxes paid
Accrued capital expenditures
$
$
$
$
The accompanying notes form an integral part of these consolidated financial statements.
F-6
222.6
33.2
24.6
(14.7)
(94.3)
2.0
3.7
(22.3)
(192.4)
99.6
(41.3)
38.7
(8.3)
382.4
(77.7)
(9.3)
(11.2)
2.4
9.8
(86.0)
4.6
(10.6)
—
(91.0)
(11.7)
(26.6)
(13.3)
(148.6)
(11.0)
136.8
524.1
660.9 $
121.2 $
83.0 $
1.0 $
218.6
18.9
19.8
(12.4)
(47.7)
6.6
9.1
9.7
(22.1)
28.6
6.8
(48.1)
31.2
309.0
(58.2)
(9.2)
(10.9)
1.5
(0.7)
(77.5)
3.1
—
—
(331.2)
(0.3)
(19.0)
(6.4)
(353.8)
9.8
(112.5)
636.6
524.1 $
135.7 $
60.4 $
1.0 $
222.2
10.6
15.0
(9.4)
(648.4)
1.9
4.1
41.8
65.1
(48.2)
(2.6)
46.2
(43.5)
348.9
(72.1)
(11.0)
(10.7)
12.0
3.8
(78.0)
1.8
—
568.0
(593.1)
(8.3)
(28.8)
1.1
(59.3)
0.4
212.0
424.6
636.6
150.8
108.8
1.8
Gates Industrial Corporation plc
Consolidated Statements of Shareholders’ Equity
(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
Other comprehensive loss, net
Total comprehensive (loss) income
Other changes in equity:
—Issuance of shares
—Share-based compensation
—Change in ownership of a controlled
subsidiary
—Shares issued by a subsidiary to a
non-controlling interest
—Dividends paid to non-controlling
interests
As of December 28, 2019
Net income
Other comprehensive income, net
Total comprehensive income
Other changes in equity:
—Issuance of shares
—Share-based compensation
—Dividends paid to non-controlling
interests
As of January 2, 2021
Net income
Other comprehensive loss, net
Total comprehensive (loss) income
Other changes in equity:
—Issuance of shares
—Repurchase of shares
—Share-based compensation
—Dividends paid to non-controlling
interests
As of January 1, 2022
—
—
—
—
—
—
—
—
2.9
—
—
—
—
—
—
2.9
—
—
—
—
—
—
—
$
—
—
—
1.8
14.6
1.2
—
—
2,434.5
—
—
—
2.8
19.5
—
2,456.8
—
—
—
3.9
—
23.4
—
2.9 $ 2,484.1 $
—
(4.1)
(4.1)
690.1
—
690.1
690.1
(4.1)
686.0
4.0
(2.4)
1.6
694.1
(6.5)
687.6
—
—
—
—
—
—
—
—
—
(858.4)
—
53.0
53.0
—
1,072.0
79.4
—
79.4
1.8
14.6
1.2
—
—
2,651.0
79.4
53.0
132.4
—
—
(1.2)
1.8
(28.8)
359.7
10.6
27.9
38.5
1.8
14.6
—
1.8
(28.8)
3,010.7
90.0
80.9
170.9
—
—
—
—
2.8
19.5
—
0.1
2.8
19.6
—
(805.4)
—
(19.8)
(19.8)
—
1,151.4
297.1
—
297.1
—
2,805.7
297.1
(19.8)
277.3
(19.0)
379.3
34.2
(5.3)
28.9
(19.0)
3,185.0
331.3
(25.1)
306.2
—
—
—
—
(10.6)
—
3.9
(10.6)
23.4
—
—
0.1
3.9
(10.6)
23.5
—
—
(825.2) $ 1,437.9 $ 3,099.7 $
—
(26.6)
(26.6)
381.7 $ 3,481.4
The accompanying notes form an integral part of these consolidated financial statements.
F-7
Gates Industrial Corporation plc
Notes to the Consolidated Financial Statements
1. Background
Gates Industrial Corporation plc (the “Company”) is a public limited company that was incorporated in the United Kingdom and
registered in England and Wales on September 25, 2017.
In these consolidated financial statements and related notes, all references to “Gates”, “we”, “us”, “our” refer, unless the context
requires otherwise, to the Company and its subsidiaries.
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. Gates is comprised of two operating
segments: Power Transmission and Fluid Power.
The first quarter of 2020 marked the beginning of an unprecedented environment for the global economy, as governments, companies
and communities implemented strict measures to minimize the spread of the novel coronavirus (“COVID-19”) pandemic. While we
have generally seen a rebound in demand from the pandemic-induced declines of 2020, the evolving impact of the pandemic,
including the emergence of variants, and continuing measures being taken around the world to combat the pandemic’s spread, may
have ongoing implications for our business which may vary from time to time. Some of these impacts may be material but cannot be
reasonably estimated at this time.
2. Significant accounting policies
A. Basis of presentation
The 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 accounting policies used in preparing these consolidated financial statements and related notes are the same as those applied in the
prior year, except for the adoption on the first day of our 2021 fiscal year of the following new Accounting Standard Update (“ASU”):
•
ASU 2019-12 “Simplifying the Accounting for Income Taxes” (Topic 740): Income Taxes
In December 2019, the Financial Accountant Standards Board (“FASB”) issued an ASU to simplify and reduce the complexity
of general principles in Topic 740: Income Taxes. Such simplifications include the elimination of certain exceptions to: 1) the
incremental approach for intraperiod tax allocation, 2) the requirement to recognize a deferred income tax liability for equity
method investments when a foreign subsidiary becomes an equity method investment, 3) the ability not to recognize a deferred
income tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and 4) the general
methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.
The adoption of this ASU did not have any significant impact on our consolidated financial statements.
B. Accounting periods
The Company prepares its annual consolidated financial statements as of the Saturday nearest December 31. Accordingly, the
consolidated balance sheets are presented as of January 1, 2022 and January 2, 2021 and the related consolidated statements of
operations, comprehensive income, cash flows, and shareholders’ equity are presented for the years ended January 1, 2022
(“Fiscal 2021”), January 2, 2021 (“Fiscal 2020”) and December 28, 2019 (“Fiscal 2019”).
C. Basis of consolidation
The consolidated financial statements include the results of operations, cash flows and assets and liabilities of Gates and its majority-
owned subsidiaries, and our share of the results of our equity method investees.
F-8
We consolidate entities in which we have a controlling interest or when we are considered the primary beneficiary of a variable
interest entity. The consolidated financial statements reflect the assets, liabilities, revenues and expenses of consolidated subsidiaries
and the non-controlling parties’ ownership interest is presented as a non-controlling interest. Intercompany transactions and balances,
and any unrealized profits or losses arising from intercompany transactions, are eliminated on consolidation.
D. Foreign currency transactions and translation
Transactions denominated in currencies other than the entity’s functional currency (foreign currencies) are translated into the entity’s
functional currency at the exchange rates prevailing on the dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated at the exchange rate prevailing on the reporting date. Exchange differences arising from changes in
exchange rates are recognized in net income for the period. The net foreign currency transaction loss included in operating income
from continuing operations during Fiscal 2021 was $7.1 million, compared to a loss of $7.7 million in Fiscal 2020 and a loss of
$1.7 million in Fiscal 2019. We also recognized net financing-related foreign currency transaction losses within other expenses
(income) of $7.6 million during Fiscal 2021, compared to a gain of $5.3 million in Fiscal 2020 and a gain of $0.8 million in Fiscal
2019.
On consolidation, the results of operations of entities whose functional currency is other than the U.S. dollar are translated into
U.S. dollars at the weighted average exchange rate for the period and their assets and liabilities are translated into U.S. dollars at the
exchange rate prevailing on the balance sheet date. Currency translation differences are recognized within other comprehensive
income (“OCI”) as a separate component of accumulated OCI. In the event that a foreign operation is sold, or substantially liquidated,
the cumulative currency translation differences that are attributable to the operation are reclassified to net income.
In the statement of cash flows, the cash flows of operations whose functional currency is other than the U.S. dollar are translated into
U.S. dollars at the weighted average exchange rate for the period.
E. Net sales
Gates derives its net sales primarily from the sale of a wide range of power transmission and fluid power products and components for
a large variety of industrial and automotive applications, both in the aftermarket and first-fit channels, throughout the world.
Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. We apply the five-step model under Topic 606
(“Revenue from Contracts with Customers”) to all contracts. The five steps are: (1) identify the contract(s) with a customer;
(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the
performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy a performance obligation.
In most of our agreements with customers, we consider accepted customer purchase orders, which in some cases are governed by
master sales agreements, to represent the contracts with our customers. Revenue from the sale of goods under these contracts is
measured at the invoiced amount, net of estimated returns, early settlement discounts and rebates. Taxes collected from customers
relating to product sales and remitted to government authorities are excluded from revenues. Where a customer has the right to return
goods, future returns are estimated based on historical returns profiles. Settlement discounts that may apply to unpaid invoices are
estimated based on the settlement histories of the relevant customers. Our transaction prices often include variable consideration,
usually in the form of discounts and rebates that may apply to issued invoices. The reduction in the transaction price for variable
consideration requires that we make estimations of the expected total qualifying sales to the relevant customers. These estimates,
including an analysis for potential constraint on variable consideration, take into account factors such as the nature of the rebate
program, historical information and expectations of customer and consumer behavior. Overall, the transaction price is reduced to
reflect our estimate of the consideration that is not probable of significant reversal.
We allocate the transaction price to each distinct performance obligation based on their relative standalone selling price. The product
price as specified on the accepted purchase order is considered to be the standalone selling price.
In substantially all of our contracts with customers, our performance obligations are satisfied at a point in time, rather than over a
period of time, when control of the product is transferred to the customer. This occurs typically at shipment. In determining whether
control has transferred and the customer is consequently able to control the use of the product for their own benefit, we consider if
there is a present right to payment, legal title and physical possession has been transferred, whether the risks and rewards of ownership
have transferred to the customer, and if acceptance of the asset by the customer is more than perfunctory.
F-9
F. Selling, general and administrative expenses
Shipping and handling costs
Costs of outbound shipping and handling are included in SG&A. During Fiscal 2021, we recognized shipping and handling costs of
$170.1 million, compared to $137.2 million in Fiscal 2020 and $145.2 million in Fiscal 2019.
Research and development costs
Research and development costs are charged to net income in the period in which they are incurred. Our research and development
expense was $70.7 million in Fiscal 2021, compared to $67.2 million in Fiscal 2020 and $67.9 million in Fiscal 2019. These costs
related primarily to product development and also to technology to enhance manufacturing processes.
Advertising costs
Advertising costs are expensed as incurred and included in SG&A. During Fiscal 2021, we recognized advertising costs of
$12.0 million, compared to $6.7 million in Fiscal 2020 and $10.2 million in Fiscal 2019.
G. Restructuring expenses
Restructuring expenses are incurred in major projects undertaken to rationalize and improve our cost competitiveness. Restructuring
expenses incurred during the periods presented are analyzed in note 5.
Liabilities in respect of termination benefits provided to employees who are involuntarily terminated under the terms of a one-time
benefit arrangement are recognized over the future service period when those employees are required to render services to the entity
beyond the minimum retention period. If employees are not required to render service until they are terminated or if they will not be
retained to render service beyond 60 days or a longer legal notification period, the liability is recognized on the communication date.
Termination benefits that are covered by a contract or an ongoing benefit arrangement are recognized when it is probable that
employees will be entitled to benefits and the amount can be reasonably estimated. Benefits that are offered for a short period of time
in exchange for voluntary termination are recognized when the employees accept the offer.
Restructuring expenses other than termination benefits and lease exit costs are recognized only when the Company has incurred a
related liability.
H. Inventories
Inventories are stated at the lower of cost or net realizable value. A valuation adjustment is made to inventory for any excess, obsolete
or slow-moving items based on management’s review of on-hand inventories compared to historical and estimated future sales and
usage profiles. Any consequent write-down of inventory results in a new cost basis for inventory.
Cost represents the expenditure incurred in bringing inventories to their existing location and condition, which may include the cost of
raw materials, direct labor costs, other direct costs and related production overheads. Cost is generally determined on a first in, first
out (“FIFO”) basis, but the cost of certain inventories is determined on a last in, first out (“LIFO”) basis. As of January 1, 2022,
inventories whose cost was determined on a LIFO basis represented 31.2% of the total carrying amount of inventories compared to
30.8% as of January 2, 2021. Inventories would have been $9.3 million and $0 million higher than reported as of January 1, 2022 and
January 2, 2021, respectively, had all inventories been valued on a FIFO basis, which approximates current cost.
I. Goodwill
Goodwill arising in a business combination is allocated to the reporting unit that is expected to benefit from the synergies of the
acquisition.
Where goodwill is attributable to more than one reporting unit, the goodwill is determined by allocating the purchase consideration in
proportion to their respective business enterprise values and comparing the allocated purchase consideration with the fair value of the
identifiable assets and liabilities of the reporting unit. Goodwill is not amortized but is tested for impairment on the first day of the
fourth quarter or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable
and is carried at cost less any recognized impairment. For both reporting units, which are also our reportable segments, the fair values
exceeded the carrying values and no goodwill impairments were therefore recognized during Fiscal 2021, Fiscal 2020 or Fiscal 2019.
F-10
To identify a potential impairment of goodwill, the fair value of the reporting unit to which the goodwill is allocated is compared to its
carrying amount, including goodwill. We calculate fair values using a weighted blend of income and market approaches. If the fair
value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. If the fair value
is lower than the carrying amount, an impairment charge is recognized for the amount by which the carrying amount exceeds the
reporting unit’s fair value, limited to the amount of goodwill allocated to that reporting unit.
J. Other intangible assets
Other intangible assets are stated at cost less accumulated amortization and any recognized impairment.
(i) Assets acquired in business combinations
An acquired intangible asset with a finite useful life is amortized on a straight-line basis so as to charge its cost, which represents its
fair value at the date of acquisition, to net income over the Company’s expectation of its useful life, as follows:
Customer relationships
Technology
15 to 17 years
5 to 7 years
Acquired brands and trade names are considered to have an indefinite useful life and are not amortized but are tested at least annually
for impairment and are carried at cost less any recognized impairment.
(ii) Computer software
Computer software that is not integral to an item of property, plant and equipment is recognized separately as an intangible asset.
Computer software is amortized on a straight-line basis over its estimated useful life, which ranges from 2 to 6 years.
K. Property, plant and equipment
Property, plant and equipment is recorded at cost less accumulated depreciation and any recognized impairment losses. Major
improvements are capitalized. Expenditures for repairs and maintenance that do not significantly extend the useful life of the asset are
expensed as incurred.
Land and assets under construction are not depreciated. Depreciation of property, plant and equipment, other than land and assets
under construction, is generally expensed on a straight-line basis over their estimated useful lives. The Company’s estimated useful
lives of items of property, plant and equipment are generally in the following ranges:
Buildings and improvements
Leasehold improvements
Machinery, equipment and vehicles
L. Leases
30 to 40 years
Shorter of lease term or
useful life
2 to 20 years
Gates has a large number of 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 a relatively small number of real estate leases, which accounted for approximately 92% of
the lease liability under non-cancellable leases as of January 1, 2022. The remaining leases are predominantly comprised of equipment
and vehicle leases.
In determining the impact of renewal options on 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.
F-11
Certain payments under our lease agreements, such as property taxes and utility costs, 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. 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 inflation index. Payments that vary based on an index or rate are included
in the measurement of our right-of-use assets and lease liabilities at the rate as of the commencement date with any subsequent
changes to those payments being recognized as variable payments in the period in which they occur.
Gates does not have any significant leases containing residual value guarantees, restrictions or covenants. Additionally, as of
January 1, 2022, there were no significant new leases that have not yet commenced.
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.
We have adopted the following practical expedients:
(i)
(ii)
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
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.
M. Financial instruments
(i) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, deposits available on demand and other short-term, highly liquid investments with
maturities on acquisition of 90 days or less. We have cash concentrations in certain large, highly-rated global financial institutions.
Management closely monitors the credit quality of the institutions in which it holds deposits.
(ii) Restricted cash
Restricted cash, which is included in the prepaid expenses and other assets line in the consolidated balance sheet, includes cash given
as collateral under letters of credit for insurance and regulatory purposes. Cash and cash equivalents for the purposes of the
consolidated statement of cash flows includes restricted cash of $2.7 million as of January 1, 2022, compared to $2.7 million and
$1.3 million as of January 2, 2021 and December 28, 2019, respectively.
(iii) Trade accounts receivable
Trade accounts receivable represent the amount of sales of goods to customers, net of discounts and rebates, for which payment has
not been received, less an allowance for expected credit losses. Our businesses develop their expected loss estimates based either on
the aging profile of outstanding receivables or by applying an experience factor (either a percentage of sales or a percentage of open
receivables). These methodologies are based primarily on historical trends and experience, but credit controllers also regularly assess
individual customer accounts to identify any potential increases or decreases in the level of expected credit loss needed to be applied
to each customer based on current circumstances and future expectations.
Before accepting a new customer, we assess their credit quality and establish a credit limit. Credit quality is assessed by using data
maintained by reputable credit rating agencies, by checking of references included in credit applications and, where they are available,
by reviewing the customer’s recent financial statements. Credit limits are subject to multiple levels of authorization and are reviewed
on a regular basis.
F-12
Although Gates has a wide variety of customers from multinational original equipment manufacturers and distributors to small family-
owned businesses, the majority of our sales are generated from large companies with low credit risk. Global developments related to
the COVID-19 pandemic and its impact on our customers’ ability to pay us continue to be closely monitored and taken into account in
the determination of our expected credit loss estimates.
Movements in our allowance for expected credit losses during the periods presented are analyzed in note 22.
During 2021, the Company implemented a program with an unrelated third party under which we may periodically sell trade accounts
receivable from one of our aftermarket customers with whom we have extended payment terms as part of a commercial agreement.
The purpose of using this program is to generally offset the working capital impact resulting from this terms extension. All eligible
accounts receivable from this customer are covered by the program, and any factoring is solely at our option. Following the factoring
of a qualifying receivable, because we maintain no continuing involvement in the underlying receivable, and collectability risk is fully
transferred to the unrelated third party, we account for these transactions as a sale of a financial asset and derecognize the asset. Cash
received under the program is classified as operating cash inflows in the consolidated statement of cash flows. As of January 1, 2022,
the collection of $106.9 million of our trade accounts receivable had been accelerated under this program. During Fiscal 2021, we
incurred costs in respect of this program of $1.4 million, which are recorded under other expenses (income).
(iv) Debt
Debt is initially measured at its principal amount, net of directly attributable transaction costs, if any, and is subsequently measured at
amortized cost using the effective interest rate method.
(v) Accounts payable
Accounts payable represents the amount of invoices received from suppliers for purchases of goods and services and the amount of
goods received but not invoiced, for which payment has not been made.
(vi) Derivative financial instruments
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 all derivative financial instruments as either assets or liabilities at fair value on the balance sheet date. The accounting
for the change in the fair value is recognized in net income based on the nature of the items being hedged unless the financial
instrument has been designated in an effective cash flow or net investment hedging relationship, in which case the change in fair value
is recognized in OCI.
(vii) Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Financial assets and liabilities that are held at fair value, or for which fair values are
presented in these consolidated financial statements, have been categorized into one of three levels to reflect the degree to which
observable inputs are used in determining the fair values. Where a change in the determination of the fair value of a financial asset or
liability results in a transfer between the levels of the fair value hierarchy, we recognize that transfer at the end of the reporting period.
N. Post-retirement benefits
Post-retirement benefits comprise pension benefits provided to employees and other benefits, mainly healthcare, provided to certain
employees in North America.
We account for our post-retirement benefit plans in accordance with Topic 715 “Compensation – Retirement Benefits”, which is based
on the principle that the cost of providing these benefits is recognized in net income over the service periods of the participating
employees.
F-13
For defined benefit plans, the net obligation or surplus arising from providing the benefits is recognized as a liability or an asset
determined by actuarial valuations of each of the plans that are carried out annually by independent qualified actuaries as of the year
end balance sheet date. Benefit obligations are measured using the projected unit credit method. Plan assets (if any) are measured at
fair value. We recognize the service cost component of our net periodic pension and other post-retirement benefit cost in the lines
within operating income to which the relevant employees' other compensation costs are reported. All other components of the net
periodic benefit cost (which include the interest cost, the expected return on plan assets, gains or losses on settlements and
curtailments, the amortization of prior year service cost or credit and prior year actuarial gains and losses) are included in the other
(expenses) income line, outside of operating income from continuing operations.
Actuarial gains and losses represent differences between the expected and actual returns on the plan assets, gains and losses on the
plan liabilities and the effect of changes in actuarial assumptions. We use the “corridor approach” whereby, to the extent that
cumulative actuarial gains and losses exceed 10% of the greater of the market related value of the plan assets and the projected benefit
obligation at the beginning of the fiscal year, they are reclassified from accumulated other comprehensive income to net income over
the average remaining service periods of participating employees.
Gains and losses on settlements and curtailments are recognized in net income in the period in which the curtailment or settlement
occurs.
O. Share-based compensation
Share-based compensation has historically been provided to certain of our employees under share option, bonus and other share award
plans. All share-award plans are equity settled, except for certain awards issued in the form of stock appreciation rights (“SARs”) to
employees in China, where local regulations necessitate a cash-settled award. These awards are therefore accounted for as liabilities
rather than equity.
We recognize compensation expense based on the fair value of the awards, measured using either the share price on the date of grant,
a Black-Scholes option-pricing model or a Monte-Carlo valuation model, depending on the nature of the award. Fair value is
determined at the date of grant and reflects market and performance conditions and all non-vesting conditions.
Generally, the compensation expense for each separately vesting portion of the award is recognized on a straight-line basis over the
vesting period for that portion of the award. Compensation expense is recognized for awards containing market conditions regardless
of whether or not the market condition is met, whereas compensation expense for awards containing performance conditions is
recognized only to the extent that it is probable that those performance conditions will be met. Adjustments are made to reflect
expected and actual forfeitures during the vesting period due to failure to satisfy service conditions or performance conditions.
For equity awards, fair value is not subsequently remeasured unless the conditions on which the award was granted are modified. An
amount corresponding to the compensation expense for equity awards is recognized in equity as additional paid in capital.
For liability awards, the fair value is remeasured each period and the change in fair value is recognized in net income for the period
with a corresponding change in the outstanding liability.
P. Income taxes
Current tax is the amount of tax payable or receivable in respect of the taxable income for the period. Taxable income differs from
financial reporting income because it excludes items of income or expense recognized for financial reporting purposes that are either
not taxable or deductible for tax purposes or are taxable or deductible in other periods. Current tax is calculated using tax rates that
have been enacted at the balance sheet date.
Management assesses unrecognized tax benefits based upon an evaluation of the facts, circumstances and information available at the
balance sheet date. Provision is made for unrecognized tax benefits to the extent that the amounts previously taken or expected to be
taken in tax returns exceeds the tax benefits that are recognized in the consolidated financial statements in respect of the tax positions.
A tax benefit is recognized in the consolidated financial statements only if management considers that it is more likely than not that
the tax position will be sustained on examination by the relevant tax authority solely on the technical merits of the position and is
measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement assuming that the tax
authority has full knowledge of all relevant information. Provisions for unrecognized tax benefits are reviewed regularly and are
adjusted to reflect events such as the expiration of limitation periods for assessing tax, guidance given by the tax authorities and court
decisions.
F-14
Interest and penalties relating to unrecognized tax benefits are accrued in accordance with the applicable tax legislation on any excess
of the tax benefit claimed or expected to be claimed in a tax return and the tax benefit recognized in the consolidated financial
statements. Interest and penalties are recognized as a component of income tax benefit (expense) in the consolidated statement of
operations and accrued interest and penalties are included under the related taxes payable line in the consolidated balance sheet.
Deferred tax assets and liabilities are recognized based on the expected future tax consequences of the difference between the financial
statement carrying amount and the respective tax basis. Deferred taxes are measured on the enacted rates expected to apply to taxable
income at the time the difference is anticipated to reverse. Deferred tax assets are reduced through the establishment of a valuation
allowance if it is more likely than not that the deferred tax asset will not be realized taking into account the timing and amount of the
reversal of taxable temporary differences, expected future taxable income and tax planning strategies.
Deferred tax is provided on taxable temporary differences arising on investments in foreign subsidiaries, except where we intend, and
are able, to reinvest such amounts on a permanent basis or to remit such amounts in a tax-free manner.
Q. Use of estimates
The preparation of consolidated financial statements under U.S. GAAP requires us to make assumptions and estimates concerning the
future that affect the reported amounts of assets, liabilities, revenue and expenses. Estimates and assumptions are particularly
important in accounting for items such as the timing and amount of revenue recognition, rebates, impairment of long-lived assets,
intangible assets and goodwill, inventory valuation, financial instruments, expected credit losses, product warranties, income taxes and
post-retirement benefits. Estimates and assumptions used are based on factors such as historical experience, observance of trends in
the industries in which we operate and information available from our customers and other outside sources.
Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after
January 1, 2022, including those resulting from the continuing impacts of the COVID-19 pandemic, may result in actual outcomes that
differ from those contemplated by our assumptions and estimates.
3. Recent accounting pronouncements not yet adopted
The following recent accounting pronouncements are relevant to Gates’ operations but have not yet been adopted:
•
ASU 2021-10 “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”
In November 2021, FASB issued this ASU to increase the transparency of government assistance including the disclosure of
(i) the types of assistance, (ii) an entity’s accounting for the assistance, and (iii) the effect of the assistance on an entity’s
financial statements. This update requires certain annual disclosures about transactions with a government that are accounted for
by applying a grant or contribution accounting model by analogy, including (i) information about the nature of the transactions
and the related accounting policy used to account for them, (ii) the line items on the balance sheet and income statement that are
affected by the transactions, and the amounts applicable to each line item, and (iii) significant terms and conditions of the
transactions, including commitments and contingencies.
The amendments are effective for all entities within their scope for financial statements issued for annual periods beginning after
December 15, 2021. Early application of the amendments is permitted. We do not expect significant impact on our consolidated
financial statements on adoption of this ASU.
4. Segment information
A. Background
The segment information provided in these consolidated financial statements reflects the information that is used by the chief
operating decision maker for the purposes of making decisions about allocating resources and in assessing the performance of each
segment. The chief executive officer (“CEO”) of Gates serves as the chief operating decision maker. These decisions are based
principally on net sales and Adjusted EBITDA (defined below).
F-15
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-based 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.
(dollars in millions)
Power Transmission
Fluid Power
Net sales
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
2,216.3 $
1,258.1
3,474.4 $
1,800.2 $
992.8
2,793.0 $
1,945.7
1,141.4
3,087.1
Our commercial function is organized by region and therefore, in addition to reviewing net sales by our reporting segments, the CEO
also reviews net sales information disaggregated by region, including between emerging and developed markets.
The following table summarizes our net sales by key geographic region of origin:
(dollars in millions)
U.S.
North America, excluding U.S.
United Kingdom (“U.K.”)
EMEA(1), excluding U.K.
East Asia and India
Greater China
South America
Net sales
$
$
January 1, 2022
For the year ended
January 2, 2021
December 28, 2019
Power
Transmission
Fluid Power
Power
Transmission
Fluid Power
Power
Transmission
Fluid Power
621.8 $
179.8
50.2
640.6
308.6
344.2
71.1
2,216.3 $
615.5 $
193.8
58.3
198.8
86.3
67.8
37.6
1,258.1 $
538.3 $
147.3
44.3
487.4
251.8
279.5
51.6
1,800.2 $
513.9 $
146.9
28.2
151.0
60.5
66.9
25.4
992.8 $
580.4 $
165.3
43.6
509.9
288.6
288.4
69.5
1,945.7 $
590.0
175.9
37.3
173.6
74.3
57.8
32.5
1,141.4
(1)
Europe, Middle East and Africa (“EMEA”).
The following table summarizes our net sales into emerging and developed markets:
(dollars in millions)
Developed
Emerging
Net sales
D. Measure of segment profit or loss
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
2,214.6 $
1,787.8 $
1,259.8
1,005.2
3,474.4 $
2,793.0 $
2,013.4
1,073.7
3,087.1
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.
F-16
“EBITDA” represents net income for the period before net interest and other (income) expenses, income taxes, depreciation and
amortization.
“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:
•
•
•
•
•
non-cash charges in relation to share-based compensation;
transaction-related expenses incurred in relation to major corporate transactions, including the acquisition of businesses, and
equity and debt transactions;
impairments of assets;
restructuring expenses, including severance-related expenses; and
fees paid to our private equity sponsor for monitoring, advisory and consulting services.
Adjusted EBITDA by segment was as follows:
(dollars in millions)
Power Transmission
Fluid Power
Adjusted EBITDA
Reconciliation of net income from continuing operations to Adjusted EBITDA:
(dollars in millions)
Net income from continuing operations
Income tax expense (benefit)
Income from continuing operations before taxes
Interest expense
Other expenses (income)
Operating income from continuing operations
Depreciation and amortization
Transaction-related expenses (1)
Asset impairments
Restructuring expenses
Share-based compensation expense
Sponsor fees (included in other operating expense)
Inventory impairments (included in cost of sales)
Severance expenses (included in cost of sales)
Severance expenses (included in SG&A)
Other items not directly related to current operations (2)
Adjusted EBITDA
$
$
$
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
500.6 $
235.2
735.8 $
353.0 $
153.6
506.6 $
412.6
198.4
611.0
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
331.3 $
18.4
349.7
133.5
0.9
484.1
222.6
3.7
0.6
7.4
24.6
—
1.4
—
0.7
(9.3)
90.3 $
(19.3)
71.0
154.3
(14.2)
211.1
218.6
5.2
5.2
37.3
19.8
1.9
1.4
1.0
8.0
(2.9)
694.7
(495.9)
198.8
157.8
(9.8)
346.8
222.2
2.6
0.7
6.0
15.0
6.5
1.2
4.0
3.4
2.6
$
735.8 $
506.6 $
611.0
(1)
Transaction-related expenses relate primarily to advisory fees and other costs recognized in respect of major corporate
transactions, including the acquisition of businesses, and equity and debt transactions.
(2) During Fiscal 2021, we realized a net gain of $9.3 million related to the sale of a purchase option on a building that we lease in
Europe.
F-17
E. Selected geographic information
(dollars in millions)
Property, plant and equipment, net by geographic location
U.S.
Rest of North America
U.K.
Rest of EMEA
East Asia and India
Greater China
South America
As of January 1,
2022
As of January 2,
2021
$
$
172.9 $
127.1
32.8
151.3
45.7
124.8
15.7
670.3 $
184.4
121.5
31.8
161.4
54.9
134.9
16.1
705.0
F. Information about major customers
Gates has a significant concentration of sales in the U.S., which accounted for 36.3% of Gates’ net sales by destination from
continuing operations during Fiscal 2021, compared to 39.0% during Fiscal 2020 and 43.2% during Fiscal 2019. During Fiscal 2021,
Fiscal 2020 and Fiscal 2019, no single customer accounted for more than 10% of Gates’ net sales. Two customers of our North
America businesses accounted for 13.9% and 10.0%, respectively, of our total trade accounts receivable balance as of January 1, 2022,
compared to 11.9% and 16.5%, respectively, as of January 2, 2021. These concentrations are due to the extended payment terms
common in the industry in which these businesses operate.
5. Restructuring and other strategic initiatives
Gates continues to undertake various restructuring and other strategic initiatives to drive increased productivity in all aspects of our
operations. These actions include efforts to consolidate our manufacturing and distribution footprint, scale operations to current
demand levels, streamline our selling, general and administrative (“SG&A”) back-office functions and relocate certain operations to
lower cost locations.
Overall costs associated with our restructuring and other strategic initiatives have been recognized in the consolidated statements as set
forth below. Expenses incurred in relation to certain of these actions qualify as restructuring expenses under U.S. GAAP.
(dollars in millions)
Restructuring expenses:
—Severance expenses
—Non-severance labor and benefit expenses
—Consulting expenses
—Other net restructuring expenses
Restructuring expenses in asset impairments:
—Impairment of fixed assets
Restructuring expenses in cost of sales:
—Impairment of inventory
Total restructuring expenses
Expenses related to other strategic initiatives:
—Severance expenses included in cost of sales
—Severance - related expenses included in SG&A
Total expenses related to other strategic initiatives
F-18
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
$
$
0.7 $
2.5
2.2
2.0
7.4
0.6
24.0 $
3.8
2.1
7.4
37.3
5.2
1.4
9.4 $
1.4
43.9 $
— $
0.7
0.7 $
1.0 $
8.0
9.0 $
4.7
—
1.6
(0.3)
6.0
0.7
1.2
7.9
4.0
3.4
7.4
Restructuring and other strategic initiatives during Fiscal 2021 included $3.4 million of primarily severance and other labor-related
expenses related principally to our European reorganization involving office and distribution center closures or downsizings and the
implementation of a regional shared service center, and $3.7 million of additional costs related to the closure in 2020 of a
manufacturing facility in Korea, including impairment of fixed assets of $0.6 million. Also during Fiscal 2021, we incurred
$1.4 million of inventory impairments, predominantly in North America as part of a strategic product line shift, and we recognized
$1.0 million of expenses related to the consolidation of certain of our Middle East businesses. Partially offsetting these costs were
gains of $3.1 million on the disposal of buildings in Korea and France that were no longer needed following the completion of certain
restructuring initiatives.
Expenses incurred in connection with our restructuring and other strategic initiatives during the year ended January 2, 2021 related
primarily to the closure of a manufacturing facility in Korea, our European reorganization involving office and distribution center
closures or downsizings and implementation of a regional shared service center, the closure of two North American manufacturing
facilities, in addition to reductions in workforce, primarily in EMEA and North America. The closure of the Korean facility resulted in
an accrual for severance and other labor costs of $13.2 million, an impairment of inventory of $1.4 million (recognized in cost of
sales) and an impairment of fixed assets of $4.8 million (included in asset impairments). Restructuring costs related to our European
reorganization were $12.6 million, of which $11.4 million related to estimated severance.
Restructuring activities
As indicated above, restructuring expenses, as defined under U.S. GAAP, form a subset of our total expenses related to restructuring
and other strategic initiatives. These expenses include the impairment of inventory, which is recognized in cost of sales. Analyzed by
segment, our restructuring expenses were as follows:
(dollars in millions)
Power Transmission
Fluid Power
Continuing operations
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
5.6 $
3.8
9.4 $
32.6 $
11.3
43.9 $
3.5
4.4
7.9
The following summarizes the reserve for restructuring expenses for the year ended January 1, 2022 and January 2, 2021, respectively:
(dollars in millions)
Balance as of the beginning of the period
Utilized during the period
Charge for the period
Released during the period
Foreign currency translation
Balance as of the end of the period
For the year ended
January 1,
2022
January 2,
2021
$
$
17.9 $
(18.0)
8.0
(0.6)
(0.8)
6.5 $
2.9
(23.4)
37.7
(0.4)
1.1
17.9
Restructuring reserves, which are expected to be utilized during 2022, are included in the consolidated balance sheet within the
accrued expenses and other current liabilities line.
F-19
6. Income taxes
Provision for income taxes
Gates Industrial Corporation plc is domiciled in the United Kingdom. Income from continuing operations before income taxes and
income tax expense (benefit) are summarized below based on the geographic location of the operation to which such earnings and
income taxes are attributable.
(dollars in millions)
U.K.
U.S.
Other foreign
Income from continuing operations before income taxes
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
(32.9) $
63.5
319.1
349.7 $
(82.7) $
(105.3)
259.0
71.0 $
(80.6)
0.9
278.5
198.8
Income tax expense (benefit) on income from continuing operations analyzed by tax jurisdiction is as follows:
(dollars in millions)
Current tax
U.K.
U.S.
Other foreign
Total current tax expense
Deferred income tax
U.K.
U.S.
Other foreign
Total deferred income tax benefit
Income tax expense (benefit)
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
$
$
4.2 $
12.9
95.6
112.7 $
(18.1) $
(61.7)
(14.5)
(94.3)
18.4 $
(0.1) $
5.4
23.1
28.4 $
(19.2) $
2.0
(30.5)
(47.7)
(19.3) $
7.5
21.0
124.3
152.8
(4.7)
(49.3)
(594.7)
(648.7)
(495.9)
F-20
Reconciliation of the applicable statutory income tax rate to the reported effective income tax rate:
U.K. corporation tax rate
Effect of:
—State tax provision, net of Federal benefit
—Provision for unrecognized income tax benefits
—Company Owned Life Insurance
—Tax on international operations(1)
—Manufacturing incentives(2)
—Change in valuation allowance(3)
—Deferred income tax rate changes
—Currency exchange rate movements
—Other permanent differences
Reported effective income tax rate
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
19.0%
19.0%
19.0%
1.4%
(0.4%)
(2.4%)
(31.2%)
(1.8%)
36.3%
(17.8%)
0.8%
1.4%
5.3%
(0.9%)
(30.8%)
(11.3%)
(4.4%)
(4.4%)
(2.8%)
(3.8%)
8.2%
4.0%
(27.2%)
(2.1%)
34.0%
(4.4%)
(325.9%)
0.5%
6.6%
17.8%
6.5%
(1.4%)
(249.4%)
(1)
(2)
(3)
“Tax on international operations” includes U.S. tax on foreign earnings, unremitted earnings of foreign subsidiaries, effects of
global funding structures, and effects of differences between statutory and foreign tax rates. Fiscal 2021 includes $129.9 million
benefit for additional net deferred tax assets, primarily finite-lived net operating losses for Fiscal 2019 in Luxembourg. Fiscal
2020 and Fiscal 2019 include the effects of tax law enactments other than deferred income tax rate changes. Also, Fiscal 2020
includes the impact of nondeductible transaction-related expenses, and Fiscal 2019 includes $608.6 million for the generation of
finite-lived net operating losses in Luxembourg.
“Manufacturing incentives” for Fiscal 2019 includes an adjustment of $5.0 million for the expiration of manufacturing incentives
in the Czech Republic, offset partially by $4.1 million of incentives generated during the year.
“Change in valuation allowance” is comprised primarily of:
Expense (benefit)
Luxembourg finite-lived net operating losses
Luxembourg indefinite-lived net operating losses
U.S. foreign tax credits
Disallowed interest carryforwards
Rate change
Significant Events
CARES Act
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
$
$
$
129.9 $
— $
(53.4) $
— $
48.3 $
— $
— $
5.4 $
(11.7) $
— $
608.6
(579.0)
—
42.9
(36.4)
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted and signed into law in
the U.S. in response to the COVID-19 pandemic. One of the provisions of this law is an increase to the allowable business interest
deduction from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years. This modification
significantly increased the current deductible interest expense of the Company for both years, which resulted in a cash benefit while
increasing our effective tax rate through requirements to allocate and apportion interest expense for certain other tax purposes,
including in determining our global intangible low-taxed income inclusion, deduction for foreign derived intangible income, and the
utilization of foreign tax credits.
F-21
Deferred income tax assets (liabilities)
Deferred income tax assets (liabilities) recognized by the Company were as follows:
(dollars in millions)
Deferred income tax assets:
Accounts receivable
Inventories
Property, plant and equipment
Lease liabilities
Accrued expenses
Post-retirement benefit obligations
Compensation
Net operating losses
Capital losses
Credits
Interest
Other items
Valuation allowances
Total deferred income tax assets
Deferred income tax liabilities:
Inventories
Property, plant and equipment
Lease right-of-use assets
Intangible assets
Post-retirement benefit obligations
Undistributed earnings
Other items
Total deferred income tax liabilities
Net deferred income tax assets
As of
January 1, 2022
As of
January 2, 2021
$
$
$
$
$
$
3.8 $
—
—
37.2
36.2
4.9
19.9
1,629.4
200.8
117.1
140.2
4.4
2,193.9 $
(1,349.1)
844.8 $
(16.6) $
(37.8)
(31.3)
(382.5)
—
(21.0)
—
(489.2) $
355.6 $
3.3
8.0
8.6
36.8
39.8
30.1
19.3
1,540.7
151.9
147.9
122.1
14.2
2,122.7
(1,219.9)
902.8
(22.1)
(54.8)
(30.3)
(428.3)
(12.9)
(40.6)
(1.6)
(590.6)
312.2
As of January 1, 2022, the Company had the following loss and credit carryforward amounts:
•
•
•
•
Gates had U.S. federal, U.K. and foreign operating tax losses amounting to $6,504.7 million and U.S. state operating tax
losses amounting to $147.9 million. Operating losses of $3,331.4 million can be carried forward indefinitely and
$3,321.2 million have expiration dates between 2021 and 2040. We recognized a related deferred income tax asset of
$603.4 million after valuation allowance of $1,026.0 million;
Gates had U.S. federal and U.K. capital tax losses amounting to $805.2 million, of which $791.8 million can be carried
forward indefinitely and $13.4 million expire in 2026. We recognized no related deferred income tax asset after valuation
allowance of $200.8 million;
Gates had U.S. federal, Luxembourg, Belgium and U.K. interest expense deductions which can be carried forward amounting
to $570.8 million. Interest expense carried forward can be carried forward indefinitely. We recognized a related deferred tax
asset of $114.0 million after valuation allowance of $26.2 million; and
Gates had U.S. federal foreign tax credits amounting to $117.1 million, which expire between 2022 and 2027. We recognized
a related deferred income tax asset of $25.4 million after valuation allowance of $91.7 million.
F-22
As of January 1, 2022, income and withholding taxes in the various tax jurisdictions in which Gates operates have not been provided
on approximately $1,621.6 million of taxable temporary differences related to the investments in the Company’s subsidiaries. These
temporary differences represent the estimated excess of the financial reporting over the tax basis in our investments in those
subsidiaries, which are primarily the result of purchase accounting adjustments. These temporary differences are not expected to
reverse in the foreseeable future but could become subject to income and withholding taxes in the various tax jurisdictions in which
Gates operates if they were to reverse. The amount of unrecognized deferred income tax liability on these taxable temporary
differences has not been determined because the hypothetical calculation is not practicable due to the uncertainty as to how they may
reverse. However, Gates has recognized a deferred income tax liability of $21.0 million on taxable temporary differences related to
undistributed earnings of the Company’s subsidiaries.
Recoverability of Deferred Income 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.
As of each reporting date, we consider 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 financial statements.
After weighing all of the evidence, giving more weight to the evidence that was objectively verifiable, we determined in Fiscal 2021
that it was more likely than not that deferred income tax assets in the U.S. related to foreign tax credits totaling $53.4 million are
realizable as a result of changes in estimates of taxable profits against which these credits can be utilized. Similarly, we determined
that it was more likely than not that deferred income tax assets in Fiscal 2020 primarily related to disallowed interest carryforwards in
the U.K., Luxembourg, and Belgium totaling $29.5 million and Fiscal 2019 primarily related to indefinite-lived net operating losses in
Luxembourg totaling $586.2 million were realizable.
In Fiscal 2020, the deferred tax assets above include $26.0 million of assets which have no expiration in these jurisdictions. As a result
of changes in estimates of future taxable profits in the third quarter of Fiscal 2020, due primarily to anticipated changes to the
composition of our intercompany financing arrangements related to proposed international tax law changes, our judgment changed
regarding valuation allowances on these deferred tax assets.
Included within the $586.2 million of valuation allowances released in Fiscal 2019 are deferred income tax assets totaling
$579.0 million related to €2.1 billion of indefinite-lived net operating losses in Luxembourg for which our evaluation of the positive
and negative evidence changed during the first quarter of Fiscal 2019 due to the implementation of our European corporate center. Our
European corporate center was implemented in Fiscal 2019 to centralize and strengthen regional operations in Europe, which
thereafter became centrally managed from Luxembourg.
F-23
Unrecognized income tax benefits
The following is a reconciliation of the gross beginning and ending amount of unrecognized income tax benefits, excluding interest
and penalties:
(dollars in millions)
At the beginning of the period
Increases for tax positions related to the current period
Increases for tax positions related to prior periods
Decreases for tax positions related to prior periods
Decreases related to settlements
Decreases due to lapsed statute of limitations
Foreign currency translation
At the end of the period
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
121.6 $
147.3 $
6.7
0.7
(12.1)
—
(7.2)
(5.1)
6.9
0.5
(18.9)
(14.0)
(5.8)
5.6
80.1
70.6
5.8
(2.1)
—
(8.1)
1.0
$
104.6 $
121.6 $
147.3
Unrecognized income tax benefits represent the difference between the income tax benefits that we are able to recognize for financial
reporting purposes and the income tax benefits that we have recognized or expect to recognize in filed tax returns. Such amounts
represent a reasonable provision for income taxes ultimately expected to be paid and may need to be adjusted over time as more
information becomes known.
If all unrecognized income tax benefits were recognized, the net impact on the provision for income taxes which would impact the
annual effective tax rate would be $93.5 million, including all competent authority offsets.
As of January 1, 2022, January 2, 2021, and December 28, 2019, Gates had accrued $14.0 million, $12.3 million, and $19.6 million,
respectively, for the payment of worldwide interest and penalties on unrecognized income tax benefits, which are not included in the
table above. Gates recognizes interest and penalties relating to unrecognized income tax benefits in the provision for income tax
expense.
The primary driver of the reduction in unrecognized income tax benefits during the year relates to a change in underlying facts and
lapses in statute of limitations. We believe that it is reasonably possible that a decrease of up to $9.8 million in unrecognized income
tax benefits will occur in the next 12 months as a result of the expiration of the statutes of limitations in multiple jurisdictions and the
settlement of audits in Germany and India.
As of January 1, 2022, Gates remains subject to examination in the US for tax years 2016 and 2018 to 2020 and in other major
jurisdictions for tax years 2008 to 2020.
F-24
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:
(dollars in millions, except share numbers and per share amounts)
Net income attributable to shareholders
Weighted average number of shares outstanding
Dilutive effect of share-based awards
Diluted weighted average number of shares outstanding
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
297.1 $
79.4 $
690.1
291,623,523
290,681,615
290,057,360
5,670,552
297,294,075
1,434,349
292,115,964
1,570,101
291,627,461
Number of anti-dilutive shares excluded from diluted earnings per share calculation
3,981,424
5,257,654
3,679,014
Basic earnings per share
Diluted earnings per share
8. Inventories
(dollars in millions)
Raw materials and supplies
Work in progress
Finished goods
Total inventories
9. Property, plant and equipment
(dollars in millions)
Cost
Land and buildings
Machinery, equipment and vehicles
Assets under construction
Less: Accumulated depreciation and impairment
Total
$
$
1.02 $
1.00 $
0.27 $
0.27 $
2.38
2.37
As of
January 1, 2022
As of
January 2, 2021
$
$
199.6 $
43.4
439.6
682.6 $
135.1
34.3
338.8
508.2
As of
January 1, 2022
As of
January 2, 2021
$
$
329.2 $
873.3
81.0
1,283.5
(613.2)
670.3 $
333.0
881.3
50.4
1,264.7
(559.7)
705.0
During Fiscal 2021, the depreciation expense in relation to the above assets was $90.0 million, compared to $89.3 million during
Fiscal 2020 and $92.3 million during Fiscal 2019.
During Fiscal 2021, impairments of property, plant and equipment of $0.6 million were recognized, compared to $5.2 million in Fiscal
2020, and $0.7 million in Fiscal 2019.
Property, plant and equipment includes assets held under finance leases with a carrying amount of $4.1 million as of January 1, 2022,
compared to $4.1 million as of January 2, 2021.
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, including property, plant and equipment.
F-25
10. Goodwill
(dollars in millions)
Cost and carrying amount
As of December 28, 2019
Foreign currency translation
As of January 2, 2021
Foreign currency translation
As of January 1, 2022
11. Intangible assets
(dollars in millions)
Finite-lived:
—Customer relationships
—Technology
—Capitalized software
Indefinite-lived:
—Brands and trade names
Total intangible assets
Power
Transmission
Fluid
Power
Total
$
$
1,377.5 $
56.9
1,434.4
(46.3)
1,388.1 $
683.0 $
2.8
685.8
(10.9)
674.9 $
2,060.5
59.7
2,120.2
(57.2)
2,063.0
As of January 1, 2022
Accumulated
amortization and
impairment
Cost
Net
Cost
As of January 2, 2021
Accumulated
amortization and
impairment
Net
$ 2,031.7 $
90.9
97.8
2,220.4
(901.6) $ 1,130.1 $ 2,073.0 $
1.5
(89.4)
90.9
(56.6)
(1,047.6)
41.2
1,172.8
89.9
2,253.8
(796.9) $ 1,276.1
2.4
(88.5)
(49.2)
(934.6)
40.7
1,319.2
513.4
$ 2,733.8 $
(44.0)
469.4
(1,091.6) $ 1,642.2 $ 2,767.2 $
513.4
469.4
(44.0)
(978.6) $ 1,788.6
During Fiscal 2021, the amortization expense recognized in respect of intangible assets was $132.6 million, compared to
$129.3 million for Fiscal 2020 and $129.9 million for Fiscal 2019. In addition, movements in foreign currency exchange rates resulted
in a decrease in the net carrying value of total intangible assets of $24.3 million in Fiscal 2021, compared to an increase of
$30.8 million in Fiscal 2020.
The amortization expense for the next five years is estimated to be as follows:
(dollars in millions)
Fiscal year:
—2022
—2023
—2024
—2025
—2026
Total
135.2
137.1
128.7
125.0
122.1
$
$
$
$
$
F-26
12. Leases
(dollars in millions)
Lease expenses
Operating lease expenses
Finance lease expenses:
—Finance lease amortization expenses
—Interest on lease liabilities
Short-term lease expenses
Variable lease expenses
Sublease income
Total lease expenses
Other information
Right-of-use assets obtained in exchange for new operating lease liabilities
Assets obtained in exchange for new finance lease liabilities
Gain on sale and leaseback transactions, net
Cash paid for amounts included in the measurement of lease liabilities:
—Operating cash flows from finance leases
—Operating cash flows from operating leases
—Financing cash flows from finance leases
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
31.5
$
29.9
$
30.3
1.1
0.1
6.7
7.9
—
47.3
29.9
1.5
(9.3)
0.1
30.1
1.2
31.4
$
$
$
$
$
$
0.9
0.1
5.8
7.0
—
43.7
17.7
2.0
—
—
30.3
1.0
31.3
$
$
$
$
$
$
0.3
—
4.6
6.9
(0.1)
42.0
19.7
0.9
—
—
26.3
0.4
26.7
$
$
$
$
$
$
Weighted-average remaining lease term — finance leases
Weighted-average remaining lease term — operating leases
Weighted-average discount rate — finance leases
Weighted-average discount rate — operating leases
4.0 years
9.0 years
2.5 %
5.1 %
5.3 years
9.4 years
3.0 %
5.5 %
8.5 years
10.1 years
2.5 %
5.4 %
Maturity analysis of liabilities
(dollars in millions)
Next 12 months
Year 2
Year 3
Year 4
Year 5
Year 6 and beyond
Total lease payments
Interest
Total present value of lease liabilities
Operating leases
Finance leases
$
$
24.8 $
22.9
19.5
17.9
14.7
70.2
170.0
(34.9)
135.1 $
1.4
1.0
0.6
0.3
0.1
—
3.4
(0.1)
3.3
F-27
Balance sheet presentation of leases as of January 1, 2022 and January 2, 2021
(dollars in millions)
Right-of-use assets
Short-term lease liabilities (included in “Accrued expenses and
other current liabilities”)
Long-term lease liabilities
Total lease liabilities
As of January 1, 2022
As of January 2, 2021
Operating leases
Finance leases
Operating leases
Finance leases
$
$
$
124.2 $
4.1 $
120.9 $
4.1
20.9 $
114.2
135.1 $
1.1 $
2.2
3.3 $
21.8 $
111.4
133.2 $
0.8
2.2
3.0
Right-of-use assets arising under finance leases are presented in the property, plant and equipment, net line item in the consolidated
balance sheet. The amortization of right-of-use operating assets during Fiscal 2021 was $23.7 million, compared to $22.8 million and
$23.6 million during Fiscal 2020 and Fiscal 2019, respectively. This is included in the change in prepaid expenses and other assets line
in the consolidated statement of cash flows.
13. Derivative financial instruments
We are exposed to certain financial 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 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.
Derivative instruments that have not been 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 period end fair values of derivative financial instruments were as follows:
As of January 1, 2022
As of January 2, 2021
Prepaid
expenses
and other
assets
Other
non-
current
assets
Accrued
expenses
and other
current
liabilities
Other
non-
current
liabilities
Prepaid
expenses
and other
assets
Other
non-
current
assets
Net
Accrued
expenses
and other
current
liabilities
Other
non-
current
liabilities
Net
$ — $ — $ (19.8) $ — $ (19.8) $
(1.3)
—
—
(0.5)
(1.8) —
1.1 $ — $ — $ (42.6) $ (41.5)
(3.4)
(1.4)
—
(2.0)
—
7.7
(12.9)
(26.9)
(32.1) —
—
(13.4)
(43.6)
(57.0)
(dollars in millions)
Derivatives designated as
hedging instruments:
—Currency swaps
—Interest rate caps
—Interest rate swaps
Derivatives not designated as
hedging instruments:
—Currency swaps
—Currency forward contracts
$
2.9
2.9 $
—
—
—
—
—
—
—
—
—
—
—
(0.6) —
2.3
—
(1.3)
0.6
1.7 $ — $ (16.7) $ (88.2) $ (103.2)
(1.9) —
7.7 $ (34.6) $ (27.4) $ (51.4) $
F-28
A. Instruments designated as net investment hedges
We hold cross currency swaps that have been designated as net investment hedges of certain of our European operations. As of
January 1, 2022 and January 2, 2021, the notional principal amount of these contracts was $270.0 million and they mature in March
2022. In addition, as of both January 1, 2022 and January 2, 2021, we had designated €147.0 million of our Euro-denominated debt as
a net investment hedge of certain of our European operations.
The fair value gains (losses) before tax recognized in OCI in relation to the instruments designated as net investment hedging
instruments were as follows:
(dollars in millions)
Net fair value gains (losses) recognized in OCI in relation to:
—Euro-denominated debt
—Designated cross currency swaps
Total net fair value gains (losses)
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
12.4 $
21.4
33.8 $
(15.5) $
(26.3)
(41.8) $
(0.2)
5.7
5.5
During Fiscal 2021, a net gain of $1.8 million was recognized in interest expense in relation to our cross currency swaps that have
been designated as net investment hedges, compared to a net gain of $3.7 million and $7.8 million during Fiscal 2020 and Fiscal 2019,
respectively.
B. Instruments designated as cash flow hedges
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. These instruments are all designated as cash flow hedges. As of
January 1, 2022 and January 2, 2021, we held 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, 2025.
Our interest rate caps 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 January 1, 2022 and January 2, 2021, the notional amount of our interest rate caps
outstanding was €425.0 million, covering the period from July 1, 2019 to June 30, 2023.
The movements before tax recognized in OCI in relation to our cash flow hedges were as follows:
(dollars in millions)
Movement recognized in OCI in relation to:
—Fair value gain (loss) on cash flow hedges
—Amortization to net income of prior period fair value losses
—Reclassification from OCI to net income
Total movement
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
11.7 $
17.9
3.7
33.3 $
(29.1) $
9.1
3.6
(16.4) $
(31.7)
—
2.5
(29.2)
As of January 1, 2022, we expect to reclassify an estimated $22.8 million of losses in OCI to earnings within the next twelve months
associated with cash flow hedges along with the earnings effects of the related forecasted transactions.
C. Derivative instruments not designated as hedging instruments
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, or the currency swap contracts that are used to manage the currency profile of Gates’
cash as hedging instruments for the purposes of hedge accounting.
As of January 1, 2022 and January 2, 2021, there were no outstanding currency swaps.
As of January 1, 2022, the notional amount of outstanding currency forward contracts that are used to manage operational foreign
exchange exposures was $171.9 million, compared to $87.6 million as of January 2, 2021.
F-29
The fair value gains (losses) recognized in net income in relation to derivative instruments that have not been designated as hedging
instruments were as follows:
(dollars in millions)
Fair value gains (losses) recognized in relation to:
—Currency forward contracts recognized in SG&A
—Currency swaps recognized in other expenses
Total
14. Fair value measurement
A. Fair value hierarchy
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
5.1 $
—
5.1 $
(1.9) $
0.4
(1.5) $
3.0
0.6
3.6
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:
(dollars in millions)
Current
Non-current
As of January 1, 2022
As of January 2, 2021
Carrying amount
Fair value
Carrying amount
Fair value
$
$
38.1 $
2,526.5
2,564.6 $
37.9 $
2,553.0
2,590.9 $
42.7 $
2,666.0
2,708.7 $
42.3
2,700.0
2,742.3
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 0.75% LIBOR floor on the Dollar Term Loan and a 0% EURIBOR floor on
the Euro Term Loan. The fair values of the term loans are derived from a market price, discounted for illiquidity. 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 their quoted market price.
F-30
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)
As of January 1, 2022
Equity investments
Derivative assets
Derivative liabilities
As of January 2, 2021
Equity investments
Derivative assets
Derivative liabilities
Quoted prices in active
markets (Level 1)
Significant observable
inputs (Level 2)
Total
$
$
$
$
$
$
0.6 $
— $
— $
2.1 $
— $
— $
— $
10.6 $
(62.0) $
0.6
10.6
(62.0)
— $
1.7 $
(104.9) $
2.1
1.7
(104.9)
Equity investments 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 derivative 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 Fiscal 2021 or Fiscal 2019. During Fiscal 2020, impairments of
property, plant and equipment of $5.2 million were recognized in relation to restructuring and other strategic initiatives, primarily the
closure of our manufacturing facility in Korea.
F-31
15. Debt
(dollars in millions)
Secured debt:
—Dollar Term Loan
—Euro Term Loan
Unsecured debt:
—6.25% Dollar Senior Notes due 2026
—Other loans
Total principal of debt
Deferred issuance costs
Accrued interest
Total carrying value of debt
Debt, current portion
Debt, less current portion
As of January 1,
2022
As of January 2,
2021
$
1,363.7 $
647.5
568.0
—
2,579.2
(31.5)
16.9
2,564.6
38.1
2,526.5 $
$
1,377.4
775.2
568.0
0.2
2,720.8
(29.4)
17.3
2,708.7
42.7
2,666.0
Gates’ secured debt is jointly and severally, irrevocably and fully and unconditionally guaranteed by certain of its subsidiaries and is
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
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.
The principal payments due under our financing agreements over the next five years and thereafter are as follows:
(dollars in millions)
Fiscal year:
—2022
—2023
—2024
—2025
—2026
Thereafter
Total
21.2
21.3
642.9
17.2
581.8
1,294.8
2,579.2
$
$
Debt issuances and redemptions
During June 2021, we made a principal debt repayment of €58.7 million ($69.5 million) against our Euro Term Loan facility. As a
result of this repayment, we accelerated the recognition of $0.4 million of deferred issuance costs (recognized in interest expense).
On December 31, 2020, we made a principal debt repayment of $300.0 million against our Dollar Term Loan facility. As a result of
this repayment, we accelerated the recognition of $3.7 million of deferred financing costs (recognized in interest expense).
On November 22, 2019, we issued and sold $568.0 million of unsecured Dollar Senior Notes, described further below. The proceeds
from this debt issuance were used on December 5, 2019 to redeem all $568.0 million of our outstanding 6.00% Dollar Senior Notes,
plus interest accrued up to and including the redemption date of $13.2 million. The majority of the costs totaling approximately
$8.6 million related to the refinancing transactions were deferred and are being amortized to interest expense over the remaining term
of the related borrowings using the effective interest method.
F-32
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 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 our option, LIBOR plus an applicable margin. The Euro Term Loan matures on
March 31, 2024. On February 24, 2021, we made amendments to the Dollar Term Loan credit agreement, including extending the
maturity date of the Dollar Term Loan, from March 31, 2024 to March 31, 2027, reducing the floor applicable to the Dollar Term
Loan from 1.00% to 0.75% and modifying the applicable interest rate margin for the Dollar Term Loan to include a 0.25% reduction if
our consolidated total net leverage ratio (as defined in the credit agreement) is less than or equal to 3.75 times. In connection with
these amendments, we paid accrued interest up to the date of the amendments of $3.7 million, in addition to fees of $8.6 million, of
which $6.9 million qualified for deferral and will be amortized to interest expense over the new remaining term of the Dollar Term
Loan using the effective interest method.
The Dollar Term Loan interest rate is currently LIBOR, subject to a floor of 0.75%, plus a margin of 2.50%, and as of January 1,
2022, borrowings under this facility bore interest at a rate of 3.25% per annum. This margin reflects the 0.25% reduction described
above, as the consolidated total net leverage ratio (as defined in the credit agreement) dropped below 3.75 times during the third
quarter of Fiscal 2021. The Dollar Term Loan interest rate is re-set on the last business day of each month.
As of January 1, 2022, the Euro Term Loan bore interest at EURIBOR, which is currently below 0%, subject to a floor of 0%, plus a
margin of 3.00%. The Euro Term Loan interest rate is re-set on the last business day of each quarter.
Both term loans are subject to quarterly amortization payments of 0.25%, based on the original principal amount less certain
repayments with the balance payable on maturity. During Fiscal 2021, we made amortization payments against the Dollar Term Loan
and the Euro Term Loan of $13.8 million and $7.6 million, respectively. During Fiscal 2020, we made amortization payments against
the Dollar Term Loan and the Euro Term Loan of $21.7 million and $9.4 million, respectively.
Under the terms of the credit agreement, we are 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 2021 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 2022.
During the periods presented, foreign exchange 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 our Euro investments, a corresponding
portion of the foreign exchange gain (loss) were recognized in OCI.
(dollars in millions)
Gain (loss) recognized in statement of operations
Gain (loss) recognized in OCI
Total gain (loss)
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
38.2 $
12.4
50.6 $
(51.4) $
(15.5)
(66.9) $
17.3
(0.2)
17.1
The above net foreign exchange gain (loss) recognized in the other expenses (income) line of the 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.
A wholly-owned U.S. subsidiary of Gates Global LLC is the principal obligor under the Term Loans for U.S. federal income tax
purposes and makes the payments due on this tranche of debt. As a result, interest received by lenders of this tranche of debt is U.S.
source income.
Unsecured Senior Notes
As of January 1, 2022, we had $568.0 million of Dollar Senior Notes outstanding that were issued in November 2019. These notes are
scheduled to mature on January 15, 2026 and bear interest at an annual fixed rate of 6.25% with semi-annual interest payments.
F-33
On and after January 15, 2022, we may redeem the Dollar Senior Notes, at our option, in whole at any time or in part from time to
time, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest to the
redemption date:
During the year commencing:
—2022
—2023
—2024 and thereafter
Redemption price
103.125 %
101.563 %
100.000 %
Upon the occurrence of a change of control or a certain qualifying asset sale, the holders of the notes will have the right to require us
to make an offer to repurchase each holder's notes at a price equal to 101% (in the case of a change of control) or 100% (in the case of
an asset sale) of their principal amount, plus accrued and unpaid interest.
Revolving credit facility
We have a secured revolving credit facility that provides for multi-currency revolving loans. On November 18, 2021, we amended the
credit agreement governing this facility to, among other things, increase the size of the facility from $185.0 million to $250.0 million,
extend the maturity date from January 29, 2023 to November 18, 2026 (subject to certain springing maturities related to our Euro
Term Loan and Unsecured Senior Notes if more than $500.0 million is outstanding in respect of either such facility 91 days prior to
their respective maturities), and increase the letter of credit sub-facility from $20.0 million to $75.0 million.
In connection with these amendments, we paid fees of $2.0 million, which have been deferred and will, together with existing deferred
issuance costs related to this facility, be amortized to interest expense over the new term of the facility on a straight-line basis.
As of both January 1, 2022 and January 2, 2021, 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 our option, LIBOR, plus an applicable margin.
Asset-backed revolver
We also have a revolving credit facility backed by certain of our assets in North America. On November 18, 2021, we amended the
credit agreement governing this facility to, among other things, reduce the maximum facility size from $325.0 million to
$250.0 million ($240.4 million as of January 1, 2022, compared to $230.2 million as of January 2, 2021, based on the values of the
secured assets on those dates), and extended the maturity date from January 29, 2023 to November 18, 2026 (subject to certain
springing maturities related to our Euro Term Loan and Unsecured Senior Notes if more than $500.0 million is outstanding in respect
of either such facility 91 days prior to their respective maturities). The facility also allows for a letter of credit sub-facility of
$150.0 million within the $250.0 million maximum.
In connection with these amendments, we paid fees of $1.3 million, which have been deferred and will, together with existing deferred
issuance costs related to this facility, be amortized to interest expense over the new term of the facility on a straight-line basis.
As of both January 1, 2022 and January 2, 2021, there were no drawings for cash under the asset-backed revolver, but there were
letters of credit outstanding of $45.3 million and $28.5 million, respectively.
Debt under the facility bears interest at a floating rate, which can be either a base rate as defined in the credit agreement plus an
applicable margin or, at our option, LIBOR, plus an applicable margin.
F-34
16. Accrued expenses and other liabilities
Accrued expenses and other liabilities consisted of the following:
(dollars in millions)
Accrued compensation
Current portion of lease obligations
Derivative financial instruments
Payroll and related taxes payable
VAT and other taxes payable
Warranty reserve
Restructuring reserve
Workers’ compensation reserve
Other accrued expenses and other liabilities
The above liabilities are presented in Gates’ balance sheet as follows:
(dollars in millions)
—Accrued expenses and other current liabilities
—Other non-current liabilities
As of January 1,
2022
As of January 2,
2021
$
$
80.2 $
22.0
62.0
21.9
10.9
18.7
6.5
7.9
106.2
336.3 $
70.0
22.6
104.9
25.0
11.7
19.8
17.9
8.8
92.5
373.2
As of January 1,
2022
As of January 2,
2021
$
$
277.1 $
59.2
336.3 $
252.2
121.0
373.2
Warranty reserves
Changes in warranty reserves (included in accrued expenses and other liabilities) were as follows:
(dollars in millions)
Balance at the beginning of the period
Charge for the period
Utilized during the period
Released during the period
Foreign currency translation
Balance at the end of the period
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
19.8 $
10.3
(9.6)
(1.9)
0.1
18.7 $
17.7 $
11.8
(9.5)
(0.7)
0.5
19.8 $
14.3
16.5
(10.9)
(2.2)
—
17.7
An accrual is made for warranty claims on various products depending on specific market expectations and the type of product. These
estimates are established using historical information on the nature, frequency and average cost of warranty claims. The majority of
the warranty accruals are expected to be utilized during 2022, with the remainder estimated to be utilized within the next three years.
An accrual is made for the cost of product recalls if management considers it probable that it will be necessary to recall a specific
product and the amount can be reasonably estimated.
17. Post-retirement benefits
A. Defined contribution pension plans
Gates provides defined contribution pension benefits in most of the countries in which it operates; in particular, the majority of its
employees in the U.S. are entitled to such benefits.
During Fiscal 2021, the expense recognized by Gates in respect of defined contribution pension plans was $20.6 million, compared to
$19.0 million in Fiscal 2020 and $17.9 million in Fiscal 2019.
F-35
B. Defined benefit pension plans
Gates operates defined benefit pension plans in certain of the countries in which it operates, in particular, in the U.S. and U.K.
Generally, the pension benefits provided under these plans are based on pensionable salary and the period of service of the individual
employees. Plan assets are held separately from those of Gates in funds that are under the control of trustees. All of the defined benefit
pension plans operated by Gates 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.
Funded status
The net deficit recognized in respect of defined benefit pension plans is presented in the balance sheet as follows:
(dollars in millions)
Pension surplus
Accrued expenses and other current liabilities
Post-retirement benefit obligations
Net funded status
Plans whose projected benefit obligation was in excess of plan assets:
—Aggregate projected benefit obligation
—Aggregate fair value of plan assets
Plans whose accumulated benefit obligation was in excess of plan assets:
—Aggregate accumulated benefit obligation
—Aggregate fair value of plan assets
As of January 1,
2022
As of January 2,
2021
$
$
$
$
$
$
(75.5) $
2.6
64.2
(8.7) $
341.4 $
274.6 $
336.1 $
274.0 $
(69.3)
2.3
91.5
24.5
376.3
282.5
371.6
281.9
During the year ended January 1, 2022, the net unfunded pension obligation decreased by $33.2 million. This decrease was driven
primarily by actuarial gain of $43.4 million, offset partially by actual loss on plan assets of $4.9 million.
Benefit obligation
Changes in the projected benefit obligation in relation to defined benefit pension plans were as follows:
(dollars in millions)
Benefit obligation at the beginning of the period
Employer service cost
Plan participants’ contributions
Plan amendments
Interest cost
Net actuarial (gain) loss
Benefits paid
Expenses paid from assets
Curtailments and settlements
Foreign currency translation
Benefit obligation at the end of the period
Accumulated benefit obligation
For the year ended
January 1,
2022
January 2,
2021
$
$
$
905.9 $
4.3
0.1
—
13.4
(43.4)
(47.6)
(1.3)
(1.6)
(8.7)
821.1 $
816.3 $
898.1
5.6
0.2
1.5
18.3
31.3
(44.6)
(2.0)
(30.6)
28.1
905.9
901.6
F-36
Changes in plan assets
Changes in the fair value of the assets held by defined benefit pension plans were as follows:
(dollars in millions)
Plan assets at the beginning of the period
Actual (loss) return on plan assets
Employer contributions
Plan participants’ contributions
Settlements
Benefits paid
Expenses paid from assets
Foreign currency translation
Plan assets at the end of the period
For the year ended
January 1,
2022
January 2,
2021
$
$
881.4 $
(4.9)
11.3
0.1
(1.6)
(47.6)
(1.3)
(7.6)
829.8 $
835.2
83.0
9.8
0.2
(29.2)
(44.6)
(2.0)
29.0
881.4
Gates’ desired investment objectives for pension plan assets include maintaining an adequate level of diversification to reduce interest
rate and market risk, and to provide adequate liquidity to meet immediate and future benefit payment requirements. Outside the U.S.,
Gates’ defined benefit pension plans target a mix of growth seeking assets, comprising equities, and income generating assets, such as
government and corporate bonds, that are considered by the trustees to be appropriate in the circumstances. Plan assets are rebalanced
periodically to maintain target asset allocations.
Certain benefit obligations outside the U.S. are matched by insurance contracts.
Investments in equities and fixed income securities are held in pooled investment funds that are managed by investment managers on a
passive (or “index-tracking”) basis. The trustees ensure that there is no significant concentration of credit risk in any one financial
institution.
Plan assets do not include any financial instruments issued by, any property occupied by, or other assets used by Gates.
The fair values of pension plan assets by asset category were as follows:
(dollars in millions)
Collective investment trusts:
Equity Securities
Debt Securities
—Corporate bonds
—Government bonds
Annuities and insurance
Other
Cash and cash equivalents
Total
$
As of January 1, 2022
As of January 2, 2021
Quoted prices
in active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Quoted prices
in active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
Total
$
— $
145.3 $
— $ 145.3 $
— $
144.1 $
— $ 144.1
—
—
—
240.1
199.6
21.2
—
7.5
7.5 $
5.6
—
611.8 $
—
—
210.5
240.1
199.6
231.7
—
—
5.6
7.5
210.5 $ 829.8 $
—
—
—
190.6
249.5
49.4
—
8.4
8.4 $
—
—
633.6 $
—
—
239.4
190.6
249.5
288.8
—
—
—
8.4
239.4 $ 881.4
Investments in equities and bonds held in pooled investment funds are measured at the bid price quoted by the investment managers,
which reflect the quoted prices of the underlying securities. Insurance contracts are measured at their surrender value quoted by the
insurers. Cash and cash equivalents largely attract floating interest rates.
F-37
Changes in the fair value of plan assets measured using significant unobservable inputs (level 3) were as follows:
(dollars in millions)
Fair value at the beginning of the period
Actual (loss) return on plan assets
Purchases
Sales
Impacts of benefits paid
Settlements
Foreign currency translation
Fair value at the end of the period
For the year ended
January 1,
2022
January 2,
2021
$
$
239.4 $
(13.0)
1.2
—
(12.6)
(1.3)
(3.2)
210.5 $
235.9
11.2
0.9
(6.7)
(12.6)
(0.4)
11.1
239.4
Estimated future contributions and benefit payments
Gates’ funding policy for its defined benefit pension plans is to contribute amounts determined annually on an actuarial basis to
provide for current and future benefits in accordance with federal law and other regulations. During 2022, Gates expects to contribute
approximately $10.0 million to its defined benefit pension plans (including non-qualified supplemental plans).
Benefit payments, reflecting expected future service, are expected to be made by Gates’ defined benefit pension plans as follows:
(dollars in millions)
Fiscal year:
—2022
—2023
—2024
—2025
—2026
—2027 through 2031
Net periodic benefit cost
Total
46.7
45.6
45.8
45.1
47.1
230.8
$
$
$
$
$
$
Components of the net periodic benefit cost for defined benefit pension plans relating to continuing operations were as follows:
(dollars in millions)
Employer service cost
Settlements and curtailments
Interest cost
Expected return on plan assets
Amortization of prior net actuarial loss
Amortization of prior service cost
Net periodic benefit cost
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
4.3 $
0.1
13.4
(19.3)
0.4
1.0
(0.1) $
5.6 $
(2.1)
18.3
(22.0)
0.2
0.8
0.8 $
5.5
(0.6)
23.4
(27.8)
—
0.8
1.3
F-38
Other comprehensive income
Changes in plan assets and benefit obligations of defined benefit pension plans recognized in OCI were as follows:
(dollars in millions)
Current period net actuarial (gain) loss
Amortization of prior net actuarial loss
Prior service cost
Amortization of prior service cost
(Loss) gain recognized due to settlements and curtailments
Pre-tax changes recognized in OCI other than foreign currency translation
Foreign currency translation
Total pre-tax changes recognized in OCI
$
$
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
(19.1) $
(0.4)
—
(1.0)
(0.1)
(20.6)
(0.3)
(20.9) $
(32.6) $
(0.2)
1.5
(0.8)
2.1
(30.0)
1.7
(28.3) $
20.5
—
—
(0.8)
(0.8)
18.9
1.0
19.9
Cumulative losses before tax recognized in OCI in respect of post-retirement benefits that had not yet been recognized as a component
of the net periodic benefit cost were as follows:
(dollars in millions)
Actuarial (gain) loss
Prior service costs
Foreign currency translation
Cumulative total
Assumptions
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
(29.1) $
10.8
(1.5)
(19.8) $
(9.5) $
11.8
(1.2)
1.1 $
21.2
11.1
(2.9)
29.4
Major assumptions used in determining the benefit obligation and the net periodic benefit cost for defined benefit pension plans are
presented in the following table as weighted averages:
Benefit obligation:
—Discount rate
—Rate of salary increase
Net periodic benefit cost:
—Discount rate
—Rate of salary increase
—Expected return on plan assets
As of
January 1, 2022
As of
January 2, 2021
2.003 %
3.095 %
1.527 %
3.032 %
2.380 %
1.527 %
3.032 %
2.144 %
3.170 %
2.832 %
In determining the expected return on plan assets, we consider the relative weighting of plan assets, the historical performance of total
plan assets and individual asset classes, and economic and other indicators of future performance. Return projections are validated
using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns.
F-39
C. Other defined benefit plans
Gates provides other post-employment benefits, principally health and life insurance cover, on an unfunded basis to certain of its
employees in the U.S. and Canada.
Funded status
The deficit recognized in respect of other defined benefit plans is presented in the balance sheet as follows:
(dollars in millions)
Accrued expenses and other current liabilities
Post-retirement benefit obligations
Benefit obligation
As of
January 1, 2022
As of
January 2, 2021
$
$
4.0 $
42.0
46.0 $
5.7
51.0
56.7
Changes in the accumulated benefit obligation in relation to other defined benefit plans were as follows:
(dollars in millions)
Benefit obligation at the beginning of the period
Interest cost
Actuarial (gain) loss
Benefits paid
Foreign currency translation
Benefit obligation at the end of the period
Accumulated benefit obligation
Estimated future contributions and benefit payments
For the year ended
January 1,
2022
January 2,
2021
$
$
$
56.7 $
1.2
(8.4)
(3.8)
0.3
46.0 $
46.0 $
57.9
1.7
0.3
(3.7)
0.5
56.7
56.7
Contributions are made to our other defined benefit plans as and when benefits are paid from the plans. During 2022, Gates expects to
contribute approximately $4.1 million to its other benefit plans.
Benefit payments, reflecting expected future service, are expected to be made by Gates’ other defined benefit plans as follows:
(dollars in millions)
Fiscal years:
—2022
—2023
—2024
—2025
—2026
—2027 through 2031
Net periodic benefit cost
Total
4.1
3.9
3.7
3.5
3.4
14.4
$
$
$
$
$
$
Components of the net periodic benefit cost for other defined benefit plans were as follows:
(dollars in millions)
Interest cost
Amortization of prior net actuarial gain
Amortization of prior service credit
Net periodic benefit cost
The net periodic benefit cost relates entirely to continuing operations.
F-40
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
1.2 $
(1.0)
(0.4)
(0.2) $
1.7 $
(1.0)
(0.4)
0.3 $
2.3
(0.8)
(0.4)
1.1
Other comprehensive income
Changes in the benefit obligation of other defined benefit plans recognized in OCI were as follows:
(dollars in millions)
Current period net actuarial (gain) loss
Amortization of prior net actuarial gain
Amortization of prior service credit
Pre-tax changes recognized in OCI other than foreign currency translation
Foreign currency translation
Total pre-tax changes recognized in OCI
$
$
$
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
(8.4) $
1.0
0.4
(7.0)
—
(7.0)
(7.0) $
0.3 $
1.0
0.4
1.7
—
$
1.7 $
(1.8)
0.8
0.4
(0.6)
(0.2)
(0.8)
(0.8)
Cumulative gains before tax recognized in OCI in respect of other post-retirement benefits that had not yet been recognized as a
component of the net periodic benefit cost were as follows:
(dollars in millions)
Actuarial gains
Prior service credits
Other adjustments
Foreign currency translation
Cumulative total
Assumptions
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
(23.4) $
(2.6)
0.2
(0.2)
(26.0) $
(16.0) $
(3.0)
0.2
(0.2)
(19.0) $
(17.3)
(3.4)
0.2
(0.2)
(20.7)
The primary assumption used in determining the benefit obligation and the net periodic benefit cost for other defined benefit plans is
the discount rate, the weighted average of which is presented in the following table:
Discount rate
Benefit obligation
Net periodic benefit cost
As of January 1,
2022
As of January 2,
2021
As of January 1,
2022
As of January 2,
2021
2.81 %
2.30 %
2.30 %
3.08 %
The initial healthcare cost trend rate as of January 1, 2022, starts at 5.74%, compared to 6.14% as of January 2, 2021, with an ultimate
trend rate of 4.91%, compared to 4.92% as of January 2, 2021, beginning in 2028.
18. 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 Fiscal 2021, we recognized a charge of $24.6 million, compared to $19.8 million and $15.0 million, respectively,
in the prior year periods.
Awards issued under the 2014 Omaha Topco Ltd. Stock Incentive Plan (the “2014 Plan”)
Gates has a number of share-based incentive awards issued under the 2014 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 continuing to provide service to Gates
on the vesting date. Tier II, III and IV options vest on achievement of specified investment returns by our majority owners, who are
various investment funds managed by affiliates of Blackstone Inc. (“Blackstone” or our “Sponsor”), 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.
F-41
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; instead, cash equivalent to the increase in the value of the shares from the date of grant to
the date of exercise is paid 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.
Changes in the awards granted under this plan are summarized in the tables below.
Awards issued under the Gates Industrial Corporation plc 2018 Omnibus Incentive Plan (the “2018 Plan”)
In conjunction with the initial public offering in January 2018, Gates adopted the 2018 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 issued under this plan take the form of options, except that no share is issued on exercise; instead, cash equivalent to the
increase in the value of the shares from the date of grant to the date of exercise is paid 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. 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, three or four 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.
F-42
Summary of movements in options outstanding
Outstanding at the beginning of the period:
—Tier I
—Tier II
—Tier III
—Tier IV
—SARs
—Share options
—Premium-priced options
Granted during the period:
—SARs
—Share options
—Premium-priced options
Forfeited during the period:
—Tier I
—Tier II
—Tier III
—Tier IV
—Share options
Exercised during the period:
—Tier I
—SARs
—Share options
Outstanding at the end of the period:
—Tier I
—Tier II
—Tier III
—Tier IV
—SARs
—Share options
—Premium-priced options
Exercisable at the end of the period
Vested and expected to vest at the end of the period
Year ended January 1, 2022
Plan
Number of
options
Weighted average
exercise price
$
2014 Plan
2014 Plan
2014 Plan
2014 Plan
Both plans
2018 Plan
2018 Plan
2018 Plan
2018 Plan
2018 Plan
2014 Plan
2014 Plan
2014 Plan
2014 Plan
2018 Plan
2014 Plan
Both Plans
2018 Plan
2014 Plan
2014 Plan
2014 Plan
2014 Plan
Both plans
2018 Plan
2018 Plan
3,165,482 $
3,779,467 $
3,779,467 $
3,779,467 $
841,811 $
2,565,066 $
796,460 $
18,707,220 $
36,360 $
925,024 $
39,009 $
1,000,393 $
(10,343) $
(201,997) $
(201,997) $
(201,997) $
(119,832) $
(736,166) $
(402,439) $
(49,063) $
(116,161) $
(567,663) $
2,752,700 $
3,577,470 $
3,577,470 $
3,577,470 $
829,108 $
3,254,097 $
835,469 $
18,403,784 $
4,002,291 $
7,651,212 $
6.93
6.89
6.89
10.34
9.00
14.75
19.00
9.28
15.00
15.00
16.50
15.06
7.87
6.73
6.73
10.09
14.26
8.89
7.05
8.20
14.80
8.74
6.91
6.90
6.90
10.35
9.31
14.84
18.88
9.63
9.65
11.83
As of January 1, 2022, the aggregate intrinsic value of options that were vested or expected to vest was $34.8 million, and these
options had a weighted average remaining contractual term of 6.2 years. As of January 1, 2022, the aggregate intrinsic value of options
that were exercisable was $25.9 million, and these options had a weighted average remaining contractual term of 5.0 years.
F-43
As of January 1, 2022, the unrecognized compensation charge relating to the nonvested options other than Tier II, Tier III and Tier IV
options, was $5.3 million, which is expected to be recognized over a weighted-average period of 1.4 years. The unrecognized
compensation charge relating to the nonvested Tier II, Tier III and Tier IV options was $23.2 million, which may be recognized on
occurrence of a liquidity event as described above.
During Fiscal 2021, cash of $4.6 million was received in relation to the exercise of vested options, compared to $3.1 million and
$1.8 million during Fiscal 2020 and Fiscal 2019, respectively. The aggregate intrinsic value of options exercised during Fiscal 2021
was $4.8 million, compared to $2.5 million and $2.1 million during Fiscal 2020 and Fiscal 2019, respectively.
Summary of movements in RSUs and PRSUs outstanding
Outstanding at the beginning of the period:
—RSUs
—PRSUs
Granted during the period:
—RSUs
—PRSUs
Forfeited during the period:
—RSUs
—PRSUs
Vested during the period:
—RSUs
Outstanding at the end of the period:
—RSUs
—PRSUs
Year ended January 1, 2022
Number of
awards
Weighted average
grant date fair value
$
1,583,910 $
571,650 $
2,155,560 $
954,504 $
325,052 $
1,279,556 $
(163,130) $
(12,724) $
(175,854) $
(630,879) $
(630,879) $
1,744,405 $
883,978 $
2,628,383 $
12.88
16.45
13.83
15.16
17.92
15.86
13.69
16.97
13.93
13.07
13.07
13.98
16.98
14.99
As of January 1, 2022, the unrecognized compensation charge relating to nonvested RSUs and PRSUs was $14.7 million, which is
expected to be recognized over a weighted average period of 1.5 years, subject, where relevant, to the achievement of the performance
conditions described above. The total fair value of RSUs and PRSUs vested during Fiscal 2021 was $12.3 million, compared to
$3.1 million and $0.6 million during Fiscal 2020 and Fiscal 2019, respectively.
F-44
Valuation of awards granted during the period
The grant date fair value of the options and SARs are measured using a Black-Scholes valuation model. RSUs are valued at the share
price on the date of grant. The premium-priced options and PRSUs were valued using Monte Carlo simulations. As Gates only has
volatility data for its shares for the period since its initial public offering, this volatility has, where necessary, been weighted with the
debt-levered volatility of a peer group of public companies in order to determine the expected volatility over the expected option life.
The expected option life represents the period of time for which the options are expected to be outstanding and is based on
consideration of the contractual life of the option, option vesting period, and historical exercise patterns. The weighted average fair
values and relevant assumptions were as follows:
Weighted average grant date fair value:
—SARs
—Share options
—Premium-priced options
—RSUs
—PRSUs
Inputs to the model:
—Expected volatility - SARs
—Expected volatility - share options
—Expected volatility - premium-priced options
—Expected volatility - PRSUs
—Expected option life for SARs (years)
—Expected option life for share options (years)
—Expected option life for premium-priced options (years)
—Risk-free interest rate:
SARs
Share options
Premium-priced options
PRSUs
19. Equity
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
$
$
$
6.66
6.66
6.36
15.16
17.92
$
$
$
$
4.59
4.78
n/a
11.79
14.41
$
$
$
$
$
5.88
5.88
5.65
16.28
20.07
46.1 %
46.1 %
46.1 %
50.8 %
6.0
6.0
6.0
0.95 %
0.95 %
0.95 %
0.27 %
37.7 %
37.6 %
n/a
40.4 %
6.0
6.0
n/a
1.25 %
1.33 %
n/a
1.29 %
31.9 %
31.9 %
31.9 %
32.8 %
6.0
6.0
7
2.51 %
2.51 %
2.53 %
2.48 %
Movements in the Company’s number of shares in issue for the year ended January 1, 2022 and January 2, 2021, respectively, were as
follows:
(number of shares)
Balance as of the beginning of the period
Exercise of share options
Vesting of restricted stock units, net of withholding taxes
Shares repurchased and cancelled
Balance as of the end of the period
For the year ended
January 1,
2022
January 2,
2021
290,853,067
518,600
290,157,299
468,890
566,921
226,878
(656,451)
—
290,853,067
291,282,137
The Company has one class of authorized and issued shares, with a par value of $0.01, and each share has equal voting rights.
In November 2021, the Company established a repurchase program allowing for up to $200 million in authorized share repurchases.
During Fiscal 2021, 656,451 shares were repurchased and cancelled under this program, at an aggregate cost of $10.6 million.
F-45
20. Analysis of accumulated other comprehensive income (loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:
(dollars in millions)
As of December 29, 2018
Foreign currency translation
Cash flow hedges movements
Post-retirement benefit movements
Other comprehensive (loss) income
As of December 28, 2019
Foreign currency translation
Cash flow hedges movements
Post-retirement benefit movements
Other comprehensive income (loss)
As of January 2, 2021
Foreign currency translation
Cash flow hedges movements
Post-retirement benefit movements
Other comprehensive income (loss)
Post-
retirement
benefit
Cumulative
translation
adjustment
Cash flow
hedges
Accumulated
OCI
attributable to
shareholders
Non-
controlling
interests
Accumulated
OCI
$
7.6 $
—
—
(16.9)
(16.9)
(850.0) $
37.7
—
—
37.7
(9.3)
(812.3)
(11.9) $
—
(24.9)
—
(24.9)
(36.8)
(854.3) $
37.7
(43.6) $
(2.8)
(24.9)
(16.9)
(4.1)
—
0.4
(2.4)
(897.9)
34.9
(24.9)
(16.5)
(6.5)
(858.4)
(46.0)
(904.4)
1.7
—
22.5
24.2
14.9
42.1
—
—
42.1
(770.2)
(0.1)
(66.5)
—
21.8
21.7
—
—
(66.5)
—
(13.3)
(50.1)
—
25.0
—
25.0
—
43.8
(13.3)
(13.3)
22.5
53.0
27.4
—
0.5
27.9
71.2
(13.3)
23.0
80.9
(805.4)
(18.1)
(823.5)
(66.6)
(5.2)
25.0
21.8
(19.8)
—
(0.1)
(5.3)
(71.8)
25.0
21.7
(25.1)
As of January 1, 2022
$
36.6 $
(836.7) $
(25.1) $
(825.2) $
(23.4) $
(848.6)
21. 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 Transaction and Monitoring Fee Agreement (the “Monitoring Fee
Agreement”). Under this agreement, which terminated in January 2020 upon the second anniversary of the closing date of the initial
public offering of Gates, the Company 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 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 Fiscal 2021, Gates incurred
$0 million, compared to $1.9 million and $6.5 million during Fiscal 2020 and Fiscal 2019, respectively, in respect of these oversight
services and out-of-pocket expenses, and there were no amounts owing at January 1, 2022 or January 2, 2021.
In addition, in connection with the initial public offering, we entered into a Support and Services Agreement with BMP, under which
the Company 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.
F-46
B. Equity method investees
Sales to and purchases from equity method investees were as follows:
(dollars in millions)
Sales
Purchases
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
0.1 $
(14.9) $
0.9 $
(13.8) $
1.4
(15.4)
Amounts outstanding in respect of these transactions were payables of $1.0 million as of January 1, 2022, compared to $0.6 million as
of January 2, 2021. No dividends were received from our equity method investees during the periods presented.
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:
(dollars in millions)
Sales
Purchases
Amounts outstanding in respect of these transactions were as follows:
(dollars in millions)
Receivables
Payables
D. Majority-owned subsidiaries
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
67.3 $
(21.7) $
47.5 $
(18.5) $
51.3
(20.5)
As of January 1,
2022
As of January 2,
2021
$
$
5.4 $
(3.6) $
0.4
(4.5)
In early 2019, 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 in the non-controlling interests line in the consolidated statement of
operations.
22. Commitments and contingencies
A. Capital and other commitments
As of January 1, 2022, we had entered into contractual commitments for the purchase of property, plant and equipment amounting to
$5.1 million, compared to $3.5 million as of January 2, 2021, and for the purchase of non-integral computer software amounting to
$0.7 million, compared to $0.6 million as of January 2, 2021. As of January 1, 2022, we had entered into contractual commitments for
non-capital items such as raw materials and supplies amounting to $31.3 million, compared to $26.1 million as of January 2, 2021.
B. Performance bonds, letters of credit and bank guarantees
As of January 1, 2022, letters of credit were outstanding against the asset-backed revolving facility amounting to $45.3 million,
compared to $28.5 million as of January 2, 2021. We had additional outstanding performance bonds, letters of credit and bank
guarantees amounting to $6.3 million as of January 1, 2022, compared to $6.0 million as of January 2, 2021.
C. Company–owned life insurance policies
Gates is the beneficiary of a number of corporate-owned life insurance policies against which it borrows from the relevant life
insurance company. As of January 1, 2022, the surrender value of the policies was $966.1 million, compared to $954.9 million as of
January 2, 2021, and the amount outstanding on the related loans was $964.3 million, compared to $953.2 million as of January 2,
2021. For financial reporting purposes, these amounts are offset as a legal right of offset exists and the net receivable of $1.8 million,
compared to $1.7 million as of January 2, 2021, is included in other receivables.
F-47
D. Contingencies
The Company is, from time to time, party to general legal proceedings and claims, which arise in the ordinary course of business
including those relating to environmental obligations, product liability, intellectual property, commercial and contractual disputes,
employment matters and other business matters. When appropriate, management consults with legal counsel and other appropriate
experts to assess claims. If, in management’s opinion, we have incurred a probable loss as determined in accordance with U.S. GAAP,
an estimate is made of the loss and the appropriate accrual is reflected in our consolidated financial statements. Currently, there are no
material amounts accrued.
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.
E. Allowance for expected credit losses
Movements in our allowance for expected credit losses were as follows:
(dollars in millions)
Balance at beginning of year
Current period provision for expected credit losses
Write-offs charged against allowance
Foreign currency translation
Balance at end of year
For the year ended
January 1,
2022
January 2,
2021
December 28,
2019
$
$
5.2 $
0.2
(0.1)
(0.2)
5.1 $
8.6 $
0.7
(4.3)
0.2
5.2 $
7.4
2.4
(1.3)
0.1
8.6
F-48
TOTAL SHAREHOLDER RETURN
)
d
e
s
a
b
e
r
(
)
$
(
e
u
a
V
l
180
160
140
120
100
80
60
40
20
Gates Industrial
Corporation plc
S&P MidCap 400 Capital
Goods Industry Group
Russell 2500 Index
This graph shows the value, by
1/1/2022, of $100 invested in
Gates Industrial Corporation
plc on 1/25/2018, at the IPO
price of $19, compared with
the value of $100 invested in
the S&P MidCap 400 Capital
Goods Industry Group Index
and Russell 2500 Index on a
daily basis.
1/25/2018
1/1/2022
Source: S&P Capital IQ
Board of Directors
Executive Officers
NEIL SIMPKINS
Chairman of the Board
Executive Advisor to Blackstone
STEPHANIE MAINS
Chief Executive Officer
LSC Communications-MCL
IVO JUREK
Chief Executive Officer
Gates Industrial Corporation plc
WILSON NEELY
Retired Partner
Simpson Thacher & Bartlett LLP
ALICIA TILLMAN
Global Chief Marketing Officer
Capitolis
MOLLY ZHANG
Retired Vice President,
Asset Management
Orica Ltd.
JAMES IRELAND, III
Retired President &
Chief Executive Officer
General Electric Africa
JULIA KAHR
Former Senior Managing Director
Blackstone
TERRY KLEBE
Retired Senior Vice President &
Chief Financial Officer
Cooper Industries plc
GATES 2021 ANNUAL REPORT
IVO JUREK
Chief Executive Officer
CRISTIN BRACKEN
Chief Legal Officer
GRANT GAWRONSKI
Chief Commercial Officer
WALT LIFSEY
Chief Operating Officer
BROOKS MALLARD
Chief Financial Officer
TOM PITSTICK
Chief Marketing Officer
75805_NAR.indd 9
75805_NAR.indd 9
4/22/22 3:12 PM
4/22/22 3:12 PM
NON-GAAP MEASURES
This Annual Report includes certain non-GAAP financial measures, which management believes
are useful to investors. Non-GAAP financial measures should be considered only as supplemental
to, and not as superior to, financial measures prepared in accordance with GAAP. The following
tables provide a reconciliation of certain of these non-GAAP financial measures to the most
directly comparable financial measures prepared in accordance with GAAP.
(USD in millions, except share numbers and per share amounts)
(USD in millions)
RECONCILIATION TO ADJUSTED NET INCOME
Net Income Attributable to Shareholders
Adjusted for:
Loss on disposal of discontinued operations
Amortization of intangible assets arising from the 2014
acquisition of Gates
Transaction-related expenses
Asset impairments
Restructuring expenses
Share-based compensation expense
Sponsor fees (included in other operating expenses)
Inventory impairments (included in cost of sales)
Adjustments relating to post-retirement benefits
Financing-related FX losses (gains)
Other adjustments (1)
Estimated tax effect of the above adjustments
Adjusted Net Income
FY 2021
$297.1
FY 2020
$79.4
-
0.3
120.3
117.5
3.7
0.6
7.4
24.6
-
1.4
(4.6)
7.6
(18.4)
(31.6)
$408.1
5.2
5.2
37.3
19.8
1.9
1.4
(4.5)
(5.3)
(11.5)
(42.2)
$204.5
Diluted weighted average number of shares outstanding
297,294,075 292,115,964
Adjusted Net Income per diluted share
$1.37
$0.70
(1) During the year ended January 1, 2022, other adjustments included a $9.3 million net gain on the sale
of a purchase option on a building that we lease in Europe. During the year ended January 2, 2021, other
adjustments included $17.7 million in relation to the non-controlling interest share of the adjustments
above, primarily restructuring expenses incurred in relation to the closure of our manufacturing facility
in Korea.
(USD in millions)
RECONCILIATION OF FREE CASH FLOW
Net Cash Provided By Operating Activities
Capital Expenditures (1)
Free Cash Flow
(1) Capital expenditures represent purchases of property, plant and equipment and purchases of
FY 2021
$382.4
(87.0)
$295.4
FY 2020
$309.0
(67.4)
$241.6
RETURN ON INVESTED CAPITAL (ROIC)
Adjusted EBITDA
Total depreciation and amortization
Amortization of intangible assets arising from the 2014
acquisition of Gates
Adjusted EBIT
Notional tax at 25%
Tax-effected Adjusted EBIT
Total Assets
Adjusted for:
Cash
Taxes receivable
Deferred tax assets
Prepaid taxes
Accounts payable
Intangibles arising from the acquisition of Gates
Invested Capital
FY 2021
$735.8
(222.6)
FY 2020
$506.6
(218.6)
120.3
117.5
633.5
(158.4)
$475.1
405.5
(101.4)
$304.1
$7,533.0
$7,426.3
(658.2)
(34.8)
(639.3)
(13.4)
(506.6)
(3,557.7)
$2,123.0
(521.4)
(55.1)
(672.6)
(4.7)
(417.4)
(3,755.7)
$1,999.4
Return On Invested Capital
22.4%
15.2%
(USD in millions)
RECONCILIATION TO NET LEVERAGE
Total principal amount of debt
Less: Cash and cash equivalents
Net Debt
FY 2021
$2,579.2
658.2
$1,921.0
FY 2020
$2,720.8
521.4
$2,199.4
intangible assets.
Net Leverage (Net Debt divided by Adjusted EBITDA)
2.6 x
4.3 x
GATES 2021 ANNUAL REPORT