The following discussion should be read in conjunction with our consolidated
financial statements and related notes thereto included elsewhere in this annual
report. This discussion and analysis addresses Fiscal 2020 and Fiscal 2019. For
discussion and analysis of our financial condition and results of operations for
Fiscal 2019 and Fiscal 2018, see the Management's Discussion and Analysis of
Financial Condition and Results of Operations, in Part II, Item 7 of our Annual
Report on Form 10-K for Fiscal 2019, which is incorporated   herein   by
reference. In addition to historical information, this discussion contains
forward-looking statements that involve risks, uncertainties and assumptions
that could cause actual results to differ materially from management's
expectations. Factors that could cause such differences are discussed in
"Forward-Looking Statements" and "Risk Factors" above.
Our Company
We are a global manufacturer of innovative, highly engineered power transmission
and fluid power solutions. We offer a broad portfolio of products to diverse
replacement channel customers and to original equipment ("first-fit")
manufacturers as specified components, with the majority of our revenue coming
from replacement channels. Our products are used in applications across numerous
end markets, which include construction, agriculture, energy, automotive,
transportation, general industrial, consumer products and many others. We sell
our products globally under the Gates brand, which is recognized by
distributors, equipment manufacturers, installers and end users as a premium
brand for quality and technological innovation; this reputation has been built
for over a century since Gates' founding in 1911. Within the diverse end markets
we serve, our highly engineered products are often critical components in
applications for which the cost of downtime is high relative to the cost of our
products, resulting in the willingness of end users to pay a premium for
superior performance and availability. These applications subject our products
to normal wear and tear, resulting in a natural replacement cycle that drives
high-margin, recurring revenue. Our product portfolio represents one of the
broadest ranges of power transmission and fluid power products in the markets we
serve, and we maintain long-standing relationships with a diversified group of
blue-chip customers throughout the world. As a leading designer, manufacturer
and marketer of highly engineered, mission-critical products, we have become an
industry leader across most of the regions and end markets in which we operate.
Business Trends
Our net sales have historically been, and remain, highly correlated with
industrial activity and utilization and not with any single end market given the
diversification of our business and high exposure to replacement channels. This
diversification limits our exposure to trends in any given end market. In
addition, a majority of our sales are generated from customers in replacement
channels, who serve primarily a large base of installed equipment that follows a
natural maintenance cycle that is somewhat less susceptible to various trends
that affect our end markets. Such trends include infrastructure investment and
construction activity, agricultural production and related commodity prices,
commercial and passenger vehicle production, miles driven and fleet age,
evolving regulatory requirements related to emissions and fuel economy and oil
and gas prices and production. Key indicators of our performance include
industrial production, industrial sales and manufacturer shipments.
During Fiscal 2020, sales into replacement channels accounted for approximately
64% of our total net sales. Our replacement sales cover a very broad range of
applications and industries and, accordingly, are highly correlated with
industrial activity and utilization and not a single end market. Replacement
products are principally sold through distribution partners that may carry a
very broad line of products or may specialize in products associated with a
smaller set of end market applications.
During Fiscal 2020, sales into first-fit channels accounted for approximately
36% of our total net sales. First-fit sales are to a variety of industrial and
automotive customers. Our industrial first-fit customers cover a diverse range
of industries and applications and many of our largest first-fit customers
manufacture construction and agricultural equipment. Among our automotive
first-fit customers, a majority of our net sales are to emerging market
customers, where we believe our first-fit presence provides us with a strategic
advantage in developing those markets and ultimately increasing our higher
margin replacement channel sales. First-fit automotive sales in developed
markets represented approximately 7% of our total net sales for Fiscal 2020,
with first-fit automotive sales in North America contributing less than 3% of
total net sales. As a result of the foregoing factors, we do not believe that
our historical consolidated net sales have had any meaningful correlation to
global automotive production but are positively correlated to industrial
production.
                                       38
--------------------------------------------------------------------------------
  Table of Contents
Our recently completed manufacturing footprint investments and other
productivity improvements in recent years have helped to position us to 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 2020 and 2021. 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 the
current and prior years.
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 2021, although to a lessening
degree as it impacts our business, as governments, companies and communities
implemented strict measures to minimize the spread of COVID-19. We are
prioritizing 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.
In early February 2020, as our business in China was being impacted, we
mobilized a centralized crisis response team that developed and is tactically
engaged in the implementation of our countermeasure actions across our global
footprint. We are adhering to local government mandates and guidance provided by
health authorities and have proactively implemented quarantine protocols, social
distancing policies, working from home arrangements, travel suspensions,
frequent and extensive disinfecting of our workspaces, provision of personal
protective equipment, and mandatory temperature monitoring at our facilities. We
expect to continue implementing these measures and we may take further actions
if required or recommended by government authorities or if we determine them to
be in the best interests of our employees, customers, and suppliers.
Our operations are supported largely by local supply chains. Where necessary, we
have taken steps to qualify additional suppliers to ensure we are able to
maintain continuity of supply. Although we have not experienced any significant
disruptions to date, certain Gates suppliers have, or may in the future,
temporarily close operations, delay order fulfillment or limit production due to
the pandemic. Continued disruptions, shipping delays or insolvency of key
vendors in our supply chain could make it difficult or more costly for us to
obtain the raw materials or other inputs we need for our operations.
Gates employs an in-region, for-region manufacturing strategy, under which local
operations primarily support local demand. In those cases where local production
supports demand in other regions, contingency plans have been activated as
appropriate. In addition to the handful of plants that were temporarily closed
by government mandates, we have proactively managed our output to expected
demand levels and occasionally suspended production at other plants for short
periods of time, predominantly in the first half of 2020. We may continue to
experience these production disruptions, which could place constraints on our
ability to produce our products and meet customer demand or increase our costs.
Of these temporary closures in the first half of 2020, the most significant for
us was in Greater China, where we closed all of our production facilities for
approximately three weeks, and in India, where our facilities were closed for
approximately six weeks. We have since safely returned these plants to more
normalized capacity. Our two largest regions of Europe and North America did not
begin to see an impact from COVID-19 until late March 2020. With large portions
of the economies in these regions having been effectively shut down during April
2020, we experienced significant year-over-year revenue declines most sharply in
that month, with significant month-over-month improvements in subsequent months.
As shelter-in-place requirements eased in various jurisdictions, unfortunately
accompanied in some cases by a resurgence in cases, there has been continued
progress in the fight against COVID-19. We have seen sequential improvements in
both the third and fourth quarters of 2020 compared to the second quarter of
2020, and we currently expect the first quarter of 2021 to show further
improvement compared to the fourth quarter. During this crisis, we have
maintained our ability to respond to demand improvements, and while we have
limited new capital expenditures, 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 $386.7 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 $521.4 million as of January 2, 2021. In addition,
our business also has a demonstrated ability to generate free cash flow even in
challenging environments.
                                       39
--------------------------------------------------------------------------------
  Table of Contents
As a result of the unpredictable and evolving impact of the pandemic and
measures being taken around the world to combat its spread, the timing and
trajectory of the recovery remain unclear at this time, and the adverse impact
of the pandemic on Gates' operations may continue to be material.
Despite this highly uncertain environment, our early experience in China, and
more recent experience in North America and EMEA, has helped frame our response
to this crisis and our focus in 2021 will continue to be on:
•safely supporting our employees, customers and the communities in which we
operate;
•actively managing what we can control in terms of our supply chains and
operations;
•managing our compressible costs to the prevailing demand conditions by tightly
controlling discretionary spending; and
•funding our key growth initiatives to enhance our differentiation in the market
and allow us to emerge from this downturn in an even stronger competitive
position.
Results for the year ended January 2, 2021 compared to the results for the year
ended December 28, 2019
Summary Gates Performance
                                                            For the year ended
                                                                       January 2,      December 28,
 (dollars in millions)                                                    2021             2019
 Net sales                                                            $ 2,793.0       $    3,087.1
 Cost of sales                                                          1,758.3            1,944.6
 Gross profit                                                           1,034.7            1,142.5
 Selling, general and administrative expenses                             776.9              777.3
 Transaction-related expenses                                               5.2                2.6
 Asset impairments                                                          5.2                0.7
 Restructuring expenses                                                    37.3                6.0
 Other operating (income) expenses                                         (1.0)               9.1
 Operating income from continuing operations                              211.1              346.8
 Interest expense                                                         154.3              157.8
 Other income                                                             (14.2)              (9.8)
 Income from continuing operations before taxes                            71.0              198.8
 Income tax benefit                                                       (19.3)            (495.9)
 Net income from continuing operations                                $    

90.3 $ 694.7



 Adjusted EBITDA(1)                                                   $   

506.6 $ 611.0


 Adjusted EBITDA margin                                                    18.1  %            19.8  %


(1)  See "-Non-GAAP Measures" for a reconciliation of Adjusted EBITDA to net
income from continuing operations, the closest comparable GAAP measure, for each
of the periods presented.
Net sales
Net sales during Fiscal 2020 were $2,793.0 million, compared to $3,087.1 million
during the prior year, a decrease of 9.5%, or $294.1 million. Our net sales for
Fiscal 2020 were adversely impacted by movements in average currency exchange
rates of $34.5 million compared to the prior year period, due principally to the
strengthening of the U.S. dollar against a number of currencies, in particular
the Brazilian Real and Mexican Peso. Excluding this impact, core sales decreased
by $259.6 million, or 8.4%, during Fiscal 2020 compared to the prior year,
driven primarily by lower volumes, offset partially by a benefit of $16.1
million from favorable pricing.
                                       40
--------------------------------------------------------------------------------
  Table of Contents
Core sales in our Power Transmission and Fluid Power businesses declined by 6.5%
and 11.6%, respectively, during Fiscal 2020. This decline in core sales was
driven by the impacts from the COVID-19 pandemic which adversely affected sales
to customers across all of our channels, particularly the industrial replacement
channel, which declined by $91.1 million compared to the prior year. Globally,
sales to our industrial customers declined by $153.3 million on a core basis,
compared to a $106.3 million decline in core sales to our automotive customers,
compared to the prior year. Most of the industrial decline came from North
America, which decreased by $111.0 million during Fiscal 2020, compared to the
prior year, driven by lower volumes in the construction, energy and heavy duty
vehicle end markets. Industrial sales in EMEA decreased by 10.6% compared to the
prior year, buoyed by strong sales in the second half, but reflecting the
weakness in the construction end market, and a decline of 4.3% in the general
industrial end market. Industrial sales in Greater China grew by $19.8 million
in Fiscal 2020 compared to the prior year, driven almost exclusively by sales to
our industrial first-fit customers, primarily in the general industrial and
heavy duty vehicle end markets.
Global sales to the automotive end markets declined by 7.6% during Fiscal 2020
compared to the prior year, driven by declines in North America, Greater China
and East Asia & India. In all of our regions, the decline was focused in the
first half of the year and we have seen steady recovery throughout the second
half of 2020 with sales broadly flat in the third quarter and growing by 8.7% in
the fourth quarter, compared to the prior year periods.
Cost of sales
Cost of sales for Fiscal 2020 was $1,758.3 million, compared to $1,944.6 million
for the prior year, a decrease of 9.6%, or $186.3 million. The decrease was
driven primarily by lower volumes, a function of lower demand resulting from the
COVID-19 pandemic. Favorable movements in average currency exchange rates
contributed a further $20.6 million to the decrease in cost of sales during
Fiscal 2020 compared to the prior year.
Gross profit
Gross profit for Fiscal 2020 was $1,034.7 million, down 9.4% from
$1,142.5 million for the prior year. This change was driven primarily by lower
volumes, offset partially by a benefit from favorable pricing of $16.1 million.
Our gross profit margin for Fiscal 2020 was unchanged from the prior year at
37.0%.
Selling, general and administrative expenses
SG&A expenses for Fiscal 2020 were $776.9 million compared to $777.3 million for
the prior year. This decrease of $0.4 million was driven primarily by higher
labor costs of $24.0 million (including higher severance), offset by savings on
most other cost categories, primarily travel, entertainment and marketing, and
variable costs related to decreased volumes.
Transaction-related expenses
Transaction-related expenses of $5.2 million were incurred during Fiscal 2020,
related primarily to payments made on resolution of certain contingencies that
affected the purchase price paid by Blackstone upon acquiring Gates in July
2014. Transaction-related expenses of $2.6 million were incurred during the
prior year period, related primarily to exploratory merger and acquisition
activity, as well as to corporate filings and transactions to provide the
Company with flexibility for future raising of capital and debt, share buybacks
and dividend payments. These expenses were offset partially by the release of an
accrual from a prior year period acquisition.
Restructuring expenses
As described further under "Business Trends" above, we have accelerated and
expanded upon our previously announced restructuring program, which is primarily
intended to optimize our manufacturing and distribution footprint over the
mid-term by removing structural fixed costs, and, to a lesser degree,
streamlining our SG&A back-office functions.
                                       41
--------------------------------------------------------------------------------
  Table of Contents
Restructuring expenses, including asset impairments, of $43.9 million were
recognized during Fiscal 2020, related primarily to the closure of a
manufacturing facility in Korea, a European reorganization involving office and
distribution center closures or downsizings and implementation of a regional
shared service center, and the closure of two North American manufacturing
facilities. The closure of the Korean facility resulted in severance and other
labor and benefit costs of $13.2 million, an impairment of inventory of $1.4
million (recognized in cost of sales) and an impairment of fixed assets of $4.8
million (recognized in asset impairments). Restructuring costs incurred in
relation to our European reorganization were $12.6 million, of which $11.4
million related to estimated severance.
Restructuring expenses, including asset impairments, of $7.9 million were
recognized during the prior year, related primarily to severance costs,
predominantly due to reductions in force across all regions and impairments of
inventory and fixed assets related to facility closures in countries including
France, the U.S., Turkey and Australia. During Fiscal 2019 we also incurred
$1.6 million of professional fees relating primarily to the closure of one of
our facilities in France, the reorganization of our European corporate center,
and a strategic restructuring of part of our Asian business.
Interest expense
                                                         For the year ended
                                                                     

January 2, December 28,


   (dollars in millions)                                                2021              2019

Debt:


   Dollar Term Loan                                                 $      

77.2 $ 80.7


   Euro Term Loan                                                          24.2               22.4
   Dollar Senior Notes                                                     35.9               35.4

   Other loans                                                              0.1                0.1
                                                                          137.4              138.6
   Amortization of deferred issuance costs                                 13.5               16.6
   Other interest expense                                                   3.4                2.6
                                                                    $     154.3      $       157.8


Details of our long-term debt are presented in note 15 to the consolidated
financial statements included elsewhere in this report.
Interest on debt for Fiscal 2020 decreased when compared to the prior year due
primarily to the lower interest rates applicable to the floating rate Dollar
Term Loan. This decrease was substantially offset by derivative hedging activity
on our cross currency and interest rate derivatives of $16.1 million during
Fiscal 2020 compared to the prior year.
The amortization of deferred issuance costs in Fiscal 2020 includes accelerated
amortization of $3.7 million due to the prepayment of $300.0 million against our
Dollar Term Loan facility on December 31, 2020, whereas Fiscal 2019 includes
accelerated amortization of $6.1 million due to the repayment of our outstanding
6.00% Senior Notes due 2022 as part of the refinancing transactions described
further in note 15 to the consolidated financial statements included elsewhere
in this report.
Other income
                                                                           For the year ended
                                                                                  January 2,          December 28,
(dollars in millions)                                                                2021                 2019
Interest income on bank deposits                                                $      (4.3)         $       (5.7)
Foreign currency gain on net debt and hedging instruments                              (5.3)                 (0.8)

Net adjustments related to post-retirement benefits                                    (4.5)                 (3.1)
Other                                                                                  (0.1)                 (0.2)
                                                                                $     (14.2)         $       (9.8)


Other income for Fiscal 2020 was $14.2 million, compared to $9.8 million in the
prior year. Lower interest on bank deposits due to lower interest rates was more
than offset by higher gains from movements in foreign currency exchange rates on
net debt and hedging instruments during Fiscal 2020 compared to the prior year.
In addition, we recognized net settlement and curtailment gains in relation to
our post-retirement benefit plans of $2.1 million during Fiscal 2020, compared
to $0.7 million in the prior year.
                                       42
--------------------------------------------------------------------------------
  Table of Contents
Income tax benefit
For Fiscal 2020, we had an income tax benefit of $19.3 million on pre-tax income
of $71.0 million, which resulted in an effective tax rate of (27.2%) compared to
an income tax benefit of $495.9 million on pre-tax income of $198.8 million,
which resulted in an effective tax rate of (249.4)% for Fiscal 2019.
The increase in the effective tax rate for Fiscal 2020 compared to the prior
year was due primarily to the recognition in the prior year of a $579.0 million
tax benefit related to the release of valuation allowances, related mainly to
Luxembourg net operating losses, offset partially by a tax expense of $59.7
million from related unrecognized tax benefits, both resulting from our European
business reorganization. In addition to the business reorganization, our
effective tax rate for Fiscal 2020 benefited from certain tax items including
$32.3 million for audit settlements, changes in valuation allowances and tax law
changes. Fiscal 2019 also included $12.0 million of net tax benefits, consisting
of a benefit in tax on international operations of $19.9 million, offset
partially by an increase of $7.9 million in unrecognized tax benefits.
Deferred Income Tax Assets and Liabilities
We recognize deferred tax assets and liabilities for future tax consequences
arising from differences between the carrying amounts of existing assets and
liabilities under U.S. GAAP and their respective tax bases, and for net
operating loss carryforwards and tax credit carryforwards. We evaluate the
recoverability of our deferred tax assets, weighing all positive and negative
evidence, and are required to establish or maintain a valuation allowance for
these assets if we determine that it is more likely than not that some or all of
the deferred tax assets will not be realized. The weight given to the evidence
is commensurate with the extent to which the evidence can be objectively
verified. If negative evidence exists, positive evidence is necessary to support
a conclusion that a valuation allowance is not needed.
Our framework for assessing the recoverability of deferred tax assets requires
us to weigh all available evidence, including:
•taxable income in prior carry back years if carry back is permitted under the
relevant tax law;
•future reversal of existing temporary differences;
•tax-planning strategies that are prudent and feasible; and
•future taxable income exclusive of reversing temporary differences and
carryforwards.
After weighing all of the evidence, giving more weight to the evidence that was
objectively verifiable, we determined in Fiscal 2020 that it was more likely
than not that deferred tax assets in the U.K., Luxembourg, and Belgium totaling
$29.5 million were realizable. Similarly, we determined in Fiscal 2019 that it
was more likely than not that deferred income tax assets in Luxembourg, the
U.K., and the U.S. totaling $586.2 million were realizable.
In Fiscal 2020, the deferred tax assets above relate primarily to disallowed
interest carryforwards of $26 million in these jurisdictions which have no
expiration. As a result of changes in estimates of future taxable profits, in
the third quarter of Fiscal 2020, due primarily to the impact of anticipated
changes to the composition of our intercompany financing arrangements, our
judgment changed regarding valuation allowances on these deferred tax assets.
The change in estimates and resulting change in judgment relate to the
evaluation of proposed international tax law changes advanced during the period.
Included within the $586.2 million of valuation allowances released in Fiscal
2019 are deferred income tax assets totaling $579.0 million related to €2.1
billion of indefinite lived net operating losses in Luxembourg for which our
evaluation of the positive and negative evidence changed during the first
quarter of Fiscal 2019 due to the implementation of our European corporate
center. Our European corporate center was implemented in Fiscal 2019 to
centralize and strengthen regional operations in Europe, which thereafter became
centrally managed from Luxembourg.
                                       43
--------------------------------------------------------------------------------
  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.
Significant Events
On March 27, 2020, the CARES Act was enacted and signed into law in the U.S. in
response to the COVID-19 pandemic. One of the provisions of this law is an
increase to the allowable business interest deduction from 30% of adjusted
taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax
years. This modification significantly increases the current deductible interest
expense of the Company for both years, which will result in a cash benefit while
increasing our effective tax rate through requirements to allocate and apportion
interest expense for certain other tax purposes, including in determining our
global intangible low-taxed income inclusion, deduction for foreign derived
intangible income, and the utilization of foreign tax credits.
Adjusted EBITDA
Adjusted EBITDA for Fiscal 2020 was $506.6 million, compared to $611.0 million
in the prior year, a decrease of 17.1% or $104.4 million. The Adjusted EBITDA
margin was 18.1% for Fiscal 2020, a 170 basis point decrease from the prior
year. The decrease in Adjusted EBITDA was driven primarily by the impact from
reduced volumes and resulting lower fixed cost absorption.
For a reconciliation of net income to Adjusted EBITDA for each of the periods
presented and the calculation of the Adjusted EBITDA margin, see "-Non-GAAP
Measures."
Analysis by Operating Segment
Power Transmission (64.5% of Gates' net sales for the year ended January 2,
2021)
                                    For the year ended
                               January 2,      December 28,
     (dollars in millions)        2021             2019           Period over period change
     Net sales                $ 1,800.2       $    1,945.7                          (7.5  %)
     Adjusted EBITDA          $   353.0       $      412.6                         (14.4  %)
     Adjusted EBITDA margin        19.6  %            21.2  %


Net sales in Power Transmission for Fiscal 2020 were $1,800.2 million, compared
to $1,945.7 million in the prior year, a decrease of 7.5%, or $145.5 million.
Excluding the adverse impact of movements in average currency exchange rates of
$18.4 million, core sales decreased by 6.5%, or $127.1 million, compared to the
prior year, driven primarily by lower volumes.
Power Transmission's core sales decline was driven primarily by a combination of
weak demand and widespread shutdowns resulting from measures taken in response
to the COVID-19 pandemic. These factors impacted sales to our automotive
customers in particular, with automotive first-fit and automotive replacement
sales decreasing by 14.1% and 4.7%, respectively, during Fiscal 2020 compared to
the prior year. Most of this decline came from the automotive replacement
channel in North America and the automotive first-fit channels in Greater China
and East Asia & India. Partially offsetting these declines was growth of 4.4% in
sales to our industrial first-fit customers, primarily in Greater China and
EMEA, driven by the general industrial and heavy duty vehicle end markets. We
also saw modest growth of 5.3% in the construction end market for Fiscal 2020
compared to the prior year, particularly in North America. Sequentially, all
regions grew during the fourth quarter compared to the third quarter, with North
America growing by 9.3% and EMEA by 5.5%.
Power Transmission Adjusted EBITDA for Fiscal 2020 was $353.0 million, compared
to $412.6 million in the prior year, a decrease of 14.4% or $59.6 million. The
Adjusted EBITDA margin for Fiscal 2020 was 19.6%, a 160 basis point decline from
the prior year. The decreases compared to the prior year were driven primarily
by lower volumes and resulting lower fixed cost absorption.
                                       44
--------------------------------------------------------------------------------
  Table of Contents
Fluid Power (35.5% of Gates' net sales for the year ended January 2, 2021)
                                    For the year ended
                              January 2,       December 28,
    (dollars in millions)        2021              2019           Period over period change
    Net sales                $    992.8       $    1,141.4                         (13.0  %)
    Adjusted EBITDA          $    153.6       $      198.4                         (22.6  %)
    Adjusted EBITDA margin         15.5  %            17.4  %


Net sales in Fluid Power for Fiscal 2020 were $992.8 million, compared to
$1,141.4 million in the prior year, a decrease of 13.0%, or $148.6 million.
Excluding the adverse impact of movements in average currency exchange rates of
$16.1 million, core sales decreased by 11.6%, or $132.5 million, compared to the
prior year, driven primarily by lower volumes.
Fluid Power's core sales decline in Fiscal 2020 was driven almost exclusively by
lower sales to our industrial customers, across all regions, except for Greater
China. The combination of weak demand and widespread shutdowns resulting from
measures taken in response to the COVID-19 pandemic impacted almost all of our
end markets, but particularly construction, which declined during Fiscal 2020 by
17.4% compared to the prior year. Sales to the automotive end market returned to
growth in Fiscal 2020 compared to the prior year, growing by 2.2%, driven
primarily by EMEA. Sequentially, most regions grew by double-digits during the
fourth quarter, compared to the third quarter, with North America growing by
18.4% and EMEA by 15.5%.
Fluid Power Adjusted EBITDA for Fiscal 2020 was $153.6 million, compared to
$198.4 million in the prior year period, a decrease of 22.6%, or $44.8 million.
The Adjusted EBITDA margin for Fiscal 2020 was 15.5%, a 190 basis point decline
from the prior year. The decreases compared to the prior year were driven
primarily by lower volumes and resulting lower fixed cost absorption.
Liquidity and Capital Resources
Treasury Responsibilities and Philosophy
Our primary liquidity and capital resource needs are for working capital, debt
service requirements, capital expenditures, facility expansions and
acquisitions. We expect to finance our future cash requirements with cash on
hand, cash flows from operations and, where necessary, borrowings under our
revolving credit facilities. We have historically relied on our cash flow from
operations and various debt and equity financings for liquidity.
From time to time, we enter into currency derivative contracts to manage
currency transaction exposures. Similarly from time to time, we may enter into
interest rate derivatives to maintain the desired mix of floating and fixed rate
debt.
As market conditions warrant, we and our majority equity holders, Blackstone and
its affiliates, may from time to time, seek to repurchase 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. While we have seen a
decline in our business during 2020, and the duration and extent of the impacts
of the COVID-19 pandemic on our business are difficult to predict, we do not
currently anticipate any material long-term deterioration in our overall
liquidity position in the foreseeable future. Further, 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 as of January 2, 2021, we have adequate liquidity and
capital resources for the next twelve months.
                                       45
--------------------------------------------------------------------------------
  Table of Contents
Cash Flow
Year ended January 2, 2021 compared to the year ended December 28, 2019
Cash provided by operations was $309.0 million during Fiscal 2020 compared to
cash provided by operations of $348.9 million during the prior year. This
decrease was driven primarily by lower operating performance due to the
difficult demand environment during the current year, offset partially by lower
cash interest and tax payments. Interest paid was lower at $135.7 million during
Fiscal 2020, compared to $150.8 million in the prior year, due primarily to
timing of interest payments. Net income taxes paid were also lower, with
$60.4 million paid during Fiscal 2020 compared to $108.8 million in the prior
year, largely a function of refunds received and lower tax payments based on the
decrease in taxable profits.
Net cash used in investing activities during Fiscal 2020 was $77.5 million,
compared to $78.0 million in the prior year. Capital expenditures decreased by
$15.7 million from $83.1 million in prior year to $67.4 million in Fiscal 2020,
which was mostly offset by lower cash received under corporate-owned life
insurance policies of $10.5 million and lower net cash flows from other
investing activities of $4.5 million (primarily lower proceeds from the sale of
property, plant and equipment).
Net cash used in financing activities was $353.8 million during Fiscal 2020,
compared to $59.3 million in the prior year. This higher cash outflow was driven
primarily by the prepayment of $300.0 million against our Dollar Term Loan
facility in December 2020.
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
                                               As of January 2,             As of December 28,          As of January 2,           As of December 28,
(dollars in millions)                                2021                          2019                       2021                        2019
Debt:
-Secured
Term Loans (U.S. dollar and Euro
denominated)                               $                2,131.2       $              2,395.0       $           2,152.6       $              2,416.8

-Unsecured


Senior Notes (U.S. dollar)                                    577.3                        563.2                     568.0                        568.0
Other debt                                                      0.2                          0.2                       0.2                          0.2
                                           $                2,708.7       $              2,958.4       $           2,720.8       $              2,985.0


Details of our long-term debt are presented in note 15 to the consolidated
financial statements included elsewhere in this annual report.
Debt issuances and redemptions
On December 31, 2020, we made a principal debt prepayment of $300.0 million
against our Dollar Term Loan facility.
On November 22, 2019, we issued and sold $568.0 million of unsecured Dollar
Senior Notes, described further below. The proceeds from this debt issuance were
used on December 5, 2019 to redeem all $568.0 million of our outstanding 6.00%
Dollar Senior Notes, plus interest accrued up to and including the redemption
date of $13.2 million. The majority of the costs totaling approximately $8.6
million related to the refinancing transactions have been deferred and will be
amortized to interest expense over the remaining term of the related borrowings
using the effective interest method.
Dollar and Euro Term Loans
Our secured credit facilities include a Dollar Term Loan credit facility and a
Euro Term Loan credit facility that were drawn on July 3, 2014. These facilities
mature on March 31, 2024. These term loan facilities bear interest at a floating
rate. As of January 2, 2021, borrowings under the Dollar Term Loan facility,
which currently bears interest at LIBOR, subject to a floor of 1.00%, plus a
margin of 2.75%, bore interest at a rate of 3.75% per annum. The Dollar Term
Loan interest rate is re-set on the last business day of each month. As of
January 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.
                                       46
--------------------------------------------------------------------------------
  Table of Contents
Both term loans are subject to quarterly amortization payments of 0.25%, based
on the original principal amount less certain prepayments with the balance
payable on maturity. During Fiscal 2020, we made amortization payments against
the Dollar Term Loan and the Euro Term Loan of $21.7 million and $9.4 million,
respectively. During Fiscal 2019, we made amortization payments against the
Dollar Term Loan and the Euro Term Loan of $17.3 million and $7.4 million,
respectively.
During the periods presented, foreign exchange (losses) gains were recognized in
respect of the Euro Term Loans as summarized in the table below. As a portion of
the facility was designated as a net investment hedge of certain of our Euro
investments, a corresponding portion of the foreign exchange (losses) gains were
recognized in other comprehensive income ("OCI").
                                                                        For the year ended
                                                                                 January 2,          December 28,
(dollars in millions)                                                               2021                 2019
(Loss) gain recognized in statement of operations                              $     (51.4)         $       17.3
Loss recognized in OCI                                                               (15.5)                 (0.2)
Total (loss) gain                                                              $     (66.9)         $       17.1


The above net foreign exchange (losses) gains recognized in the Other (income)
expenses line of the consolidated statement of operations have been
substantially offset by net foreign exchange movements on Euro-denominated
intercompany loans as part of our overall hedging strategy.
Our Term Loans, which mature after 2021, use LIBOR as a benchmark for
establishing the rate of interest. LIBOR is the subject of recent national,
international and other regulatory guidance and proposals for reform and is not
expected to be maintained after 2021. The transition to alternatives to LIBOR
could be modestly disruptive to credit markets, and while we don't believe that
the impact would be material to us, we do not yet have insight into what those
impacts might be.
Unsecured Senior Notes
As of December 28, 2019, we had $568.0 million of 6.25% 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 6.25% 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.
As of both January 2, 2021 and December 28, 2019, there were no drawings for
cash under the revolving credit facility and there were no letters of credit
outstanding.
                                       47
--------------------------------------------------------------------------------
  Table of Contents
Asset-Backed Revolver
We have a revolving credit facility backed by certain of our assets in North
America. The facility allows for loans of up to a maximum of $325.0 million
($230.2 million as of January 2, 2021, compared to $294.6 million as of
December 28, 2019, 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. The
facility matures on January 29, 2023.
As of both January 2, 2021 and December 28, 2019, there were no drawings for
cash under the asset-backed revolver, but there were letters of credit
outstanding of $28.5 million and $50.1 million, respectively.
Non-guarantor subsidiaries
The majority of the Company's U.S. subsidiaries are guarantors of the senior
secured credit facilities.
For the twelve months ended January 2, 2021, before intercompany eliminations,
our non-guarantor subsidiaries represented approximately 70% of our net sales
and 63% of our EBITDA as defined in the financial covenants attaching to the
senior secured credit facilities. As of January 2, 2021, before intercompany
eliminations, our non-guarantor subsidiaries represented approximately 57% of
our total assets and approximately 24% 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 Fiscal 2020, our
net debt decreased by $150.3 million from $2,349.7 million as of December 28,
2019 to $2,199.4 million as of January 2, 2021. Excluding changes in foreign
currency exchange rates, the decrease in net debt during Fiscal 2020 was driven
primarily by the increase in cash, a function of cash provided by operating
activities of $309.0 million, offset partially by capital expenditures of $67.4
million, dividends paid to non-controlling shareholders of $19.0 million and net
cash paid under corporate-owned life insurance policies of $9.4 million.
Partially offsetting this decrease in net debt were movements in foreign
currency exchange rates, which had an unfavorable net impact of $57.1 million on
net debt during Fiscal 2020, with the majority of the movement relating to the
impact of the strengthening of the Euro against the U.S. dollar on our
Euro-denominated debt.
Borrowing Headroom
As of January 2, 2021, our asset-backed revolving credit facility had a
borrowing base of $230.2 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 $28.5 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 $386.7 million, in addition to
cash balances of $521.4 million.
Tabular Disclosure of Contractual Obligations
Our consolidated contractual obligations and commercial commitments are
summarized in the following table which includes aggregate information about our
contractual obligations as of January 2, 2021 and the periods in which payments
are due, based on the earliest date on which we could be required to settle the
liabilities. The table below excludes our gross liability for uncertain tax
positions of $111.5 million because the timing of cash settlement, if any, is
unknown at this time.
Floating interest payments and payments and receipts on interest rate
derivatives are estimated based on market interest rates prevailing at the
balance sheet date. Amounts in respect of purchase obligations are items that we
are obligated to pay in the future, but they are not required to be included on
the consolidated balance sheet.
                                       48

--------------------------------------------------------------------------------

Table of Contents

Earliest period in which payments are due


                                                                                                                               2026 and
(dollars in millions)                   Total                2021              2022 and 2023           2024 and 2025            beyond
Bank overdrafts and debt:
-Principal                           $ 2,720.8          $      25.4          $         50.5          $      2,076.9          $    568.0
-Interest payments(1)(2)                 441.7                113.6                   221.0                    89.3                17.8
Derivative financial instruments(3)      105.1                 15.1                    69.8                    20.2                   -
Finance leases                             3.1                  1.1                     1.7                     0.3                   -
Operating leases                         174.0                 27.8                    40.2                    28.9                77.1
Post-retirement benefits(4)               16.4                 16.4                       -                       -                   -
Indemnified tax liabilities                0.9                  0.8                     0.1                       -                   -
Purchase obligations(5)                   30.2                 14.1                    11.8                     4.2                 0.1
Total                                $ 3,492.2          $     214.3          $        395.1          $      2,219.8          $    663.0


(1)  Future interest payments include payments on fixed and floating rate debt.
(2)  Floating rate interest payments are estimated based on market interest
rates and terms prevailing as of January 2, 2021.
(3)  Net payments on cross currency swaps, interest rate caps, interest rate
swaps and currency forward contracts are estimated based on market rates
prevailing as of January 2, 2021.
(4)  Post-retirement benefit obligations represent our expected cash
contributions to defined benefit pension and other post-retirement benefit plans
in 2021. It is not practicable to present expected cash contributions for
subsequent years because they are determined annually on an actuarial basis to
provide for current and future benefits in accordance with federal law and other
regulations.
(5)  A purchase obligation is defined as an agreement to purchase goods or
services that is enforceable and legally binding on us and that specifies all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the
transaction.

Cash Balances
As of January 2, 2021, our total cash and cash equivalents were $521.4 million,
compared to $635.3 million as of December 28, 2019.
Restricted cash was $2.7 million as of January 2, 2021, compared to $1.3 million
as of December 28, 2019, including $1.0 million as of January 2, 2021 and
$1.0 million as of December 28, 2019, which was held in escrow for insurance
purposes. Cash held in our non-wholly owned Asian subsidiaries was
$152.7 million and $141.5 million as of January 2, 2021 and December 28, 2019,
respectively.
Distributable Reserves
Under the laws of England and Wales, future dividend payments or share
repurchases may only be made out of "distributable reserves" on the Company's
statutory balance sheet. During August 2019, the High Court of Justice in London
sanctioned a reduction in the Company's statutory capital for the purpose of
creating distributable reserves by approving the cancellation of the deferred
shares in issue and the cancellation of the entire amount standing to the credit
of the Company's share premium account, creating $5.5 billion of distributable
reserves. These transactions, which have no impact on the consolidated U.S. GAAP
financial statements, facilitate the possible future payment of dividends to
shareholders of the Company or possible future share repurchases.
                                       49
--------------------------------------------------------------------------------
  Table of Contents
Non-GAAP Measures
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP measure that represents net income or loss for the period
before the impact of income taxes, net interest and other expenses, depreciation
and amortization. EBITDA is widely used by securities analysts, investors and
other interested parties to evaluate the profitability of companies. EBITDA
eliminates potential differences in performance caused by variations in capital
structures (affecting net finance costs), tax positions (such as the
availability of net operating losses against which to relieve taxable profits),
the cost and age of tangible assets (affecting relative depreciation expense)
and the extent to which intangible assets are identifiable (affecting relative
amortization expense).
Management uses Adjusted EBITDA as its key profitability measure. This is a
non-GAAP measure that represents EBITDA before certain items that are considered
to hinder comparison of the performance of our businesses on a
period-over-period basis or with other businesses. We use Adjusted EBITDA as our
measure of segment profitability to assess the performance of our businesses,
and it is used for total Gates as well because we believe it is important to
consider our profitability on a basis that is consistent with that of our
operating segments, as well as that of our peer companies with a similar
leveraged, private equity ownership history. We believe that Adjusted EBITDA
should, therefore, be made available to securities analysts, investors and other
interested parties to assist in their assessment of the performance of our
businesses.
During the periods presented, the items excluded from EBITDA in computing
Adjusted EBITDA primarily included:
•non-cash charges in relation to share-based compensation;
•transaction-related expenses incurred in relation to business combinations and
major corporate transactions, including acquisition integration activities;
•asset impairments;
•restructuring expenses, including severance-related expenses;
•net gains or losses 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 from continuing operations for
the period.
                                       50
--------------------------------------------------------------------------------
  Table of Contents
The following table reconciles net income from continuing operations, the most
directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:
                                                                            

For the year ended


                                                                                January 2,           December 28,           December 29,
(dollars in millions)                                                              2021                  2019                   2018
Net income from continuing operations                                       

$ 90.3 $ 694.7 $ 271.7 Income tax (benefit) expense

                                                        (19.3)                (495.9)                  31.8
Net interest and other expenses                                                     140.1                  148.0                  193.3
Depreciation and amortization                                                       218.6                  222.2                  218.5
EBITDA                                                                              429.7                  569.0                  715.3
Transaction-related expenses                                                          5.2                    2.6                    6.7
Asset impairments                                                                     5.2                    0.7                    0.6
Restructuring expenses                                                               37.3                    6.0                    6.4

Share-based compensation expense                                                     19.8                   15.0                    6.0

Sponsor fees (included in other operating (income) expenses)

                                                                             1.9                    6.5                    8.0

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

                                                                          -                      -                    0.3

Inventory impairments and adjustments (included in cost of sales)

                                                                                1.4                    1.2                    1.2
Duplicate expenses incurred on facility relocation                                      -                      -                    5.2
Severance expenses (included in cost of sales)                                        1.0                    4.0                    1.7
Other primarily severance expenses (included in SG&A)                                 8.0                    3.4                    4.4
Other items not directly related to current operations                               (2.9)                   2.6                      -
Adjusted EBITDA                                                               $     506.6          $       611.0          $       755.8


Adjusted EBITDA Margin
Adjusted EBITDA margin is a non-GAAP measure that represents Adjusted EBITDA
expressed as a percentage of net sales. We use Adjusted EBITDA margin to measure
the success of our businesses in managing our cost base and improving
profitability.
                                                   For the year ended
                                                 January 2,      December 28,       December 29,
           (dollars in millions)                    2021             2019               2018
           Net sales                            $ 2,793.0       $    3,087.1       $    3,347.6
           Adjusted EBITDA                      $   506.6       $      611.0       $      755.8
           Adjusted EBITDA margin                    18.1  %            19.8  %            22.6  %


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.
                                       51

--------------------------------------------------------------------------------

Table of Contents


                                                                     For the year ended January 2, 2021
(dollars in millions)                                  Power Transmission             Fluid Power            Total

Net sales for the year ended January 2, 2021 $ 1,800.2

          $     992.8          $ 2,793.0
Impact on net sales of movements in currency rates                18.4                      16.1               34.5

Core revenue for the year ended January 2, 2021                1,818.6                   1,008.9            2,827.5

Net sales for the year ended December 28, 2019                 1,945.7                   1,141.4            3,087.1

Decrease in net sales on a core basis (core revenue) $ (127.1)

$    (132.5)         $  (259.6)

Core revenue decline                                              (6.5)  %                 (11.6) %            (8.4) %



                                                                      For the year ended December 28, 2019
(dollars in millions)                                    Power Transmission              Fluid Power           Total

Net sales for the year ended December 28, 2019 $ 1,945.7

             $  1,141.4          $ 3,087.1
Impact on net sales of movements in currency rates                  56.5                      20.5               77.0
Impact on net sales from recent acquisitions                           -                      (7.5)              (7.5)
Core revenue for the year ended December 28, 2019                2,002.2                   1,154.4            3,156.6

Net sales for the year ended December 29, 2018                   2,098.8                   1,248.8            3,347.6

Decrease in net sales on a core basis (core revenue) $ (96.6)

$    (94.4)         $  (191.0)

Core revenue decline                                                (4.6)  %                  (7.6) %            (5.7) %


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 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:
                                           As of January 2,       As of December 28,
      (dollars in millions)                      2021                    2019

      Principal amount of debt            $         2,720.8      $         

2,985.0


      Less: Cash and cash equivalents                (521.4)               

 (635.3)
      Net debt                            $         2,199.4      $          2,349.7


                                       52

--------------------------------------------------------------------------------
  Table of Contents
The principal amount of debt is reconciled to the carrying amount of debt as
follows:
                                      As of January 2,       As of December 

28,


          (dollars in millions)             2021                    2019

Principal amount of debt $ 2,720.8 $ 2,985.0


          Accrued interest                        17.3                    

15.2


          Deferred issuance costs                (29.4)                  

(41.8)

Carrying amount of debt $ 2,708.7 $ 2,958.4




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 $15.1 million.
Gates Industrial Corporation plc is not an obligor under our revolving credit
facility, our term loan facility or the indenture governing our outstanding
notes. Gates Global LLC, an indirect subsidiary of Gates Industrial Corporation
plc, is the borrower under our revolving credit facility and our term loan
facility and the issuer of our outstanding notes. The only significant
difference between the results of operations and net assets that would be shown
in the consolidated financial statements of Gates Global LLC and those for the
Company that are included elsewhere in this report is a receivable of
$0.6 million and $9.2 million as of January 2, 2021 and December 28, 2019,
respectively, due to Gates Global LLC and its subsidiaries from indirect parent
entities of Gates Global LLC and additional cash and cash equivalents held by
the Company of $4.2 million and $2.0 million as of January 2, 2021 and
December 28, 2019, respectively.
Critical Accounting Estimates and Judgments
Details of our significant accounting policies are set out in note 2 to our
audited consolidated financial statements included elsewhere in this annual
report.
When applying our accounting policies, we must make assumptions, judgments and
estimates concerning the future that affect reported amounts of assets,
liabilities, revenue and expenses. We makes these assumptions, estimates and
judgments based on factors such as historical experience, the observance of
trends in the industries in which we operate and information available from our
customers and other outside sources. Due to the inherent uncertainty involved in
making assumptions, estimates and judgments, the actual outcomes could be
different. The policies discussed below are considered by management to be more
critical than other policies because their application involves a significant
amount of estimation uncertainty that increases the risk of a material
adjustment to the carrying amounts of our assets and liabilities.
Net Sales
We derive our net sales primarily from the sale of a wide range of power
transmission and fluid power products and components for a large variety of
industrial and automotive applications, both in the aftermarket and first-fit
channels, throughout the world.
In the substantial majority of our agreements with customers, we consider
accepted customer purchase orders, which in some cases are governed by master
sales agreements, to represent the contracts with our customers. Revenue from
the sale of goods under these contracts is measured at the invoiced amount, net
of estimated returns, early settlement discounts and rebates. Taxes collected
from customers relating to product sales and remitted to government authorities
are excluded from revenues. Where a customer has the right to return goods,
future returns are estimated based on historical returns profiles. Settlement
discounts that may apply to unpaid invoices are estimated based on the
settlement histories of the relevant customers.
                                       53
--------------------------------------------------------------------------------
  Table of Contents
Our transaction prices often include variable consideration, usually in the form
of discounts and rebates that may apply to issued invoices. The reduction in the
transaction price for variable consideration requires that we make estimates of
the expected total qualifying sales to the relevant customers. These estimates,
including an analysis for potential constraint on variable consideration, take
into account factors such as the nature of the rebate program, historical
information and expectations of customer and consumer behavior. Overall, the
transaction price is reduced to reflect our estimate of the amount of
consideration that is not probable of significant reversal.
We allocate the transaction price to each distinct performance obligation based
on their relative standalone selling price. The product price as specified on
the accepted purchase order or similar binding contract is considered to be the
standalone selling price. In substantially all of our contracts with customers,
our performance obligations are satisfied at a point in time, rather than over a
period of time, when control of the product is transferred to the customer. This
occurs typically at shipment. In determining whether control has transferred and
the customer is consequently able to control the use of the product for their
own benefit, we consider if there is a present right to payment, legal title and
physical possession has been transferred, whether the risks and rewards of
ownership have transferred to the customer, and if acceptance of the asset by
the customer is more than perfunctory.
Impairment of Goodwill and Other Indefinite-Lived Assets
Goodwill and other indefinite-lived intangible assets are subject to an annual
impairment test but are also tested for impairment if an event occurs or
circumstances change that would more likely than not reduce the fair value below
its carrying amount.
Goodwill
Goodwill arising in a business combination is allocated to the reporting unit
that is expected to benefit from the synergies of the acquisition. Where
goodwill is attributable to more than one reporting unit, the goodwill is
determined by allocating the purchase consideration in proportion to their
respective business enterprise values and comparing the allocated purchase
consideration with the fair value of the identifiable assets and liabilities of
the reporting unit.
Goodwill is not amortized but is tested for impairment on the first day of the
fourth quarter or more frequently whenever events or changes in circumstances
indicate that the carrying value may not be recoverable and is carried at cost
less any recognized impairment.
To identify a potential impairment of goodwill, the fair value of the reporting
unit to which the goodwill is allocated is compared to its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its carrying
amount, the goodwill of the reporting unit is not considered impaired. If the
fair value is lower than the carrying amount, an impairment charge is recognized
for the amount by which the carrying amount exceeds the reporting unit's fair
value, limited to the amount of goodwill allocated to that reporting unit.
Management based the fair value calculations on a weighted blend of the income
and market approaches. The income approach was based on cash flow forecasts
derived from the most recent financial plans approved by the board of directors,
in which the principal assumptions were those regarding sales growth rates,
selling prices and changes in direct costs. Forecasts for the following two
years were based on region-specific growth assumptions determined by management,
taking into account strategic initiatives.
Cash flows for each of the reporting units for the years beyond this period were
projected to grow at compound annual growth rates reflecting annual decreases
over the next seven years from the 2023 growth rates to the terminal growth
rate. For Gates as a whole, this growth rate was 4.0%. The terminal growth rate
for both reporting units was set at 2.5%, a rate that does not exceed the
expected long-term growth rates in the respective principal end markets.
Management applied discount rates to the resulting cash flow projections that
reflect current market assessments of the time value of money and the risks
specific to each reporting unit. In each case, the discount rate was determined
using a capital asset pricing model. The discount rates used in the impairment
tests of goodwill during Fiscal 2020 were 9.0% for both reporting units.
For both reporting units, the fair values exceeded the carrying values and no
goodwill impairments were therefore recognized during Fiscal 2020. A decline in
the fair value of greater than 38% and 29% on our Power Transmission and Fluid
Power reporting units, respectively, all else being equal, would result in an
impairment of the goodwill allocated to those reporting units.
                                       54
--------------------------------------------------------------------------------
  Table of Contents
We base our fair value estimates on assumptions we believe to be reasonable at
the time but that are unpredictable and inherently uncertain. In addition, we
make certain judgments and assumptions in allocating goodwill between reporting
units and in allocating shared assets and liabilities to determine the carrying
values for each of our reporting units tested. Changes in assumptions or
circumstances could result in an additional impairment in the period in which
the change occurs and in future years.
Indefinite-Lived Assets Other than Goodwill
To identify a potential impairment of indefinite-lived assets other than
goodwill, the fair value of the asset is compared to its carrying amount. If the
fair value of the indefinite-lived asset exceeds its carrying amount, it is not
considered impaired. Fair value is calculated based on the anticipated net cash
inflows and outflows related to the indefinite-lived asset.
During the periods covered by this annual report, we held an indefinite-lived
brand and trade name intangible asset. We test the intangible for impairment on
the first day of the fourth quarter or more frequently whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
and is carried at cost less any recognized impairment.
The fair value for our indefinite-lived brand and trade name intangible asset
was determined using a relief from royalty valuation methodology in which the
key assumptions included sales growth rates and an estimated royalty rate. Sales
forecasts were determined on the same basis as those used for the annual
impairment testing of goodwill (as described above).
Management applied discount rates to the calculated royalty savings that reflect
current market assessments of the time value of money and the risks specific to
each region in which those royalty savings arose. In each case, the discount
rate was determined using a capital asset pricing model adjusted for a premium
to reflect the higher risk specific to the nature of the intangible asset. The
discount rate used in Fiscal 2020 impairment test was 10.0%. As a result of the
impairment testing, no impairment was recognized during Fiscal 2020. All else
being equal, a decline in the fair value of greater than 37% in the fair value
of the brand and trade name intangible asset would result in an impairment.
We base our fair value estimates on assumptions we believe to be reasonable at
the time but that are unpredictable and inherently uncertain. Changes in
assumptions or circumstances could result in an additional impairment in the
period in which the change occurs and in future years.
Taxation
We are subject to income tax in most of the jurisdictions in which we operate.
Management is required to exercise significant judgment in determining our
provision for income taxes. Management's judgment is required in relation to
unrecognized income tax benefits whereby additional current tax may become
payable in the future following the audit by tax authorities of previously-filed
tax returns. It is possible that the final outcome of these unrecognized income
tax benefits may differ from management's estimates.
Management assesses unrecognized income tax benefits based upon an evaluation of
the facts, circumstances and information available at the balance sheet date.
Provision is made for unrecognized tax benefits to the extent that the amounts
previously taken or expected to be taken in tax returns exceeds the tax benefits
that are recognized in the consolidated financial statements in respect of the
tax positions. A tax benefit is recognized in the consolidated financial
statements only if management considers that it is more likely than not that the
tax position will be sustained on examination by the relevant tax authority
solely on the technical merits of the position and is measured as the largest
amount of tax benefit that is greater than 50% likely of being realized upon
settlement assuming that the tax authority has full knowledge of all relevant
information. Provisions for unrecognized income tax benefits are reviewed
regularly and are adjusted to reflect events such as the expiration of
limitation periods for assessing tax, guidance given by the tax authorities and
court decisions.
Deferred income tax assets and liabilities are recognized based on the expected
future tax consequences of the difference between the financial statement
carrying amount and the respective tax basis. Deferred income taxes are measured
on the enacted rates expected to apply to taxable income at the time the
difference is anticipated to reverse. Deferred income tax assets are reduced
through the establishment of a valuation allowance if it is more likely than not
that the deferred income tax asset will not be realized taking into account the
timing and amount of the reversal of taxable temporary differences, expected
future taxable income and tax planning strategies.
Deferred income tax is provided on certain taxable temporary differences arising
on investments in foreign subsidiaries, except where we intend, and are able, to
reinvest such amounts on a permanent basis or to remit such amounts in a
tax-free manner.
                                       55

--------------------------------------------------------------------------------


  Table of Contents
We have recorded valuation allowances against certain of our deferred income tax
assets and we intend to continue maintaining such valuation allowances until
there is sufficient evidence to support the reduction of all or some portion of
these allowances. During Fiscal 2020, we determined that it was more likely than
not that certain deferred income tax assets in the U.K., Luxembourg and Belgium
totaling $29.5 million were realizable. During Fiscal 2019, we determined that
it was more likely than not that certain deferred income tax assets in
Luxembourg, the U.K., and the U.S. totaling $586.2 million were realizable.
Accounting Pronouncements Not Yet Adopted
Recently-issued accounting pronouncements that may be relevant to our operations
but have not yet been adopted are outlined in note 3 to our audited consolidated
financial statements included elsewhere in this annual report.

© Edgar Online, source Glimpses