Segment information

A. Background

Topic 280 “Segment Reporting” requires segment information provided in the consolidated financial statements to reflect the information that was provided to 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.

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. These decisions are based on net sales and Adjusted EBITDA (defined below).

B. Operating Segments

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.

C. Disaggregated net sales

The following table summarizes our net sales by key geographic region:



	Net Sales
	Three months ended				Six months ended
(dollars in millions)	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
North America	$	412.7	$	358.0	$	808.7	$	703.1
EMEA	226.9		195.8		458.2		384.8
East Asia and India	102.7		99.3		201.0		189.5
Greater China	98.8		82.3		191.5		155.7
South America	34.0		33.7		67.7		66.2
Net Sales	$	875.1	$	769.1	$	1,727.1	$	1,499.3

The following table summarizes our net sales into emerging and developed markets:



	Net Sales
	Three months ended				Six months ended
(dollars in millions)	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Developed	$	550.5	$	486.1	$	1,112.7	$	973.1
Emerging	324.6		283.0		614.4		526.2
Net Sales	$	875.1	$	769.1	$	1,727.1	$	1,499.3

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 expense and other expenses, income taxes, depreciation and amortization derived from financial information prepared in accordance with U.S. GAAP.

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


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


•	transaction-related costs incurred in relation to business combinations and major corporate transactions, including acquisition integration activities;


•	the effect on cost of sales of fair value adjustments to the carrying amount of inventory acquired in business combinations;


•	impairments, comprising impairments of goodwill and significant impairments or write downs of other assets;


•	restructuring costs;


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


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

E. Net sales and Adjusted EBITDA – continuing operations

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



	Net Sales
	Three months ended				Six months ended
(dollars in millions)	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Power Transmission	$	549.6	$	510.8	$	1,095.6	$	996.4
Fluid Power	325.5		258.3		631.5		502.9
Continuing operations	$	875.1	$	769.1	$	1,727.1	$	1,499.3



	Adjusted EBITDA
	Three months ended				Six months ended
(dollars in millions)	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Power Transmission	$	133.3	$	120.4	$	258.6	$	227.9
Fluid Power	71.6		58.6		130.2		104.1
Continuing operations	$	204.9	$	179.0	$	388.8	$	332.0

Sales between reporting segments and the impact of such sales on Adjusted EBITDA for each segment are not included in internal reports presented to the CEO and have therefore not been included above.

Reconciliation of Adjusted EBITDA to net income from continuing operations:



	Three months ended						Six months ended
(dollars in millions)	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net income from continuing operations	$	92.9		$	8.3		$	122.3		$	34.3
Income tax expense	11.5			4.5			23.2			17.0
Income from continuing operations before taxes	104.4			12.8			145.5			51.3
Interest expense	39.8			68.8			99.6			124.0
Other (income) expenses	(3.3		)	35.1			14.1			35.8
Operating income from continuing operations	140.9			116.7			259.2			211.1
Depreciation and amortization	54.6			53.8			109.6			106.2
Transaction-related costs⁽¹⁾	1.3			2.1			6.0			4.1
Impairment of intangibles and other assets	0.1			—			0.4			—
Restructuring expense	2.3			4.1			2.0			5.9
Share-based compensation	1.6			0.9			3.2			1.7
Sponsor fees (included in other operating expenses)	2.1			1.5			4.0			3.0
Impact of fair value adjustment on inventory (included in cost of sales)	0.3			—			0.3			—
Non-recurring inventory adjustments (included in costs of sales)	0.8			—			0.8			—
Other operating expenses (income)	1.0			(0.1		)	3.4			—
Other non-recurring adjustments (included in SG&A)	(0.1		)	—			(0.1		)	—
Adjusted EBITDA	$	204.9		$	179.0		$	388.8		$	332.0


⁽¹⁾	Transaction-related costs relate primarily to advisory costs recognized in respect of our initial public offering, the acquisition of businesses and costs related to other corporate transactions such as debt refinancings.