Coats Regulatory News (COA)

3 August 2015

Coats Group plc

2015 Half Year results

Coats Group plc ('Coats' or the 'Company'), the world's leading industrial thread and consumer textile crafts business, today announces its unaudited results for the six months ended 30 June 2015.

Highlights

· Revenue of $748 million, up 4% on a like-for-like1, 2 basis and down 3% reported; continued double digit sales growth (13%2) in Speciality business

· Operating profit up 9% on a like-for-like1, 3 basis before exceptional items; with 15% growth in Industrial segmental profit

· Adjusted EPS4 up 20% to 1.82 cents; reported EPS negatively impacted by non-operating items

· Adjusted free cash flow5 for the last twelve months of $50 million

· Completed sale of EMEA Crafts business in July 2015

Commenting on Coats half year 2015 results Paul Forman, Group Chief Executive, said:

'Coats performed well in the first half of 2015, delivering a 9% increase in operating profit. The Speciality business continued to deliver double digit sales growth, with product innovation playing a key role, and we achieved further market share gains in the core Apparel and Footwear business. Both factors contributed to 15% growth in Industrial profit. Performance in our ongoing Crafts business was impacted by reduced fashion handknitting sales, although there was encouraging growth in some product ranges and notably greater predictability of performance.

'Non-operating items, primarily foreign exchange losses on parent group cash and discontinued losses related to EMEA Crafts, had a negative impact on reported earnings; however on an adjusted basis we continued to deliver good growth. Consistent delivery of good levels of free cash flow provide a solid platform for ongoing investment in organic and inorganic growth opportunities. Supported by our defined growth strategy, key differentiators and strong underlying business performance, Coats is well positioned for 2015 and beyond.'

Conference call

Coats Management will discuss this report in a webcast / conference call with the investment community at 0900 BST today (3 August 2015). The webcast can be accessed via www.coats.com/investors/hy15. The conference call can be accessed by dialling 020 3059 8125 (UK), 0800 443 000 (New Zealand), 1 800 033 716 (Australia) or + 44 20 3059 8125 (international), and using participant code 'Coats Group'. The webcast will also be made available in archive on coats.com.

Enquiry details

Investors

Jaideep Thatai Head of IR Coats Group plc +44 20 8210 5086

Media

UK Richard Mountain FTI Consulting +44 20 3727 1374

NZ & Australia Geoff Senescall Senescall Akers +64 9 309 5659

About Coats Group plc

Coats is the world's leading industrial thread and consumer textile crafts business. At home in more than 70 countries and employing approximately 20,000 people across six continents, the Company generated revenues of US$1.7bn in 2014. With a rich heritage dating back to the 1750s, Coats' pioneering history and innovative culture ensure the Company continues leading the way around the world: providing complementary and value added products and services to the apparel and footwear industries; applying innovative techniques to develop new Speciality products; and extending the crafts offer into new markets and online. Headquartered in the UK, Coats Group has a premium listing on the London Stock Exchange and is also listed on the New Zealand and Australian exchanges. To find out more about Coats visit www.coats.com.

Operating summary

In the following commentary, all comparisons with H1 2014 are on a like-for-like currency basis (restates H1 2014 figures at H1 2015 exchange rates) and all references to operating profit are on a pre-exceptional basis.

Coats' revenues from continuing operations increased 4% to $748.1 million in H1 2015 from $722.6 million. Including EMEA Crafts group revenues were up 2%. Industrial sales in the first half of 2015 were $615.0 million, up 6% year-on-year (H1 2014: $580.2 million), underpinned by market share gains and product and service innovation. Within Apparel and Footwear there was good demand growth in domestic and export markets in Asia and Speciality grew across all regions, particularly in the automotive and wire and cable markets. Crafts' ongoing operations generated sales of $133.1 million, a 7% year-on-year decline (H1 2014: $142.4 million). The business continued to deliver growth in its foundation handknitting product range however, as expected, total sales fell due to a decline in fashion handknitting sales following a peak in demand in 2013 that continued into the first half of 2014.

Operating profit increased 9% year-on-year due to higher Industrial profitability and lower group costs, which more than offset a decline in Crafts trading. Industrial profit grew 15% through increased sales, lower material costs due to the lower oil price, productivity and non-raw material procurement improvements, all of which more than offset other inflationary cost rises and a tougher pricing environment. The $3.5 million decline in Crafts profit was primarily due to lower sales.

As the Company's presentational currency is US Dollars and it generates significant revenues and expenses in a number of other currencies, given its global footprint, a translational currency impact can arise. Currency movements continued to impact the Group's results in H1 2015, with a decline in group sales of 3% and operating profit growth of 3% on a reported (actual currency) basis reflecting the strengthening of the US Dollar against a number of currencies, particularly the Euro.

As previously announced the sale of EMEA Crafts to Aurelius Group business was completed at the end of July.

Financial summary

Adjusted earnings per share (EPS) increased by 20%, on an actual currency basis, to 1.82 cents (H1 2014: 1.52 cents). This was achieved by the higher operating profit, improvements in the underlying tax rate and lower interest charges on borrowings. Reported EPS for continuing operations declined from 1.36 cents to 0.25 cents in H1 2015 due to foreign exchange losses of $12.3 million on the group's cash balance (non-distributed proceeds of the Company's asset realisation programme) (H1 2014: $1.6 million gain) and a higher level of exceptional costs. The Company generated a net loss attributable to equity shareholders for continuing and discontinued operations of $48.1 million (H1 2014: $12.8 million profit), due to a significant loss from discontinued items related to the EMEA Crafts business.

For the last twelve months Coats generated an adjusted free cash inflow of $49.9 million (see note 11g). In H1 2015 Coats generated a free cash outflow of $64.7 million, compared to an outflow of $44.2 million in the first half of 2014. The working capital cycle of Coats' business is such that there is generally an operating cash outflow during the first half of the year.

Return on capital employed1 for the last twelve months increased to 24% from 19% for the preceding twelve months. The improvement was achieved due to higher profitability, the treatment of EMEA Crafts as a discontinued item and a reduction in net working capital over the twelve month period.

Acquisition of GSD

In early May, Coats acquired GSD Corporate Ltd ('GSD'), a UK based company, for a total consideration of approximately $5.5 million. GSD supplies expert management solutions that analyse time, cost and production capability in the sewn products sector with a focus on maximising productivity and controlling costs. GSD becomes part of Coats Global Services and will enhance its end-to-end Operational Excellence offering, which provides practical, industry-specific technical services, training, technology solutions, quality assurance and compliance. Revenues in 2014 were approximately $2 million.

UK Pensions Regulator investigations

Written representations in response to the Warning Notice ('WN') issued by the UK Pensions Regulator ('tPR') on the Coats UK Pension Plan were submitted at the end of July. Having reviewed the WN with its legal and other advisers, which include leading Pension and Public Law QCs, the Company remains of the view that, under the regulations, it is not proper for tPR to seek to use its statutory powers in relation to the Coats Plan; and Coats intends to litigate this matter as far as necessary, unless it can be resolved satisfactorily via negotiation.

tPR has previously indicated that it believes it would be appropriate for the Determinations Panel of tPR to hear the cases for the Brunel and Staveley pension schemes at the same time as the Coats Plan, which means that any hearing is unlikely before the second half of 2016 at the earliest.

Lower Passaic River

As previously reported, the US Environmental Protection Agency ('EPA') notified Coats, and many other companies, of potential responsibility for certain environmental costs for the Lower Passaic River, New Jersey, USA. Coats is part of a Cooperating Parties Group which submitted a remedial investigation and feasibility study ('RI/FS') in H1 2015 with an estimated cost of between $518 million and $772 million, on an undiscounted basis. During H1 2015, Coats recorded a charge of $6.0 million, net of insurance covering a proportion of incurred and expected legal and remediation costs. The EPA is expected to issue its final Record of Decision by end of H2 2015. In the event that the EPA selects its own remedy (with an estimated cost of $1.7 billion on a net present value basis), the provision could increase materially and depending on timing of the decision, may need to be reflected in Coats' 2015 full year results.

Outlook

The Company's good operating performance in the first half of 2015, based on market share gains, product and service innovation and a reduction in operating costs, provides a solid platform for the remainder of the year. As such, Management expects to deliver a year-on-year improvement in Group pre-exceptional operating profit (2014: $123 million). Adjusted EPS growth is expected to follow the same trend; however, non-operating charges will materially impact full year reported EPS.

Operating Review

In the following commentary, all comparisons with H1 2014 are on a like-for-like currency basis (restates H1 2014 figures at H1 2015 exchange rates) and all references to segment profit are to pre-exceptional segment profit.

Industrial

Industrial revenue rose 6% year-on-year from $580.2 million in H1 2014 to $615.0 million in H1 2015, underpinned by market share gains and product and service innovation.

Revenue in Asia and Australasia increased by 8% year-on-year, with good levels of growth across most countries. This was driven by both domestic and export demand in Apparel and Footwear, as well as Speciality growth in automotive and tyre cord markets. The Americas region generated an 8% increase in revenue, primarily due to strong Speciality sales in North America particularly within the engineered performance fabrics (including aramids used in protective clothing) and wire and cable markets, while Latin America delivered good growth within Apparel and Footwear. Sales were down 1% in EMEA, primarily as a result of weaker demand in zips due to changes in high end footwear fashion, especially in Italy, as well as softness in apparel thread demand in some markets. The region delivered growth in Speciality, with increased demand in automotive, bedding and wire and cable markets.

Revenues in the Apparel and Footwear category (which includes accessories, zips and trims and global services) grew 4% year-on-year as Coats gained market share with global brands within relatively flat market conditions overall. As expected in a general deflationary environment, it was more challenging to deliver pricing improvements during the first half of 2015. The Speciality business continued to deliver double digit growth, up 13% year-on-year. This reflects increasing market share gains through geographic expansion of existing products eg automotive and tyre cord in Asia, and new product innovation, eg strong uptake in product demand within the engineered performance fabrics and wire and cable markets.

Industrial segment profit increased by 15% to $66.3 million (H1 2014: $57.5 million). This was achieved through higher sales, mainly driven by volume growth, productivity and non-raw material procurement improvements, all of which more than offset inflation in wages and energy costs. The lower oil price led to a reduction in material costs however it also led to a tougher pricing environment. Operating margins increased 90bps to 10.8%(H1 2014: 9.9%).

Crafts

Crafts revenues for ongoing operations declined 7% year-on-year from $142.4 million in H1 2014 to $133.1 million in H1 2015. The North American business continued to deliver growth in its foundation handknitting product range (5%) however, as expected, this was more than offset by a decline in fashion handknitting sales following a peak in demand in 2013 that continued into the first half of 2014. The decline in Needlecrafts sales reflected the long term decline in the North American needlecrafts market. The smaller Latin American business delivered relatively stable year-on-year performance. Overall, Handknitting sales declined by 9% and Needlecrafts sales declined by 3%. With EMEA Crafts not included in the results of the ongoing Crafts business (see below) there has been a greater predictability in trading performance.

The Crafts segment made a profit for the period of $2.8 million (H1 2014: $6.3 million). The 55% decrease was mainly due to the reduced trading activity and a change in mix with lower sales in higher margin fashion handknitting products. This resulted in a segment margin of 2.1% in H1 2015 (H1 2014: 4.4%).

Sale of EMEA Crafts

As previously reported, Coats completed the sale of its EMEA Crafts business in July 2015. The business generated a loss of $6.2 million in the first half of 2015, which is recognised within discontinued items.

Financial review

Exceptional items

Net exceptional costs before taxation totalled $12.5 million in the first half of 2015 (H1 2014: $3.9 million). This included $6.5 million for US environmental costs, including an increased provision for remedial work on the Lower Passaic River, New Jersey, USA (see below for further details). There was also a charge of $2.7 million related to the consolidation of Coats' Mexican operations from three sites to two, which will increase utilisation and efficiency while reducing operational costs. This process is expected to complete by the end of 2015 with the property disposal, which is expected to lead to a positive overall impact on profitability for the full year.

As previously disclosed in February 2015, with the announced sale of EMEA Crafts Coats commenced a review of elements of its cost base, including costs previously allocated to that business. During the first half of 2015 the review identified savings within specific support services, resulting in $2.6 million of restructuring costs with the benefits to be realised from H2 2015 onwards. With the sale of EMEA Crafts now complete the review is expected to identify further areas of savings which would lead to material additional restructuring costs being incurred in the second half of 2015.

Non-operating results

Finance costs were $30.9 million in the first half of 2015, up from $16.5 million in H1 2014. The increase was mainly driven by foreign exchange losses of $12.3 million (H1 2014: $1.6 million gain) on the parent group cash balance (non-distributed proceeds of the Company's asset realisation programme) in relation to movements between the British Pound, New Zealand Dollar and Australian Dollar at the end of H1 2015. The Company has taken action to reduce this currency exposure going forward by denominating the cash held in Pound Sterling and US Dollars. In addition IAS19 pensions interest charges increased from $5.7 million to $8.6 million as a function of the higher pensions accounting deficit at the end of 2014. These items more than offset an increase in investment income from $5.7 million in H1 2014 to $7.9 million in H1 2015, related to compensation($3.6 million) received in respect of a compulsory state financing arrangement in Latin America in the 1980s and 1990s, and a reduction in interest on borrowings from $11.4 million to $9.5 million in H1 2015. The decrease was a result of lower year-on-year net debt and a reduction in interest rates on the Company's borrowing facility.

The taxation charge for H1 2015 was $20.2 million (H1 2014: $24.3 million) resulting in a reported tax rate of 66% (H1 2014: 49%). Excluding exceptional 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 600 basis points (bps) to 36% (H1 2014: 42%). This was driven by a reduction in unrelieved losses and a change in profit mix for the period. Profit attributable to minority interests remained relatively stable at $6.6 million (H1 2014: $6.4 million).

Net profit from continuing operations attributable to equity shareholders was $3.6 million (H1 2014:$19.1 million). Excluding exceptional items this was $13.2 million (H1 2014: $23.0 million).

Adjusted EPS, which excludes exceptional items and foreign exchange gains/losses on the parent group cash balance, increased 20%, on an actual currency basis, to 1.82 cents (H1 2014: 1.52 cents). Reported EPS from continuing operations of 0.25 cents (H1 2014: 1.36 cents) was driven by the higher level of exceptional costs and the foreign exchange loss.

Discontinued items

There was a loss from discontinued operations of $51.7 million in H1 2015 related to the EMEA Crafts business. $6.2 million was related to the trading loss generated during the first half of 2015 (H1 2014: $5.9 million) and the remaining $45.5 million represents the loss on reclassification of the business as held for sale. With the completion of the sale of EMEA Crafts in July 2015, the trading result for July as well as other items, such as historical foreign exchange translation gains (position as at 30 June 2015 was $7.3 million) and losses previously recognised in equity, will be included as discontinued items in the 2015 full year results.

Investment

Investment continued to be made to support the growth of the business, further improve operational performance and ensure compliance with environmental and other standards. In the first half of 2015 capital expenditure amounted to $18.1 million (H1 2014: $14.7 million) and was 0.8 times depreciation (including computer software amortisation). The increase was due to further investment in IT and digital services and spend on environmental projects. It is expected that capital expenditure will remain at or below 1.0 times depreciation in the medium term.

Cash flow

The historical free cash flow trend, whereby the second half cash inflow significantly exceeds that in the first half, continued with a free cash outflow of $64.7 million in H1 2015. The cash outflow was higher year-on-year (H1 2014: $44.2 million outflow) due to a larger working capital outflow, an increase in exceptional items and the acquisition of GSD.

EBITDA (defined as pre-exceptional operating profit before depreciation and amortisation) was $86.7 million(H1 2014: $85.3 million on a reported basis). Net working capital as a percentage of the last twelve months sales fell year-on-year to 15% (H1 2014: 18%). However due to the aforementioned working capital cycle of Coats' business there was a net cash outflow related to working capital of $61.7 million (H1 2014: $43.8 million). Interest paid decreased to $8.8 million (H1 2014: $12.3 million) as a result of lower year-on-year net debt and a reduction in interest rates achieved on borrowings. Tax paid reduced year-on-year from $31.2 million to $24.8 million in the first half of 2015 due to the continued reduction in the underlying effective tax rate of the Group and the timing of certain payments in H1 2014. Pension payments remained relatively stable at $19.1 million in the first half of 2015 compared to $18.7 million in H1 2014. The cash outflow related to EMEA Crafts was $10.5 million (H1 2014: $9.9 million).

A key metric for the Company is adjusted free cash flow for the last twelve months and in the period to 30 June 2015, Coats generated $49.9 million. This figure includes $13 million of group costs, such as outgoings related to the transition of Guinness Peat Group to Coats Group and 'plc' related costs. The figure excludes exceptional items such as tPR investigations and acquisitions.

Balance sheet

The Group had a net cash position of $234.3 million at 30 June 2015 ($320.9 million at 31 December 2014), which included a parent group cash balance of $552.4 million (£351.7 million). Parent group cash at 31 December 2014 was $583.5 million (£375.0 million), with the decrease primarily driven by foreign exchange losses.

The Coats operating business had a net debt position of $318.1 million at the end of H1 2015, see note 11f, an increase of $55.5 million due to the aforementioned cash outflow (31 December 2014: $262.6 million). 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 1.9 times EBITDA of the preceding twelve months (2.1 times at 30 June 2014).

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 $526 million as at 30 June 2015, down from $584 million at the end of 2014. The deficits in the Group's UK schemes, namely the Coats Plan, Brunel and Staveley schemes, decreased to $468 million (£298 million) from the position at 31 December 2014 ($508 million, £326 million). This was primarily due to a decrease in liabilities largely driven by a 30bps increase in the discount rate, which more than offset a 20bps increase in the inflation rate.

Other

UK Pensions Regulator's investigations

Coats Pension Plan

As previously announced, Coats Group received a Warning Notice ('WN') from the UK Pensions Regulator ('tPR') in relation to the Coats UK Pension Plan in December 2014. Written representations in response to the Coats WN were submitted at the end of July, within the required timeframe.

Having reviewed the WN with its legal and other advisers which include leading Pension and Public Law QCs, the Company remains of the view that, under the regulations, it is not proper for tPR to seek to use its statutory powers in relation to the Coats Plan. The Board will continue to robustly oppose tPR's view on insufficiency of resources and intends to litigate this matter as far as necessary, unless it can be resolved satisfactorily via negotiation.

Brunel and Staveley schemes

As previously reported, in December 2013 Coats Group received WNs from tPR in respect of Brunel and Staveley. The Company submitted written representations on the WNs at the end of September 2014 within the deadlines set by tPR, but has yet to receive responses from tPR.

Timing and settlement discussions

In the Coats WN, tPR has indicated that it believes that it would be appropriate for the Determinations Panel ('DP') to hear the Brunel and Staveley cases at the same time as the Coats case rather than considering the three schemes individually. Therefore, the timetable is likely to be driven by the status of the Coats Plan proceedings and, as a result, any hearing before the DP for all three schemes is unlikely before the second half of 2016 at the earliest.

The Board will continue to explore options to try to resolve these matters, balancing the interests of all the Company's stakeholders.

Triennial funding valuations

The current level of deficit reduction payments for the Coats Plan of £14 million per annum that commenced in November 2013 for a period of approximately 14 years will be subject to review as part of the current triennial valuation, which has a valuation date of 1 April 2015. The Company anticipates that the Coats Plan Trustee will initiate discussions later in the calendar year.

The triennial valuation processes for both the Brunel and Staveley schemes remain ongoing and the Company remains engaged in discussions with the Trustees of both schemes with a view to reaching agreement on the valuations in due course.

Lower Passaic River

As previously reported, the US Environmental Protection Agency ('EPA') notified Coats and Clark Inc, a subsidiary of Coats, and many other companies, of potential responsibility for certain environmental costs for the Lower Passaic River (LPR), New Jersey, USA. In April 2014, the EPA released a Focused Feasibility Study ('FFS') for the lower 8 miles of the LPR with an estimated cost of its preferred remedy of approximately$1.7 billion, on a net present value basis. Coats submitted a petition in Q1 2015 to the EPA asserting that it is a de minimis party and is seeking resolution on that basis.

A Cooperating Parties Group ('CPG'), of which Coats is among approximately 70 members, submitted a remedial investigation and feasibility study ('RI/FS') in H1 2015 with an estimated cost of between $518 million and $772 million, on an undiscounted basis. Consequently Coats has recorded a $6.0 million charge, net of insurance, that will cover a proportion of incurred and expected legal and remediation costs, based on the mid-point of the RI/FS range. The EPA is expected to issue its final Record of Decision ('ROD') by end of H2 2015. If the EPA issues its ROD in H2 2015 and adopts the FFS as its selected remedy, the provision could increase materially and will be reflected in Coats' 2015 full year results. See note 10 for further details.

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 2015 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 the 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 2015 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

3 August 2015

Condensed consolidated financial statements

Condensed consolidated income statement

For the half year ended 30 June 2015

Earnings per ordinary share

from continuing operations:

Basic and diluted (cents) 7 0.25 1.36 2.99

(Loss)/earnings per ordinary

share from continuing and

discontinued operations:

Basic and diluted (cents) 7 (3.42) 0.91 1.06

Adjusted earnings per share

(cents) 7 1.82 1.52 3.08

* Restated to reflect the change in accounting policies for presentation currency, operating profit and exceptional items and the results of EMEA Crafts business as a discontinued operation (see note 1).

Condensed consolidated statement of comprehensive income

For the half year ended 30 June 2015

* Restated to reflect the change in presentation currency (see note 1).

Condensed consolidated statement of financial position

At 30 June 2015

* Restated to reflect the change in presentation currency (see note 1).

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2015

* Restated to reflect the change in presentation currency (see note 1).

Condensed consolidated cash flow statement

For the half year ended 30 June 2015

* Restated to reflect the change in presentation currency and operating profit accounting policy (see note 1).

Notes to the condensed consolidated financial statements

For the half year ended 30 June 2015

1. Basis of preparation and changes to the Group's accounting policies

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 and the Listing Rules of the Australian Securities Exchange.

The condensed consolidated financial statements for the six months ended 30 June 2015 have been reviewed but have not been audited. The condensed consolidated financial statements for the equivalent period in 2014 were also reviewed but not audited.

The information for the year ended 31 December 2014 does not constitute statutory accounts (as defined in section 434 of the Companies Act 2006). The financial information for the year ended 31 December 2014 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.

New standards, interpretation and amendments adopted by the Group

Except as set out below 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.

Changes in the Group's accounting policies

Following the change in the name of the Company to Coats Group plc a number of the Group's accounting policies have been changed to reflect those of a global manufacturing business:

- presentation currency changed from Great Britain pounds sterling ('Sterling') to United States Dollars ('USD');

- operating profit accounting policy changed to exclude interest income and foreign exchange gains and losses on cash and cash equivalents used in investing activities;

- exceptional items accounting policy adopted; and

- operating segments changed to Industrial and Crafts.

In addition to the above changes, the EMEA Crafts business has been classified as held for sale at 30 June 2015 and its results presented as a discontinued operation. Accordingly, prior period amounts in the condensed consolidated income statement have been reclassified to discontinued operations.

Presentation currency

The financial statements of Coats Group plc have previously been presented in Sterling. Following the change in the name of the Company to Coats Group plc the currency in which the Group presents its financial results has been changed from Sterling to USD. This reflects the change in focus of the Group to a global manufacturing business. Accordingly, the Board determined that, with effect from 1 January 2015, Coats Group plc will present its results in USD. The Board believes that this change will help to provide a clearer understanding of the Group's financial performance by more closely reflecting the profile of its operations.

In order to satisfy the requirements of IAS 21 with respect to a change in presentation currency, the financial information previously reported has been restated from Sterling into USD using the procedures outlined below:

- assets and liabilities were translated into USD at the relevant closing rates of exchange;

- income and expenses were translated into USD at the average exchange rate for the relevant period;

- differences arising from the retranslation of the opening net assets and the income and expenses for the period have been taken to the translation reserve; and

- the cumulative foreign currency translation reserve was set to nil at 1 January 2004, the date of transition to IFRS. All subsequent movements comprising differences on the retranslation of the opening net assets of non-USD subsidiaries have been taken to the translation reserve. Share capital, share premium and other reserves were translated at the historic rates prevailing at the dates of transactions.

The change in presentation currency represents a change in accounting policy which is accounted for retrospectively. Comparative periods have been restated from Sterling into USD using the following exchange rates:

Operating profit

The Group has adopted a new policy for operating profit following the change in focus of the Group to a global manufacturing business. The new policy is as follows:

Operating profit is stated before the share of results of joint ventures, investment and interest income, finance costs and foreign exchange gains and losses from cash and cash equivalents used in investing activities.

The new policy has been applied retrospectively with restatement of comparative numbers in the condensed consolidated income statement. The impact of the change in the policy is as follows:

- Interest and other income - Parent Group (30 June 2014: $4.5 million, 31 December 2014: $9.2 million) is now classified below operating profit as part of investment income;

- Foreign exchange gains and losses on cash and cash equivalents used in investing activities (30 June 2014: $1.6 million gain, 31 December 2014: $18.9 million gain) are now reported as part of finance costs rather than administrative expenses; and

- Profit on sale of property (30 June 2014: $0.8 million, 31 December 2014: $3.1 million) is now reported as part of other operating income rather than administrative expenses.

The financial impact on prior periods is as follows: