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Share-based compensation
 3 Months Ended
Mar. 28, 2020
Share-based Payment Arrangement [Abstract]  
Share-based compensation 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 months ended March 28, 2020, we recognized a charge of $2.9 million, compared with $2.6 million during the three months ended March 30, 2019.
Share-based incentive awards issued under the 2014 Omaha Topco Ltd. Stock Incentive Plan
Gates has a number of awards issued under the 2014 Omaha Topco Ltd. Stock Incentive 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. No new awards have been granted under this plan since 2017. The options are 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 our majority owners, who are various investment funds managed by affiliates of The Blackstone Group 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 be 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.
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.
In addition to the above, in 2017, under the same plan, the Company issued 76,293 restricted stock units (“RSUs”). These RSUs vest evenly over three years from the date of grant, subject to the participant’s continued provision of service to Gates on the vesting date. The awards expire ten years after the date of grant, in December 2027.
Changes in the awards granted under this plan are summarized in the tables below.
Share-based incentive awards issued under the Gates Industrial Corporation plc 2018 Omnibus Incentive Plan
In conjunction with the initial public offering in January 2018, Gates adopted a new equity-based compensation 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 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 one or three years from the date of grant, subject to the participant’s continued provision of service to Gates on the vesting date. The PRSUs provide that 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.
New awards and movements in existing awards granted under this plan are summarized in the tables below.
Summary of movements in options outstanding
Three months ended
March 28, 2020
Number of
options		Weighted average exercise price
$
Outstanding at the beginning of the period:
—Tier I3,825,855  $7.07  
—Tier II4,405,340  $7.01  
—Tier III4,405,340  $7.01  
—Tier IV4,405,340  $10.52  
—SARs772,450  $8.72  
—Share options1,610,485  $16.69  
—Premium-priced options796,460  $19.00  
20,221,270  $9.09  
Granted during the period:
—SARs69,361  $12.08  
—Share options1,193,114  $12.55  
1,262,475  $12.52  
Forfeited during the period:
—Tier I(86,581) $6.74  
—Tier II(404,446) $6.63  
—Tier III(404,446) $6.63  
—Tier IV(404,446) $9.94  
—Share options(89,803) $16.46  
(1,389,722) $8.24  
Exercised during the period:
—Tier I(318,607) $6.60  
(318,607) $6.60  
Outstanding at the end of the period:
—Tier I3,420,667  $7.12  
—Tier II4,000,894  $7.05  
—Tier III4,000,894  $7.05  
—Tier IV4,000,894  $10.58  
—SARs841,811  $9.00  
—Share options2,713,796  $14.88  
—Premium-priced options796,460  $19.00  
19,775,416  $9.42  
Exercisable at the end of the period3,080,858  $8.79  
Vested and expected to vest at the end of the period7,714,079  $11.24  
As of March 28, 2020, the aggregate intrinsic value of options that were vested or expected to vest was $2.5 million and these options had a weighted average remaining contractual term of 7.3 years. As of March 28, 2020, the aggregate intrinsic value of options that were exercisable was $1.9 million and these options had a weighted average remaining contractual term of 6.0 years.
As of March 28, 2020, the unrecognized compensation charge relating to the nonvested options other than Tier II, Tier III and Tier IV options, was $12.7 million, which is expected to be recognized over a weighted-average period of 2.5 years. The unrecognized compensation charge relating to the nonvested Tier II, Tier III and Tier IV options was $26.3 million, which will be recognized on occurrence of a liquidity event as described above.
During the three months ended March 28, 2020, cash of $2.1 million was received in relation to the exercise of vested options, compared with $1.2 million during the three months ended March 30, 2019. The aggregate intrinsic value of options exercised during the three months ended March 28, 2020 was $2.0 million, compared with $1.7 million during the three months ended March 30, 2019.
Summary of movements in RSUs and PRSUs outstanding
Three months ended
March 28, 2020
Number of
awards		Weighted average
grant date fair value
$
Outstanding at the beginning of the period:
—RSUs718,269  $16.20  
—PRSUs248,550  20.07  
966,819  $17.20  
Granted during the period:
—RSUs1,126,523  $12.01  
—PRSUs365,258  14.41  
1,491,781  $12.60  
Forfeited during the period:
—RSUs(35,135) $16.46  
—PRSUs(28,552) 20.07  
(63,687) $18.08  
Vested during the period:
—RSUs(218,556) $16.41  
(218,556) $16.41  
Outstanding at the end of the period:
—RSUs1,591,101  $13.20  
—PRSUs585,256  16.53  
2,176,357  $14.10  
As of March 28, 2020, the unrecognized compensation charge relating to nonvested RSUs and PRSUs was $24.3 million, which is expected to be recognized over a weighted average period of 2.5 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 months ended March 28, 2020 was $2.7 million, compared with $0.2 million during the three months ended March 30, 2019.
Valuation of awards granted during the period
The grant date fair value of the options and SARs was measured using a Black-Scholes valuation model. RSUs are valued at the share price on the date of grant. The premium-priced options and 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 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:
Three months ended
March 28, 2020March 30, 2019
Grant date fair value:
—SARs$4.59  $5.88  
—Share options$4.78  $5.88  
—Premium-priced optionsn/a  $5.65  
—RSUs$12.01  $16.46  
—PRSUs$14.41  $20.07  
Inputs to the model:
—Expected volatility - SARs37.7 %31.9 %
—Expected volatility - share options37.6 %31.9 %
—Expected volatility - premium-priced optionsn/a  31.9 %
—Expected volatility - PRSUs40.4 %32.8 %
—Expected option life for SARs6.06.0
—Expected option life for share options6.06.0
—Expected option life for premium-priced optionsn/a7.0
—Risk-free interest rate:
SARs1.25 %2.51 %
Share options1.33 %2.51 %
Premium-priced optionsn/a  2.53 %
PRSUs1.29 %2.48 %