UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 3,~~October 2, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission file number 001-38366

Gates Industrial Corporation plc

(Exact Name of Registrant as Specified in its Charter)


England and Wales						98-1395184
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1144 Fifteenth Street, Denver, Colorado 80202



(Address of principal executive offices)						(Zip Code)

(303) 744-1911

(~~Registrant��s~~Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary Shares, $0.01 par value per share	GTES	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 6,~~November 5, 2021, there were ~~291,854,218~~291,935,207 ordinary shares of $0.01 par value outstanding.

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TABLE OF CONTENTS


Part I – Financial Information

Item 1.	Financial Statements (unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2830
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4143
Item 4.	Controls and Procedures	4143

Part II – Other Information

Item 1.	Legal Proceedings	4244
Item 1A.	Risk Factors	4244


Item 6.	Exhibits	4244
Signatures		4345

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Forward-looking Statements

This Quarterly Report on Form 10-Q (this “quarterly report” or “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those expressed in or implied by our forward-looking statements, including but not limited to the factors described in Item 1A. “Risk Factors” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021 (the “annual report”), as filed with the Securities and Exchange Commission (the “SEC”), which include the following: conditions in the global and regional economy and the major end markets we serve; severe disruptions in the global economy due to the coronavirus (“COVID-19”) pandemic and uncertainty regarding recovery from the pandemic; economic, political and other risks associated with international operations; availability of raw materials at favorable prices and in sufficient quantities; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; exchange rate fluctuations in the international markets; terrorist acts, conflicts and wars; competition in all areas of our business; pricing pressures from our customers; continued operation of our manufacturing facilities; our ability to forecast demand or meet significant increases in demand; our ability to maintain and enhance our strong brand; market acceptance of new product introductions and product innovations; our cost-reduction actions; longer lives of products used in our end markets may affect demand for some of our replacement markets; development of the replacement market in emerging markets may limit our ability to grow; our ability to successfully integrate acquired businesses or assets; our investments in joint ventures; liabilities with respect to businesses that we have divested in the past; insurance coverage of future losses we may incur; losses to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events; loss or financial instability of any significant customer; litigation, legal or regulatory proceedings brought against us; infringement on the intellectual property of others; failure to adequately protect or enforce of our intellectual property rights against counterfeiting activities; failure to develop, obtain, enforce and protect our intellectual property rights in all jurisdictions throughout the world; recalls, product liability claims or product warranties claims; failure to comply with anti-corruption laws and other laws governing our international operations; existing or new laws and regulations that may prohibit, restrict or burden the sale of aftermarket products; environmental, health and safety laws and regulations that may impact the sale of our products; cyber-security vulnerabilities, threats, and more sophisticated and targeted computer crime; highly complex and rapidly evolving global privacy, data protection and data security requirements may increase our costs; failure of information systems; loss of senior management or key personnel; work stoppages and other labor matters; we may be required to make additional cash contributions to our defined benefit pension plans; change in our effective tax rates or additional tax liabilities; change in tax laws; tax authorities may no longer treat us as being exclusively a resident of the U.K. for tax purposes; our substantial leverage; and the significant influence of our majority shareholders, affiliates of ~~The~~ Blackstone ~~Group~~ Inc., over us, as such factors may be updated from time to time in the Company’s periodic filings with the SEC. Investors are urged to consider carefully the disclosure in this report and our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. Gates undertakes no obligation to update or supplement any forward-looking statements as a result of new information, future events or otherwise, except as required by law.

ABOUT THIS QUARTERLY REPORT

Financial Statement Presentation

Gates Industrial Corporation plc is a public limited company that was incorporated under the 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 quarterly report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

~~Table of Contents~~

All amounts in this quarterly report are expressed in United States of America (the “U.S.”) dollars, unless indicated otherwise.

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Certain Definitions

As used in this quarterly report, unless otherwise noted or the context requires otherwise:

•“Gates,” the “Company,” “we,” “us” and “our” refer, ~~unless the context requires otherwise,~~ to Gates Industrial Corporation plc and its consolidated subsidiaries; and

•“Blackstone” or “our Sponsor” refer to investment funds affiliated with ~~The~~ Blackstone ~~Group~~ Inc., which, although no individual fund owns a controlling interest in us, together represent our current majority owners.

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PART I — FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Operations


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions, except per share amounts)	(dollars in millions, except per share amounts)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions, except per share amounts)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net sales	Net sales	$	915.1	$	576.5	$	1,796.4	$	1,286.6		Net sales	$	862.4	$	712.2	$	2,658.8	$	1,998.8
Cost of sales	Cost of sales	548.4		373.0		1,084.2		827.3			Cost of sales	521.7		438.6		1,605.9		1,265.9
Gross profit	Gross profit	366.7		203.5		712.2		459.3			Gross profit	340.7		273.6		1,052.9		732.9
Selling, general and administrative expenses	Selling, general and administrative expenses	214.2		182.9		425.8		376.3			Selling, general and administrative expenses	217.4		195.4		643.2		571.7
Transaction-related expenses (income)		0.2		0		2.6		(0.2)
Transaction-related expenses											Transaction-related expenses	0.2		5.4		2.8		5.2
Asset impairments	Asset impairments	0		3.7		0		3.7			Asset impairments	—		1.4		—		5.1
Restructuring expenses	Restructuring expenses	3.7		17.2		6.6		19.1			Restructuring expenses	1.9		7.3		8.5		26.4
Other operating income		(0.5)		(3.7)		(0.5)		(1.4)
Other operating (income) expenses											Other operating (income) expenses	(9.3)		0.2		(9.8)		(1.2)
Operating income from continuing operations	Operating income from continuing operations	149.1		3.4		277.7		61.8			Operating income from continuing operations	130.5		63.9		408.2		125.7
Interest expense	Interest expense	33.3		34.3		67.7		71.0			Interest expense	33.1		38.3		100.8		109.3
Other income		(1.2)		(3.7)		(2.4)		(5.8)
Income (loss) from continuing operations before taxes		117.0		(27.2)		212.4		(3.4)
Other expenses (income)											Other expenses (income)	1.9		(4.1)		(0.5)		(9.9)
Income from continuing operations before taxes											Income from continuing operations before taxes	95.5		29.7		307.9		26.3
Income tax expense (benefit)	Income tax expense (benefit)	11.6		0.6		30.5		(15.5)			Income tax expense (benefit)	17.3		(16.0)		47.8		(31.5)
Net income (loss) from continuing operations		105.4		(27.8)		181.9		12.1
(Gain) loss on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0		(0.4)		0.2		(0.3)		0.2
Net income (loss)		105.8		(28.0)		182.2		11.9
Net income from continuing operations											Net income from continuing operations	78.2		45.7		260.1		57.8
Loss (gain) on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0											Loss (gain) on disposal of discontinued operations, net of tax, respectively, of $0, $0, $0 and $0	0.2		0.1		(0.1)		0.3
Net income											Net income	78.0		45.6		260.2		57.5
Less: non-controlling interests	Less: non-controlling interests	8.9		(5.6)		18.0		(1.3)			Less: non-controlling interests	7.8		3.7		25.8		2.4
Net income (loss) attributable to shareholders		$	96.9	$	(22.4)	$	164.2	$	13.2
Net income attributable to shareholders											Net income attributable to shareholders	$	70.2	$	41.9	$	234.4	$	55.1

Earnings (loss) per share
Earnings per share											Earnings per share
Basic	Basic										Basic
Earnings (loss) per share from continuing operations		$	0.33	$	(0.08)	$	0.56	$	0.05
Earnings per share from continuing operations											Earnings per share from continuing operations	$	0.24	$	0.14	$	0.80	$	0.19
Earnings per share from discontinued operations	Earnings per share from discontinued operations	0		0		0		0			Earnings per share from discontinued operations	—		—		—		—
Earnings (loss) per share		$	0.33	$	(0.08)	$	0.56	$	0.05
Earnings per share											Earnings per share	$	0.24	$	0.14	$	0.80	$	0.19

Diluted	Diluted										Diluted
Earnings (loss) per share from continuing operations		$	0.33	$	(0.08)	$	0.55	$	0.05
Earnings per share from discontinued operations		0		0		0		0
Earnings (loss) per share		$	0.33	$	(0.08)	$	0.55	$	0.05
Earnings per share from continuing operations											Earnings per share from continuing operations	$	0.23	$	0.14	$	0.79	$	0.19
Loss per share from discontinued operations											Loss per share from discontinued operations	—		—		—		—
Earnings per share											Earnings per share	$	0.23	$	0.14	$	0.79	$	0.19

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Comprehensive Income


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income (loss)		$	105.8	$	(28.0)	$	182.2	$	11.9
Other comprehensive income (loss)
Net income											Net income	$	78.0	$	45.6	$	260.2	$	57.5
Other comprehensive (loss) income											Other comprehensive (loss) income
Foreign currency translation:	Foreign currency translation:										Foreign currency translation:
—Net translation gain (loss) on foreign operations, net of tax expense, respectively, of $0, $0, $0 and $0		32.6		46.2		(35.4)		(160.8)
—(Loss) gain on net investment hedges, net of tax expense, respectively, of $0, $0, $0 and $0		(2.7)		(5.8)		15.5		(1.8)
—Net translation (loss) gain on foreign operations, net of tax expense, respectively, of $0, $0.1, $0 and $0.1											—Net translation (loss) gain on foreign operations, net of tax expense, respectively, of $0, $0.1, $0 and $0.1	(57.5)		80.5		(92.9)		(80.3)
—Gain (loss) on net investment hedges, net of tax expense, respectively, of $0, $0, $0 and $0											—Gain (loss) on net investment hedges, net of tax expense, respectively, of $0, $0, $0 and $0	9.7		(15.7)		25.2		(17.5)
Total foreign currency translation movements	Total foreign currency translation movements	29.9		40.4		(19.9)		(162.6)			Total foreign currency translation movements	(47.8)		64.8		(67.7)		(97.8)
Cash flow hedges (Interest rate derivatives):	Cash flow hedges (Interest rate derivatives):										Cash flow hedges (Interest rate derivatives):
—(Loss) gain arising in the period, net of tax benefit (expense), respectively, of $0.4, $1.2, $(1.5) and $3.7		(3.2)		(9.4)		4.6		(22.8)
—Reclassification to net income, net of tax expense, respectively, of $(1.7), $0, $(2.7) and $0		3.7		1.9		8.0		3.6
—(Loss) gain arising in the period, net of tax benefit (expense), respectively, of $0, $0.5, $(1.5) and $4.2											—(Loss) gain arising in the period, net of tax benefit (expense), respectively, of $0, $0.5, $(1.5) and $4.2	(0.2)		(3.3)		4.4		(26.1)
—Reclassification to net income, net of tax expense, respectively, of $(1.3), $0, $(4.0) and $0											—Reclassification to net income, net of tax expense, respectively, of $(1.3), $0, $(4.0) and $0	4.1		4.5		12.1		8.1
Total cash flow hedges movements	Total cash flow hedges movements	0.5		(7.5)		12.6		(19.2)			Total cash flow hedges movements	3.9		1.2		16.5		(18.0)
Post-retirement benefits:	Post-retirement benefits:										Post-retirement benefits:

—Reclassification of prior year actuarial movements to net income, net of tax expense, respectively, of $0, $0, $0 and $0		0		0		0		(0.1)
—Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0, $0, $0 and $0.1											—Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $0, $0, $0 and $0.1	—		—		—		(0.1)
Total post-retirement benefits movements	Total post-retirement benefits movements	0		0		0		(0.1)			Total post-retirement benefits movements	—		—		—		(0.1)
Other comprehensive income (loss)		30.4		32.9		(7.3)		(181.9)
Other comprehensive (loss) income											Other comprehensive (loss) income	(43.9)		66.0		(51.2)		(115.9)
Comprehensive income (loss) for the period	Comprehensive income (loss) for the period	$	136.2	$	4.9	$	174.9	$	(170.0)		Comprehensive income (loss) for the period	$	34.1	$	111.6	$	209.0	$	(58.4)

Comprehensive income (loss) attributable to shareholders:	Comprehensive income (loss) attributable to shareholders:										Comprehensive income (loss) attributable to shareholders:
—Income (loss) arising from continuing operations	—Income (loss) arising from continuing operations	$	123.7	$	7.4	$	163.4	$	(164.4)		—Income (loss) arising from continuing operations	$	26.9	$	95.9	$	190.3	$	(68.5)
—Income (loss) arising from discontinued operations		0.4		(0.2)		0.3		(0.2)
—(Loss) income arising from discontinued operations											—(Loss) income arising from discontinued operations	(0.2)		(0.1)		0.1		(0.3)
		124.1		7.2		163.7		(164.6)				26.7		95.8		190.4		(68.8)
Comprehensive income (loss) attributable to non-controlling interests		12.1		(2.3)		11.2		(5.4)
Comprehensive income attributable to non-controlling interests											Comprehensive income attributable to non-controlling interests	7.4		15.8		18.6		10.4
		$	136.2	$	4.9	$	174.9	$	(170.0)			$	34.1	$	111.6	$	209.0	$	(58.4)

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Balance Sheets


(dollars in millions, except share numbers and per share amounts)	(dollars in millions, except share numbers and per share amounts)	As of July 3, 2021		As of January 2, 2021		(dollars in millions, except share numbers and per share amounts)	As of October 2, 2021		As of January 2, 2021
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	473.3	$	521.4	Cash and cash equivalents	$	540.6	$	521.4
Trade accounts receivable, net	Trade accounts receivable, net	852.4		695.0		Trade accounts receivable, net	809.3		695.0
Inventories	Inventories	588.5		508.2		Inventories	650.5		508.2
Taxes receivable	Taxes receivable	27.2		28.6		Taxes receivable	39.4		28.6
Prepaid expenses and other assets	Prepaid expenses and other assets	181.1		153.4		Prepaid expenses and other assets	183.2		153.4
Total current assets	Total current assets	2,122.5		1,906.6		Total current assets	2,223.0		1,906.6
Non-current assets	Non-current assets					Non-current assets
Property, plant and equipment, net	Property, plant and equipment, net	692.8		705.0		Property, plant and equipment, net	678.6		705.0
Goodwill	Goodwill	2,102.6		2,120.2		Goodwill	2,073.8		2,120.2
Pension surplus	Pension surplus	71.6		69.3		Pension surplus	70.9		69.3
Intangible assets, net	Intangible assets, net	1,716.4		1,788.6		Intangible assets, net	1,676.1		1,788.6
Right-of-use assets	Right-of-use assets	124.1		120.9		Right-of-use assets	126.6		120.9
Taxes receivable	Taxes receivable	14.8		26.5		Taxes receivable	14.8		26.5
Deferred income taxes	Deferred income taxes	635.8		672.6		Deferred income taxes	624.0		672.6
Other non-current assets	Other non-current assets	18.3		16.6		Other non-current assets	18.2		16.6
Total assets	Total assets	$	7,498.9	$	7,426.3	Total assets	$	7,506.0	$	7,426.3
Liabilities and equity	Liabilities and equity					Liabilities and equity
Current liabilities	Current liabilities					Current liabilities
Debt, current portion	Debt, current portion	$	39.1	$	42.7	Debt, current portion	$	29.8	$	42.7
Trade accounts payable	Trade accounts payable	479.7		417.4		Trade accounts payable	459.5		417.4
Taxes payable	Taxes payable	37.0		14.0		Taxes payable	51.4		14.0
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	285.0		252.2		Accrued expenses and other current liabilities	301.7		252.2
Total current liabilities	Total current liabilities	840.8		726.3		Total current liabilities	842.4		726.3
Non-current liabilities	Non-current liabilities					Non-current liabilities
Debt, less current portion	Debt, less current portion	2,559.6		2,666.0		Debt, less current portion	2,542.0		2,666.0
Post-retirement benefit obligations	Post-retirement benefit obligations	136.3		142.5		Post-retirement benefit obligations	131.2		142.5
Lease liabilities	Lease liabilities	117.2		113.6		Lease liabilities	118.2		113.6
Taxes payable	Taxes payable	103.5		111.5		Taxes payable	105.1		111.5
Deferred income taxes	Deferred income taxes	311.4		360.4		Deferred income taxes	302.8		360.4
Other non-current liabilities	Other non-current liabilities	66.1		121.0		Other non-current liabilities	62.8		121.0
Total liabilities	Total liabilities	4,134.9		4,241.3		Total liabilities	4,104.5		4,241.3
Commitments and contingencies (note 18)	Commitments and contingencies (note 18)	0		0		Commitments and contingencies (note 18)	0		0
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 291,842,659 (January 2, 2021: authorized shares: 3,000,000,000; outstanding shares: 290,853,067)		2.9		2.9
—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 291,906,736 (January 2, 2021: authorized shares: 3,000,000,000; outstanding shares: 290,853,067)						—Shares, par value of $0.01 each - authorized shares: 3,000,000,000; outstanding shares: 291,906,736 (January 2, 2021: authorized shares: 3,000,000,000; outstanding shares: 290,853,067)	2.9		2.9
—Additional paid-in capital	—Additional paid-in capital	2,471.2		2,456.8		—Additional paid-in capital	2,477.7		2,456.8
—Accumulated other comprehensive loss	—Accumulated other comprehensive loss	(805.9)		(805.4)		—Accumulated other comprehensive loss	(849.4)		(805.4)
—Retained earnings	—Retained earnings	1,315.6		1,151.4		—Retained earnings	1,385.8		1,151.4
Total shareholders’ equity	Total shareholders’ equity	2,983.8		2,805.7		Total shareholders’ equity	3,017.0		2,805.7
Non-controlling interests	Non-controlling interests	380.2		379.3		Non-controlling interests	384.5		379.3
Total equity	Total equity	3,364.0		3,185.0		Total equity	3,401.5		3,185.0
Total liabilities and equity	Total liabilities and equity	$	7,498.9	$	7,426.3	Total liabilities and equity	$	7,506.0	$	7,426.3

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Cash Flows


		Six months ended					Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	182.2	$	11.9	Net income	$	260.2	$	57.5
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	112.7		109.6		Depreciation and amortization	167.4		163.2
Foreign exchange and other non-cash financing expenses	Foreign exchange and other non-cash financing expenses	13.3		3.7		Foreign exchange and other non-cash financing expenses	23.7		8.7

Share-based compensation expense	Share-based compensation expense	12.8		8.6		Share-based compensation expense	18.5		13.5
Decrease in post-employment benefit obligations, net	Decrease in post-employment benefit obligations, net	(7.6)		(3.4)		Decrease in post-employment benefit obligations, net	(11.9)		(8.1)
Deferred income taxes	Deferred income taxes	(34.2)		(11.6)		Deferred income taxes	(46.0)		(40.3)
Asset impairments	Asset impairments	0.1		5.1		Asset impairments	0.1		6.5
Other operating activities	Other operating activities	3.8		4.1		Other operating activities	5.6		6.9
Changes in operating assets and liabilities, net of effects of acquisitions:	Changes in operating assets and liabilities, net of effects of acquisitions:					Changes in operating assets and liabilities, net of effects of acquisitions:
—(Increase) decrease in accounts receivable		(161.0)		25.0
—Increase in accounts receivable						—Increase in accounts receivable	(123.9)		(24.5)
—Increase in inventories	—Increase in inventories	(85.3)		(39.3)		—Increase in inventories	(154.8)		(19.0)
—Increase (decrease) in accounts payable	—Increase (decrease) in accounts payable	66.2		(49.1)		—Increase (decrease) in accounts payable	49.8		(33.4)
—Increase in prepaid expenses and other assets		(14.9)		(0.4)
—(Increase) decrease in prepaid expenses and other assets						—(Increase) decrease in prepaid expenses and other assets	(18.3)		2.7
—Increase (decrease) in taxes payable	—Increase (decrease) in taxes payable	28.1		(35.7)		—Increase (decrease) in taxes payable	35.1		(44.4)
—(Decrease) increase in other liabilities		(4.4)		43.1
—Increase in other liabilities						—Increase in other liabilities	8.0		38.2
Net cash provided by operating activities	Net cash provided by operating activities	111.8		71.6		Net cash provided by operating activities	213.5		127.5
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(40.3)		(23.1)		Purchases of property, plant and equipment	(56.4)		(39.0)
Purchases of intangible assets	Purchases of intangible assets	(3.7)		(4.5)		Purchases of intangible assets	(7.6)		(6.6)

Cash paid under corporate-owned life insurance policies	Cash paid under corporate-owned life insurance policies	(10.1)		(9.8)		Cash paid under corporate-owned life insurance policies	(11.2)		(9.8)
Cash received under corporate-owned life insurance policies	Cash received under corporate-owned life insurance policies	1.9		0		Cash received under corporate-owned life insurance policies	2.4		1.5

Other investing activities	Other investing activities	1.6		0.3		Other investing activities	2.2		0.3
Net cash used in investing activities	Net cash used in investing activities	(50.6)		(37.1)		Net cash used in investing activities	(70.6)		(53.6)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Issuance of shares	Issuance of shares	3.7		2.7		Issuance of shares	4.3		2.8

Payments of long-term debt	Payments of long-term debt	(80.4)		(12.4)		Payments of long-term debt	(85.7)		(18.6)

Debt issuance costs paid	Debt issuance costs paid	(8.6)		(0.3)		Debt issuance costs paid	(8.6)		(0.3)
Dividends paid to non-controlling interests	Dividends paid to non-controlling interests	(10.3)		(9.9)		Dividends paid to non-controlling interests	(13.5)		(13.5)
Other financing activities	Other financing activities	(7.3)		1.0		Other financing activities	(10.5)		(2.1)
Net cash used in financing activities	Net cash used in financing activities	(102.9)		(18.9)		Net cash used in financing activities	(114.0)		(31.7)
Effect of exchange rate changes on cash and cash equivalents and restricted cash	Effect of exchange rate changes on cash and cash equivalents and restricted cash	(6.4)		(11.5)		Effect of exchange rate changes on cash and cash equivalents and restricted cash	(9.7)		(4.1)
Net (decrease) increase in cash and cash equivalents and restricted cash		(48.1)		4.1
Net increase in cash and cash equivalents and restricted cash						Net increase in cash and cash equivalents and restricted cash	19.2		38.1
Cash and cash equivalents and restricted cash at the beginning of the period	Cash and cash equivalents and restricted cash at the beginning of the period	524.1		636.6		Cash and cash equivalents and restricted cash at the beginning of the period	524.1		636.6
Cash and cash equivalents and restricted cash at the end of the period	Cash and cash equivalents and restricted cash at the end of the period	$	476.0	$	640.7	Cash and cash equivalents and restricted cash at the end of the period	$	543.3	$	674.7
Supplemental schedule of cash flow information	Supplemental schedule of cash flow information					Supplemental schedule of cash flow information
Interest paid	Interest paid	$	62.0	$	48.5	Interest paid	$	100.7	$	96.8
Income taxes paid	Income taxes paid	$	36.5	$	16.6	Income taxes paid	$	58.7	$	37.3
Accrued capital expenditures	Accrued capital expenditures	$	0.6	$	0.9	Accrued capital expenditures	$	0.5	$	1.1

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

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Shareholders’ Equity


		Three months ended July 3, 2021															Three months ended October 2, 2021

(dollars in millions)	(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total 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 April 3, 2021		$	2.9	$	2,463.1	$	(833.1)	$	1,218.7	$	2,851.6	$	378.4	$	3,230.0
As of July 3, 2021																As of July 3, 2021	$	2.9	$	2,471.2	$	(805.9)	$	1,315.6	$	2,983.8	$	380.2	$	3,364.0

Net income	Net income	—		—		—		96.9		96.9		8.9		105.8		Net income	—		—		—		70.2		70.2		7.8		78.0
Other comprehensive income		—		—		27.2		—		27.2		3.2		30.4
Total comprehensive income		—		—		27.2		96.9		124.1		12.1		136.2
Other comprehensive loss																Other comprehensive loss	—		—		(43.5)		—		(43.5)		(0.4)		(43.9)
Total comprehensive (loss) income																Total comprehensive (loss) income	—		—		(43.5)		70.2		26.7		7.4		34.1
Other changes in equity:	Other changes in equity:															Other changes in equity:
—Issuance of shares	—Issuance of shares	—		2.0		—		—		2.0		—		2.0		—Issuance of shares	—		0.6		—		—		0.6		—		0.6

—Share-based compensation	—Share-based compensation	—		6.1		—		—		6.1		—		6.1		—Share-based compensation	—		5.9		—		—		5.9		0.1		6.0

—Dividends paid to non-controlling interests	—Dividends paid to non-controlling interests	—		—		—		—		—		(10.3)		(10.3)		—Dividends paid to non-controlling interests	—		—		—		—		—		(3.2)		(3.2)

As of July 3, 2021		$	2.9	$	2,471.2	$	(805.9)	$	1,315.6	$	2,983.8	$	380.2	$	3,364.0
As of October 2, 2021																As of October 2, 2021	$	2.9	$	2,477.7	$	(849.4)	$	1,385.8	$	3,017.0	$	384.5	$	3,401.5


		Three months ended June 27, 2020															Three months ended September 26, 2020

(dollars in millions)	(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total 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 March 28, 2020		$	2.9	$	2,440.1	$	(1,065.8)	$	1,107.6	$	2,484.8	$	356.6	$	2,841.4
As of June 27, 2020																As of June 27, 2020	$	2.9	$	2,445.4	$	(1,036.2)	$	1,085.2	$	2,497.3	$	344.4	$	2,841.7

Net loss	Net loss	—		—		—		(22.4)		(22.4)		(5.6)		(28.0)		Net loss	—		—		—		41.9		41.9		3.7		45.6
Other comprehensive income	Other comprehensive income	—		—		29.6		—		29.6		3.3		32.9		Other comprehensive income	—		—		53.9		—		53.9		12.1		66.0
Total comprehensive income (loss)		—		—		29.6		(22.4)		7.2		(2.3)		4.9
Total comprehensive income																Total comprehensive income	—		—		53.9		41.9		95.8		15.8		111.6
Other changes in equity:	Other changes in equity:															Other changes in equity:
—Issuance of shares	—Issuance of shares	—		0.6		—		—		0.6		—		0.6		—Issuance of shares	—		0.1		—		—		0.1		—		0.1

—Share-based compensation	—Share-based compensation	—		4.7		—		—		4.7		—		4.7		—Share-based compensation	—		5.3		—		—		5.3		0.1		5.4

—Dividends paid to non-controlling interests	—Dividends paid to non-controlling interests	—		—		—		—		—		(9.9)		(9.9)		—Dividends paid to non-controlling interests	—		—		—		—		—		(3.6)		(3.6)

As of June 27, 2020		$	2.9	$	2,445.4	$	(1,036.2)	$	1,085.2	$	2,497.3	$	344.4	$	2,841.7
As of September 26, 2020																As of September 26, 2020	$	2.9	$	2,450.8	$	(982.3)	$	1,127.1	$	2,598.5	$	356.7	$	2,955.2

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Gates Industrial Corporation plc

Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Continued)


		Six months ended July 3, 2021															Nine months ended October 2, 2021

(dollars in millions)	(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total 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 January 2, 2021	As of January 2, 2021	$	2.9	$	2,456.8	$	(805.4)	$	1,151.4	$	2,805.7	$	379.3	$	3,185.0	As of January 2, 2021	$	2.9	$	2,456.8	$	(805.4)	$	1,151.4	$	2,805.7	$	379.3	$	3,185.0

Net income	Net income	—		—		—		164.2		164.2		18.0		182.2		Net income	—		—		—		234.4		234.4		25.8		260.2
Other comprehensive loss	Other comprehensive loss	—		—		(0.5)		—		(0.5)		(6.8)		(7.3)		Other comprehensive loss	—		—		(44.0)		—		(44.0)		(7.2)		(51.2)
Total comprehensive (loss) income	Total comprehensive (loss) income	—		—		(0.5)		164.2		163.7		11.2		174.9		Total comprehensive (loss) income	—		—		(44.0)		234.4		190.4		18.6		209.0
Other changes in equity:	Other changes in equity:															Other changes in equity:
—Issuance of shares	—Issuance of shares	—		3.0		—		—		3.0		—		3.0		—Issuance of shares	—		3.6		—		—		3.6		—		3.6

—Share-based compensation	—Share-based compensation	—		11.4		—		—		11.4		—		11.4		—Share-based compensation	—		17.3		—		—		17.3		0.1		17.4

—Dividends paid to non-controlling interests	—Dividends paid to non-controlling interests	—		—		—		—		—		(10.3)		(10.3)		—Dividends paid to non-controlling interests	—		—		—		—		—		(13.5)		(13.5)

As of July 3, 2021		$	2.9	$	2,471.2	$	(805.9)	$	1,315.6	$	2,983.8	$	380.2	$	3,364.0
As of October 2, 2021																As of October 2, 2021	$	2.9	$	2,477.7	$	(849.4)	$	1,385.8	$	3,017.0	$	384.5	$	3,401.5


		Six months ended June 27, 2020															Nine months ended September 26, 2020

(dollars in millions)	(dollars in millions)	Share capital		Additional paid-in capital		Accumulated other comprehensive loss		Retained earnings		Total shareholders’ equity		Non- controlling interests		Total 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 28, 2019	As of December 28, 2019	$	2.9	$	2,434.5	$	(858.4)	$	1,072.0	$	2,651.0	$	359.7	$	3,010.7	As of December 28, 2019	$	2.9	$	2,434.5	$	(858.4)	$	1,072.0	$	2,651.0	$	359.7	$	3,010.7

Net income (loss)		—		—		—		13.2		13.2		(1.3)		11.9
Other comprehensive loss		—		—		(177.8)		—		(177.8)		(4.1)		(181.9)
Net income																Net income	—		—		—		55.1		55.1		2.4		57.5
Other comprehensive (loss) income																Other comprehensive (loss) income	—		—		(123.9)		—		(123.9)		8.0		(115.9)
Total comprehensive (loss) income	Total comprehensive (loss) income	—		—		(177.8)		13.2		(164.6)		(5.4)		(170.0)		Total comprehensive (loss) income	—		—		(123.9)		55.1		(68.8)		10.4		(58.4)
Other changes in equity:	Other changes in equity:															Other changes in equity:
—Issuance of shares	—Issuance of shares	—		2.5		—		—		2.5		—		2.5		—Issuance of shares	—		2.6		—		—		2.6		—		2.6

—Share-based compensation	—Share-based compensation	—		8.4		—		—		8.4		—		8.4		—Share-based compensation	—		13.7		—		—		13.7		0.1		13.8

—Dividends paid to non-controlling interests	—Dividends paid to non-controlling interests	—		—		—		—		—		(9.9)		(9.9)		—Dividends paid to non-controlling interests	—		—		—		—		—		(13.5)		(13.5)

As of June 27, 2020		$	2.9	$	2,445.4	$	(1,036.2)	$	1,085.2	$	2,497.3	$	344.4	$	2,841.7
As of September 26, 2020																As of September 26, 2020	$	2.9	$	2,450.8	$	(982.3)	$	1,127.1	$	2,598.5	$	356.7	$	2,955.2

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

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Gates Industrial Corporation plc

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Introduction

A. Background

Gates Industrial Corporation plc (the “Company”) is a public limited company that was registered in England and Wales on September 25, 2017.

In these condensed consolidated financial statements and related notes, all references to “Gates,” “we,” “us,” and “our” refer, unless the context requires otherwise, to Gates Industrial Corporation plc and its consolidated subsidiaries.

B. Accounting periods

The Company prepares its annual consolidated financial statements for the period ending on the Saturday nearest December 31. Accordingly, the condensed consolidated balance sheet is presented as of ~~July 3,~~October 2, 2021 and January 2, 2021 and the related condensed consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity are presented, where relevant, for the 91 day period from ~~April~~July 4, 2021 to ~~July 3,~~October 2, 2021, with comparative information for the 91 day period from ~~March 29,~~June 28, 2020 to ~~June 27,~~September 26, 2020 and for the ~~182~~273 day period from January 3, 2021 to ~~July 3,~~October 2, 2021, with comparative information for the ~~182~~273 day period from December 29, 2019 to ~~June 27,~~September 26, 2020.

C. Basis of preparation

The condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars unless otherwise indicated. The condensed consolidated financial statements and related notes contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of ~~July 3,~~October 2, 2021 and the results of its operations and cash flows for the periods ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

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. AsWhile we have generally seen a ~~result~~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, ~~there~~ may becreate ongoing implications for our business which may vary from time to time, and ~~the impact~~some of ~~the pandemic on the Company’s operations~~these impacts may ~~continue to~~ be material but cannot be reasonably estimated at this time.

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 revenue, 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 ~~July 3,~~October 2, 2021, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by our assumptions and estimates.

These condensed consolidated financial statements are unaudited and, except as noted below, have been prepared on substantially the same basis as Gates’ audited annual consolidated financial statements and related notes for the year ended January 2, 2021. The condensed consolidated balance sheet as of January 2, 2021 has been derived from those audited financial statements.

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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 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 October 2, 2021, collection of $66.7 million of our trade accounts receivable had been accelerated under this program. During the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, we ~~sold $48.0 million~~incurred costs in respect of ~~trade accounts receivable under~~ this program of $0.4 million and ~~incurred costs of $0.2~~$0.6 million, respectively, which are recorded under other ~~income.~~expenses (income).

These condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended January 2, 2021 included in the Company’s Annual Report on Form 10-K.

The accounting policies used in preparing these condensed consolidated financial statements are the same as those applied in the prior year, except for the adoption on the first day of the 2021 fiscal year of the following new Accounting Standard ~~Updates (each, an “ASU”~~Update (“ASU”):

•ASU 2019-12 “Simplifying the Accounting for Income Taxes” (Topic 740): Income Taxes

In December 2019, the 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.

2. Recent accounting pronouncements not yet adopted

None.

3. Segment information

A. Background

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

B. Operating segments and segment assets

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

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

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

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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.


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Power Transmission	Power Transmission	$	588.6	$	370.0	$	1,148.1	$	811.2		Power Transmission	$	549.4	$	469.2	$	1,697.5	$	1,280.4
Fluid Power	Fluid Power	326.5		206.5		648.3		475.4			Fluid Power	313.0		243.0		961.3		718.4
Continuing operations	Continuing operations	$	915.1	$	576.5	$	1,796.4	$	1,286.6		Continuing operations	$	862.4	$	712.2	$	2,658.8	$	1,998.8

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:


			Three months ended										Three months ended
		July 3, 2021			June 27, 2020						October 2, 2021			September 26, 2020
(dollars in millions)	(dollars in millions)		Power Transmission		Fluid Power		Power Transmission		Fluid Power			(dollars in millions)			Power Transmission		Fluid Power		Power Transmission		Fluid Power
U.S.	U.S.		$	161.8	$	157.7	$	121.5	$	112.5		U.S.			$	157.3	$	157.1	$	138.1	$	126.1
North America, excluding U.S.	North America, excluding U.S.		46.1		51.5		23.8		27.2			North America, excluding U.S.			44.7		49.1		40.3		37.0
United Kingdom (“U.K.”)	United Kingdom (“U.K.”)		12.9		15.4		6.0		3.4			United Kingdom (“U.K.”)			12.4		13.4		12.3		7.6
EMEA(1), excluding U.K.	EMEA(1), excluding U.K.		180.9		51.2		92.6		31.7			EMEA(1), excluding U.K.			157.0		50.2		130.4		35.3
East Asia and India	East Asia and India		77.2		20.4		48.1		9.7			East Asia and India			75.4		22.2		60.3		15.2
Greater China	Greater China		91.0		20.8		69.3		17.5			Greater China			83.0		10.4		74.4		14.7
South America	South America		18.7		9.5		8.7		4.5			South America			19.6		10.6		13.4		7.1
Net sales	Net sales		$	588.6	$	326.5	$	370.0	$	206.5		Net sales			$	549.4	$	313.0	$	469.2	$	243.0


		Six months ended								Nine months ended
		July 3, 2021				June 27, 2020					October 2, 2021				September 26, 2020
(dollars in millions)	(dollars in millions)	Power Transmission		Fluid Power		Power Transmission		Fluid Power				(dollars in millions)	Power Transmission		Fluid Power		Power Transmission		Fluid Power
U.S.	U.S.	$	317.7	$	310.4	$	259.2	$	252.2			U.S.	$	475.0	$	467.5	$	397.3	$	378.3
North America, excluding U.S.	North America, excluding U.S.	92.8		100.9		64.1		68.9				North America, excluding U.S.	137.5		150.0		104.4		105.9
U.K.	U.K.	25.6		30.1		17.4		10.3				U.K.	38.0		43.5		29.7		17.9
EMEA(1), excluding U.K.	EMEA(1), excluding U.K.	343.7		100.8		221.8		75.7				EMEA(1), excluding U.K.	500.7		151.0		352.2		111.0
East Asia and India	East Asia and India	160.1		43.9		113.3		27.1				East Asia and India	235.5		66.1		173.6		42.3
Greater China	Greater China	172.9		44.8		113.6		30.5				Greater China	255.9		55.2		188.0		45.2
South America	South America	35.3		17.4		21.8		10.7				South America	54.9		28.0		35.2		17.8
Net sales	Net sales	$	1,148.1	$	648.3	$	811.2	$	475.4			Net sales	$	1,697.5	$	961.3	$	1,280.4	$	718.4

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

The following table summarizes our net sales into emerging and developed markets:
Three months ended Six months ended
(dollars in millions) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Developed $ 590.8 $ 372.6 $ 1,145.8 $ 848.4
Emerging 324.3 203.9 650.6 438.2
Net sales $ 915.1 $ 576.5 $ 1,796.4 $ 1,286.6


	Three months ended				Nine months ended
(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Developed	$	554.2	$	452.8	$	1,700.0	$	1,301.2
Emerging	308.2		259.4		958.8		697.6
Net sales	$	862.4	$	712.2	$	2,658.8	$	1,998.8

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D. Measure of segment profit or loss

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

“EBITDA” represents net income for the period before net interest and other (income) expenses, income taxes, depreciation and amortization.

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

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

• transaction-related expenses ~~(income)~~ incurred in relation to major corporate transactions, including the acquisition of businesses and related integration activities, and equity and debt transactions;

• asset impairments;

• restructuring expenses, including severance-related expenses;

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

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

Adjusted EBITDA by segment was as follows:


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Power Transmission	Power Transmission	$	149.6	$	57.7	$	282.3	$	137.2		Power Transmission	$	123.2	$	99.3	$	405.5	$	236.5
Fluid Power	Fluid Power	66.4		25.5		130.0		66.8			Fluid Power	60.7		40.7		190.7		107.5
Continuing operations	Continuing operations	$	216.0	$	83.2	$	412.3	$	204.0		Continuing operations	$	183.9	$	140.0	$	596.2	$	344.0

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Reconciliation of net income (loss) from continuing operations to Adjusted EBITDA:


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income (loss) from continuing operations		$	105.4	$	(27.8)	$	181.9	$	12.1
Net income from continuing operations											Net income from continuing operations	$	78.2	$	45.7	$	260.1	$	57.8
Income tax expense (benefit)	Income tax expense (benefit)	11.6		0.6		30.5		(15.5)			Income tax expense (benefit)	17.3		(16.0)		47.8		(31.5)
Income (loss) from continuing operations before taxes		117.0		(27.2)		212.4		(3.4)
Income from continuing operations before taxes											Income from continuing operations before taxes	95.5		29.7		307.9		26.3
Interest expense	Interest expense	33.3		34.3		67.7		71.0			Interest expense	33.1		38.3		100.8		109.3
Other income		(1.2)		(3.7)		(2.4)		(5.8)
Other expenses (income)											Other expenses (income)	1.9		(4.1)		(0.5)		(9.9)
Operating income from continuing operations	Operating income from continuing operations	149.1		3.4		277.7		61.8			Operating income from continuing operations	130.5		63.9		408.2		125.7
Depreciation and amortization	Depreciation and amortization	56.9		54.7		112.7		109.6			Depreciation and amortization	54.7		53.6		167.4		163.2
Transaction-related expenses (income) (1)		0.2		0		2.6		(0.2)
Transaction-related expenses (1)											Transaction-related expenses (1)	0.2		5.4		2.8		5.2
Asset impairments	Asset impairments	0		3.7		0		3.7			Asset impairments	—		1.4		—		5.1
Restructuring expenses	Restructuring expenses	3.7		17.2		6.6		19.1			Restructuring expenses	1.9		7.3		8.5		26.4
Share-based compensation expense	Share-based compensation expense	6.5		5.7		12.8		8.6			Share-based compensation expense	5.7		4.9		18.5		13.5
Sponsor fees (included in other operating expense)	Sponsor fees (included in other operating expense)	0		0		0		1.7			Sponsor fees (included in other operating expense)	—		0.2		—		1.9

Inventory impairments (included in cost of sales)	Inventory impairments (included in cost of sales)	0.1		1.4		0.1		1.4			Inventory impairments (included in cost of sales)	—		—		0.1		1.4

Severance expenses (included in cost of sales)	Severance expenses (included in cost of sales)	0		0.5		0		0.6			Severance expenses (included in cost of sales)	—		0.3		—		0.9
Severance expenses (included in SG&A)	Severance expenses (included in SG&A)	0		0.3		0.3		0.8			Severance expenses (included in SG&A)	0.2		3.0		0.5		3.8
Other items not directly related to current operations(2)	Other items not directly related to current operations(2)	(0.5)		(3.7)		(0.5)		(3.1)			Other items not directly related to current operations(2)	(9.3)		—		(9.8)		(3.1)
Adjusted EBITDA	Adjusted EBITDA	$	216.0	$	83.2	$	412.3	$	204.0		Adjusted EBITDA	$	183.9	$	140.0	$	596.2	$	344.0

(1) Transaction-related expenses ~~(income)~~ 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 the three and nine months ended October 2, 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.

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4. 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.

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Overall costs associated with our restructuring and other strategic initiatives have been recognized in the condensed consolidated statements as set forth below. Expenses incurred in relation to certain of these actions qualify as restructuring expenses under U.S. GAAP.


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Restructuring expenses:	Restructuring expenses:										Restructuring expenses:
—Severance expenses	—Severance expenses	$	0.4	$	13.6	$	0.9	$	13.8		—Severance expenses	$	0.1	$	3.3	$	1.0	$	17.1
—Non-severance labor and benefit expenses	—Non-severance labor and benefit expenses	0.6		0		1.4		0			—Non-severance labor and benefit expenses	0.2		1.8		1.6		2.6
—Consulting expenses	—Consulting expenses	0.8		0.7		1.5		0.9			—Consulting expenses	0.4		0.3		1.9		1.2
—Other restructuring expenses	—Other restructuring expenses	1.9		2.9		2.8		4.4			—Other restructuring expenses	1.2		1.9		4.0		5.5
		3.7		17.2		6.6		19.1				1.9		7.3		8.5		26.4
Restructuring expenses in asset impairments:	Restructuring expenses in asset impairments:										Restructuring expenses in asset impairments:
—Impairment of fixed assets	—Impairment of fixed assets	0		3.7		0		3.7			—Impairment of fixed assets	—		1.4		—		5.1

Restructuring expenses in cost of sales:	Restructuring expenses in cost of sales:										Restructuring expenses in cost of sales:

—Impairment of inventory	—Impairment of inventory	0.1		1.4		0.1		1.4			—Impairment of inventory	—		—		0.1		1.4

Total restructuring expenses	Total restructuring expenses	$	3.8	$	22.3	$	6.7	$	24.2		Total restructuring expenses	$	1.9	$	8.7	$	8.6	$	32.9

Expenses related to other strategic initiatives:	Expenses related to other strategic initiatives:										Expenses related to other strategic initiatives:
—Severance expenses included in cost of sales	—Severance expenses included in cost of sales	$	0	$	0.5	$	0	$	0.6		—Severance expenses included in cost of sales	$	—	$	0.3	$	—	$	0.9
—Severance expenses included in SG&A	—Severance expenses included in SG&A	0		0.3		0.3		0.8			—Severance expenses included in SG&A	0.2		3.0		0.5		3.8

Total expenses related to other strategic initiatives	Total expenses related to other strategic initiatives	$	0	$	0.8	$	0.3	$	1.4		Total expenses related to other strategic initiatives	$	0.2	$	3.3	$	0.5	$	4.7

Restructuring and other strategic initiatives during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 included ~~$2.1~~$0.8 million and ~~$2.9~~$3.7 million, respectively, 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 ~~$0.7~~$0.8 million and ~~$1.5~~$2.3 million, respectively, of additional costs related to the closure in 2020 of a manufacturing facility in Korea. In addition, during the ~~six~~nine months ended ~~July 3,~~October 2, 2021, we recognized $1.0 million of expenses related to the consolidation of certain of our Middle East businesses.

Expenses incurred in connection with our restructuring and other strategic initiatives during the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020 related primarily to the ~~June 2020 announcement~~closure of ~~plans to close~~ 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 2 North American manufacturing facilities, and reductions in workforce, primarily in ~~the U.S., Mexico and Greater China.~~North America. The closure of the Korean facility, the most significant restructuring activity during the prior year nine month period, resulted in an accrual for severance costs of $12.8 million, an impairment of inventory of $1.4 million (recognized in cost of sales) and an impairment of fixed assets of ~~$3.6~~$4.8 million, included in the asset impairments line in the unaudited condensed consolidated statement of operations.

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Restructuring activities

As indicated above, restructuring expenses, as defined under U.S. GAAP, form a subset of our total expenses related to restructuring and other strategic initiatives. These expenses include the impairment of inventory, which is recognized in cost of sales. Analyzed by segment, our restructuring expenses were as follows:


		Three months ended				Six months ended				Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Power Transmission	Power Transmission	$	3.0	$	19.8	$	4.6	$	20.0		Power Transmission	$	1.5	$	5.4	$	6.1	$	25.4
Fluid Power	Fluid Power	0.8		2.5		2.1		4.2			Fluid Power	0.4		3.3		2.5		7.5
Continuing operations	Continuing operations	$	3.8	$	22.3	$	6.7	$	24.2		Continuing operations	$	1.9	$	8.7	$	8.6	$	32.9

The following summarizes the reserve for restructuring expenses for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, respectively:


		Six months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020			(dollars in millions)	October 2, 2021		September 26, 2020
Balance as of the beginning of the period	Balance as of the beginning of the period	$	17.9	$	2.9		Balance as of the beginning of the period	$	17.9	$	2.9
Utilized during the period	Utilized during the period	(12.3)		(4.9)			Utilized during the period	(18.2)		(18.3)
Net charge for the period		7.1		19.6
Charge for the period							Charge for the period	9.1		26.9
Released during the period	Released during the period	(0.5)		(0.5)			Released during the period	(0.6)		(0.5)
Foreign currency translation	Foreign currency translation	(0.5)		0.1			Foreign currency translation	(0.7)		0.4
Balance as of the end of the period	Balance as of the end of the period	$	11.7	$	17.2		Balance as of the end of the period	$	7.5	$	11.4

Restructuring reserves, which are expected to be utilized during 2021 and 2022, are included in the condensed consolidated balance sheet within the accrued expenses and other current liabilities line.

5. Income taxes

We compute the year-to-date income tax provision by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust for discrete tax items in the period in which they occur.

For the three months ended ~~July 3,~~October 2, 2021, we had income tax expense of ~~$11.6~~$17.3 million on pre-tax income of ~~$117.0~~$95.5 million, which resulted in an effective tax rate of ~~9.9%~~18.1%, compared to an income tax ~~expense~~benefit of ~~$0.6~~$16.0 million on pre-tax ~~loss~~income of ~~$27.2~~$29.7 million, which resulted in an effective tax rate of ~~(2.2)~~(53.9)% for the three months ended ~~June 27, 2020.~~

For the six months ended July 3, 2021, we had an income tax expense of $30.5 million on pre-tax income of $212.4 million, which resulted in an effective tax rate of 14.4%, compared to an income tax benefit of $15.5 million on pre-tax loss of $3.4 million, which resulted in an effective tax rate of 455.9% for the six months ended June 27,September 26, 2020.

For the three months ended ~~July 3,~~October 2, 2021, the effective tax rate was driven primarily by discrete tax benefits of ~~$8.3~~$6.5 million related to deferred taxes on unremitted earnings of our subsidiaries and $2.6 million related to the partial ~~release of a~~ valuation allowance release on deferred tax assets for U.S. foreign tax credits, ~~and $6.6~~offset partially by a discrete tax expense of $2.3 million related to ~~tax law changes enacted~~the sale of a purchase option on a building in ~~the U.K. during the period.~~Europe, and an unfavorable jurisdictional mix of taxable earnings. For the three months ended ~~June 27,~~September 26, 2020, the effective tax rate was driven primarily by ~~$18.5~~discrete benefits of $14.6 million related to changes in valuation allowance and tax laws and a favorable jurisdictional mix of ~~non-operating costs for which no tax benefit was recognized.~~taxable earnings.

For the ~~six~~nine months ended ~~July 3,~~October 2, 2021, we had an income tax expense of $47.8 million on pre-tax income of $307.9 million, which resulted in an effective tax rate of 15.5%, compared to an income tax benefit of $31.5 million on pre-tax income of $26.3 million, which resulted in an effective tax rate of (119.8)% for the nine months ended September 26, 2020.

For the nine months ended October 2, 2021, the effective tax rate was driven primarily by the same factors as described above for the three month ~~period.~~period and additional discrete benefits of $14.9 million recognized in prior periods related to changes in valuation allowance and tax laws. For the ~~six~~nine months ended ~~June 27,~~September 26, 2020, the effective tax rate was driven primarily by ~~$21.6~~$36.2 million of ~~net~~ discrete tax benefits related to audit resolutions, changes in valuation allowance and tax ~~law changes,~~laws, and a favorable jurisdictional mix of taxable earnings, offset partially ~~offset~~ by ~~$18.5~~$19.6 million of non-operating costs for which no tax benefit was recognized.

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Deferred Tax Assets and Liabilities

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized.

~~Table of Contents~~

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 during the three months ended October 2, 2021, that ~~as of July 3, 2021,~~ it is more likely than not that deferred tax assets in the U.S. totaling ~~$8.3~~$2.6 million are realizable. As a result of changes in estimates of future taxable profits against which the foreign tax credits can be utilized, our judgment changed regarding valuation allowances on these deferred tax assets.

6. Earnings ~~(loss)~~ per share

Basic earnings ~~(loss)~~ per share represents net income ~~(loss)~~ attributable to shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings ~~(loss)~~ 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 ~~(loss)~~ per share is presented below:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions, except share numbers and per share amounts)	(dollars in millions, except share numbers and per share amounts)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions, except share numbers and per share amounts)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income (loss) attributable to shareholders		$	96.9	$	(22.4)	$	164.2	$	13.2
Net income attributable to shareholders										Net income attributable to shareholders	$	70.2	$	41.9	$	234.4	$	55.1

Weighted average number of shares outstanding	Weighted average number of shares outstanding	291,696,946		290,732,375		291,432,153		290,566,743		Weighted average number of shares outstanding	291,863,482		290,769,392		291,575,929		290,634,292
Dilutive effect of share-based awards	Dilutive effect of share-based awards	6,077,196		0		5,524,477		1,149,764		Dilutive effect of share-based awards	7,819,807		1,672,207		5,624,154		1,249,143
Diluted weighted average number of shares outstanding	Diluted weighted average number of shares outstanding	297,774,142		290,732,375		296,956,630		291,716,507		Diluted weighted average number of shares outstanding	299,683,289		292,441,599		297,200,083		291,883,435

Number of anti-dilutive shares excluded from the diluted earnings (loss) per share calculation		2,200,770		6,317,804		4,340,852		5,597,575
Number of anti-dilutive shares excluded from the diluted earnings per share calculation										Number of anti-dilutive shares excluded from the diluted earnings per share calculation	2,173,147		3,896,143		3,813,255		5,811,571

Basic earnings (loss) per share		$	0.33	$	(0.08)	$	0.56	$	0.05
Diluted earnings (loss) per share		$	0.33	$	(0.08)	$	0.55	$	0.05
Basic earnings per share										Basic earnings per share	$	0.24	$	0.14	$	0.80	$	0.19
Diluted earnings per share										Diluted earnings per share	$	0.23	$	0.14	$	0.79	$	0.19

7. Inventories
(dollars in millions)
As of
July 3, 2021
As of
January 2, 2021
Raw materials and supplies $ 172.4 $ 135.1
Work in progress 40.2 34.3
Finished goods 375.9 338.8
Total inventories $ 588.5 $ 508.2

~~8. Goodwill~~
(dollars in millions) Power
Transmission Fluid
Power Total
Cost and carrying amount
As of January 2, 2021 $ 1,434.4 $ 685.8 $ 2,120.2
Foreign currency translation (18.3) 0.7 (17.6)
As of July 3, 2021 $ 1,416.1 $ 686.5 $ 2,102.6


(dollars in millions)	As of October 2, 2021		As of January 2, 2021
Raw materials and supplies	$	186.8	$	135.1
Work in progress	44.6		34.3
Finished goods	419.1		338.8
Total inventories	$	650.5	$	508.2

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8. Goodwill


(dollars in millions)	Power Transmission		Fluid Power		Total
Cost and carrying amount
As of January 2, 2021	$	1,434.4	$	685.8	$	2,120.2

Foreign currency translation	(36.6)		(9.8)		(46.4)
As of October 2, 2021	$	1,397.8	$	676.0	$	2,073.8

9. Intangible assets


		As of July 3, 2021						As of January 2, 2021							As of October 2, 2021						As of January 2, 2021
(dollars in millions)	(dollars in millions)	Cost		Accumulated amortization and impairment		Net		Cost		Accumulated amortization and impairment		Net		(dollars in millions)	Cost		Accumulated amortization and impairment		Net		Cost		Accumulated amortization and impairment		Net
Finite-lived:	Finite-lived:													Finite-lived:
—Customer relationships	—Customer relationships	$	2,057.2	$	(852.0)	$	1,205.2	$	2,073.0	$	(796.9)	$	1,276.1	—Customer relationships	$	2,038.2	$	(874.2)	$	1,164.0	$	2,073.0	$	(796.9)	$	1,276.1
—Technology	—Technology	91.0		(89.0)		2.0		90.9		(88.5)		2.4		—Technology	90.9		(89.2)		1.7		90.9		(88.5)		2.4
—Capitalized software	—Capitalized software	92.7		(52.9)		39.8		89.9		(49.2)		40.7		—Capitalized software	96.1		(55.1)		41.0		89.9		(49.2)		40.7
		2,240.9		(993.9)		1,247.0		2,253.8		(934.6)		1,319.2			2,225.2		(1,018.5)		1,206.7		2,253.8		(934.6)		1,319.2
Indefinite-lived:	Indefinite-lived:													Indefinite-lived:
—Brands and trade names	—Brands and trade names	513.4		(44.0)		469.4		513.4		(44.0)		469.4		—Brands and trade names	513.4		(44.0)		469.4		513.4		(44.0)		469.4
Total intangible assets	Total intangible assets	$	2,754.3	$	(1,037.9)	$	1,716.4	$	2,767.2	$	(978.6)	$	1,788.6	Total intangible assets	$	2,738.6	$	(1,062.5)	$	1,676.1	$	2,767.2	$	(978.6)	$	1,788.6

During the three months ended ~~July 3,~~October 2, 2021, the amortization expense recognized in respect of intangible assets was ~~$33.2~~$32.9 million, compared to ~~$31.7~~$32.5 million for the three months ended June 27, 2020. In addition, movements in foreign currency exchange rates resulted in an increase in the net carrying value of total intangible assets of $5.7 million for the three months ended July 3, 2021, compared to an increase of $11.2 million for the three months ended June 27, 2020.

~~During the six months ended July 3, 2021, the amortization expense recognized in respect of intangible assets was $66.6 million, compared to $63.9 million for the six months ended June 27,~~September 26, 2020. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of ~~$9.3~~$11.3 million for the ~~six~~three months ended ~~July 3,~~October 2, 2021, compared to an increase of $17.9 million for the three months ended September 26, 2020.

During the nine months ended October 2, 2021, the amortization expense recognized in respect of intangible assets was $99.5 million, compared to $96.4 million for the nine months ended September 26, 2020. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $20.6 million for the nine months ended October 2, 2021, compared to a decrease of ~~$27.2~~$9.3 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020.

10. Derivative financial instruments

We are exposed to certain risks relating to our ongoing business operations. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts, interest rate caps (options) and interest rate swaps, to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact.

We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheet. We designate certain of our currency swaps as net investment hedges and designate our interest rate caps and interest rate swaps as cash flow hedges. The gain or loss on the designated derivative instrument is recognized in other comprehensive income (“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.

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The period end fair values of derivative financial instruments were as follows:


		As of July 3, 2021										As of January 2, 2021											As of October 2, 2021										As of January 2, 2021
(dollars in millions)	(dollars in millions)	Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net		Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net		(dollars in millions)	Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net		Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net
Derivatives designated as hedging instruments:	Derivatives designated as hedging instruments:																					Derivatives designated as hedging instruments:
—Currency swaps	—Currency swaps	$	0	$	—	$	(31.5)	$	0	$	(31.5)	$	1.1	$	—	$	—	$	(42.6)	$	(41.5)	—Currency swaps	$	—	$	—	$	(25.3)	$	—	$	(25.3)	$	1.1	$	—	$	—	$	(42.6)	$	(41.5)
—Interest rate caps	—Interest rate caps	—		—		(1.3)		(1.3)		(2.6)		—		—		(1.4)		(2.0)		(3.4)		—Interest rate caps	—		—		(1.3)		(1.0)		(2.3)		—		—		(1.4)		(2.0)		(3.4)
—Interest rate swaps	—Interest rate swaps	—		1.3		(13.4)		(32.2)		(44.3)		—		—		(13.4)		(43.6)		(57.0)		—Interest rate swaps	—		1.8		(13.4)		(29.5)		(41.1)		—		—		(13.4)		(43.6)		(57.0)

Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:																					Derivatives not designated as hedging instruments:

—Currency forward contracts	—Currency forward contracts	1.5		—		(0.2)		—		1.3		0.6		—		(1.9)		—		(1.3)		—Currency forward contracts	2.0		—		(0.2)		—		1.8		0.6		—		(1.9)		—		(1.3)
		$	1.5	$	1.3	$	(46.4)	$	(33.5)	$	(77.1)	$	1.7	$	0	$	(16.7)	$	(88.2)	$	(103.2)		$	2.0	$	1.8	$	(40.2)	$	(30.5)	$	(66.9)	$	1.7	$	—	$	(16.7)	$	(88.2)	$	(103.2)

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 ~~July 3,~~October 2, 2021 and January 2, 2021, the notional principal amount of these contracts was $270.0 ~~million. During July 2019, we extended the maturity of these contracts from March 2020 to~~million, and they mature in March 2022. In addition, we have 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) ~~gains~~ before tax recognized in OCI in relation to the instruments designated as net investment hedging instruments were as follows:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net fair value (losses) gains recognized in OCI in relation to:
Net fair value gains (losses) recognized in OCI in relation to:										Net fair value gains (losses) recognized in OCI in relation to:
—Euro-denominated debt	—Euro-denominated debt	$	(1.0)	$	(2.1)	$	5.7	$	(0.6)	—Euro-denominated debt	$	3.6	$	(5.8)	$	9.3	$	(6.4)
—Designated cross currency swaps	—Designated cross currency swaps	(1.7)		(3.7)		9.8		(1.2)		—Designated cross currency swaps	6.1		(9.9)		15.9		(11.1)
Total net fair value (losses) gains		$	(2.7)	$	(5.8)	$	15.5	$	(1.8)
Total net fair value gains (losses)										Total net fair value gains (losses)	$	9.7	$	(15.7)	$	25.2	$	(17.5)

During the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, a net gain of $0.4 million and ~~$0.9~~$1.3 million, respectively, 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 ~~$1.3~~$0.4 million and ~~$2.9~~$3.3 million, respectively, during the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020.

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 ~~July 3,~~October 2, 2021 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 both ~~July 3,~~October 2, 2021 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.

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The movements before tax recognized in OCI in relation to our cash flow hedges were as follows:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Movement recognized in OCI in relation to:	Movement recognized in OCI in relation to:									Movement recognized in OCI in relation to:
—Fair value (loss) gain on cash flow hedges	—Fair value (loss) gain on cash flow hedges	$	(3.6)	$	(10.6)	$	6.1	$	(26.5)	—Fair value (loss) gain on cash flow hedges	$	(0.2)	$	(3.8)	$	5.9	$	(30.3)
—Amortization to net income of prior period fair value losses	—Amortization to net income of prior period fair value losses	4.5		0		8.9		0		—Amortization to net income of prior period fair value losses	4.5		4.3		13.4		4.3
—Deferred premium reclassified from OCI to net income	—Deferred premium reclassified from OCI to net income	0.9		1.9		1.8		3.6		—Deferred premium reclassified from OCI to net income	0.9		0.2		2.7		3.8
Total movement	Total movement	$	1.8	$	(8.7)	$	16.8	$	(22.9)	Total movement	$	5.2	$	0.7	$	22.0	$	(22.2)

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 ~~July 3,~~October 2, 2021 and January 2, 2021, there were no outstanding currency swaps.

As of ~~July 3,~~October 2, 2021, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was ~~$126.7~~$130.4 million, compared to $87.6 million as of January 2, 2021.

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:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Fair value gains (losses) recognized in relation to:	Fair value gains (losses) recognized in relation to:									Fair value gains (losses) recognized in relation to:
—Currency forward contracts recognized in SG&A	—Currency forward contracts recognized in SG&A	$	0.2	$	(0.8)	$	2.0	$	(0.5)	—Currency forward contracts recognized in SG&A	$	1.1	$	(1.3)	$	3.1	$	(1.8)
—Currency swaps recognized in other income	—Currency swaps recognized in other income	0		0.4		0		0.9		—Currency swaps recognized in other income	—		(0.6)		—		0.3
Total	Total	$	0.2	$	(0.4)	$	2.0	$	0.4	Total	$	1.1	$	(1.9)	$	3.1	$	(1.5)

11. Fair value measurement

A. Fair value hierarchy

We account for certain assets and liabilities at fair value. Topic 820 “Fair Value Measurements and Disclosures” establishes the following hierarchy for the inputs that are used in fair value measurement:

•“Level 1” inputs are unadjusted quoted prices in active markets for identical assets or liabilities;

•“Level 2” inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

•“Level 3” inputs are not based on observable market data (unobservable inputs).

Assets and liabilities that are measured at fair value are categorized in one of the three levels on the basis of the lowest-level input that is significant to its valuation.

B. Financial instruments not held at fair value

Certain financial assets and liabilities are not measured at fair value; however, items such as cash and cash equivalents, restricted cash, revolving credit facilities and bank overdrafts generally attract interest at floating rates and accordingly their carrying amounts are considered to approximate fair value. Due to their short maturities, the carrying amounts of accounts receivable and accounts payable are also considered to approximate their fair values.

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The carrying amount and fair value of our debt are set out below:


		As of July 3, 2021				As of January 2, 2021					As of October 2, 2021				As of January 2, 2021
(dollars in millions)	(dollars in millions)	Carrying amount		Fair value		Carrying amount		Fair value		(dollars in millions)	Carrying amount		Fair value		Carrying amount		Fair value
Current	Current	$	39.1	$	38.8	$	42.7	$	42.3	Current	$	29.8	$	29.5	$	42.7	$	42.3
Non-current	Non-current	2,559.6		2,592.6		2,666.0		2,700.0		Non-current	2,542.0		2,572.4		2,666.0		2,700.0
		$	2,598.7	$	2,631.4	$	2,708.7	$	2,742.3		$	2,571.8	$	2,601.9	$	2,708.7	$	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.

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)	(dollars in millions)	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Total		(dollars in millions)	Quoted prices in active markets (Level 1)		Significant observable inputs (Level 2)		Total
As of July 3, 2021
As of October 2, 2021								As of October 2, 2021
Equity investments	Equity investments	$	1.4	$	0	$	1.4	Equity investments	$	0.6	$	—	$	0.6
Derivative assets	Derivative assets	$	0	$	2.8	$	2.8	Derivative assets	$	—	$	3.8	$	3.8
Derivative liabilities	Derivative liabilities	$	0	$	(79.9)	$	(79.9)	Derivative liabilities	$	—	$	(70.7)	$	(70.7)

As of January 2, 2021	As of January 2, 2021							As of January 2, 2021
Equity investments	Equity investments	$	2.1	$	0	$	2.1	Equity investments	$	2.1	$	—	$	2.1
Derivative assets	Derivative assets	$	0	$	1.7	$	1.7	Derivative assets	$	—	$	1.7	$	1.7
Derivative liabilities	Derivative liabilities	$	0	$	(104.9)	$	(104.9)	Derivative liabilities	$	—	$	(104.9)	$	(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. ~~NaN~~No significant impairment was recognized during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021. Impairments of property, plant and equipment of ~~$3.7~~$1.4 million and $5.1 million were recognized in relation to restructuring and other strategic initiatives, primarily the closure of our manufacturing facility in Korea, for the three and ~~six~~nine months ended ~~June 27, 2020.~~September 26, 2020, respectively.

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12. Debt


(dollars in millions)	(dollars in millions)	As of July 3, 2021		As of January 2, 2021		(dollars in millions)	As of October 2, 2021		As of January 2, 2021
Secured debt:	Secured debt:					Secured debt:
—Dollar Term Loan	—Dollar Term Loan	$	1,370.5	$	1,377.4	—Dollar Term Loan	$	1,367.1	$	1,377.4
—Euro Term Loan	—Euro Term Loan	677.4		775.2		—Euro Term Loan	661.6		775.2
Unsecured debt:	Unsecured debt:					Unsecured debt:
—6.25% Dollar Senior Notes due 2026	—6.25% Dollar Senior Notes due 2026	568.0		568.0		—6.25% Dollar Senior Notes due 2026	568.0		568.0
—Other loans	—Other loans	0		0.2		—Other loans	—		0.2
Total principal of debt	Total principal of debt	2,615.9		2,720.8		Total principal of debt	2,596.7		2,720.8
Deferred issuance costs	Deferred issuance costs	(34.8)		(29.4)		Deferred issuance costs	(33.2)		(29.4)
Accrued interest	Accrued interest	17.6		17.3		Accrued interest	8.3		17.3
Total carrying value of debt	Total carrying value of debt	2,598.7		2,708.7		Total carrying value of debt	2,571.8		2,708.7
Debt, current portion	Debt, current portion	39.1		42.7		Debt, current portion	29.8		42.7
Debt, less current portion	Debt, less current portion	$	2,559.6	$	2,666.0	Debt, less current portion	$	2,542.0	$	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 condensed consolidated financial statements, we were in compliance with the applicable financial covenants. Also under the agreements governing our debt facilities, our ability to engage in activities such as incurring certain additional indebtedness, making certain investments and paying certain dividends is dependent, in part, on our ability to satisfy tests based on measures determined under those agreements.

Debt redemptions

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 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. During February 2021, we made amendments to the 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 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 ~~this amendment,~~these amendments, we paid accrued interest up to the date of the ~~amendment~~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 ~~2.75%~~2.50%, and as of ~~July 3,~~October 2, 2021, borrowings under this facility bore interest at a rate of ~~3.50%~~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 current quarter. The Dollar Term Loan interest rate is re-set on the last business day of each month.

As of ~~July 3,~~October 2, 2021, 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.

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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 the ~~six~~nine months ended ~~July 3,~~October 2, 2021, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of ~~$6.9~~$10.3 million and ~~$3.9~~$5.8 million, respectively. During the ~~six~~nine months ended ~~June 27,~~September 26, 2020, we made amortization payments against the Dollar Term Loan and the Euro Term Loan of ~~$8.7~~$13.0 million and ~~$3.7~~$5.5 million, respectively.

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Under the terms of the credit agreement, we are obligated 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 2020 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 2021.

During the periods presented, foreign exchange gain (losses) ~~gains~~ were recognized in respect of the Euro Term Loans as summarized in the table below. As a portion of the facility was designated as a net investment hedge of certain of our Euro investments, a corresponding portion of the foreign exchange gain (losses) ~~gains~~ were recognized in OCI.
Three months ended Six months ended
(dollars in millions) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
(Loss) gain recognized in statement of operations $ (3.4) $ (6.9) $ 18.7 $ (2.0)
(Loss) gain recognized in OCI (1.0) (2.1) 5.7 (0.6)
Total (loss) gain $ (4.4) $ (9.0) $ 24.4 $ (2.6)


	Three months ended				Nine months ended
(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Gain (loss) recognized in statement of operations	$	10.4	$	(19.4)	$	29.1	$	(21.4)
Gain (loss) recognized in OCI	3.6		(5.8)		9.3		(6.4)
Total gain (loss)	$	14.0	$	(25.2)	$	38.4	$	(27.8)

The above net foreign exchange (losses) gains recognized in the other ~~income~~expenses (income) line of the condensed consolidated statement of operations have been substantially offset by net foreign exchange movements on Euro-denominated intercompany loans as part of our overall hedging strategy.

A wholly-owned U.S. subsidiary of Gates Global LLC (the term loan borrower and an indirect subsidiary of Gates Industrial Corporation plc) 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 ~~July 3,~~October 2, 2021, 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.

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:


	Redemption price
During the year commencing:
—2022	103.125	%
—2023	101.563	%
—2024 and thereafter	100.000	%

Additionally, net cash proceeds from an equity offering can be utilized at any time prior to January 15, 2022, to redeem up to 40% of the notes at a redemption price equal to 106.250% of the principal amount thereof, plus accrued and unpaid interest through to the redemption date.

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

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As of both ~~July 3,~~October 2, 2021 and January 2, 2021, there were 0no drawings for cash under the revolving credit facility and there were 0no 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.

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Asset-backed revolver

We have a revolving credit facility, maturing on January 29, 2023, backed by certain of our assets in North America. The facility allows for loans of up to a maximum of $325.0 million ($~~256.3~~240.4 million as of ~~July 3,~~October 2, 2021, compared to $230.2 million as of January 2, 2021, based on the values of the secured assets on those dates) with a letter of credit sub-facility of $150.0 million within this maximum.

As of both ~~July 3,~~October 2, 2021 and January 2, 2021, there were 0no drawings for cash under the asset-backed revolver, but there were letters of credit outstanding of ~~$29.1~~$29.4 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.

13. Post-retirement benefits

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

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

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Net periodic benefit (income) cost

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


		Three months ended July 3, 2021						Three months ended June 27, 2020							Three months ended October 2, 2021						Three months ended September 26, 2020
(dollars in millions)	(dollars in millions)	Pensions		Other post-retirement benefits		Total		Pensions		Other post-retirement benefits		Total		(dollars in millions)	Pensions		Other post-retirement benefits		Total		Pensions		Other post-retirement benefits		Total
Reported in operating income:	Reported in operating income:													Reported in operating income:
—Employer service cost	—Employer service cost	$	1.0	$	0	$	1.0	$	1.4	$	0	$	1.4	—Employer service cost	$	1.1	$	—	$	1.1	$	1.3	$	—	$	1.3
Reported outside of operating income:	Reported outside of operating income:													Reported outside of operating income:
—Interest cost	—Interest cost	3.4		0.3		3.7		4.5		0.4		4.9		—Interest cost	3.3		0.3		3.6		4.6		0.5		5.1
—Expected return on plan assets	—Expected return on plan assets	(4.8)		0		(4.8)		(5.4)		0		(5.4)		—Expected return on plan assets	(4.8)		—		(4.8)		(5.6)		—		(5.6)
—Net amortization of prior period losses (gains)	—Net amortization of prior period losses (gains)	0.3		(0.3)		0		0.2		(0.4)		(0.2)		—Net amortization of prior period losses (gains)	0.4		(0.4)		—		0.3		(0.3)		—

—Settlements and curtailments														—Settlements and curtailments	—		—		—		(0.9)		—		(0.9)
Net periodic benefit (income) cost	Net periodic benefit (income) cost	$	(0.1)	$	0	$	(0.1)	$	0.7	$	0	$	0.7	Net periodic benefit (income) cost	$	—	$	(0.1)	$	(0.1)	$	(0.3)	$	0.2	$	(0.1)

Contributions	Contributions	$	2.2	$	1.0	$	3.2	$	1.5	$	0.9	$	2.4	Contributions	$	3.5	$	0.8	$	4.3	$	3.6	$	0.9	$	4.5

Six months ended July 3, 2021 Six months ended June 27, 2020
(dollars in millions) Pensions Other post-retirement benefits Total Pensions Other post-retirement benefits Total
Reported in operating income:
—Employer service cost $ 2.1 $ 0 $ 2.1 $ 2.8 $ 0 $ 2.8
Reported outside of operating income:
—Interest cost 6.8 0.6 7.4 9.1 0.8 9.9
—Expected return on plan assets (9.7) 0 (9.7) (10.9) 0 (10.9)
—Net amortization of prior period losses (gains) 0.7 (0.7) 0 0.5 (0.7) (0.2)
Net periodic benefit (income) cost $ (0.1) $ (0.1) $ (0.2) $ 1.5 $ 0.1 $ 1.6
Contributions $ 5.1 $ 2.3 $ 7.4 $ 3.2 $ 2.1 $ 5.3


	Nine months ended October 2, 2021						Nine months ended September 26, 2020
(dollars in millions)	Pensions		Other post-retirement benefits		Total		Pensions		Other post-retirement benefits		Total
Reported in operating income:
—Employer service cost	$	3.2	$	—	$	3.2	$	4.1	$	—	$	4.1
Reported outside of operating income:
—Interest cost	10.1		0.9		11.0		13.7		1.3		15.0
—Expected return on plan assets	(14.5)		—		(14.5)		(16.5)		—		(16.5)
—Net amortization of prior period losses (gains)	1.1		(1.1)		—		0.8		(1.0)		(0.2)
—Settlements and curtailments	—		—		—		(0.9)		—		(0.9)
Net periodic (income) benefit cost	$	(0.1)	$	(0.2)	$	(0.3)	$	1.2	$	0.3	$	1.5

Contributions	$	8.6	$	3.1	$	11.7	$	6.8	$	3.0	$	9.8

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

~~Table of Contents~~

For 2021 as a whole, we expect to contribute approximately $10.6 million to our defined benefit pension plans and approximately $5.8 million to our other post-retirement benefit plans.

14. Share-based compensation

The Company operates a share-based incentive plan over its shares to provide incentives to Gates’ senior executives and other eligible employees. During the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, we recognized a charge of ~~$6.5~~$5.7 million and ~~$12.8~~$18.5 million, respectively, compared to ~~$5.7~~$4.9 million and ~~$8.6~~$13.5 million, respectively, in the ~~six months ended June 27, 2020.~~prior year periods.

Table of Contents

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 ~~The~~ Blackstone ~~Group~~ 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.

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.

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Summary of movements in options outstanding


			Six months ended July 3, 2021			Nine months ended October 2, 2021
		Plan	Number of options	Weighted average exercise price $				Plan	Number of options	Weighted average exercise price $
Outstanding at the beginning of the period:	Outstanding at the beginning of the period:						Outstanding at the beginning of the period:
—Tier I	—Tier I	2014 Plan	3,165,482	$	6.93		—Tier I	2014 Plan	3,165,482	$	6.93
—Tier II	—Tier II	2014 Plan	3,779,467	$	6.89		—Tier II	2014 Plan	3,779,467	$	6.89
—Tier III	—Tier III	2014 Plan	3,779,467	$	6.89		—Tier III	2014 Plan	3,779,467	$	6.89
—Tier IV	—Tier IV	2014 Plan	3,779,467	$	10.34		—Tier IV	2014 Plan	3,779,467	$	10.34
—SARs	—SARs	Both plans	841,811	$	9.00		—SARs	Both plans	841,811	$	9.00
—Share options	—Share options	2018 Plan	2,565,066	$	14.75		—Share options	2018 Plan	2,565,066	$	14.75
—Premium-priced options	—Premium-priced options	2018 Plan	796,460	$	19.00		—Premium-priced options	2018 Plan	796,460	$	19.00
			18,707,220	$	9.28				18,707,220	$	9.28
Granted during the period:	Granted during the period:						Granted during the period:

—SARs	—SARs	2018 Plan	36,360	$	15.00		—SARs	2018 Plan	36,360	$	15.00
—Share options	—Share options	2018 Plan	925,024	$	15.00		—Share options	2018 Plan	925,024	$	15.00
—Premium-priced options	—Premium-priced options	2018 Plan	39,009	$	16.50		—Premium-priced options	2018 Plan	39,009	$	16.50
			1,000,393	$	15.06				1,000,393	$	15.06
Forfeited during the period:	Forfeited during the period:						Forfeited during the period:
—Tier I	—Tier I	2014 Plan	(10,343)	$	7.87		—Tier I	2014 Plan	(10,343)	$	7.87
—Tier II	—Tier II	2014 Plan	(93,602)	$	6.92		—Tier II	2014 Plan	(113,926)	$	6.86
—Tier III	—Tier III	2014 Plan	(93,602)	$	6.92		—Tier III	2014 Plan	(113,926)	$	6.86
—Tier IV	—Tier IV	2014 Plan	(93,602)	$	10.38		—Tier IV	2014 Plan	(113,926)	$	10.28

—Share options	—Share options	2018 Plan	(77,780)	$	14.24		—Share options	2018 Plan	(118,582)	$	14.25

			(368,929)	$	9.37				(470,703)	$	9.57

Exercised during the period:	Exercised during the period:						Exercised during the period:
—Tier I	—Tier I	2014 Plan	(350,052)	$	6.81		—Tier I	2014 Plan	(386,635)	$	6.84

—SARs	—SARs	Both Plans	(47,730)	$	7.97		—SARs	Both Plans	(47,730)	$	7.97
—Share options	—Share options	2018 Plan	(86,442)	$	14.77		—Share options	2018 Plan	(109,604)	$	14.70

			(484,224)	$	8.35				(543,969)	$	8.53
Outstanding at the end of the period:	Outstanding at the end of the period:						Outstanding at the end of the period:
—Tier I	—Tier I	2014 Plan	2,805,087	$	6.94		—Tier I	2014 Plan	2,768,504	$	6.94
—Tier II	—Tier II	2014 Plan	3,685,865	$	6.89		—Tier II	2014 Plan	3,665,541	$	6.89
—Tier III	—Tier III	2014 Plan	3,685,865	$	6.89		—Tier III	2014 Plan	3,665,541	$	6.89
—Tier IV	—Tier IV	2014 Plan	3,685,865	$	10.34		—Tier IV	2014 Plan	3,665,541	$	10.34
—SARs	—SARs	Both plans	830,441	$	9.32		—SARs	Both plans	830,441	$	9.32
—Share options	—Share options	2018 Plan	3,325,868	$	14.83		—Share options	2018 Plan	3,261,904	$	14.84
—Premium-priced options	—Premium-priced options	2018 Plan	835,469	$	18.88		—Premium-priced options	2018 Plan	835,469	$	18.88
			18,854,460	$	9.61				18,692,941	$	9.61

Exercisable at the end of the period	Exercisable at the end of the period		3,966,409	$	9.68		Exercisable at the end of the period		4,001,891	$	9.67
Vested and expected to vest at the end of the period	Vested and expected to vest at the end of the period		7,759,147	$	11.83		Vested and expected to vest at the end of the period		7,667,695	$	11.83

As of ~~July 3,~~October 2, 2021, the aggregate intrinsic value of options that were vested or expected to vest was ~~$47.9~~$39.4 million, and these options had a weighted average remaining contractual term of ~~6.6~~6.4 years. As of ~~July 3,~~October 2, 2021, the aggregate intrinsic value of options that were exercisable was ~~$32.6~~$28.3 million, and these options had a weighted average remaining contractual term of ~~5.5~~5.2 years.

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As of ~~July 3,~~October 2, 2021, the unrecognized compensation charge relating to the nonvested options other than Tier II, Tier III and Tier IV options, was ~~$9.5~~$7.3 million, which is expected to be recognized over a weighted-average period of ~~1.8~~1.6 years. The unrecognized compensation charge relating to the nonvested Tier II, Tier III and Tier IV options was ~~$23.8~~$23.7 million, which will be recognized on occurrence of a liquidity event as described above.

During the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, cash of ~~$2.0~~$0.6 million and ~~$3.7~~$4.3 million, respectively, was received in relation to the exercise of vested options, compared to ~~$0.6~~$0.1 million and ~~$2.7~~$2.8 million, respectively, during the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020. The aggregate intrinsic value of options exercised during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 was ~~$2.4~~$0.5 million and ~~$4.3~~$4.8 million, respectively, compared to $0.1 million and ~~$2.1~~$2.2 million, respectively, during the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020.

Summary of movements in RSUs and PRSUs outstanding


		Six months ended July 3, 2021			Nine months ended October 2, 2021
		Number of awards	Weighted average grant date fair value $				Number of awards	Weighted average grant date fair value $
Outstanding at the beginning of the period:	Outstanding at the beginning of the period:					Outstanding at the beginning of the period:
—RSUs	—RSUs	1,583,910	$	12.88		—RSUs	1,583,910	$	12.88
—PRSUs	—PRSUs	571,650	$	16.45		—PRSUs	571,650	$	16.45
		2,155,560	$	13.83			2,155,560	$	13.83
Granted during the period:	Granted during the period:					Granted during the period:
—RSUs	—RSUs	891,212	$	15.10		—RSUs	898,712	$	15.12
—PRSUs	—PRSUs	325,052	$	17.92		—PRSUs	325,052	$	17.92
		1,216,264	$	15.86			1,223,764	$	15.86
Forfeited during the period:	Forfeited during the period:					Forfeited during the period:
—RSUs	—RSUs	(99,747)	$	13.54		—RSUs	(153,626)	$	13.79
—PRSUs	—PRSUs	(12,724)	$	16.97		—PRSUs	(12,724)	$	16.97
		(112,471)	$	13.93			(166,350)	$	14.04

Vested during the period:	Vested during the period:					Vested during the period:
—RSUs	—RSUs	(617,056)	$	13.12		—RSUs	(621,388)	$	13.10

		(617,056)	$	13.12			(621,388)	$	13.10
Outstanding at the end of the period:	Outstanding at the end of the period:					Outstanding at the end of the period:
—RSUs	—RSUs	1,758,319	$	13.89		—RSUs	1,707,608	$	13.90
—PRSUs	—PRSUs	883,978	$	16.98		—PRSUs	883,978	$	16.98
		2,642,297	$	14.92			2,591,586	$	14.95

As of ~~July 3,~~October 2, 2021, the unrecognized compensation charge relating to nonvested RSUs and PRSUs was ~~$23.0~~$18.2 million, which is expected to be recognized over a weighted average period of ~~1.9~~1.6 years, subject, where relevant, to the achievement of the performance conditions described above. The total fair value of RSUs and PRSUs vested during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 was ~~$0.4~~$0.1 million and ~~$8.1~~$8.2 million, respectively, compared to $0$0.1 million and ~~$2.7~~$2.8 million, respectively, during the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020.

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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:


		Six months ended						Nine months ended
		July 3, 2021			June 27, 2020					October 2, 2021			September 26, 2020
Weighted average grant date fair value:	Weighted average grant date fair value:								Weighted average grant date fair value:
—SARs	—SARs	$	6.66		$	4.59			—SARs	$	6.66		$	4.59
—Share options	—Share options	$	6.66		$	4.78			—Share options	$	6.66		$	4.78
—Premium-priced options	—Premium-priced options	$	6.36		n/a				—Premium-priced options	$	6.36		n/a
—RSUs	—RSUs	$	15.10		$	11.81			—RSUs	$	15.12		$	11.78
—PRSUs	—PRSUs	$	17.92		$	14.41			—PRSUs	$	17.92		$	14.41

Inputs to the model:	Inputs to the model:								Inputs to the model:
—Expected volatility - SARs	—Expected volatility - SARs	46.1		%	37.7		%		—Expected volatility - SARs	46.1		%	37.7		%
—Expected volatility - share options	—Expected volatility - share options	46.1		%	37.6		%		—Expected volatility - share options	46.1		%	37.6		%
—Expected volatility - premium-priced options	—Expected volatility - premium-priced options	46.1		%	n/a				—Expected volatility - premium-priced options	46.1		%	n/a
—Expected volatility - PRSUs	—Expected volatility - PRSUs	50.8		%	40.4		%		—Expected volatility - PRSUs	50.8		%	40.4		%

—Expected option life for SARs (years)	—Expected option life for SARs (years)	6.0			6.0				—Expected option life for SARs (years)	6.0			6.0
—Expected option life for share options (years)	—Expected option life for share options (years)	6.0			6.0				—Expected option life for share options (years)	6.0			6.0
—Expected option life for premium-priced options (years)	—Expected option life for premium-priced options (years)	6.0			n/a				—Expected option life for premium-priced options (years)	6.0			n/a

—Risk-free interest rate:	—Risk-free interest rate:								—Risk-free interest rate:
SARs	SARs	0.95		%	1.25		%		SARs	0.95		%	1.25		%
Share options	Share options	0.95		%	1.33		%		Share options	0.95		%	1.33		%
Premium-priced options	Premium-priced options	0.95		%	n/a				Premium-priced options	0.95		%	n/a
PRSUs	PRSUs	0.27		%	1.29		%		PRSUs	0.27		%	1.29		%

15. Equity

Movements in the Company’s number of shares in issue for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, respectively, were as follows:


		Six months ended			Nine months ended
(number of shares)	(number of shares)	July 3, 2021	June 27, 2020	(number of shares)	October 2, 2021	September 26, 2020
Balance as of the beginning of the period	Balance as of the beginning of the period	290,853,067	290,157,299	Balance as of the beginning of the period	290,853,067	290,157,299

Exercise of share options	Exercise of share options	436,494	400,573	Exercise of share options	496,239	424,726
Vesting of restricted stock units, net of withholding taxes	Vesting of restricted stock units, net of withholding taxes	553,098	196,984	Vesting of restricted stock units, net of withholding taxes	557,430	205,145
Balance as of the end of the period	Balance as of the end of the period	291,842,659	290,754,856	Balance as of the end of the period	291,906,736	290,787,170

The Company has 1 class of authorized and issued shares, with a par value of $0.01, and each share has equal voting rights.

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16. Analysis of accumulated other comprehensive ~~loss~~(loss) income

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


(dollars in millions)	(dollars in millions)	Post- retirement benefits		Cumulative translation adjustment		Cash flow hedges		Accumulated OCI attributable to shareholders		Non-controlling interests		Accumulated OCI		(dollars in millions)	Post- retirement benefits		Cumulative translation adjustment		Cash flow hedges		Accumulated OCI attributable to shareholders		Non-controlling interests		Accumulated OCI
As of January 2, 2021	As of January 2, 2021	$	14.9	$	(770.2)	$	(50.1)	$	(805.4)	$	(18.1)	$	(823.5)	As of January 2, 2021	$	14.9	$	(770.2)	$	(50.1)	$	(805.4)	$	(18.1)	$	(823.5)
Foreign currency translation	Foreign currency translation	(0.1)		(13.0)		—		(13.1)		(6.8)		(19.9)		Foreign currency translation	(0.1)		(60.4)		—		(60.5)		(7.2)		(67.7)
Cash flow hedges movements	Cash flow hedges movements	—		—		12.6		12.6		—		12.6		Cash flow hedges movements	—		—		16.5		16.5		—		16.5

Other comprehensive (loss) income	Other comprehensive (loss) income	(0.1)		(13.0)		12.6		(0.5)		(6.8)		(7.3)		Other comprehensive (loss) income	(0.1)		(60.4)		16.5		(44.0)		(7.2)		(51.2)
As of July 3, 2021		$	14.8	$	(783.2)	$	(37.5)	$	(805.9)	$	(24.9)	$	(830.8)
As of October 2, 2021														As of October 2, 2021	$	14.8	$	(830.6)	$	(33.6)	$	(849.4)	$	(25.3)	$	(874.7)


(dollars in millions)	(dollars in millions)	Post- retirement benefits		Cumulative translation adjustment		Cash flow hedges		Accumulated OCI attributable to shareholders		Non-controlling interests		Accumulated OCI		(dollars in millions)	Post- retirement benefits		Cumulative translation adjustment		Cash flow hedges		Accumulated OCI attributable to shareholders		Non-controlling interests		Accumulated OCI
As of December 28, 2019	As of December 28, 2019	$	(9.3)	$	(812.3)	$	(36.8)	$	(858.4)	$	(46.0)	$	(904.4)	As of December 28, 2019	$	(9.3)	$	(812.3)	$	(36.8)	$	(858.4)	$	(46.0)	$	(904.4)
Foreign currency translation	Foreign currency translation	1.3		(159.8)		—		(158.5)		(4.1)		(162.6)		Foreign currency translation	0.6		(106.4)		—		(105.8)		8.0		(97.8)
Cash flow hedges movements	Cash flow hedges movements	—		—		(19.2)		(19.2)		—		(19.2)		Cash flow hedges movements	—		—		(18.0)		(18.0)		—		(18.0)
Post-retirement benefit movements	Post-retirement benefit movements	(0.1)		—		—		(0.1)		—		(0.1)		Post-retirement benefit movements	(0.1)		—		—		(0.1)		—		(0.1)
Other comprehensive income (loss)	Other comprehensive income (loss)	1.2		(159.8)		(19.2)		(177.8)		(4.1)		(181.9)		Other comprehensive income (loss)	0.5		(106.4)		(18.0)		(123.9)		8.0		(115.9)
As of June 27, 2020		$	(8.1)	$	(972.1)	$	(56.0)	$	(1,036.2)	$	(50.1)	$	(1,086.3)
As of September 26, 2020														As of September 26, 2020	$	(8.8)	$	(918.7)	$	(54.8)	$	(982.3)	$	(38.0)	$	(1,020.3)

17. 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 the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, ~~and during the three months ended June 27, 2020,~~ Gates incurred $0 million in respect of these oversight services and out-of-pocket ~~expenses, but~~expenses. During the three and nine months ended September 26, 2020, Gates incurred ~~$1.7~~$0.2 million ~~during the first quarter of 2020.~~and $1.9 million, respectively. There was no amount owing at ~~July 3,~~October 2, 2021 or January 2, 2021 in respect of these transactions.

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.

In connection with the extension of the maturity of our Dollar Term Loan during February 2021, Blackstone Securities Partners L.P. and Blackstone Alternative Credit Advisors LP, both affiliates of Blackstone, received arrangement fees of $0.3 million and was an initial lender of $6.9 million of the Dollar Term Loan, respectively.

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~~B. Commercial transactions with sponsor portfolio companies~~

Our Sponsor and its affiliates have ownership interests in a broad range of companies. We have entered and may in the future enter into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services.

During the periods presented, our Sponsor held an interest in Equity Healthcare L.L.C., a provider of healthcare vendor management and consulting services, and Blue Yonder Holding, Inc. (formerly, JDA Software), a provider of supply chain software. In addition, through to April 1, 2021, our Sponsor held a majority interest in Custom Truck One Source L.P., a provider of specialized truck and heavy equipment solutions in North America. Sales to and purchases from each of these related parties were as follows:

Three months ended Six months ended
(dollars in millions) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Sales:
—Custom Truck One Source L.P. $ 0 $ 0.1 $ 0 $ 0.1
Purchases:
—Equity Healthcare L.L.C. $ (0.1) $ 0 $ (0.1) $ 0
—Blue Yonder Holding, Inc. $ (0.1) $ 0 $ (0.1) $ 0

B. Equity method investees

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


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Sales	Sales	$	0	$	0.4	$	0.1	$	0.7	Sales	$	—	$	0.1	$	0.1	$	0.8
Purchases	Purchases	$	(3.3)	$	(3.5)	$	(7.7)	$	(7.1)	Purchases	$	(3.3)	$	(3.5)	$	(11.0)	$	(10.6)

Amounts outstanding in respect of these transactions were payables of ~~$0.8~~$1.2 million as of ~~July 3,~~October 2, 2021, 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:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Sales	Sales	$	16.9	$	12.0	$	33.5	$	24.5	Sales	$	17.1	$	10.5	$	50.6	$	35.0
Purchases	Purchases	$	(5.3)	$	(4.2)	$	(10.9)	$	(9.3)	Purchases	$	(5.5)	$	(4.3)	$	(16.4)	$	(13.6)

Amounts outstanding in respect of these transactions were as follows:


(dollars in millions)	(dollars in millions)	As of July 3, 2021		As of January 2, 2021		(dollars in millions)	As of October 2, 2021		As of January 2, 2021
Receivables	Receivables	$	7.4	$	0.4	Receivables	$	6.8	$	0.4
Payables	Payables	$	(4.3)	$	(4.5)	Payables	$	(4.1)	$	(4.5)

18. Commitments and contingencies

A. Performance bonds, letters of credit and bank guarantees

As of ~~July 3,~~October 2, 2021, letters of credit totaling ~~$29.1~~$29.4 million were outstanding against the asset-backed revolving facility, compared to $28.5 million as of January 2, 2021. Gates had additional outstanding performance bonds, letters of credit and bank guarantees amounting to ~~$6.1~~$6.0 million as of ~~July 3,~~October 2, 2021, compared to $6.0 million as of January 2, 2021.

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B. Contingencies

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

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C. Warranties

The following summarizes the movements in the warranty liability for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, respectively:


		Six months ended					Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020
Balance as of the beginning of the period	Balance as of the beginning of the period	$	19.8	$	17.7	Balance as of the beginning of the period	$	19.8	$	17.7
Charge for the period	Charge for the period	4.4		7.2		Charge for the period	7.1		9.3
Payments made	Payments made	(4.6)		(4.7)		Payments made	(7.1)		(6.6)

Released during the period	Released during the period	(1.0)		(0.8)		Released during the period	(1.0)		(0.7)
Foreign currency translation	Foreign currency translation	0.1		(0.1)		Foreign currency translation	0.1		0.1
Balance as of the end of the period	Balance as of the end of the period	$	18.7	$	19.3	Balance as of the end of the period	$	18.9	$	19.8

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Item 2: Management’s Discussion and Analysis
of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” above and Part I, Item 1A. “Risk Factors” in our annual report.

Our Company

We are a global manufacturer of innovative, highly engineered power transmission and fluid power solutions. We offer a broad portfolio of products to diverse replacement channel customers and to original equipment (“first-fit”) manufacturers as specified components, with the majority of our revenue coming from replacement channels. Our products are used in applications across numerous end markets, ~~which include~~including industrial off-highway end markets such as construction and agriculture, industrial on-highway ~~mobility & recreation,~~end markets such as transportation, diversified industrial, energy &and resources, automotive and ~~automotive.~~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 ~~for~~ over ~~a century~~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 a natural, and often preventative, replacement ~~cycle~~cycles that ~~drives~~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 the ~~six~~nine months ended ~~July 3,~~October 2, 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 the ~~six~~nine months ended ~~July 3,~~October 2, 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.

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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 costs associated with these actions will be incurred during 2021 and 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 the first ~~half~~nine months of 2021, we have experienced challenges from raw material and freight ~~inflation.~~inflation, which we expect to continue in the near term. As far as possible, we expect to continue to remain price/cost ~~positive~~neutral relative to these ~~challenges~~impacts for the balance of the year and into next year. In addition, we have experienced production disruptions and input shortages on labor, raw materials and freight. Despite the above, 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 ~~shortages,~~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 ~~into~~throughout 2021, ~~although to a lessening degree as it impacts~~though impacting our ~~business.~~business in different ways. 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. In particular, we are subject to the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) regulations, including any concerning a potential mandate of full vaccination or regular testing of employees for COVID-19, which could result in employee attrition in our U.S. facilities.

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. Although all of our facilities are currently operational, we may experience 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 has continued through the first ~~half~~nine months of 2021. We expect the pace of these improvements to slow as the global economy continues to normalize. 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 ~~$412.2~~$396.0 million under our lines of credit (none of which are currently expected to be drawn in the foreseeable future), in addition to cash balances of ~~$473.3~~$540.6 million as of ~~July 3,~~October 2, 2021. In addition, our business ~~also~~ has a demonstrated ability to generate free cash flow even in challenging environments.

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While we have generally seen a ~~result~~rebound in demand from the pandemic-induced declines of 2020, the evolving impact of the pandemic, including the emergence of ~~COVID-19~~ variants, and continuing measures being taken around the world to combat its spread, ~~there~~ may becreate ongoing implications for our business which may vary from time to time, and ~~the impact~~some of ~~the pandemic on Gates’ operations~~these impacts may ~~continue to~~ be ~~material.~~material but cannot be reasonably estimated at this time.

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Results for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 compared to the results for the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020

Summary Gates Performance


		Three months ended						Six months ended							Three months ended						Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020			(dollars in millions)	October 2, 2021			September 26, 2020			October 2, 2021			September 26, 2020
Net sales	Net sales	$	915.1		$	576.5		$	1,796.4		$	1,286.6		Net sales	$	862.4		$	712.2		$	2,658.8		$	1,998.8
Cost of sales	Cost of sales	548.4			373.0			1,084.2			827.3			Cost of sales	521.7			438.6			1,605.9			1,265.9
Gross profit	Gross profit	366.7			203.5			712.2			459.3			Gross profit	340.7			273.6			1,052.9			732.9
Selling, general and administrative expenses	Selling, general and administrative expenses	214.2			182.9			425.8			376.3			Selling, general and administrative expenses	217.4			195.4			643.2			571.7
Transaction-related expenses (income)		0.2			—			2.6			(0.2)
Transaction-related expenses														Transaction-related expenses	0.2			5.4			2.8			5.2
Asset impairments	Asset impairments	—			3.7			—			3.7			Asset impairments	—			1.4			—			5.1
Restructuring expenses	Restructuring expenses	3.7			17.2			6.6			19.1			Restructuring expenses	1.9			7.3			8.5			26.4
Other operating income		(0.5)			(3.7)			(0.5)			(1.4)
Other operating (income) expenses														Other operating (income) expenses	(9.3)			0.2			(9.8)			(1.2)
Operating income from continuing operations	Operating income from continuing operations	149.1			3.4			277.7			61.8			Operating income from continuing operations	130.5			63.9			408.2			125.7
Interest expense	Interest expense	33.3			34.3			67.7			71.0			Interest expense	33.1			38.3			100.8			109.3
Other income		(1.2)			(3.7)			(2.4)			(5.8)
Income (loss) from continuing operations before taxes		117.0			(27.2)			212.4			(3.4)
Other expenses (income)														Other expenses (income)	1.9			(4.1)			(0.5)			(9.9)
Income from continuing operations before taxes														Income from continuing operations before taxes	95.5			29.7			307.9			26.3
Income tax expense (benefit)	Income tax expense (benefit)	11.6			0.6			30.5			(15.5)			Income tax expense (benefit)	17.3			(16.0)			47.8			(31.5)
Net income (loss) from continuing operations		$	105.4		$	(27.8)		$	181.9		$	12.1
Net income from continuing operations														Net income from continuing operations	$	78.2		$	45.7		$	260.1		$	57.8

Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	216.0		$	83.2		$	412.3		$	204.0		Adjusted EBITDA(1)	$	183.9		$	140.0		$	596.2		$	344.0
Adjusted EBITDA margin	Adjusted EBITDA margin	23.6		%	14.4		%	23.0		%	15.9		%	Adjusted EBITDA margin	21.3		%	19.7		%	22.4		%	17.2		%

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

Net sales

Net sales during the three months ended ~~July 3,~~October 2, 2021 were ~~$915.1~~$862.4 million, compared to ~~$576.5~~$712.2 million during the prior year period, an increase of ~~58.7%~~21.1%, or ~~$338.6~~$150.2 million. Our net sales for the three months ended ~~July 3,~~October 2, 2021 were favorably impacted by movements in average currency exchange rates of ~~$44.6~~$15.1 million compared to the prior year period, due principally to the weakening of the U.S. dollar against a number of currencies, in particular the ~~Euro~~Chinese Renminbi and ~~Chinese Renminbi.~~Mexican Peso. Excluding this impact, core sales increased by ~~$294.0~~$135.1 million, or ~~51.0%~~19.0%, during the three months ended ~~July 3,~~October 2, 2021 compared to the prior year period, driven primarily by higher volumes, but with a ~~$18.6~~$35.8 million benefit from favorable pricing.

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Core sales in our Power Transmission and Fluid Power businesses increased by ~~51.1%~~15.2% and ~~50.8%~~26.3%, respectively, for the three months ended ~~July 3,~~October 2, 2021 compared to the prior year period. These improvements, predominantly a function of the significant economic impact from the COVID-19 pandemic in the prior year period, were driven primarily by increases in sales to customers ~~across all of~~in our industrial channels, ~~but particularly in the~~with industrial ~~channels. Sales to our~~ first-fit ~~customers increased~~sales up by ~~65.3% for the three months ended July 3, 2021 compared with the prior year period, outpacing the 44.1% growth in~~38.4% and industrial replacement sales ~~to our replacement customers in the same period.~~up by 36.0%. The majority of this growth was focused in North America and EMEA, ~~which~~where industrial sales grew by ~~40.9%~~36.1% and ~~81.1%~~48.5%, respectively, during the three months ended October 2, 2021 compared to the prior year period. The diversified industrial end markets, particularly in North America and EMEA, drove most of the industrial channel growth during the three months ended October 2, 2021 compared to the prior year period, increasing by 39.4%, supported by strong growth in industrial off-highway end markets across most regions. Sales to automotive first-fit customers were slightly lower for the three months ended ~~July 3,~~October 2, 2021 compared ~~with~~to the prior year ~~period.~~period, due primarily to a strong prior period performance in Greater China ~~grew by 17.5%, as it began to return to more normalized growth,~~ due to the earlier start to the recovery in this region in ~~2020. The diversified industrial~~2020, and ~~automotive replacement end markets drove just over half~~2021 impacts from softening customer demand resulting from the global semiconductor chip shortage, and the impact of ~~the growth~~government-mandated power outages in ~~dollar terms during the three months ended July 3, 2021 compared with the prior year period, driven by strong performance in North America and EMEA, in particular.~~

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Greater China.

Net sales during the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021 were ~~$1,796.4~~$2,658.8 million, compared to ~~$1,286.6~~$1,998.8 million during the prior year period, an increase of ~~39.6%~~33.0%, or ~~$509.8~~$660.0 million. Our net sales for the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021 were favorably impacted by movements in average currency exchange rates of ~~$67.0~~$82.1 million compared to the prior year period, due principally to the weakening of the U.S. dollar against a number of currencies, in particular the Euro, Chinese Renminbi and Canadian dollar. Excluding these impacts, core sales increased by ~~$442.8~~$577.9 million, or ~~34.4%~~28.9%, during the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021 compared to the prior year period, driven primarily by higher volumes, but with a ~~$26.2~~$62.8 million benefit from favorable pricing.

Core sales in our Power Transmission and Fluid Power businesses increased by ~~35.9%~~28.3% and ~~32.0%~~30.1%, respectively, for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 compared to the prior year period. The primary drivers of these improvements were similar to those described above for the three-month period, except that sales to ~~industrial first-fit customers outpaced those~~automotive end markets contributed more significantly to ~~industrial replacement customers,~~the growth, driven by the stronger first half performance in EMEA, North America and Greater China relative to the prior year period.

Cost of sales

Cost of sales for the three months ended ~~July 3,~~October 2, 2021 was ~~$548.4~~$521.7 million, compared to ~~$373.0~~$438.6 million for the prior year period, an increase of ~~47.0%~~18.9%, or ~~$175.4~~$83.1 million. Higher volumes contributed ~~$161.6~~$62.5 million of this increase, with higher inflation-related costs and unfavorable movements in average currency exchange rates ~~being largely~~contributing a further $59.7 million of the increase. These increases were offset partially by the improved manufacturing performance due to the higher absorption of fixed costs on higher volumes.

Cost of sales for the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021 was ~~$1,084.2~~$1,605.9 million, compared to ~~$827.3~~$1,265.9 million for the prior year period, an increase of ~~31.1%~~26.9%, or ~~$256.9~~$340.0 million, driven by the same factors as described above for the three month period.

Gross profit

As a result of the factors described above, gross profit for the three months ended ~~July 3,~~October 2, 2021 was ~~$366.7~~$340.7 million, compared to ~~$203.5~~$273.6 million for the prior year period, an increase of ~~80.2%~~24.5% or ~~$163.2~~$67.1 million. Our gross profit margin improved by ~~480~~110 basis points to ~~40.1%~~39.5% for the three months ended ~~July 3, 2021, up from 35.3% for the prior year period.~~October 2, 2021.

Gross profit for the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021 was ~~$712.2~~$1,052.9 million, compared to ~~$459.3~~$732.9 million for the prior year period, an increase of ~~55.1%~~43.7% or ~~$252.9~~$320.0 million. Our gross profit margin improved by ~~390~~290 basis points to 39.6% for the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021.

Selling, general and administrative expenses

SG&A expenses for the three months ended ~~July 3,~~October 2, 2021 were ~~$214.2~~$217.4 million compared to ~~$182.9~~$195.4 million for the prior year period. This increase of ~~$31.3~~$22.0 million was driven primarily by higher labor and benefits costs of ~~$11.1~~$12.2 million, combined with ~~unfavorable movements in average currency exchange rates~~increased advertising expenditure of $4.5 million and volume increases of approximately $7$2.3 million, ~~each.~~driven by the rebound in demand during the current period compared to the prior year period.

SG&A expenses for the ~~six~~nine months ended ~~months ended July 3,~~October 2, 2021 were ~~$425.8~~$643.2 million compared to ~~$376.3~~$571.7 million for the prior year period. This increase of ~~$49.5~~$71.5 million was driven primarily by the same factors as described above for the three month period, in addition to ~~a $4.5~~$11.9 million ~~benefit~~of unfavorable movements in ~~the prior year period from favorable legal settlements~~average currency exchange rates and an increase ~~in the current year period~~ of ~~$4.2~~$5.0 million in the stock-based compensation expense compared to the prior ~~year.~~year period.

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Transaction-related expenses ~~(income)~~

Transaction-related expenses of $0.2 million and ~~$2.6~~$2.8 million were incurred during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, respectively, related primarily to the Dollar Term Loan amendments completed in February 2021 and ~~certain~~ other corporate transactions. ~~No transaction-related~~Transaction-related expenses of $5.4 million and $5.2 million were incurred during the prior year ~~three-month period~~three and ~~income~~nine-month periods, respectively, related primarily to payments made on resolution of ~~$0.2 million was recognized~~certain contingencies that affected the purchase price paid by Blackstone upon acquiring Gates in ~~the prior year six-month period.~~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.

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Restructuring expenses, including asset impairments, of ~~$22.3~~$8.7 million and ~~$24.2~~$32.9 million were recognized during the prior year three and ~~six~~nine month periods, respectively, related primarily to the ~~June 2020 announcement~~closure of ~~plans to close~~ 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 North America.

Other operating (income) expenses

Other operating income of $9.3 million and $9.8 million was recognized during the ~~U.S., Mexico~~three and ~~Greater China.~~nine months ended October 2, 2021, respectively, related primarily to a net gain on the sale of a purchase option on a building that we lease in Europe.

Interest expense

Our interest expense was as follows:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Debt:	Debt:									Debt:
Dollar Term Loan	Dollar Term Loan	$	16.5	$	16.3	$	33.5	$	35.1	Dollar Term Loan	$	15.9	$	20.2	$	49.4	$	55.3
Euro Term Loan	Euro Term Loan	6.3		5.7		12.6		11.4		Euro Term Loan	5.9		6.1		18.5		17.5
Dollar Senior Notes	Dollar Senior Notes	8.9		8.8		17.9		17.6		Dollar Senior Notes	8.7		8.8		26.6		26.4

Other loans	Other loans	—		0.1		—		0.1		Other loans	—		—		—		0.1
		31.7		30.9		64.0		64.2			30.5		35.1		94.5		99.3
Amortization of deferred issuance costs	Amortization of deferred issuance costs	0.7		2.5		2.0		4.9		Amortization of deferred issuance costs	1.9		2.3		3.9		7.2
Other interest expense	Other interest expense	0.9		0.9		1.7		1.9		Other interest expense	0.7		0.9		2.4		2.8
		$	33.3	$	34.3	$	67.7	$	71.0		$	33.1	$	38.3	$	100.8	$	109.3

Details of our long-term debt are presented in note 12 to the condensed consolidated financial statements included elsewhere in this report. Interest on debt for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 ~~was broadly flat~~decreased by $4.6 million and $4.8 million, respectively, when compared to the prior year ~~periods~~periods. The decreases were driven primarily by interest savings due to debt repayments, as well as by the benefit from lower interest rates on the Dollar Term ~~Loans~~Loan. In the nine months ended October 2, 2021, these benefits were offset partially by a combination of the impact of derivatives and an increase in interest on the Euro Term ~~Loans~~Loan due to unfavorable movements in average currency exchange rates.

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Amortization of deferred issuance costs has decreased during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 due primarily to the extension of the maturity of the Dollar Term Loan completed in February 2021, offset partially in the nine-month period by anthe accelerated recognition of $0.4 million of amortization related to the partial repayment of the Euro Term Loan in June 2021.

Other ~~income~~expenses (income)

Our other ~~income~~expenses (income) was as follows:


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Interest income on bank deposits	Interest income on bank deposits	$	(0.5)	$	(0.7)	$	(1.5)	$	(2.7)	Interest income on bank deposits	$	(0.9)	$	(0.7)	$	(2.4)	$	(3.4)
Foreign currency loss (gain) on net debt and hedging instruments	Foreign currency loss (gain) on net debt and hedging instruments	0.4		(2.2)		1.5		(1.9)		Foreign currency loss (gain) on net debt and hedging instruments	3.6		(2.1)		5.1		(4.0)

Net adjustments related to post-retirement benefits	Net adjustments related to post-retirement benefits	(1.1)		(0.7)		(2.3)		(1.2)		Net adjustments related to post-retirement benefits	(1.2)		(1.4)		(3.5)		(2.6)
Other	Other	—		(0.1)		(0.1)		—		Other	0.4		0.1		0.3		0.1
		$	(1.2)	$	(3.7)	$	(2.4)	$	(5.8)		$	1.9	$	(4.1)	$	(0.5)	$	(9.9)

Other ~~income~~expenses (income) for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 was ~~$1.2~~an expense of $1.9 million and ~~$2.4~~an income of $0.5 million, compared to ~~$3.7~~an income of $4.1 million and ~~$5.8~~$9.9 million, respectively, in the prior year periods. These changes were driven primarily by the impact of net movements in foreign currency exchange rates on net debt and hedging instruments in addition to, in ~~six~~the nine months ended ~~July 3,~~October 2, 2021, lower interest income on cash balances, offset ~~partially~~ by higher net interest income on post-retirement benefit obligations, compared ~~with~~to the prior year period.

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Income tax expense

Deferred Tax Assets and Liabilities

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U.S. and International Tax Reform Proposals

U.S. federal corporate tax reform is currently a major legislative agenda item and includes a variety of proposals under consideration. In addition, most of the countries included in the Organization for Economic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting have now politically committed to changes in the international corporate tax system focused on market sourcing for the largest multinational corporations and a global minimum tax regime. If enacted, these proposals would generally increase income tax expense in the applicable future periods and also result in an adjustment to the value of deferred income tax balances in the period of enactment.

Adjusted EBITDA

Adjusted EBITDA for the three months ended ~~July 3,~~October 2, 2021 was ~~$216.0~~$183.9 million, compared to ~~$83.2~~$140.0 million in the prior year period, an increase of ~~159.6%~~31.4% or ~~$132.8~~$43.9 million. The Adjusted EBITDA margin was ~~23.6%~~21.3% for the three months ended ~~July 3,~~October 2, 2021, a ~~920~~160 basis point increase from the prior year period margin of ~~14.4%~~19.7%. The increase in Adjusted EBITDA was driven primarily by the increase in volumes, pricing benefits and improvement in manufacturing performance, as described above, driving an increase in gross profit of ~~$163.2~~$67.1 million, which was offset partially by higher inflation-related costs and SG&A expenses as noted above.

Adjusted EBITDA for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 was ~~$412.3~~$596.2 million, compared to ~~$204.0~~$344.0 million in the prior year period, an increase of ~~102.1%~~73.3% or ~~$208.3~~$252.2 million. Adjusted EBITDA margin was ~~23.0%~~22.4% for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, a ~~710~~520 basis point increase from the prior year period margin of ~~15.9%~~17.2%. The drivers of the increase in Adjusted EBITDA were similar to those described above for the three-month period.

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

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Analysis by Operating Segment

Power Transmission ~~(64.3%~~(63.7% and ~~63.9%~~63.8%, respectively, of Gates’ net sales for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021)


		Three months ended									Three months ended
(dollars in millions)	(dollars in millions)	July 3, 2021			June 27, 2020			Period over period change		(dollars in millions)	October 2, 2021			September 26, 2020			Period over period change
Net sales	Net sales	$	588.6		$	370.0		59.1	%	Net sales	$	549.4		$	469.2		17.1	%
Adjusted EBITDA	Adjusted EBITDA	$	149.6		$	57.7		159.3	%	Adjusted EBITDA	$	123.2		$	99.3		24.1	%
Adjusted EBITDA margin	Adjusted EBITDA margin	25.4		%	15.6		%			Adjusted EBITDA margin	22.4		%	21.2		%


		Six months ended									Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021			June 27, 2020			Period over period change		(dollars in millions)	October 2, 2021			September 26, 2020			Period over period change
Net sales	Net sales	$	1,148.1		$	811.2		41.5	%	Net sales	$	1,697.5		$	1,280.4		32.6	%
Adjusted EBITDA	Adjusted EBITDA	$	282.3		$	137.2		105.8	%	Adjusted EBITDA	$	405.5		$	236.5		71.5	%
Adjusted EBITDA margin	Adjusted EBITDA margin	24.6		%	16.9		%			Adjusted EBITDA margin	23.9		%	18.5		%

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Net sales in Power Transmission for the three months ended ~~July 3,~~October 2, 2021 ~~were $588.6~~increased by 17.1%, or $80.2 million, compared to ~~$370.0 million in~~ the prior year ~~period, an increase of 59.1%, or $218.6 million.~~period. Excluding the favorable impact of movements in average currency exchange rates of ~~$29.4~~$9.1 million, core sales increased by ~~51.1%~~15.2%, or ~~$189.2~~$71.1 million, compared to the prior year period, driven primarily by higher ~~volumes.~~volumes, but with a $19.5 million benefit from favorable pricing.

Net sales in Power Transmission for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 ~~were $1,148.1~~increased by 32.6%, or $417.1 million, compared to ~~$811.2 million in~~ the prior year ~~period, an increase of 41.5%, or $336.9 million.~~period. Excluding the favorable impact of movements in average currency exchange rates of ~~$46.0~~$55.1 million, core sales increased by ~~35.9%~~28.3%, or ~~$290.9~~$362.0 million, compared to the prior year period, driven primarily by higher ~~volumes.~~volumes, but with a $35.9 million benefit from favorable pricing.

Power Transmission’s core sales to industrial customers grew by ~~double digits across all channels, with the largest growth in dollar terms coming from sales to automotive replacement customers, which increased by 48.7%~~35.5% and ~~33.1%~~40.3%, respectively, during the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 compared to the prior year periods, ~~predominantly~~driven by growth in ~~EMEA. During the three-month period, the remaining growth arose broadly equally between the other three channels, but in the six month period, sales to~~ industrial first-fit ~~customers were slightly stronger than those to automotive first-fit~~sales in North America and EMEA, and strong industrial replacement ~~customers, growing by 59.9%~~growth in East Asia & India. Automotive replacement sales also drove growth during the three months ended October 2, 2021 compared to the prior year period, primarily in EMEA, and also grew significantly in North America and Greater China during the nine-month period. Industrial growth in the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 was focused in the diversified industrial end market, which grew by ~~59.2%~~38.2% and ~~45.4%~~42.9%, respectively, compared to the prior year period, primarily in North America and EMEA. ~~Partially offsetting this industrial growth were declines~~Sales in the ~~construction and energy~~automotive end ~~markets~~market grew by 25.1% during ~~both~~the nine months ended October 2, 2021 compared to the prior year period, but were flat in most regions during the three ~~and six~~ months ended ~~July 3,~~October 2, 2021, with the exception of EMEA, which grew by 11.7% during this period compared to the prior year period.

Power Transmission Adjusted EBITDA for the three months ended ~~July 3,~~October 2, 2021 ~~was $149.6~~increased by 24.1%, or $23.9 million, compared to ~~$57.7 million for~~ the prior year period, ~~an increase of 159.3% or $91.9 million,~~ driven primarily by higher volumes and improved manufacturing performance. As a result, the Adjusted EBITDA margin was ~~25.4%~~22.4%, a ~~980~~120 basis point improvement from the prior year ~~period~~period.

Power Transmission Adjusted EBITDA for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 ~~was $282.3~~increased by 71.5%, or $169.0 million, compared to ~~$137.2 million in~~ the prior year ~~period, an increase of 105.8% or $145.1 million.~~period. This increase was driven by the same factors as described above for the three month period, and resulted in an Adjusted EBITDA margin of ~~24.6%~~23.9%, a ~~770~~540 basis point increase compared to the prior year period.

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Fluid Power ~~(35.7%~~(36.3% and ~~36.1%~~36.2%, respectively, of Gates’ net sales for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021)


		Three months ended									Three months ended
(dollars in millions)	(dollars in millions)	July 3, 2021			June 27, 2020			Period over period change		(dollars in millions)	October 2, 2021			September 26, 2020			Period over period change
Net sales	Net sales	$	326.5		$	206.5		58.1	%	Net sales	$	313.0		$	243.0		28.8	%
Adjusted EBITDA	Adjusted EBITDA	$	66.4		$	25.5		160.4	%	Adjusted EBITDA	$	60.7		$	40.7		49.1	%
Adjusted EBITDA margin	Adjusted EBITDA margin	20.3		%	12.3		%			Adjusted EBITDA margin	19.4		%	16.7		%


		Six months ended									Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021			June 27, 2020			Period over period change		(dollars in millions)	October 2, 2021			September 26, 2020			Period over period change
Net sales	Net sales	$	648.3		$	475.4		36.4	%	Net sales	$	961.3		$	718.4		33.8	%
Adjusted EBITDA	Adjusted EBITDA	$	130.0		$	66.8		94.6	%	Adjusted EBITDA	$	190.7		$	107.5		77.4	%
Adjusted EBITDA margin	Adjusted EBITDA margin	20.1		%	14.1		%			Adjusted EBITDA margin	19.8		%	15.0		%

Net sales in Fluid Power for the three months ended ~~July 3,~~October 2, 2021 ~~were $326.5~~increased by 28.8%, or $70.0 million, compared to ~~$206.5 million in~~ the prior year ~~period, an increase of 58.1%, or $120.0 million.~~period. Excluding the favorable impact of movements in average currency exchange rates of ~~$15.2~~$6.0 million, core sales increased by ~~50.8%~~26.3%, or ~~$104.8~~$64.0 million, compared to the prior year period, driven primarily by higher ~~volumes.~~volumes, but with a $16.3 million benefit from favorable pricing.

Net sales in Fluid Power for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 ~~were $648.3~~increased by 33.8%, or $242.9 million, compared to ~~$475.4 million in~~ the prior year ~~period, an increase of 36.4%, or $172.9 million.~~period. Excluding the favorable impact of movements in average currency exchange rates of ~~$21.0~~$27.0 million, core sales increased by ~~32.0%~~30.1%, or ~~$151.9~~$215.9 million, compared to the prior year period, driven primarily by higher ~~volumes.~~volumes, but with a $26.9 million benefit from favorable pricing.

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Fluid Power’s core sales growth in the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 was driven almost entirely by increased sales to industrial customers, which grew by ~~65.3%~~38.4% and ~~39.1%~~38.9%, respectively, compared to the prior year periods. This growth was driven primarily by sales to the diversified industrial and industrial off-highway end markets, particularly in North America. Growth in automotive replacement sales was more muted during the ~~three~~current year nine month period, and ~~six~~declined in the three months ended ~~July 3,~~October 2, 2021 compared to the prior year ~~period, with growth across all regions, but particularly~~periods, driven predominantly by lower sales in North America and EMEA. Globally, sales into the industrial off-highway end market drove the growth, increasing by 67.4% and 42.9%, respectively, during the three and six months ended July 3, 2021 compared to the prior year period, with strong growth also in sales into the diversified industrial end market.America.

Fluid Power Adjusted EBITDA for the three months ended ~~July 3,~~October 2, 2021 ~~was $66.4~~increased by 49.1%, or $20.0 million, compared to ~~$25.5 million in~~ the prior year period, ~~an increase of 160.4%, or $40.9 million,~~ driven primarily by higher volumes and improved manufacturing performance. As a result, the Adjusted EBITDA margin was ~~20.3%~~19.4%, an ~~800~~270 basis point improvement from the prior year period.

Fluid Power Adjusted EBITDA for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 ~~was $130.0~~increased by 77.4%, or $83.2 million, compared to ~~$66.8 million in~~ the prior year ~~period, an increase of 94.6%, or $63.2 million.~~period. This increase was driven by the same factors as described above for the three month period, and resulted in an Adjusted EBITDA margin of ~~20.1%~~19.8%, a ~~600~~480 basis points increase compared to the prior year period.

Liquidity and Capital Resources

Treasury Responsibilities and Philosophy

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

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

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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 and we do not currently expect to need to draw down under our committed lines of credit in the foreseeable future. We therefore believe that we have adequate liquidity and capital resources for the next twelve months.

Cash Flow

~~Six~~Nine months ended ~~July 3,~~October 2, 2021 compared to the ~~six~~nine months ended ~~June 27,~~September 26, 2020

Cash provided by operating activities was ~~$111.8~~$213.5 million during the ~~six~~nine months ended ~~July 3,~~October 2, 2021 compared to cash provided by operating activities of ~~$71.6~~$127.5 million during the prior ~~year.~~year period. This increase was driven primarily by a higher operating performance during the current year period, offset partially by an increase in trade working capital of ~~$116.7~~$152.0 million more than in the prior year period, driven by the increase in production and sales, ~~volumes.~~and an increase of $21.4 million in cash taxes paid.

Net cash used in investing activities during the ~~six~~nine months ended ~~July 3,~~October 2, 2021 was ~~$50.6~~$70.6 million, compared to ~~$37.1~~$53.6 million in the prior year. This increase was driven primarily by higher capital expenditures, which increased by ~~$16.4~~$18.4 million from ~~$27.6~~$45.6 million in the prior year period to ~~$44.0~~$64.0 million in the ~~six~~nine months ended ~~July 3,~~October 2, 2021.

Net cash used in financing activities was ~~$102.9~~$114.0 million during the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared to ~~$18.9~~$31.7 million in the prior ~~year.~~year period. This higher cash outflow was driven primarily by the $69.5 million repayment made in June 2021 against our Euro Term Loan facility and $8.6 million of costs related to the amendments made to the credit agreement during February 2021.

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Indebtedness

Our long-term debt, consisting principally of two term loans and U.S. dollar denominated unsecured notes, was as follows:


		Carrying amount				Principal amount					Carrying amount				Principal amount
(dollars in millions)	(dollars in millions)	As of July 3, 2021		As of January 2, 2021		As of July 3, 2021		As of January 2, 2021		(dollars in millions)	As of October 2, 2021		As of January 2, 2021		As of October 2, 2021		As of January 2, 2021
Debt:	Debt:									Debt:
—Secured	—Secured									—Secured
Term Loans (U.S. dollar and Euro denominated)	Term Loans (U.S. dollar and Euro denominated)	$	2,020.7	$	2,131.2	$	2,047.9	$	2,152.6	Term Loans (U.S. dollar and Euro denominated)	$	2,002.5	$	2,131.2	$	2,028.7	$	2,152.6
—Unsecured	—Unsecured									—Unsecured
Senior Notes (U.S. dollar)	Senior Notes (U.S. dollar)	578.0		577.3		568.0		568.0		Senior Notes (U.S. dollar)	569.3		577.3		568.0		568.0
Other debt	Other debt	—		0.2		—		0.2		Other debt	—		0.2		—		0.2
		$	2,598.7	$	2,708.7	$	2,615.9	$	2,720.8		$	2,571.8	$	2,708.7	$	2,596.7	$	2,720.8

Details of our long-term debt are presented in note 12 to the condensed consolidated financial statements included elsewhere in this quarterly report.

Debt redemptions

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Dollar Term Loan credit agreement amendments

During February 2021, we made amendments to the 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 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 ~~this transaction,~~these amendments, we paid accrued interest up to the date of the ~~amendment~~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 current 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.

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 ~~July 3,~~October 2, 2021, before intercompany eliminations, our non-guarantor subsidiaries represented approximately ~~73%~~74% of our net sales and ~~68%~~69% of our EBITDA as defined in the financial covenants attaching to the senior secured credit facilities. As of ~~July 3,~~October 2, 2021, before intercompany eliminations, our non-guarantor subsidiaries represented approximately ~~59%~~60% of our total assets and approximately ~~25%~~26% of our total liabilities.

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 the ~~six~~nine months ended ~~July 3,~~October 2, 2021, our net debt decreased by ~~$56.8~~$143.3 million from $2,199.4 million as of January 2, 2021 to ~~$2,142.6~~$2,056.1 million as of ~~July 3,~~October 2, 2021. Excluding changes in foreign currency exchange rates, the decrease in net debt during the ~~six~~nine months ended ~~July 3,~~October 2, 2021 was driven primarily by cash provided by operating activities of ~~$111.8~~$213.5 million less capital expenditures of ~~$44.0~~$64.0 million, net cash paid under corporate-owned life insurance policies of ~~$8.2~~$8.8 million, dividends paid to non-controlling shareholders of ~~$10.3~~$13.5 million and debt issuance costs of $8.6 million paid in respect of the amendments to the credit agreement in February 2021.

In addition, net debt was favorably impacted by movements in foreign currency exchange rates of ~~$18.0~~$28.7 million during the ~~six~~nine months ended ~~July 3,~~October 2, 2021, with the majority of the movement relating to the impact of the weakening of the Euro against the U.S. dollar on our Euro-denominated debt.

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Borrowing Headroom

As of ~~July 3,~~October 2, 2021, our asset-backed revolving credit facility had a borrowing base of ~~$256.3~~$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 ~~$29.1~~$29.4 million. We also have a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $185.0 million.

In total, our committed borrowing headroom was ~~$412.2~~$396.0 million, in addition to cash balances of ~~$473.3~~$540.6 million.

Non-GAAP Measures

EBITDA and Adjusted EBITDA

EBITDA is a non-GAAP measure that represents net income or loss for the period before the impact of income taxes, net interest and other expenses, depreciation and amortization. EBITDA is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net interest and other expenses), 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).

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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 ~~(income)~~ incurred in relation to major corporate transactions, including the acquisition of businesses and related integration activities, and equity and debt transactions;

•asset impairments;

•restructuring expenses, including severance-related expenses;

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

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

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

We exclude from Adjusted EBITDA 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 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; ~~the net gain or loss on disposals of assets other than in the ordinary course of operations and gains and losses incurred in relation to non-Gates businesses disposed of in prior periods;~~ significant impairments of intangibles and of other assets, representing the excess of their carrying amounts over the amounts that are expected to be recovered from them in the future; 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 ~~(loss)~~ from continuing operations for the period.

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


		Three months ended				Six months ended					Three months ended				Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020		(dollars in millions)	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income (loss) from continuing operations		$	105.4	$	(27.8)	$	181.9	$	12.1
Net income from continuing operations										Net income from continuing operations	$	78.2	$	45.7	$	260.1	$	57.8
Income tax expense (benefit)	Income tax expense (benefit)	11.6		0.6		30.5		(15.5)		Income tax expense (benefit)	17.3		(16.0)		47.8		(31.5)
Net interest and other expenses	Net interest and other expenses	32.1		30.6		65.3		65.2		Net interest and other expenses	35.0		34.2		100.3		99.4
Depreciation and amortization	Depreciation and amortization	56.9		54.7		112.7		109.6		Depreciation and amortization	54.7		53.6		167.4		163.2
EBITDA	EBITDA	206.0		58.1		390.4		171.4		EBITDA	185.2		117.5		575.6		288.9
Transaction-related expenses (income)		0.2		—		2.6		(0.2)
Transaction-related expenses										Transaction-related expenses	0.2		5.4		2.8		5.2
Asset impairments	Asset impairments	—		3.7		—		3.7		Asset impairments	—		1.4		—		5.1
Restructuring expenses	Restructuring expenses	3.7		17.2		6.6		19.1		Restructuring expenses	1.9		7.3		8.5		26.4

Share-based compensation expense	Share-based compensation expense	6.5		5.7		12.8		8.6		Share-based compensation expense	5.7		4.9		18.5		13.5
Sponsor fees (included in other operating expense)	Sponsor fees (included in other operating expense)	—		—		—		1.7		Sponsor fees (included in other operating expense)	—		0.2		—		1.9

Inventory impairments (included in cost of sales)	Inventory impairments (included in cost of sales)	0.1		1.4		0.1		1.4		Inventory impairments (included in cost of sales)	—		—		0.1		1.4

Severance expenses (included in cost of sales)	Severance expenses (included in cost of sales)	—		0.5		—		0.6		Severance expenses (included in cost of sales)	—		0.3		—		0.9
Severance expenses (included in SG&A)	Severance expenses (included in SG&A)	—		0.3		0.3		0.8		Severance expenses (included in SG&A)	0.2		3.0		0.5		3.8
Other items not directly related to current operations	Other items not directly related to current operations	(0.5)		(3.7)		(0.5)		(3.1)		Other items not directly related to current operations	(9.3)		—		(9.8)		(3.1)
Adjusted EBITDA	Adjusted EBITDA	$	216.0	$	83.2	$	412.3	$	204.0	Adjusted EBITDA	$	183.9	$	140.0	$	596.2	$	344.0

Adjusted EBITDA Margin

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


		Three months ended						Six months ended						Three months ended					Nine months ended
(dollars in millions)	(dollars in millions)	July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020				(dollars in millions)	October 2, 2021			September 26, 2020			October 2, 2021			September 26, 2020
Net sales	Net sales	$	915.1		$	576.5		$	1,796.4		$	1,286.6			Net sales	$	862.4		$	712.2		$	2,658.8		$	1,998.8
Adjusted EBITDA	Adjusted EBITDA	$	216.0		$	83.2		$	412.3		$	204.0			Adjusted EBITDA	$	183.9		$	140.0		$	596.2		$	344.0
Adjusted EBITDA margin	Adjusted EBITDA margin	23.6		%	14.4		%	23.0		%	15.9		%		Adjusted EBITDA margin	21.3		%	19.7		%	22.4		%	17.2		%

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.


		Three months ended July 3, 2021										Three months ended October 2, 2021
(dollars in millions)	(dollars in millions)	Power Transmission			Fluid Power			Total			(dollars in millions)	Power Transmission			Fluid Power			Total
Net sales for the three months ended July 3, 2021		$	588.6		$	326.5		$	915.1
Net sales for the three months ended October 2, 2021											Net sales for the three months ended October 2, 2021	$	549.4		$	313.0		$	862.4
Impact on net sales of movements in currency rates	Impact on net sales of movements in currency rates	(29.4)			(15.2)			(44.6)			Impact on net sales of movements in currency rates	(9.1)			(6.0)			(15.1)

Core revenue for the three months ended July 3, 2021		559.2			311.3			870.5
Core revenue for the three months ended October 2, 2021											Core revenue for the three months ended October 2, 2021	540.3			307.0			847.3

Net sales for the three months ended June 27, 2020		370.0			206.5			576.5
Net sales for the three months ended September 26, 2020											Net sales for the three months ended September 26, 2020	469.2			243.0			712.2
Increase in net sales on a core basis (core revenue)	Increase in net sales on a core basis (core revenue)	$	189.2		$	104.8		$	294.0		Increase in net sales on a core basis (core revenue)	$	71.1		$	64.0		$	135.1

Core revenue growth	Core revenue growth	51.1		%	50.8		%	51.0		%	Core revenue growth	15.2		%	26.3		%	19.0		%

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		Six months ended July 3, 2021										Nine months ended October 2, 2021
(dollars in millions)	(dollars in millions)	Power Transmission			Fluid Power			Total			(dollars in millions)	Power Transmission			Fluid Power			Total
Net sales for the six months ended July 3, 2021		$	1,148.1		$	648.3		$	1,796.4
Net sales for the nine months ended October 2, 2021											Net sales for the nine months ended October 2, 2021	$	1,697.5		$	961.3		$	2,658.8
Impact on net sales of movements in currency rates	Impact on net sales of movements in currency rates	(46.0)			(21.0)			(67.0)			Impact on net sales of movements in currency rates	(55.1)			(27.0)			(82.1)

Core revenue for the six months ended July 3, 2021		1,102.1			627.3			1,729.4
Core revenue for the nine months ended October 2, 2021											Core revenue for the nine months ended October 2, 2021	1,642.4			934.3			2,576.7

Net sales for the six months ended June 27, 2020		811.2			475.4			1,286.6
Net sales for the nine months ended September 26, 2020											Net sales for the nine months ended September 26, 2020	1,280.4			718.4			1,998.8
Increase in net sales on a core basis (core revenue)	Increase in net sales on a core basis (core revenue)	$	290.9		$	151.9		$	442.8		Increase in net sales on a core basis (core revenue)	$	362.0		$	215.9		$	577.9

Core revenue growth	Core revenue growth	35.9		%	32.0		%	34.4		%	Core revenue growth	28.3		%	30.1		%	28.9		%

Net Debt

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

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

Net debt represents the net total of:

• the principal amount of our debt; and

• the carrying amount of cash and cash equivalents.

Net debt was as follows:


(dollars in millions)	(dollars in millions)	As of July 3, 2021		As of January 2, 2021		(dollars in millions)	As of October 2, 2021		As of January 2, 2021
Principal amount of debt	Principal amount of debt	$	2,615.9	$	2,720.8	Principal amount of debt	$	2,596.7	$	2,720.8
Less: Cash and cash equivalents	Less: Cash and cash equivalents	(473.3)		(521.4)		Less: Cash and cash equivalents	(540.6)		(521.4)
Net debt	Net debt	$	2,142.6	$	2,199.4	Net debt	$	2,056.1	$	2,199.4

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


(dollars in millions)	(dollars in millions)	As of July 3, 2021		As of January 2, 2021		(dollars in millions)	As of October 2, 2021		As of January 2, 2021
Principal amount of debt	Principal amount of debt	$	2,615.9	$	2,720.8	Principal amount of debt	$	2,596.7	$	2,720.8
Accrued interest	Accrued interest	17.6		17.3		Accrued interest	8.3		17.3
Deferred issuance costs	Deferred issuance costs	(34.8)		(29.4)		Deferred issuance costs	(33.2)		(29.4)
Carrying amount of debt	Carrying amount of debt	$	2,598.7	$	2,708.7	Carrying amount of debt	$	2,571.8	$	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 ~~$5.2~~$3.6 million.

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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 payable of $0.2 million due by Gates Global LLC and its subsidiaries to indirect parent entities of Gates Global LLC as of ~~July 3,~~October 2, 2021 (compared to a receivable of $0.6 million due to Gates Global LLC and its subsidiaries as of January 2, 2021) and additional cash and cash equivalents held by the Company and other indirect parent entities of Gates Global LLC of ~~$18.1~~$18.8 million and $4.2 million as of ~~July 3,~~October 2, 2021 and January 2, 2021, respectively.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Our market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices, 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. For a discussion of quantitative and qualitative disclosures about market risk, please refer to our annual report from which our exposure to market risk has not materially changed.

Item 4: Controls and Procedures

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of ~~July 3,~~October 2, 2021, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

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PART II — OTHER INFORMATION

Item 1: Legal Proceedings

Information regarding legal proceedings is incorporated into this Part II, Item 1 from note 18 of the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A: Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in Part I of the Company’s annual report, which could materially affect the Company’s business, financial condition, operating results or liquidity or future results. The risks described in the annual report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its results of operations, financial condition or liquidity. There have been no material changes to the risk factors disclosed in the annual report.

Item 6: Exhibits


Exhibit No.			Description
3.1			Certificate of Incorporation of Gates Industrial Corporation plc (incorporated by reference from Exhibit 3.1 to the registrant’s Amendment No. 1 to its Registration Statement on Form S-1, filed on January 8, 2018 (File No. 333-222310))
3.2			Articles of Association of Gates Industrial Corporation plc, effective October 7, 2019 (incorporated by reference from Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q, filed on November 6, 2019)
31.1			Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2			Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1			Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101			The following financial information from Gates Industrial Corporation’s Quarterly Report on Form 10-Q for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021, formatted in inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, (iii) Condensed Consolidated Balance Sheets as of ~~July 3,~~October 2, 2021 and January 2, 2021, (iv) Condensed Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, (v) Condensed Consolidated Statements of Shareholders’ Equity for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, and (vi) Notes to the Condensed Consolidated Financial Statements*
104			Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101)

* Filed herewith.

** Furnished herewith.

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

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SIGNATURES

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

GATES INDUSTRIAL CORPORATION PLC
(Registrant)

By:

/s/ L. Brooks Mallard

Name:

L. Brooks Mallard

Title:

Chief Financial Officer

(On behalf of the Registrant and as Principal Financial Officer)

Date: ~~August 9,~~November 8, 2021

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