Coats Regulatory News (COA)

25 February 2016

Coats Group plc

2015 full year results

Coats Group plc ('Coats' or the 'Company'), the world's leading industrial thread manufacturer, today announces its unaudited results for the year ended 31 December 2015.

Highlights

· Operating profit up 19% to $139 million on a like-for-like basis before exceptional items (13% reported)

· Group operating margin up 130bps to 9.4% (like-for-like); good growth in both Industrial and Crafts

· Adjusted EPS up 38% to 3.96c (like-for-like); reported EPS of (3.30)c primarily impacted by discontinued items related to disposal of EMEA Crafts

· Adjusted free cash flow of $74 million ($88 million in 2014)

· Strengthened business portfolio with disposal of loss-making EMEA Crafts business and first acquisition

· Repositioned Company as a UK headquartered, global industrial manufacturing business and made a number of Director changes

· Initiated settlement discussions with the Trustees of the Company's three UK pension schemes to attempt a resolution of the ongoing pensions investigations

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

'Coats delivered a strong performance in 2015 with like-for-like operating profit growth of 19%. The core Apparel and Footwear business continued to gain market share; in Speciality we continued to grow through product innovation and geographic expansion, despite tough conditions in certain key markets; and in our Americas Crafts business we delivered an encouraging second half profit. Across the Group margins increased due to volume growth, lower input prices and procurement and productivity savings. This contributed to like-for-like adjusted EPS growth of 38%. However, discontinued losses related to the sale of our loss-making EMEA Crafts business negatively impacted reported earnings.

'We enter 2016 on a solid footing with improving returns and quality of earnings and a stronger business portfolio. Our cash flow generation will remain strong which will allow us to continue to reinvest in organic and inorganic growth opportunities. Whilst we face a backdrop of mixed economic conditions, we are cautiously optimistic of growing the business in 2016.'

Conference call

Coats Management will discuss this report in a webcast / conference call with analysts and investors at0900 GMT today (25 February 2016). The webcast can be accessed via www.coats.com/investors/fy15. The conference call can be accessed by dialling 020 3059 8125 in the UK and using participant code 'Coats Group'. For non-UK numbers please visit the link above. The webcast will also be made available in archive form on coats.com.

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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.

Operating summary

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

Coats' revenues increased 3% to $1,490 million in 2015 from $1,445 million. Industrial sales growth of 5% was driven by a strong performance in the Apparel and Footwear business, almost wholly driven by volumes given a challenging pricing environment, and product innovation and geographic expansion in the Speciality business despite tough conditions in the global oil and gas sector. Crafts sales fell 6% to $277 million (2014: $295 million), reflecting tough comparators in the first half (impact of the decline in fashion handknittings demand) and the mild North American autumn/winter in 2015 which impacted consumer demand.

Pre-exceptional operating profit increased 19% year-on-year to $139.4 million (2014: $117.0 million). Industrial profit grew 20% and margins were up 130 basis points (bps) to 11.1% due to strong volume growth, lower input prices, productivity and non-raw material procurement improvements (which more than offset labour and energy inflation). The 14% increase in Crafts profit was primarily due to lower input prices and cost reduction initiatives. Margins also benefited from lower Group costs year-on-year and initial cost savings from an overhead reduction programme that resulted from a review of the Company's cost base following the disposal of the EMEA Crafts business. Operating profit, post-exceptional items, on a reported (actual currency) basis increased 14% to $117.8 million (2014: $103.4 million).

Currency movements continued to impact results on both a translational and transactional basis throughout 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. In 2015 a decline in group sales of 5% on a reported (actual currency) basis reflected the strengthening of the US Dollar against a number of currencies, particularly the Euro and Brazilian Real.

Financial summary

Adjusted earnings per share ('EPS') attributable to equity shareholders on a like-for-like basis increased by 38% to 3.96 cents (2014: 2.88 cents). This was achieved by higher operating profit and a reduction in the underlying tax rate. The Company generated a reported attributable loss of $46.2 million (2014: $15.0 million profit), due to a significant loss ($75.5 million) from discontinued items related to the disposal of the loss-making EMEA Crafts business, as well as a higher level of exceptional charges. The disposal of EMEA Crafts, which generated a trading loss of $12.7 million in 2015, has improved the Group's quality of earnings and returns and allowed management to better focus on the high performing global Industrial and strong Americas Crafts businesses.

In 2015 Coats generated an adjusted free cash inflow of $73.9 million compared to $87.8 million in 2014. Higher operating profits, lower interest and tax paid were more than offset by the implementation of a revised supplier payment approach that negatively impacted working capital (see financial review section for more details). Total net cash at 31 December 2015 was $241 million, a year-on-year decline of $80 million, primarily due to foreign exchange losses on the parent group balance and the cash outflow related to EMEA Crafts and its disposal (although the cash cost was significantly lower than the impact on the income statement).

Return on capital employed ('ROCE') increased to 33% from 24% in 2014 driven by higher profitability and the disposal of EMEA Crafts, underpinning the rationale for disposing the loss-making business (2014: 27% excluding EMEA Crafts). Over the last three years, ROCE increased 13 percentage points from 20% in 2013.

UK Pensions Regulator investigations

Coats has initiated settlement discussions with the Trustees of the Brunel, Staveley and Coats UK pension schemes to resolve the ongoing pensions investigations. Coats has committed to retain the parent group cash balance of $505 million (£342 million) within the Group to support the Company and schemes and not make a capital return to shareholders. This would be on the basis of the Pensions Regulator ('tPR') withdrawing the Warning Notices on the three schemes, thereby ending the investigations, and for Coats to be able to commence the payment of normal course dividends to shareholders and have sufficient cash to invest in growth opportunities. The support structure could be any of, or a combination of, cash directly paid into the schemes, contingent cash earmarked for the schemes, if subsequently required, and/or cash retained within the Group. At this stage the level of ongoing annual deficit recovery payments following any settlement is not known. Coats has previously indicated proposals involving the retention of approximately $253 million (£170 million).

Coats has previously stated that, under the regulations, it is not proper for tPR to seek to use its statutory powers in relation to the Coats Plan. In February 2016, the Company received tPR's response to the representations the Company made in July 2015 on the Coats Pension Plan Warning Notice. If a settlement cannot be reached in respect of all of the schemes and the investigations proceed, 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. For further information on the pensions investigations and triennial processes see page 9.

Corporate changes and delisting from the NZX and ASX

During 2015 the Company made a number of significant corporate changes. These included being renamed Coats Group plc in February (previously Guinness Peat Group) and a number of Director changes taking place to ensure the Board has the right mix of experience and expertise to lead a UK headquartered, global industrial manufacturing business. In November, the Company announced its intention to delist from the New Zealand (NZX) and Australian Stock (ASX) Exchanges. The intended date for delisting is 24 June 2016, at which point Coats shares will only be tradable on the London Stock Exchange. The decision, which is subject to shareholder approval at the AGM1, reflects the much reduced shareholder base in the two countries, the benefit of concentrating trading volumes on one market and the Company's move away from its New Zealand focused, investment firm past. Since the announcement was made the combined New Zealand and Australian shareholding has fallen from 19% to 14%, while ownership by UK shareholders has increased to over 70%.

Outlook

Coats delivered a strong performance in 2015 supported by market share gains, product innovation, lower input prices and productivity and procurement gains. These factors have put the business on a solid footing for the year ahead. Additionally, the Company will realise incremental savings from its overhead reduction programme, which aims to reduce costs following the disposal of EMEA Crafts. However, as Coats continues to grow there is a need to reinvest into the business to support its growth ambitions. Furthermore, against a backdrop of mixed economic conditions with uncertainties on consumer demand in the US and Western Europe, demand from the oil and gas industry and the potential for the US dollar to further strengthen, Group performance could be adversely impacted. On balance, Management expects to deliver modest year-on-year growth in Grouppre-exceptional operating profit with improvements to non-operating items further benefiting adjusted EPS.

Operating Review

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

Industrial

Despite a challenging pricing environment, Industrial revenue rose 5% year-on-year from $1,150 million in 2014 to $1,213 million in 2015 due to good levels of volume growth. This was driven by underlying market growth and market share gains, the latter based on product and digital service innovation and excellent service levels.

Revenue in Apparel and Footwear (which includes accessories, zips and trims and global services) grew 5% year-on-year, almost wholly due to volume growth. This included double-digit sales growth in key markets such as Bangladesh, Colombia, Mexico and Vietnam. Coats increased its market share, with the increasing adoption of Coats' digital services being a key driver. For instance, in Q1 2015 the Company rolled out an eCommerce platform: within one year it is already live in 25 countries; is used by approximately 7,500 customers; and accounts for over 50% of total thread orders. In a general deflationary environment, pricing was relatively flat in 2015, although there were regional variations.

Speciality revenue grew 8% year-on-year, in line with recent guidance, through geographic expansion of existing products, such as furniture and upholstery in Asia, and new product innovation, notably a strong uptake in demand within the engineered performance fabrics and wire and cable markets. As previously announced overall growth slowed between July and October due to the slowdown in the global oil and gas sector and tough year-on-year comparators. The oil and gas sector represented 15-20% of Specialty sales in 2015 through the supply of components for thermoplastic pipes and protective wear. Speciality growth improved in the last two months of 2015, demonstrating the diversification of the end markets in which the business operates. Given its relative importance, a continued slowdown in the oil and gas sector may marginally impact growth in 2016.

Revenue in Asia increased by 7% year-on-year, with good levels of growth across most countries driven by both domestic and export demand in Apparel and Footwear, as well as Speciality growth. The Americas delivered a 5% increase, primarily due to Speciality sales growth in North America, while Latin America delivered good Apparel and Footwear growth. However, weak market conditions adversely impacted performance in the loss-making Brazilian business and these are expected to continue in 2016. Sales were marginally lower in EMEA for the full year, primarily due to weak zip demand in H1 2015, especially in Italy. However sales improved in the second half supported by growth in key apparel and footwear markets and Speciality, and a better performance in zips.

Industrial operating profit increased 20% to $135.2 million (2014: $112.2 million) and margins increased 130bps to 11.1% (2014: 9.8%) reflecting good volume growth. In addition, the lower oil price led to a reduction in material costs. Although the lower input prices led to a challenging pricing environment the business also continued to deliver productivity and non-raw material procurement improvements. These factors more than offset the structural wage and energy inflation that the Company faces across the many countries in which it operates.

Acquisition of GSD

As previously reported, in May 2015, Coats acquired GSD Corporate Ltd ('GSD'), a UK based company, for a total consideration of $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. Strategically it is a good fit with Coats Global Services' end-to-end Operational Excellence offering, which provides practical, industry-specific technical services, training, technology solutions, quality assurance and compliance. GSD is performing in line with management's expectations.

Crafts

Crafts revenues declined 6% year-on-year from $295 million in 2014 to $277 million in 2015. Handknitting sales declined 9%, predominantly due to tough comparators following the strong demand for fashion handknitting products in H1 2014. This more than offset sales growth in foundation handknitting products, in both North America and Latin America. The mild autumn/winter in North America in 2015 negatively impacted sales in the final quarter and signs of continued softness in the handknittings market have persisted in early 2016. Needlecrafts sales declined 3%, reflecting the continued decline in the Americas needlecrafts market, however this was partly offset by strong sales in the smaller but growing lifestyle fabrics business.

Crafts made a profit for the period of $14.4 million (2014: $12.6 million). The 14% increase was mainly due to lower input prices and a focus on reducing operating costs, which more than offset the decline in sales. This resulted in 90bps improvement in segment margin to 5.2% in 2015 (2014: 4.3%). The increase in profitability from H1 2015 ($2.8 million) to H2 2015 ($11.6 million) was driven by increased sales, operational gearing, a greater benefit from lower input prices and cost reduction initiatives.

Disposal of EMEA Crafts

As previously reported, Coats completed the disposal of its loss-making EMEA Crafts business in July 2015. The sale has improved the Group's quality of earnings and returns and allowed management to better focus on the high performing global Industrial and strong Americas Crafts businesses. The business generated a loss of $12.7 million in 2015, which is recognised within discontinued items. See financial review section for further information.

Financial review

Overhead reduction programme

As previously reported, with the sale of EMEA Crafts Coats commenced 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. During the first half of 2015, the review identified savings within specific support services, resulting in $2.6 million of restructuring costs. With the sale of the business completed in July, the review identified further areas of savings during the second half. As a result, additional restructuring costs were incurred in H2 2015, leading to $14.1 million of restructuring costs for the full year. The programme has delivered initial savings of approximately $4 million in 2015, supporting the improvements in Industrial and Crafts margins. Savings will continue to be realised in 2016 and H1 2017; although, as the Company continues to grow, some of these savings will be reinvested to support growth plans in 2016.

Exceptional items

Net exceptional costs before taxation and discontinued items totalled $23.1 million in 2015 (2014: $20.0 million). This included $6.4 million for US environmental costs in H1, which included a provision for remedial work on the Lower Passaic River, New Jersey, USA (see below for further details). There was also a charge of $3.3 million related to the consolidation of Coats' Mexican operations from three sites to two, which will increase utilisation and efficiency while reducing operational costs. In December, the property was sold resulting in a gain on disposal of $9.2 million, thereby generating an overall positive contribution of $5.9 million. Coats has provided for an additional $5.7 million in 2015 in relation to the expected costs of the ongoing tPR investigations. As mentioned above, $14.1 million of costs were incurred in relation to the overhead reduction programme; no further charges are expected in 2016. A $1.5 million loss on disposal was recognised on the sale of Coats' share in a Philippines joint venture in November 2015.

Non-operating results

Finance costs, net of investment income, were $31.2 million in 2015, up from $8.0 million in 2014. The increase was mainly driven by full year foreign exchange losses of $3.2 million (2014: $18.9 million gain) on the parent group cash balance in relation to movements between the British Pound, New Zealand Dollar and Australian Dollar. Following a gain of $9.1 million in H2 2015, the Company moved substantially all of the cash to Pound Sterling. IAS19 pensions interest charges increased from $11.3 million to $17.1 million as a function of the higher pensions accounting deficit at the end of 2014. Based on the deficit at the end of December 2015, the Company estimates the charge in 2016 will be approximately $15 million (subject to any pensions investigations settlement and additional support to the schemes). In addition there was a decrease in investment income from $11.5 million in 2014 to $10.5 million in 2015, despite compensation ($3.2 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 $20.2 million to $16.8 million in 2015. The decrease was largely a result of a lower cost of local financing and fixed interest rate swaps coming to an end.

The taxation charge for 2015 was $46.1 million (2014: $45.1 million) resulting in a reported tax rate of 53% (2014: 47%). 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 600bps to 35% (2014: 41%). 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 $11.2 million (2014: $9.6 million) and is predominantly related to Coats' joint ventures in Vietnam and Bangladesh (in which it has controlling interests).

Adjusted EPS increased by 38%, on a like-for-like basis, to 3.96 cents (2014: 2.88 cents). This was generated through the higher operating profit and improvements in the underlying tax rate. Reported EPS for continuing operations declined from 2.99 cents in 2014 to 2.09 cents in 2015 due to foreign exchange losses on the parent group cash balance, a $22 million negative year-on-year movement, and a higher level of exceptional costs. The company generated a reported loss from continuing and discontinued operations of $46.2 million(2014: $15.0 million profit) primarily due to the disposal of the loss-making EMEA Crafts business.

Discontinued items

There was a loss from discontinued operations of $75.5 million in 2015 related to the sale of the loss-making EMEA Crafts business. This comprised trading losses of $12.7 million, a loss on disposal of $55.8 million and net exchange losses of $7.0 million. The loss on disposal comprised $17.0 million of cash retained in the business and $37.3 million of net working capital left in the EMEA Crafts business and $13.5 million of other assets and liabilities (including disposal related costs and completion adjustments), which were partly offset by $11.5 million of pensions and other liabilities transferred to the buyer. The $23.8 million loss from discontinued operations recognised in the second half of 2015 (H1 2015: $51.7 million) included additional trading losses, disposal related costs, completion adjustments and the net exchange loss. 

Investment

In 2015 capital expenditure amounted to $44.3 million (2014: $46.0 million) and was 1.0 times depreciation, in line with previous guidance. Key investment areas during the year were digital services, such as the roll-out of the eCommerce platform, which has enabled market share gains and reduced operating costs, and spend on environmental projects, such as effluent treatment plants, which help ensure Coats maintains its leading corporate responsibility credentials in the industry. It is expected that capital expenditure will remain around 1.0 times depreciation in the medium term, with the key investment areas in 2016 being new product/process development, capacity expansion and ongoing environmental spend.

Cash flow

Coats generated a $73.9 million adjusted free cash inflow in 2015, compared to $87.8 million in 2014 (excluding EMEA Crafts). The basis for this measure has changed from 2014 to exclude UK pension recovery payments which totalled $25.8 million in 2014 (2015: $33.8 million). The year-on-year variance was mainly due to the implementation of a revised supplier payment approach, which negatively impacted working capital.

EBITDA (defined as pre-exceptional operating profit before depreciation and amortisation) was $183.0 million, up from $170.0 million in 2014 (on a reported basis) due to the factors that contributed to the increase in pre-exceptional operating profit outlined earlier in the report.

There was a $15.2 million net working capital outflow in 2015 (2014: $27.5 million inflow). The outflow was mainly due to the implementation of a revised payment approach to suppliers, which is in keeping with Coats' commitment to treating all of its partners along the supply chain in an ethical and sustainable way. This led to a material trade payable outflow. With the year-on-year increase in trading activity there was also an outflow related to inventories and trade receivables; however this was somewhat offset by an ongoing improvement in inventory management through a reduction in stock days.

Interest paid decreased to $15.3 million (2014: $21.6 million) as a result of a reduction in interest rates achieved on borrowings. Tax paid reduced year-on-year from $55.1 million to $49.3 million in 2015 and as a percentage of pre-exceptional profit before tax the rate fell in line with the continued reduction in the underlying effective tax rate of the Group. Payments to minority interests increased year-on-year to $10.1 million (2014: $6.7 million).

There was a $21.4 million free cash outflow in 2015 (2014: $46.5 million inflow). This included UK pension recovery payments of $33.8 million (2014: $25.8 million), of which approximately $21 million was paid to the Coats Plan and $3 million to the Staveley scheme, the same as in 2014 in Pound Sterling terms, and $9 million was paid to the Brunel scheme (2014: nil) following agreement of its triennial funding valuation and deficit recovery plan in November 2015 (see pensions section below). There was a $37.0 million outflow (2014: $2.2 million) related to the disposed loss-making EMEA Crafts business, comprising $14.7 million on trading performance and $22.3 million of disposal charges. A $7.6 million outflow (2014: nil) related to the establishment and purchase of own shares for an Employee Benefits Trust. This was to cover the requirements for a share-based long term incentive scheme (in line with the standards of a FTSE 250 company) for senior employees, that more clearly aligns their interests with those of shareholders. Exceptional items included$8.9 million spent on the pensions investigation (2014: $12.2 million), $5.3 million on the overhead reduction programme and a net inflow of $5.1 million related to the restructuring and subsequent property disposal of a Mexican operation. In addition, $5.5 million was spent on the acquisition of GSD (2014: no acquisitions).

Balance sheet

The Group had a net cash position of $241 million at 31 December 2015 (31 December 2014: $321 million). This included a parent group cash balance of $505 million (£342 million), compared to $584 million (£375 million) at the end of 2014. The decline was primarily related to foreign exchange losses, due to the strengthening of the US dollar, spend on the UK pensions investigations and recovery payments to the Brunel and Staveley pensions schemes.

The Coats operating business maintained its year end net debt position (31 December 2015: $264 million,end 2014: $263 million), see note 11g. An important metric for the Company is the leverage ratio of net debt (excluding parent group cash) to EBITDA. At the end of 2015, it stood at 1.4 times, well within the 3x covenant limit of the Company's $680 million trade finance facility, comfortably within the 1-2x range Management aim to operate within and lower than 31 December 2014 (1.5 times).

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 $469 million as at 31 December 2015, down from $584 million at 31 December 2014 ($526 million at 30 June 2015). The deficits in the Group's UK defined benefit schemes, namely the Coats Plan, Brunel and Staveley schemes, decreased to $423 million (£286 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 25bps increase in the discount rate to 3.60% (derived using a yield curve approach, based on Sterling AA corporate bonds), while the inflation rate remained flat at 2.95% (based on a market implied long term rate).

Other

Pensions - triennial funding valuations

As previously announced, the March 2013 triennial funding valuation for the Brunel scheme was agreed with the trustee in November 2015. This revealed a Technical Provisions deficit of £94 million which is to be repaired by a deficit recovery plan of £5.5 million per annum (approximately $8 million at 31 December 2015 rates) over 10 years. The payment in November 2015 was made from the Company's parent group cash balance.

Coats continues to have constructive discussions with the trustee of the Staveley scheme in respect of the December 2013 triennial funding valuation, which management believe will reveal a Technical Provisions deficit of approximately £100 million, and expects to reach agreement on the details of the recovery plan during the first half of 2016.

The Coats UK Plan valuation, as at 1 April 2015 is ongoing and due to be agreed by the end of H1 2016. It is anticipated that agreement on the Coats triennial valuation will coincide with any agreed settlement. Coats currently pays £14 million per annum (approximately $21 million at 31 December 2015 rates) on the basis of the last agreed triennial valuation in October 2013 to repair a deficit of £215 million. The technical provisions approach for valuing pension liabilities is used for agreeing triennial valuations and recovery plans and will need to be more prudent than the IAS19 accounting basis, Coats anticipates that the technical provisions deficit for the Coats UK Plan will therefore follow a similar pattern to that of the Brunel and Staveley schemes.

Pensions - investigations

As mentioned earlier in the report, Coats has initiated settlement discussions with the three sets of Trustees of the Brunel, Staveley and Coats UK pension schemes to resolve the ongoing pensions investigations, agreement from tPR will also be needed.

As part of the discussions Coats has committed to all parties to retain the entire parent group cash balance of $505 million (£342 million) within the Group to support the schemes and not return this cash to shareholders.

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.

Coats' commitment to retain the entire parent group cash balance within the Group, and any settlement agreement, is based on a number of principles and conditions. These include tPR withdrawing the Warning Notices on the three 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.

The support structure could be any of, or a combination of, cash directly paid into the schemes, contingent cash earmarked for the schemes, if subsequently required, and/or cash retained within the Group. At this stage the level of ongoing annual deficit recovery payments following any settlement is not known.

If a settlement cannot be reached in respect of all of the schemes and the investigations proceed, tPR has previously indicated that it believes it would be appropriate for the Determinations Panel ('DP') 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 Clark Inc ('CC'), a subsidiary of Coats, and many other companies, of potential responsibility for certain historical 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 eight miles of the LPR with an estimated cost of its preferred remedy of approximately $1.7 billion, on a net present value basis. Coats, and certain other companies, 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 one of 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, as reported in its half year results, 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 (as a de minimis party).

Coats believes that CC's predecessors did not generate any of the contaminants which are driving the current and anticipated remedial actions in the LPR, that it has valid legal defences which are based on its own analysis of the relevant facts, that it is a de minimis party, and that additional parties not currently in the CPG will be responsible for a significant share of its ultimate costs of remediation. However, in the event that EPA issues its Record of Decision in 2016 and adopts the FFS as its selected remedy, CC could record additional provisions and such provisions could increase materially. See note 10 for further details.

Coats Group plc

Consolidated income statement

* 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).

Coats Group plc

Consolidated statement of comprehensive income

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

Coats Group plc

Consolidated statement of financial position

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

Coats Group plc

Consolidated statement of changes in equity

For the year ended 31 December 2015

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

Coats Group plc

Consolidated cash flow statement

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

Coats Group plc

Notes to the consolidated financial information for the year ended 31 December 2015

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

Basis of preparation

The preliminary financial information (the 'financial information') set out in this report is based on Coats Group plc's unaudited consolidated financial statements, which are prepared in accordance with International Financial Reporting Standard ('IFRS') as adopted by the European Union, and complies with the disclosure requirements of the Listing Rules of the UK Financial Services Authority and the Listing Rules of the Australian Securities Exchange. The accounting policies adopted by the Group have been applied consistently to all periods presented.

The financial information set out in this report does not constitute the Coats Group plc's statutory accounts for the years ended 31 December 2015 and 2014. 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 did not contain statements under Sections 498(2) or 498(3) of the Companies Act 2006. The audit opinion contained in that report was unmodified. The audit of the statutory accounts for the year ended 31 December 2015 is not yet complete. Those accounts will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Whilst the financial information included in this report has been compiled in accordance with the recognition and measurement principles of applicable IFRS, this report does not itself contain sufficient information to comply with IFRS. Coats Group plc expects to publish full consolidated financial statements that comply with IFRS; these will be available to shareholders in March 2016.

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 preliminary financial information as applied in the Group's annual audited financial statements for the year ended 31 December 2014.

Changes in the Group's accounting policies

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

- 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, following the sale of the EMEA Crafts business which was completed on 31 July 2015, the results of that business are presented as a discontinued operation. Accordingly, prior period amounts in the 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 focus of the Group to a global manufacturing business and the change in 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. 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. The comparative year has 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 consolidated income statement. The impact of the change in the policy on the results for the year ended 31 December 2014 is as follows:

- Interest and other income - Parent Group of $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 of $18.9 million gain are now reported as part of finance costs rather than administrative expenses; and

- Profit on sale of property of $3.1 million is now reported as part of other operating income rather than administrative expenses.

- The impact of the change in operating profit policy on the results for the year ended 31 December 2014 is summarised below:

There was no impact on profit before taxation from continuing operations or equity shareholders' funds.

Exceptional items

The consolidated income statement format has been changed to include results both before and after exceptional items. The Group's accounting policy for exceptional items is as follows:

The Group has adopted an income statement format which seeks to highlight significant non-recurring items within the Group results for the year. Such items may include significant restructuring associated with a business or property disposal, litigation costs and settlements, profit or loss on disposal of property, plant and equipment, acquisition related costs, gains or losses arising from de-risking of defined benefit pension obligations, regulatory investigation costs, adjustments to deferred and contingent consideration and impairment of assets.

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. This is consistent with the way financial performance is measured by management and reported to the Board.

The new policy has been applied retrospectively with restatement of comparative numbers in the consolidated income statement. The exceptional items for the prior year are set out in note 3.