Gates Industrial Corp Ltd 10-Q for FY2023 Q3
Gates Industrial Corp Ltd. (GTES)
10-Q
2023-11-03
For: 2023-09-30
View Original
Added on
April 04, 2026
About this 10-Q
Gates Industrial Corp Ltd filed this 10-Q on November 3, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $872.9M
- up 1.4% from $860.7M a year earlier
- Net income
- $78.7M
- up 51.6% from net income of $51.9M a year earlier
- Diluted EPS
- $0.29
- up 61.1% from $0.18 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2023
or
For the transition period from ____ to ____
Commission file number 001-38366
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(303 ) 744-1911
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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.
| ☒ | 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 October 31, 2023, there were 264,108,781 ordinary shares of $0.01 par value outstanding.
TABLE OF CONTENTS
| Part I – Financial Information | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II – Other Information | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
Cautionary Note Regarding 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 December 31, 2022 (the “annual report”), as filed with the Securities and Exchange Commission (the “SEC”), which include the following: economic, political and other risks associated with international operations; availability of raw materials or other manufacturing inputs at favorable prices in sufficient quantities, or at a given time; changes in our relationships with, or the financial condition, performance, purchasing power or inventory levels of, key channel partners; catastrophic events, including global pandemics; dependence on the continued operation of our manufacturing facilities, supply chains, distribution systems and information technology systems; our ability to forecast demand or meet significant increases in demand; our cost-reduction actions; market acceptance of new product introductions and innovations; longer lives of products used in our end markets may affect demand for some of our replacement products; development of the replacement market in emerging markets may limit our ability to grow; pursuit of strategic transactions, including acquisitions, divestitures, restructurings, joint ventures, strategic alliances or investments, which could create risks and present unforeseen integration obstacles or costs; our investments in joint ventures; loss or financial instability of any significant customer; societal responses to sustainability issues, including those related to climate change; the ability to maintain and enhance our strong brand; pricing pressures from customers; cyber-security vulnerabilities, threats, and more sophisticated and targeted computer crimes; failure of information systems; highly complex and rapidly evolving global privacy, data protection and data security requirements; existing or new laws and regulations, including but not limited to those relating to health, safety, and environmental concerns, and the sale of aftermarket products; evolving corporate governance and public disclosure regulations and expectations could expose us to numerous risks; failure to comply with anti-corruption laws and other laws governing our international operations; recalls, product liability claims or product warranties claims; failure to develop, obtain, enforce and protect our intellectual property rights in all jurisdictions throughout the world; infringement on the intellectual property of others; litigation, legal and regulatory proceedings and obligations, and the availability and coverage of insurance; loss of senior management or key personnel; work stoppages and other labor matters; potential requirement 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, including interest rate risk; and the significant influence of our Sponsor (as defined herein) 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.
Website Disclosure
We use our website (www.gates.com) as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls, and webcasts. In addition, you may automatically receive email alerts and other information about Gates Industrial Corporation when you enroll your email address by visiting the “Investor Resources—Email Alerts” section of our website at https://investors.gates.com. The contents of our website and any alerts are not, however, a part of this report.
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.
All amounts in this quarterly report are expressed in United States of America (the “U.S.”) dollars, unless indicated otherwise.
Certain Definitions
As used in this quarterly report, unless otherwise noted or the context requires otherwise:
•“Gates,” the “Company,” “we,” “us” and “our” refer to Gates Industrial Corporation plc and its consolidated subsidiaries; and
•“Blackstone” or “our Sponsor” refer to investment funds affiliated with Blackstone Inc., which together own approximately 43.0% of our outstanding ordinary shares as of September 30, 2023.
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Operations
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions, except per share amounts) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||
| Transaction-related expenses | |||||||||||||||||||||||||||||
| Asset impairments | |||||||||||||||||||||||||||||
| Restructuring expenses | |||||||||||||||||||||||||||||
| Other operating expense | |||||||||||||||||||||||||||||
| Operating income from continuing operations | |||||||||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||||||||
| Other (income) expense | ( | ||||||||||||||||||||||||||||
| Income from continuing operations before taxes | |||||||||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||||||||
| Net income from continuing operations | |||||||||||||||||||||||||||||
Loss on disposal of discontinued operations, net of tax, respectively, of $ | |||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||
| Less: non-controlling interests | |||||||||||||||||||||||||||||
| Net income attributable to shareholders | $ | $ | $ | $ | |||||||||||||||||||||||||
| Earnings per share | |||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||
| Earnings per share from continuing operations | $ | $ | $ | $ | |||||||||||||||||||||||||
| Earnings per share from discontinued operations | |||||||||||||||||||||||||||||
| Earnings per share | $ | $ | $ | $ | |||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||
| Earnings per share from continuing operations | $ | $ | $ | $ | |||||||||||||||||||||||||
| Earnings per share from discontinued operations | |||||||||||||||||||||||||||||
| Earnings per share | $ | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
1
Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Comprehensive Income
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||
| Other comprehensive (loss) income | |||||||||||||||||||||||||||||
| Foreign currency translation: | |||||||||||||||||||||||||||||
—Net translation loss on foreign operations, net of tax benefit (expense), respectively, of $ | ( | ( | ( | ( | |||||||||||||||||||||||||
—Gain on net investment hedges, net of tax (expense) benefit, respectively, of $( | |||||||||||||||||||||||||||||
| Total foreign currency translation movements | ( | ( | ( | ( | |||||||||||||||||||||||||
| Cash flow hedges (interest rate derivatives): | |||||||||||||||||||||||||||||
— Gain arising in the period, net of tax expense, respectively, of $( | |||||||||||||||||||||||||||||
—Reclassification to net income, net of tax benefit (expense), respectively, of $ | ( | ( | |||||||||||||||||||||||||||
| Total cash flow hedges movements | |||||||||||||||||||||||||||||
| Post-retirement benefits: | |||||||||||||||||||||||||||||
—Reclassification of prior year actuarial movements to net income, net of tax benefit, respectively, of $ | ( | ( | ( | ( | |||||||||||||||||||||||||
| Total post-retirement benefits movements | ( | ( | ( | ( | |||||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||||||||
| Comprehensive income (loss) for the period | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to shareholders: | |||||||||||||||||||||||||||||
| —Income (loss) arising from continuing operations | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| —Loss arising from discontinued operations | ( | ( | ( | ||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||
| Comprehensive income (loss) attributable to non-controlling interests | ( | ( | ( | ||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
2
Gates Industrial Corporation plc
Unaudited Condensed Consolidated Balance Sheets
(dollars in millions, except share numbers and per share amounts) | As of September 30, 2023 | As of December 31, 2022 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Trade accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Taxes receivable | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total current assets | |||||||||||
| Non-current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Pension surplus | |||||||||||
| Intangible assets, net | |||||||||||
| Right-of-use assets | |||||||||||
| Taxes receivable | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Current liabilities | |||||||||||
| Debt, current portion | $ | $ | |||||||||
| Trade accounts payable | |||||||||||
| Taxes payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities | |||||||||||
| Debt, less current portion | |||||||||||
| Post-retirement benefit obligations | |||||||||||
| Lease liabilities | |||||||||||
| Taxes payable | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 18) | |||||||||||
| Shareholders’ equity | |||||||||||
—Shares, par value of $ | |||||||||||
| —Additional paid-in capital | |||||||||||
| —Accumulated other comprehensive loss | ( | ( | |||||||||
| —Retained earnings | |||||||||||
| Total shareholders’ equity | |||||||||||
| Non-controlling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
3
Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Cash Flows
| Nine months ended | |||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | $ | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
Depreciation and amortization | |||||||||||||||||
| Foreign exchange and other non-cash financing expenses | |||||||||||||||||
Share-based compensation expense | |||||||||||||||||
Decrease in post-employment benefit obligations, net | ( | ( | |||||||||||||||
Deferred income taxes | ( | ( | |||||||||||||||
Asset impairments | |||||||||||||||||
Other operating activities | |||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| —Change in accounts receivable | ( | ( | |||||||||||||||
| —Change in inventories | ( | ||||||||||||||||
| —Change in accounts payable | ( | ( | |||||||||||||||
| —Change in prepaid expenses and other assets | ( | ||||||||||||||||
| —Change in taxes payable | ( | ( | |||||||||||||||
| —Change in other liabilities | ( | ( | |||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||||||||
| Purchases of intangible assets | ( | ( | |||||||||||||||
| Cash paid under corporate-owned life insurance policies | ( | ( | |||||||||||||||
| Cash received under corporate-owned life insurance policies | |||||||||||||||||
| Proceeds from the sale of property, plant and equipment | |||||||||||||||||
| Other investing activities | |||||||||||||||||
| Net cash used in investing activities | ( | ( | |||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Issuance of shares | |||||||||||||||||
| Buy-back of shares | ( | ( | |||||||||||||||
| Proceeds from long-term debt | |||||||||||||||||
| Payments of long-term debt | ( | ( | |||||||||||||||
| Debt issuance costs paid | ( | ( | |||||||||||||||
| Dividends paid to non-controlling interests | ( | ( | |||||||||||||||
| Other financing activities | ( | ||||||||||||||||
| Net cash used in financing activities | ( | ( | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ( | |||||||||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ( | |||||||||||||||
| Cash and cash equivalents and restricted cash at the beginning of the period | |||||||||||||||||
| Cash and cash equivalents and restricted cash at the end of the period | $ | $ | |||||||||||||||
| Supplemental schedule of cash flow information | |||||||||||||||||
| Interest paid | $ | $ | |||||||||||||||
| Income taxes paid | $ | $ | |||||||||||||||
| Accrued capital expenditures | $ | $ | |||||||||||||||
The accompanying notes form an integral part of these condensed consolidated financial statements.
4
Gates Industrial Corporation plc
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
| Three months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
(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 July 1, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive (loss) income | ( | ||||||||||||||||||||||||||||||||||||||||||||||
Other changes in equity: | |||||||||||||||||||||||||||||||||||||||||||||||
| —Issuance of shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| —Shares withheld for employee taxes | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| —Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
—Dividends paid to non-controlling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Three months ended October 1, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
(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 July 2, 2022 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive (loss) income | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Other changes in equity: | |||||||||||||||||||||||||||||||||||||||||||||||
| —Issuance of shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| —Shares withheld for employee taxes | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| —Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
—Dividends paid to non-controlling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| As of October 1, 2022 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
5
| Nine months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| (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 31, 2022 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Other changes in equity: | |||||||||||||||||||||||||||||||||||||||||||||||
| —Issuance of shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| —Shares withheld for employee taxes | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| —Buy-back and cancellation of shares | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| —Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| —Dividends paid to non-controlling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Nine months ended October 1, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| (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 1, 2022 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive (loss) income | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Other changes in equity: | |||||||||||||||||||||||||||||||||||||||||||||||
| —Issuance of shares | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| —Shares withheld for employee taxes | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| —Buy-back and cancellation of shares | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| —Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| —Dividends paid to non-controlling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| As of October 1, 2022 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
6
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
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 September 30, 2023 and the results of its operations and cash flows for the periods ended September 30, 2023 and October 1, 2022. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
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.
These condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as Gates’ audited annual consolidated financial statements and related notes for the year ended December 31, 2022. The condensed consolidated balance sheet as of December 31, 2022 has been derived from those audited financial statements.
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 September 30, 2023, the collection of $85.9 million of our trade accounts receivable had been accelerated under this program, compared to the accelerated collection of $108.2 million as of December 31, 2022. During the three and nine months ended September 30, 2023, we incurred costs in respect of this program of $2.1 million and $5.1 million, respectively, which are recorded under other (income) expense. During the three and nine months ended October 1, 2022, we incurred costs in respect of this program of $1.5 million and $2.9 million, respectively.
7
2. Recent accounting pronouncements not yet adopted
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-based measure.
C. Segment net sales and disaggregated net sales
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Power Transmission | $ | $ | $ | $ | |||||||||||||||||||||||||
| Fluid Power | |||||||||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | |||||||||||||||||||||||||
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.
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The following table summarizes our net sales by key geographic region of origin:
| Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | Power Transmission | Fluid Power | Power Transmission | Fluid Power | |||||||||||||||||||||||||||||||||||||||||||
| U.S. | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
North America, excluding U.S. | |||||||||||||||||||||||||||||||||||||||||||||||
| United Kingdom (“U.K.”) | |||||||||||||||||||||||||||||||||||||||||||||||
EMEA(1), excluding U.K. | |||||||||||||||||||||||||||||||||||||||||||||||
| East Asia and India | |||||||||||||||||||||||||||||||||||||||||||||||
| Greater China | |||||||||||||||||||||||||||||||||||||||||||||||
| South America | |||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||||
| (dollars in millions) | Power Transmission | Fluid Power | Power Transmission | Fluid Power | |||||||||||||||||||||||||||||||
| U.S. | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
North America, excluding U.S. | |||||||||||||||||||||||||||||||||||
| U.K. | |||||||||||||||||||||||||||||||||||
EMEA(1), excluding U.K. | |||||||||||||||||||||||||||||||||||
| East Asia and India | |||||||||||||||||||||||||||||||||||
| Greater China | |||||||||||||||||||||||||||||||||||
| South America | |||||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
(1) Europe, Middle East and Africa (“EMEA”).
The following table summarizes our net sales into emerging and developed markets:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Developed | $ | $ | $ | $ | |||||||||||||||||||||||||
| Emerging | |||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||
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 expense, income taxes, depreciation and amortization.
Adjusted EBITDA represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, the items excluded from EBITDA in computing Adjusted EBITDA primarily included:
• non-cash charges in relation to share-based compensation;
• transaction-related expenses incurred in relation to major corporate transactions, including the acquisition of businesses and related integration activities, and equity and debt transactions;
• asset impairments;
• restructuring expenses, including severance-related expenses;
9
• credit loss related to a customer bankruptcy;
• cybersecurity incident expenses; and
• inventory adjustments related to certain inventories accounted for on a Last-in First-out (“LIFO”) basis.
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Power Transmission | $ | $ | $ | $ | |||||||||||||||||||||||||
| Fluid Power | |||||||||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | |||||||||||||||||||||||||
Reconciliation of net income from continuing operations to Adjusted EBITDA:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Net income from continuing operations | $ | $ | $ | $ | |||||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||||||||
| Income from continuing operations before taxes | |||||||||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||||||||
| Other (income) expense | ( | ||||||||||||||||||||||||||||
| Operating income from continuing operations | |||||||||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||||||||
Transaction-related expenses (1) | |||||||||||||||||||||||||||||
| Asset impairments | |||||||||||||||||||||||||||||
| Restructuring expenses | |||||||||||||||||||||||||||||
| Share-based compensation expense | |||||||||||||||||||||||||||||
Inventory impairments and adjustments (2) (included in cost of sales) | |||||||||||||||||||||||||||||
| Severance expenses (included in cost of sales) | ( | ||||||||||||||||||||||||||||
| Severance expenses (included in SG&A) | |||||||||||||||||||||||||||||
Credit loss related to customer bankruptcy (included in SG&A) (3) | |||||||||||||||||||||||||||||
Cybersecurity incident expenses (4) | |||||||||||||||||||||||||||||
| Other items not directly related to current operations | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | |||||||||||||||||||||||||
(1) Transaction-related expenses relate primarily to advisory fees and other costs recognized in respect of major corporate transactions, including the acquisition of businesses, and equity and debt transactions.
(2) Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a LIFO basis. The recent inflationary environment has caused LIFO values to drop below First-in, First-out (“FIFO”) values because LIFO measurement results in the more recent inflated costs being matched against current sales while historical, lower costs are retained in inventories.
(3) On January 31, 2023, one of our customers filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In connection with the bankruptcy proceedings, we evaluated our potential risk and exposure relating to our outstanding pre-petition accounts receivable balance from the customer and recorded a $11.4 million pre-tax charge during the nine months ended September 30, 2023 to reflect our estimated recovery. We continue to monitor the circumstances surrounding the bankruptcy in determining whether adjustments to this recovery estimate are necessary.
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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.
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Restructuring expenses: | |||||||||||||||||||||||||||||
| —Severance expenses | $ | $ | $ | $ | |||||||||||||||||||||||||
| —Non-severance labor and benefit expenses | |||||||||||||||||||||||||||||
| —Consulting expenses | |||||||||||||||||||||||||||||
| —Other net restructuring expenses | |||||||||||||||||||||||||||||
| Restructuring expenses in asset impairments: | |||||||||||||||||||||||||||||
| —Impairment of fixed and other assets | |||||||||||||||||||||||||||||
| Restructuring expenses in cost of sales: | |||||||||||||||||||||||||||||
| —Impairment of inventory | |||||||||||||||||||||||||||||
| Total restructuring expenses | $ | $ | $ | $ | |||||||||||||||||||||||||
| Expenses related to other strategic initiatives: | |||||||||||||||||||||||||||||
| —Severance expenses included in cost of sales | ( | ||||||||||||||||||||||||||||
| —Severance expenses included in SG&A | |||||||||||||||||||||||||||||
| Total expenses related to other strategic initiatives | $ | ( | $ | $ | $ | ||||||||||||||||||||||||
Restructuring and other strategic initiatives during the three and nine months ended September 30, 2023 related primarily to severance and other non-labor costs related to relocating certain production activities in China, Mexico and Europe. During the three months ended September 30, 2023, we also incurred additional non-severance labor and benefit costs of $0.3 million related to relocation and integration of certain support functions into our regional shared service center in Europe. Other restructuring costs incurred during the three months ended September 30, 2023 related to legal and consulting expenses, as well as costs associated with prior period facility closures or relocations in several countries.
Restructuring and other strategic initiatives during the three and nine months ended October 1, 2022 related primarily to our ongoing European reorganization, including $2.2 million of labor and severance costs related to relocating certain production activities within Europe during the three months ended October 1, 2022, in addition to severance costs of $2.3 million during the nine months ended October 1, 2022 related to relocation and integration of certain support functions into our regional shared service center. We also incurred $1.4 million and $2.7 million of costs, respectively, during the three and nine months ended October 1, 2022 in relation to the suspension of our operations in Russia, which included severance costs of $0.7 0.3 1.1
11
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 | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Power Transmission | $ | $ | $ | $ | |||||||||||||||||||||||||
| Fluid Power | |||||||||||||||||||||||||||||
| Continuing operations | $ | $ | $ | $ | |||||||||||||||||||||||||
| Nine months ended | |||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | |||||||||||||||
| Balance as of the beginning of the period | $ | $ | |||||||||||||||
| Utilized during the period | ( | ( | |||||||||||||||
| Charge for the period | |||||||||||||||||
| Released during the period | ( | ( | |||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||
| Balance as of the end of the period | $ | $ | |||||||||||||||
Restructuring reserves, which are expected to be utilized during 2023 and 2024, 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 September 30, 2023, we had income tax expense of $1.0 million on pre-tax income of $86.6 million, which resulted in an effective tax rate of 1.2 %, compared to an income tax expense of $11.4 million on pre-tax income of $67.4 million, which resulted in an effective tax rate of 16.9 % for the three months ended October 1, 2022.
For the three months ended September 30, 2023, the effective tax rate was driven primarily by discrete tax benefits of $11.0 million, of which $12.9 1.9 million of other discrete expenses. For the three months ended October 1, 2022, the effective tax rate was driven primarily by a discrete tax benefit of $3.5 million related to the partial release of valuation allowance on deferred tax assets for U.S. foreign tax credits, partially offset by $2.6 million of other discrete expenses.
For the nine months ended September 30, 2023, we had an income tax expense of $25.9 million on pre-tax income of $213.7 million, which resulted in an effective tax rate of 12.1 %, compared to an income tax expense of $21.5 million on pre-tax income of $174.2 million, which resulted in an effective tax rate of 12.3 % for the nine months ended October 1, 2022.
For the nine months ended September 30, 2023, the effective tax rate was driven primarily by discrete benefits of $12.9 15.2 million related to the partial release of valuation allowance on deferred tax assets for U.S. foreign tax credits.
12
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.
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 September 30, 2023, that it is more likely than not that deferred tax assets in the U.S. totaling $2.4 million are realizable, none of which was discrete. 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 per share
Basic earnings per share represents net income attributable to shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share considers the dilutive effect of potential shares, unless the inclusion of the potential shares would have an anti-dilutive effect. The treasury stock method is used to determine the potential dilutive shares resulting from assumed exercises of equity-related instruments.
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions, except share numbers and per share amounts) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Net income attributable to shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of shares outstanding | |||||||||||||||||||||||
| Dilutive effect of share-based awards | |||||||||||||||||||||||
| Diluted weighted average number of shares outstanding | |||||||||||||||||||||||
| Number of anti-dilutive shares excluded from the diluted earnings per share calculation | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
7. Inventories
(dollars in millions) | As of September 30, 2023 | As of December 31, 2022 | |||||||||
| Raw materials and supplies | $ | $ | |||||||||
| Work in progress | |||||||||||
| Finished goods | |||||||||||
| Total inventories | $ | $ | |||||||||
13
8. Goodwill
(dollars in millions) | Power Transmission | Fluid Power | Total | ||||||||||||||
| Cost and carrying amount | |||||||||||||||||
| As of December 31, 2022 | $ | $ | $ | ||||||||||||||
| Foreign currency translation | ( | ||||||||||||||||
| As of September 30, 2023 | $ | $ | $ | ||||||||||||||
9. Intangible assets
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||||||||||||||||||||||||||
(dollars in millions) | Cost | Accumulated amortization and impairment | Net | Cost | Accumulated amortization and impairment | Net | |||||||||||||||||||||||||||||
Finite-lived: | |||||||||||||||||||||||||||||||||||
—Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
—Technology | ( | ( | |||||||||||||||||||||||||||||||||
—Capitalized software | ( | ( | |||||||||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||||||||
Indefinite-lived: | |||||||||||||||||||||||||||||||||||
—Brands and trade names | ( | ( | |||||||||||||||||||||||||||||||||
Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
During the three months ended September 30, 2023, the amortization expense recognized in respect of intangible assets was $32.1 million, compared to $31.6 million for the three months ended October 1, 2022. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $10.3 million for the three months ended September 30, 2023, compared to a decrease of $25.6 million for the three months ended October 1, 2022.
During the nine months ended September 30, 2023, the amortization expense recognized in respect of intangible assets was $96.4 million, compared to $96.9 million for the nine months ended October 1, 2022. In addition, movements in foreign currency exchange rates resulted in a decrease in the net carrying value of total intangible assets of $3.0 million for the nine months ended September 30, 2023, compared to a decrease of $60.4 million for the nine months ended October 1, 2022.
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.
14
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | Net | Prepaid expenses and other assets | Other non- current assets | Accrued expenses and other current liabilities | Other non- current liabilities | Net | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—Currency swaps | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||
—Interest rate swaps | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
—Currency forward contracts | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||
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. Concurrent with the refinancing transactions described in Note 12, we executed additional cross currency swaps that have been designated as net investment hedges of certain of our European operations, with the notional principal amount of €501.6 million and contract term from November 16, 2022 to November 16, 2027. During March 2022, we extended our cross currency swaps existing at that time, which originally matured in March 2022, to now mature on March 31, 2027. In May 2023, we amended our existing cross currency swaps to transition from a floating rate based on the London Interbank Offered Rate (“LIBOR”) to a floating rate based on a term secured overnight financing rate (“Term SOFR”). As of September 30, 2023 and December 31, 2022, the aggregated notional principal amount of the cross currency swaps was €756.1
In addition, as of January 1, 2022, we had designated €147.0 million of our Euro-denominated debt as a net investment hedge of certain of our European operations. We subsequently reduced the designated amount to €25.0 million during the second quarter of 2022. On November 16, 2022, we extinguished our Euro-denominated term loan and replaced with new Dollar-denominated term loans, and as a result, the net investment hedging designated on our Euro-denominated debt no longer exists.
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Net fair value gains recognized in OCI in relation to: | |||||||||||||||||||||||
—Euro-denominated debt | $ | $ | $ | $ | |||||||||||||||||||
—Designated cross currency swaps | |||||||||||||||||||||||
| Total net fair value gains | $ | $ | $ | $ | |||||||||||||||||||
During the three and nine months ended September 30, 2023, a net gain of $2.5 million and $8.0 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 $1.7 million and $3.3 million, respectively, during the three and nine months ended October 1, 2022.
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 both September 30, 2023 and December 31, 2022, we held pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $1,255.0 870.0 million run from June 30, 2020 through June 30, 2025, while interest rate swaps with a notional amount of $385.0 million have the contract term from November 16, 2022 to November 16, 2027.
15
In May 2023, we amended our then-existing interest rate swaps with a notional amount of $870.0 million to transition from a LIBOR-based floating rate to a Term SOFR-based floating rate.
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, covering the period from July 1, 2019 to June 30, 2023. During August 2022, we early terminated our interest rate caps. As of September 30, 2023 and December 31, 2022, there were no
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Movement recognized in OCI in relation to: | |||||||||||||||||||||||
| —Fair value gain on cash flow hedges | $ | $ | $ | $ | |||||||||||||||||||
| —Amortization to net income of prior period fair value losses | |||||||||||||||||||||||
| —Deferred OCI reclassified to net income | ( | ( | ( | ||||||||||||||||||||
Total movement | $ | $ | $ | $ | |||||||||||||||||||
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 September 30, 2023 and December 31, 2022, there were no outstanding currency swaps.
As of September 30, 2023, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was $186.2 million, compared to $150.5 million as of December 31, 2022.
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Fair value (losses) gains recognized in relation to: | |||||||||||||||||||||||
—Currency forward contracts recognized in SG&A | $ | ( | $ | $ | $ | ||||||||||||||||||
Total | $ | ( | $ | $ | $ | ||||||||||||||||||
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.
16
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, drawings under 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.
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||||||||||||||
(dollars in millions) | Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||||||||
| Current | $ | $ | $ | $ | |||||||||||||||||||
| Non-current | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
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 Term SOFR (as defined in the credit agreement) floor of 0.50 % on the New Dollar Term Loans, and an Adjusted Term SOFR (defined in the credit agreement as Term SOFR with a credit spread adjustment of 0.10 %) floor of 0.75 % on the Existing Dollar Term Loans, each as further described in Note 12. 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
(dollars in millions) | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Total | ||||||||||||||
| As of September 30, 2023 | |||||||||||||||||
| Derivative assets | $ | $ | $ | ||||||||||||||
| Derivative liabilities | $ | $ | ( | $ | ( | ||||||||||||
| As of December 31, 2022 | |||||||||||||||||
| Derivative assets | $ | $ | $ | ||||||||||||||
| Derivative liabilities | $ | $ | ( | $ | ( | ||||||||||||
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.
17
12. Debt
(dollars in millions) | As of September 30, 2023 | As of December 31, 2022 | |||||||||
| Secured debt: | |||||||||||
| —Dollar Term Loans | $ | $ | |||||||||
| Unsecured debt: | |||||||||||
— | |||||||||||
| Total principal of debt | |||||||||||
| Deferred issuance costs | ( | ( | |||||||||
| Accrued interest | |||||||||||
| Total carrying value of debt | |||||||||||
| Debt, current portion | |||||||||||
| Debt, less current portion | $ | $ | |||||||||
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 issuances and redemptions
During May 2023, we drew $100.0 million under our asset-backed revolving credit facility to partially fund the purchase of shares under our share repurchase program, as discussed further in Note 15 below. The balance on the asset-backed revolving credit facility was fully paid off during the three months ended September 30, 2023.
On November 16, 2022, we issued a new $575.0 million tranche of dollar denominated term loans (the “New Dollar Term Loans”) pursuant to an amendment to the credit agreement governing our term loan facilities, using the proceeds to extinguish the entire outstanding principal balance of €563.8 million under our Euro Term Loan facility (the “Euro Term Loan”) plus €1.0 million accrued interest. The New Dollar Term Loans have substantially similar terms as the Existing Dollar Term Loans (as defined below), bearing interest at the borrower’s option at either Term SOFR, subject to a 0.50 % per annum Term SOFR floor, plus 3.50 % margin per annum, or at the base rate, subject to a 1.50 % per annum floor, plus 2.50 % per annum. The New Dollar Term Loans require scheduled quarterly amortization payments of 1 % per annum based on the initial aggregate principal amount and mature in November 2029. Issuance discount and costs totaling approximately $23.2 million related to the issuance of the New Dollar Term Loans have been deferred and will be amortized to interest expense over the remaining term of the related borrowings using the effective interest method. The repayment of Euro Term Loan resulted in the accelerated recognition of $2.2 million deferred financing costs (recognized in interest expense).
During March 2022, we drew $70.0 million under our asset-backed revolving credit facility to partially fund the purchase of shares under our share repurchase program, as discussed further in Note 15 below. During Fiscal 2022, we paid down the borrowings on the asset-backed revolver and had no remaining balance as of December 31, 2022.
18
Dollar and Euro Term Loans
Our secured credit facilities consist of two loans (collectively, the “Dollar Term Loans”), one of which was originally drawn on July 3, 2014 and refinanced on February 24, 2021 (the “Existing Dollar Term Loans”), and the New Dollar Term Loans drawn on November 16, 2022 as described above. 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, Term SOFR plus an applicable margin. The New Dollar Term Loans mature on November 16, 2029.
The Existing Dollar Term Loans’ interest rate is currently at Adjusted Term SOFR, subject to a floor of 0.75 %, plus a margin of 2.60 %, and as of September 30, 2023, borrowings under this facility bore interest at a rate of 7.92 % per annum. On March 1, 2023, Gates amended the Existing Dollar Term Loans’ reference rate from LIBOR to Term SOFR, with a credit spread adjustment of 0.10 %. The Existing Dollar Term Loans interest rate is currently re-set on the last business day of each month based on the election of one month interest periods.
The New Dollar Term Loans’ interest rate as of September 30, 2023 was Term SOFR, subject to a floor of 0.50 %, plus a margin of 3.50 %, and as of September 30, 2023, borrowings under this facility bore interest at a rate of 8.82 % per annum. The New Dollar Term Loans’ interest rate is currently re-set on the last business day of each month based on the election of one month interest periods. On October 10, 2023, we amended the New Dollar Term Loans’ interest rate to be, at our option, either Term SOFR, subject to a floor of 0.50 %, plus a margin of 3.00 % per annum, or the base rate, subject to a 1.50 % per annum floor, plus 2.00 % per annum.
Both Dollar 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 nine months ended September 30, 2023, we made amortization payments against the Existing Dollar Term Loans and New Dollar Term Loans of $10.3 million and $4.3 million, respectively. During the nine months ended October 1, 2022, we made amortization payments against the Existing Dollar Term Loans and the Euro Term Loan of $10.3 million and $5.1 million, respectively.
Under the terms of the credit agreement, we are obliged to offer annually to the term loan lenders an “excess cash flow” amount as defined under the agreement, based on the preceding year’s final results. Based on our 2022 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 2023.
During the periods presented, foreign exchange gains were recognized in respect of the Euro Term Loans as summarized in the table below. As of October 1, 2022 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 were recognized in OCI. As of September 30, 2023, the Euro Term Loan, and the net investment hedging designation on the Euro Term Loan, no longer exist.
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Gain recognized in statement of operations | $ | $ | $ | $ | |||||||||||||||||||||||||
| Gain recognized in OCI | |||||||||||||||||||||||||||||
| Total gain | $ | $ | $ | $ | |||||||||||||||||||||||||
The above net foreign exchange gain recognized in the other (income) expense 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 September 30, 2023, 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.
19
Redemption price | |||||
| During the year commencing: | |||||
| —2023 | % | ||||
| —2024 and thereafter | % | ||||
Upon the occurrence of a change of control or a certain qualifying asset sale, the holders of the notes will have the right to require us to make an offer to repurchase each holder’s notes at a price equal to 101 % (in the case of a change of control) or 100 % (in the case of an asset sale) of their principal amount, plus accrued and unpaid interest.
Revolving credit facility
We have a secured revolving credit facility that provides for multi-currency revolving loans. On November 18, 2021, we amended the credit agreement governing this facility to, among other things, increase the size of the facility from $185.0 million to $250.0 million, extend the maturity date from January 29, 2023 to November 18, 2026 (subject to certain springing maturities related to our Unsecured Senior Notes if more than $500.0 million is outstanding in respect of either such facility 91 days prior to their respective maturities), and increase the letter of credit sub-facility from $20.0 million to $75.0 million.
As of both September 30, 2023 and December 31, 2022, there were no no
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, the reference rate, plus an applicable margin. On March 1, 2023, Gates amended the secured revolving credit facility reference rate for borrowing in dollars from LIBOR to Term SOFR.
Asset-backed revolver
We also have a revolving credit facility backed by certain of our assets in North America. On November 18, 2021, we amended the credit agreement governing this facility to, among other things, reduce the maximum facility size from $325.0 million to $250.0 million ($250.0 million as of September 30, 2023, compared to $214.7 million as of December 31, 2022, based on the values of the secured assets on those dates), and extended the maturity date from January 29, 2023 to November 18, 2026 (subject to certain springing maturities related to our Unsecured Senior Notes if more than $500.0 million is outstanding in respect of either such facility 91 days prior to their respective maturities). The facility also allows for a letter of credit sub-facility of $150.0 million within the $250.0 million maximum.
In connection with these amendments, we paid fees of $1.3 million, which have been deferred and will, together with existing deferred issuance costs related to this facility, be amortized to interest expense over the new term of the facility on a straight-line basis.
As of September 30, 2023, there were no drawings for cash under this facility. The letters of credit outstanding under this facility were $31.6 million and $25.8 million as of September 30, 2023 and December 31, 2022, respectively.
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.
20
Net periodic benefit cost (income)
The components of the net periodic benefit cost (income) for pensions and other post-retirement benefits were as follows:
| Three months ended September 30, 2023 | Three months ended October 1, 2022 | ||||||||||||||||||||||||||||||||||
(dollars in millions) | Pensions | Other post-retirement benefits | Total | Pensions | Other post-retirement benefits | Total | |||||||||||||||||||||||||||||
| Reported in operating income: | |||||||||||||||||||||||||||||||||||
| —Employer service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Reported outside of operating income: | |||||||||||||||||||||||||||||||||||
| —Interest cost | |||||||||||||||||||||||||||||||||||
| —Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| —Net amortization of prior period (gains) losses | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Net periodic benefit cost (income) | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Cash Contributions | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Nine months ended September 30, 2023 | Nine months ended October 1, 2022 | ||||||||||||||||||||||||||||||||||
(dollars in millions) | Pensions | Other post-retirement benefits | Total | Pensions | Other post-retirement benefits | Total | |||||||||||||||||||||||||||||
| Reported in operating income: | |||||||||||||||||||||||||||||||||||
| —Employer service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Reported outside of operating income: | |||||||||||||||||||||||||||||||||||
| —Interest cost | |||||||||||||||||||||||||||||||||||
| —Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| —Net amortization of prior period (gains) losses | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Net periodic benefit cost (income) | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||
| Cash Contributions | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The components of the above net periodic benefit cost (income) for pensions and other post-retirement benefits that are reported outside of operating income are all included in the other (income) expense line in the condensed consolidated statement of operations.
For 2023 as a whole, we expect to contribute approximately $9.2 million to our defined benefit pension plans and approximately $3.2 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 nine months ended September 30, 2023, we recognized a charge of $3.3 million and $19.6 million, respectively, compared to $7.2 million and $34.8 million, respectively, in the three and nine months ended October 1, 2022.
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 (our “IPO”). No new awards have been granted under this plan since 2017. The options granted prior to our IPO were 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 certain investment funds affiliated with Blackstone Inc. (“Blackstone” or our “Sponsor”) at the time of a defined liquidity event, which is also subject to the participant’s continued provision of service to Gates on the vesting date. The performance conditions associated with Tiers II, III and IV must have been 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.
21
During March 2022, a liquidity event as defined occurred following the sale by Blackstone of a certain portion of their interest in Gates and the Tier II and IV options vested as the specified investment returns related to these options had been met. In connection with this vesting, a one-time share-based compensation charge of $16.1 million was recognized. On July 3, 2022, the performance period for the Tier III options expired and, as the specified investment returns were not achieved, all Tier III awards expired during Fiscal 2022.
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. The SARs include option awards with the same vesting terms as the Tier II, III and IV option awards described above, and, due to the vesting event described above, the SAR equivalents of the Tier II and IV awards also vested in March 2022, resulting in a share-based compensation charge of $2.6 million. All Tier III SARs expired on July 3, 2022 as the specific performance hurdle was not achieved.
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 or three years 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. Starting in Fiscal 2022, the terms for PRSUs are identical, except that 75 % of the award will generally vest based on the specified Adjusted ROIC achievement and the remaining 25 % will generally vest based on Relative TSR goal attainment.
22
New awards and movements in existing awards granted under this plan are summarized in the tables below.
Summary of movements in options outstanding
| Nine months ended September 30, 2023 | ||||||||||||||||||||||||||
| Plan | Number of options | Weighted average exercise price $ | ||||||||||||||||||||||||
| Outstanding at the beginning of the period: | ||||||||||||||||||||||||||
| —Tier I | 2014 Plan | $ | ||||||||||||||||||||||||
| —Tier II | 2014 Plan | $ | ||||||||||||||||||||||||
| —Tier IV | 2014 Plan | $ | ||||||||||||||||||||||||
| —SARs | Both plans | $ | ||||||||||||||||||||||||
| —Share options | 2018 Plan | $ | ||||||||||||||||||||||||
| —Premium-priced options | 2018 Plan | $ | ||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| Granted during the period: | ||||||||||||||||||||||||||
| —SARs | 2018 Plan | $ | ||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| Forfeited during the period: | ||||||||||||||||||||||||||
| —SARs | 2018 Plan | ( | $ | |||||||||||||||||||||||
| —Share options | 2018 Plan | ( | $ | |||||||||||||||||||||||
| ( | $ | |||||||||||||||||||||||||
| Expired during the period: | ||||||||||||||||||||||||||
| —Tier I | 2014 Plan | ( | $ | |||||||||||||||||||||||
| —Tier II | 2014 Plan | ( | $ | |||||||||||||||||||||||
| —Tier IV | 2014 Plan | ( | $ | |||||||||||||||||||||||
| —SARs | Both Plans | ( | $ | |||||||||||||||||||||||
| —Share options | 2018 Plan | ( | $ | |||||||||||||||||||||||
| ( | $ | |||||||||||||||||||||||||
| Exercised during the period: | ||||||||||||||||||||||||||
| —Tier I | 2014 Plan | ( | $ | |||||||||||||||||||||||
| —Tier II | 2014 Plan | ( | $ | |||||||||||||||||||||||
| —Tier IV | 2014 Plan | ( | $ | |||||||||||||||||||||||
| —Share options | 2018 Plan | ( | $ | |||||||||||||||||||||||
| ( | $ | |||||||||||||||||||||||||
| Outstanding at the end of the period: | ||||||||||||||||||||||||||
| —Tier I | 2014 Plan | $ | ||||||||||||||||||||||||
| —Tier II | 2014 Plan | $ | ||||||||||||||||||||||||
| —Tier IV | 2014 Plan | $ | ||||||||||||||||||||||||
| —SARs | Both plans | $ | ||||||||||||||||||||||||
| —Share options | 2018 Plan | $ | ||||||||||||||||||||||||
| —Premium-priced options | 2018 Plan | $ | ||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| Exercisable at the end of the period | $ | |||||||||||||||||||||||||
| Vested and expected to vest at the end of the period | $ | |||||||||||||||||||||||||
As of September 30, 2023, the aggregate intrinsic value of options that were exercisable was $22.5 million, and these options had a weighted average remaining contractual term of 3.2 years. As of September 30, 2023, the aggregate intrinsic value of options that were vested or expected to vest was $22.5 million, and these options had a weighted average remaining contractual term of 3.4 years.
23
As of September 30, 2023, the unrecognized compensation charge relating to the nonvested options was $0.5 million, which is expected to be recognized over a weighted-average period of 0.6 years.
During the three and nine months ended September 30, 2023, cash of $0.8 million and $17.5 million was received in relation to the exercise of vested options, respectively, compared to $1.2 million and $15.1 million during the three and nine months ended October 1, 2022, respectively. The aggregate intrinsic value of options exercised during the three and nine months ended September 30, 2023 was $0 million and $5.0 million, respectively, compared to $0.2 million and $0.8 million during the three and nine months ended October 1, 2022, respectively.
| Nine months ended September 30, 2023 | |||||||||||||||||||||||
| Number of awards | Weighted average grant date fair value $ | ||||||||||||||||||||||
| Outstanding at the beginning of the period: | |||||||||||||||||||||||
| —RSUs | $ | ||||||||||||||||||||||
| —PRSUs | $ | ||||||||||||||||||||||
| $ | |||||||||||||||||||||||
| Granted during the period: | |||||||||||||||||||||||
| —RSUs | $ | ||||||||||||||||||||||
| —PRSUs | $ | ||||||||||||||||||||||
| $ | |||||||||||||||||||||||
| Forfeited during the period: | |||||||||||||||||||||||
| —RSUs | ( | $ | |||||||||||||||||||||
| —PRSUs | ( | $ | |||||||||||||||||||||
| ( | $ | ||||||||||||||||||||||
| Vested during the period: | |||||||||||||||||||||||
| —RSUs | ( | $ | |||||||||||||||||||||
| —PRSUs | ( | ||||||||||||||||||||||
| ( | $ | ||||||||||||||||||||||
| Outstanding at the end of the period: | |||||||||||||||||||||||
| —RSUs | $ | ||||||||||||||||||||||
| —PRSUs | $ | ||||||||||||||||||||||
| $ | |||||||||||||||||||||||
As of September 30, 2023, the unrecognized compensation charge relating to unvested RSUs and PRSUs was $20.7 1.8 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 nine months ended September 30, 2023 was $5.8 million and $21.1 million, respectively, compared to $0.1 million and $12.2 million during the three and nine months ended October 1, 2022, respectively.
24
Valuation of awards granted during the period
The grant date fair value of the SARs are measured using a Black-Scholes valuation model. RSUs are valued at the share price on the date of grant. The Relative TSR component of the 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:
| Nine months ended | |||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||
| Weighted average grant date fair value: | |||||||||||||||||
| —SARs | $ | $ | |||||||||||||||
| —RSUs | $ | $ | |||||||||||||||
| —PRSUs | $ | $ | |||||||||||||||
| Inputs to the model: | |||||||||||||||||
| —Expected volatility — SARs | % | % | |||||||||||||||
| —Expected volatility — PRSUs | % | % | |||||||||||||||
| —Expected option life for SARs (years) | |||||||||||||||||
| —Risk-free interest rate: | |||||||||||||||||
| SARs | % | % | |||||||||||||||
| PRSUs | % | % | |||||||||||||||
15. Equity
| Nine months ended | |||||||||||
(number of shares) | September 30, 2023 | October 1, 2022 | |||||||||
| Balance as of the beginning of the period | |||||||||||
| Exercise of share options | |||||||||||
| Vesting of restricted stock units, net of withholding taxes | |||||||||||
| Shares repurchased and cancelled | ( | ( | |||||||||
| Balance as of the end of the period | |||||||||||
The Company has one class of authorized and issued shares, with a par value of $0.01 , and each share has equal voting rights.
In November 2021, the Company established a repurchase program allowing for up to $200 million in authorized share repurchases. On March 24, 2022, the Company, certain selling shareholders affiliated with Blackstone, and Citigroup Global Markets Inc. (“Citigroup”) entered into an underwriting agreement pursuant to which the selling shareholders agreed to sell to Citigroup 5,000,000 ordinary shares of the Company at a price of $15.14 per ordinary share (the “2022 Offering”). The selling shareholders also granted to Citigroup an option to purchase up to 750,000 additional ordinary shares of the Company; this option was exercised in full on March 25, 2022. The Company did not receive any proceeds from the sale of ordinary shares in the 2022 Offering, which closed on March 30, 2022. In connection with the 2022 Offering, the Company repurchased 8,000,000 ordinary shares through Citigroup from the same selling shareholders at a price of $15.14 per ordinary share for an aggregate consideration of $121.1 million (the “2022 Repurchase”), plus costs directly related to the transaction of $0.8 million. This repurchase was funded by cash on hand and a borrowing of $70.0 million under Gates’ asset-backed revolving credit facility. All shares repurchased pursuant to the 2022 Repurchase have been cancelled and the original share repurchase program expired on December 31, 2022.
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On April 28, 2023, the Company’s Board of Directors approved another share repurchase program for up to $250 million in authorized share repurchases. On May 17, 2023, the Company, certain selling shareholders affiliated with Blackstone, and the representatives of the several underwriters entered into an underwriting agreement pursuant to which the selling shareholders agreed to sell to the underwriters 22,500,000 ordinary shares of the Company at a price of $11.3975 per ordinary share (the “May 2023 Offering”). The selling shareholders also granted the underwriters an option to purchase up to 3,375,000 additional ordinary shares of the Company; this option was exercised in full on May 18, 2023. The Company did not receive any proceeds from the sale of ordinary shares in the May 2023 Offering, which closed on May 23, 2023. In connection with the May 2023 Offering, the Company repurchased 21,934,634 ordinary shares through Citigroup from the same selling shareholders at a price of $11.3975 per ordinary share for an aggregate consideration of approximately $250.0 million (the “2023 Repurchase”), plus costs paid directly related to the transaction of $1.7 million. This repurchase was funded by cash on hand and a borrowing of $100.0 million under Gates’ asset-backed revolving credit facility. All shares repurchased pursuant to the 2023 Repurchase have been cancelled. Following the May 2023 Offering and the 2023 Repurchase, shareholders affiliated with Blackstone no longer beneficially own a majority of our outstanding ordinary shares and therefore we are no longer considered a “controlled company” within the meaning of the NYSE corporate governance standards.
On August 8, 2023, the Company, certain selling shareholders affiliated with Blackstone, and the representatives of the several underwriters entered into another underwriting agreement pursuant to which the selling shareholders agreed to sell to the underwriters 15,000,000 ordinary shares of the Company at a price of $11.57 per ordinary share (the “August 2023 Offering”), with an option to purchase up to 2,250,000 additional ordinary shares of the Company; this option was exercised in full on August 9, 2023. The Company did not receive any proceeds from the sale of ordinary shares in the August 2023 Offering, which closed on August 14, 2023.
16. Analysis of accumulated other comprehensive (loss) income
Changes in accumulated other comprehensive (loss) income by component, net of tax, were as follows:
| (dollars in millions) | Post- retirement benefits | Cumulative translation adjustment | Cash flow hedges | Accumulated OCI attributable to shareholders | Non-controlling interests | Accumulated OCI | |||||||||||||||||||||||||||||||||||
| As of December 31, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Foreign currency translation | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Cash flow hedges movements | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Post-retirement benefit movements | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | |||||||||||||||||||||||||||||||||||||||
| As of September 30, 2023 | $ | ( | $ | ( | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||
(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 1, 2022 | $ | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||
| Foreign currency translation | ( | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Cash flow hedges movements | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Post-retirement benefit movements | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||
| As of October 1, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
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17. Related party transactions
A. Entities affiliated with Blackstone
In connection with the initial public offering of Gates, we entered into a Support and Services Agreement with Blackstone Management Partners L.L.C. (“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 were 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.
As described in Note 15, in March 2022, the Company repurchased 8,000,000 ordinary shares through Citigroup from certain shareholders affiliated with Blackstone for an aggregate consideration of $121.1 million, plus costs directly related to the transaction of $0.8 million. Additionally, in May 2023, the Company repurchased 21,934,634 ordinary shares through Citigroup from certain shareholders affiliated with Blackstone for an aggregate consideration of approximately $250.0 million, plus costs paid directly related to the transaction of $1.7 million.
B. Equity method investees
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Sales | $ | $ | $ | $ | |||||||||||||||||||
Purchases | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Amounts outstanding in respect of these transactions were payables of $0.4 million as of September 30, 2023, compared to $2.4 million as of December 31, 2022. 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 | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Purchases | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Amounts outstanding in respect of these transactions were as follows:
(dollars in millions) | As of September 30, 2023 | As of December 31, 2022 | |||||||||
| Receivables | $ | $ | |||||||||
| Payables | $ | ( | $ | ( | |||||||
18. Commitments and contingencies
A. Performance bonds, letters of credit and bank guarantees
As of September 30, 2023, letters of credit totaling $31.6 million were outstanding against the asset-backed revolving facility, compared to $25.8 million as of December 31, 2022. Gates had additional outstanding performance bonds, letters of credit and bank guarantees amounting to $8.3 million as of September 30, 2023, compared to $8.7 million as of December 31, 2022.
27
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 U.S. GAAP, an estimate is made of the loss and the appropriate accrual is reflected in our consolidated financial statements. Currently, there are no material amounts accrued.
While it is not possible to quantify the financial impact or predict the outcome of all pending claims and litigation, management does not anticipate that the outcome of any current proceedings or known claims, either individually or in aggregate, will materially affect Gates’ financial position, results of operations or cash flows.
C. Warranties
| Nine months ended | |||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | |||||||||
| Balance as of the beginning of the period | $ | $ | |||||||||
| Charge for the period | |||||||||||
| Payments made | ( | ( | |||||||||
| Released during the period | ( | ( | |||||||||
| Foreign currency translation | ( | ( | |||||||||
| Balance as of the end of the period | $ | $ | |||||||||
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Item 2: Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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 “Cautionary Note Regarding 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, including industrial off-highway end markets such as construction and agriculture, industrial on-highway end markets such as transportation, diversified industrial, energy and resources, automotive, and personal mobility. Our net sales have historically been, and remain, highly correlated with industrial activity and utilization, and not with any single end market given the diversification of our business and high exposure to replacement markets. We sell our products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation; this reputation has been built over 110 years since Gates’ founding in 1911.
Within the diverse end markets we serve, our highly engineered products are often critical components in applications for which the cost of downtime is high relative to the cost of our products, resulting in the willingness of end users to pay a premium for superior performance and availability. These applications subject our products to normal wear and tear, resulting in natural, and often preventative, replacement cycles that drive high-margin, recurring revenue. Our product portfolio represents one of the broadest ranges of power transmission and fluid power products in the markets we serve, and we maintain long-standing relationships with a diversified group of blue-chip customers throughout the world. As a leading designer, manufacturer and marketer of highly engineered, mission-critical products, we have become an industry leader across most of the regions and end markets in which we operate.
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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 nine months ended September 30, 2023, 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 the nine months ended September 30, 2023, 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.
During the nine months ended September 30, 2023, challenges related to supply chains, logistics, and inflation continued to ease, which improved our productivity and expanded our profitability. We continue to make progress on improving our inventory position and turnover to meet our customer demands. We expect our inventory-focused initiatives to continue enhancing our working capital use and cash conversion through Fiscal 2023.
Global conflicts, such as the conflict between Russia and Ukraine and the sanctions and counter-sanctions imposed in response to it, created increased economic uncertainty and operational complexity both in Europe, Middle East and Africa (“EMEA”) and globally, the impacts of which we cannot fully predict. Gates had a single distribution center in Russia that sold primarily to customers based in Russia. In early July 2022, we suspended our operations in Russia. The Russia-Ukraine and other global conflicts did not have a significant adverse impact on our operating results during the three months ended September 30, 2023. We will continue to monitor if the Russia-Ukraine and other conflicts impact global economic conditions or our business.
During 2022, our operations in China were impacted by the COVID-19 pandemic and related government actions, resulting in a modest loss of production, sales and profitability as well as decreased customer demand and labor availability. Although these conditions improved in 2023, we may experience future production or distribution disruptions associated with public health crises where individual locations are temporarily closed or productivity is reduced by government mandates or as a result of supply chain or labor disruptions, which could place further constraints on our ability to produce or deliver our products and meet customer demand or increase our costs. We may also continue to experience periods of inconsistency in customer demand as customers address their own supply chain constraints. Throughout the pandemic, we were able to maintain our ability to respond to changes in demand and we continue to fund key initiatives, which we believe will serve us well as our end markets continue to evolve.
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Results for the three and nine months ended September 30, 2023 compared to the results for the three and nine months ended October 1, 2022
Summary Gates Performance
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
| Net sales | $ | 872.9 | $ | 860.7 | $ | 2,706.9 | $ | 2,660.9 | |||||||||||||||
| Cost of sales | 529.5 | 551.2 | 1,685.7 | 1,720.3 | |||||||||||||||||||
| Gross profit | 343.4 | 309.5 | 1,021.2 | 940.6 | |||||||||||||||||||
| Selling, general and administrative expenses | 213.4 | 199.7 | 666.2 | 644.0 | |||||||||||||||||||
| Transaction-related expenses | 1.3 | 0.7 | 2.1 | 2.0 | |||||||||||||||||||
| Asset impairments | 0.1 | 0.5 | 0.1 | 1.1 | |||||||||||||||||||
| Restructuring expenses | 2.6 | 4.7 | 10.3 | 8.4 | |||||||||||||||||||
| Other operating expense | 0.1 | 0.1 | 0.2 | 0.2 | |||||||||||||||||||
| Operating income from continuing operations | 125.9 | 103.8 | 342.3 | 284.9 | |||||||||||||||||||
| Interest expense | 39.5 | 33.3 | 124.8 | 98.9 | |||||||||||||||||||
| Other (income) expense | (0.2) | 3.1 | 3.8 | 11.8 | |||||||||||||||||||
| Income from continuing operations before taxes | 86.6 | 67.4 | 213.7 | 174.2 | |||||||||||||||||||
| Income tax expense | 1.0 | 11.4 | 25.9 | 21.5 | |||||||||||||||||||
| Net income from continuing operations | $ | 85.6 | $ | 56.0 | $ | 187.8 | $ | 152.7 | |||||||||||||||
Adjusted EBITDA(1) | $ | 189.4 | $ | 177.7 | $ | 561.2 | $ | 514.6 | |||||||||||||||
Adjusted EBITDA margin | 21.7 | % | 20.6 | % | 20.7 | % | 19.3 | % | |||||||||||||||
(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 the three months ended September 30, 2023 were $872.9 million, compared to $860.7 million during the prior year period, an increase of 1.4%, or $12.2 million. Our net sales for the three months ended September 30, 2023 were favorably impacted by movements in average currency exchange rates of $16.2 million compared to the prior year period, principally due to the weakening of the U.S. dollar against a number of currencies, in particular the Euro and Mexican Peso. Excluding this impact, core sales decreased by $4.0 million, or 0.5%, during the three months ended September 30, 2023 compared to the prior year period, driven primarily by the impact of lower sales volume, partially offset by a $39.1 million benefit from pricing.
Core sales in our Power Transmission business increased by 1.2% while core sales in our Fluid Power business decreased by 3.0% for the three months ended September 30, 2023 compared to the prior year period. The overall decline in core sales was primarily driven by a 9.7% and 2.8% decline in sales to our industrial first fit and industrial replacement channels, respectively, for the three months ended September 30, 2023, primarily in North America, Greater China, and EMEA. Personal mobility, off-highway and diversified industrial end markets drove most of this decline from industrial sales for the three months ended September 30, 2023. These decreases were largely offset by increases in sales to our automotive replacement and automotive first-fit channels by 6.4% and 5.4%, respectively. The growth of the automotive replacement sales primarily came from EMEA and South America, while the increase of automotive first-fit sales was mostly driven by North America and East Asia & India.
Net sales during the nine months ended September 30, 2023 were $2,706.9 million, compared to $2,660.9 million during the prior year period, an increase of 1.7%, or $46.0 million. Our net sales for the nine months ended September 30, 2023 were adversely impacted by movements in average currency exchange rates of $20.4 million compared to the prior year period, principally due to the strengthening of the U.S. dollar against a number of currencies, in particular the Chinese Renminbi, Turkish Lira, and Canadian Dollar. Excluding these impacts, core sales increased by $66.4 million, or 2.5%, during the nine months ended September 30, 2023 compared to the prior year period, driven primarily by a $166.0 million benefit from pricing, partially offset by the impact of lower volumes.
31
Core sales in our Power Transmission and Fluid Power businesses increased by 3.8% and 0.4%, respectively, for the nine months ended September 30, 2023 compared to the prior year period. These improvements were primarily driven by sales to customers in our automotive channel with an overall growth of 8.6%, primarily due to EMEA and North America with a year-over-year increase in core sales of 18.0% and 2.4%, respectively.
Cost of sales
Cost of sales for the three months ended September 30, 2023 was $529.5 million, compared to $551.2 million for the prior year period, a decrease of 3.9%, or $21.7 million. This decrease was primarily attributable to lower volume and improved fixed cost absorption of $27.2 million. The decreases were partially offset by unfavorable movements in average currency exchange rates.
Cost of sales for the nine months ended September 30, 2023 was $1,685.7 million, compared to $1,720.3 million for the prior year period, a decrease of 2.0%, or $34.6 million. The decrease was primarily driven by favorable movements in average currency exchange rates of $22.0 million and lower volume net of lower fixed cost absorption of $13.9 million. This decrease was partially offset by higher inflation-related costs.
Gross profit
As a result of the factors described above, gross profit for the three months ended September 30, 2023 was $343.4 million, compared to $309.5 million for the prior year period, an increase of 11.0% or $33.9 million. Our gross profit margin improved by 330 basis points to 39.3% for the three months ended September 30, 2023.
As a result of the factors described above, gross profit for the nine months ended September 30, 2023 was $1,021.2 million, compared to $940.6 million for the prior year period, an increase of 8.6% or $80.6 million. Our gross profit margin improved by 240 basis points to 37.7% for the nine months ended September 30, 2023.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2023 were $213.4 million compared to $199.7 million for the prior year period. This increase of $13.7 million was driven primarily by an increase in labor and benefits expense of $17.5 million and unfavorable movements in average currency exchange rates of $7.5 million. The increases were partially offset by lower share-based compensation costs and decreased warranty expenditures.
SG&A expenses for the nine months ended September 30, 2023 were $666.2 million compared to $644.0 million for the prior year period. This increase of $22.2 million was driven primarily by an increase of labor and benefits expense of $34.4 million and an $11.4 million charge to reflect an estimated credit loss due to a recent customer bankruptcy as further described in Note 3 to the condensed consolidated financial statements included elsewhere in this quarterly report. This increase was partially offset by lower share-based compensation costs of $15.2 million, largely due to the March 2022 vesting of certain pre-IPO options as discussed further in Note 14 to the condensed consolidated financial statements included elsewhere in this report. Additional offsets were primarily due to decreased outbound freight and warranty expenditures.
Transaction-related expenses
Transaction-related expenses of $1.3 million and $2.1 million were incurred during the three and nine months ended September 30, 2023, respectively, related primarily to the accrued fees for amending the New Dollar Term Loans in October 2023 and certain other corporate transactions. Transaction-related expenses of $0.7 million and $2.0 million were incurred during the prior year three and nine months ended October 1, 2022, respectively, related primarily to the secondary offering completed in March 2022 and other corporate transactions.
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Restructuring expenses
Restructuring and other strategic initiatives during the three and nine months ended September 30, 2023 related primarily to severance and other non-labor costs related to relocating certain production activities in China, Mexico and Europe. During the three months ended September 30, 2023, we also incurred additional non-severance labor and benefit costs of $0.3 million related to relocation and integration of certain support functions into our regional shared service center in Europe. Other restructuring costs incurred during the three months ended September 30, 2023 related to legal and consulting expenses, as well as costs associated with prior period facility closures or relocations in several countries.
Restructuring and other strategic initiatives during the three and nine months ended October 1, 2022 related primarily to our ongoing European reorganization, including $2.2 million of labor and severance costs related to relocating certain production activities within Europe during the three months ended October 1, 2022, in addition to severance costs of $2.3 million during the nine months ended October 1, 2022 related to relocation and integration of certain support functions into our regional shared service center. We also incurred $1.4 million and $2.7 million of costs, respectively, during the three and nine months ended October 1, 2022 in relation to the suspension of our operations in Russia, which included severance costs of $0.7 million, an impairment of inventories of $0.3 million (recognized in cost of sales), and an impairment of fixed and other assets of $1.1 million (recognized in asset impairments) for the nine months ended October 1, 2022. Other restructuring costs incurred during the period related to non-severance and other labor and benefit costs, prior period facility closures or relocations in several countries.
Interest expense
Our interest expense was as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Debt: | |||||||||||||||||||||||
| Dollar Term Loans | $ | 26.9 | $ | 17.0 | $ | 87.5 | $ | 47.8 | |||||||||||||||
Euro Term Loan | — | 4.9 | — | 15.7 | |||||||||||||||||||
Dollar Senior Notes | 8.7 | 8.8 | 26.6 | 26.6 | |||||||||||||||||||
| Asset-backed revolver | 1.0 | 0.4 | 1.8 | 0.8 | |||||||||||||||||||
| 36.6 | 31.1 | 115.9 | 90.9 | ||||||||||||||||||||
Amortization of deferred issuance costs | 2.3 | 1.8 | 6.7 | 5.7 | |||||||||||||||||||
Other interest expense | 0.6 | 0.4 | 2.2 | 2.3 | |||||||||||||||||||
| $ | 39.5 | $ | 33.3 | $ | 124.8 | $ | 98.9 | ||||||||||||||||
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 increased by $5.5 million for the three months ended September 30, 2023 and increased by $25.0 million for the nine months ended September 30, 2023, when compared to the respective prior year periods. The increase during both the three and nine months ended September 30, 2023 was primarily driven by a higher interest rate on the Dollar Term Loans, partially offset by the impact of derivatives. Interest expense during both the three and nine months ended September 30, 2023 also increased due to higher interest rates and higher borrowing amounts under the asset-backed revolver. Amortization of deferred issuance costs increased during the three and nine months ended September 30, 2023 primarily due to the additional costs incurred from issuing the New Dollar Term Loans in November 2022.
33
Other (income) expense
Our other (income) expense was as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||
Interest income on bank deposits | $ | (4.0) | $ | (0.6) | $ | (9.2) | $ | (2.1) | |||||||||||||||
| Foreign currency (gain) loss on net debt and hedging instruments | (1.4) | 3.7 | 1.5 | 14.4 | |||||||||||||||||||
Net adjustments related to post-retirement benefits | (0.7) | (1.6) | (2.2) | (4.8) | |||||||||||||||||||
Other | 5.9 | 1.6 | 13.7 | 4.3 | |||||||||||||||||||
| $ | (0.2) | $ | 3.1 | $ | 3.8 | $ | 11.8 | ||||||||||||||||
Other (income) expenses for the three and nine months ended September 30, 2023 were income of $0.2 million and expense of $3.8 million, respectively, compared to expenses of $3.1 million and $11.8 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 and increased interest income on our bank deposits, partially offset by higher interest costs on post-retirement obligations based on the most recent actuarial valuations. In addition, the economies of Türkiye and Argentina are both designated as a highly inflationary economy under U.S. GAAP. The functional currency for a portion of our Türkiye operations and our Argentina operations were previously changed from their local currency to the U.S. dollar as a result of applying highly-inflationary accounting treatment. During the three and nine months ended September 30, 2023, we incurred a foreign currency remeasurement loss of $3.7 million and $8.5 million, respectively, due to translation adjustments for these entities that operate in highly inflationary economies, compared to a remeasurement loss of $0.2 million and $1.6 million during the three and nine months ended October 1, 2022, respectively.
Income tax expense
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 September 30, 2023, we had income tax expense of $1.0 million on pre-tax income of $86.6 million, which resulted in an effective tax rate of 1.2%, compared to an income tax expense of $11.4 million on pre-tax income of $67.4 million, which resulted in an effective tax rate of 16.9% for the three months ended October 1, 2022.
For the three months ended September 30, 2023, the effective tax rate was driven primarily by discrete tax benefits of $11.0 million, of which $12.9 million related to unrecognized tax benefits due to audit closures offset by $1.9 million of other discrete expenses. For the three months ended October 1, 2022, the effective tax rate was driven primarily by a discrete tax benefit of $3.5 million related to the partial release of valuation allowance on deferred tax assets for U.S. foreign tax credits, partially offset by $2.6 million of other discrete expenses.
For the nine months ended September 30, 2023, we had an income tax expense of $25.9 million on pre-tax income of $213.7 million, which resulted in an effective tax rate of 12.1%, compared to an income tax expense of $21.5 million on pre-tax income of $174.2 million, which resulted in an effective tax rate of 12.3% for the nine months ended October 1, 2022.
For the nine months ended September 30, 2023 the effective tax rate was driven primarily by discrete benefits of $12.9 million related to unrecognized tax benefits due to audit closures. For the nine months ended October 1, 2022, the effective tax rate was driven primarily by discrete benefits of $15.2 million related to the partial release of valuation allowance on deferred tax assets for U.S. foreign tax credits.
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.
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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 September 30, 2023, that it is more likely than not that deferred tax assets in the U.S. totaling $2.4 million are realizable, none of which was discrete. 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.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2023 was $189.4 million, compared to $177.7 million in the prior year period, an increase of 6.6% or $11.7 million. Adjusted EBITDA margin was 21.7% for the three months ended September 30, 2023, a 110 basis point increase from the prior year period margin of 20.6%. The increase in Adjusted EBITDA was driven primarily by the increase in gross profit of $33.9 million, which was largely the result of favorable pricing, partially offset by lower volumes. The increase in Adjusted EBITDA was also partially offset by higher labor and benefit expenses during the three months ended September 30, 2023.
Adjusted EBITDA for the nine months ended September 30, 2023 was $561.2 million, compared to $514.6 million in the prior year period, an increase of 9.1% or $46.6 million. Adjusted EBITDA margin was 20.7% for the nine months ended September 30, 2023, a 140 basis point improvement from the prior year period Adjusted EBITDA margin of 19.3%. The drivers of the increase in Adjusted EBITDA were similar to those described above for the three-month period, further offset by lower absorption of fixed costs and higher inflation costs during the nine months ended September 30, 2023 compared to the prior year period.
For a reconciliation of net income to Adjusted EBITDA for each of the periods presented and the calculation of the Adjusted EBITDA margin, see “—Non-GAAP Measures.”
Analysis by Operating Segment
Power Transmission (61.5% and 61.3%, respectively, of Gates’ net sales for the three and nine months ended September 30, 2023)
| Three months ended | |||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | Period over period change | ||||||||||||||
Net sales | $ | 536.4 | $ | 522.5 | 2.7 | % | |||||||||||
Adjusted EBITDA | $ | 116.5 | $ | 101.9 | 14.3 | % | |||||||||||
Adjusted EBITDA margin | 21.7 | % | 19.5 | % | |||||||||||||
| Nine months ended | |||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | Period over period change | ||||||||||||||
Net sales | $ | 1,658.4 | $ | 1,621.1 | 2.3 | % | |||||||||||
Adjusted EBITDA | $ | 343.2 | $ | 302.1 | 13.6 | % | |||||||||||
Adjusted EBITDA margin | 20.7 | % | 18.6 | % | |||||||||||||
Net sales in Power Transmission for the three months ended September 30, 2023 increased by 2.7%, or $13.9 million, compared to the prior year period. Excluding the favorable impact of movements in average currency exchange rates of $7.8 million, core sales increased by 1.2%, or $6.1 million, compared to the prior year period, driven primarily by a $23.5 million benefit from pricing.
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Net sales in Power Transmission for the nine months ended September 30, 2023 increased by 2.3%, or $37.3 million, compared to the prior year period. Excluding the adverse impact of movements in average currency exchange rates of $24.7 million, core sales increased by 3.8%, or $62.0 million, compared to the prior year period, driven primarily by a $96.1 million benefit from pricing, partially offset by the impact of lower volumes.
Power Transmission’s core sales to automotive customers grew by 6.4% and 10.1% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. EMEA contributed most of this growth particularly in automotive replacement sales, which grew by 12.8% and 20.2%, respectively, during the three and nine months ended September 30, 2023 compared to the prior year period. The growth of sales to our automotive customers was partially offset by a decline in industrial sales of 6.7% and 5.2% for the three and nine months ended September 30, 2023, respectively. The industrial sales decline was mostly driven by personal mobility and diversified industrial end market during both the three and nine months ended September 30, 2023, primarily from North America, EMEA, and East Asia & India.
Power Transmission Adjusted EBITDA for the three months ended September 30, 2023 increased by 14.3%, or $14.6 million, compared to the prior year period, driven primarily by pricing, partially offset by lower volumes. As a result, Adjusted EBITDA margin was 21.7%, a 220 basis point improvement from the prior year period.
Power Transmission Adjusted EBITDA for the nine months ended September 30, 2023 increased by 13.6%, or $41.1 million, compared to the prior year period. This increase was driven primarily by pricing, partially offset by lower volumes, lower absorption of fixed costs and higher inflation-related costs. The increase resulted in an Adjusted EBITDA margin of 20.7%, a 210 basis point improvement compared to the prior year period.
Fluid Power (38.5% and 38.7%, respectively, of Gates’ net sales for the three and nine months ended September 30, 2023)
| Three months ended | |||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | Period over period change | ||||||||||||||
Net sales | $ | 336.5 | $ | 338.2 | (0.5 | %) | |||||||||||
Adjusted EBITDA | $ | 72.9 | $ | 75.8 | (3.8 | %) | |||||||||||
Adjusted EBITDA margin | 21.7 | % | 22.4 | % | |||||||||||||
| Nine months ended | |||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | Period over period change | ||||||||||||||
Net sales | $ | 1,048.5 | $ | 1,039.8 | 0.8 | % | |||||||||||
Adjusted EBITDA | $ | 218.0 | $ | 212.5 | 2.6 | % | |||||||||||
Adjusted EBITDA margin | 20.8 | % | 20.4 | % | |||||||||||||
Net sales in Fluid Power for the three months ended September 30, 2023 decreased by 0.5%, or $1.7 million, compared to the prior year period. Excluding the favorable impact of movements in average currency exchange rates of $8.4 million, core sales decreased by 3.0%, or $10.1 million, compared to the prior year period, driven primarily by a decrease in volume, partially offset by a $15.6 million benefit from pricing.
Net sales in Fluid Power for the nine months ended September 30, 2023 increased by 0.8%, or $8.7 million, compared to the prior year period. Excluding the favorable impact of movements in average currency exchange rates of $4.3 million, core sales increased by 0.4%, or $4.4 million, compared to the prior year period, driven primarily by a $69.9 million benefit from pricing, partially offset by lower volumes.
Fluid Power’s core sales to our industrial channel declined by 5.3%, while sales to our automotive channel increased by 5.1% during the three months ended September 30, 2023. The decline in the industrial channel was primarily driven by North America, while automotive growth arose from EMEA and North America. The off-highway end market drove most of the sales decline of 7.9% during the three months ended September 30, 2023 compared to prior year period. Fluid Power’s core sales growth of 0.4% during the nine months ended September 30, 2023 was primarily attributable to a 2.2% increase in the automotive channel sales compared to the prior year period, primarily driven by EMEA and North America. Sales to our energy end market grew 9.2% for the nine months ended September 30, 2023, primarily driven by EMEA. This was partially offset by a decline in diversified industrial sales of 5.2% during the nine months ended September 30, 2023 compared to prior year period, primarily driven by EMEA and North America.
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Fluid Power Adjusted EBITDA for the three months ended September 30, 2023 decreased by 3.8%, or $2.9 million, compared to the prior year period, driven primarily by lower volumes and increased labor and benefits costs, partially offset by pricing. As a result, the Adjusted EBITDA margin was 21.7%, a 70 basis point decline from the prior year period.
Fluid Power Adjusted EBITDA for the nine months ended September 30, 2023 increased by 2.6%, or $5.5 million, compared to the prior year period. This increase was driven primarily by pricing, partially offset by lower volume and absorption of fixed costs, increased labor and benefits costs, and higher inflation costs, resulting in an Adjusted EBITDA margin of 20.8%, a 40 basis points improvement 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, share repurchases, facility expansions and acquisitions. We expect to finance our future cash requirements with cash on hand, cash flows from operations and, where necessary, borrowings under our revolving credit facilities. We have historically relied on our cash flow from operations and various debt and equity financings for liquidity.
From time to time, we enter into currency derivative contracts to manage currency transaction exposures. Similarly, from time to time, we may enter into interest rate derivatives to maintain the desired mix of floating and fixed rate debt.
As market conditions warrant, we and our Sponsor 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 2026; however, we regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure, and may refinance all or a portion of our indebtedness on or before maturity. We do not anticipate any material long-term deterioration in our overall liquidity position in the foreseeable future, and believe that we have adequate liquidity and capital resources for the next twelve months.
Cash Flow
Nine months ended September 30, 2023 compared to the nine months ended October 1, 2022
Cash provided by operating activities was $291.7 million during the nine months ended September 30, 2023 compared to cash provided by operating activities of $18.8 million during the prior year period, driven primarily by an improvement of $180.0 million in trade working capital movement compared to the prior year period, combined with improved operating performance in the current year, an improvement in value-added tax recoveries compared to the prior year period, and a decrease of $26.8 million in income taxes paid compared to the prior year period, partially offset by $30.6 million higher cash paid for interest in the current year period.
Net cash used in investing activities during the nine months ended September 30, 2023 was $58.0 million, compared to $71.5 million in the prior year period. The decrease of cash used in investing activities was primarily driven by decreased capital expenditures of $18.5 million, partially offset by a $4.6 million increase in net cash paid under corporate-owned life insurance policies.
Net cash used in financing activities was $241.7 million during the nine months ended September 30, 2023, compared to $177.0 million in the prior year period. Current year outflows were primarily related to the $251.7 million paid to acquire shares under our share repurchase program, including shares repurchased through an intermediary from Blackstone as further described in Note 15 to the condensed consolidated financial statements included elsewhere in this report. The increase of cash outflow was partially offset by $28.2 million in lower dividends paid to non-controlling interest shareholders in 2023.
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Indebtedness
Our long-term debt, consisting principally of two secured term loans and the U.S. dollar denominated unsecured senior notes, was as follows:
| Carrying amount | Principal amount | ||||||||||||||||||||||
(dollars in millions) | As of September 30, 2023 | As of December 31, 2022 | As of September 30, 2023 | As of December 31, 2022 | |||||||||||||||||||
Debt: | |||||||||||||||||||||||
—Secured | |||||||||||||||||||||||
Dollar Term Loans | $ | 1,873.6 | $ | 1,883.3 | $ | 1,908.8 | $ | ||||||||||||||||
—Unsecured | |||||||||||||||||||||||
Dollar Senior Notes | 571.8 | 579.7 | 568.0 | 568.0 | |||||||||||||||||||
| $ | 2,445.4 | $ | 2,463.0 | $ | 2,476.8 | $ | 2,491.4 | ||||||||||||||||
We refer to the term loans denominated in U.S. dollars as the “Dollar Term Loans” and the unsecured senior notes denominated in U.S. dollars as the “Dollar Senior Notes”. Details of our long-term debt are presented in Note 12 to the condensed consolidated financial statements included elsewhere in this quarterly report.
Debt drawings and redemptions
During May 2023, we drew $100.0 million under our asset-backed revolving credit facility to partially fund the purchase of shares under our share repurchase program. The balance on the asset-backed revolving credit facility was fully paid off during the three months ended September 30, 2023, as discussed further in Note 12 to the condensed consolidated financial statements included elsewhere in this quarterly report.
On November 16, 2022, we issued a new $575.0 million tranche of dollar denominated term loans (the “New Dollar Term Loans”) pursuant to an amendment to the credit agreement governing our term loan facilities, using the proceeds to extinguish the entire outstanding principal balance of €563.8 million under our Euro Term Loan facility (the “Euro Term Loan”) plus €1.0 million accrued interest. The New Dollar Term Loans have substantially similar terms as the dollar denominated term loans drawn on July 3, 2014 and refinanced on February 24, 2021 (the “Existing Dollar Term Loans”), bearing interest at the borrower’s option at either Term SOFR (as defined in the credit agreement), subject to a 0.50 % per annum Term SOFR floor, plus 3.50 % margin per annum, or at the base rate, subject to a 1.50 % per annum floor, plus 2.50 % per annum. The New Dollar Term Loans require scheduled quarterly amortization payments of 1 % per annum based on the initial aggregate principal amount and mature in November 2029. Issuance discount and costs totaling approximately $23.2 million related to the issuance of the New Dollar Term Loans have been deferred and will be amortized to interest expense over the remaining term of the related borrowings using the effective interest method. The repayment of Euro Term Loan resulted in the accelerated recognition of $2.2 million deferred financing costs (recognized in interest expense).
During March 2022, we drew $70.0 million under our asset-backed revolving credit facility to partially fund the purchase of shares under our share repurchase program, as discussed further in Note 15 to the condensed consolidated financial statements included elsewhere in this report. During Fiscal 2022, we paid down the borrowings on the asset-backed revolver and had no remaining outstanding balance as of December 31, 2022.
Dollar Term Loan credit agreement amendments
On October 10, 2023, we amended the New Dollar Term Loans’ interest rate to be, at our option, either Term SOFR, subject to a floor of 0.50 %, plus a margin of 3.00 % per annum, or the base rate, subject to a 1.50% per annum floor, plus 2.00% per annum.
On March 1, 2023, we amended the Existing Dollar Term Loans, revolving credit facility and asset-backed revolver, which bore interests at LIBOR plus an applicable margin. The amendments modified the reference rates for borrowings in dollar from LIBOR to Term SOFR or Adjusted Term SOFR, as applicable. For further information on the facilities, see Note 12 to the condensed consolidated financial statements included elsewhere in this quarterly report.
On November 16, 2022, we amended the credit agreement governing our term loan facilities to pay off and replace our Euro Term Loan with a new class of $575.0 million of New Dollar Term Loans as described above.
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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 September 30, 2023, before intercompany eliminations, our non-guarantor subsidiaries represented approximately 73% of our net sales and 72% of our EBITDA as defined in the financial covenants attaching to the senior secured credit facilities. As of September 30, 2023, before intercompany eliminations, our non-guarantor subsidiaries represented approximately 65% of our total assets and approximately 23% 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 2023, our Net Debt increased by $7.0 million from $1,913.0 million as of December 31, 2022 to $1,920.0 million as of September 30, 2023. Net Debt was impacted adversely by $13.3 million due to movements in currency exchange rates. Excluding this impact, Net Debt decreased by $6.3 million, which was driven primarily by $251.7 million paid to acquire shares under our share repurchase program and $47.2 million of capital expenditures, partially offset by cash provided by operating activities of $291.7 million during the nine months ended September 30, 2023.
Borrowing Headroom
As of September 30, 2023, our asset-backed revolving credit facility had a borrowing base of $250.0 million, being the maximum amount we can draw down based on the current value of the secured assets. During May 2023, we drew $100.0 million under this facility to partially fund the purchase of shares under our share repurchase program, all of which was repaid during the three months ended September 30, 2023, as discussed further in Note 15 to the condensed consolidated financial statements included elsewhere in this report. In addition, there were letters of credit outstanding against the facility amounting to $31.6 million as of September 30, 2023. We also have a secured revolving credit facility that provides for multi-currency revolving loans up to an aggregate principal amount of $250.0 million, with no amounts drawn as of September 30, 2023.
In total, our committed borrowing headroom was $468.4 million, in addition to cash balances of $556.8 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).
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.
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During the periods presented, the items excluded from EBITDA in computing Adjusted EBITDA primarily included:
•non-cash charges in relation to share-based compensation;
•transaction-related expenses incurred in relation to major corporate transactions, including the acquisition of businesses and related integration activities, and equity and debt transactions;
•asset impairments;
•restructuring expenses, including severance-related expenses;
•credit loss related to a customer bankruptcy;
•cybersecurity incident expenses; and
•inventory adjustments related to certain inventories accounted for on the Last-in-First-out (“LIFO”) basis.
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. We also exclude costs associated with major corporate transactions because we do not believe that they relate to our performance. Other items are excluded from Adjusted EBITDA because they are individually or collectively significant items that are not considered to be representative of the underlying performance of our businesses. During the periods presented, we excluded restructuring expenses and severance-related expenses that reflect specific, strategic actions taken by management to shutdown, downsize, or otherwise fundamentally reorganize areas of Gates’ business; credit loss related to a customer bankruptcy; expenses related to a malware attack that occurred in February 2023; and changes in the LIFO inventory reserve recognized in cost of sales for certain inventories that are valued on a LIFO basis. During inflationary or deflationary pricing environments, LIFO adjustments can result in variability of the cost of sales recognized each period as the most recent costs are matched against current sales, while historical, typically lower, costs are retained in inventory. LIFO adjustments are determined based on published pricing indices, which often are not representative of the actual cost changes or timing of those changes as experienced by our business. Excluding the impact from the application of LIFO therefore improves the comparability of our financial performance from period to period and with the Company’s peers, and more closely represents the physical flow of our inventory and how we manage the business.
EBITDA and Adjusted EBITDA exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with, not as substitutes for, profit or loss for the period. Management compensates for these limitations by separately monitoring net income from continuing operations for the period.
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The following table reconciles net income from continuing operations, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Net income from continuing operations | $ | 85.6 | $ | 56.0 | $ | 187.8 | $ | 152.7 | |||||||||||||||||||||
| Income tax expense | 1.0 | 11.4 | 25.9 | 21.5 | |||||||||||||||||||||||||
| Net interest and other expenses | 39.3 | 36.4 | 128.6 | 110.7 | |||||||||||||||||||||||||
| Depreciation and amortization | 54.0 | 53.2 | 162.5 | 164.1 | |||||||||||||||||||||||||
| EBITDA | 179.9 | 157.0 | 504.8 | 449.0 | |||||||||||||||||||||||||
Transaction-related expenses (1) | 1.3 | 0.7 | 2.1 | 2.0 | |||||||||||||||||||||||||
| Asset impairments | 0.1 | 0.5 | 0.1 | 1.1 | |||||||||||||||||||||||||
| Restructuring expenses | 2.6 | 4.7 | 10.3 | 8.4 | |||||||||||||||||||||||||
| Share-based compensation expense | 3.3 | 7.2 | 19.6 | 34.8 | |||||||||||||||||||||||||
Inventory impairments and adjustments (2) (included in cost of sales) | 2.2 | 7.5 | 6.3 | 18.7 | |||||||||||||||||||||||||
| Severance expenses (included in cost of sales) | (0.1) | — | 0.4 | — | |||||||||||||||||||||||||
| Severance expenses (included in SG&A) | — | — | 0.9 | 0.4 | |||||||||||||||||||||||||
Credit loss related to customer bankruptcy (included in SG&A) (3) | — | — | 11.4 | — | |||||||||||||||||||||||||
Cybersecurity incident expenses (4) | — | — | 5.1 | — | |||||||||||||||||||||||||
| Other items not directly related to current operations | 0.1 | 0.1 | 0.2 | 0.2 | |||||||||||||||||||||||||
| Adjusted EBITDA | $ | 189.4 | $ | 177.7 | $ | 561.2 | $ | 514.6 | |||||||||||||||||||||
(1) Transaction-related expenses relate primarily to advisory fees and other costs recognized in respect of major corporate transactions, including the acquisition of businesses, and equity and debt transactions.
(2) Inventory impairments and adjustments include the reversal of the adjustment to remeasure certain inventories on a LIFO basis. The recent inflationary environment has caused LIFO values to drop below First-in, First-out (“FIFO”) values because LIFO measurement results in the more recent inflated costs being matched against current sales while historical, lower costs are retained in inventories.
(3) On January 31, 2023, one of our customers filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In connection with the bankruptcy proceedings, we evaluated our potential risk and exposure relating to our outstanding pre-petition accounts receivable balance from the customer and recorded a $11.4 million pre-tax charge during the nine months ended September 30, 2023 to reflect our estimated recovery. We continue to monitor the circumstances surrounding the bankruptcy in determining whether adjustments to this recovery estimate are necessary.
(4) On February 11, 2023, Gates determined that it was the target of a malware attack. Cybersecurity incident expenses include legal, consulting, and other costs incurred as a direct result of this incident, some of which may be partially offset by insurance recoveries.
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 | Nine months ended | ||||||||||||||||||||||||||||
(dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| Net sales | $ | 872.9 | $ | 860.7 | $ | 2,706.9 | $ | 2,660.9 | |||||||||||||||||||||
| Adjusted EBITDA | $ | 189.4 | $ | 177.7 | $ | 561.2 | $ | 514.6 | |||||||||||||||||||||
| Adjusted EBITDA margin | 21.7 | % | 20.6 | % | 20.7 | % | 19.3 | % | |||||||||||||||||||||
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Core revenue 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 revenue 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 September 30, 2023 | |||||||||||||||||
(dollars in millions) | Power Transmission | Fluid Power | Total | ||||||||||||||
| Net sales for the three months ended September 30, 2023 | $ | 536.4 | $ | 336.5 | $ | 872.9 | |||||||||||
| Impact on net sales of movements in currency rates | (7.8) | (8.4) | (16.2) | ||||||||||||||
| Core revenue for the three months ended September 30, 2023 | 528.6 | 328.1 | 856.7 | ||||||||||||||
| Net sales for the three months ended October 1, 2022 | 522.5 | 338.2 | 860.7 | ||||||||||||||
| Increase (decrease) in net sales on a core basis (core revenue) | $ | 6.1 | $ | (10.1) | $ | (4.0) | |||||||||||
| Core revenue growth | 1.2 | % | (3.0) | % | (0.5) | % | |||||||||||
| Nine months ended September 30, 2023 | |||||||||||||||||
(dollars in millions) | Power Transmission | Fluid Power | Total | ||||||||||||||
| Net sales for the nine months ended September 30, 2023 | $ | 1,658.4 | $ | 1,048.5 | $ | 2,706.9 | |||||||||||
| Impact on net sales of movements in currency rates | 24.7 | (4.3) | 20.4 | ||||||||||||||
| Core revenue for the nine months ended September 30, 2023 | 1,683.1 | 1,044.2 | 2,727.3 | ||||||||||||||
| Net sales for the nine months ended October 1, 2022 | 1,621.1 | 1,039.8 | 2,660.9 | ||||||||||||||
| Increase in net sales on a core basis (core revenue) | $ | 62.0 | $ | 4.4 | $ | 66.4 | |||||||||||
| Core revenue growth | 3.8 | % | 0.4 | % | 2.5 | % | |||||||||||
Net Debt
Management uses Net Debt, rather than the narrower measure of cash and cash equivalents and restricted cash which forms the basis for the condensed consolidated statement of cash flows, as a measure of our liquidity and in assessing the strength of our balance sheet.
Management analyzes the key cash flow items driving the movement in net debt to better understand and assess Gates’ cash performance and utilization in order to maximize the efficiency with which resources are allocated. The analysis of cash movements in Net Debt also allows management to more clearly identify the level of cash generated from operations that remains available for distribution after servicing our debt and post-employment benefit obligations and after the cash impacts of acquisitions and disposals.
Net Debt represents the net total of:
• the principal amount of our debt; and
• the carrying amount of cash and cash equivalents.
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Net Debt was as follows:
(dollars in millions) | As of September 30, 2023 | As of December 31, 2022 | |||||||||
| Principal amount of debt | $ | 2,476.8 | $ | 2,491.4 | |||||||
Less: Cash and cash equivalents | (556.8) | (578.4) | |||||||||
| Net Debt | $ | 1,920.0 | $ | 1,913.0 | |||||||
The principal amount of debt is reconciled to the carrying amount of debt as follows:
(dollars in millions) | As of September 30, 2023 | As of December 31, 2022 | |||||||||
| Principal amount of debt | $ | 2,476.8 | $ | 2,491.4 | |||||||
Accrued interest | 8.2 | 17.1 | |||||||||
Deferred issuance costs | (39.6) | (45.5) | |||||||||
Carrying amount of debt | $ | 2,445.4 | $ | 2,463.0 | |||||||
Adjusted EBITDA adjustments for ratio calculation purposes
The financial maintenance ratio in our revolving credit agreement and other ratios related to incurrence-based covenants (measured only upon the taking of certain actions, including the incurrence of additional indebtedness) under our revolving credit facility, our term loan facility and the indenture governing our outstanding notes are calculated in part based on financial measures similar to Adjusted EBITDA as presented elsewhere in this 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 $5.6 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 payable of $342.3 million due to Gates Global LLC and its subsidiaries from indirect parent entities of Gates Global LLC as of September 30, 2023 (compared to a payable of $117.3 million due to Gates Global LLC and its subsidiaries as of December 31, 2022) and additional cash and cash equivalents held by the Company and other indirect parent entities of Gates Global LLC of $11.3 million and $6.4 million as of September 30, 2023 and December 31, 2022, respectively.
Critical Accounting Estimates and Judgments
Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions concerning the future that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period.
Please refer to “Critical Accounting Estimates and Judgments” described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC, from which there have been no material changes.
43
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 September 30, 2023, 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 5. Other Information
Section 13(r) Disclosure
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we hereby incorporate by reference herein Exhibit 99.1 of this report, which includes disclosures regarding activities at Mundys S.p.A. (formerly Atlantia S.p.A.), which may be, or may have been at the time considered to be, an affiliate of Blackstone and, therefore, our affiliate.
Trading Arrangements
During the three months ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company informed us of the adoption termination
Item 6: Exhibits
Exhibit No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | Amendment No. 8, dated as of October 10, 2023, to the Credit Agreement dated as of July 3, 2014 among Omaha Holdings LLC, Gates Global LLC, Gates Corporation, the guarantors party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and the lenders party thereto.* | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 99.1 | |||||
| 101 | The following financial information from Gates Industrial Corporation’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023, formatted in inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and October 1, 2022, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and October 1, 2022, (iii) Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and October 1, 2022, (v) Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2023 and October 1, 2022, 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) | ||||
45
* 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.
46
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: November 3, 2023
47
Exhibit 10.1
Execution Version
AMENDMENT NO. 8 TO CREDIT AGREEMENT
AMENDMENT NO. 8 TO CREDIT AGREEMENT, dated as of October 10, 2023 (this “Amendment”), among OMAHA HOLDINGS LLC, a Delaware limited liability company (“Holdings”), GATES GLOBAL LLC (the “Borrower”), GATES CORPORATION (the “Co-Borrower”), each of the Guarantors party hereto, CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as administrative agent and collateral agent (in such capacity and including any permitted successor or assign, the “Administrative Agent”) for the Lenders (as defined in the Credit Agreement referred to below), the Lenders party hereto and CITIBANK, N.A., as the New Lender (as defined below).
W I T N E S S E T H:
WHEREAS, Holdings, the Borrower, the Lenders, the Administrative Agent and certain other parties entered into a Credit Agreement dated as of July 3, 2014 (as amended by Amendment No. 1 dated as of April 7, 2017, as amended by Amendment No. 2 dated as of November 22, 2017, as amended by Amendment No. 3 dated as of January 24, 2018, as amended by Amendment No. 4 dated as of February 24, 2021, as amended by Amendment No. 5 dated as of November 18, 2021, as amended by Amendment No. 6 dated as of November 16, 2022, as amended by Amendment No. 7 dated as of March 1, 2023 and as further amended, supplemented or otherwise modified through the date hereof, the “Credit Agreement”; capitalized terms used herein but not otherwise defined herein shall have the meanings given such terms in the Credit Agreement);
WHEREAS, Holdings and the Borrower have requested an amendment to the Credit Agreement pursuant to which certain provisions of the Credit Agreement will be amended as set forth herein;
WHEREAS, Section 10.01 of the Credit Agreement provides that the parties hereto may amend the Credit Agreement for the purposes set forth herein;
WHEREAS, Citigroup Global Markets, Inc., Credit Suisse Loan Funding LLC, Morgan Stanley Senior Funding, Inc., Barclays Bank PLC, Goldman Sachs Bank USA, Santander Bank, N.A., CIBC World Markets Corp. and JPMorgan Chase Bank, N.A. are joint lead arrangers for this Amendment (the “Amendment No. 8 Arrangers”); and
WHEREAS, each Lender holding Initial B-4 Dollar Term Loans (the “Existing Term B-4 Loans”, and the Lenders with Existing Term B-4 Loans, the “Existing Term B-4 Lenders”) and each other Lender that executes and delivers a consent (a “Consent”) in the form of Exhibit A to this Amendment by 5:00 p.m., New York City time on Thursday, September 28, 2023 (the “Consent Deadline”) will have agreed to the terms of this Amendment upon the effectiveness of this Amendment on the Amendment No. 8 Effective Date (as defined below).
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
Amendments
Amendments
The Credit Agreement is, effective as of the Amendment No. 8 Effective Date, hereby amended as follows:
(a) The following new defined terms are added to Section 1.01 of the Credit Agreement in appropriate alphabetical order:
“Amendment No. 8” means Amendment No. 8 to this Agreement dated as of October 10, 2023.
“Amendment No. 8 Arrangers” has the meaning set forth in Amendment No. 8.
“Amendment No. 8 Effective Date” means October 10, 2023.
(b) The definition of “Applicable Rate” in Section 1.01 of the Credit Agreement is amended by replacing clause (a)(ii) thereof with the following:
“(i) with respect to Initial B-4 Dollar Term Loans, a percentage per annum equal to (1) for Term SOFR Loans, 3.00% and (2) for Base Rate Loans, 2.00%;
(c) The definition of “Lead Arrangers” in Section 1.01 of the Credit Agreement is amended by adding the following sentence after the last sentence thereof:
“With respect to Amendment No. 8, the Lead Arrangers shall be the Amendment No. 8 Arrangers.”
(d) The definition of “Loan Documents” in Section 1.01 of the Credit Agreement is amended and restated in its entirety to read as follows:
“Loan Documents” means, collectively, (i) this Agreement, (ii) Amendment No. 1, (iii) Amendment No. 2, (iv) Amendment No. 3, (v) Amendment No. 4, (vi) Amendment No. 5, (vii) Amendment No. 6, (viii) Amendment No. 7, (ix) Amendment No. 8, (x) the Notes, (xi) the Collateral Documents, (xii) each Intercreditor Agreement to the extent then in effect, (xiii) each Letter of Credit Issuance Request and (xiv) any Refinancing Amendment, Incremental Amendment or Extension Amendment.
(e) Section 2.05(a)(iv) of the Credit Agreement is amended by deleting both references to “on or prior to the six-month anniversary of the Amendment No. 6 Effective Date” and replacing such references with “on or prior to the six-month anniversary of the Amendment No. 8 Effective Date.”
ARTICLE II
Conditions to Effectiveness
Section 2.1. This Amendment shall become effective on the date (the “Amendment No. 8 Effective Date”) on which:
(a) The Administrative Agent (or its counsel) shall have received from (i) the Administrative Agent, (ii) the New Lender and (iii) each Loan Party, (x) a counterpart of this Amendment signed on behalf of such party or (y) written evidence satisfactory to the Administrative Agent (which may include a telecopy or other electronic transmission of a signed signature page of this Amendment) that such party has signed a counterpart of this Amendment.
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(b) The Administrative Agent shall have received a Consent in the form of Exhibit A to this Amendment, duly executed by each Existing Term B-4 Lender (excluding any Non-Consenting Lender (as defined below)) and other Lenders representing the Required Facility Lenders for the Initial B-4 Dollar Term Loans immediately prior to the Amendment No. 8 Effective Date, in each case, by the Consent Deadline.
(c) The Borrower shall have paid to the Administrative Agent all fees and expenses due to the Administrative Agent and Citigroup Global Markets, Inc., as separately agreed in writing, on the Amendment No. 8 Effective Date. All out-of-pocket and documented reasonable costs and expenses (including, without limitation, the reasonable fees, charges and disbursements of counsel for the Administrative Agent) of the Administrative Agent and the Amendment No. 8 Arrangers in connection with this Amendment and the transactions contemplated hereby shall have been paid, to the extent invoiced.
(d) The representations and warranties of each Loan Party set forth in Article V of the Credit Agreement and in each other Loan Document shall be true and correct in all material respects (except that any representation and warranty that is qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all respects as so qualified) on and as of the date of this Amendment with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case they shall be true and correct in all material respects (except that any representation and warranty that is qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all respects as so qualified) as of such earlier date.
(e) At the time of and immediately after giving effect to this Amendment, no Default or Event of Default shall exist or would result from this Amendment or from the application of the proceeds therefrom.
(f) The Administrative Agent shall have received a certificate, dated the Amendment No. 8 Effective Date and signed by a Responsible Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (d) and (e) of this Section 2.1.
(g) The Borrower shall have paid to the Administrative Agent all accrued and unpaid interest on the Initial B-4 Dollar Term Loans to, but not including, the Amendment No. 8 Effective Date.
ARTICLE III
Representations and Warranties.
Representations and Warranties.
Section 3.1. Each Loan Party represents and warrants that:
(a) Organization; Power. Each Loan Party (i) is duly organized or incorporated, validly existing and, to the extent such concept is applicable in the corresponding jurisdiction, in good standing under the laws of the jurisdiction of its organization or incorporation and (ii) has all requisite organizational or constitutional power and authority to execute and deliver this Amendment and perform its obligations under the Credit Agreement as amended by this Amendment, and the other Loan Documents to which it is a party, except, in the case of clauses (i) and (ii), where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
(b) Authorization; Enforceability. This Amendment has been duly authorized by all necessary corporate, shareholder or other organizational action by each Loan Party and constitutes a legal, valid and binding obligation of such Loan Party, as applicable, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
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(c) Loan Document Representations and Warranties. The representations and warranties of the Borrower and each other Loan Party contained in Article V of the Credit Agreement or any other Loan Document are true and correct in all material respects (except that any representation and warranty that is qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all respects as so qualified) on and as of the Amendment No. 8 Effective Date and except that the representations and warranties which by their terms are made as of an earlier date are true and correct in all material respects (except that any representation and warranty that is qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all respects as so qualified) only as of such specified date.
(d) No Default. At the time of and immediately after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing.
ARTICLE IV
Section 4.1. New Lenders and Non-Consenting Lenders.
(a) If any Existing Term B-4 Lender (each, a “Non-Consenting Lender”) declines or fails to consent to this Amendment by failing to return an executed Consent to the Administrative Agent prior to the Consent Deadline or elects to assign its Existing Term B-4 Loans as provided in its executed Consent, then pursuant to and in compliance with the terms of Section 3.07(a) of the Credit Agreement, such Non-Consenting Lender may be replaced and all of its interests, rights and obligations under the Credit Agreement and the related Loan Documents with respect to its Existing Term B-4 Loans may be purchased and assumed by either a new lender or an existing Lender which is willing to execute the Consent. As of the Amendment No. 8 Effective Date, each Non-Consenting Lender will be deemed to have executed an Assignment and Assumption Agreement (“Assignment Agreement”) for all of its then outstanding Existing Term B-4 Loans and will be deemed to have assigned all of its then outstanding Existing Term B-4 Loans to Citibank, N.A. (the “New Lender”), in each case pursuant to and in compliance with the terms of Section 3.07(b) of the Credit Agreement.
(b) The New Lender hereby (i) confirms that it has received a copy of the Credit Agreement and the other Loan Documents and the exhibits thereto, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Amendment, (ii) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, (iii) appoints and authorizes the Administrative Agent to take such actions as agent on its behalf and to exercise such powers under the Credit Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto and (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender.
(c) The Administrative Agent hereby (i) consents to this Amendment and consents to the assignment of the then outstanding Existing Term B-4 Loans of each Non-Consenting Lender to the New Lender in accordance with Section 10.07 of the Credit Agreement and (ii) agrees that no assignment fees specified in Section 10.07 shall be required to be paid by the Borrower in connection with such assignment.
(d) This Amendment shall constitute the notice required under Section 3.07(a) of the Credit Agreement.
(e) For the avoidance of doubt, all Existing Term B-4 Loans shall continue to be outstanding as Initial B-4 Dollar Term Loans under the Credit Agreement (as amended hereby) on and after the Amendment No. 8 Effective Date, subject to the terms of this Amendment, and
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for the avoidance of doubt the Initial B-4 Dollar Term Loans shall continue as the same Class of Term Loans for all purposes under the Credit Agreement.
ARTICLE V
Miscellaneous
Miscellaneous
Section 5.1. Effect of Amendment.
(a) On and after the date hereof, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the “Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, mean and are a reference to the Credit Agreement as modified by this Amendment. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions thereof.
(b) The Credit Agreement, as specifically amended by this Amendment, and each of the other Loan Documents are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall continue to secure the payment of all of the respective Obligations of Holdings and the Borrower under the Loan Documents, in each case as the Credit Agreement is amended by this Amendment.
(c) The execution, delivery and effectiveness of this Amendment does not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents nor constitute a waiver of any provision of any of the Loan Documents. This Amendment shall not constitute a novation of the Credit Agreement.
Section 5.2. Counterparts. This Amendment may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Amendment constitutes the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Amendment shall be binding upon and inure to the benefit of the parties hereto and to the other Loan Documents and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Amendment by facsimile or electronic transmission shall be effective as delivery of an original executed counterpart of this Amendment. Any signature to this Amendment may be delivered by facsimile, electronic mail (including pdf) or any electronic signature complying with the U.S. federal ESIGN Act of 2000 or the New York Electronic Signature and Records Act or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes to the fullest extent permitted by applicable law.
Section 5.3. GOVERNING LAW, ETC. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. The provisions of Sections 10.15(b) and 10.16 of the Credit Agreement are incorporated herein and apply to this Amendment mutatis mutandis.
Section 5.4. Headings. Article and Section headings used herein are for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or be taken into consideration in interpreting, this Amendment.
[signature pages follow]
-a-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date first above written.
GATES GLOBAL LLC,
as Borrower
as Borrower
By: /s/ Nathan Rogers
Name: Nathan Rogers Title: Authorized Representative
Name: Nathan Rogers Title: Authorized Representative
GATES CORPORATION,
as Co-Borrower
as Co-Borrower
By: /s/ Nathan Rogers
Name: Nathan Rogers Title: Authorized Representative
Name: Nathan Rogers Title: Authorized Representative
OMAHA HOLDINGS LLC,
as Holdings
as Holdings
By: /s/ Nathan Rogers
Name: Nathan Rogers Title: Authorized Representative
Name: Nathan Rogers Title: Authorized Representative
GATES GLOBAL CO.
OMAHA ACQUISITION INC.
GATES INVESTMENTS, LLC
GATES ADMINISTRATION CORP.
PHILIPS HOLDING CORPORATION
TOMKINS BP US HOLDING CORP.
GATES E&S NORTH AMERICA, INC.
GATES TPU, INC.
GATES INTERNATIONAL HOLDINGS, LLC
ATLAS HYDRAULICS INC.
GATES HOLDINGS 1 LLC
each as a Guarantor
By: /s/ Nathan Rogers
Name: Nathan Rogers Title: Authorized Representative
Name: Nathan Rogers Title: Authorized Representative
[Signature Page to Amendment No. 8]
Accepted and Acknowledged:
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Administrative Agent
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Administrative Agent
/s/ Vipul Dhadda
Name: Vipul Dhadda
Title: Authorized Signatory
/s/ Cassandra Droogan
Name: Cassandra Droogan
Title: Authorized Signatory
[Signature Page to Amendment No. 8]
CITIBANK, N.A., as New Lender
/s/ Caesar Wyszomirski
Name: Caesar Wyszomirski
Title: Director & Vice President
[Signature Page to Amendment No. 8]
EXHIBIT A
CONSENT TO AMENDMENT NO. 8
CONSENT (this “Consent”) TO AMENDMENT NO. 8 (the “Amendment”) to the Credit Agreement, dated as of July 3, 2014 (as amended by Amendment No. 1 dated as of April 7, 2017, as amended by Amendment No. 2 dated as of November 22, 2017, as amended by Amendment No. 3 dated as of January 24, 2018, as amended by Amendment No. 4 dated as of February 24, 2021, as amended by Amendment No. 5 dated as of November 18, 2021, as amended by Amendment No. 6 dated as of November 16, 2022, as amended by Amendment No. 7 dated as of March 1, 2023 and as further amended, supplemented or otherwise modified through the date hereof, the “Credit Agreement”), among Omaha Holdings LLC, a Delaware limited liability company (“Holdings”), Gates Global LLC (the “Borrower”), each of the Guarantors party thereto, the Lenders or other financial institutions or entities from time to time party thereto and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent (the “Administrative Agent”). Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the respective meanings given to such terms in the Amendment.
Initial B-4 Dollar Term Lenders Only
Check the first or second box below
Consent: The undersigned Lender (including any New Lender) hereby irrevocably and unconditionally approves of and consents to the Amendment with respect to all Existing Term B-4 Loans held by such Lender. All Existing Term B-4 Loans held by such Lender will be amended on a cashless basis to reflect the new terms of the Amendment. | |||||
Post-Close Settle: The undersigned Lender (including any New Lender) hereby irrevocably and unconditionally approves of and consents to the Amendment with respect to all Existing Term B-4 Loans held by such Lender. The undersigned Lender hereby elects to have all Existing Term B-4 Loans held by such Lender be assigned on the Amendment No. 8 Effective Date to the New Lender (and is hereby deemed to execute the Assignment Agreement). | |||||
Name of Lender: ____________________________________________________ by Name: Title: | ||
For any Institution requiring a second signature line: by Name: Title: | ||
[Signature Page to Amendment No. 8]
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Ivo Jurek, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 of Gates Industrial Corporation plc (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 3, 2023 | ||||
| /s/ Ivo Jurek | |||||
| Ivo Jurek | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, L. Brooks Mallard, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 of Gates Industrial Corporation plc (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 3, 2023 | ||||
| /s/ L. Brooks Mallard | |||||
| L. Brooks Mallard | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
Exhibit 32.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Gates Industrial Corporation plc (the “Company”) for the period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, in his capacity as an officer of the Company and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Ivo Jurek | |||||
| Ivo Jurek | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: | November 3, 2023 | ||||
| /s/ L. Brooks Mallard | |||||
| L. Brooks Mallard | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
| Date: | November 3, 2023 | ||||
A signed original of this certification required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 99.1
Section 13(r) Disclosure
After Gates Industrial Corporation plc (“Gates”) filed its Form 10-Q for the quarter ended July 1, 2023 with the Securities and Exchange Commission (the “SEC”), Blackstone Inc. (“Blackstone”) filed the disclosure reproduced below with respect to its quarter ended June 30, 2023, in accordance with Section 13(r) of the Securities Exchange Act of 1934, as amended, in regard to Mundys S.p.A. (formerly, Atlantia S.p.A.). Mundys S.p.A. may be, or may have been at the time considered to be, an affiliate of Blackstone, and therefore an affiliate of Gates. As of the date Gates filed its Form 10-Q for the quarter ended September 30, 2023 with the SEC, Blackstone had not yet filed its Form 10-Q for its quarter ended September 30, 2023. Therefore, the disclosure reproduced below does not include any information for the quarter ended September 30, 2023. Gates did not independently verify or participate in the preparation of the disclosure reproduced below.
Blackstone included the following disclosure in its Form 10-Q for the period ended June 30, 2023:
Mundys S.p.A. (formerly “Atlantia S.p.A.”) provided the disclosure reproduced below in connection with activities during the quarter ended June 30, 2023. We have not independently verified or participated in the preparation of this disclosure.
“Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934. Funds affiliated with Blackstone first invested in Mundys S.p.A. on November 18, 2022 in connection with the voluntary public tender offer by Schema Alfa S.p.A. for all of the shares of Mundys S.p.A., pursuant to which such funds obtained a minority non-controlling interest in Mundys S.p.A. Mundys S.p.A. owns and controls Aeroporti di Roma S.p.A. (“ADR”), an operator of airports in Italy including Leonardo da Vinci-Fiumicino Airport. Iran Air has historically operated periodic flights to and from Leonardo da Vinci-Fiumicino Airport as authorized, from time to time, by an aviation-related bilateral agreement between Italy and Iran, scheduled in compliance with European Regulation 95/93, and approved by the Italian Civil Aviation Authority. ADR, as airport operator, is under a mandatory obligation to provide airport services to all air carriers (including Iran Air) authorized by the applicable Italian authority. The relevant turnover attributable to these activities (whose consideration is calculated on the basis of general tariffs determined by such independent Italian authority) in the quarter ended June 30, 2023 was less than €50,000. Mundys S.p.A. does not track profits specifically attributable to these activities.”