Coats Regulatory News (COA)

28 July 2016

Coats Group plc

2016 Half Year results

Coats Group plc ('Coats' or the 'Company'), the world's leading industrial thread manufacturer, today announces its unaudited results for the six months ended 30 June 2016.

Highlights1

· Revenue of $718 million maintained; lower sales growth in Q2 due to tougher market conditions

· Operating profit up 24% to $77 million on an adjusted basis (up 44% reported)

· Industrial profit growth of 27% delivered by market share gains and cost productivity

· Americas Crafts margin increased, despite tough market conditions, due to focus on costs

· Adjusted EPS up 24% to 2.08c with higher operating profit and reduction in tax rate offset mainly by unrealised losses on foreign exchange hedges; reported EPS of 1.90c (2015 continuing: 0.25c)

· Adjusted free cash flow for last twelve months of $82 million (June 2015: $75 million) primarily due to higher profitability

· Acquired Gotex and Fast React; last year's acquisition GSD performing well

· Continuing settlement discussions with Trustees of the three UK pension schemes and engaging with UK Pensions Regulator to seek to achieve a resolution of investigations

Commenting on Coats first half 2016 results Paul Forman, Group Chief Executive, said:

'Coats continued to perform well in the first half of 2016 with operating profit growth of 24%. In challenging market conditions, which led to lower sales growth in Q2, we continued to take market share, introduce new and innovative products and drive customer adoption of our eCommerce platform. We delivered productivity gains, tightly managed our overheads and greater sales volumes led to a positive operational gearing effect. We completed the acquisitions of Gotex and Fast React, both of which have leading positions in their markets and we are confident they will deliver strong growth under Coats' ownership. We will build on progress made during the first half and focus on maintaining our strong cash flows. However, the tougher market conditions that impacted Q2 sales performance are likely to persist, particularly given macroeconomic uncertainty. On balance we therefore maintain our previous 2016 guidance.'

Conference call

Coats Management will discuss this report in a webcast / conference call with analysts and investors at0900 BST today (28 July 2016). The webcast can be accessed via www.coats.com/investors/hy16. The conference call can be accessed by dialling +44 (0)20 3059 8125 and using participant code 'Coats'. The webcast will also be made available in archive form on coats.com.

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Enquiry details

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About Coats Group plc

Coats is the world's leading industrial thread manufacturer and a major player in the Americas textile crafts market. At home in more than 60 countries, Coats employs 19,000 people across six continents. Revenues in 2015 were US$1.5bn. Coats' pioneering history and innovative culture ensure the company leads the way around the world: providing complementary and value added products and services to the apparel and footwear industries; applying innovative techniques to develop high technology Speciality threads and yarns in areas such as automotive and fibre optics; and extending the crafts offer into new markets and online. Headquartered in the UK, Coats has a premium listing on the London Stock Exchange. To find out more about Coats visit www.coats.com.

Summary

In the following commentary all comparisons with H1 2015 are on a CER basis, all references to revenue are on an organic basis and all references to operating profit are on an adjusted basis, unless otherwise stated.

Coats generated revenues of $718 million in the first half of 2016, similar to H1 2015 ($716 million). Industrial sales grew 3% driven by share gains in Apparel and Footwear and product innovation and geographic expansion in Speciality, although growth was moderated by lower sales in Q2 due to softer demand from clothing retailers and manufacturers in US consumer durable markets. Crafts sales fell 13% due to a sharp contraction in the US handknitting market predominantly caused by a mild North American winter.

Adjusted operating profit increased 24% to $77.3 million (H1 2015: $62.1 million). Industrial profit grew 27% and margins were up 250 basis points (bps) to 13.3% due to volume growth, lower input prices and productivity and procurement improvements and tight cost control. The 67% decline in Crafts profit was primarily due to lower US handknittings sales and losses made in the UK business, which will close by the end of the year. Craft Americas margins increased 40bps to 3.0%, despite lower volumes, due to tight cost control. The overhead reduction programme, initiated in 2015, continued to deliver in line with management expectations, although some savings are being reinvested to support growth.

Performance on a reported basis was impacted by the relative strength of the US Dollar compared to H1 2015. As the Company reports in US Dollars and given that its global footprint generates significant revenues and expenses in a number of other currencies, a translational currency impact can arise. The main currency impact during the period was the Dollar against the Brazilian Real, Indian Rupee and Mexican Peso, with a relatively smaller impact on operating profit compared to revenues.

Financial summary

Adjusted earnings per share ('EPS') on a CER basis increased 24% to 2.08 cents (H1 2015: 1.68 cents) with higher operating profits and a reduction in the tax rate offset mainly by unrealised losses on forward foreign exchange contracts due to the depreciation of Sterling following the EU Referendum. The Company generated a reported attributable profit of $26.3 million compared to $3.6 million in H1 2015 (from continuing operations), in which there was a higher level of exceptional costs and foreign exchange losses on parent group cash.

There was an adjusted free cash outflow of $14.6 million in the first half of 2016 which reflects the normal intra-year working capital cycle of the business (H1 2015: $22.9 million outflow). The reduction in net cash from$241 million at the end of 2015 to $59 million at 30 June 2016 was also due to pensions deficit repair payments to the Staveley and Brunel schemes, the lower US dollar value of Sterling denominated parent group cash (committed to supporting Sterling pension liabilities) and $35 million spent on acquisitions. On a last twelve months' basis, Coats generated an adjusted free cash inflow of $82.2 million to June 2016, an increase on the twelve months to June 2015 ($75.0 million) due primarily to higher profitability. Return on capital employed increased to 31%, from 24% at 30 June 2015, also due to higher profits.

UK Pensions Regulator investigations

Coats continues its settlement discussions, which commenced earlier this year, with the Trustees of the Company's three UK pension schemes and has now also met with the UK Pensions Regulator ('tPR') to seek to achieve a resolution of the ongoing investigations.

As previously announced, Coats has committed to retain the parent group cash within the Group to support the Company and schemes. This would be on the basis of tPR withdrawing the Warning Notices on the three schemes, thereby ending the investigations. There are active discussions as to the support structure provided by the parent group cash and the level of annual deficit recovery payments. If a settlement cannot be reached and the investigation process continues, Coats believes any hearing is unlikely before the fourth quarter of 2016 at the earliest. See page 9 for further details.

Strategic progress

In June, Coats announced the acquisitions of Gotex and Fast React Systems for an initial consideration of $28 million and $7 million respectively. Gotex designs and manufactures high-tech industrial yarns and tapes used to protect, reinforce and insulate cables and pipes in the global telecommunications, energy and oil and gas sectors. Gotex's market leading fibreglass technology and products will complement Coats' existing fibre optic product range, while Coats will support Gotex in further expanding into high-growth markets. Fast React is a provider of software solutions and expertise to manufacturers and retailers in the global apparel and footwear industries. This will enable Coats Global Services to offer an even wider range of operational improvement tools to customers and follows the successful acquisition of GSD in 2015, which has delivered double digit sales growth by leveraging Coats global reach and strong customer relationships. See page 6 for more details.

Following on from the disposal of the EMEA Crafts business last year, Coats is to close its loss-making UK Crafts operations which is anticipated by the end of 2016. See page 7 for more details.

EU referendum

Earlier this year, Coats undertook a risk analysis of the UK voting to leave the European Union. As a global industrial manufacturing company with no manufacturing facilities and minimal sales in the UK, Coats was of the view that there would be a limited direct adverse impact on the Group. Following the outcome of the vote, although too early to provide a definitive assessment given the lack of certainty on the future relationship between the UK and EU, the Company maintains this view. Indirect factors have impacted the Company in these results, namely the effect of lower discount rates on the accounting valuation of pension liabilities and the depreciation of Sterling on unrealised losses on foreign exchange hedging. In the near and longer term there may be other impacts, notably macroeconomic uncertainty, and, as such, Coats will continue to monitor the situation through its risk management framework. See page 9 for more details.

Corporate changes

On 24 June, the Company de-listed from the New Zealand and Australian stock exchanges and now has a single listing on the London Stock Exchange. Simon Boddie has recently joined the Company as Chief Financial Officer and Executive Director and in October Fran Philips will join as a Non-Executive Director.

Outlook

Coats will look to build on the performance of the first half of 2016 in which it continued to gain market share and deliver productivity and procurement improvements. However, the challenging market conditions that impacted Q2 sales performance are likely to persist into the second half, particularly given macroeconomic uncertainty. Therefore, on balance, expectations for the year remain unchanged: to deliver modest year-on-year growth in Group adjusted operating profit for continuing operations, with improvements to non-operating items further benefiting adjusted EPS.

Operating Review

In the following commentary all comparisons with H1 2015 are on a CER basis, all references to revenue are on an organic basis and all references to operating profit are on an adjusted basis, unless otherwise stated.

Industrial

Revenue in Apparel and Footwear (A&F) grew 3%. In a challenging pricing environment this was driven by volume growth, of which the majority was through market share gains as underlying market growth was adversely impacted by softer retailer demand in the second quarter especially. Coats' ability to continue to take market share was driven by several factors including deepening its relationships with retailers and brand owners through its global accounts programme, and with manufacturers, through the increasing adoption of digital services. Eighteen months after the Company rolled out an eCommerce platform it is now live in over 25 countries, used by over 10,000 customers (manufacturers) and accounts for over 60% of total thread orders. It has also enabled a reduction in back office headcount.

Speciality revenue grew 3% despite tough comparators (13% growth in H1 2015) and challenging market conditions in US consumer durable markets, such as outdoor goods, where destocking was prevalent. Emerging markets continued to deliver good sales growth through geographic expansion of existing products, such as furniture and upholstery. The business also continued to grow sales in new, innovative products, for example in the fibre optics sector, and entered new end-markets such as carbon composites.

By region, revenue in Asia increased 3% with a strong start to the year in A&F somewhat offset by softer demand from retailers in Q2. In the Americas revenues were marginally down with solid growth in A&F sales in Latin American markets such as Mexico and Colombia offset by the slowdown in some US consumer durable markets. Sales in EMEA rose 8%, following a challenging 2015, with growth in key A&F markets, improved performance in zips and good performance in Speciality.

Industrial operating profit increased 27% to $80.6 million (H1 2015: $63.7 million) and margins increased 250bps to 13.3%. This reflected good volume growth, leading to a positive operational gearing impact, a reduction in material costs due to the lower average oil price compared to H1 2015 and ongoing productivity and non-raw material procurement improvements. These factors more than offset the challenging pricing environment and the structural wage and energy inflation that the Company faces across the many countries in which it operates.

Acquisitions

In June, Coats completed the acquisition of Gotex, a company that designs, manufactures and trades a range of innovative, high performance industrial textiles to serve industries such as telecommunications (fibre optic cables), energy and oil and gas. Based near Barcelona, Spain, Gotex is a market leader in coated fibreglass yarns with proprietary technology that enables manufacture at significantly higher speeds than conventional technology. This will complement Coats' aramid product range and strengthen Coats' presence in fibre optics. Coats will support Gotex in further expanding into high-growth markets by leveraging Coats' unrivalled geographic footprint, breadth of global customer relationships and strong corporate brand. In 2015, Gotex generated sales of approximately €14 million. The initial consideration was US$28 million, with a further payment of up to US$4 million after a two-year period, contingent on Gotex achieving certain performance targets.

In May, Coats acquired Fast React, a UK based provider of software solutions and expertise to manufacturers and retailers in the apparel and footwear industries to improve their operational efficiency. The business generated revenues of approximately £4 million in 2015. The initial consideration was US$7 million, with further payments of up to US$4 million over a three-year period, contingent on Fast React achieving certain performance targets. The transaction enables Coats Global Services to offer an even wider range of productivity improvement tools to customers and follows the acquisition of GSD in May 2015. GSD has performed well under Coats ownership and delivered double digit sales growth in H1 2016 by leveraging Coats global reach and strong customer relationships.

Crafts

Americas Crafts (excluding UK) revenues declined 13% to $104 million in the first half of 2016 (H1 2015: $119 million). Handknitting sales declined 23% due to a sharp decline in the US handknitting market. Based on feedback from Coats major customers the mild North American winter was a contributing factor, while systems issues at a key customer also negatively impacted demand. However, there has been an improvement in handknitting sales levels in the last couple of months. Revenue in Needlecrafts decreased 1% but with continued growth in Coats' lifestyle fabrics sales during the period. Overall revenues in Latin America were broadly stable, with lower volumes due to challenging market conditions largely offset by product and country mix benefits.

Overall, Crafts profit for the period (including the UK) fell to $0.8 million (H1 2015: $2.4 million). Despite the decline in sales, profit in Americas Crafts for the period was maintained at $3.1 million (H1 2015: $3.1 million) and margins increased 40bps to 3.0%. This was achieved by taking cost actions, such as reducing discretionary spend and tightly controlling overheads, which will remain a focus throughout 2016. Margins are expected to improve in H2 2016 due to the anticipated improvement in market conditions, ongoing focus on costs and traditionally greater weighting of sales in the second half of the year.

UK Crafts

Following on from the disposal of the EMEA Crafts business last year, Coats is to close its loss-making UK Crafts operations. It is anticipated that the business will cease operations by the end of 2016 and be treated as a discontinued item in the full year 2016 results. In H1 2016 the business generated revenues of $7 million and an operating loss of $2 million. The closure will have no impact on the ongoing Americas Crafts business.

Financial review

Overhead reduction programme

As previously reported following the disposal of EMEA Crafts in July 2015, Coats reviewed elements of its cost base to establish the appropriate cost structure for a smaller and less complex Group. As a result, $14.1 million of restructuring costs were recognised in 2015. The programme continued to deliver in line with management expectations during the first half of 2016, with incremental savings of $3-4 million in addition to the $4 million delivered in 2015. Some savings will continue to be realised in H2 2016 and H1 2017, although as the Company continues to grow some of these savings will be reinvested to support growth plans.

Exceptional and acquisition related items

There were $2.5 million of exceptional and acquisition related costs which related to the upcoming closure of UK Crafts, Gotex and Fast React transaction costs and the amortisation of intangible assets acquired. In H1 2015 exceptional costs totalled $12.5 million and mainly related to the consolidation of Coats' Mexican operations, the initial provision for the overhead reduction programme and a provision for remedial work on the Lower Passaic River ('LPR'), New Jersey, USA. There are no updates to provide on LPR in this report (see note 10).

Non-operating results

Net finance costs in the period were $18.3 million, down from $23.0 million in H1 2015. There was a reduction in interest on borrowings from $9.5 million to $7.3 million in H1 2016 partly due to fixed interest rate swaps coming to an end. There was approximately $4 million of unrealised losses on forward foreign exchange contracts primarily due to the depreciation of Sterling following the EU Referendum. With the movement of all the parent cash group (committed to support the Company's pension schemes) to Pound Sterling from New Zealand, Australian and US Dollars in H2 2015, interest income on the balance declined to $1.4 million in the first half of 2016 (H1 2015: $3.0 million). This move also negated the foreign exchange exposure, which led to a significant loss in H1 2015 ($12.3 million). IAS19 pensions interest charges reduced from $8.6 million to $7.1 million as a function of the lower pensions accounting deficit at the end of 2015.

The taxation charge for H1 2016 was $22.7 million (H1 2015: $20.2 million) resulting in a reported tax rate of 40% (H1 2015: 66%). Excluding exceptional and acquisition related items, the impact of IAS19 finance charges and foreign exchange gains/losses on the parent group cash balance, the underlying effective rate on pre-tax profits reduced 200bps to 34% (H1 2015: 36%). This was driven by a reduction in unrelieved losses and withholding tax suffered, together with a favourable change in profit mix for the period.

Profit attributable to minority interests increased to $8.2 million (H1 2015: $6.6 million) and is predominantly related to Coats' operations in Vietnam and Bangladesh (in which it has controlling interests).

Adjusted EPS increased 24%, on a CER basis, to 2.08 cents (H1 2015: 1.68 cents) and 14% on an actual currency basis. The higher operating profit and improvements in the underlying tax rate were mainly offset by the unrealised loss on forward foreign exchange contracts. Reported EPS of 1.90 cents compares to 0.25 cents in H1 2015 for continuing operations; last year's result was impacted by a higher level of exceptional costs and foreign exchange losses on the parent group cash (there was a reported loss per share of 3.42 cents in H1 2015 due to a loss on discontinued items related to the EMEA Crafts business).

Investment

Capital expenditure during the half, in addition to ongoing maintenance requirements, focused on new product/process development, capacity expansion and environmental spend. The latter, which includes building effluent treatment plants, helps ensure Coats maintains its leading corporate responsibility credentials in the industry. Total capital spend amounted to $17.5 million (H1 2015: $18.1 million) and was 0.9 times depreciation, in line with previous guidance.

Cash flow

In the first half of 2016 there was an adjusted free cash outflow of $14.6 million, an improvement on performance in H1 2015 ($22.9 million outflow), primarily due to higher profitability. The outflow reflects Coats' normal free cash flow cycle, whereby the second half cash inflow significantly exceeds that in the first half. EBITDA (defined as pre-exceptional operating profit before depreciation and amortisation) for the half was$98.0 million (H1 2015: $86.7 million). Net working capital as a percentage of sales was maintained at 15%. Interest paid was $7.1 million, a $1.7 million reduction on H1 2015 (from continuing operations), partly as a result of fixed rates swaps coming to an end. Tax paid was $30.7 million, an increase of $5.9 million on H1 2015, due to higher profitability in the first half of 2016 and timing of payments of withholding taxes on remittance of overseas profits. On a non-adjusted basis, there was a free cash outflow of $134.1 million, compared to $64.7 million in H1 2015. The increase was primarily related to $35.4 million spent on acquisitions (H1 2015: $5.5 million on GSD) and $55 million of pension recovery payments made to the Brunel and Staveley schemes.

A key metric for the Company is adjusted free cash flow on a last twelve months' basis. For the twelve months to 30 June 2016, Coats generated $82.2 million. This improvement on the $73.9 million generated for the full year 2015 and $75.0 million for the twelve months to 30 June 2015 was due to higher profitability. This measure is before annual pension recovery payments, acquisitions and dividends, and excludes exceptional items such as tPR investigations.

Balance sheet

The Company had a net cash position of $59 million at 30 June 2016 (31 December 2015: $241 million). This included parent group cash, held in Sterling and committed to support the Group's three UK pension schemes (Sterling liabilities) of $396 million (£298 million), compared to $505 million (£342 million) at the end of 2015. The reduction was primarily due to $55 million (£38 million) of pensions recovery payments made to the Brunel and Staveley schemes and, in Dollar terms, due to the depreciation of Sterling following the EU Referendum, although there is no real impact as the cash is matched to the Sterling denominated liabilities.

The Coats operating business had a net debt position of $337 million at the end of H1 2016, see note 11f, an increase of $73 million from 31 December 2015 ($264 million) primary due to the adjusted free cash outflow in the half and acquisition spend. An important metric for the operating business is the leverage ratio of net debt (excluding parent group cash) to EBITDA. Net debt at 30 June 2015 was 1.7 times EBITDA of the last twelve months (1.9 times at 30 June 2015).

Pensions and other post-employment benefits

The net obligation for the Group's retirement and other post-employment defined benefit liabilities, on an IAS19 financial reporting basis, was $515 million as at 30 June 2016, up from $469 million at 31 December 2015. The deficits in the Group's UK defined benefit schemes, namely the Coats Plan, Brunel and Staveley schemes, increased to $465 million (£349 million) from the position at 31 December 2015 ($423 million, £286 million). This was primarily due to an increase in liabilities largely driven by a 70bps decrease in the discount rate to 2.90% (derived using a yield curve approach, based on Sterling AA corporate bonds), while the inflation rate only fell slightly to 2.80% (based on a market implied long term rate). Approximately half of the fall in the discount rate followed the result of the EU Referendum vote on June 23. In US Dollar terms the increase in deficits was partially offset by the depreciation of Sterling following of the EU Referendum. The reduction in the Staveley deficit was due to the £34 million payment made as part of the deficit repair plan agreed earlier this year.

Pensions

Investigations

As mentioned earlier in the report, Coats continues settlement discussions with the Trustees of the Brunel, Staveley and Coats UK pension schemes. The Company initiated the process earlier in the year and discussions have been constructive and progress is being made. Agreement to any settlement will also be required from tPR. To that end Coats is not only actively engaging with the Trustees but also now with tPR.

Earlier this year, Coats committed to all parties to retain the entire parent group cash balance within the Group to support the schemes. The cash balance is the proceeds generated from Guinness Peat Group's ('GPG's'), as the Company was known at the time, asset realisation programme between 2011-2013 when it sold its share in approximately 50 businesses leaving Coats as the only remaining operating business. GPG's Directors had envisaged returning the proceeds of the programme to shareholders, and distributions were made in the form of capital returns and share buybacks between 2011 and the first quarter of 2013. However, GPG's Directors decided to stop returns in the second quarter of 2013 when tPR began its investigations, initially into the Coats UK and Brunel schemes in April 2013 and then later that year into the Staveley scheme.

As previously stated, any settlement agreement would be based on a number of principles and conditions. These include tPR withdrawing the Warning Notices on the schemes, thereby ending the investigations, and for Coats to have the ability to commence the payment of normal course dividends to its shareholders and have sufficient cash to invest in growth opportunities. At this stage the level of annual deficit recovery payments to meet any Technical Provisions deficit remaining, after the support provided by the parent group cash, is not certain. If a settlement cannot be reached and the investigation process continues, Coats believes any hearing is unlikely before the fourth quarter of 2016 at the earliest.

Triennial funding valuations

As previously announced, the 2013 triennial funding valuations for the Brunel and Staveley schemes have been agreed. The April 2015 valuation for the Coats scheme is ongoing and is currently anticipated to be agreed alongside any settlement agreement of the pension investigation.

EU referendum

As highlighted on page 4 of this report, although too early to provide a definitive assessment, the Company is of the view that there would be limited direct adverse impacts on the Group. Indirect factors have already impacted Coats and may continue to do so in the near and longer term, notably macroeconomic uncertainty. However, the Company does not believe there have been any changes to its principal risks and uncertainties outlined in the 2015 Annual Report as a result.

As outlined elsewhere in this report, there have been three main immediate impacts of the vote which have negatively affected the H1 2016 results. To manage currency risk the Company's policy is to use forward foreign currency contracts. The sharp decline in Sterling against the US Dollar led to much of the $4 million of unrealised losses on these contracts which impacted reported EPS. Secondly, the parent group cash balance held in Sterling, and intended to support the Group's three UK pension schemes, reduced in US Dollar terms, although there is no real impact as the cash is matched to the Sterling denominated liabilities. The third impact was the material increase in the IAS19 deficits of the Group's three UK defined benefit schemes due to the significant decline in discount rates.

In the medium to longer term as a global market leader, with a strong and defendable core business supplying components to the Apparel and Footwear industry, Coats is relatively well placed to operate in periods of macroeconomic uncertainty. Also as the Company reports in US Dollars and has a Sterling cost base, a persistently lower GBP to USD rate may give rise to a positive translational currency impact.

INDEPENDENT REVIEW REPORT TO COATS GROUP PLC

We have been engaged by Coats Group plc (the 'Company') to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and related notes 1 to 20. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of Coats Group plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

28 July 2016

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2016

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2016

Condensed consolidated statement of financial position

At 30 June 2016

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2016

Condensed consolidated cash flow statement

For the half year ended 30 June 2016

Notes to the condensed consolidated financial statements

For the half year ended 30 June 2016

1. Basis of preparation

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting, as adopted by the European Union, and comply with the disclosure requirements of the Listing Rules of the UK Financial Services Authority.

The condensed consolidated financial statements for the six months ended 30 June 2016 have been reviewed but have not been audited. The condensed consolidated financial statements for the equivalent period in 2015 were also reviewed but not audited.

The information for the year ended 31 December 2015 does not constitute statutory accounts (as defined in section 434 of the Companies Act 2006). The financial information for the year ended 31 December 2015 is derived from the statutory accounts for that year, which have been filed with the Registrar of Companies. The audit report on those accounts was not qualified, did not draw attention to any matters by way of emphasis and did not contain statements under Sections 498(2) or 498(3) of the Companies Act 2006.

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements, and are expected to be applied in the annual audited financial statements for the current year.

Going concern

At 30 June 2016 the Group had cash totalling $535 million (30 June 2015: $680 million; 31 December 2015: $650 million). The Group also has various actual and contingent liabilities. The Board expects to be able to meet these obligations from existing resources. Further information on the net cash position of the Group is provided in note 11(f).

Giving due consideration to the nature of the Group's business and taking account of the following matters: the financing facilities available to the Group; the Group's foreign currency exposures; the potential requirement to provide financial support to the Group's UK pension schemes; and also taking into consideration the cash flow forecasts prepared by the Group and the sensitivity analysis associated therewith, the directors consider that the Company and the Group are going concerns and this financial information is prepared on that basis.

Principal exchange rates

The principal exchange rates (to the US dollar) used are as follows:

2. Operating segments

The Group has two reportable segments: Industrial and Crafts. Both segments includes businesses with similar operating and market characteristics. These segments are consistent with the internal reporting as reviewed by the Coats Group plc Board (the 'Chief Operating Decision Maker').

Segment revenue and results

Six months ended 30 June 2016:

Excluding acquisitions in the six months ended 30 June 2016, segment profit for Industrial was $80.6 million and operating profit before exceptional and acquisition related items for the Group was $77.3 million.

Six months ended 30 June 2015:

Year ended 31 December 2015:

3. Exceptional and acquisition related items

The Group's consolidated income statement format includes results both before and after exceptional and acquisition related items. This is consistent with the way financial performance is measured by management and reported to the Board.

Exceptional items

Exceptional items are set out below:

Following on from the disposal of the EMEA Crafts business in 2015, Coats is to close its loss-making UK Crafts operations. A provision for the expected costs of closure of $1.0 million has been included as an exceptional charge for the six months ended 30 June 2016. It is anticipated that the business will cease operations by the end of 2016 and be treated as a discontinued item in the full year 2016 results.

Net exceptional costs before taxation in 2015 were as follows:

- costs related to the consolidation of Coats' Mexican operations from three sites to two were $3.3 million (30 June 2015: $2.7 million). The gain on disposal of the property in Mexico was $9.2 million (30 June 2015: $nil) thereby generating an overall positive contribution of $5.9 million;

- with the sale of EMEA Crafts, Coats undertook a review of elements of its cost base, including costs previously allocated to that business, to establish the appropriate cost structure for a smaller and less complex Group. Costs incurred on this overhead reduction programme in the year ended 31 December 2015 were $14.1 million (six months ended 30 June 2015: $2.6 million);

- US environmental costs were $13.2 million (30 June 2015: $6.5 million) which included a provision for the remedial work on the Lower Passaic River, New Jersey, USA (see note 10 for further details);

- the Group provided for an additional $5.7 million (30 June 2015: $nil) in relation to the expected costs of the ongoing UK Pensions Regulator ('tPR') investigations;

- a loss on disposal of $1.5 million (30 June 2015: $nil) was recognised on the sale of Coats' share in a Philippines joint venture; and

- other exceptional costs of $1.3 million (30 June 2015: $0.7 million) related to the capital incentive plan.

Judgement is used by the Group in assessing the particular items, which by virtue of their scale and nature, should be presented in the income statement and disclosed in the related notes as exceptional items. In determining whether an event or transaction is exceptional, quantitative as well as qualitative factors such as frequency or predictability of occurrence are considered.

Acquisition related items

Acquisition related items are set out below: