GATES INDUSTRIAL CORP PLC: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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

Our company

We are a global manufacturer of innovative, highly engineered power transmission
and fluid power solutions. We offer a broad portfolio of products to diverse
replacement channel customers, and to original equipment ("first-fit")
manufacturers as specified components, with the majority of our revenue coming
from replacement channels. Our products are used in applications across numerous
end markets, 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, mobility and
recreation. Our net sales have historically been, and remain, highly correlated
with industrial activity and utilization, and not with any single end market
given the diversification of our business and high exposure to replacement
markets. We sell our products globally under the Gates brand, which is
recognized by distributors, equipment manufacturers, installers and end users as
a premium brand for quality and technological innovation; this reputation has
been built over 110 years since Gates' founding in 1911.

Within the diverse end markets we serve, our highly engineered products are
often critical components in applications for which the cost of downtime is high
relative to the cost of our products, resulting in the willingness of end users
to pay a premium for superior performance and availability. These applications
subject our products to normal wear and tear, resulting in natural, and often
preventative, replacement cycles that drive high-margin, recurring revenue. Our
product portfolio represents one of the broadest ranges of power transmission
and fluid power products in the markets we serve, and we maintain long-standing
relationships with a diversified group of blue-chip customers throughout the
world. As a leading designer, manufacturer and marketer of highly engineered,
mission-critical products, we have become an industry leader across most of the
regions and end markets in which we operate.

Business trends

Our net sales have historically been, and remain, highly correlated with
industrial activity and utilization and not with any single end market given the
diversification of our business and high exposure to replacement channels. This
diversification limits our exposure to trends in any given end market. In
addition, a majority of our sales are generated from customers in replacement
channels, who serve primarily a large base of installed equipment that follows a
natural maintenance cycle that is somewhat less susceptible to various trends
that affect our end markets. Such trends include infrastructure investment and
construction activity, agricultural production and related commodity prices,
commercial and passenger vehicle production, miles driven and fleet age,
evolving regulatory requirements related to emissions and fuel economy and oil
and gas prices and production. Key indicators of our performance include
industrial production, industrial sales and manufacturer shipments.

During the six months ended July 2, 2022, sales into replacement channels
accounted for approximately 63% of our total net sales. Our replacement sales
cover a very broad range of applications and industries and, accordingly, are
highly correlated with industrial activity and utilization and not a single end
market. Replacement products are principally sold through distribution partners
that may carry a very broad line of products or may specialize in products
associated with a smaller set of end market applications.

During the six months ended July 2, 2022, sales into first-fit channels
accounted for approximately 37% of our total net sales. First-fit sales are to a
variety of industrial and automotive customers. Our industrial first-fit
customers cover a diverse range of industries and applications and many of our
largest first-fit customers manufacture construction and agricultural equipment.
Among our automotive first-fit customers, a majority of our net sales are to
emerging market customers, where we believe our first-fit presence provides us
with a strategic advantage in developing those markets and ultimately increasing
our higher margin replacement channel sales.
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During the six months ended July 2, 2022, we continued to experience challenges
from raw material and freight inflation, which we expect to continue in the near
term. We have remained price/cost positive on a dollar basis relative to these
inflation impacts in the first half of 2022 and expect additional pricing in all
regions across all channels to support our goal of Adjusted EBITDA margin
neutrality by the end of 2022. In addition, we experienced production
disruptions and input shortages on labor, certain raw materials and freight in
2021 and through the first half of 2022, which we expect to continue through the
remainder of 2022. While raw material availability has improved for many inputs,
we continue to face inconsistent supply of certain petrochemicals we use in our
compounding process. Although we have seen some easing in container prices and
port congestion, the reliability of intra-region freight and logistics is still
inconsistent. We continue to prioritize supporting our customers and anticipate
that the margin impact of incremental costs incurred as a result of doing so
will be temporary. While we believe we can continue to manage through these
challenges, this has and may continue to impact our ability to deliver products
to our customers.

Russia-Ukraine conflict

Gates has a single distribution center in Russia that sells primarily to
customers based in Russia. We have not shipped product into Russia since late
February 2022, but continued to fulfill limited contractual obligations through
this distribution center while complying with all current, applicable sanctions
and regulations. In early July 2022, we suspended our operations in Russia,
resulting in restructuring and other charges totaling $1.3 million in the three
months ended July 2, 2022. This crisis, and the sanctions and counter-sanctions
imposed in response to it, have created increased economic uncertainty and
operational complexity both in the region and globally, the impacts of which we
cannot fully predict. Should the conflict continue or escalate, it could have a
significant negative effect on our business and results in the future including
continued inflationary pressures on raw materials, energy and transportation,
supply chain and logistics disruptions, volatility in foreign exchange rates and
interest rates, and heightened cybersecurity threats. We currently anticipate a
headwind of approximately 2% to our 2022 global revenues resulting directly from
this conflict.

Impact of the COVID-19 pandemic

In the third year of COVID-19, we continue to contend with the ongoing
implications of the pandemic and prioritizing the health and safety of our
employees and the communities in which we operate around the world, taking
additional protective measures in our plants to safely maintain operational
continuity in support of our global customer base. We may take further actions
if required or recommended by government authorities or if we determine them to
be in the best interests of our employees, customers, and suppliers.

Our operations are supported largely by local supply chains. Where necessary, we
have taken steps to qualify additional suppliers to ensure we are able to
maintain continuity of supply. Although we have not experienced any significant
operational disruptions to date, we have incurred meaningful operational
inefficiencies. In addition, certain Gates suppliers have, or may in the future,
temporarily close operations, delay order fulfillment or limit production due to
the pandemic, including the lack of availability of necessary raw materials to
support their production. Continued disruptions, shipping delays or insolvency
of key vendors in our supply chain could make it difficult or more costly for us
to obtain the raw materials or other inputs we need for our operations, or to
deliver products to our customers.
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Gates employs an in-region, for-region manufacturing strategy, under which local
operations primarily support local demand. In those cases where local production
supports demand in other regions, contingency plans have been activated as
appropriate. In addition to the handful of plants that were temporarily closed
by government mandates at various times, we have proactively managed our output
to expected demand levels and occasionally suspended production at other plants
for short periods of time, predominantly in the first half of 2020. As
shelter-in-place requirements eased in various jurisdictions, we saw sequential
quarterly improvements in the second half of 2020 which continued during the
first half of 2021, and then began to slow during the second half of 2021 as the
global economy continued to normalize. During March 2022, an increase in
COVID-19 related cases in certain parts of China resulted in the re-imposition
of widespread shutdowns and restrictions in China through most of April and May
2022, and resulted in a modest loss of production, sales and profitability. As
the COVID-19 lockdowns began to ease in June 2022, our business in China began
to slowly recover, but we expect it will take additional time for our customers
and the local supply base to ramp up their operations toward more normal levels;
we anticipate this recovery in China will steadily continue, but at a slower
pace than we experienced emerging from the initial COVID-19 lockdowns in early
2020. We may experience future production disruptions where plants are
temporarily closed or productivity is reduced by government mandates or as a
result of supply chain or labor disruptions, which could place further
constraints on our ability to produce or deliver our products and meet customer
demand or increase our costs. During this crisis, we have maintained our ability
to respond to demand improvements and we continue to fund key initiatives, which
we believe will serve us well as our end markets continue to recover.

We have strength and flexibility in our liquidity position, which includes
committed borrowing headroom of $404.3 million under our lines of credit, in
addition to cash balances of $393.2 million as of July 2, 2022. In addition, our
business has a demonstrated ability to generate free cash flow even in
challenging environments.

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

Results for the three and six months ended July 2, 2022 compared to the results for the three and six months ended July 3, 2021

Door Performance Summary

                                                        Three months ended                    Six months ended
                                                    July 2,            July 3,           July 2,            July 3,
(dollars in millions)                                 2022              2021               2022               2021
Net sales                                         $   906.8          $  915.1          $ 1,800.2          $ 1,796.4
Cost of sales                                         580.6             548.4            1,169.1            1,084.2
Gross profit                                          326.2             366.7              631.1              712.2
Selling, general and administrative expenses          209.1             214.2              444.3              425.8
Transaction-related expenses                            0.5               0.2                1.3                2.6
Asset impairments                                       0.6                 -                0.6                  -
Restructuring expenses                                  3.2               3.7                3.7                6.6
Other operating expense (income)                        0.1              (0.5)               0.1               (0.5)
Operating income from continuing operations           112.7             149.1              181.1              277.7
Interest expense                                       33.0              33.3               65.6               67.7
Other expenses (income)                                 8.1              (1.2)               8.7               (2.4)
Income from continuing operations before taxes         71.6             117.0              106.8              212.4
Income tax expense                                     12.3              11.6               10.1               30.5
Net income from continuing operations             $    59.3          $  105.4          $    96.7          $   181.9

Adjusted EBITDA(1)                                $   180.1          $  216.0          $   336.9          $   412.3
Adjusted EBITDA margin                                 19.9  %           23.6  %            18.7  %            23.0  %


(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.
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Net sales

Net sales during the three months ended July 2, 2022 were $906.8 million,
compared to $915.1 million during the prior year period, a decrease of 0.9%, or
$8.3 million. Our net sales for the three months ended July 2, 2022 were
adversely impacted by movements in average currency exchange rates of
$41.1 million, compared to the prior year period, due principally to the
strengthening of the U.S. dollar against a number of currencies, in particular
the Euro. Excluding this impact, core sales increased by $32.8 million, or 3.6%,
during the three months ended July 2, 2022 compared to the prior year period,
driven primarily by a $97.5 million benefit from favorable pricing, partially
offset by the impact of lower volume.

Core sales in our Power Transmission businesses declined by 2.4% while our Fluid
Power businesses increased by 14.3% for the three months ended July 2, 2022
compared to the prior year period. The overall improvements were driven
primarily by increases in sales to customers in our industrial channels, with
industrial replacement sales up by 9.1% and industrial first-fit sales up by
7.5%. The majority of this growth was focused in North America and EMEA, where
industrial sales grew by 13.5% and 18.9%, respectively, during the three months
ended July 2, 2022 compared to the prior year period. The off-highway and
diversified industrial end markets, particularly in North America and EMEA,
drove most of the industrial channel growth during the three months ended
July 2, 2022 compared to the prior year period, increasing by 9.1%. This growth
was offset partially by a 34.9% decline in industrial sales in Greater China,
driven by declines across all end markets due to the continued weakness in the
industrial sector of Chinese economy and challenges exacerbated by the lockdowns
during the three months ended July 2, 2022. Sales to automotive replacement
customers were slightly lower for the three months ended July 2, 2022, having
declined by 2.5% compared to the prior year period. This automotive replacement
decline was primarily in EMEA and Greater China, but was somewhat offset by
growth in North America and South America.

Net sales during the six months ended July 2, 2022 were $1,800.2 million,
compared to $1,796.4 million during the prior year period, an increase of 0.2%,
or $3.8 million. Our net sales for the six months ended July 2, 2022 were
adversely impacted by movements in average currency exchange rates of
$65.4 million, compared to the prior year period, due principally to the
strengthening of the U.S. dollar against a number of currencies, in particular
the Euro. Excluding these impacts, core sales increased by $69.2 million, or
3.9%, during the six months ended July 2, 2022 compared to the prior year
period, driven primarily by a $146.3 million benefit from favorable pricing,
partially offset by the impact of lower volume.

Core sales in our Power Transmission and Fluid Power businesses increased by
0.2% and 10.4%, respectively, for the six months ended July 2, 2022 compared to
the prior year period. The primary drivers of these improvements were similar to
those described above for the three-month period, except that sales to
automotive replacement had an overall growth of 1.3%, driven by the stronger
first half performance in North America and South America relative to the prior
year period.

Cost of sales

Cost of sales for the three months ended July 2, 2022 was $580.6 million,
compared to $548.4 million for the prior year period, an increase of 5.9%, or
$32.2 million. This increase is primarily attributable to higher
inflation-related costs, including higher materials and inbound freight costs,
of $66.1 million, in addition to a $3.4 million adjustment to remeasure certain
inventories on a LIFO basis. These increases were offset partially by $30.7
million from favorable movements in average currency exchange rates. The
decrease in cost of sales due to lower volumes was broadly offset by the
resulting lower absorption of fixed costs.

Cost of sales for the six months ended July 2, 2022 was $1,169.1 million,
compared to $1,084.2 million for the prior year period, an increase of 7.8%, or
$84.9 million, driven by the same factors as described above for the three month
period.

Gross profit

As a result of the factors described above, gross profit for the three months
ended July 2, 2022 was $326.2 million, compared to $366.7 million for the prior
year period, a decrease of 11.0% or $40.5 million. Our gross profit margin
dropped by 410 basis points to 36.0% for the three months ended July 2, 2022.

Due to the factors described above, gross profit for the six months ended July 2, 2022 has been $631.1 millioncompared to $712.2 million for the prior year period, a decrease of 11.4% or $81.1 million. Our gross profit margin fell 450 basis points to 35.1% for the six months ended July 2, 2022.

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Selling, general and administrative expenses

SG&A expenses for the three months ended July 2, 2022 were $209.1 million
compared to $214.2 million for the prior year period. This decrease of
$5.1 million was driven primarily by favorable movements in average currency
exchange rates of $10.5 million, offset partially by higher labor and benefits
costs of $3.5 million, combined with increased marketing expenditures of $3.0
million.

SG&A expenses for the six months ended July 2, 2022 were $444.3 million compared
to $425.8 million for the prior year period. This increase of $18.5 million was
driven primarily by higher share-based compensation costs of $14.8 million, due
largely 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. Other increases due to higher labor costs, marketing
and traveling expenditures are largely offset by favorable movements in average
currency exchange rates compared to the prior year period.

Transaction-related expenses

Transaction-related expenses of $0.5 million and $1.3 million were incurred
during the three and six months ended July 2, 2022, respectively, related
primarily to the secondary offering completed in March 2022 and certain other
corporate transactions. Transaction-related expenses of $0.2 million and
$2.6 million were incurred during the prior year three and six-month periods,
respectively, related primarily to the Dollar Term Loan amendments completed in
February 2021 and other corporate transactions.

Restructuring costs

Restructuring costs, including asset impairments, most of which were incurred
during the three months ended July 2, 2022, related primarily to our ongoing
European reorganization, including severance of $1.9 million related to
relocation and integration of certain support functions into our regional shared
service center. We also incurred $1.3 million of costs during the three months
ended July 2, 2022 in relation to the suspension of our operations in Russia,
which included severance costs of $0.4 million, an impairment of inventories of
$0.3 million (recognized in cost of sales), and an impairment of fixed and other
assets of $0.6 million (recognized in asset impairments). 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.

Restructuring and other strategic initiatives during the three and six months
ended July 3, 2021 included $2.1 million and $2.9 million, respectively, of
primarily severance and other labor-related expenses related to our European
reorganization involving office and distribution center closures or downsizings
and the implementation of a regional shared service center, and $0.7 million and
$1.5 million, respectively, of additional costs related to the closure in 2020
of a manufacturing facility in Korea. In addition, during the six months ended
July 3, 2021, we recognized $1.0 million of expenses related to the
consolidation of certain of our Middle East businesses.
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Interest expense

Our interest charges were as follows:

                                                       Three months ended                          Six months ended
                                                   July 2,               July 3,              July 2,             July 3,
(dollars in millions)                                2022                  2021                2022                 2021
Debt:
Dollar Term Loan                              $     15.1               $    16.5          $    30.8             $    33.5
Euro Term Loan                                       5.5                     6.3               10.8                  12.6
Dollar Senior Notes                                  8.9                     8.9               17.8                  17.9

Asset-backed revolver                                0.4                       -                0.4                     -
                                                    29.9                    31.7               59.8                  64.0
Amortization of deferred issuance costs              2.0                     0.7                3.9                   2.0
Other interest expense                               1.1                     0.9                1.9                   1.7
                                              $     33.0               $    33.3          $    65.6             $    67.7


Details of our long-term debt are presented in note 12 to the condensed
consolidated financial statements included elsewhere in this report. Interest on
debt for the three and six months ended July 2, 2022 decreased by $1.8 million
and $4.2 million, respectively, when compared to the prior year periods. The
decreases were driven primarily by interest savings due to debt repayments,
lower interest on the Euro Term Loan due to favorable movements in average
currency exchange rates, as well as the benefit from lower interest rates on the
Dollar Term Loan. Amortization of deferred issuance costs has increased during
the three and six months ended July 2, 2022 due primarily to the additional
costs incurred from extending the Dollar Term Loan in February 2021, as well as
additional costs from the amendments from extending our revolving credit
facility and asset-backed revolver in November 2021.

Other expenses (income)

Our other expenses (income) were as follows:

                                                        Three months ended                          Six months ended
                                                    July 2,               July 3,              July 2,             July 3,
(dollars in millions)                                 2022                  2021                2022                 2021
Interest income on bank deposits               $     (0.7)              $    (0.5)         $    (1.5)            $    (1.5)
Foreign currency loss on net debt and hedging
instruments                                           8.2                     0.4               10.7                   1.5

Net adjustments related to post-retirement
benefits                                             (1.6)                   (1.1)              (3.2)                 (2.3)
Other                                                 2.2                       -                2.7                  (0.1)
                                               $      8.1               $    (1.2)         $     8.7             $    (2.4)


Other expenses (income) for the three and six months ended July 2, 2022 was an
expense of $8.1 million and $8.7 million, compared to an income of $1.2 million
and $2.4 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 fees incurred in relation to our
trade accounts receivable factoring program that had only been implemented in
June 2021. In addition, as of April 2, 2022, the economy of Türkiye was
designated as a highly inflationary economy under U.S. GAAP, and the functional
currency for a portion of our Türkiye operations was changed from the Turkish
lira to the U.S. dollar, resulting in a remeasurement loss of $1.4 million
during both the three and six months ended July 2, 2022. These higher expenses
were offset partially by higher expected returns on post-retirement benefit plan
assets based on the most recent actuarial valuations.

income tax expense

We calculate 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 during which they occur.

For the three months ended July 2, 2022, we had income tax expense of
$12.3 million on pre-tax income of $71.6 million, which resulted in an effective
tax rate of 17.2%, compared to an income tax expense of $11.6 million on pre-tax
income of $117.0 million, which resulted in an effective tax rate of 9.9% for
the three months ended July 3, 2021.
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For the three months ended July 2, 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 $1.9 million of other discrete expense. For the
three months ended July 3, 2021, the effective tax rate was driven primarily by
discrete benefits of $8.3 million related to the partial release of valuation
allowance on deferred tax assets for U.S. foreign tax credits and $6.6 million
related to tax law changes enacted in the U.K. during the period.

For the six months ended July 2, 2022, we had an income tax expense of $10.1
million on pre-tax income of $106.8 million, which resulted in an effective tax
rate of 9.5%, compared to an income tax expense of $30.5 million on pre-tax
income of $212.4 million, which resulted in an effective tax rate of 14.4% for
the six months ended July 3, 2021.

For the six months ended July 2, 2022, the effective tax rate was driven
primarily by discrete benefits of $11.7 million related to the partial release
of valuation allowance on deferred tax assets for U.S. foreign tax credits,
partially offset by jurisdictional mix of taxable earnings. For the six months
ended July 3, 2021, the effective tax rate was driven primarily by the same
factors as described above for the three month period.

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 July 2,
2022, that it is more likely than not that deferred tax assets in the U.S.
totaling $4.0 million are realizable of which $3.5 million was a discrete
benefit in the period. 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 July 2, 2022 was $180.1 million,
compared to $216.0 million in the prior year period, a decrease of 16.6% or
$35.9 million. The Adjusted EBITDA margin was 19.9% for the three months ended
July 2, 2022, a 370 basis point decrease from the prior year period margin of
23.6%. The decrease in Adjusted EBITDA was driven primarily by the decrease in
gross profit of $40.5 million, which was largely the result of higher inflation
and lower absorption of fixed costs as described above.

Adjusted EBITDA for the six months ended July 2, 2022 was $336.9 million,
compared to $412.3 million in the prior year period, a decrease of 18.3% or
$75.4 million. Adjusted EBITDA margin was 18.7% for the six months ended July 2,
2022, a 430 basis point decrease from the prior year period margin of 23.0%. The
drivers of the decrease in Adjusted EBITDA were similar to those described above
for the three-month period.

For a reconciliation of net earnings to Adjusted EBITDA for each of the periods presented and the calculation of Adjusted EBITDA margin, see “-Non-GAAP Measures”.

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Analysis by operating segment

Power Transmission (59.9% and 61.0%, respectively, of Gates’ net sales for the three and six months ended July 2, 2022)

                             Three months ended
                           July 2,        July 3,
(dollars in millions)        2022           2021        Period over period change
Net sales                $   543.0       $ 588.6                          (7.7  %)
Adjusted EBITDA          $   102.4       $ 149.6                         (31.6  %)
Adjusted EBITDA margin        18.9  %       25.4  %


                                     Six months ended
                                 July 2,         July 3,
      (dollars in millions)        2022            2021         Period over period change
      Net sales                $ 1,098.6       $ 1,148.1                          (4.3  %)
      Adjusted EBITDA          $   200.2       $   282.3                         (29.1  %)
      Adjusted EBITDA margin        18.2  %         24.6  %


Net sales in Power Transmission for the three months ended July 2, 2022
decreased by 7.7%, or $45.6 million, compared to the prior year period.
Excluding the adverse impact of movements in average currency exchange rates of
$31.6 million, core sales decreased by 2.4%, or $14.0 million, compared to the
prior year period, driven primarily by the impact of lower volumes, but
partially offset by a $52.7 million benefit from favorable pricing.

Net sales in Power Transmission for the six months ended July 2, 2022 decreased
by 4.3%, or $49.5 million, compared to the prior year period. Excluding the
adverse impact of movements in average currency exchange rates of $51.6 million,
core sales increased by 0.2%, or $2.1 million, compared to the prior year
period, driven primarily by a $79.9 million benefit from favorable pricing,
mostly offset by the impact of lower volume.

Power Transmission's core sales to industrial customers grew by 4.1% and 4.3%,
respectively, during the three and six months ended July 2, 2022 compared to the
prior year periods, driven by growth in industrial replacement sales in EMEA and
East Asia & India, and strong growth in industrial first-fit sales in North
America. This growth is mostly offset by the decline in automotive sales during
the three and six months ended July 2, 2022 compared to the prior year period,
primarily in EMEA and Greater China. Industrial growth in the three and six
months ended July 2, 2022 was focused in the diversified industrial and personal
mobility end markets, which together grew by 7.2% and 9.7%, respectively,
compared to the prior year period, primarily in North America and EMEA. Sales in
the automotive end market declined by 6.6% and 3.6% during the three and six
months ended July 2, 2022 compared to the prior year period, primarily from EMEA
and Greater China.

Power Transmission Adjusted EBITDA for the three months ended July 2, 2022
decreased by 31.6%, or $47.2 million, compared to the prior year period, driven
primarily by a combination of higher inflation and lower volumes, offset
partially by the benefit from favorable pricing of $52.7 million. As a result,
the Adjusted EBITDA margin was 18.9%, a 650 basis point decline from the prior
year period.

Power Transmission Adjusted EBITDA for the six months ended July 2, 2022
decreased by 29.1%, or $82.1 million, compared to the prior year period. This
decrease was driven by the same factors as described above for the three month
period, and resulted in an Adjusted EBITDA margin of 18.2%, a 640 basis point
decrease compared to the prior year period.
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Fluid energy (40.1% and 39.0%, respectively, of Gates net sales for the three and six months ended July 2, 2022)

                             Three months ended
                           July 2,        July 3,
(dollars in millions)        2022           2021        Period over period change
Net sales                $   363.8       $ 326.5                           11.4  %
Adjusted EBITDA          $    77.7       $  66.4                           17.0  %
Adjusted EBITDA margin        21.4  %       20.3  %


                                     Six months ended
                                  July 2,       July 3,
        (dollars in millions)       2022          2021        Period over period change
        Net sales                $ 701.6       $ 648.3                            8.2  %
        Adjusted EBITDA          $ 136.7       $ 130.0                            5.2  %
        Adjusted EBITDA margin      19.5  %       20.1  %


Net sales in Fluid Power for the three months ended July 2, 2022 increased by
11.4%, or $37.3 million, compared to the prior year period. Excluding the
unfavorable impact of movements in average currency exchange rates of $9.5
million, core sales increased by 14.3%, or $46.8 million, compared to the prior
year period, driven primarily by a $44.8 million benefit from favorable pricing,
with a slight increase in volumes.

Net sales in Fluid Energy for the six months ended July 2, 2022 increased by 8.2%, or $53.3 million, compared to the period of the previous year. Excluding the unfavorable impact of variations in the average exchange rates of $13.8 millionbase sales increased by 10.4%, or $67.1 millioncompared to the prior year period, mainly due to a $66.4 million benefit from favorable rates.

Fluid Power's core sales growth in the three and six months ended July 2, 2022
was driven by increased sales from both industrial and automotive customers. The
sales from industrial channels grew by 12.2% and 9.1%, respectively, compared to
the prior year periods. This growth was driven primarily by sales to the
diversified industrial and off-highway end markets, particularly in North
America and EMEA. Automotive replacement sales also grew strongly by 22.3% and
15.3% during the three and six months ended July 2, 2022, primarily in North
America.

 Fluid Power Adjusted EBITDA for the three months ended July 2, 2022 increased
by 17.0%, or $11.3 million, compared to the prior year period, driven primarily
by the benefit from favorable pricing. As a result, the Adjusted EBITDA margin
was 21.4%, an 110 basis point improvement from the prior year period.

 Fluid Power Adjusted EBITDA for the six months ended July 2, 2022 increased by
5.2%, or $6.7 million, compared to the prior year period. This increase was
driven by the same factors as described above for the three month period. The
increase is largely offset by higher inflation and lower volume, resulting in an
Adjusted EBITDA margin of 19.5%, a 60 basis points decline compared to the prior
year period.

Cash 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.
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As market conditions warrant, we and our majority equity holders, Blackstone and
its affiliates, may from time to time seek to repurchase securities that we have
issued or loans that we have borrowed in privately negotiated or open market
transactions, by tender offer or otherwise. Subject to any applicable
limitations contained in the agreements governing our indebtedness, any such
purchases may be funded by existing cash or by incurring new secured or
unsecured debt, including borrowings under our credit facilities. The amounts
involved in any such purchase transactions, individually or in the aggregate,
may be material. Any such purchases may relate to a substantial amount of a
particular tranche of debt, with a corresponding reduction, where relevant, in
the trading liquidity of that debt. In addition, any such purchases made at
prices below the "adjusted issue price" (as defined for U.S. federal income tax
purposes) may result in taxable cancellation of indebtedness income to us, which
may be material, and result in related adverse tax consequences to us.

Our policy is to maintain sufficient liquidity throughout the capital expenditure cycle to maintain our financial flexibility. We have no significant debt maturities before 2024; however, we regularly assess market conditions, our liquidity profile and various financing alternatives to identify opportunities to improve our capital structure, and may refinance all or a portion of our debt at or before maturity. We do not expect 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

Six months ended July 2, 2022 compared to the half-year ended July 3, 2021

Cash used in operating activities was $81.8 million during the six months ended
July 2, 2022 compared to cash provided by operating activities of $111.8 million
during the prior year period, driven primarily by lower operating performance
during the current year, and an increase of $32.2 million in taxes paid, as well
as higher bonus payments and lower value-added tax recoveries than in the prior
year.

Net cash used in investing activities during the six months ended July 2, 2022
has been $42.6 millioncompared to $50.6 million in the period of the previous year. This decrease is mainly due to lower capital expenditures.

Net cash used in financing activities was $127.3 million during the six months
ended July 2, 2022, compared to $102.9 million in the prior year period. This
higher cash outflow was driven primarily by the $175.8 million paid to acquire
shares under our share repurchase program. This higher cash outflow is offset
partially by the drawing of $70.0 million under our asset-backed revolving
credit facility, the cash from which was used to partially fund the share
repurchases, as well as lower debt repayment comparing to the prior year period,
which included a $69.5 million repayment against our Euro Term Loan.

Debt

Our long-term debt, consisting mainly of two term loans and WE unsecured dollar-denominated notes, was as follows:

                                                                 Carrying amount                                            Principal amount
                                                    As of                         As of                         As of                         As of
(dollars in millions)                            July 2, 2022                January 1, 2022                 July 2, 2022                January 1, 2022
Debt:
-Secured

Term loans (WE denominated in dollars and euros) $ $1,922.4

                1,986.1       $          1,944.5       $                    2,011.2
Asset-backed revolver                                       70.0                                  -                     70.0                                  -
-Unsecured
Senior Notes (U.S. dollar)                                 579.3                              578.5                    568.0                              568.0

                                              $          2,571.7       $                    2,564.6       $          2,582.5       $                    2,579.2

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



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Drawings

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 quarterly report. This borrowing is
intended to be short-term in nature.

Debt buybacks

During June 2021we repaid the principal of the debt of 58.7 million euros ($69.5 million) on our Euro Term Loan Facility. Following this reimbursement, we have accelerated the recognition of $0.4 million deferred issue costs (recognised as interest expense).

Amendments to the Dollar Term Loan Credit Agreement

On February 24, 2021, we made amendments to the Dollar Term Loan credit
agreement, including extending its maturity date from March 31, 2024 to March
31, 2027, reducing the floor applicable to the Dollar Term Loan from 1.00% to
0.75% and modifying the applicable interest rate margin for the Dollar Term Loan
to include a 0.25% reduction if our consolidated total net leverage ratio (as
defined in the credit agreement) is less than or equal to 3.75 times. In
connection with these amendments, we paid accrued interest up to the date of the
amendments of $3.7 million, in addition to fees of approximately $8.6 million,
of which $6.9 million qualified for deferral and will be amortized to interest
expense over the new remaining term of the Dollar Term Loan using the effective
interest method.

During the third quarter of 2021, following the changes described above, the margin on the dollar term loan was reduced by 0.25%, the total consolidated net leverage ratio (as defined in the credit) having fallen below 3.75 times.

Revolver Extensions

On November 18, 2021, we amended the credit agreements governing both of our
revolving credit facilities to, among other things, increase the size of the
cash flow revolving credit facility from $185.0 million to $250.0 million, and
decrease the maximum commitments available under the asset-backed revolver from
$325.0 million to $250.0 million. In addition, the letter of credit sub-facility
under the cash flow revolving credit facility was increased from $20.0 million
to $75.0 million. The maturity dates of both revolving credit facilities were
also extended from January 29, 2023 to November 18, 2026 (subject to certain
springing maturities related to our Euro Term Loan and Unsecured Senior Notes if
more than $500.0 million is outstanding in respect of either such facility 91
days prior to their respective maturities).

In connection with these amendments, we paid fees of $3.3 million, which have
been deferred and will, together with existing deferred issuance costs related
to these facilities, be amortized to interest expense over the new term of the
facilities on a straight-line basis.

Non-guarantor subsidiaries

The majority of WE the subsidiaries are guarantors of the senior secured credit facilities.

For the twelve months ended July 2, 2022, before intercompany eliminations, our
non-guarantor subsidiaries represented approximately 73% of our net sales and
66% of our EBITDA as defined in the financial covenants attaching to the senior
secured credit facilities. As of July 2, 2022, before intercompany eliminations,
our non-guarantor subsidiaries represented approximately 62% of our total assets
and approximately 27% of our total liabilities.
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Net debt

Net Debt is a non-GAAP measure representing the principal amount of our debt
less the carrying amount of cash and cash equivalents. During the six months
ended July 2, 2022, our Net Debt increased by $268.3 million from $1,921.0
million as of January 1, 2022 to $2,189.3 million as of July 2, 2022. Net Debt
was impacted favorably by $43.4 million due to movements in currency exchange
rates, related primarily to the impact of the weakening of the Euro against the
U.S. dollar on our Euro-denominated debt. Excluding this impact, Net Debt
increased by $311.7 million, which was driven primarily by cash used in
operating activities of $81.8 million, $175.8 million paid to acquire shares
under our share repurchase program, and capital expenditures of $38.1 million.

Borrowing margin

As of July 2, 2022, 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 March 2022, we drew $70.0 million
under this facility to partially fund the purchase of shares under our share
repurchase program. In addition, there were letters of credit outstanding
against the facility amounting to $25.7 million. We also have a secured
revolving credit facility that provides for multi-currency revolving loans up to
an aggregate principal amount of $250.0 million.

In total, our committed borrowing margin was $404.3 millionin addition to the cash balances of $393.2 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, items excluded from EBITDA in the calculation of Adjusted EBITDA mainly included:

•non-cash charges related to stock-based compensation;

• transaction-related expenses incurred in connection with major corporate transactions, including business acquisitions and related integration activities, as well as equity and debt transactions;

•asset impairments;

•restructuring charges, including charges related to severance pay; and

•inventory adjustments related to certain inventories accounted for on a 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. In particular, we exclude the effect
on cost of sales of the uplift to the carrying amount of inventory held by
entities acquired by Gates. We also exclude costs associated with major
corporate transactions because we do not believe that they relate to our
performance. Other items are excluded from Adjusted EBITDA because they are
individually or collectively significant items that are not considered to be
representative of the underlying performance of our businesses. During the
periods presented, we excluded restructuring expenses and severance-related
expenses that reflect specific, strategic actions taken by management to
shutdown, downsize, or otherwise fundamentally reorganize areas of Gates'
business, 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                      Six months ended
                                                       July 2,              July 3,           July 2,            July 3,
(dollars in millions)                                    2022                2021               2022              2021
Net income from continuing operations              $     59.3             $  105.4          $    96.7          $  181.9
Income tax expense                                       12.3                 11.6               10.1              30.5
Net interest and other expenses                          41.1                 32.1               74.3              65.3
Depreciation and amortization                            55.8                 56.9              110.9             112.7
EBITDA                                                  168.5                206.0              292.0             390.4
Transaction-related expenses (1)                          0.5                  0.2                1.3               2.6
Asset impairments                                         0.6                    -                0.6                 -
Restructuring expenses                                    3.2                  3.7                3.7               6.6

Share-based compensation expense                          3.5                  6.5               27.6              12.8

Inventory impairments and adjustments (2)
(included in cost of sales)                               3.6                  0.1               11.2               0.1

Severance expenses (included in cost of sales)              -                    -                  -                 -
Severance expenses (included in SG&A)                     0.1                    -                0.4               0.3
Other items not directly related to current
operations                                                0.1                 (0.5)               0.1              (0.5)
Adjusted EBITDA                                    $    180.1             $  216.0          $   336.9          $  412.3

(1) Transaction-related expenses primarily relate to advisory fees and other costs recognized in connection with significant corporate transactions, including business acquisitions, 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.

Adjusted EBITDA Margin

Adjusted EBITDA margin is a non-GAAP measure that represents Adjusted EBITDA
expressed as a percentage of net sales. We use Adjusted EBITDA margin to measure
the success of our businesses in managing our cost base and improving
profitability.
                             Three months ended              Six months ended
                           July 2,        July 3,        July 2,         July 3,
(dollars in millions)        2022           2021           2022            2021
Net sales                $   906.8       $ 915.1       $ 1,800.2       $ 1,796.4
Adjusted EBITDA          $   180.1       $ 216.0       $   336.9       $   412.3
Adjusted EBITDA margin        19.9  %       23.6  %         18.7  %         23.0  %



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Core Growth Reconciliations

Core revenue growth is a non-GAAP measure that represents net sales for the
period excluding the impacts of movements in average currency exchange rates and
the first-year impacts of acquisitions and disposals, when applicable. We
present core growth because it allows for a meaningful comparison of
year-over-year performance without the volatility caused by foreign currency
gains or losses or the incomparability that would be caused by impacts of
acquisitions or disposals. Management believes that this measure is therefore
useful for securities analysts, investors and other interested parties to assist
in their assessment of the operating performance of our businesses. The closest
GAAP measure is net sales.
                                                                     Three months ended July 2, 2022
(dollars in millions)                                   Power Transmission         Fluid Power            Total

Net sales for the three months ended July 2, 2022 $543.0

       $     363.8          $  906.8
Impact on net sales of movements in currency rates                31.6                    9.5              41.1

Core revenue for the three months ended July 2, 2022             574.6                  373.3             947.9

Net sales for the three months ended July 3, 2021                588.6                  326.5             915.1

(Decrease) increase in net sales on a base basis (base income)

                                               $         (14.0)     

$46.8 $32.8

Core revenue (decline) growth                                     (2.4)   %              14.3  %            3.6  %


                                                                      Six months ended July 2, 2022
(dollars in millions)                                  Power Transmission          Fluid Power            Total

Net turnover for the six months ended July 2, 2022 $1,098.6

       $     701.6          $ 1,800.2
Impact on net sales of movements in currency rates                  51.6                 13.8               65.4

Core revenue for the six months ended July 2, 2022               1,150.2                715.4            1,865.6

Net sales for the six months ended July 3, 2021                  1,148.1                648.3            1,796.4
Increase in net sales on a core basis (core revenue)  $              2.1          $      67.1          $    69.2

Core revenue (decline) growth                                        0.2  %              10.4  %             3.9  %


Net Debt

Management uses net debt, rather than the narrower measure of cash and cash equivalents and restricted cash that forms the basis of the condensed consolidated statement of cash flows, as a measure of our liquidity and to assess 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 book value of cash and cash equivalents.

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Net Debt was as follows:
                                         As of               As of
(dollars in millions)                July 2, 2022       January 1, 2022
Principal amount of debt            $     2,582.5      $        2,579.2
Less: Cash and cash equivalents            (393.2)               (658.2)
Net Debt                            $     2,189.3      $        1,921.0


The principal amount of debt is reconciled to the carrying amount of debt as
follows:
                                As of               As of
(dollars in millions)       July 2, 2022       January 1, 2022
Principal amount of debt   $     2,582.5      $        2,579.2
Accrued interest                    17.3                  16.9
Deferred issuance costs            (28.1)                (31.5)
Carrying amount of debt    $     2,571.7      $        2,564.6

Adjustments to Adjusted EBITDA for Ratio Calculation

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 $5.1 million.

Gates Industrial Corporation plc is not an obligor under our revolving credit
facility, our term loan facility or the indenture governing our outstanding
notes. Gates Global LLC, an indirect subsidiary of Gates Industrial Corporation
plc, is the borrower under our revolving credit facility and our term loan
facility and the issuer of our outstanding notes. The only significant
difference between the results of operations and net assets that would be shown
in the consolidated financial statements of Gates Global LLC and those for the
Company that are included elsewhere in this report is a payable of
$117.6 million due to Gates Global LLC and its subsidiaries from indirect parent
entities of Gates Global LLC as of July 2, 2022 (compared to a payable of
$0.9 million due to Gates Global LLC and its subsidiaries as of January 1, 2022)
and additional cash and cash equivalents held by the Company and other indirect
parent entities of Gates Global LLC of $0.5 million and $12.7 million as of
July 2, 2022 and January 1, 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 January 1, 2022, as filed with the SEC, from which there have
been no material changes.
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