[Part I](index=6&type=section&id=Part%20I) [Business](index=6&type=section&id=Item%201.%20Business) Gates is a global manufacturer of highly engineered power transmission and fluid power solutions, diversified across two segments with a majority of revenue from replacement channels - The company operates through two reporting segments: Power Transmission, which accounted for approximately **63% of Fiscal 2018 net sales**, and Fluid Power, which accounted for approximately **37%**[29](index=29&type=chunk) - Sales channels are divided between replacement markets (approximately **62% of Fiscal 2018 net sales**) and first-fit markets (**38%**), with higher replacement sales in mature markets[56](index=56&type=chunk) - No single customer accounted for more than **10% of the company's net sales** in Fiscal 2018[60](index=60&type=chunk) - Gates has a global manufacturing footprint with **64 facilities in 29 countries**, enabling an "in region, for region" service model[62](index=62&type=chunk) Fiscal 2018 Net Sales Breakdown | Category | Percentage of Net Sales | Source Chunk(s) | | :--- | :--- | :--- | | **By Segment** | | | | Power Transmission | 63% | 29 | | Fluid Power | 37% | 29 | | **By Channel** | | | | Replacement | 62% | 56 | | First-Fit | 38% | 56 | [Risk Factors](index=13&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from global economic conditions, international operations, raw material price volatility, intense competition, substantial leverage, and its "controlled company" status - Approximately **62% of Fiscal 2018 net sales** originated outside the U.S., exposing the business to international operational risks[76](index=76&type=chunk) - The company faces pricing pressure from customers, particularly in the automotive first-fit market, which could adversely affect margins[86](index=86&type=chunk) - As of February 7, 2019, Blackstone beneficially owned approximately **84.2% of outstanding ordinary shares**, making Gates a "controlled company" under NYSE rules[176](index=176&type=chunk)[178](index=178&type=chunk) Key Financial Risks | Risk Category | Description | Source Chunk(s) | | :--- | :--- | :--- | | **Leverage** | As of Dec 29, 2018, total principal debt was **$3,027.1 million**, which could affect financial condition and ability to raise capital | 161 | | **Interest Rate** | A significant portion of debt is at variable rates, exposing the company to increased costs if interest rates rise. As of Dec 29, 2018, **41.6%** of outstanding debt had variable interest rates | 165 | | **Debt Covenants** | Credit agreements impose significant operating and financial restrictions, limiting the ability to incur additional debt, pay dividends, or make certain investments | 167, 169 | [Unresolved Staff Comments](index=34&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that there are no unresolved staff comments from the SEC - None[203](index=203&type=chunk) [Properties](index=34&type=section&id=Item%202.%20Properties) The company maintains a global footprint with **120+ locations in 29 countries**, owning 33 facilities and leasing 101, with property, plant, and equipment valued at **$756.3 million** - As of December 29, 2018, the company owned **33 facilities** and leased **101 locations**, including a total of **64 manufacturing or service centers**[207](index=207&type=chunk)[208](index=208&type=chunk) - The carrying amount of property, plant, and equipment was **$756.3 million** as of December 29, 2018, an increase from **$686.2 million** in 2017[206](index=206&type=chunk) [Legal Proceedings](index=34&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various ordinary course legal proceedings, with management not expecting a material adverse effect on financial position or results - Management does not anticipate that the outcome of any current legal proceedings or known claims will have a material adverse effect on the company's financial position[211](index=211&type=chunk) [Mine Safety Disclosures](index=34&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[213](index=213&type=chunk) [Part II](index=35&type=section&id=Part%20II) [Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](index=35&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%2C%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's ordinary shares began trading on the NYSE under "GTES" on January 25, 2018, with no dividends paid or planned for fiscal years 2016-2018 - Ordinary shares began trading on the NYSE under the symbol "GTES" on January 25, 2018[216](index=216&type=chunk) - The company has no current plans to pay dividends and did not pay any dividends in fiscal 2018, 2017, or 2016[217](index=217&type=chunk)[218](index=218&type=chunk) [Selected Financial Data](index=35&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes the company's historical consolidated financial data, including key statement of operations and balance sheet figures for fiscal years 2014-2018 Selected Historical Financial Data (in millions) | Metric | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | | :--- | :--- | :--- | :--- | | **Net sales** | $3,347.6 | $3,041.7 | $2,747.0 | | **Net income (loss) attributable to shareholders** | $245.3 | $151.3 | $57.7 | | **Total assets** | $6,722.6 | $6,853.7 | $6,383.3 | | **Total Debt** | $3,005.0 | $3,955.7 | $3,836.9 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition and operations, highlighting a **10.1% net sales increase** and **13.0% Adjusted EBITDA growth** in FY2018, with improved liquidity from IPO debt reduction [Results of Operations](index=38&type=section&id=Results%20of%20Operations) In FY2018, net sales grew **10.1% to $3.35 billion**, operating income increased to **$496.8 million**, and Adjusted EBITDA rose **13.0% to $755.8 million**, with both segments contributing to growth Fiscal 2018 vs. 2017 Performance Summary (in millions) | Metric | Fiscal 2018 | Fiscal 2017 | Change (%) | | :--- | :--- | :--- | :--- | | **Net Sales** | $3,347.6 | $3,041.7 | 10.1% | | **Gross Profit** | $1,330.6 | $1,218.0 | 9.2% | | **Operating Income** | $496.8 | $402.9 | 23.3% | | **Net Income from Cont. Ops.** | $271.7 | $182.0 | 49.3% | | **Adjusted EBITDA** | $755.8 | $669.1 | 13.0% | | **Adjusted EBITDA Margin** | 22.6% | 22.0% | +60 bps | - FY2018 core sales (excluding acquisitions and currency effects) increased by **5.9%**, driven by higher volumes and favorable pricing[231](index=231&type=chunk) - Interest expense decreased to **$175.9 million** in FY2018 from **$234.6 million** in FY2017, primarily due to debt repayment following the IPO[239](index=239&type=chunk)[240](index=240&type=chunk) Segment Performance: Fiscal 2018 vs. 2017 (in millions) | Segment | Net Sales (2018) | Net Sales (2017) | Sales Change | Adj. EBITDA (2018) | Adj. EBITDA (2017) | EBITDA Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Power Transmission** | $2,098.8 | $2,009.4 | +4.5% | $492.2 | $458.1 | +7.4% | | **Fluid Power** | $1,248.8 | $1,032.3 | +21.0% | $263.6 | $211.0 | +24.9% | [Liquidity and Capital Resources](index=48&type=section&id=Liquidity%20and%20Capital%20Resources) FY2018 cash from operations was **$313.5 million**, with net debt decreasing by **$809.7 million to $2.58 billion** due to IPO-funded debt redemptions, strengthening liquidity - Cash provided by operations was **$313.5 million** in FY2018, a slight decrease from **$319.9 million** in FY2017, mainly due to working capital build[276](index=276&type=chunk) - In Q1 2018, the company used IPO proceeds and cash to redeem **$913.7 million** in principal of its Senior Notes, paying a **$27.0 million** redemption premium[284](index=284&type=chunk) - Net debt decreased by **$809.7 million** during FY2018, from **$3,391.3 million to $2,581.6 million**[300](index=300&type=chunk) Contractual Obligations as of Dec 29, 2018 (in millions) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | **Debt (Principal)** | $3,027.1 | $25.0 | $50.1 | $617.7 | $2,334.3 | | **Interest Payments** | $746.5 | $149.8 | $314.8 | $254.9 | $27.0 | | **Operating Leases** | $178.0 | $25.0 | $39.5 | $27.0 | $86.5 | | **Total** | **$4,127.6** | **$265.6** | **$467.2** | **$946.7** | **$2,448.1** | [Non-GAAP Measures](index=53&type=section&id=Non-GAAP%20Measures) This section defines and reconciles non-GAAP measures like EBITDA, Adjusted EBITDA, and Core Sales Growth, used by management to evaluate performance by excluding specific non-recurring items - Adjusted EBITDA is defined as EBITDA adjusted for items such as transaction-related expenses, restructuring costs, share-based compensation, and sponsor fees[313](index=313&type=chunk)[314](index=314&type=chunk)[315](index=315&type=chunk) Reconciliation of Net Income to Adjusted EBITDA (in millions) | Line Item | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | | :--- | :--- | :--- | :--- | | **Net income from continuing operations** | $271.7 | $182.0 | $71.9 | | Income tax expense (benefit) | $31.8 | $(72.5) | $21.1 | | Net interest and other expenses | $193.3 | $293.4 | $212.3 | | Depreciation and amortization | $218.5 | $212.2 | $240.8 | | **EBITDA** | **$715.3** | **$615.1** | **$546.1** | | Adjustments (Transaction costs, Restructuring, etc.) | $40.5 | $54.0 | $48.8 | | **Adjusted EBITDA** | **$755.8** | **$669.1** | **$594.9** | - Core sales growth is a non-GAAP measure excluding the impacts of currency movements and first-year effects of acquisitions/disposals for meaningful year-over-year comparison[321](index=321&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=58&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company manages market risks from foreign currency, interest rates, and commodity prices using derivatives like swaps and caps, and operational strategies, avoiding speculative positions - The company is exposed to foreign currency risk from global operations and euro-denominated debt, using forward contracts and cross-currency swaps for hedging[342](index=342&type=chunk)[343](index=343&type=chunk)[344](index=344&type=chunk) - To manage interest rate risk on variable-rate debt, the company uses interest rate caps and swaps, holding caps with a notional value of **$2.7 billion** as of December 29, 2018[347](index=347&type=chunk)[551](index=551&type=chunk) - Commodity price risk for materials like aluminum, steel, and polymers is managed through operational activities, including passing on price increases to customers, not derivatives[351](index=351&type=chunk) [Financial Statements and Supplementary Data](index=61&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item incorporates the company's audited consolidated financial statements and supplementary data by reference, located in a separate section of the annual report - The required information for this item is included as a separate section in the Annual Report on Form 10-K, starting with the Report of Independent Registered Public Accounting Firm[353](index=353&type=chunk)[387](index=387&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=61&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[354](index=354&type=chunk) [Controls and Procedures](index=61&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 29, 2018, with no material changes during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 29, 2018[357](index=357&type=chunk) - Based on a COSO framework assessment, management concluded that the company's internal control over financial reporting was effective as of December 29, 2018[359](index=359&type=chunk) - As a newly public company, the annual report does not include an attestation report from the independent registered public accounting firm on internal control over financial reporting[360](index=360&type=chunk) [Other Information](index=62&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[362](index=362&type=chunk) [Part III](index=62&type=section&id=Part%20III) [Directors, Executive Officers and Corporate Governance](index=62&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement, including the Code of Business Conduct and Ethics - The information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[365](index=365&type=chunk) - The company maintains a Code of Business Conduct and Ethics, which is posted on its website[366](index=366&type=chunk) [Executive Compensation](index=62&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's definitive 2019 Proxy Statement - The information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[368](index=368&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=62&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership of beneficial owners and management, as well as equity compensation plan information, is incorporated by reference from the company's definitive 2019 Proxy Statement - The information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[368](index=368&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=62&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive 2019 Proxy Statement - The information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[369](index=369&type=chunk) [Principal Accountant Fees and Services](index=63&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's definitive 2019 Proxy Statement - The information required by this item is incorporated by reference from the registrant's 2019 Proxy Statement[371](index=371&type=chunk) [Part IV](index=64&type=section&id=Part%20IV) [Exhibits, Financial Statement Schedules](index=64&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all exhibits filed with the 10-K, including governance documents, financing agreements, and management/shareholder agreements - Lists exhibits filed with the report, including governance documents (Articles of Association), financing agreements (Indenture, Credit Agreements), and management/shareholder agreements (Shareholders Agreement, Registration Rights Agreement, Omnibus Incentive Plan)[373](index=373&type=chunk)[374](index=374&type=chunk) [Form 10-K Summary](index=68&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable to the company - Not applicable[378](index=378&type=chunk) [Financial Statements](index=71&type=section&id=Financial%20Statements) [Consolidated Statements of Operations](index=73&type=section&id=Consolidated%20Statements%20of%20Operations) The Consolidated Statements of Operations present the company's financial performance, reporting **$3.35 billion in net sales** and **$245.3 million in net income** for fiscal 2018 Consolidated Statement of Operations Highlights (in millions) | Line Item | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | | :--- | :--- | :--- | :--- | | **Net sales** | $3,347.6 | $3,041.7 | $2,747.0 | | **Gross profit** | $1,330.6 | $1,218.0 | $1,060.8 | | **Operating income** | $496.8 | $402.9 | $305.3 | | **Net income attributable to shareholders** | $245.3 | $151.3 | $57.7 | | **Diluted EPS** | $0.84 | $0.60 | $0.23 | [Consolidated Balance Sheets](index=75&type=section&id=Consolidated%20Balance%20Sheets) The Consolidated Balance Sheets show the company's financial position, with **total assets of $6.72 billion** and **total shareholders' equity of $1.95 billion** as of December 29, 2018 Consolidated Balance Sheet Highlights (in millions) | Line Item | As of Dec 29, 2018 | As of Dec 30, 2017 | | :--- | :--- | :--- | | **Total Current Assets** | $1,814.6 | $1,826.2 | | **Total Assets** | $6,722.6 | $6,853.7 | | **Total Current Liabilities** | $679.0 | $697.8 | | **Total Liabilities** | $4,388.9 | $5,425.3 | | **Total Shareholders' Equity** | $1,947.4 | $1,014.6 | [Consolidated Statements of Cash Flows](index=77&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The Consolidated Statements of Cash Flows show **$313.5 million in cash from operations** for FY2018, with significant debt repayments funded by the IPO, ending with **$424.6 million in cash** Consolidated Statement of Cash Flows Highlights (in millions) | Line Item | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | | :--- | :--- | :--- | :--- | | **Net cash provided by operations** | $313.5 | $319.9 | $376.7 | | **Net cash used in investing activities** | $(243.6) | $(227.0) | $(67.9) | | **Net cash used in financing activities** | $(198.9) | $(75.3) | $(110.8) | | **Net (decrease) increase in cash** | $(141.4) | $37.2 | $188.6 | | **Cash at end of period** | $424.6 | $566.0 | $528.8 | [Notes to the Consolidated Financial Statements](index=80&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed disclosures for the financial statements, covering accounting policies, acquisitions, segment information, income taxes, debt, and related party transactions with Blackstone - In 2018, the company acquired Rapro for **$50.9 million**, and in 2017, Atlas Hydraulics for **$74.0 million** and Techflow Flexibles for **$36.7 million**, all included in the Fluid Power segment[496](index=496&type=chunk)[497](index=497&type=chunk)[498](index=498&type=chunk) - In Q1 2018, the company redeemed **€235.0 million Euro Senior Notes** and partially redeemed Dollar Senior Notes, totaling **$913.7 million** in principal repayments, funded by IPO proceeds and cash[567](index=567&type=chunk)[568](index=568&type=chunk)[569](index=569&type=chunk) - The company pays an annual monitoring fee to Blackstone affiliates, which was **$8.0 million** in FY2018, **$6.7 million** in FY2017, and **$6.1 million** in FY2016[634](index=634&type=chunk)