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7
COATS GROUP PLC
ANNUAL REPORT 2017
Delivering today
Transforming for
tomorrow
WWW.COATS.COM/ARA2017
A full copy of our Annual Report can be downloaded,
along with other relevant documents from
www.coats.com/ara2017
Coats Group plc
1 The Square
Stockley Park
Uxbridge
Middlesex UB11 1TD
Tel: 020 8210 5000
www.coats.com
Incorporated and registered in England No. 103548
Registered office: 1 The Square, Stockley Park
Uxbridge, Middlesex UB11 1TD
Coats-AR17_Cover_130318_RM.indd 2-4
13/03/2018 12:37
DELIVERING TODAY
TRANSFORMING FOR TOMORROW
SHAREHOLDER INFORMATION
WE ARE COATS. CONTINUING TO DELIVER
SUSTAINABLE VALUE FOR OUR STAKEHOLDERS
TODAY, AND TRANSFORMING TO REALISE THE
OPPORTUNITIES OF TOMORROW.
Our focus on business performance and meeting customer needs means we deliver benefits
to our investors, employees and customers today. Our global reach and relationships, and our
evolving expertise enable us to anticipate and meet their future needs.
We operate with one common purpose --- to harness talent and technology to benefit our
customers and their industries, our shareholders and our people and the communities in
which we operate.
We are committed to operating responsibly and in a sustainable manner with regard to all
our stakeholders and the environment.
For over 200 years we have been helping to connect and form the fabric of daily life on
our planet.
Managing your shareholding online
UK registered members
To manage your shareholding online,
please visit: www.investorcentre.co.uk
United Kingdom
1 The Square, Stockley Park, Uxbridge,
Middlesex UB11 1TD
Tel: 020 8210 5000
www.coats.com
Incorporated and registered
in England No. 103548
Registered offi ce: 1 The Square,
Stockley Park, Uxbridge,
Middlesex UB11 1TD
Location of share registers
The Company’s register of members is maintained in the UK
Register enquiries may be addressed direct to the Company’s share registrars named below:
Registrar
Computershare Investor
Services PLC
Telephone and postal enquiries
Inspection of Register
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
Tel: 0370 707 1022 Facsimile: 0370 703 6143
The Pavilions,
Bridgwater Road,
Bristol BS99 6ZZ
Find out more online:
See our online ‘Year in Review for 2017’ – for a more visually engaging way to read about our
progress in the year www.coats.com/ara2017
A full copy of this Annual Report can be downloaded along with other relevant documents from
www.coats.com/investors
Throughout this document you will see references to where supporting information can also be
found online at www.coats.com
For more on our Corporate Responsibility (CR) performance in 2017, our approach to CR,
our policies and their impact see online at www.coats.com/cr
CONTENTS
Strategic report
01 2017 Full year results
and highlights
02 Coats at a glance
03 Our investment case
04 Chairman’s statement
06 Group Chief Executive’s
statement
08 Market trends
10 Business model
12 Our strategic goals
14 Key Performance Indicators
16 People
18 Corporate Responsibility
21 Principal risks and
uncertainties
26 Long term viability statement
27 Operating review
31 Financial review
Corporate governance
37 Chairman’s Introduction
39 Board of Directors
42 Group Executive Team
43 Corporate Governance Report
48 Nomination Committee Report
50 Audit and Risk Committee
Report
55 Directors’
Remuneration Report
68 Corporate Governance
Code Report
71 Directors’ Report
76 Directors’ Responsibilities
Statement
Financial statements
77
Independent auditor’s report
84 Primary financial statements
90 Notes to the
financial statements
147 Company financial statements
150 Notes to Company
financial statements
Other information
153 Group structure
160 Five-year summary
IBC Shareholder information
.
Coats-AR17_Cover_130318_RM.indd 5-7
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2017 FULL YEAR RESULTS
AND HIGHLIGHTS
Revenue ($m)
Financial performance
Adjusted operating profit
($m)
Operating profit ($m)
Revenue
Adjusted
2017
2016
Change
CER
change
Organic
change
$1,510m
$1,457m
4%
4%
3%*
Operating profit
$174m
$158m
10%
11%
9%*
Basic earnings per share
6.4c
4.9c
30%*
Free cash flow
Return on capital
employed (ROCE)
Reported1
Operating profit
Basic earnings per share
Net cash generated by
operating activities2
$87m*
35%*
$78m
35%
$167m
$153m
5.8c
$(232)m
4.3c
$8m
12%
–
9%
35%
n/a%
Full year dividend per share3
1.44c
1.25c
15%
Revenue growth of 4% to $1,510 million; driven by Apparel and Footwear (up 5%)
and Performance Materials (up 12%), with some offset due to a weak performance
in North America Crafts.
Adjusted operating profit up 11% to $174 million (reported $167 million, up 9%);
Group operating margin up 70bps to 11.5%.
Employee Engagement
(%)
Adjusted EPS up 30% to 6.4 cents (reported EPS of 5.8 cents, up 35%) as a result of higher
operating profits, a further reduction in effective tax rate and a reduction in finance costs.
Adjusted free cash flow growth of 12% to $87 million; which includes a $10 million
year-on-year increase in capital spend predominantly in H2, as anticipated.
Settlement concluded with all three UK pension schemes and Pension Regulator investigations
now ceased with $348 million of parent Group cash paid to the schemes during the year.
Successful $225 million debut US Private Placement issue, alongside refinancing of
existing bank debt facilities, providing diversification of sources and maturity of debt.
Full year dividend per share increase of 15% to 1.44 cents per share.
Strategic progress
Launch of ‘Connecting for Growth’ global strategic change programme to drive the
next phase of Coats’ growth; expected to deliver $15 million annualised recurring net
savings by 2020.
Completed the Performance Materials acquisition of Patrick Yarn Mill in December 2017.
Non-financial performance
Employee Engagement maintained at 83%*, a global top decile performance.
Global Health and Safety campaign – ‘Be the One’ – heightened awareness of incidents
and near misses and increased reporting. Recordable accident rate at 0.55*, 83% lower
than the latest US OSHA textile rate.
Alternative Performance Measures see note 37 on page 143
Key Performance Indicators
We have indicated with * those
measures we consider KPIs.
See page 14 for more details
and historical performance.
1. Reported refers to values contained in the IFRS
column of the primary financial statements in either
the current or comparative period.
2 Net cash generated by operating activities includes
$373 million payments into the three UK defined
benefit schemes in 2017 (2016: $99 million).
3 Dividend growth based on 2016 pro-forma full
year dividend of 1.25 cents per share.
1
COATS AT
A GLANCE
COATS IS THE WORLD’S LEADING INDUSTRIAL THREAD
MANUFACTURER. HEADQUARTERED IN THE UK, WE
OPERATE GLOBALLY IN OVER 50 COUNTRIES AND IN
2017 GENERATED REVENUES OF $1.5BN.
INDUSTRIAL 2017 revenue: $1,297m (2016: $1,221m)
Apparel & Footwear
2017: $1,021m (2016: $975m)
Performance Materials
2017: $276m (2016: $246m)
2017 performance
The trusted, value adding partner to the global
Apparel and Footwear industry --- providing a
portfolio of world class products and services
to meet the needs of customers and brands.
Apparel,
footwear &
accessories
threads
End uses include: Menswear, Ladies-
wear, Activewear, Outdoor, Denim,
Workwear, Intimates and Footwear
Global experts in the design and supply
of products that serve traditional end
uses and hi-tech products that operate
‘beyond the stitch line’.
Traditional --- End uses include:
Outdoor, Home textiles, Feminine
hygiene, Tea bags, Bedding and
quilting, Upholstered furniture,
Filtration and Sports goods
Key brands include: Epic, Astra,
Nylbond, Gral, Gramax, Dual Duty
Seamsoft, Sylko and Knit
End uses include: Zips for luxury
and domestic uses, Interlinings
Key brands include: Opti, Permess,
Signal and Connect
Zips and
Trims
products
Software
solutions
Enabling supply chain productivity
gains, increasing speed of supply
and facilitating compliance
Key brands include: Fast React
and GSD
Hi-tech --- End uses include:
Automotive, Composites, Fibre optics,
Flame retardant, Extrusion, Engineered
performance fabrics and knits and
Tyre cord
Key brands include: Firefly, Flamepro,
Protos, Synergex, Lattice, Magellan,
Gotex, Ultrabloc, Neophil, Dabond,
Nylbond, Aptan, Gral, Admiral, Patrick,
earthspun® and ‘Spun by the Sun’
CRAFTS
2017 revenue: $213m
(2016: $236m)
Foundation and fashion hand
knitting yarns, threads, zips and
a variety of needlecraft items
Key brands include: Red Heart,
Coats & Clark, Dual Duty XP,
Anchor and Cisne
Our global
footprint
Revenue by
region
Americas 31%
EMEA 18%
Asia 51%
Our sales presence in over
100 countries and digital
platforms enable us to
serve customers wherever
they are located.
With employees across
six continents, and some
50 manufacturing sites, we
have an unrivalled global
manufacturing footprint.
For more information see
www.coats.com/aboutus
2
OUR
INVESTMENT CASE
There are five elements to our investment case --- each element is a strength in itself but, together, they combine to set us apart from
our competitors, giving us a solid platform from which to innovate and grow.
During 2017 we continued to review each element of our investment case and looked to align these more closely to the future core
operations of our key business segments and the ongoing integration of recent acquisitions.
Element
1. Global market
leader in Apparel
and Footwear
(A&F) thread
Which provides
us as an organisation with:
Key attributes
of this element
A strong and defendable
core business representing
some 70% of Group sales
Global leader in A&F market
Increasing market share in
stable market
Leading the response to meet
changing industry needs --- speed,
productivity, innovation, quality,
corporate responsibility
and sustainability
2. Leading player
in Performance
Materials market
Ability to build scale through
technology, innovation and
acquisition
Global presence in multiple hi-tech
end use sectors some of which are
high growth
Highlights in 2017
+5%
Sales growth driven by key
markets across all territories
+8%
Sales growth in premium brands
such as Epic and Nylbond
+12%
Revenue growth to $276m ---
including acquisitions
+18%
Double digit organic sales
growth in hi-tech end uses
e.g. telecommunications
Significant post-acquisition sales
growth from Gotex of c.30%
New North American leadership
team to focus on consumer
marketing and enhancing
digital offers
Commencing integration of
Latin American Crafts business
into Industrial
Performance Materials offer
hi-tech products that guarantee
performance and safety and a
more sustainable product offer
Innovation in developing or
acquiring new competencies and
technologies --- such as lightweight
carbon and ‘Spun by the Sun’
Market leading brands in
North and Latin America
Deep customer relationships
with North American retailers
3. Refocused Americas
Crafts business
Major player in the
Americas textile
crafts market
4. Delivering self-help
initiatives
Focused improvement
programmes and
experienced management
to deliver margin and
financial improvements
5. Track record
of delivering free
cash flow
Strong cash flow generation
and high returns on capital
employed (ROCE)
Productivity gains and
procurement initiatives
Investing in energy / waste
reduction to improve
operational efficiencies
Global strategic change
programme --- Connecting
for Growth
Balancing key cash demands
of organic investment, pension
schemes, bolt on acquisitions
and shareholder dividends
Increased ROCE over recent years
+11%
Adjusted operating profit
growth through operational
leverage, procurement and
productivity savings. Successfully
offsetting input cost pressures
Disciplined approach to SD&A
cost base --- flat costs year on year
+15%
Full year dividend payment
of 1.44 cents per share
Adjusted free cash flow generation
of +12% to $87m
For more go online www.coats.com/investors/investmentcase
Alternative Performance Measure see note 37 on page 143
3
CHAIRMAN’S
STATEMENT
Mike Clasper
Chairman
Highlights for 2017:
Achieving inclusion in the
FTSE 250 stock market index
Successful ongoing integration
of prior acquisitions
Board visits to observe
sustainable global operations
Priorities for 2018
Oversight of ‘Connecting
for Growth’ global strategic
change programme
Focus on key themes including
data, innovation, people and
corporate responsibility
Continued proactive outward
focus through programme of
visits to operations, customers
and other third parties
‘Having a diverse range of Board
members is vital to our success.
Board decisions set the tone and
culture for the organisation.’
‘Our entry into the FTSE 250…has
been celebrated by staff across all
our sites, from Shenzhen to Singapore
and Stockley Park’.
4
‘TO MAKE CONSIDERED AND BOLD DECISIONS
REQUIRES THOUGHTFUL DISCUSSION WITHIN
THE BOARD AND A DEEP UNDERSTANDING OF
OUR STAKEHOLDERS.’
Dear Shareholder
This past year has seen us make good progress on our move from the industrial to the digital
age, as we work with clients to meet their needs in a digital world and to anticipate trends
that will influence the way in which we work in the future. In doing so we have drawn on the
talents and engagement of our workforce, while aligning the interests of our shareholders
in any decisions made about the business. It has been the year in which we realised our
aspiration to return to FTSE 250 listing as a global manufacturer and also the year in which
the Pension Regulator ceased its investigations.
Governance
Our corporate governance framework provides a platform from which we can deliver our
strategic aims. It also ensures that we operate to the benefit of all of our stakeholders ---
so having a diverse range of Board members is vital.
I am, therefore, pleased to report that the Board appointed two new female Non-Executive
Directors. Hongyan ‘Echo’ Lu joined the Board in December 2017 and Anne Fahy joined the
Board in March 2018.
Ruth Anderson, Non-Executive Director and currently Chairman of the Audit and Risk
Committee, has announced she will not be standing for re-election as a Director at the
2018 Annual General Meeting. I would like to thank Ruth for her insightful guidance and
contribution over the years she has served, in which she has played a key part in steering
change both to the Audit and Risk Committee and also the broader Group.
To make considered and bold decisions requires thoughtful discussion within the Board
and a deep understanding of our stakeholders, be they investors, employees, suppliers or
customers. It also demands an in-depth understanding of the business and --- to this end
--- we made Board visits to two of our international sites this year.
In June, we met the local management team (and wider EMEA Performance Materials
leadership team) in Turkey. We also visited the innovation showroom, showcasing the latest
developments in Performance Materials and Apparel and Footwear, and heard about a
pilot project in Bursa to digitise and automate the supply chain. The team told us about
opportunities presented by machine learning, robotics and the use of sensors to digitise
the working environment.
In October, we met in India, where we were given an introduction to the business
(performance, key competitors, market environment) and the sheer scale of the domestic
end uses of the thread produced (e.g. apparel tailoring). We also visited our manufacturing
facility at Ambas, where we saw the results of our recent major investments in safety and
sustainability: a new synthetic dyehouse, a zero-liquid discharge facility, a biomass-based
steam boiler and a solar power plant.
FTSE 250
Our trip to Turkey coincided with their celebration of Coats’ entry into the FTSE 250, which
has been celebrated by staff across all our sites, from Shenzhen to Singapore and Stockley
Park. This is a validation of the corporate changes we have made since returning to listed
status in February 2015 and brings the company full circle, as Coats was a founding member
of the FT 30 index created in 1935.
Pension funds
I am happy to say that, in June, we signed a binding settlement agreement with the Trustee
of the Staveley Industries Retirement Benefits Scheme. The UK Pensions Regulator has now
withdrawn its regulatory action and its investigations have now ceased.
CHAIRMAN’S
STATEMENT CONTINUED
‘I am pleased to report that the Board
has been able to continue with the
progressive dividend policy announced
last year.’
‘Our continued success relies on our
ability to understand and anticipate
global trends, so that we offer our
customers leading-edge processes
and products.’
‘Achieving our FTSE 250 listing
has given us an important
external accreditation.‘
Dividend
I am pleased to report that the Board has been able to continue with the progressive dividend
policy announced last year. For 2017 we have recommended a final dividend of 1.00 cents per
share, which combined with the interim dividend of 0.44 cents per share, gives a total dividend
for the year of 1.44 cents per share (pro-forma 2016 full year dividend: 1.25 cents per share),
which represents a 15% increase on the previous year. The final dividend will be paid on
29 May 2018 to ordinary shareholders on the register at 4 May 2018.
Performance in 2017
We continued to perform well during the year with revenue growth of 4% to $1,510 million;
driven by Apparel and Footwear, up 5%, and Performance Materials, up 12%, with some
offset due to a weak performance in Crafts which declined by 11%.
Wider global trends
Our continued success relies on our ability to understand and anticipate global trends, so
that we offer our customers leading-edge processes and products. This requires a pro-active
outward focus, working in partnership with outside organisations to broaden understanding
and identify future opportunities. For example, this year our Performance Materials team
has been working with research and development partners and a major car mouldings
manufacturer to respond to the car industry’s continued move towards lighter, cleaner cars in
order to meet ever more stringent new fuel efficiency standards. By exploiting our innovative
composite technology, we aim to produce carbon composite shapes that could ultimately
replace metal.
Heritage and culture
It was very pleasing to see the diversity and richness of our shared heritage cultures were very
much in evidence this past year. In the UK, we celebrated our long standing links with the
city of Paisley by supporting its bid to become the 2021 UK City of Culture (ultimately won
by Coventry, in December). We also recently became the Royal Shakespeare Company (RSC)’s
Official Thread Supplier and a supporter of its ‘Stitch In Time’ campaign for the restoration
and redevelopment of the RSC’s Costume Workshop in Stratford-upon-Avon.
In the year we launched a programme called ‘Doing the right thing’ which encourages
employees to reflect still further on the importance of ethical behaviour in their working lives,
supported by a network of Ethical Culture Champions around the Group. 2017 also saw us
taking part in Global Ethics Day for the first time --- the day on which organisations around
the world hold events to explore the meaning of ethics in international affairs.
Diversity
Diversity is an important asset in achieving our success and one that we strive to instil
throughout the business, not simply at Board level. In November 2017, the Turkish
parliament recognised Coats Turkey for its gender equality work, naming it as one of
the top three companies in the country where working conditions show equality of
opportunity for women and men.
People
As ever, the business benefited from the loyalty and involvement of our people around
the network. Our employee engagement survey showed an engagement score of 83%,
maintaining our position in the top 10% of companies globally. This survey is an important
tool in understanding how our workforce feels about the company and why.
Looking ahead
Achieving our FTSE 250 listing has given us an important external accreditation, but we
recognise that to maintain the support of all our stakeholders – our shareholders, our
customers, employees and suppliers, we must be vigilant in maintaining the best possible
behaviours --- meeting their needs in a manner that is forward thinking, responsible
and sustainable.
.
Mike Clasper,
Chairman
6 March 2018
5
GROUP CHIEF EXECUTIVE’S
STATEMENT
Rajiv Sharma
Group Chief Executive
Highlights for 2017:
Strategic progress in the year
Acquisition of Patrick Yarn Mill
Continued strong operational
performance – with over
$1bn in A&F sales
Priorities for 2018
Implementing Connecting
for Growth programme
Continuing integration
of recent acquisitions
Continuing focus on four
strategic growth pillars
‘We recognise, too, the importance of
our impact on the communities in which
we operate and on our suppliers.’
‘Coats delivered a strong performance
in 2017. Momentum in Industrial
continued throughout the year in key
Apparel and Footwear markets, where
we continued to take share, and we saw
double-digit growth in hi-tech end-uses
in Performance Materials.’
Alternative Performance
Measures – see note 37
on page 143
6
‘I AM REPORTING ON THE COMPANY THIS YEAR
FROM THE VANTAGE POINT OF OUR NEWLY-
ACQUIRED STATUS AS A MEMBER OF THE FTSE 250.’
Dear Shareholder
I am reporting on the company this year from the vantage point of our newly-acquired
status as a member of the FTSE 250. This is a source of great pride for all of us at Coats
and one which affirms the legitimacy of our strategic aims and the ongoing achievement
of all our employees.
Such recognition brings with it greater expectations of us as a company and new ambitions
which we must fulfil in order to keep growing in our role as a global manufacturer. This is
summed up in the title to this report: delivering today, transforming for tomorrow. It
recognises the dual perspective we must maintain to remain relevant in today’s fast-changing
market --- both satisfying the needs of our stakeholders and all the while anticipating and
planning ahead for future demands.
So, while we are always focused on the business’s current performance, we are also putting in
place the drivers for change. Currently, that means a focus on four pillars: digital; innovation;
simplification; and acquisition, all of which are an evolution of our existing strategy. These
pillars will help us deliver benefits appropriate to each of our stakeholders, allowing us to
provide our 40,000 customers with products to meet their existing needs (while developing
unique products, services and digital solutions to cater to their changing requirements) and,
at the same time, maintaining a level of growth and efficiency that results in sustainable and
profitable earnings for our shareholders. It also allows us to offer our 19,000 employees work
in an environment that is innovative, safe, ethical and personally fulfilling. We recognise, too,
the importance of our impact on the communities in which we operate and on our suppliers.
2017 performance
Coats delivered a strong performance in 2017. Momentum in Industrial continued throughout
the year in key Apparel and Footwear markets, where we continued to take share, and we
saw double-digit growth in hi-tech end-uses in Performance Materials. This was partly offset
by North America Crafts where market conditions remained weak. In an environment of rising
input costs, we were able to grow our operating margins, through realising price increases,
productivity and procurement gains, as well as tight control of our cost base.
Industrial revenues grew at 6%, driven by share gains in Apparel and Footwear, and
underpinned by our continued focus on product innovation, digital solutions and our strong
Corporate Responsibility credentials. This growth in Apparel and Footwear was achieved
despite mixed demand from clothing retailers. In addition, Performance Materials revenues
grew by 12%, due to double-digit growth in hi-tech end uses, and the contribution from
bolt-on acquisitions. Crafts saw revenues decline by 11% on a CER basis (10% decline on
a reported basis), as the North American market conditions remained weak throughout
the second half of the year.
Group adjusted operating profit increased 11% to $174 million on a CER basis (2016:
$157 million)
and adjusted operating margins were up 70 bps to 11.5% (2016: 10.8%).
On a reported basis operating profit (which is after exceptional and acquisition related items)
increased 9% to $167 million (2016: $153 million).
For more details see the Operating Review on pages on 27 to 30.
Strategic progress
As our customers’ expectations change in line with current trends --- be that urbanisation,
the non-negotiable need to do business in an increasingly responsible, sustainable and ethical
manner, or the ever-increasing adoption of digital technology --- our responses to those
changes must also meet the aims of our strategic focus on profitable sales growth, increased
productivity and value delivery. The four pillars (digital, innovation, simplification and
acquisition) are the building blocks that will help us deliver those goals and, to that end,
we have made good progress during the year.
GROUP CHIEF EXECUTIVE’S
STATEMENT CONTINUED
‘The four pillars (digital, innovation,
simplification and acquisition) are the
building blocks that will help us deliver
those goals and, to that end, we have
made good progress during the year.’
‘To accelerate our transition from
the industrial to the digital age, we have
launched the Connecting for Growth
transformation programme, which will
drive our next phase of growth.’
Digital. To stay relevant, we must evolve in new directions, thinking beyond the stitch line to
collaborate with internal and external stakeholders, to repurpose our products into new areas and
to find different and better ways of operating. This year we created a data science team to extract
and analyse our data to gain insights to help us predict future behaviours and make sound, data-
driven business decisions. We also launched two mobile apps: one for our Red Heart yarn, which
improves the customer’s experience by allowing them to scan images and unlock additional
content (with access to interactive experiences and special offers); and one for resellers in India,
giving them a fast and convenient way to check the status of orders without having to use
the full version of eComm.
Innovation. This is at the heart of everything we do and big, bold, game-changing ideas are crucial
to our success. Our Global Innovation Forum launched during the summer with a remit to foster
a culture of innovation within the Group, sharing ideas and focusing on new avenues of growth
and profitability for our customers. In Apparel and Footwear we achieved an industry first when
we launched Epic EcoVerde, a 100% recycled premium thread made from post-consumer waste.
Meanwhile, our Crafts team has been working closely with colleagues from Industrial to
repurpose products for consumers. This has resulted in our Eloflex yarn – a thread for stretch
fabric previously sold to Industrial customers only – being marketed in branches of two major
US department store chains.
Simplification. In today’s digital age, we need to be fleet of foot and capable of efficient delivery
in the quickest possible timeframe. To achieve this, we need lean and integrated processes and
an organisational culture of speed and simplification. During the year we created a single Digital
and Technology structure and our project team worked with a range of countries to increase their
compliance with our finance Target Operating Model, resulting in better controls, reduced risk
and cost savings to the Group. We also made significant progress with the ongoing integration
of the activities of Latin America Crafts into the larger Industrial Division.
Acquisition. Our recent acquisitions, Gotex, FastReact and GSD have all proved successful,
delivering on our strategy of acquiring companies with unique capabilities that can leverage
off our network. Our latest acquisition – Patrick Yarn Mill – is another case in point. The North
Carolina company, with 150 employees and a turnover of $42 million in 2017, specialises in cut-
resistant and flame-retardant yarns, and can manufacture yarns using recycled fibres under its
earthspun® trademark and machines powered by solar panels allowing it to offer products
under its unique ‘Spun by the Sun’ trademark.
Connecting for Growth
To accelerate our transition from the industrial to the digital age, we have launched the
Connecting for Growth transformation programme, which will support our next phase of
growth. We expect this programme to deliver increased productivity, with targeted net
annualised operating cost savings of $15 million by 2020.
For more details see the Financial review on pages 31 to 36.
Looking ahead
We enter 2018 in a strong position, with continued momentum in our Apparel and Footwear
and hi-tech Performance Materials businesses. Whilst market conditions in our North American
Crafts business are expected to remain challenging, our new management team has
commenced implementation of a refocused strategy. We expect 2018 adjusted operating
profits to benefit from the incremental full year contribution from the Patrick Yarn Mill
acquisition, and the anticipated first year benefits from the Connecting for Growth
programme. As such, 2018 adjusted operating profits are expected to be slightly ahead of
previous management expectations. We will also continue to focus on cash flow generation in
order to allow us to continue to reinvest in both organic and inorganic growth opportunities.
Our levers for change --- digital, innovation, simplification and acquisition --- anticipate the
continuing challenges from digital technologies and online retailers, and give us the tools
that will enable us to deliver value to customers, shareholders, employees and communities
over the long term.
Rajiv Sharma,
Group Chief Executive
6 March 2018
7
MARKET
TRENDS
For more on our market
environment go online
www.coats.com/investors
Trend #1: Our response in
the year
Investing in Asia manufacturing
facilities such as a new
warehouse in Vietnam.
Growing scale and extent of
our China domestic sales
operations.
Trend #2: Our response in
the year
Offering customers technology
solutions via Coats Global
Services to accelerate their
lead times and planning.
8
What markets do we serve?
Apparel and Footwear (A&F)
Coats is the market leader in supplying premium thread to the Apparel and Footwear
industries. The global market for thread is estimated to be c.$4 billion and while thread
represents only 1-2% of the cost of a typical garment, it is recognised to be a critical
component in the overall garment performance. We are a key supplier to the $1.5 trillion
global apparel and c.$350 billion footwear industries, which are projected to grow at
low single digits in the medium term.
In addition to thread we are also a major global supplier of zips and provide consulting
and software services to the A&F industry.
Performance Materials
We are a leading player in manufacturing high performance technical threads and yarn used
in a range of industries which include automotive, household and recreation, medical, health
and food, safety, telecoms, conductive and composites.
We estimate the addressable market (i.e. that into which we currently or could realistically
serve in the near term) is c.$3.2 billion in size, of which c.$2.7 billion is in relation to high
technology end uses (e.g. composites). We anticipate upper single digit medium term
organic % growth in this area, with growth weighted towards high technology end uses.
Crafts America
Our Crafts business is a market leader in the c.$1.8 billion Americas textile crafting industry
(of which c.$1.4 billion is in North America), which we categorise into two segments:
handknitting yarns and needlecrafts, which includes consumer threads and zips.
Trends that are impacting our businesses:
1. Growth of the urban middle class in Asia
Globally, the Apparel and Footwear thread market is expected to grow by low single digits
% over the medium term, but this is projected to be higher in Asia. In 2018 it is expected that
retail sales in North America and Western Europe will for the first time account for less than
50% of all global sales. And not only will Asian consumers demand more garments --- but
more affluent consumers will demand higher-end garments, so we expect that regional
sales from our many factories in Asia will increase over time.
Demand for Performance Materials threads and yarns is increasing due to the pace of
urbanisation (for example, the rollout of fibre optic cable networks) and economic growth,
which means consumers purchase more products which require high performance threads
(for example, leisure goods, cars with airbags).
2. Speed to market
The rise of fast fashion, which has dramatically reduced the time between catwalk to high
street, and consumers demanding more than just the traditional two season cycle has put
tremendous pressure on the full garment supply chain. Not only do all participants need to act
faster, to respond to shorter lead times, they need to act smarter also focusing on productivity.
Our global asset footprint means we are uniquely placed, across the entire component supply
chain, to manufacture and distribute consistently high quality products to service retailers’
multi-location sourcing strategies. We also have the digital tools such as our web-based
service Coats Colour Express, the fastest thread sampling service in the world.
We also support garment manufacturers to become more productive. Our technology solutions
consulting offering includes time benchmarking tools and production planning systems both
of which will improve speed to market.
3. Innovative uses of threads, yarns and soft materials
Consumers are demanding more innovative products in every area of their lives and as a result
new thread based application end uses continue to be identified. We are at the forefront
of innovating smart thread and yarns to enhance the functionality or performance of many
products in multiple end markets. This is a core competency in our Performance Materials
business in which we have developed and grown sales in many new products such as flame
retardant threads used in protective wear, and water swellable threads that protect deep
water fibre optic cables.
MARKET
TRENDS CONTINUED
Trend # 3: Our response in
the year
Creating the ‘Global Innovation
Forum’ – a cross functional
approach to harness and
develop transformational ideas.
Trend #4: Our response in
the year
Launch of EcoVerde, first
range of premium threads to
be made from 100% recycled
post consumer waste.
Continuing the roll out of
programmes such as our Supplier
Code and Ethics programme.
We are also developing new high-tech applications such as lightweight carbon composite
shapes made from commingled nylon and carbon fibre. However, it’s not just in Performance
Materials we are innovating. Within A&F we are delivering innovative knitted upper yarn
solutions into footwear and apparel markets to global sports brands as they strive to simplify
their products (e.g. Nike FlyKnit). In Crafts we have developed insulating hand knitting yarns
that can be used for winter gloves, hats and scarfs.
Our scale is a benefit and allows us to continually invest in new technologies and innovation;
we can leverage our global, world class asset base to develop centres of excellence in key
growth markets; as the market leader we are in a position to use bolt-on acquisitions to access
new geographies and adjacent end-markets. This is supported by our customer relationships,
globally and across all levels of their organisation --- often it is these ‘innovation conversations’
that help us come up with technological breakthroughs. In 2017 we set up a Global Innovation
Forum and have invested in developing innovation centres in the US, Turkey and China which
are due to open in 2018.
4. Operating sustainably, increasing compliance and ethical standards
Consumers, shareholders, authorities, brands/retailers and manufacturers are all becoming
increasingly focused on operating in a compliant and ethical way. Be it environmental, labour
or sourcing, the entire supply chain is coming under pressure not just to conform to local
requirements but also to higher international standards as well.
Increasingly, environmental, social and governance standards are being used by our
shareholders and potential investors as a critical part of their investment criteria, and we are
committed to driving excellence in all of these areas This goes to the heart of Coats values and
standards. We behave responsibly wherever we operate, and during 2017 we have launched
our ‘Doing the right thing’ internal programme. Ethical business practice is core to the way we
do business and as such our Corporate Responsibility (CR) programme is integrated with our
business strategy and helps us build and maintain both our reputation and our relationships
with key stakeholders.
We regularly review the most relevant social, ethical, environmental and governance issues
to Coats by using a range of benchmarks and consider the interests of our peers and key
stakeholders, especially our employees, shareholders, brands and our customers. We then rank
the most important of these and ensure we have established relevant policies and programmes
to manage our impacts. For instance, we have invested significantly in upgrading Effluent
Treatment Plants (ETPs) across many of our sites so we can reuse more and discharge cleaner
water, as well as driving greater use of renewable energy in our units, which now stands
at c.30% of total energy used.
Trend #5: Our response in
the year
Globalising our Online Business
model to service more
customers entirely online.
5. Increasing adoption of digital services
Digital technology is playing an ever increasing role in everyday life and this is replicated
in the industries in which we operate. To ensure we remain and increase our relevance to
our customers we need to be more than just the supplier of the best products; we need
to provide value adding services and customer experiences that deliver value.
We have been at the forefront of digital innovation by component suppliers to the global
garment industry for several years now. We introduced Coats Colour Express, the fastest
thread sampling service in the world in 2012 and Opti Express, a revolutionary zip sampling
service in 2015. Once again we are leading our industry by introducing an online sales
organisation to manage sales to our smaller customers. Our Online Business teams provide
telesales, service and technical support to customers, as well as enabling customers to place,
monitor and pay for their orders using our market leading eComm platform.
The Online Business aims to increase efficiency while growing sales and market share with our
small customers and is now operating across Eastern and Western Europe, Latin America and
South and South East Asia. By end of 2017 the Online Business was managing approximately
12,000 customers across EMEA, Asia and the Americas.
While in Crafts we have Redheart.com, the most popular crafting website in the USA to which
more than 18 million crafters have come for inspiration, and we have also launched our first
mobile app for Red Heart during the year.
9
BUSINESS
MODEL
For an interactive version of
our business model go online:
www.coats.com/investors
Our business model
While having the right products and
services is critical, what is fundamental
to our success is our reputation.
Our vision is to become the world leader in value adding engineered yarns and threads for
industrial and consumer use, and our business model provides us with the framework to
effectively design, manufacture, market and deliver high quality products and digital services.
How Coats creates value
Our financial strength, resilience and ability to generate free cash flow provides us with the
capacity to undertake well-considered, valuable investment into our products, services and
people, to better meet our customers’ needs and further our success and brand reputation.
While having the right products and services is critical, what is fundamental to our success
is our reputation. This ensures the trust and confidence of our stakeholders and therefore
our ability to create ongoing value. Three elements are pivotal to maintaining and further
strengthening our reputation; our commitment to operating responsibly; our principles which
guide our behaviours; and the effective and efficient management of risk. These components
underpin our overall approach and impact every decision we make as they help to safe-guard
our reputation.
Our resources: ‘Core strengths’
Customer relationships --- we work with nearly 30,000 apparel, footwear and accessories
customers and approx. 4,000 retailers and brands globally. These strong relationships,
across all levels of our customers’ organisations provides us with deep market insight.
Global asset base --- we manufacture at some 50 sites, on six continents, with 100+
warehouses, the majority of which are connected by a global ERP system; this ensures we
are uniquely positioned to service the industries we serve on a short lead time basis.
People --- our diverse international workforce of nearly 19,000 is both highly engaged and
committed, with an employee engagement score of 83% in 2017 (keeping us in top 10%
of all companies globally).
Suppliers --- we have a diverse and global supplier base of raw materials (predominantly
polyester and nylon), intermediates (grey thread and bought-in Crafts products) and other
materials (cones and chemicals).
Corporate Responsibility --- we have strong credentials amongst all component suppliers
to the global garment industry; this helps us build and maintain both our reputation and
our relationships with key stakeholders.
Our talent: ‘Operational and commercial expertise’
Sales and marketing --- through our network of customer and supplier relationships we
have close interactions with the world’s leading global retailers and are able to respond
to their specific needs, pressures and aspirations.
Manufacturing --- we are able to service our customers with a globally consistent quality
and colour that has been manufactured to high ethical, employment, and environmental
standards. Whilst only 1-2% of the cost of a typical garment, seam failure as a result
of lower cost threads can involve costly returns as well as reputational damage. Our
products are tested and measured against stringent quality and safety standards.
We have strong corporate responsibility
credentials amongst all component
suppliers to the global garment industry.
10
BUSINESS
MODEL CONTINUED
Our global asset base, engaged
workforce and strong CSR credentials
deliver an unrivalled and attractive
proposition for our customers.
We continue to invest in developing the
skills and expertise, in order to deliver
the innovative products, digital solutions
and services that our customers
increasingly require.
Alternative Performance
Measures – see note 37
on page 143
Our talent: ‘Operational and commercial expertise’ (continued)
New product / process innovation --- through our virtual global network we are always
seeking to innovate in the industries in which we operate and in 2017 we have invested in
innovation centres in the US, Turkey and China which are due to open in 2018. Our R&D
team works with customers to understand their needs, with support from academic
institutions and specialist companies, developing new product solutions with our
customers’ needs always front of mind.
Technical --- we use our expertise to support our customers by making numerous technical
interventions on the shop floor every year.
Digital --- by offering the most comprehensive set of services in the industry; from colour
sampling to online training and ecommerce, this makes it easier to do business with us
and offers greater value and time benefits to customers.
Our products and services: ‘Value enhancing products and services’
PRODUCTS
Apparel and Footwear --- we are the world’s leading manufacturer and supplier of a range
of industrial sewing threads, with leading products such as Epic (fashion apparel), Dual Duty
(denim) and Nylbond (footwear); under the Opti brand we are a major global manufacturer
of metal, plastic and spiral zippers; and also offer a growing range of other trim products
to the global garment industry, such as reflective tape and premium interlinings.
Performance Materials --- we produce multiple innovative threads and yarns for traditional
and high technology uses and sell directly to global original equipment manufacturers
(‘OEMs’). End-markets include household and recreation, healthcare (medical sutures),
automotive (airbag thread), telecoms (coated fibreglass to provide strength to fibre optic
cables), oil and gas (flame retardant yarn for protective clothing) and composites (yarn
commingled with carbon that is pressed into carbon fibre shapes).
Americas Crafts --- In North America we sell to a handful of major retailers (and to a lesser
extent directly to consumers through Redheart.com); in Latin America we sell to a mix of
major retailers, independent stores and distributors.
SERVICES
Through the acquisitions of GSD and Fast React, we offer industry leading consultancy,
tools (e.g. cost benchmarking) and software to garment manufacturers and brands / retailers
to increase their productivity and reduce costs.
Our outputs: ‘Benefits for stakeholders’
Through our activities we make an economic contribution that stretches far beyond the
boundaries of our own operations as we buy from local, regional and global suppliers;
through the wages we pay our employees; and as we pay interest to financial institutions
and taxes and remittances to governments.
We are economically linked with the local communities in which we operate and the markets
that we serve around the world. As our business grows, then so does the positive economic
contribution we make.
In 2017 Coats generated a total of $1.5 billion of economic value, of which the majority was
distributed to our suppliers (63%) and employees (23%). A further 4% was paid in taxes to
local and national governments.
All the while we continue to deliver benefits for our investors. Operating profits reflect this
and have delivered a double digit CAGR % growth increase between 2015---17. By increasing
profitability and disciplined capital management, both fixed assets and working capital,
we have seen our returns on capital measured as ROCE remain high at 35% in 2017
By ensuring a track record of delivering good levels of adjusted free cash flow, we have
generated $236 million cumulatively between 2015---17
.
.
11
OUR STRATEGIC
GOALS
Our three strategic goals help and support us in achieving our vision of becoming the world leader in value adding engineered yarns and
threads for industrial and consumer use. They are closely aligned to the elements of our investment case and business model to ensure
delivery of value for all our stakeholders.
Strategic goals
Profitable sales growth
Performance in 2017
Key metric
For Apparel and Footwear this means:
Leading product portfolios and relationships
5% A&F revenue growth
Ensuring we constantly develop our leading brands,
strong market positions and customer relationships.
Responding to customer demands to make us
easier, simpler and faster to do business with.
Being able to offer operational excellence tools,
software and advice that is relevant to the global
A&F industry.
Having strong corporate responsibility credentials
that are aligned to requirements of major
global brands.
with leading brands.
Digital sales model – deeper integration
of eComm in our main markets, c.19,000
customers, over 80% of total orders.
Ongoing capital expenditure to ensure
safe, respectful and inclusive workplaces,
minimising environmental impact, achieving
strong environmental credentials.
Priorities for 2018 include
Meet customer needs for speed,
productivity, quality and peace of mind
Further strengthen operational
capabilities and capacities in growth
geographies and markets
Build sustainable innovation pipelines
13% Industrial adjusted
operating profit growth
Industrial adjusted operating
margin increase of 70bps
Relevant principal risk
Customer and end
user expectations
Economic risk
Environmental
non-performance
For Performance Materials this means:
Gotex – post acquisition sales growth of
12% revenue growth
Focusing on hi-tech sectors and new technology
sectors where we have ability to build scale through
technology, innovation and acquisition.
Securing global specifications and build deeper
relationships with global customers and brands.
Unlocking revenue and innovation synergies
with acquired companies to achieve market
leadership in new sectors.
Developing transformational new products
in emerging new technologies like composites
and conductive.
c.30% following global revenue synergies
with the wider Group.
FlamePro branded products in Personal
protection sector growth of 46%.
Acquisition of Patrick Yarn Mill for a maximum
consideration of $25m – providing specific
technological / innovation skills.
Priorities for 2018 include
Globalise and build scale in
hi-tech sectors
Explore new frontier of composite
and conductive technologies
Build new innovation ecosystem
and culture
18% organic revenue growth
in hi-tech sectors
>20% of organic sales in 2017
in relation to products that
didn’t exist 5 years ago
Relevant principal risk
Customer and end
user expectations
Economic risk
Appropriate capability
development
Product and services liability
For Crafts this means:
Having consumer brands that are relevant to
the consumer and retain strong market positions.
Our Red Heart, Coats thread and Cisne brands
are #1 or #2 in their respective handknitting
and needlecrafting categories.
Ensuring we have deep customer relationships
based around focused channel and product
portfolios.
Successful disaster recovery procedures
implemented following the tornado that hit our
Georgia distribution facility in January 2017.
1% Latin America
revenue growth
15% decline in
On-going integration of the Latin America
North America Crafts
business into Industrial.
Priorities for 2018 include
Focus on consumer centric, innovation
led strategy to grow sales
Finalisation of LatAm integration
Complete sale of non-core lifestyle
fabrics business
Relevant principal Risk
Customer and end
user expectations
Economic risk
Appropriate capability
development
12
OUR STRATEGIC
GOALS CONTINUED
Increased productivity
Performance in 2017
Key metric
For us as a Group this means:
Delivered improved operating margins
ROCE of 35%*
Continually looking at initiatives to make savings
in the areas of productivity, procurement and
SD&A. These include expanding our network
of Lean and Six Sigma experts, reducing electricity,
fossil fuel and water consumption and increasing
sales and productivity per employee. These initiatives
help to offset factors such as ongoing structural
labour, energy and raw material inflation and
support operating margins.
Meeting management’s commitment to generate
consistent and strong free cash flow every year.
This is required to meet intended uses such as
funding organic growth, pension recovery
payments, bolt on acquisitions and shareholder
dividends.
of 11.5% (2016: 10.8%).
Track record of delivering manufacturing
productivity and non-raw material sourcing
gains: $10–20m pa (2013–17).
Energy consumption down 3% and
water usage down 6%.
Maintained ROCE at 35% including planned
$10m increase in capital expenditure.
Priorities for 2018 include
Deliver savings and growth through
Connecting for Growth programme.
Achieving net operating cost savings,
after reinvestments of $5 million
in 2018
Adjusted FCF of $87m*
Pre-exceptional operating
profit margin increase of
70bps
Adjusted EPS increase of
30%* to 6.4 US cents
Relevant principal risk:
Connecting for
Growth programme
Environmental
non-performance
Value delivery
Performance in 2017
Key metric
For us as a Group this means:
We will add superior value to our customers
through our offer of unique product, services
and digital solutions.
Customers delivered share gain and
new market growth across all aspects
of our offer for example, 9% growth
in sports footwear thread.
We will drive shareholder value through
the successful implementation of our strategy ---
balancing our growth and efficiency agenda.
Shareholders earnings and cash growth,
and shareholder dividend growth of 15%
in line with our progressive policy.
Market share gains
Total Shareholder Return
(including share price increase
in last 12 months of 64%)
Employee Engagement
score of 83%*
We will deliver a value proposition to our
employees where people can develop to their
full potential within a safe, respectful and inclusive
workplace.
Employees benchmark workplace culture
and our employee engagement score in
2017 of 83% retains our place in the top
10% of all global companies surveyed by
IBM Kenexa.
Health and safety remains a key priority – Coats
has seen a reduction in its recordable accident
rate in the year, and remains significantly better
than industry benchmarks in this area.
Priorities for 2018 include
Meet customer needs for speed,
productivity, quality and peace of mind
Maintain progressive dividend policy
Further strengthen H&S management
programme
Relevant principal risk
Connecting for
Growth programme
Customer and end
user expectations
Appropriate capability
development
Pensions scheme
deficit funding
* Indicates Key Performance Indicator measure --- see page 14 for more details.
13
KEY PERFORMANCE
INDICATORS
MONITORING PERFORMANCE TO MEASURE THE GROUP’S PROGRESS
TODAY AND ONGOING PERFORMANCE TOMORROW.
During 2017 we continued to monitor our performance and progress using the consistent range of key performance indicators used in
the prior year. These non-GAAP measures are set out below. For further details of how these financial Alternative Performance Measures
are reconciled to the nearest corresponding statutory measure see note 37 on page 143.
KPI
Definition
Why we measure this
Performance (% year on year)
2017 commentary
Revenue
growth1
Annual organic growth
in sales at like-for-like
exchange rates.
Measures the ability of the
Company to grow sales
by operating in selected
geographies and segments
and offering differentiated,
cost competitive products
and services.
Strong performance
in A&F business, driven
by volumes, price and
mix. Product innovation
and geographic
expansion in hi-tech
Performance Materials
business, offset by
Crafts sales decline
in year.
Strong volume
growth, productivity
and non-raw
material procurement
improvements and
cost control have offset
other inflationary cost
pressures with some
offset in Crafts.
EPS growth in 2017
at reported exchange
rates was driven by
higher operating profit
a reduction in the
underlying tax rate and
lower finance charges.
Generated good
levels of free cash,
higher year-on-year
operating profits, along
with controlled Net
Working Capital whilst
increasing organic
investment in Capital
Expenditure.
Linked to
strategic goal
Adjusted
operating profit
growth2
Linked to
strategic goal
Annual organic growth in
operating profit, adjusted for
exceptional and acquisition
related items, at like-for-
like exchange rates.
Measures the underlying
profitability progression
of the Company.
Adjusted
earnings
per share
growth3
Annual growth in reported
EPS from continuing activities,
excluding exceptional and
acquisition related items.
Measures the underlying
progression of the benefits
generated for shareholders.
Measures the Company’s
underlying cash generation
that is available to service
capital demands.
Cash generated from
continuing activities less
capital expenditure, interest,
tax, dividends to minority
interests and other items, and
excluding exceptional and
discontinued items, acquisitions,
purchase of own shares by the
Employee Benefit Trust and UK
pension recovery payments.
Linked to
strategic goal
Adjusted free
cash flow4
Linked to
strategic goal
14
KEY PERFORMANCE
INDICATORS CONTINUED
KPI
Description
Why we measure this
Performance (%)
2017 commentary
Return on
capital employed
(ROCE)5
Linked to
strategic goal
Pre-exceptional operating profit
from continuing operations
for the year divided by capital
employed (property, plant and
equipment plus net working
capital) at year end.
Measures the ability of
the Company’s assets
to deliver returns.
Recordable
accident rate
(RAR)
Linked to
strategic goal
Number of work-related injuries
and illnesses per 100 Full Time
Employees (FTEs) per year that
are considered recordable by
the US Occupational Safety and
Health Administration (‘OSHA’).
Measures the performance
of the Company in
delivering a safe and healthy
working environment
for employees.
Annual global survey with
results benchmarked by IBM
Kenexa, a leading specialist
survey organisation.
Employee
engagement
score
Linked to
strategic goal
Measures the Company’s
performance in delivering
an effective and efficient
work place culture and
how proud and willing
people are to work towards
achieving common goals.
Higher profitability and
controlled asset base,
offset by increased
capital expenditure and
timing of Patrick Yarns
acquisition.
Company-wide
campaign on reporting
incidents and near
misses led to an
increased focus in 2017
and a restatement of
2016. 2017 rate of 0.55
a small decrease on
2016 (0.56) and 83%
below the latest US
OSHA result (2016)
of 3.2 injuries per
100 FTEs per year.
We continued to
benchmark our
workplace culture, and
assess how people feel
about working at Coats.
Actions taken as a result
of the 2016 survey
allowed us to maintain
our engagement level
which is in the top
10% in the global
IBM/Kenexa survey.
Paying for Performance
The incentive plans used to reward the Directors and our senior managers, include Performance Measures linked to certain of
our Key Performance Indicators. For more detail see the Directors’ Remuneration Report on pages 55 to 67.
Footnotes
1 Revenue growth in 2017 and 2016 excludes contribution from acquisitions made during the period. Revenue growth in 2016 and 2015 also excludes the discontinued UK Crafts business
(discontinued in 2016) and EMEA Crafts (disposed of in 2015).
2 Adjusted operating profit growth in 2017 and 2016 excludes contribution from acquisitions made during the period. Adjusted operating profit growth in 2016 and 2015 also excludes the
discontinued UK Crafts business (discontinued in 2016) and EMEA Crafts (disposed of in 2015).
3 Adjusted EPS growth in 2016 and 2015 excludes the discontinued UK Crafts business (discontinued in 2016) and EMEA Crafts (disposed of in 2015).
4 Adjusted free cash flow in 2016 and 2015 excludes the discontinued UK Crafts business (discontinued in 2016) and EMEA Crafts (disposed of in 2015).
5 ROCE based on adjusted operating profits. With effect from 1 January 2017 capital employed used in the definition of ROCE includes intangible assets in relation to recent acquisitions.
ROCE for 2016 has been restated consistent with the current definition. 2015 is as reported, and has not been restated.
15
PEOPLE
Highlights for 2017:
New training programmes
developing skills for the
digital age
Maintained 83% engagement
score, in top 10% globally
‘Be the One’ campaign to
increase H&S risk reporting
PEOPLE ARE THE BIGGEST ASSET OF OUR
COMPANY. THEY ENABLE US TO ACHIEVE
IMPACT BY DELIVERING VALUE TO CUSTOMERS,
SHAREHOLDERS AND SUPPORTING COMMUNITY
INITIATIVES.
The pace of change in the business world and the constant pressure to adapt to new
technologies means that we must be more agile than ever before. Our employees are
constantly refreshing and updating their skills and expertise to keep pace. Competition
for talent in the digital age is increasing and the traditional concept of a career is
being challenged.
Employees are looking for more from their careers than simply job satisfaction and so our
‘Employee Value Proposition’ (EVP) has to be competitive in the marketplace: offering fair
rewards and recognition and opportunities for development, supporting health and wellbeing
and enabling employees to make a difference throughout their careers. Our new five-year
People strategy tackles these issues head on, underpins our business goals and aims to
lead all our employees from the ‘Industrial to the Digital Age’.
Attracting talented people and enabling them to grow
Mastering Coats’ digital future will require us to attract and retain a talented workforce
who are totally engaged and with an energy for change. During 2017 we have strengthened
our recruitment processes and continued our capability development programmes across the
business. Our new recruitment website, www.coatscareers.com, contains information about
our EVP, provides an online applications process and the ability to process candidates more
efficiently and cost effectively. The impact of this is that we have delivered employment
opportunity to many more people. Since its launch we have received more than 17,000 visits
to the site from over 70 countries and are continuing to receive more than 1,000 new visitors
per month. To date, we have advertised 117 vacancies via the website and received more
than 150 applications as a result.
We have continued to roll out our leaders’ programmes Management Capability Development
(MCD) and Transcend. The impact of these two programmes is that we are developing both
the core leadership skills needed to achieve our short-term goals and the specific skill sets that
will take the business into the next decade. Since its launch in 2013, over 400 employees have
completed the MCD, 118 are ongoing, and 152 new participants started their journey during
2017. Currently 72 leaders spread globally are enrolled on Transcend. In support of our
continual learning imperative, 2017 also saw the launch of Minerva, our new online digital
platform which provides over 700 resources, including online learning tools, videos and
tips sheets.
Respecting each other
It is important that Coats’ culture and values are evident across our business, and that we
provide a respectful and inclusive environment, enabling positive teamwork and the freedom
for all individuals to grow. At the heart of our culture is the way we treat each other and we
have established a global code of ethics and conduct which is reinforced through regular
employee communications.
Coats supports diversity and equal opportunity in the broadest sense. As well as a focus on
gender diversity at senior levels, Coats has location specific programmes in place in a number
of the countries in which it operates, for example supporting people with disabilities in Brazil
and Bangladesh. We actively celebrate the diversity that the Coats global family brings and are
working to see this diversity reflected at all levels in the organisation supported by our global
Diversity and Inclusion (D&I) programme. In 2017 we had 43 nationalities represented in our
senior management group¹, and in March 2017 we celebrated International Women’s Day
under the global theme #BeBoldForChange. Nearly 150 employees across the world were
nominated as internal role models for their bold work to increase gender diversity at Coats.
We also launched an online unconscious bias training programme which has been completed
by more than 600 people.
Priorities for 2018
Further strengthen H&S
management programme
Develop ‘Doing the right thing’
campaign to cover wider ethics
and human rights issues
Continue development of
leadership and management
capability programmes
Further information on our
People policies is available at
www.coats.com/people
Human Rights
We uphold the aims of the California
Transparency in Supply Chains Act of
2010 and the UK Modern Slavery Act
2015 and publish a statement on what
we are doing to prevent modern slavery
in our business and supply chain on
our website.
Furthermore, we support the UN
Guiding Principles on Business and
Human Rights throughout all our
operations. Our global policies uphold
the requirements of the UN Declaration
of Human Rights and the Convention
on the Rights of the Child, the core ILO
Conventions, and the OECD Guidelines
for Multinational Enterprises.
1 Senior management: Coats employees Grade
12 and above, excluding Board Directors.
16
PEOPLE
CONTINUED
Gender diversity1 (Number
and %)
Employee engagement score (%)
Recordable accident rate
(Number of accidents per 100
FTEs per year)
1 Senior management: Coats employees Grade
12 and above, excluding Board Directors.
2 As benchmarked by IBM Kenexa, a leading
specialist survey organisation.
We continue to improve our performance and succession planning processes, ensuring we
have diverse shortlists and succession pools. We remain focused on supporting local D&I
initiatives, and an example of the impact of this approach is that in 2017 our Turkey business
was named as one of the top three companies in the country where working conditions
show equality of opportunity for women and men.
Our seventh employee engagement survey was carried out in November 2017; this assesses
how we are doing and helps to identify areas where we can do better. We were pleased to
see that our engagement score has been maintained at 83%, the same level for the past three
years. This score is 15% higher than our initial survey in 2011 and keeps us in the top 10%
of companies surveyed globally2. Every employee is impacted by this process as every part
of the business develops and delivers action plans based on the local results of the survey.
Organisational changes taking place in 2018 will provide a short term challenge to maintaining
our employee engagement score, and reinforces our commitment to the process.
Doing the right thing
We operate to high ethical business and employment standards across all of our global
operations and encourage a culture of openness and honesty. Our business reputation,
together with the trust and confidence of the people we do business with, is one of our
most valuable assets and one which we strive to protect. High ethical standards also make
good business sense, they create value for our company, our shareholders and ultimately
for society as a whole. Our ‘Doing the right thing’ campaign, launched in 2017, further
embeds this into our culture, with around 20 Ethical Culture Champions acting as points of
contact and support across the world. We use our internal communications to showcase teams
that demonstrate the highest standards of ethical behaviour and share best practice via our
intranet. We have zero tolerance towards exploitative employment practices and our policies
and codes of practice make specific reference to the avoidance of slavery, forced or bonded
labour both in our own operations and in our supply chain.
Our ethics and compliance training is tailored for different roles within the Group and we
use targeted online training models for our senior managers and those with customer facing
roles which is refreshed for all nominated employees every two years. In addition, more than
700 new starters completed this online training during 2017, bringing the total who have
completed this training to more than 4,500. We reviewed our various ethics and compliance
policies, including updating our Whistleblowing Policy which encourages the reporting of
non-compliance with our codes of practice.
Striving for safety excellence
As a global manufacturing business, maintaining high standards of Health and Safety (H&S) is
a key priority for us. Unfortunately, during 2017 one of our employees lost his life in a forklift
accident at one of our India plants. We take every incident on our premises very seriously and
have provided help and support for the family involved. In addition we have investigated the
fatality very carefully and identified lessons that we can learn, including enhanced safety
exclusion zones around forklift truck routes and additional procedures around contractor
management. We have also improved our H&S reporting and investigation procedures.
We have a comprehensive global H&S management system in place which is used by all our
sites and during 2017 we have reviewed our policy and procedures. 11 of our sites are also
accredited to the international H&S standard OHSAS18001 and we will be reviewing the
transition to ISO 45001 during 2018. To reinforce our commitment to H&S, we ran a global
safety campaign --- ‘Be the One’ --- to stress the importance that we place on keeping our
people safe and to encourage our teams to improve their own performance. One direct impact
of our increased emphasis on H&S performance and reporting over the past two years has
been an increased number of incidents and near misses being recorded and investigated across
our estate. Each location is targeted to reduce recordable incident rates and improve their
annual H&S audit scores. Our global total recordable injury rate reduced slightly in 2017 by
2% to 0.55 (compared to 0.56 in 2016) and is 83% lower than the latest US OSHA data
for textile mills of 3.2 injuries per 100 FTEs per year.
We also recognise that our employees are increasingly at risk when they are not at our sites
and have observed an increasing number of commuting incidents. We actively train our people
to keep themselves safe when not at work and monitor H&S incidents during their commute
to and from our sites.
17
CORPORATE
RESPONSIBILITY
Highlights for 2017:
Materiality assessment update
and supply chain risk analysis
Launch of first ever 100% post
consumer recycled core thread
Continuing decline of energy
and water usage rates and
GHG emissions impact
COATS IS A GLOBAL BUSINESS, OPERATING IN MORE
THAN 50 COUNTRIES ACROSS SIX CONTINENTS
WORLDWIDE. OUR BUSINESS REPUTATION IS ONE
OF OUR MOST VALUABLE ASSETS, AND ONE WHICH
WE CONTINUALLY STRIVE TO PROTECT.
The values and standards that we subscribe to as a company are at the core of our Corporate
Responsibility (CR) programme. They are embodied in the five principles that describe the
way we work: respectful and inclusive, openness and honesty, energy for change, freedom
to operate and positive teamwork. Our CR activity is focused on seven strategic themes, all
of which support and contribute to the achievement of our business goals, and across all of
which we strive to deliver a positive impact every year.
Our activities are co-ordinated by the Head of Corporate Responsibility and monitored by
a CR Advisory Group which is chaired by the Chief Supply Chain Officer.
Developing a new strategy
This year we have taken a new look at what’s important to us as a business and to establish
some key areas of focus for our CR programme. We repeated our global materiality assessment
and have undertaken a specific human rights risk assessment to identify the areas of highest
risk both in our own business operations and in those of our supply chain. We have mapped
our operations and those of our supply chain to identify particular industry / sectoral risks as
well as risks from their geographical location.
To identify particular country risks, we took account of a number of external benchmarks
and indices in our risk assessment process, including the UN Human Development Index, ITUC
Global Rights Index, Freedom House Freedom in the World Civil Liberties, UNICEF % of children
aged 5-14 years engaged in child labour, US State Department Trafficking in Persons, and
Transparency International’s Corruption Perceptions Index.
The chart below illustrates those areas identified as important both to our business and to
our stakeholders:
For each of the key material areas identified we have reviewed our policies and procedures to
identify any gaps in our processes. Both key and less material areas are covered in more detail
on our website.
During 2018 we will continue to develop plans and targets to enhance our impact on material
issues and will carry out a more detailed human rights assessment of our operations.
Priorities for 2018
Establish plans and targets
for top 10 material issues
Continue to develop renewable
energy programmes
Complete more detailed
Human Rights assessment
across all operations
For more about our Strategic
Themes see the CR section
www.coats.com/cr
Our top 10 material
issues are:
Water consumption
Energy consumption
Environmental footprint
Waste generation and recycling
Health & Safety
Resource scarcity
Child labour
Forced labour
Transparency and reporting
Environmental legal compliance
18
CORPORATE
RESPONSIBILITY CONTINUED
Economic contribution ($m)
HIGHLIGHTS AND IMPACTS ACHIEVED FROM OUR
2017 CORPORATE RESPONSIBILITY PROGRAMME.
For more information on
economic contribution see
www.coats.com/cr
4,000+
Employees took part in Diversity & Inclusion
activities in the year (2016: 350+)
100%
Post-consumer recycled core spun thread
developed and launched for the first time
ever, under the EcoVerde brand family
Water usage (litres per kg of
dyed product)
The following highlights are a summary from the year. For more detail on our approach
to CR, our activities and outcomes during the year see our website www.coats.com/cr
Our Standards
We have updated and re-issued our anti-bribery and corruption policies and reinforced
our whistleblowing policy and hotline.
In October, we ran a global Ethics Day, to reinforce our programme for ‘Doing the Right Thing’.
Special events took place across the world to share views on what doing the right thing means to
our employees.
All 4,500+ senior employees and those with external facing roles are trained in ethics,
anti-bribery and corruption, and competition policies and laws.
Our People
Our health, safety and welfare programmes have been successful in keeping our recordable
accident rates 83% lower than the latest average reported by OSHA for US textile mills.
Over 700 employees have either completed or are currently working their way through
our 18-month Management Capability Programme.
We launched Minerva, our new online digital platform which provides over 700 resources and is
accessible to more than 5,000 people worldwide. Since the launch in June there has been a 14%
take-up, delivering new training opportunities to a wide group of employees.
Over 6,500 employees now have access to our global D&I network and more than 4,000 of our
employees took part in Diversity & Inclusion initiatives during 2017.
We provide training courses in safety for our employees on their journey to work which has a
direct positive impact on the welfare of our workforce.
Our Products
We have developed and launched the first ever 100% post-consumer recycled core
spun thread, under the EcoVerde brand family.
We have also successfully trialled Coats Verifi products, in bulk manufacturing, which
helps ensure garment seam integrity and hence an extended life cycle for the garment.
We are members of the Zero Discharge of Hazardous Chemicals (ZDHC) Programme which aims
to eliminate hazardous chemicals from the global footwear and textile supply chain.
Our Manufacturing and Product Restricted Substances Lists (RSLs) have been refreshed and
communicated to all our global suppliers. We believe these are the most comprehensive in the
industry and incorporate the requirements of all the major internationally recognised
environmental standards (eg ZDHC, REACH, Oeko-Tex, CPSIA).
Our Manufacturing
We have continued to reduce our water usage per kg of dyed product by 5% compared
to 2016 (26% reduction in last 5 years) through improvement in process technology.
We also continue to increase the recycling of process water which now represents 11% of our
water consumption (up from 8% in 2016) This reflects the continued implementation of water
recycling projects at our major plants at India, China, and Sri Lanka.
Our energy use per kg of dyed product has also continued to reduce (3% down compared to
2016 and >20% reduction in the last five years), reflecting investments in more efficient process
equipment and higher utilisations.
19
CORPORATE
RESPONSIBILITY CONTINUED
Energy use
(Kwh per kg of dyed product)
Our Environment
Greenhouse gas (GHG), as measured in kilos per kilo of dyed product, went down by
over 5% in the last year (4.3 kg CO2e per kg of dyed product compared to 4.6 in 2016). This
reflects both reduction in energy use and more use of renewable energy.
In 2017, the total carbon footprint of our manufacturing operations (Scope 1 and Scope 2) was
310,578 tonnes, a decrease of 2% compared to the previous year, even though production
volumes increased by 3% in the year.
Our emissions intensity is shown in the graph to the left and shows a 17% reduction
over the last six years.
We are looking at ways of reducing our GHG emissions, both by increased efficiencies,
but also through the generation and purchase of renewable energy. Over the past five years the
proportion of energy usage from renewables has increased to almost 29%. Biomass boilers in
India and Vietnam and solar panels in India and the USA have all contributed to this.
We have updated our environmental policy and made a commitment to achieving ISO14001
across all our operating units, 10 sites are already accredited. We will be establishing a global
environmental management system standard across all our units during 2018.
Our Partners
We have further consolidated our Supplier Code programme, holding additional supplier training
workshops in Bangladesh, China, India, Indonesia, and Vietnam, and extending our internal
auditing programme from China to four additional units. This is the first phase of a more robust
supplier management programme that we will be developing during 2018. Our Supplier Code
covers labour practices, environmental management, responsible sourcing of materials and
products, and business conduct.
Emissions intensity*
(tonnes CO2e/$m sales)
* For a table of results ranging from 2011-2017
see Directors’ Report page 75
Renewable energy
(% of total energy used in year)
So far we have carried out over 30 face-to-face supplier engagement workshops across
15 countries, targeting over 80% of our key suppliers and carried out more than
100 audits during 2017 (1% of our supplier base) across five high-risk locations.
Our Communities
Our activity rate in the community has continued to increase and during 2017 we completed
140 plans in the year with almost 7,500 volunteer hours dedicated to the communities in which
we operate.
These activities took place in 45 different operating units and helped lay the foundations for
exciting community projects in the future.
More details can be found at www.coats.com/cr
20
PRINCIPAL RISKS
AND UNCERTAINTIES
THE EFFECTIVE MANAGEMENT OF OUR RISKS
AND RELATED OPPORTUNITIES IS ESSENTIAL IN
SMARTLY AND PRUDENTLY ACHIEVING OUR
STRATEGIC OBJECTIVES.
Overview
As a global industrial manufacturer we recognise that risk is inherent within our geographical
footprint and activities. The timely identification of risks and related opportunities, combined
with their appropriate mitigation and escalation, enables us effectively to run our business
and deliver our strategy in the knowledge that the likelihood and/or impact associated with
such risks is understood and managed within our risk tolerance.
Governance structure
We operate a formal governance structure to manage risk across the Group. The roles and
responsibilities of the main stakeholders involved in this structure are set out below.
Highlights for 2017:
Refreshed the Group Risk
Register, in light of the
evolving Group strategy and
external environment
Deep dives across a range
of areas including principal
risks (and related key risk
indicators), specific business
areas, projects and acquisition
reviews
Ongoing implementation of
activities to reinforce ethical
compliance and culture
Reinforcing the risk
management framework
and processes at individual
business unit and enabling
function levels
Priorities for 2018
Execution of the Connecting
for Growth global strategic
change programme
Focus on key themes including
data, innovation and people
Continued focus on the use of
key risk indicators and
leveraging insights obtained
from these
While overall responsibility for reviewing the Group’s risk profile and setting risk tolerance,
as well as assessing the Group’s principal risks, rests with the Board, the management of
risk using our common risk management framework is embedded throughout our global
manufacturing, distribution, sales and other business operations, as well as our enabling
functions, with all our employees having an important role to play.
The management of risk using our
common risk management framework
is embedded throughout our global
manufacturing, distribution, sales
and other business operations.
Local business units and enabling functions globally, as well as the Group’s senior executive
leadership team, regularly review a broad range of individual current strategic and operational
risks, as well as conducting broader horizon scanning reviews of emerging and potential
such risks. They also monitor key risk indicators for a number of these risks, which provide
early warning signals and assist with prompt and proactive risk management and mitigation.
Through these reviews and their appropriate escalation, the Board receives actionable
information and updates which assist it in conducting its own such reviews, monitoring
the Group’s risk exposure, identifying the principal risks and determining an appropriate
level of risk tolerance.
21
PRINCIPAL RISKS
AND UNCERTAINTIES CONTINUED
The Board is keenly aware that the
effectiveness of our risk management
is dependent not only on systems and
processes but also on behaviours.
We regularly review and, as
appropriate, refine our risk
management and reporting processes
and activities, to enhance our ability
to identify issues promptly and to
proactively manage any risks and
related opportunities.
We assess risks through a standardised
process which includes measuring
likelihood and impact levels, with and
without controls, against a pre-defined
scoring matrix.
Culture
The Board is keenly aware that the effectiveness of our risk management is dependent not
only on systems and processes but also on behaviours.
During 2017 we continued to review and reinforce our Ethics Code and supporting policies,
training, communications and compliance activities --- this also included our comprehensive
Supplier Code. Our Board and senior executive management actively support, endorse and
champion the values and behaviours expected of both internal colleagues and third parties
with whom we work, all of which helps to strengthen our risk culture.
Identification and management of risk
Our approach to identifying risks follows a dual approach
1) ‘Top-down approach’ based on regular input and insights from, and deep dive discussions
involving, the Board and the Group Risk Management Committee, drawing on a broad range of
internal and external operational, commercial, economic and other perspectives and helping to
establish the key risks, and potential future risks, which could threaten the Group and its ability
to deliver its strategy. This gives colleagues throughout the Group a clear direction and set of
priorities in their ongoing discharge of their own risk management responsibilities.
2) ‘Bottom-up approach’ based on regular individual business unit/function-level input
which helps to identify the risks which could threaten local business or functional activities.
While these risks are managed at the local level, they are also consolidated and escalated
as appropriate to the Group Risk Management Committee and the Board to help in the
ongoing cycle of identification, testing and reviewing described below.
Our approach to risk management is based around a continuous process, which helps to ensure
that we remain focused on the appropriate risks and that we are taking the appropriate actions
to manage and mitigate those risks and to deliver our business strategy and objectives within
agreed risk parameters as defined in our risk tolerance.
Through that process we operate an ongoing cycle of identifying risks; setting risk tolerance
levels for those risks; testing those risks and risk tolerance levels through deep dive analysis into
likelihood of occurrence (including through the use of key risk indicators), impacts, mitigation
plans, related opportunities and resource and capital expenditure implications; then reviewing
those risks and risk tolerance levels accordingly.
We regularly review and, as appropriate, refine our risk management and reporting processes
and activities, to enhance our ability to identify issues promptly and to proactively manage
any risks and related opportunities.
Our risk assessment and risk tolerance
We assess risks through a standardised process which includes measuring likelihood and impact
levels, with and without controls, against a pre-defined scoring matrix. This assessment process
assists the Board in prioritising risks and determining its level of risk tolerance for each of the
principal risks, as well as helping to evaluate the adequacy of existing controls and mitigating
actions and the cost-benefit analysis of potential further such controls and actions.
Our risk tolerance is determined using four categories which are listed below:
Very Risk Averse: where we are very cautious and seek to minimise the financial and reputational
risk as far as possible. Mitigation costs are accepted albeit that they might exceed potential loss;
Risk Averse: where we are cautious and seek to reduce the financial and reputational risk.
Mitigation actions are proportional and based on cost effectiveness;
Somewhat Risk Tolerant: where we are willing to take some financial and reputational
risk to achieve our objectives. Mitigation actions are again proportional and based on
cost effectiveness; and
High Degree of Risk Tolerance: where we are willing to take significant financial risk to achieve
our objectives. Mitigation involves an active management of risk-return trade-offs.
22
PRINCIPAL RISKS
AND UNCERTAINTIES CONTINUED
Principal Risks overview
During the year the Board, supported by the Group Risk Management Committee, undertook a robust assessment of the principal
risks facing the Group along with the current levels of risk tolerance for each of those risks.
As a result of this process, the Directors created a refreshed Group Risk Register. This included introducing a new risk category ---
‘External risk’, arising from the macroeconomic climate, political events, regulatory issues and competitive pressures --- and revising
the contents of the Group Risk Register itself:
NEW
NEW
‘Connecting for Growth programme’ --- Added given the launch of the global strategic change programme and in
particular the implementation of the Group’s digital offering and global functional model.
‘Changing customer and end user expectations’ --- Added given the importance of continuing to identify, understand
and respond to these expectations.
‘Failure of critical infrastructure’ --- Moved down and off the list of principal risks in light of the robust controls and
effective mitigating actions demonstrated by the management team during 2017 including in response to the tornado
which impacted the Albany Crafts distribution centre.
Amended
‘Data controls and security’ --- Management of sensitive corporate and personal data and compliance with the General
Data Protection Regulations has been moved down and off the list of principal risks in light of the robust controls
and mitigating actions demonstrated by the management team during 2017. IT security risks remain on the list of
principal risks within ‘Cyber Risk’.
Currently the Board has identified ten principal risks, which fall into one of the following four categories:
Strategic: Risks that could adversely impact the Group’s ability to achieve its defined strategic objectives.
External: Risks arising from the macroeconomic climate, political events, regulatory issues and competitive pressures.
Operational: Risks inherent in our ongoing commercial operations and geographic footprint, which if not effectively managed,
would be liable to cause significant commercial disruption.
Legacy: Risks relating to the Group’s past operations and activities, including through historical mergers and acquisitions, which
could create material financial exposure for the Group in its present form.
These principal risks, along with a summary of the measures in place to manage and mitigate them, are set out in the table below.
As stated above, the Board will continue to keep these principal risks, as well as the appropriateness of this list and the ever evolving
broader risk environment, under ongoing review.
Principal risk
Risk nature / potential impact
Action / mitigation
1. STRATEGIC:
Connecting
for Growth
programme
Trend on year:
NEW
Execution of global strategic
change programme --- in particular
implementation of digital offering
and global functional model.
The Group is pursuing changes in its operating model to increase
productivity, promote efficiency in its supply chain and therefore speed
of delivery to customers and to optimise its use of digital platforms
to improve customer experience.
Customer
and end user
expectations
Trend on year:
NEW
Risk of failure to identify, understand
and respond to changing customer
and end-user expectations (e.g.
spending patterns and impact of
online channel switch).
Leadership of the programme is provided by a Chief Transformation
Officer, supported by a team of project managers, and regular reviews,
including through the use of key performance and risk indicators,
are held at executive management and Board level.
Our sales teams have over 1,000 interactions a day with brands,
retailers and manufacturers and this informs our understanding of
different markets. During the year we created a new customer insights
role and extended the use of our Customer Relationship Management
systems to gain more customer insights. We also strengthened our
commercial team to better service key and emerging markets. In order
to ensure a firm understanding of emerging trends and technologies,
we undertake regular competitor and media analysis, desktop
research and attend external and industry-led events.
23
PRINCIPAL RISKS
AND UNCERTAINTIES CONTINUED
Principal risk
Risk nature / potential impact
Action / mitigation
Appropriate
capability
development
Risk of failure to attract and retain
talent and capability given business
changes and growth in new areas.
The Board and senior management remain very focused on talent
and capability development, as well as retention and succession
planning.
Trend on year:
No move ~
2. EXTERNAL:
Cyber risk
Trend on year:
Upwards
2017 capability development actions included new cohorts on a range
of management and senior leader development programmes and
individual assessments and coaching for selected senior managers.
2017 also saw Board approval of a new People Strategy to support
the changing roles and capabilities required by the business in the
next three years.
Risk of cyber incidents leading to
corruption of applications, critical
IT infrastructure, compromised
networks, operational technology
and/or loss of data.
Throughout the year we implemented a range of policies, standards
and training programmes that focused on IT security and the need
to prevent leakage of data. These were driven by the global
Technology function and led by the Cyber and Information
Security Director.
In 2018 we are building on this approach by delivering a programme
of automated training to targeted groups and the Group as a
whole to reinforce the training on an ongoing basis. Technology
enhancements are also being put in place, including further firewall
blocking of non-approved applications, the expanded deployment
of multi-factor authentication, deployment of an email encryption
solution, and centralisation of data into Azure which both protects
the data and creates enhanced tracking capabilities.
As a global industrial manufacturing company with no UK
manufacturing facilities and minimal direct sales in the UK, Coats is
of the view that there would be limited direct adverse impacts on
the Group from Brexit.
Both the UK and the EU, however, are significant markets for both
Apparel and Footwear and Performance Materials. Therefore any
impact on sales and future growth expectations for these markets
could have an indirect consequence on our business.
Whilst there continue to be a number of uncertainties in connection
with the future of the UK and its relationship with the EU, there
have been indirect factors which continue to have an impact on
our results, primarily the effect of lower discount rates on the
accounting valuation of pension liabilities and the depreciation
of sterling on our UK costs.
We continually monitor and analyse economic and demand indicators
to ensure that our supply chain remains flexible and our product
portfolio remains relevant. This analysis provides a key input to our
product development, business planning and pricing strategies.
The Group’s international footprint and comprehensive portfolio
provide an increasing balance in our exposure to both EU and
non-EU markets.
Our environmental policy applies across the Group. Compliance
with all environmental legal requirements is a minimum standard
for the Group, and is monitored very closely at both a local and
Group level.
A Group-wide environmental management system (EMS)
aligned to ISO 14001 will commence in 2018, which will further
enhance our systematic management of these requirements
and standards.
Economic risk
Trend on year:
No move ~
Economic risk arising from political
and demand uncertainty --- including
risk to free trade conventions.
Environmental
non-performance
risk
Trend on year:
No move ~
Environmental non-performance
risk given changing standards and
increased scrutiny resulting in disruption
of existing business, fines and/or
reputational damage.
24
PRINCIPAL RISKS
AND UNCERTAINTIES CONTINUED
Principal risk
Risk nature / potential impact
Action / mitigation
3. OPERATIONAL:
Products and
services liability
risk
Products and services liability risk
arising in particular from Performance
Materials and software services.
Trend on year:
No move ~
Bribery and
anti-competitive
behaviour risk
Risk of breach of anti-corruption law or
competition law resulting in a material
fine and/or reputational damage.
Trend on year:
No move ~
4. Legacy risks
Pension scheme
deficit funding
risk
Trend on year:
No move ~
Risk of potential volatility in UK pension
gross liabilities and total assets leading
to increased annual cost of repair plan
to fund deficit (which could impact
one or more of free cash flow and
dividend payment).
Products and services are tested and measured against stringent quality
standards. Controls in the Performance Materials area specifically have
been strengthened with enhanced batch by batch testing of safety
critical products. Coats’ global insurance programme includes product
liability cover.
Actions and programmes developed during the year included:
digital automation with direct Internet of Things linkage implemented
between testing equipment and the SAP quality module in order to
minimise the risk of human error; fail-safe restrictive programming
to prevent the risk of sale of unapproved products to safety-critical
customer sectors; introduction of new key risk indicators to track
monthly and quarterly progress; and a zero defect communication
programme to factory operators and associates working in safety
critical areas.
The Group continues to maintain clear and well publicised policies
and processes, spanning bribery and anti-competitive behaviour
along with a number of other ethics issues, including in relation to
partners, contractors and suppliers which are reinforced through a
comprehensive Supplier Code (covering initial due diligence processes,
on-boarding, ongoing compliance and auditing). These policies are
reviewed annually. There is extensive online and face-to-face training
and regular communications through a range of channels including
through our global ethical champions network.
A sub-committee of the Group Risk Management Committee
comprising key business and functional leaders meets quarterly to
consider a range of ethics risks (including key risk indicators for those
risks), legislative and regulatory developments and mitigation plans.
The Group actively maintains a whistle blower system, enabling
employees and others who are aware of or suspect unethical
behaviour to report it confidentially. See page 52 for more details.
The funded pension schemes are overseen by their Trustees, who
are required to have the appropriate knowledge and understanding
in this area. Where appropriate, independent professional trustees
are appointed to the schemes to provide additional expertise.
In particular, professional investment advice is taken as necessary;
and assets diversified by class and geography and currency exposures
hedged where appropriate. Interest rate and inflation exposures
are hedged at appropriate levels.
Funding agreements are reviewed and agreed triennially.
The Group and the schemes’ trustees routinely review de-risking of
the schemes through liability management and investment strategies.
See note 9 on page 104 for more details.
Legacy
environmental
risks
Trend on year:
No move ~
Under the laws of certain countries,
Coats’ subsidiaries could potentially
be deemed responsible for investigating
and/or remediating conditions alleged
to be associated in whole or in part
with former operations.
The Board continues to monitor the strategy and developments
in relation to the Lower Passaic River proceedings, more detail of
which can be found in note 28 on page 127.
Beyond that the Group continues to refine its policies and procedures
for managing and mitigating potential legacy risks associated with
former operations.
25
PRINCIPAL RISKS
AND UNCERTAINTIES CONTINUED
Long Term Viability Statement
In accordance with provision C.2.2 of the 2016 revision of the Corporate Governance Code, the Directors have assessed the longer
term viability of the Group over the period to December 2020.
The Directors’ assessment has been made with reference to the Group’s current position and prospects, as detailed in the strategic
report. This takes into account the Group’s business model, strategy, approach to allocating capital and the potential impact of the
principal risks and how these are managed. The Directors have also considered committed finance facilities which, following the
refinancing exercise concluded in December 2017, all have a maturity of five years or longer.
The Group’s strategic objectives and associated principal risks are underpinned by an annual Medium Term Plan process, which
comprises a financial forecast for the current year and financial projections for the next three years. The Medium Term Plan represents
a common process with standard outputs and requirements at the Group level. The Board reviews the Medium Term Plan annually.
Although this period provides less certainty of outcome, the underlying methodology is considered to provide a robust planning tool
against which strategic decisions can be made.
For these reasons, the Directors have determined that a three-year time horizon to December 2020 is an appropriate period over which
to provide its viability assessment, although they do have due regard to key points outside this timeframe, such as the due dates for the
repayment of long-term debt.
The Directors have considered a range of severe but plausible scenarios that explore the Group’s resilience to the potential impact of
the principal risks as set out on pages 23 to 25 as well as other risks that could crystallise during the medium term. The risks considered
to have the most potential impact on viability were:
A global economic downturn;
Execution of the global strategic change programme;
UK pension scheme deficit funding; and
Potential developments in the Lower Passaic River proceedings.
These risks have been modelled both individually and in combination, notwithstanding the fact that the likelihood of all of these risks
occurring simultaneously is considered to be very low. The Directors have also taken into account a number of assumptions that they
consider reasonable within these assessments including:
The assumption that funding facilities will continue to be available throughout the period under review;
The assumption that following a material risk event, the Group would adjust capital management to preserve cash; and
The assumption that the Group will be able to mitigate risks effectively through other available actions.
Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet
its liabilities as they fall due over the period of the assessment.
26
OPERATING
REVIEW CONTINUED
Summary
Revenue2
Industrial
Crafts
Total
Adjusted operating profit2,3
Industrial
Crafts
UK Pension admin
Group
Adjusted operating margin
Industrial
Crafts
Group
2017
$m
2016
$m
Inc/(dec)
%
20161
CER
CER1
inc/(dec)
%
Organic4
inc/(dec)
%
1,297
1,221
6%
1,218
6%
5%
213
236
(10)%
239
(11)%
(11)%
1,510
1,457
4%
1,457
4%
3%
173
7
(6)
155
12%
153
13%
11%
(34)%
11
(8)
11
(7)
(34)%
(34)%
174
158
10%
157
11%
9%
13.3%
12.7%
70bps
12.6%
70bps
70bps
3.3%
4.6%
(120)bps
4.5%
(120)bps
(120)bps
11.5%
10.8%
70bps
10.8%
70bps
70bps
1 2016 figures restated at 2017 exchange rates.
2 Includes contributions from bolt-on acquisitions.
3 On an adjusted basis which excludes exceptional and acquisition related items.
4 On a CER basis excluding contributions from bolt-on acquisitions.
Coats revenues increased by 4%. There was a neutral impact of foreign exchange on revenues
(whereas in 2016 we faced FX headwinds due to the previous US dollar strength against
certain key trading currencies), so reported revenue growth is consistent with CER growth of
4%. On an organic basis, which excludes a 1% contribution from the acquisitions of Gotex,
Fast React, and Patrick Yarn Mill, revenue growth was 3%.
Industrial revenues grew at 6%, driven by share gains in Apparel and Footwear, and
underpinned by our continued focus on product innovation, digital solutions and our strong
corporate responsibility credentials. This growth in Apparel and Footwear was achieved despite
mixed demand from clothing retailers. In addition, Performance Materials revenues grew by
12%, due to double-digit growth in hi-tech end uses, and the contribution from bolt-on
acquisitions. Geographically, our organic growth of 5% continued to strengthen during the
year in the key geographies of Asia (6% growth) and EMEA (9% growth), although the US
consumer durables market (e.g. bedding and quilting) remained soft in the second half.
The Crafts division saw revenues decline by 11% on a CER basis (10% decline on a reported
basis), as the North American market conditions remained weak throughout the second half
of the year, alongside an adverse impact from the introduction of own-label handknitting
products at a major customer. This followed the first half business disruption caused by the
tornado strike at the main Crafts distribution centre in Albany, Georgia, USA on 22 January
2017 (estimated sales impact $10 million).
Group adjusted operating profit increased 11% to $174 million on a CER basis (2016:
$157 million) and operating margins were up 70 bps to 11.5% (2016: 10.8%). On a reported
basis operating profit (which is after exceptional and acquisition related items) increased 9%
to $167 million (2016: $153 million). Exceptional and acquisition related items are not
allocated to segments and as such segmental performance commentary is based on adjusted
operating profit.
Industrial adjusted operating profit grew 13% on a CER basis to $173 million and margins
were up 70bps to 13.3%. This was due to volume growth, realising price increases through
continually focussing on our customers’ needs (e.g. speed, quality, innovation and corporate
responsibility), productivity and procurement improvements, and continued cost control which
more than offset input cost inflation. The majority of the raw material price increases during
the year (partly linked to the rising oil price) were recovered through price increases. Organic
27
OPERATING
REVIEW CONTINUED
Industrial adjusted operating profit grew 11% year-on-year, and margins were up 70bps, with
strengthening year-on-year growth of profits and margins in the second half of the year.
Crafts adjusted operating profit declined by 34% to $7 million (margins down 120bps) due to
lower year-on-year volumes in North America (particularly in the second half), as well as certain
non-trading items (see later for details). This was offset to some extent by cost synergies being
realised in the smaller Latin America market following the decision to commence integrating its
activities with the Industrial Division (as previously announced). From 2018, it is anticipated
that Latin America Crafts will be reported as part of the Industrial division once the integration
of activities is finalised.
Industrial
Revenue2
By business
Apparel and Footwear3
Performance Materials5
Total
By region
Asia
Americas
EMEA
Total
2017
$m
2016
$m
Inc/(dec)
%
2016
CER1
CER1
inc/(dec)
%
Organic6
inc/(dec)
%
1,021
276
975
246
5%
12%
972
246
1,297
1,221
6%
1,218
764
257
276
720
249
252
6%
3%
9%
724
253
242
1,297
1,221
6%
1,218
5%
12%
6%
6%
2%
14%
6%
5%
7%
5%
6%
1%
9%
5%
Adjusted operating profit2,4
173
155
12%
153
13%
11%
Adjusted operating
margin2,4
13.3%
12.7%
70bps
12.6%
70bps
70bps
1 2016 figures at 2017 exchange rates.
2 Includes contribution from bolt-on acquisitions made during the period.
3 Includes accessories, zips and trims and global services.
4 On an adjusted basis which excludes exceptional and acquisition related items.
5 Previously named Speciality.
6 On a CER basis excluding contributions from bolt-on acquisitions
Industrial revenues grew by 6% in the year due to continued strong momentum in Apparel
and Footwear (~70% of Group revenues) which grew by 5%, along with 12% growth in
Performance Materials (7% organic growth and 5% contribution from acquisitions).
The strong Apparel and Footwear performance in the year delivered market share gains and
was achieved despite continued mixed demand from clothing retailers and ongoing price
pressures, as we maintained our customer-led approach to innovation and digital solutions,
alongside our strong corporate responsibility credentials. Coats’ ability to continue to take
market share was assisted 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 (e.g. our growing eCommerce platform which now
extends to online payment availability in a number of our key markets which helps to reduce
payment times from our customers). In addition, market share gains were realised through the
launch of innovative new products, for example knitted footwear uppers for key sportswear
brands, and we are actively working on further innovation projects with a number of global
brands. We have also developed and recently launched a 100% post-consumer recycled
premium thread, Epic Ecoverde, which is an industry first.
Performance Materials revenues grew 12% in the period on a CER basis (12% reported),
which includes a 5% contribution from the acquisitions of Gotex (acquired in June 2016) and
Patrick Yarn Mill (acquired in December 2017). Organic growth of 7% was underpinned by
strong growth in EMEA and Asia as we continued to drive geographic expansion of existing
products across the Coats portfolio, and leveraging Coats’ global customer base.
Apparel and Footwear
Highlights for 2017:
Strong revenue growth of 5%
Continued market share gains
Innovative new products such
as knitted footwear uppers
Priorities for 2018
Meeting customer needs for
speed, productivity, quality
and peace of mind
Further strengthen operational
capabilities in growth
geographies and markets
Build sustainable innovation
pipelines
28
OPERATING
REVIEW CONTINUED
Performance Materials
Highlights for 2017:
Strong growth in hi-tech sectors
Acceleration of innovation
Gotex exceeding business
case in sales and profits
Priorities for 2018
Build scale in hi-tech sectors
Breakthrough into composites
and conductive
Deepen innovation culture
and ecosystem
However the US consumer durables market (e.g. ‘‘traditional’’ end uses such as bedding and
quilting) remained soft in the second half. Growth in hi-tech end uses which now account for
50% of Performance Materials revenues (e.g. wire and cable, and engineering performance
yarns) remained strong throughout the year delivering double-digit year-on-year growth (18%
organic growth). The business also continued to grow revenues in new, innovative products,
and in 2017 over 20% of our total Performance Materials revenues were in relation to
products that did not exist 5 years ago (for example, Coats Synergex). Overall, following the
Performance Materials organic growth of 4% in the July-October period which was reported
in November 2017, we have seen the organic growth for the second half improve to 6%.
By region, revenue in Asia grew by 6% on a CER basis which was ahead of the 4% growth
reported in the first half, as momentum in key Apparel and Footwear markets (e.g. Vietnam
and Indonesia) gathered pace during the year (7% growth in H2). Thread sales in China for
domestic Apparel and Footwear consumption grew strongly by 9% in 2017, supporting our
belief that Coats remains well placed in that market to benefit from the macro trend of the
expansion of the urban middle class in Asia. Revenues in EMEA rose 14% (9% organic growth)
which was a continuation of a strong and improving performance in 2016 (7% organic
growth) and the first half of 2017 (organic growth 8%), driven by double-digit growth in
certain key A&F markets (e.g. Turkey) and hi-tech Performance Materials end uses (including
Gotex). In the Americas there was a return to growth in the year (2% decline in 2016)
following strong performance in certain key Latin America Markets, and a marginal year-on-
year improvement in the US consumer durables market on 2016 although overall this market
remains weak.
Industrial adjusted operating profit increased 13% to $173 million on a CER basis (2016:
$153 million) and margins increased 70bps to 13.3%. This reflected strong volume growth
driving a positive operational gearing impact, realising price increases through continually
focussing on our customers’ needs (e.g. speed, quality, innovation and corporate
responsibility), ongoing productivity and procurement savings, and a close control of costs.
The majority of the raw material price increases seen during the year (partly linked to the
rising oil price) were recovered through price increases, and together with these other
self-help initiatives were able to more than offset the other structural non-raw material
inflation (e.g. wages and energy) that the Group faces across the many countries in which
it operates. Year-on-year adjusted operating profit growth in the second half of 2017
improved to 15% and margins increased year-on-year by 100bps.
Acquisition
As previously reported, Coats acquired 100% of the share capital of Patrick Yarn Mill
in December 2017.
Patrick Yarn Mill is a manufacturer of high-performance engineered yarns based in North
Carolina, US. It specialises in cut-resistant and flame retardant yarns. It also produces yarns
from recycled fibres marketed under its earthspun® trademarks and with its large solar
installation promotes its earth friendly yarns as 'Spun by the Sun'.
Founded in 1963, Patrick Yarn Mill has 150 employees. Patrick Yarn Mill's unique spinning
competencies in engineered performance yarns offer an opportunity to expand Coats' existing
Performance Materials portfolio as well as to extend its innovation capability. Coats will
support Patrick Yarn Mill's expansion into high-growth markets by leveraging Coats' unrivalled
geographic footprint, breadth of global customer relationships and strong corporate brand.
The initial consideration is $21 million, with further payments of up to $4 million over a three
year period to 2020, contingent on Patrick Yarn Mill achieving certain performance targets.
The acquisition will be funded from Coats' operating cash flows and existing debt facilities.
In 2017, the business achieved revenues of $42 million, and an adjusted operating profit of
$2 million. It is our intention to grow revenues and operating margins going forward through
identified revenue and cost synergies as a result of Patrick Yarn Mill being part of the wider
Coats group of companies.
29
OPERATING
REVIEW CONTINUED
Crafts
Highlights for 2017:
New management team in
place for North America Crafts
Progress in integration
of Latin American business
into Industrial
Priorities for 2018
Focus on areas of consumer
marketing, product innovation
and digital offerings
Crafts
Revenue
By business
Handknittings
Needlecrafts2
Total
By region
North America
Full integration of Latin America
Latin America
business into Industrial
Total
Adjusted operating profit3
2017
$m
20161
$m
Inc/(dec)
%
2016
CER1
CER1
inc/(dec)
%
108
105
213
149
64
213
7
121
115
(11)%
(8)%
122
117
(11)%
(10)%
236
(10)%
239
(11)%
176
(15)%
176
(15)%
60
6%
63
1%
236
(10)%
239
(11)%
11
(34)%
11
(34)%
Adjusted operating margin3
3.3%
4.6% (120)bps
4.5% (120)bps
1 2016 figures at 2017 exchange rates.
2 Includes other textile craft products such as consumer sewings and lifestyle fabrics.
3 On an adjusted basis which excludes exceptional and acquisition related items.
Crafts revenues declined 10% on a reported basis (11% CER decline). This was as a result of
the business disruption caused by the tornado strike in January at the main Crafts distribution
centre in Albany, Georgia, USA, along with continued tough underlying market conditions in
the North American market which persisted throughout the second half of the year and the
adverse impact from the introduction of own-label handknitting products at a major customer.
The revenue decline was broadly split evenly across both the Handknittings and Needlecrafts
categories. Revenues in the smaller Latin America market grew by 1% on a CER basis (6%
reported), with growth in the key markets of Brazil and Argentina.
Despite the continued difficult trading conditions, the division has continued to make good
progress in the areas of enhancing its online offerings and new product launches. New
management is now in place in our North American Crafts business who will be delivering
a revised and refocused strategy, and the previously announced integration of the Latin
American business with the Industrial operations remains on-going. From 2018, it is
anticipated that Latin America Crafts will be reported as part of the Industrial division
once the integration of activities is finalised.
Adjusted operating margins in the Crafts Division reduced to 3.3% (2016: 4.5%) and adjusted
operating profits were down 34% to $7 million (2016: $11 million). This margin reduction
was mainly due to non-trading items that occurred in the second half. These included
reorganisation costs in relation to the North American management team, specific business
disruption costs in relation to the Albany tornado, and asset write-downs following the sale
of the non-core lifestyle fabrics business (due to complete in H1 2018). Offsetting the above,
were the realisation of the initial cost synergies anticipated in the Latin American business
ahead of its eventual full integration with the Industrial business. First half adjusted operating
margins of 5.3% benefitted partially from the profit insurance cover in relation to lost revenues
resulting from the tornado.
30
FINANCIAL
REVIEW CONTINUED
Simon Boddie
Chief Financial Officer
Highlights for 2017:
Successful completion of
$225m debut issue in US
placement
Settlement concluded with all
three UK pension schemes
Improvement in cash generation
driven by increased profitability,
effectively controlled net
working capital and lower
effective tax rate
Priorities for 2018
Implementing Connecting
for Growth programme
Continuing integration
of recent acquisition
Delivery of sales, earnings
and cash growth
Alternative Performance
Measures – see note 37
on page 143
for the year increased 30% to 6.4 cents (2016: 4.9
Financial summary
Adjusted earnings per share (‘EPS’)
cents). This growth was driven by higher adjusted operating profits (11% CER growth)
a reduction in effective tax rate (4% reduction in underlying rate, including a $3 million
deferred tax credit resulting from the recent US tax reforms), a $4 million reduction in the
IAS19 pension finance charge (albeit offset to some extent by the related decrease in interest
income on reduced parent group cash), and foreign exchange gains of $2 million (2016:
$4 million losses) primarily relating to mark-to-market (MTM) adjustments. Excluding the year-
on-year impact of the foreign exchange gains / losses (net of tax), and the deferred tax credit
as a result of the recently announced US tax reforms, adjusted EPS growth would have been
17%. The Company generated a reported attributable profit from continuing operations of
$81 million compared to $64 million in 2016, primarily due to the reasons set out above.
,
was $87 million in 2017, a 12% increase on 2016 ($78 million),
Adjusted free cash flow
driven by improved profitability, which was partially offset by the anticipated increase in capital
expenditure to $50 million (2016: $40 million); the increase in which was predominantly in
the second half. The reduction in net cash from $78 million at the end of 2016 to a net debt
position at 31 December 2017 of $241 million primarily reflects the upfront deficit recovery
payments made into the three UK defined benefit pension schemes in the first half of the
year following settlement with the Trustees of those schemes (see later for further details).
An important metric for the operating business is the leverage ratio of net debt (excluding
parent group cash) to adjusted EBITDA, which further improved to 1.1x adjusted EBITDA
at 31 December 2017 (31 December 2016: 1.3x).
Return on capital employed
operating profits and controlled working capital were offset by the anticipated increase in
capital expenditure.
remained in line with 2016 at 35%, as higher adjusted
Connecting for Growth programme
Connecting for Growth is a two year transformation programme to drive agility across the
organisation, enabling the next phase of growth at Coats, and accelerating our transition from
the industrial age to the digital age. We are building on our current strong position in order to
respond to the constantly changing market demands and adding value to our customers by
being agile partners with an increased emphasis on speed, quality, value, innovation and
corporate responsibility. This programme will focus on simplification across many aspects of
the organisation, connecting the business end to end, and releasing funds for reinvestment in
our customer-focussed initiatives and our people. Examples of reinvestment will include further
building our innovation capabilities, digital tools (e.g. further connecting our global
manufacturing assets), and developing our people (e.g. skills upgrades relevant to a digital
world), all of which are key to delivering our wider Group strategy.
We have identified potential gross annualised operating cost savings of $25 million by 2020.
After reinvestments of c.$10 million per annum, we expect the programme to deliver net
annualised operating cost savings of $15 million by 2020. The total reorganisation cost to
achieve these operating cost savings is estimated to be $30 million, with the majority of these
reorganisation costs incurred in 2018 (as these costs are not expected to form part of the on-
going cost base, these will be excluded from adjusted operating profit). In 2018, we anticipate
there to be net operating cost savings, after reinvestments, of $5 million (reflected within
adjusted operating profit).
We expect that the majority of savings will be achieved from reducing complexity in the
existing Group. For example, transitioning from market-focussed support functions (e.g.
Finance, HR, Technology) to realigned globally integrated support functions, redesigning the
way we service a number of our peripheral markets, and moving from a business which is
currently operated by individual local management teams into 10 scalable clusters. The
programme extends beyond productivity improvements to delivering process excellence,
improving customer satisfaction, and creating a wider pool of world class talent, all of which
underpin our growth strategy and increase shareholder value.
Financial review
Adjusted EPS
for the year increased 30% to 6.4 cents (2016: 4.9 cents). This was driven by
the higher operating profit, improvements in the underlying tax rate, the deferred tax credit as
a result of the recently announced US tax reforms, a lower pension finance charge (offset to
some extent by decrease in interest income on reduced parent group cash), and MTM foreign
31
FINANCIAL
REVIEW CONTINUED
exchange gains (2016: foreign exchange losses). Excluding the year-on-year impact of the
MTM foreign exchange gains/losses (net of tax), and the one-off impact of the US tax reforms
on deferred tax balances, adjusted EPS growth would have been 17%. Reported EPS of 5.8
cents compares to 4.3 cents in 2016 with the increase predominantly due to the above factors.
Non-operating results
Net finance costs in the period were $23.0 million, significantly down from $31.6 million in
2016. The key drivers of the reduction in net finance costs in the period were $2 million
foreign exchange gains mainly in relation to MTM adjustments for the year ended 31
December 2017 (2016: $4 million losses), and a $4 million reduction in the IAS19 pension
finance charge to $9.4 million (2016: $13.6 million). The latter was following the injection of
parent group cash into the three UK defined benefit schemes which reduced the net IAS19
liabilities accordingly, although the reduced pension finance charge was offset to some extent
by reduced interest income on the lower parent group cash balance. Interest on borrowings
was broadly flat year-on-year at $14.5 million (2016 $14.4 million); underlying interest was
lower partly due to fixed interest rate swaps coming to an end, as well as lower net debt levels
during the year. However, this was offset by a $2 million charge in relation to accelerated
amortisation of capitalised facility fees in relation to the previous 2015 refinancing (following
the USPP issue and refinancing of existing bank debt in December 2017).
The taxation charge for 2017 was $47.8 million (2016: $46.8 million) resulting in a reported
tax rate of 33% (2016: 38%). Excluding exceptional and acquisition related items and the
impact of IAS19 finance charges, the underlying effective rate on pre-tax profits reduced by
400bps to 30% (2016: 34%). This reduction includes a non-cash tax credit of $3.0 million
(200 bps) as a result of the revaluation of the net US deferred tax liabilities following the tax
reform measures introduced by the US Government in the Tax Cuts & Jobs Act. The Group’s
underlying effective tax rate excluding this one-off impact is 32%, a reduction of 200bps
from 2016 which was driven by a reduction in unrelieved losses, together with a change
in profit mix for the period.
We have reviewed the available detail of the Tax Cuts & Jobs Act but do not expect the
changes to have a significant impact on the Group’s future underlying effective tax rate
despite the reduction in the headline US Corporate Income Tax rate from 35% to 21% with
effect from 1 January 2018. The benefit of the rate reduction is offset by provisions to limit net
interest expense to 30% of adjusted taxable income and the loss of the domestic production
activities deduction, which our US operations have historically benefitted from. Further detail
and guidance is expected to be released in the coming months and we will continue to
monitor this.
Profit attributable to minority interests was $14.3 million (2016: $11.9 million) and was
predominantly related to Coats’ operations in Vietnam and Bangladesh (in which it has
controlling interests).
Exceptional and acquisition related items
Net exceptional and acquisition related items before taxation were $9.1 million in 2017. These
are related to the amortisation of intangible assets acquired in the recent acquisitions ($2.1
million), contingent consideration in relation to these acquisitions ($4.0 million), acquisition
transaction costs ($0.4 million), and the closure costs of a joint venture entity ($2.6 million).
In 2016 net exceptional and acquisition related items before taxation totalled $4.6 million.
Lower Passaic River (‘LPR’)
In 2010, the US Environmental Protection Agency (‘EPA’) notified Coats & Clark, Inc. (‘CC’),
a subsidiary within the Coats Group, that it was a ‘potentially responsible party’ under the US
Superfund law for investigation and remediation costs at the 17 mile Lower Passaic River Study
Area (‘LPR’) in New Jersey in respect of alleged operations of a predecessor’s former facilities in
that area prior to 1950. CC has concluded that it was not responsible for the contaminants
and environmental damage that are the primary focus of the EPA process.
In 2015, a provision of $15.8 million was recorded for remediation costs and associated legal
and professional costs based on CC’s estimated share of de minimis costs for appropriate
remedies, net of insurance reimbursements.
In September 2017, in response to comments from various parties that all parties should be
included in the same allocation process, EPA expanded the process to include private parties
that are alleged to have discharged the relevant contaminants, and asked the allocator to
Alternative Performance
Measures – see note 37
on page 143
32
FINANCIAL
REVIEW CONTINUED
make a determination about the respective shares of all parties. CC has previously indicated
to EPA that it is not responsible for the primary risk drivers. The duration and scope of the
allocation process have yet to be determined. No additional provision has been recorded
during 2017.
See note 28 for further details.
Investment
Capital expenditure in the year, in addition to ongoing maintenance requirements, related
to new product development, process improvements, capacity expansion, health and safety,
and environmental spend. The latter, include projects such as effluent treatment plants which
enable a thread plant to recycle more process water, or even to operate with zero discharges.
These help to ensure that Coats maintains its strong corporate responsibility credentials and
ethical reputation in the industry as well as benefitting the local communities that we do
business in. Total capital spend for the year amounted to $50 million (1.2x depreciation
and amortisation), in line with the previously flagged increase on the 2016 capital spend
of $40 million (1.0x depreciation and amortisation).
In order to continue to support our growth strategy and reinforce our strong environmental
compliance credentials we anticipate capital spend to remain in the $50-60 million range
for 2018.
was $87 million in 2017, which was a 12% increase on 2016
Cash flow
Adjusted free cash flow
($78 million). This was due to increased profitability, effectively controlled net working capital
and lower effective tax rates, which more than offset the anticipated second half increase
in capital expenditure ($8 million increase vs H2 2016). This is a key metric for the Group in
relation to underlying cash flow generation and is before annual pension recovery payments,
acquisitions and dividends, and excludes exceptional items.
Adjusted EBITDA
was $216 million (2016: $199 million). Net working capital has been
effectively controlled at 10% of Group sales (2016: 10%), driven by an improvement in
days payable outstanding which was offset by an increase in stocks to support service delivery,
along with a marginal improvement in days sales outstanding. Interest paid was $14 million,
which was in line with 2016. Tax paid was $61 million, a $3 million increase on 2016, where
higher profitability in 2017 was offset by the overall reduction in the Group’s underlying
effective tax rate driven by favourable profit mix.
On a non-adjusted basis, free cash outflow was $330 million, compared to $84 million outflow
in 2016. The increase was primarily related to $373 million of payments into the three UK
defined benefit pension schemes (2016: $99 million) following settlement with their respective
trustees (including $348 million of upfront settlement payments out of parent group cash
made in the first half), shareholder dividends of $18 million (2016: nil), offset by a lower
spend on acquisitions in 2017 of $20 million (2016: $36 million).
Adjusted free cash flow 2017 ($m)
Alternative Performance
Measures – see note 37
on page 143
33
FINANCIAL
REVIEW CONTINUED
Balance sheet
The Group had a net debt position
2016: net cash $78 million). At 31 December 2016 the net cash position of $78 million
included parent group cash of $343 million and operating business net debt of $265 million.
Following the settlement of the three UK defined benefit pension schemes in the first
half of 2017 the parent group cash has now reduced to $0.5 million, with $348 million
(£270 million) up-front settlement payments into those three schemes.
of $241 million at 31 December 2017 (31 December
of $242 million at the end 2017. This
The Coats operating business had a net debt position
was below 31 December 2016 ($265 million) primarily due to the adjusted free cash flow
in the last year ($87 million)
, offset by on-going pension deficit recovery payments (including
administrative expenses) now paid out of the operating business net debt following settlement
($25 million), shareholder dividends ($18 million) and the acquisition of Patrick Yarn Mill
($20 million). An important metric for the operating business is the leverage ratio of net debt
(excluding parent group cash) to adjusted EBITDA
to 1.1x adjusted EBITDA of the last twelve months (1.3x at 31 December 2016).
. Net debt at 31 December 2017 improved
Following the binding settlement agreements agreed with the trustees of the three UK
pension schemes (see further details below) it was determined that the functional currency
of Coats Group plc had changed from Great Britain pounds sterling to the United States
dollars, effective 1 March 2017. This change has been accounted for prospectively (in line
with accounting standards) and generated exchange differences in the year that reduced
share capital by $40 million, reduced the capital reduction reserve by $25 million, and reduced
the share premium account by $11 million. Equivalent gains were booked in the translation
reserve and as a result distributable reserves have not been impacted by this change.
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 $163 million as at 31 December 2017,
down from $627 million at 31 December 2016.
The deficits in the Group’s UK defined benefit schemes, namely the UK Coats Plan, and
Brunel and Staveley schemes, decreased to $106 million (£79 million) from the position at
31 December 2016 ($576 million, £467 million). The decrease in liabilities in the period of
$470 million primarily consisted of deficit repair payments of $373 million (which included
agreed upfront settlement payments of £270 million ($348 million) made in the first half),
actuarial gains of $141 million (mainly related to asset outperformance) offset by the
impact of foreign exchange on Sterling liabilities of $31 million.
IAS19 deficit
Coats Plan
Brunel
Staveley
UK defined benefit schemes
Other Coats net employee benefit obligations
Total
31 Dec
2017
$m
31 Dec
2016
$m
31 Dec
2017
$m
31 Dec
2016
£m
58
22
(1)
79
378
52
37
467
78
30
(2)
106
57
163
467
64
45
576
51
627
Pensions investigations
As previously reported in the announcements of 16 December 2016, 17 February 2017, and
26 June 2017 Coats has signed binding settlement agreements with the Trustees of all three
UK pension schemes; the UK Coats Pension Plan, the Brunel Holdings Pension scheme and the
Staveley Industries Retirement Benefit Scheme. The settlements with the three schemes were
completed in the first half of 2017, and as a result the UK Pension Regulator confirmed that
its regulatory action has ceased in relation to the warning notices issued to the Company in
2013 and 2014.
Alternative Performance
Measures – see note 37
on page 143
34
FINANCIAL
REVIEW CONTINUED
The principal commercial terms of the combined three settlements are:
Financial support on the basis of a combined technical provisions deficit as at April 2015
of £582 million ($786 million) to be repaired by:
a) upfront payments totalling £329.5 million ($447 million) from the Company's
parent group cash paid directly into the schemes (inclusive of the agreed Recovery Plan
contributions paid to the Brunel and Staveley schemes since 1 January 2016); and
b) annual deficit contributions totalling £17.5 million ($24 million), including estimated
administration expenses and levies of £5 million p.a. to be paid until 2028.
Access to sponsor support from Coats for future funding needs together with a
Company guarantee.
As a result of the settlements reached with the three schemes, the total cash Recovery Plan
contributions in 2017, including estimated administration expenses and levies, were £290
million ($373 million). This comprised £270 million upfront settlement payments (which were
paid in H1), and £20 million annual deficit contributions, including estimated administration
expenses and levies. These cash payments continue to be excluded from the Group's adjusted
Free Cash Flow.
Triennial funding valuations
The next triennial funding valuations for the Coats UK, Brunel and Staveley schemes have
an effective date of 31 March 2018.
Although there is a relatively small IAS19 accounting deficit as at 31 December 2017 in
comparison to the defined benefit obligations, the pension trustees are required to calculate
the funding position on the more prudent ‘technical provisions’ basis. In addition, real UK
interest rates have reduced since the first quarter of 2015 and in aggregate the UK schemes
now hedge c.70% of interest rate and inflation linked liabilities. These triennial valuations
will determine the Group’s agreed future contribution requirements and the process is
expected to be completed in the first half of 2019.
Refinancing
As previously reported, in December, the Group completed a $225 million issue of US Private
Placement (USPP) notes. The notes, which represent our debut issue in the USPP market,
have a maturity of seven and ten years and have been issued on investment grade terms.
Simultaneously, Coats agreed a new $350 million five-year bank facility with a syndicate
mainly comprising its existing lenders. The USPP notes and new bank facility replace
Coats' $680 million bank facility that was due to mature in March 2020. This refinancing
has achieved the Group's aims of diversifying the sources of debt financing and extending
their maturity out to 2027.
Dividend
Coats has a track record of delivering good levels of free cash through profitable sales growth,
delivering self-help initiatives and investing in organic growth opportunities. The Board aims
to use this free cash flow to fund its pension schemes, self-finance bolt-on acquisitions, and
make returns to shareholders. Over time, and as underlying earnings and cash flows increase,
the Board intends to pursue a progressive dividend policy.
As a result of this established policy, and reflecting the financial performance in 2017,
the Board is proposing a final dividend of 1.00c per share which, combined with the interim
divided of 0.44c per share, gives a total dividend for the year of 1.44c (pro-forma 2016
full year dividend: 1.25c per share), which represents a 15% increase on the previous year.
Subject to approval at the forthcoming AGM, the final dividend will be paid on 29 May
2018 to ordinary shareholders on the register at 4 May 2018, with an ex-dividend date
of 3 May 2018.
35
FINANCIAL
REVIEW CONTINUED
Outlook
We enter 2018 in a strong position, with continued momentum in our Apparel and Footwear
and hi-tech Performance Materials businesses. Whilst market conditions in our North American
Crafts business are expected to remain challenging, our new management team has
commenced implementation of a refocused strategy.
We expect 2018 adjusted operating profits to benefit from the incremental full year
contribution from the Patrick Yarn Mill acquisition, and the anticipated first year benefits from
the Connecting for Growth programme. As such, 2018 adjusted operating profits are expected
to be slightly ahead of previous management expectations.
We will also continue to focus on cash flow generation in order to allow us to continue to
reinvest in both organic and inorganic growth opportunities.
Simon Boddie
Chief Financial Officer
6 March 2018
The Strategic Report comprising pages 1 to 36 was approved by the Board and signed
on its behalf by the Group Chief Executive.
Rajiv Sharma
Group Chief Executive
36
CHAIRMAN’S
INTRODUCTION
Highlights for 2017
Role in review and setting
of new five year Group strategy
Appointment of two new
Non-Executive Directors
and meeting Hampton-
Alexander recommendations
on boardroom diversity
Time during the year allocated
to risk deep dives
Priorities for 2018
Oversight of long term strategy
and acquisitions
Risks which may materially
impact Group strategy and
long term viability
Continue programme of
site visits around Coats
43
Section contents
Chairman’s Introduction 37
39
Board of Directors
Group Executive Team
42
Corporate
Governance Report
Nomination
Committee Report
Audit and Risk
Committee Report
Directors’
Remuneration Report
UK Corporate
Governance Code Report 68
Directors’ Report
71
Directors’ Responsibilities
Statement
55
76
50
48
As a listed company, Coats is required to
report on how it has applied the principles
of the Code and this report is set out in the
following pages.
A statement of compliance with the provisions
of the Code can be found on page 68.
‘SOLID CORPORATE GOVERNANCE IS THE
FOUNDATION ON WHICH THE BUSINESS
CONTINUES TO BE MANAGED.’
Dear Shareholder
I am pleased to report to you the Governance section of the 2017 Annual Report and further
to confirm that Coats Group plc (Coats) has complied fully with the principles and provisions
of the 2016 UK Code of Corporate Governance (the Code).
This report describes Coats’ corporate governance structures and procedures and the roles
played by each of the Board, its Committees and the Group Executive Team (GET) in these.
I believe that our corporate governance framework – set out on the following page – is
appropriate for a company of our size and FTSE 250 status and supports the delivery of the
Group’s strategic objectives whilst also ensuring accountability, transparency and fairness
in our dealings with all of our stakeholders, in particular our shareholders, customers,
employees and suppliers.
Culture and diversity
At Coats, we have long believed that supporting and respecting all aspects of the diversity of
our people is an important contributor to business performance as well as being the right thing
to do. Having a diverse range of Board members is critical, as Board decisions set the tone
and culture for the organisation, and diversity and a broad range of experience help generate
the sparks that ensure our decisions are never the result of ‘group think’ or treading all-too
familiar paths.
Consequently, I am pleased to report the Board has appointed two new female Directors,
which brings the percentage of female representation on the Board to over 30%. In December
2017 Echo Lu joined the Board and Anne Fahy joined on 1 March 2018. Echo brings 20 years
of global HR operations and management expertise, and direct managerial experience of
global companies operating in markets in Asia. Anne has a wealth of financial experience from
her time at BP including knowledge of the full range of audit matters and financial controls.
Anne will also become Chairman of our Audit and Risk Committee in place of Ruth Anderson
who will step down from the Board following our Annual General Meeting on 16 May 2018.
Compliance and accountability
Significant time and resource is given to governance matters by the Board and within
the everyday operations of the Group. This ensures compliance within the framework
of regulations but is also central to delivering sustainable business success.
We believe that reputation is critical to commercial success and can only be enhanced
by behaviours of which we are all proud. A key element of ensuring sound governance
is guaranteeing an appropriate system of controls and accountability.
Details of the Group’s Committees and their reports are contained in this section of the Report.
Activities in the year
In addition to time spent at Board and Committee meetings, the Directors participate in
strategy days and Company-related events such as the Global Leadership Conference and
visits to the Company’s sites worldwide.
Two such visits in 2017 were to operations in Turkey and India where the Board had the
opportunity to deepen its understanding of the business and culture of the Company
and the important role we play for a broad range of stakeholder groups.
Mike Clasper
Chairman
6 March 2018
37
CHAIRMAN’S
INTRODUCTION CONTINUED
The UK Corporate Governance
code (April 2016) can be found
on www.FRC.org.uk
Our governance activities are aligned to the Code and this report is structured accordingly:
Leadership
The Board recognises the need for clear divisions of responsibility in order to provide leadership
for the long term success of Coats. The Corporate Governance Report details our approach in
these matters and our relations with shareholders.
The Terms of reference of each
Committee are available at
www.coats.com/governance
.
Effectiveness
The Board recognises that to operate effectively the organisation requires the correct balance of
skills, experience and diversity. The report of the Nomination Committee outlines our approach
in this area.
Accountability
A key element of ensuring sound governance is guaranteeing an appropriate system of controls
and accountability. The report of the Audit and Risk Committee provides an update in this area.
Remuneration
Director remuneration is set to promote the long term success of Coats. The report of the
Remuneration Committee sets out our approach in this area.
Governance Code Report
The UK Governance Code Report and the Directors’ Report outline our compliance with all
aspects of the Code.
Our governance framework
Responsibility for good governance rests with the Board; this is underpinned by an effective
governance framework which, the Board believes, fits the requirements of Coats’ business.
The Board retains certain matters for its own preserve; other specific responsibilities are
delegated to its principal Committees, namely the Audit and Risk Committee, the Nomination
Committee and the Remuneration Committee, and to senior executive management.
d
r
a
o
B
m
o
r
f
d
e
t
a
g
e
l
e
d
y
t
i
l
i
b
i
s
n
o
p
s
e
R
Board of Directors
For details of individual roles and
responsibilities, see page 39
Engagement
Shareholders
Engagement
Stakeholders internal
and external
Nomination
Committee
See page 48
Remuneration
Committee
See page 55
Audit and Risk
Committee
See page 50
Pensions
Committee
See page 43
Disclosure
Committee
See page 44
Group Chief Executive
Group Executive Team
For details of individual roles and
responsibilities, see page 42
38
BOARD OF DIRECTORS
Key to Committee membership
Audit and Risk
Nomination
Remuneration
Chair of Committee
Changes to the composition of the
Board since 1 January 2017 up to
the date of this report are detailed
below and also in the Directors’
Report on page 71:
Hongyen ‘Echo’ Lu,
Non-Executive Director
Appointed 1 December 2017
Anne Fahy,
Non-Executive Director
Appointed 1 March 2018
Mike Clasper CBE, Chairman
Key skills and experience: Mike has over 35 years’ experience in general management
and marketing for global companies, with a particular focus on brands and business services.
Other current appointments: He is currently the Senior Independent Director at Serco Group
plc, a leading provider of public services and Chairman of Bioss, an organisation and people
development consultancy. He is also a trustee of the Chartered Management Institute (CMI)
a governor of the Royal Shakespeare Company (RSC) and an Advisory Board member for
Arora International.
Previous relevant experience: Mike was until recently Chairman of Which? Ltd. and has
previously served as Chief Executive Officer of BAA plc, Chairman of HM Revenue & Customs,
Operational Managing Director at Terra Firma, and held a number of senior management
positions at Procter & Gamble. He has also been the Senior Independent Non-Executive Director
of ITV plc, Chairman of the West London Consortium, and Chairman of the Market Place
Impact Taskforce of Business in the Community.
Qualifications: Mike holds an MA in Engineering from the University of Cambridge.
Rajiv Sharma, Group Chief Executive
Key skills and experience: Rajiv became Group Chief Executive on 1 January, 2017, having
served as an Executive Director since December, 2014. He has nearly 30 years’ of experience
which includes commercial, operations, M&A, strategy, digital and general management. Rajiv
joined Coats in November 2010 as Global CEO Industrial and was responsible for developing
and executing a growth strategy. He has lived and worked in the US, Europe and Asia.
Other current appointments: Rajiv does not currently have any other external appointments.
Previous relevant experience: Rajiv has multi industry global experience. He has managed
complex businesses with blue chip companies that include Saab, Honeywell, GE and Shell.
The majority of his career has been dedicated to growing or turning around businesses and
he has been on the board of joint ventures at both GE and Shell.
Qualifications: Rajiv holds a degree in Mechanical Engineering, as well as an MBA from the
University of Pittsburgh, USA.
Simon Boddie, Chief Financial Officer
Key skills and experience: Simon has over 30 years’ experience of working in finance
with extensive knowledge of international operations, emerging markets and digital.
Other current appointments: He is currently a Non-Executive Director of PageGroup plc,
a specialist recruitment company, where he also chairs the audit committee.
Previous relevant experience: Simon was previously Group Finance Director for ten years at
Electrocomponents plc, a FTSE 250 industrial distribution business. Prior to Electrocomponents,
Simon worked for Diageo, the leading international drinks business, where he held a variety
of senior finance positions. His career started at Price Waterhouse, where he qualified as a
Chartered Accountant, before working in the Corporate Finance Team of Hill Samuel Bank.
Qualifications: Simon is a member of the Institute of Chartered Accountants in England
and Wales and has an MA in Economics from the University of Cambridge.
Nicholas Bull, Senior Independent Non-Executive Director
Key skills and experience: Nicholas is a qualified chartered accountant with over 30 years’
experience in global banking.
Other current appointments: He is currently Chairman of the investment trust, Fidelity China
Special Situations plc, as well as a trustee of the Design Museum, the Conran Foundation and
a member of the Council of the University of Exeter.
Previous relevant experience: Nicholas has served as Chairman of De Vere, the hotel and
leisure group. He has also served as Chairman of the Advisory Board of City stockbroker,
Westhouse Securities and of Smith’s Corporate Advisory Limited. Prior to that he had a career
in banking with Morgan Grenfell (subsequently Deutsche Bank), Société Générale and ABN
AMRO working in London, Hong Kong, Singapore and Sydney.
Qualifications: Nicholas has a BSc in Chemistry from the University of Exeter and is a Fellow
of the Institute of Chartered Accountants in England and Wales.
39
BOARD OF DIRECTORS
CONTINUED
Mike Allen, Independent Non-Executive Director
Key skills and experience: Mike has over 25 years’ experience in investment banking
and general management both in New Zealand and the UK.
Other current appointments: He is currently Chairman of Investore Property Limited,
Director of Godfrey Hirst Australia and Taumata Forests Limited, and an Independent Director
of China Construction Bank (NZ) Limited and Tainui Group Holdings.
Previous relevant experience: Mike has previously held a variety of senior leadership roles
in New Zealand at Southpac Corporation and Westpac.
Qualifications: Mike has an LLB / BCom from Otago University, New Zealand.
Ruth Anderson, Independent Non-Executive Director
Key skills and experience: Ruth is a chartered accountant with more than 30 years’ experience
of working for the accounting firm KPMG LLP.
Other current appointments: Ruth is a Non-Executive Director at Ocado Group plc and
Travis Perkins plc and chairs the audit committees at both. She is also a Director of The Royal
Parks and a Trustee of the charity The Duke of Edinburgh’s Award.
Previous relevant experience: During her career with the accounting firm KPMG LLP Ruth
worked from student accountant to UK Vice Chairman and advised many global businesses.
Qualifications: Ruth has a BA in French and Spanish from the University of Bradford. She is
a Fellow of the Institute of Chartered Accountants in England and Wales and a member of
the Chartered Institute of Taxation.
David Gosnell, Independent Non-Executive Director
Key skills and experience: David has over 30 years’ experience in supply and procurement
strategy and execution.
Other current appointments: David is currently Non-Executive Director of Brambles Ltd,
the supply chain solutions provider and Chairman of Old Bushmills Distillery Company Ltd.
Previous relevant experience: David retired from Diageo plc in 2014 where he had most
recently held the role of President of Global Supply and Procurement. He led a global team
of 9,000 people around the world across manufacturing, logistics and technical operations
as well as managing Diageo’s global procurement budget. Prior to joining Diageo, David
spent 25 years at HJ Heinz in various operational roles.
Qualifications: David holds a Bachelor of Science degree in Electrical and Electronic
Engineering from Middlesex University and has completed Supply Chain Manufacturing –
Drive Operational Excellence at INSEAD (Singapore).
Hongyan Echo (‘Echo’) Lu, Independent Non-Executive Director
Key skills and experience: Echo has over 20 years’ of global HR, operations and general
management experience in retail and pharmaceutical industries across Europe, Asia and the US.
Other current appointments: Echo is currently the Managing Director of Holland & Barrett
International, a European health and wellbeing retailer.
Previous relevant experience: Echo previously served as the Managing Director of Homebase
Ltd as part of Home Retail Group plc and spent ten years at Tesco plc in a variety of senior
leadership roles, including Asia HR Director, Chief Operations Officer, China and Property
Director, UK / Ireland. Echo has previously been a Non-Executive Director of Dobbies Garden
Centres and served as a steering committee member of the Trestle Group Foundation,
a non-profit organisation which supports female entrepreneurs in emerging economies.
Qualifications: Echo has a Bachelor of Arts in International Economy and Finance from
Fudan University, Shanghai and a Master of Science in Industrial Relations and Human
Resources from West Virginia University.
Independence
Tenure
Diversity
Charts reflect Board composition as at date
of Annual Report publication.
40
BOARD OF DIRECTORS
CONTINUED
Key to Committee membership
Audit and Risk
Nomination
Remuneration
Chair of Committee
Membership details can
also be found online at
www.coats.com/aboutus
Fran Philip, Independent Non-Executive Director
Key skills and experience: Fran has over 30 years’ of apparel merchandising, product
innovation and branding experience having spent the majority of her career at the US retailer
LL Bean.
Other current appointments: Fran is currently a Non-Executive Director of a number of
US companies including Vera Bradley Inc., the accessories brand; Totes Isotoner, the accessories
manufacturer; Regent Holding, a home décor designer and importer; and an industry executive
for Freeman Spogli, a US private equity firm specialising in retail and consumer brands.
Previous relevant experience: Fran worked for several specialty chains such as The Gap,
Williams –Sonoma and The Nature Company. She joined LL Bean in 1994 as Director of Product
Development, Home Furnishings and went on to hold a number of roles including Vice President,
Affiliated Brands, before becoming Chief Merchandising Officer in 2002 until she retired in 2011.
Qualifications: Fran has a degree in English and Sociology from Bowdoin College, Maine, and
an MBA from the Harvard Business School.
Alan Rosling, CBE, Independent Non-Executive Director
Key skills and experience: Alan has wide international experience, especially in Asia, and has
worked in general management, strategy and business development roles across a number of
sectors including energy, textiles, retailing, banking and government.
Other current appointments: Alan is currently the Chairman of Griffin Growth Partners,
a specialist strategic advisory firm focused on growing markets in Asia and is a Director of
Constellation Alpha Capital Corporation. He is also co-founder of Kiran Energy, one of
India’s leading solar power developers.
Previous relevant experience: Until 2009 Alan was an Executive Director of Tata Sons Limited.
Prior to that he was Chairman of the Jardine Matheson Group in India, Strategy Development
Director at United Distillers and a member of The Policy Unit at No. 10 Downing Street. He was
CEO of Piersons, a division of Courtaulds Textiles, and an investment banker with S.G. Warburg
& Co.
Qualifications: Alan has an MA in History from the University of Cambridge and an MBA
from the Harvard Business School.
Anne Fahy, Independent Non-Executive Director
(Anne joined the Board as a Non-Executive Director on 1 March 2018)
Key skills and experience: Anne has over 25 years’ experience in global business,
financial markets and internal control.
Other current appointments: Anne is currently a Non-Executive Director of Interserve, an
international support services and construction company, SThree, a global staffing organisation
providing specialist recruitment services, and Nyrstar, a global multi-metals business. She is also
a Trustee of Save the Children.
Previous relevant experience: During her career at BP, Anne gained extensive experience
of global business, developing markets, risk management, internal control, compliance and
strategy development in the aviation, petrochemicals, trading and retail sectors.
Qualifications: Anne is a Fellow of the Institute of Chartered Accountants in Ireland and
a Bachelor of Commerce in Economics, Accounting and Business from University College
Galway, Ireland.
41
GROUP
EXECUTIVE TEAM
Membership details can
also be found online at
www.coats.com/aboutus
Rajiv Sharma, Group Chief Executive – for details see page 39.
Simon Boddie, Chief Financial Officer – for details see page 39.
Changes to the composition of the
GET since 1 January 2017 up to the
date of this report are shown below
Ashok Mathur served as Chief
Operations Officer Asia, until
he retired 30 April 2017.
Andy Speak served as Chief
Human Resources Officer until
he left 31 August 2017.
Monica McKee’s appointment
as Chief Human Resources Officer
was announced on 16 January
2018 and she will join 20 March
2018.
Shantanu Banerjee, President Performance Materials – Shantanu has 30 years’ of
experience working at Coats and has held a number of senior marketing and manufacturing
roles across North America and South Asia. Currently, as President of Performance Materials,
he is responsible for leading and growing the business in all geographic clusters around the
world by focusing on innovation and technology development.
Ronan Cox, Chief Transformation Officer – Ronan has over 20 years’ of experience at
Coats across sales, manufacturing and supply chain operations. As Chief Transformation
Officer he leads the ‘Connecting for Growth’ programme, a series of projects which each
address different aspects of reinventing Coats for the future and support the drive to a faster,
more profitable business delivering value for customers, employees and shareholders.
Adrian Elliott, President Apparel and Footwear – Adrian leads the Apparel and Footwear
segment at Coats providing a world class portfolio of threads, zips and trims to global brands
and manufacturers. He is primarily responsible for the development and delivery of value
adding products and customer propositions leading to sustainable and profitable sales growth.
Adrian has worked at Coats for over 25 years across several countries and continents.
Kevin Finn, Chief Operating Officer, Asia – Kevin is responsible for ensuring a safe,
respectful and inclusive working environment and sound internal controls across operations in
Asia. Kevin has over 30 years’ of experience working at Coats and held a range of operational
and management roles throughout the business globally. Most recently he was Managing
Director in China, with responsibility for country operations.
Hizmy Hassen, Chief Digital and Technology Officer – Hizmy has global responsibility for
Technology within the organisation and is responsible for leading on digitising Coats’ customer
facing interactions which will underpin sales growth and increased productivity. He has worked
at Coats for almost 20 years and across areas of Supply Chain, Technology and Digital.
Stuart Morgan, Chief Legal & Risk Officer and Group Company Secretary – Stuart joined
Coats in 2014 and is responsible for legal and compliance, governance, risk management,
communications and company secretarial matters. He was previously General Counsel, Global
Retail and Wealth with Lloyds Banking Group where he led international teams and provided
legal and regulatory advice, risk management guidance and strategic support.
Massimo Petronio, Chief Operating Officer, EMEA and LatAm – Massimo is responsible
for ensuring a safe, respectful and inclusive working environment and sound internal controls
across operations in both regions. He has over 30 years’ of experience of working at Coats,
most recently as Chief Industrial Operations Officer.
Michael Schofer, Chief Supply Chain Officer – Michael leads the supply chain business with
responsibility for procurement, manufacturing, logistics and the programme to digitise Coats'
supply chain. He has over 25 years’ experience at Coats and held leadership roles in General
Management, Supply Chain management, IT and large scale business reorganisation
throughout Coats. His previous role was as CEO of the Global Crafts Business.
Monica McKee, Chief Human Resources Officer (Monica will join on 20 March 2018)
Monica will join as Chief Human Resources Officer and will be responsible for delivering
Coats’ global HR strategy. This covers performance management, progression planning,
reward and talent acquisition. Previously Monica was Head of Human Resources, Corporate
Functions at Bristol-Myers Squibb where she also held a series of senior executive roles in
organisation design, change management and business partnership.
42
CORPORATE
GOVERNANCE REPORT
LEADERSHIP
Responsibilities
The Board
The Board’s role is to provide leadership of the Company, and it is responsible to the
shareholders for the long term success of the Company. This includes:
Monitoring and challenging performance against plan;
Co-developing strategy with executive management;
Leveraging Non-Executive Director expertise beyond the boardroom; and
Ensuring good corporate governance.
All matters are reserved for the Board unless specifically listed in the terms of reference for
Committees of the Board or where the Board has delegated authority. A delegated authorities
policy and schedule are reviewed by the Board annually.
Chairman
Mike Clasper, the Chairman, leads the Board, and is responsible for its effectiveness and
governance. He sets the tone for the Company and ensures that the links between the Board
and management and between the Board and shareholders are strong. He sets the Board
agenda and ensures that sufficient time is allocated to important matters.
Group Chief Executive
Rajiv Sharma is responsible for the day-to-day management of the Group’s operations, for
recommending the Group’s strategy to the Board and for implementing the strategy agreed
by the Board. He is supported in decision-making by Simon Boddie, Chief Financial Officer and
fellow Executive Director, and by a Group Executive Team (GET) comprised of senior managers.
Senior Independent Director (‘SID’)
In his role as the SID, Nicholas Bull provides a ‘sounding board’ for the Chairman and serves
as an intermediary for the other Directors when necessary. Nicholas is available to shareholders
if they have concerns which contact through the normal channels of Chairman, Group
Chief Executive or other Executive Directors have failed to resolve, or for which such contact
is inappropriate.
Non-Executive Directors
The role of the Non-Executive Directors is to provide constructive challenge to the executive
management, and to bring experience and objectivity to the Board’s discussion and decision-
making.They monitor the delivery of the Company’s strategy against the governance, risk and
control framework established by the Board. The Non-Executive Directors, led by the SID,
are also responsible for evaluating the performance of the Chairman.
Group Executive Team (GET)
The GET is responsible for the operational delivery of the Group’s strategy. This includes day-
to-day management of operations and responsibility for monitoring detailed performance
of all aspects of our business.
Company Secretary
Stuart Morgan is the Chief Legal & Risk Officer and Group Company Secretary. In his role as
Group Company Secretary, Stuart is responsible for working with the Chairman to develop
Board and Committee agendas and to ensure that all Board procedures are complied with.
Stuart also advises the Board on corporate governance, legal, regulatory and compliance
matters and developments.
Other Committees
Pensions
This ad hoc Committee has been established by resolution of the Board to act as a committee
to provide guidance on the actuarial valuations and investment strategies for the Company’s
three UK defined benefit pension schemes for such duration as determined by the Board. It is
known as the Pensions Committee. The Pensions Committee is chaired by Mike Allen, and its
other members are Simon Boddie, Nicholas Bull, and David Gosnell.
43
CORPORATE
GOVERNANCE REPORT CONTINUED
Disclosure
The Committee’s primary duty is to determine whether, what and when any Group
information needs to be disclosed to the market and to verify such information ahead of
its disclosure to the market via a Regulatory Information Service in accordance with the EU
Market Abuse Regulation and the Financial Conduct Authority’s Disclosure Guidance and
Transparency Rules. This includes providing appropriate reassurances to the Board and, as
required, individual Directors, and ensuring appropriate records are kept. The Committee
is chaired by Rajiv Sharma and its other members are Simon Boddie and Stuart Morgan.
Board meetings attendance
Appointment
date
Committee
Appointments*
Total meetings held
Chairman
Mike Clasper
20/02/14
Group Chief Executive
Rajiv Sharma
02/03/15
Chief Financial Officer
Simon Boddie
04/07/16
N
N
Board
11
11
11
11
Senior Independent
Director
Nicholas Bull
Non-Executive Directors
Mike Allen
Ruth Anderson
David Gosnell
Echo Lu**
Fran Philip
Alan Rosling
10/04/15
A / N
11
22/09/10
16/04/14
N / R
A / N
02/03/15
A / N / R
01/12/17
01/10/16
N / R
N / R
02/03/15
A / N / R
10
11
11
1/1
11
11
Audit
Committee
Nomination
Committee
Remuneration
Committee
6
6
6
6
6
2
2
2
2
2
2
2
2
2
3
3
3
1/1
3
3
*Key to Committee Appointments : A: Audit and Risk / N: Nominations / R: Remuneration
** Echo Lu attended the maximum possible number of meetings since joining the Board.
The Board met formally 11 times during the year and a number of sub-committee meetings
were also convened to deal with matters such as approval of the Trading Statement,
settlement of the Heads of Terms of the pensions matter with certain Trustees, and the final
approval of the interim and half year results. In addition, one Board meeting was devoted
exclusively to discussions on the Group’s strategy.
Noteworthy matters considered by the Board in 2017
Major projects and M&A activity
M&A discount rates
Capital structure
Refreshed Group Risk Register together with numerous principal and other risk deep dives
Corporate Responsibility
Employee Engagement Survey
Health and Safety
USPP and financing arrangements with banks
Dividend approach
Connecting for Growth strategic change programme
Investor Relations
Legal and litigation issues
2018 Budget and Medium Term Plan
Year end and half year results
44
CORPORATE
GOVERNANCE REPORT CONTINUED
Board support
Each Director has access to the advice and services of the Group Company Secretary. Where
necessary Directors may take independent professional advice at the Company’s expense.
No such independent advice was sought during the financial year. The Board receives regular
briefings from the Group Company Secretary on governance, legal and regulatory matters.
Before each Board meeting, papers are delivered electronically via a secure iPad accessible
web portal, which helps to ensure that Directors have time and resources to fulfil their duties.
The web portal includes a resource centre providing access to key information.
Time commitment
Each Director is aware of the need to allocate sufficient time to the Company to discharge
their responsibilities effectively. In addition to time spent at Board and Committee meetings,
the Directors attend strategy days and participate in Company-related events such as the
Global Leadership Conference and visits to the Company’s sites worldwide.
Directors’ interests and conflicts
The interests of the Directors (including interests of their connected persons) in the share
capital of the Company and its subsidiaries are set out in the Directors’ Remuneration Report
on pages 55 to 67.
There is an established process to capture details of any interests that a Director may have
which conflict with, or could potentially conflict with, the interests of the Company. The
Company’s Articles of Association permit the Board to authorise any actual or potential
conflicts of interest if considered appropriate. At each meeting the Board considers Directors’
conflicts of interest and Directors are reminded of their duty to disclose any conflicts and
potential conflicts, as well as any interests in the matters to be discussed at the meeting.
No Director, either during or since the end of the year under review, was or has become
interested in any material contract (not being a contract of employment) with the Company
or any of its subsidiaries.
Board effectiveness
Introduction
The Board recognises the importance of monitoring and seeking ways to enhance its
effectiveness in line with best practice corporate governance. Following the externally
facilitated Board effectiveness review in 2016 by an independent third party, Grand Shearman,
the Board conducted an internal effectiveness review in the last quarter of 2017.
Board effectiveness review
During 2017, the Board continued to reflect and act upon the various recommendations
which emerged from the 2016 Grand Shearman Board effectiveness review, which had
examined how the Directors engaged individually and collectively and how each Director
could further enhance the effective functioning of the Board and its Committees for the
benefit of the Group.
In the last quarter of 2017, the Board undertook an internal review which considered progress
against the various recommendations in the 2016 review along with any further areas for
focus. The review found a strong agreement that good progress had been made against all
the recommendations in the 2016 review, and concluded that the Board should continue to
focus in particular on:
Striking the optimal balance between the breadth and the depth of the issues it discusses;
Ensuring it remains in a position to provide informed oversight of the Group’s ‘Digital’
agenda; and
Using pre-education sessions to help prepare Directors for discussions on key evolving
business areas.
45
CORPORATE
GOVERNANCE REPORT CONTINUED
In the wake of this internal review, actions have been agreed to ensure further progress
against these areas in 2018, including, in relation to the Board’s role in oversight of the
‘Digital’ agenda, appropriately leveraging external market expertise.
In addition, during the year Nicholas Bull led an assessment of my performance in
discussion with the other Non-Executive Directors.
Following these reviews, I am satisfied that the Board and its Committees are performing
effectively and that the balance of skill, experience, diversity, independence and knowledge
of the Group are sufficient to enable the Directors to discharge their respective duties and
responsibilities effectively and I believe the Board has a sufficient balance of diversity.
Board improvement
The Chairman in conjunction with the Group Company Secretary is responsible for the
ongoing development and training of the Non-Executive Directors. The Board receives
reports from the Group Company Secretary on relevant legal and governance issues
at Board meetings.
On appointment, Directors are given an induction and training programme – details of
Echo Lu’s induction programme can be found in the Nomination Committee Report on
page 49. The Directors receive information including Board and Committee packs in a
timely manner and have access to all relevant information and staff.
UK Corporate Governance Code Compliance Statement
For the year ended 31 December 2017, we are pleased to report that the principles of
the 2016 UK Corporate Governance Code have been applied and the Company complied
in full with the provisions of the Code.
46
CORPORATE
GOVERNANCE REPORT CONTINUED
RELATIONS WITH
SHAREHOLDERS
‘BOARD MEMBERS TAKE AN ACTIVE ROLE IN
ENGAGING WITH SHAREHOLDERS, BOTH IN
PRIVATE MEETINGS AND IN WIDER FORUMS
SUCH AS THE ANNUAL GENERAL MEETING.’
The Chairman and the Senior Independent Director aim to meet some of the major
institutional investors at least once per year and are available to meet other investors on
request. The Chairman shares feedback from these meetings with the wider Board.
The Board receives regular updates on investor communication activity, changes to the
shareholder register, analysis of share price performance and particular investment themes
such as Environmental, Social and Governance compliance (ESG), and the Chairman
ensures that any views expressed by shareholders are communicated to the Board at
the earliest opportunity.
The Board considers transparency and openness to be a key feature of its stated strategy
and endeavours to ensure that both shareholders and the market remain appropriately
informed and that timely updates are released to the market.
We maintain an active engagement with our key financial audiences, including institutional
shareholders, debt stakeholders and sell-side analysts as well as potential shareholders.
During the year we made regular presentations to, and had meetings with, institutional and
retail investors from the UK, Europe and the US to communicate progress towards achieving
our sales growth strategy and to answer questions. Throughout the year our senior
management team presented at industry conferences organised by investor bodies and
investment banks for their institutional investor bases.
Our dedicated Investor Relations function and management team managed the interaction
with these audiences and provided additional regular presentations during the year.
Presentations are made to analysts and shareholders covering the Company’s Preliminary
Results and its half year results each year.
Our website has a section focused on information and updates relevant to public shareholders
which can be found at www.coats.com/investors
Annual General Meetings
The Board values the Annual General Meeting as an important opportunity to engage with
investors. Attendees have the opportunity to ask questions of the Board and are invited to
meet with the Board following the formal business of the meeting. This interaction helps
the Board to develop an understanding of the views of the Company’s shareholders.
Copies of the presentations and reports and the results of proxy voting at the 2017
AGM were released to the market and can be found at www.coats.com/shareholders
This year’s Annual General Meeting will be held in London on 16 May 2018.
Mike Clasper
Chairman
6 March 2018
47
NOMINATION
COMMITTEE REPORT
‘THE COMMITTEE CONTINUES TO ENSURE THAT
THE BOARD HAS THE CORRECT BALANCE OF
SKILLS, EXPERIENCE, GENDER, ETHNIC DIVERSITY
AND INDEPENDENCE.’
Dear Shareholder
I am pleased to present the Nomination Committee Report, which summarises our work
over the past year.
Last year I reported on a year of change and further changes were another feature of 2017.
On 1 January 2017 Rajiv Sharma’s tenure as Group Chief Executive began which evidenced
the Committee’s strong focus on senior executive, as well as Board level talent development
and succession planning. Throughout the year we considered and reviewed plans for the
continued development of key personnel within the business to ensure an ongoing pipeline
of executive talent.
The Committee also continued to ensure that the Board has the right balance of skills,
experience, diversity and independence. Reviewing our succession plans and the composition
of the Board are an essential part of this process.
During 2017 the Committee conducted a search with the assistance of an executive search
agency, the Inzito Partnership, which resulted in Echo Lu being appointed as a Non-Executive
Director. Echo joined the Board, and this Committee, on 1 December 2017 and her direct
managerial experience of global companies operating in markets in Asia, particularly North
East Asia, will bring very pertinent additional local and regional insight. She also has practical
knowledge of empowering women entrepreneurs in emerging economies which will bring
invaluable perspective to the Board and this Committee.
As a result of Ruth Anderson’s decision to retire from the Board and not stand for re-relection
as a Director at the 2018 Annual General Meeting (AGM), the Committee also engaged
Inzito Parnership to search for her replacement. On 8 January 2018 we announced that
Anne Fahy would join the Board on 1 March 2018 as a Non-Executive Director and will
succeed Ruth to become Chairman of the Audit and Risk Committee at the AGM on
16 May 2018. Anne is a very experienced Non-Executive Director with extensive experience
of global business, developing markets and internal controls and will be a strong addition
to this Committee.
Both recent appointments have increased the gender and ethnic diversity of the Board
and will broaden the Committee’s perspective and contribution to the Company.
I welcome both Anne and Echo to the Board and thank Ruth for her wisdom and support
over the years.
Mike Clasper
Chairman, Nomination Committee
6 March 2018
Composition and meetings
The Committee is chaired by Mike Clasper and its members comprise all of the Non-Executive
Directors along with the Group Chief Executive. The Committee met on two occasions
during 2017 to discuss proposed appointments, succession planning and development and
to evaluate the balance of skills, experience, diversity, independence and knowledge on
the Board.
EFFECTIVENESS
Highlights for 2017:
Oversight of market search
and recommendations for
appointment of Echo Lu
and Anne Fahy
Oversight of senior executive
talent development and
succession planning
Priorities for 2018
Ongoing focus on ensuring
appropriate mix of diversity
among Board, GET and senior
management more generally
48
NOMINATION
COMMITTEE REPORT CONTINUED
Diversity and gender
The Board believes that having people with a diverse range of skills and qualifications, as well
as a mix of geographical experience, ethnicities and gender on the Board and GET contributes
to an effective and high performing leadership team, who are better able to guide the
Company and set the tone and culture for the organisation.
When reviewing the composition of the Board, the Committee takes into account a number
of factors including the balance of skills, experience, knowledge and independence of existing
Board members and regularly considers the benefits and periodically seeks to balance the mix
of ethnic, gender, age and professional diversity.
While the Committee’s focus is to ensure that appointment recommendations are made on
objective criteria and that the best candidates are put forward for appointments, it always
remains cognisant of the needs for and benefits of diversity. Close regard is also given to these
factors when considering senior executive appointments. While there is no formal diversity
policy, the Committee’s own practices are such that diversity considerations are taken into
account as a matter of course and these were all applied when considering the appointment
of Echo Lu, in December 2017 and Anne Fahy in March 2018.
The Committee continues to take an active interest in talent management, in particular
ensuring that initiatives are in place to develop the talent pipeline and to promote diversity
and gender in the GET and other senior executives. During the year the Committee considered
the changes in the GET including the appointment of the Chief Transformation Officer and
changes in the Chief Operating Officer roles for EMEA and LatAm and the Global Supply Chain
Officer. During the year an executive search took place for external candidates for the roles
of Chief Human Resources Officer and President, Crafts North America. For the latter role
Stephanie Leichtweis was appointed in October 2017 and for the former Monica McKee was
appointed in March 2018 to replace Andy Speak who left the Company in August 2017.
Induction and training
There is a formal induction programme for new Directors, which was followed during the
year for Echo Lu. This included meetings with GET members, and other senior executives
individually and also meeting with relevant bankers, advisers and investors. Following the
initial induction for Non-Executive Directors, their continuing understanding of the business
is progressed through relevant business engagements such as the Board’s visits to the
Turkish and Indian operations of the business during the course of 2017.
Succession planning
The Committee has in place a developed approach to succession planning and developing
a diverse pipeline to meet strategic objectives and achieve gender balance in senior
management, as well as ensuring appropriate succession and development plans are
in place for appointments to the Board.
We are satisfied that the succession planning structure in place is appropriate for a FTSE250
company of the size and nature of the Group. Our succession planning arrangements will
continue to be kept under regular review going forward.
Committee performance and effectiveness
The Committee performance was evaluated as part of the Board and Committee effectiveness
review and it was considered to be effective and remains independent. The Committee is
satisfied that the external commitments of its Chairman and members do not conflict with
their duties and commitment as Directors of the Company.
During the year the Committee also considered potential actions resulting from the Board
effectiveness review which are included in more detail on page 45. The Committee noted
that the Board considered the results of a follow up questionnaire on progress on Board
effectiveness at its meeting in December 2017.
The Nomination Committee Report was approved by a Committee of the Board of Directors
on 6 March 2018 and signed on its behalf by:
Mike Clasper
Chairman, Nomination Committee
6 March 2018
49
AUDIT AND RISK
COMMITTEE REPORT
‘THE COMMITTEE REMIT COVERS ACCOUNTING
AND FINANCIAL REPORTING, INTERNAL CONTROLS
AND EXTERNAL AUDIT. A PARTICULAR FOCUS
DURING THE YEAR WAS ASSESSING THE IMPACT
OF THE NEW LEASING ACCOUNTING STANDARD.’
Dear Shareholder
I am pleased to present the report of the Audit and Risk Committee for the year ended
31 December 2017.
This Report explains the work that the Committee has undertaken during the year. We have
included information on our oversight of the Company’s financial reporting, its assurance
framework and of its systems of risk management and internal controls and explain the
significant accounting issues that have been considered by the Committee, which are set
out on page 51.
The Committee has an annual work plan linked to the Group’s financial reporting cycle,
which ensures that it considers all matters delegated to it by the Board. During the year,
the Committee met six times and in that time, in addition to its annual work plan, it reviewed
management’s initial findings on the impact of adopting the new accounting standard for
leases, revenue recognition and financial instruments. The Committee also reviewed the
Group’s processes and controls for the approval and subsequent monitoring of capital
expenditure and for procurement.
This report will be my last as Chairman as, after four years on the Board, I will be stepping
down as Chairman of the Committee later in the year and will not seek re-election as a
Director at the 2018 Annual General Meeting. As announced on 8 January 2018 Anne Fahy
will be taking over as Chairman with effect from 16 May 2018. Anne and I will be working
closely together to ensure a smooth handover and both of us will be available at the 2018
Annual General Meeting to answer any questions.
Ruth Anderson
Chairman, Audit and Risk Committee
6 March 2018
Membership and meetings
It is important that the Committee operates effectively and efficiently and has the right balance
of skills and expertise to deliver its responsibilities. The composition of the Committee and its
members’ biographies, including their relevant financial and accounting experience can be
found on pages 39 to 41, and their attendance can be found on page 44. Ruth Anderson and
Nicholas Bull were the members of the Committee determined by the Board as having recent
and relevant financial experience for the year ended 31 December 2017.
Committee responsibilities
During the year, the Committee reviewed its terms of reference to ensure they reflect current
standards of governance. The Committee is responsible for monitoring:
the financial reporting process, the integrity of the financial statements of the Group, and any
other formal announcements relating to its financial performance and reviewing significant
financial reporting judgments contained in them;
the effectiveness of the internal financial controls and the internal control and risk management
systems of the Company; and
the Company’s policy on the supply of non-audit services by the external auditor.
The Committee is responsible on behalf of the Board for agreeing the terms of engagement
of the external auditor, the auditor’s remuneration, confirming the auditor’s independence
and its objectivity as well as monitoring the effectiveness of the external audit process.
ACCOUNTABILITY
Highlights for 2017:
In depth review of Lower
Passaic River provision
Review of future strategy
and structure for Group
Internal Audit
Global tax costs and provisions
Priorities for 2018
Connecting for Growth –
global change programme
In depth reviews of major
provisions where significant
judgements and estimates
are required
50
AUDIT AND RISK
COMMITTEE REPORT CONTINUED
Committee responsibilities (continued)
Regular attendees at Committee meetings in the year included the Group Chief Financial
Officer, the Chief Legal & Risk Officer and Group Company Secretary, the Head of Financial
Control, the Group Financial Controller, the Group Head of Internal Audit, and the external
auditor. The Group Chairman and Group Chief Executive also attend most meetings.
The Chairman holds regular meetings with both internal and external auditors and each has
an opportunity to discuss matters with the Committee without management being present.
Significant issues relating to the financial statements
The Committee considered the following issues relating to the financial statements during
the year:
Significant issues relating
to the financial statements
Pension matters –
valuation of obligations
and disclosure
US environment provision
The carrying value
of tangible assets
Taxation
How the Committee addressed the issue during the year
At 31 December 2017, the Group’s IAS19 Pension deficit was $163m.
The Committee reviewed the methodology for determining key
assumptions underpinning the valuation of liabilities of the Group’s
most significant pension schemes. The Committee also reviewed in
detail the various aspects of the continuing obligations to the Group’s
ongoing schemes. The Committee is satisfied that these, and
the disclosures provided in note 10 to the financial statements
are appropriate.
The Group has recognised a provision, net of insurance reimbursements,
of $11.3m in respect of remediation and legal / professional costs
for the Lower Passaic River. The Committee considered at length
management’s position on the accounting and disclosure implications
surrounding this environmental case. Following the delivery of the
EPA’s Record of Decision in March 2016, the Committee has continued
to review whether subsequent events, including those impacting
other parties considered to be responsible for the most significant
contamination in the river, triggered the requirement to re-measure
the level of provisioning previously established. The Committee is
satisfied that there is no requirement to re-measure the provision at
31 December 2017 and that the disclosures provided in note 28 to
the financial statements are appropriate.
The carrying value of the Group’s tangible assets is $293 million.
The Committee reviewed, and discussed in some detail, the evidence
presented by management of its impairment assessment of tangible
assets including the related business plans to support the carrying
values. The review specifically focused on management’s assessment
of assets held in Brazil, with a carrying value of $38m, following difficult
economic and trading conditions. The Committee was satisfied with
management’s conclusion that based on the fair value of net assets
there was no impairment of tangible assets during 2017 even in a
reasonable downside scenario and that the disclosures in note 14
to the financial statements are appropriate.
The Group operates in numerous jurisdictions around the world, with
different regulations applying in different territories. This complexity
together with intra-group cross-border transactions give rise to inherent
risks. In addition to reviewing the Group’s effective tax rate, which has
dropped from 34%to 32%, the Committee also considered the Group’s
uncertain tax provisions which amount in total to $13 million and
deferred tax asset recognition. The Committee is satisfied with the
approach and disclosures adopted by management as reflected in the
financial statements in note 9 to the financial statements.
51
AUDIT AND RISK
COMMITTEE REPORT CONTINUED
‘The Committee considered the
overall performance and effectiveness
of the Internal Audit function, their
independence and objectivity.’
Financial reporting
The Committee’s primary responsibility in relation to the Group’s financial reporting is
to review with management and the external auditor the half-year and annual financial
statements including, amongst other matters:
the accounting policies and practices adopted;
material areas in which significant judgments have been applied, where there are significant
estimates, or where significant issues have been discussed with the external auditor; and
the clarity of disclosures and compliance with financial reporting standards and relevant
financial and governance reporting requirements including the use, prominence and balance
of financial Alternative Performance Measures compared to their closest Generally Accepted
Accounting Principles equivalents.
Going concern and viability statements
The Committee undertook to review the appropriateness of the going concern basis of
accounting in preparing the annual financial statements.
The Committee reported to the Board that management had followed sound processes
in reaching its conclusion in relation to both the going concern and viability statements,
as confirmed by the external auditor.
Internal audit
The Group Head of Internal Audit agrees the Internal Audit department’s programme of work
annually in advance with the Committee and, at each Committee meeting, the Committee
reviews key findings from internal audit reports and monitors the rate at which actions agreed
with management are implemented.
During the year, the Group Head of Internal Audit presented to the Committee his future
vision for the internal audit department, taking into account the increasing use of data
analytics and the focus on risk-based auditing.
The Committee considered the overall performance and effectiveness of the Internal Audit
function, its independence and objectivity and, based on its own assessment and input from
management worldwide, was satisfied that the experience and expertise of the function
is appropriate for the Company.
Internal control and risk management
The Board has overall responsibility for determining the nature and extent of its principal risks
and the extent of the Group’s risk appetite, and for monitoring and reviewing the effectiveness
of the Group’s systems of risk management and internal control. The principal risks and
uncertainties facing the Company are addressed in the Strategic Report and in the table on
pages 21 to 26 earlier in this document.
The Board has delegated to the Committee the responsibility for monitoring the effectiveness
of the systems of risk management and internal control.
The Committee receives reports from management, Internal Audit and the external auditor
relating to the effectiveness of the control environment. The reporting process ensures that
all business units regularly report on internal control and risks through the submission of
self-assessments every six months. During the year, the Committee specifically looked at
the processes and controls underpinning the approval and subsequent monitoring of the
Group’s capital expenditure as well as a review of procurement controls.
The Committee and the Board are satisfied that these systems operate effectively in all
material respects and provide reasonable assurance regarding the Group’s financial and
operational condition.
Whistleblowing procedure
Whistleblowing is a standing item on the Committee’s agenda. The Company has a
whistleblowing procedure which enables employees who are aware of, or suspect, misconduct,
illegal activities, fraud, abuse of assets or violations of any Company policy to report these
confidentially. During the year we launched a programme called ‘Doing the right thing’,
encouraging employees to reflect still further on the importance of ethical behaviour in their
working lives as well as providing continued training and awareness on the importance of
a strong ethical and compliance-focussed culture for the group. There were 50 incidents
‘The Company has a whistleblowing
procedure which enables employees
who are aware of, or suspect,
misconduct, illegal activities, fraud,
abuse of assets or violations of any
Company policy to report these
confidentially.’
52
AUDIT AND RISK
COMMITTEE REPORT CONTINUED
(2016: 30) of whistleblowing during the year, all of which were investigated, with disciplinary
action taken where there was evidence of misdemeanour.
External audit
Independence
The Committee is responsible for reviewing the independence of the Company’s auditor,
Deloitte LLP, agreeing the terms of engagement with them and the scope of their audit.
Deloitte has a policy of partner rotation, which complies with regulatory standards, and,
in addition, Deloitte has a structure of peer reviews for its engagements, which are aimed
at ensuring that its independence is maintained.
Maintaining an independent relationship with the Company’s auditor is a critical part of
assessing the effectiveness of the audit process. The Committee has agreed the Company’s
policy on non-audit fees and regularly reviews the level of audit and non-audit fees paid to
Deloitte. There is also a policy for ensuring significant assignments are not awarded to the
auditor without first being subject to the scrutiny of the Committee. The key principles of
the policy on non-audit services are:
Summary of non-audit services policy
The Committee has approved a list of all permitted non-audit services which are allowed under
UK statutory legislation and complies with the European Union Directive on audit and non-audit
services. Permitted services include audit-related services such as reviews of interim financial
information or any other review of accounts required by law to be provided by the auditor.
The list also includes certain tax compliance and advisory services for Group subsidiaries
incorporated outside the European Union.
The Committee has also approved a list of prohibited services which include services
remunerated on a success fee or participation in activities normally undertaken by management.
Any service that is not on the list of permitted services if in excess of US$15,000 requires the
approval of the Committee.
During 2017, the external auditor provided services in relation to the Group’s interim results
and tax advisory services outside the European Union.
The external auditor has confirmed to the Committee that they did not provide any prohibited
services and that they have not undertaken any work that could lead to their objectivity and
independence being compromised.
The non-audit services supplied by the external auditor during the year can be found in note 5
of the financial statements. The non-audit services primarily relate to tax compliance and
advisory services in India. In the case of each engagement, it was considered appropriate to
engage Deloitte LLP for the work because of their existing knowledge and experience from
prior Group engagements.
The Committee discussed with, and received confirmation from, the external auditor that
the audit team have not relied on the work performed by their tax teams as part of the
audit and their objectivity and independence has been safeguarded.
Consideration of Audit tender
Deloitte LLP was appointed the Company’s auditor in 2003. The Company has an established
policy that the external audit contract be put out to competitive tender in accordance with
the provisions of The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order
2014. However, given the significant change programme that is the Finance Review being
implemented widely in the Group, the Company has decided not yet to tender the audit, as
permitted by the transitional provisions under the EU Statutory Audit Directive but it will have
to do so no later than 2023. Tim Biggs was appointed as the lead audit engagement partner
in 2016. He will rotate off the audit team after the 2020 year-end. The Company will continue
to consider annually the timetable for audit tendering.
There are no contractual obligations that restrict the Company’s choice of external audit firm.
53
AUDIT AND RISK
COMMITTEE REPORT CONTINUED
Assessment of audit process
The scope of the external audit is formally documented by the auditor. They discuss the draft
proposal with management before it is referred to the Committee who reviews its adequacy
and holds further discussions with management and the auditor before final approval.
The Committee reviewed the performance and effectiveness of the external auditor, as
well as their independence and objectivity. The review process included the completion of a
questionnaire assessing their performance which was completed by the Committee members,
regular attendees to the Committee and those Coats colleagues globally who interact most
frequently with the external auditor. The feedback has been reviewed by the Committee which
is satisfied that it can recommend to the Board that the Board should propose to shareholders
the reappointment of Deloitte LLP as auditor for the year ending 31 December 2018.
Assessment of the performance of the Committee
As reported last year the Board undertook an evaluation of its effectiveness and that of the
Audit and Risk Committee and its members. The feedback has been evaluated and acted upon.
The Board has also held a follow up session to reflect on the recommendations and progress
on their implementation.
The Audit and Risk Committee Report was approved by a Committee of the Board of Directors
on 6 March 2018 and signed on its behalf by:
Ruth Anderson
Chairman, Audit and Risk Committee
6 March 2018
54
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
REMUNERATION
Highlights for 2017:
Strong shareholder support for
the revised Remuneration Policy
at the 2017 AGM
Increase in shareholding
requirements from 100% to
200% for Executive Directors
Priorities for 2018:
Aligning of targets to
‘Connecting for Growth’
ambitions
Extension of shareholding
requirements to the direct
reports of the Group
Chief Executive
‘The strong financial performance
of the group is reflected in the
bonus outcomes for 2017.’
‘Over this three-year period the
TSR performance of Coats Group plc
was at the 98th Percentile versus
its comparator group of FTSE 250
companies (excluding investment
trusts).’
‘THE GROUP’S REMUNERATION FRAMEWORK IS
INTENDED TO STRIKE THE RIGHT BALANCE
BETWEEN RISK AND REWARD.’
Dear Shareholder
As referred to elsewhere, the theme of this year’s report is ‘Delivering today. Transforming
for tomorrow’. The objectives of the Remuneration Committee are to ensure that we have
a suitable remuneration framework in place that incentivises the right behaviours to deliver
the results we expect today and to take the actions necessary to transform the Company
going forward.
The Group’s remuneration framework is intended to strike the right balance between risk and
reward, alignment with stakeholders interests and the need to ensure that we have the right
level of remuneration to attract and retain the people with the key skills we need to continue
to grow.
Overview of 2017
There have been significant achievements and developments this year. On 1 January 2017,
as announced last year, Rajiv Sharma was appointed to the position of Chief Executive Officer
and in June 2017 Coats Group plc entered the FTSE 250. The strength of the company’s
performance has been reflected in the increase in the share price and the commencement
of dividend payments during 2017.
I am pleased to note that at the 2017 AGM the Directors Remuneration Policy received
overwhelming support from our shareholders. I did write to major shareholders prior to
the meeting to outline the Committee’s approach to the policy and I was encouraged by
the constructive comments that we received during this process. The Committee remains
committed to ensuring an open and proactive dialogue with shareholders on all aspects
of the remuneration policy.
Following the adoption of the new policy there is now a greater proportion of annual bonus
that is deferred and awarded in shares with an increase in deferral from 25% to 33%. The
Committee also increased the ‘Minimum Shareholding Requirement’ from 100% to 200%
of salary for Executive Directors and a requirement (at 75% of salary) has been adopted from 1
July 2018 for the first time for other members of the Group Executive Team. The strong
financial performance of the group is reflected in the bonus outcomes for 2017. Continued
growth in the sales and profitability of the Industrial Division from both Apparel and Footwear
and Performance Materials segments and conversion of profit to free cash flow has resulted
in bonus payments that are in excess of the target level of payout.
Also reflected in the report is the vesting of the ‘Long Term Incentive’ award for the
performance period 1 January 2015 to 31 December 2017. Over this three-year period the
TSR performance of Coats Group plc was at the 98th Percentile versus its comparator group
of FTSE 250 companies (excluding investment trusts) and the ‘Attributable Profit’ growth
exceeded the compound annual growth target of 20%.
The minimum ‘Free Cash Flow’ target was not achieved which is largely a reflection of the
ambitious nature of the targets originally set. The LTIP award for the three-year period ending
on 31 December 2017 vests at 60% of maximum and the value of the award is enhanced
by the increase in the share price from 25.25 pence on the grant date of 7 April 2015 to
89.125 pence on 31 December 2017.
Outlook for 2018
Looking forward to 2018 the group has announced a transformation programme –
‘Connecting for Growth’ – that will support the business on its next stage of development.
The programme is expected to have some initial exceptional costs that will be predominantly
weighted to 2018 but will produce longer term benefits for shareholder value over the
forthcoming three-year period.
55
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
‘I acknowledge the increasing desire
from stakeholders and shareholders
that Remuneration Committees should
continue to consider remuneration
for executives in the context of the
rest of the workforce.’
Outlook for 2018 (continued)
Accordingly, the Committee have decided that for the 2018 LTIP award the threshold EPS
Compound Annual Growth Rate (CAGR) target should be increased from 5% to 7% and
a mid-range target of 10% CAGR should be introduced to increase the challenge of the
vesting scale. The maximum EPS CAGR target remains unchanged at 15%. Further details
are provided in the forward-looking statement for 2018 contained in the Annual Report
on Remuneration on page 66.
No other significant changes are proposed for 2018 other than the adoption of a Minimum
Shareholding Requirement for senior positions below the Board,as described above.
Corporate Governance
I acknowledge the increasing desire from stakeholders and shareholders that Remuneration
Committees should continue to consider remuneration for executives in the context of the
rest of the workforce. In particular, there is an increasing focus on the publication of the ratio
of CEO pay to the rest of the workforce. This does present some challenge to Coats as the
Group has fewer than 200 employees in the UK but employs some 19,000 employees in over
50 countries. Although the UK government have announced an intention to require UK
companies to publish a CEO pay ratio no methodology has been yet been released.
We have in the meantime adopted our own methodology to compare the 2016 Single Figure
CEO remuneration to the average and median employee based in the UK. The CEO multiple
versus the average is 16 times and versus the median is 25 times. We will continue to monitor
developments and to adhere to requirements as they become clearer.
I am pleased to welcome Echo Lu who joined the Committee on her appointment to the
Board on 1 December 2017.
On behalf of the Committee I would like to thank shareholders for their continued support.
David Gosnell
Chairman, Remuneration Committee
6 March 2018
56
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
POLICY SUMMARY
The following is a summary of the key features of the Remuneration Policy approved at the Annual General Meeting held 17 May 2017.
Components of remuneration
Fixed components
Base salary
Rajiv Sharma (CEO)
Simon Boddie (CFO)
Pension
Policy
£578,000
£412,000
Executive Directors’ salaries are reviewed annually with effect from 1 July. Reference is made to market
competitive levels of pay at relevant comparator companies, average salary increases applied elsewhere
across the Group, individual performance and experience as well as any changes to the size and scope
of the role.
Rajiv Sharma (CEO)
20% of salary
Simon Boddie (CFO)
20% of salary
Executive Directors receive defined contributions pensions (and/or cash in lieu thereof) of up to 20%
of salary. Other benefits may include the provision of private medical insurance, ill-health protection
and/or life insurance and a cash-for-car allowance. In addition, the Company may provide assistance in
connection with the relocation of an Executive Director and, in the event of an international transfer,
may provide tax equalisation.
Variable components
Annual bonus
Policy
Maximum opportunity for 2018
Maximum award opportunity: 150% of base salary
Rajiv Sharma (CEO)
100% of salary
Simon Boddie (CFO)
100% of salary
Performance measures weighting
Any bonus awarded is subject to mandatory deferral of 33%. Deferred bonuses are transferred into
shares, and held for a three-year retention period. The performance measures, weightings and targets
for the annual bonus are set by the Committee on an annual basis. Any bonuses paid are subject to
malus and clawback.
Attributable Profit
EBIT
Free Cash Flow
Individual objectives
LTIP
Annual bonus
25%
25%
30%
20%
Policy
Maximum opportunity for 2018
Maximum LTIP award opportunity: 250% of base salary
Awards are made annually; conditional on three-year performance conditions. Any shares vesting are
subject to an additional two-year holding period. Performance measures and targets are determined
by the Committee, taking into account the balance of strategic priorities for Coats for the upcoming
three-year performance period. Any LTIP shares vesting are subject to malus and clawback.
Rajiv Sharma (CEO)
150% of salary
Simon Boddie (CFO)
150% of salary
Performance measures weighting
3-year EPS CAGR
3-year cumulative
Free Cash Flow
TSR vs FTSE250
(ex. investment trusts)
40%
40%
20%
57
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Shareholding requirements
Rajiv Sharma (CEO)
Simon Boddie (CFO)
200% of salary
200% of salary
More details on our policies can be found at www.coats.com/governance
58
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Annual Report on Remuneration
This Annual Report on Remuneration has been prepared in accordance with the relevant provisions of the Companies Act 2006 and
as prescribed in The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended in 2013
(the Regulations). Where indicated data has been audited by Deloitte LLP.
The Annual Report on Remuneration will be subject to an advisory vote at the AGM on 16 May 2018. A revised Remuneration Policy
applicable to the year ended 31 December 2017 was approved by shareholders at the AGM on 17 May 2017 and the previous policy
was approved on 22 May 2014; both can be found in the Corporate Governance section at www.coats.com/governance
Executive Directors
Two Executive Directors were employed during 2017. Rajiv Sharma, was originally appointed to the Board on 2 March 2015 and was
appointed as Chief Executive with effect from 1 January 2017 following the departure of Paul Forman. Rajiv Sharma had been based
in Dubai during his previous tenure as Managing Director, Industrial Division and remained on secondment in Dubai until 31 May 2017.
Details of the remuneration arrangements and relocation assistance offered to Rajiv are reflected in this report and were disclosed to
shareholders in last year’s Annual Report on Remuneration.
Single total figure for Executive Directors’ remuneration for 2017 (audited information)
Base salary
£000
Benefits
£000
Annual incentive
(cash & shares)
£000
2017
2016
2017
2016
2017
2016
2017
Simon Boddie
406.0
197.4
29.3
11.5
324.7
156.6
–
LTIP
£000
2016
–
Pension
£000
2016
39.5
2017
81.2
Total
£000
2016
2017
841.2
405.0
Rajiv Sharma
569.5
540.6
141.5
281.6
459.5
429.3 1,452.2
410.5
113.9
108.1
2,736.6
1,770.1
Total
975.5
738.0
170.8
293.1
784.2
585.9 1,452.2
410.5
195.1
147.6
3,577.8
2,175.1
The figures in the table above have been calculated on the basis of the following:
The figures for Rajiv Sharma include the value of additional benefits that were provided to him during his secondment from Singapore to
Dubai which commenced in June 2015 and ended in May 2017. The benefits figure for Rajiv Sharma includes an international allowance of
$100,000 per annum which was paid until May 2017. From 1 June 2017 he was paid £10,000 per month as a housing allowance following
his relocation to the UK.
Benefits: is the value of all taxable benefits in kind including a car allowance, private medical insurance and life insurance. A car allowance
of £20,000 per annum is paid to Rajiv Sharma and an allowance of £15,000 is paid to Simon Boddie. In the case of Rajiv Sharma this also
reflects the additional benefits provided in connection with his secondment to Dubai and relocation to the UK as described above.
Rajiv Sharma’s remuneration arrangements in 2016 were determined and paid in US dollars and the figures for 2016 were converted to
UK currency at an average annual exchange rate of $1 = £0.738. The international allowance that was paid until May 2017 while he was
on secondment in Dubai has been converted at a rate of $1 = £0.797. With effect from his appointment as CEO on 1 January 2017 his
base salary and benefits are determined in UK currency.
Simon Boddie was appointed to the Board on 4 July 2016. The 2016 year figures therefore reflect his remuneration from his date of
appointment to 31 December 2016 only.
Annual bonus (cash and shares): the total value of the annual incentive that is attributable to 2017. One third of any bonus outcome is
compulsorily awarded in shares under the terms of the Deferred Annual Bonus Plan that was approved by shareholders at the AGM in
May 2014. The compulsory deferral for the 2016 bonus was one quarter.
Long Term Incentive Plan (LTIP): the value of any awards that were granted during a period as an Executive Director or which contained
a performance period that ended during the year. The LTIP award value shown for 2017 reflects the vesting of the LTIP award that was
granted to Rajiv Sharma in respect of the performance period 1 January 2015 to 31 December 2017. The value shown represents the
number of shares that vest multiplied by the mid-market share price on 29 December 2017 which was £0.89125. The value shown also
reflects the cash value of dividend equivalents payable on vested shares This value will be re-stated in next year’s report to reflect the
share price on the vesting date of 7 April 2018.
Pension: represents the value of all employer contributions to any pension plan or cash payments paid in lieu of a pension benefit.
No Executive Director participates in any defined benefit pension arrangement.
Simon Boddie is a Non-Executive Director of PageGroup plc and received fees of £67,083 during the year to 31 December 2017.
The policy of the Board is that Directors are entitled to retain any fees in respect of external appointments.
59
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Annual bonus outcome 2017 (audited information)
The annual bonus for 2017 was determined in accordance with the details provided in the 2016 Directors’ Remuneration Report.
Details of the bonus measures and opportunities are provided in the table below.
Annual bonus 2017
Weighting
Bonus opportunity
Performance achieved in 2017
All figures are as a % of salary
Performance Measure
Attributable Profit (AP)
Earnings Before Interest
and Taxation (EBIT)
Free Cash Flow (adjusted)
(FCF)
Individual objectives
Total
Threshold
Target
Maximum
Simon Boddie
Rajiv Sharma
25.0%
25.0%
0%
3.0%
12.5%
12.5%
25.0%
25.0%
20.5%
17.5%
20.5%
17.5%
30.0%
0%
15.0%
30.0%
24.0%
24.0%
20.0%
100.0%
0%
3.0%
10.0%
50.0%
20.0%
100.0%
16.8%
78.8%
17.5%
79.5%
The measures were selected to incentivise a balance of outcomes that reflected the strategic priorities for the Group. In particular these
were to increase the attributable profit (profit after tax) that was available for shareholders, to achieve strong growth in trading profit
through continued efficiency and growth in EBIT performance, ensure consistent and increasing level of cash generation from operations
through working capital management, and achieve certain key strategic objectives that were specific for each Executive Director.
Annual bonus 2017
Performance targets
AP ($m)
EBIT ($m)
FCF (adjusted)
Individual objectives
Weighting
Bonus targets
25.0%
25.0%
30.0%
20.0%
Threshold
65.8
152.0
60.0
Target
77.4
164.4
81.6
Maximum
Performance
achieved in 2017
89.0
180.8
91.6
84.8
171.0
87.6
Strategic objective
See table above
The targets above were established on a basis which excludes the impact of certain exceptional items and the impact of any exchange
rate fluctuations during the year and the extent to which planned capital expenditure was delivered during the year. Targets are set in
relation to Budget for the upcoming financial year. For the 2017 annual bonus challenging individual objectives were established by the
Committee for each Executive Director that reflected activities and initiatives intended to improve the performance of the Group. The
objectives established and assessed for 2017 included the development of a refreshed group strategy, a comprehensive digital strategy,
plans to simplify the group’s operating model and increase the effectiveness of supporting group functions.
Long Term Incentive award vesting
On 7 April 2015 Rajiv Sharma was granted a Long Term Incentive award in the form of nil cost options over shares in respect of the
performance period 1 January 2015 to 31 December 2017 (referred to as LTIP 2015).
The performance measures were based upon the Total Shareholder Return Performance (TSR) of Coats Group plc and compound
annual growth (CAGR) in Attributable Profit and cumulative Free Cash Flow relating to Coats Limited.
60
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
The achievement of the Long Term Incentive performance measures and the consequent vesting of the award is shown in the
table below.
LTIP 2015: Performance period 1 January 2015 to 31 December 2017
Measure
Weighting
Threshold
40.0%
5.0%
Cumulative Free Cash Flow over 3 years
40.0%
Compound Annual Growth
in Attributable Profit
Vesting % of total award
Vesting % of total award
Total Shareholder Return versus the
FTSE250 excluding investment trusts
Vesting % of total award
Total
Mid
15.0%
25.0%
$231m
25.0%
Maximum
20.0%
40.0%
$250m
40.0%
Actual
20.4%
40.0%
$188.2m
0%
10.0%
$210m
10.0%
20.0%
Median
62.5 Percentile
Upper Quartile
98 Percentile
100.0%
5.0%
25.0%
12.5%
62.5%
20.0%
100.0%
20.0%
60.0%
Share awards granted in 2017
The following share awards were granted to Executive Directors during the financial year ended 31 December 2017.
The targets for achieving minimum performance for each measure, where these apply, are shown in the tables below.
Coats Group plc Long Term Incentive Plan
Executive
Director
Date of
grant
Number of
options awarded
Face value
at award date
Award value
as a % of salary
Share price
to calculate
no of shares
% vesting for
minimum
performance
Simon Boddie
27-Feb-17
1,095,890
£600,000
150%
£0.5475
25%
Rajiv Sharma
27-Feb-17
1,536,986
£841,500
150%
£0.5475
25%
Performance
period
Vesting
date
1 Jan 2017 to
31 Dec 2019
1 Jan 2017 to
31 Dec 2019
27-Feb-20
27-Feb-20
Coats Group plc Deferred Bonus Plan
Executive Director
Simon Boddie
Rajiv Sharma
Date of
grant
Number of
options awarded
Face value
at award date
Award deferred
cash value as a
% of salary
Share price
to calculate
no of shares
Performance
period
Vesting
date
27-Feb-17
27-Feb-17
71,506
£39,150
9.8%
£0.5475
None
27-Feb-20
211,214
£115,640
19.6%
£0.5475
None
27-Feb-20
The share price used to calculate the number of options awarded under the terms of the Coats Group plc Long Term Incentive Plan and
the Coats Group plc Deferred Annual Bonus Plan is based on the mid-market closing price for the day immediately preceding the grant
date, which was £0.5475 for 27 February 2017.
Coats Group plc Long Term Incentive Plan
Awards were granted on 27 February 2017 as nil cost options under the terms of the Coats Group plc Long Term Incentive Plan that was
approved by shareholders on 22 May 2014. The LTIP awards will vest, subject to the achievement of performance measures, on the third
anniversary of the date of grant. For Executive Directors an additional two year holding period applies. The notional value of any
dividends paid on any vested share during the period from grant to the end of the holding period is payable as a cash sum.
61
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Coats Group plc Deferred Annual Bonus Plan
For all Executive Directors one quarter of the bonus outcome relating to the financial year 2016 was awarded in the form of nil cost
options during the year. The awards were granted on 27 February 2017 under the terms of the Deferred Annual Bonus Plan that was
approved by shareholders on 22 May 2014. Awards are not subject to additional performance measures but are subject to clawback in
certain circumstances such as gross misconduct or a material misstatement of results. The compulsory deferral for any award relating
to 2017 bonus outcome was increased to 33%.
Long Term Incentive awards performance measures
The performance measures applicable to awards granted in respect of the three year performance period that commenced on 1 January
2017 (LTIP 2017) are shown below. The table on the previous page reflects the performance measures for the award that relates to the
three year performance period that ended on 31 December 2017 (LTIP 2015).
LTIP 2017 Measures
Weighting
Threshold
Compound Annual Growth (CAGR)
in Earnings Per Share
Vesting % of total award
Cumulative Free Cash Flow over
3 years
Vesting % of total award
Total Shareholder Return versus the
FTSE250 excluding investment trusts
Vesting % of total award
Total
40.0%
40.0%
20.0%
100.0%
5.0%
10.0%
$229m
10.0%
Median
5.0%
25.0%
Mid
10.0%
25.0%
$259m
25.0%
Maximum
15.0%
40.0%
$289m
40.0%
62.5 Percentile
Upper Quartile
12.5%
62.5%
20.0%
100.0%
For this purpose Earnings Per Share (EPS) growth is defined as the cumulative Compound Annual Growth Rate in the performance
period. The Board will consider the growth in normalised EPS, adjusted to exclude the impact of exceptional costs such as property
gains or losses and the impact of variation of the IAS19 (pensions finance) charge.
Free Cash Flow targets are based on cumulative Free Cash Flow generated for each year of the performance period after maintaining the
Company’s asset base i.e. operating cash flow minus capital expenditure, adjusted to reflect any exceptional items, disposals, acquisitions
or property gains or losses. Targets are established on a basis that is before any UK pension scheme deficit repair contributions.
Total Shareholder Return is the total returns to shareholders which includes share price growth and ordinary dividend payments.
The performance measure is assessed against a comparator group consisting of the FTSE250, excluding investment trusts.
Prior to 1 January 2016 the targets and measures that refer to Attributable Profit Growth and Cumulative Free Cash Flow are based on
the performance of Coats Limited, a subsidiary of Coats Group plc. Awards from 2016 onwards are based on the performance of Coats
Group plc. The Committee retains the discretion to consider whatever adjustments it considers are fair and reasonable when considering
performance against the targets shown. The Committee may adjust the level of vesting if it considers that the performance measures
do not reflect the overall performance of the Company during the performance period or if there has been a material event such as an
acquisition or disposal during the course of the performance period.
62
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Non-Executive Directors
In July 2017 the fee levels for the Chairman were reviewed by the Remuneration Committee and for the Non-Executive Directors
by a sub-committee consisting of the Chairman and the Executive Directors. The Chairman’s fee which had not increased since his
appointment to the Board in October 2013 was increased in order to ensure that the level of fee was appropriate considering the
company’s scale and profile in comparison with other FTSE 250 companies. For other Non-Executive Directors no changes were proposed
during 2017 and the base fees have remained at the same level since 1 October 2013. Non-Executive Directors, excluding the Chairman,
who are required to travel long haul (more than 5 hours one-way) to meetings are entitled to an additional travel allowance of £1,500
for each round-trip subject to a maximum of five trips per annum.
Single total figure for Non-Executive Directors’ remuneration for 2017 (audited information)
Other fee2
Supplementary fee
£000
£000
Benefits1
£000
Base fee
£000
2017
2016
2017
2016
2017
2016
2017
2016
2017
Mike Clasper
237.5
225.0
Mike Allen
Ruth Anderson
Nicholas Bull
David Gosnell
Echo Lu
Fran Philip
Alan Rosling
60.0
60.0
60.0
60.0
5.0
60.0
60.0
60.0
60.0
60.0
60.0
–
15.0
60.0
–
20.0
10.0
10.0
10.0
–
–
–
–
20.0
10.0
10.0
10.0
–
–
–
2.4
1.3
1.3
1.1
2.5
–
1.1
1.3
Total
602.5
540.0
50.0
50.0
11.0
4.3
39.6
3.3
3.6
2.3
–
–
1.8
54.9
–
7.5
3.0
3.0
3.0
–
7.5
7.5
Comments
Total
£000
2016
229.3
119.6
73.3
73.6
72.3
–
Appointed 1-Dec-17
–
–
–
–
–
–
239.9
88.8
74.3
74.1
75.5
5.0
5.0
68.6
–
68.8
20.0
61.8
Appointed 1-Oct-16
31.5
5.0
695.0
649.9
1 The figure under benefits for Non-Executive Directors relates to business expense re-imbursements which are deemed to be taxable in the UK and include the tax paid by the Company
directly to HMRC. Mike Allen‘s expenses include the grossed up cost of travel from his residence in New Zealand to attend Board Meetings which were regarded as taxable in the UK in 2016.
2 Fees under Other Fee for 2017 represent the £1,500 per trip travel fee payable for Directors (excluding the Chairman) who travel long-haul to attend meetings. The travel fee is capped
at a maximum of £7,500 per annum.
The base fee paid by Coats Group plc is £60,000 per annum for Non-Executive Directors and with effect from 1 July 2017 £250,000 for
the Chairman. A supplementary fee is paid to the Senior Independent Director and Chairs of the Audit Committee and Remuneration
Committee (£10,000 per annum). Mike Allen receives a supplementary fee of £20,000 per annum as Chair of the Pensions Committee.
Payments to past Directors
The following former Directors exercised options that were originally granted under the rules Guinness Peat Group plc Executive Share
Option Scheme (ESOS). The value shown under gain represents the difference between the price paid for any option and the market
value on exercise.
Name
Plan
Granted
Max no.
of options
Exercise Price
per share
Date of
exercise
No. of
options
MV per share
on exercise
Anthony Gibbs Guinness Peat Group ESOS
9-Mar-07
1,441,115
£0.565534
9-Mar-17
1,441,115
£0.584365
Anthony Gibbs Guinness Peat Group ESOS
10-Apr-08
1,310,104
£0.499961
10-Mar-17
1,310,104
£0.566482
Blake Nixon
Guinness Peat Group ESOS
9-Mar-07
1,441,115
£0.565534
9-Mar-17
1,441,115
£0.584365
Gary Weiss
Guinness Peat Group ESOS
9-Mar-07
1,441,115
£0.565534
9-Mar-17
1,441,115
£0.584365
Gain
(£000)
£27.1
£87.1
£27.1
£27.1
No other payments were paid to past Directors.
Payments for loss of office
There have been no payments for loss of office during the year and no Director resigned from the Board during 2017. The arrangements
for the previous Chief Executive Officer, Paul Forman, who resigned from the Board on 31 December 2016 were disclosed in last year’s
Directors Remuneration Report. Paul Forman was regarded as a ‘Good Leaver’ for the purposes of all Long Term Incentive awards but
did not receive any compensation for loss of office payments.
63
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Statement of Directors’ shareholding and share interests
The interests of the Directors who held office during the year, and their closely associated persons (if any), in the shares, options
and listed securities of Coats Group plc and its subsidiaries as at 31 December 2017, are set out below.
Shareholding
requirement in 2017
Shares beneficially
owned
Deferred bonus shares
subject to vesting period
LTIP share options
(subject to performance
conditions)
Share options
(no performance
conditions)
Equivalent
% of Salary3
Condition
Met?
Shares
01-Jan-171
31-Dec-172
01-Jan-171
31-Dec-172
01-Jan-171
31-Dec-172 01-Jan-171 31-Dec-172
Executive Director
Simon Boddie 1,100,000
Rajiv Sharma
1,600,000
200%
200%
Chairman and Non-Executive Directors
Mike Clasper
Mike Allen
Ruth
Anderson
Nicholas Bull
David Gosnell
Echo Lu
Fran Philip
Alan Rosling
1 Or date of appointment, if later.
2 Or date of resignation, if earlier.
No 100,000
200,000
–
71,506
1,724,137
2,820,027
No 200,000
400,000
932,311
1,143,525
7,315,019
7,132,323
1,490,000
1,490,000
200,000
200,000
200,000
200,000
400,000
400,000
786,475
786,475
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
749,781
–
–
–
–
–
–
–
–
3 This target was increased to 200% on 1 January 2017. The target number of shares is based on the average share price for 2017 which was 72.1p.
The Executive Directors’ shareholding requirement must be met within five years of their appointment to the Board which is by 2 March
2020 for Rajiv Sharma and 4 July 2021 for Simon Boddie. For the purposes of achieving this target the total number of shares beneficially
owned by the Director or a closely associated person is considered as well as the estimated post-tax number of vested but unexercised
share options or deferred bonuses that are not subject to a performance condition. All Long Term Incentive awards granted to Executive
Directors from 29 July 2016 onwards include a requirement to retain any vested shares (save for any shares that may be sold to satisfy
income tax liabilities) until a minimum of the fifth anniversary of the date of grant.
The table above indicates shares beneficially owned by Directors or closely associated persons; deferred bonus shares are the compulsory
proportion of the annual bonus that are still subject to a holding period and LTIP share options are the performance related awards
which are still subject to performance conditions. Deferred bonus and LTIP awards were granted on 7 April 2015, 26 February 2016,
29 July 2016 (LTIP only to Simon Boddie on joining) and 27 February 2017. The share options with no performance conditions remaining
represents the 43.6% vesting of the LTIP 14 award that was disclosed in the 2016 report and which have not yet been exercised.
The LTIP 14 award was originally subject to 3 year performance conditions for the period to 31 December 2016.
On 28 February 2018, Executive Directors were awarded the following nil cost options as part of their deferred bonus for 2017;
Simon Boddie 130,384 shares, Rajiv Sharma 184,542 shares. The options are exercisable after a period of three years. In addition, the
following nil cost options were awarded in respect of awards under the LTIP, Simon Boddie 744,578 shares, Rajiv Sharma 1,044,578
shares. Simon Boddie purchased 100,000 shares on 28 February 2018 and a person closely associated to Echo Lu purchased 15,000
shares on 5 March 2018. No options have been exercised by any Director during the year or between the year end and the signing
of this report.
No other Directors have entered into any transactions since the year end.
The middle market price of Coats Group plc shares at 29 December 2017 was 89.125 pence and the range during the year was
50.0 pence to 90.0 pence.
64
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Review of performance
The graph shows the difference between investing £100 in the Company and the constituents of the FTSE All Share Index and FTSE 250
from 1 January 2009 to 31 December 2017. It is assumed dividends are reinvested over that period. The Board feels the FTSE All Share
Index and the FTSE 250 each provide an appropriate comparator given the Company’s market capitalisation and its presence on the
London Stock Exchange.
To enable comparison with the TSR performance measure for the Long Term Incentive Plan award an additional graph is shown that
reflects the three year performance period ending 31 December 2017.
Chief Executive total remuneration for the last 9 years1
Executive Director
2009
2010
2011
2012
2013
2014
2015
2016
2017
CEO single figure of
remuneration (£k)
Annual Bonus as a % of
maximum opportunity
LTIP award as a % of
maximum opportunity
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,017.0
1,760.3
2,736.6
87.1%
77.0%
79.5%
–
43.6%
60.0%
Chief Executive remuneration – percentage change from 2016 to 2017
Executive Director
CEO Remuneration (Single Figure data)
Average of all employees2
Salary
3.0%
4.2%
Benefits
266.6%
0%
Bonus
6.4%
3.0%
1 The Company did not have an Executive Director who performed the role of CEO until 2 March 2015, when the Company completed its transition from Guinness Peat Group plc to Coats Group plc.
The increase in CEO remuneration from 2015 to 2016 is therefore largely influenced by the 2015 single figure data being part year data. The CEO figures for 2017 reflect the appointment of Rajiv Sharma
and in particular the increase in benefits reflect the relocation and expatriate support that was offered to him following his appointment as CEO on 1 January 2017.
2 The average of all employees reflects the total number of employees based in the UK. The UK has been chosen as the most appropriate comparator group because the CEO is based in the UK and the
majority of Coats employees who are employed outside the UK are working in locations with very different inflationary and market pressures. The UK employee population includes employees across all
levels of the organisation.
65
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
Relative importance of spend on pay
The table below shows the total pay for all of the Company’s employees compared to other key financial indicators.
Employee costs ($m)
Distributions to shareholders1 ($m)
Average number of employees
Revenues from continuing operations ($m) – like-for-like
Operating profit pre-exceptional ($m) – like-for-like
1 By way of dividends and share buybacks.
Year to
31 December 2017
Year to
31 December 2016
% change
372.3
17.8
19,085
1,510.3
173.7
342.5
–
19,046
1,457.4
156.9
9%
N/A
-%
4%
11%
Additional information on number of employees, total revenues and profit has been provided for context. The figures for employee costs
and average number of employees in 2017 and 2016 have been stated on the basis of continuing operations only. Information for 2017
includes acquisitions made during the year. The figures have been amended from prior years to reflect the revenue and profit on the
basis of like-for-like comparison and to reflect Coats Group reporting currency of US dollars.
Statement of implementation of Remuneration Policy for 2018
Base salaries for Executive Directors and fees for the Chairman and Non-Executive Directors will be reviewed on 1 July 2018.
Rajiv Sharma was appointed as Chief Executive of Coats Group plc with effect from 1 January 2017. Rajiv is a Singaporean national and
was previously based in Dubai until 31 May 2017; having been previously recruited as the Managing Director, Industrial Division based in
Singapore. He will receive a base salary of £578,000 per annum, a pension allowance of 20%, a car allowance, medical insurance, life
insurance and income replacement insurance.
As disclosed in last year’s Directors’ Remuneration Report to support his relocation to the UK he will be paid a net allowance of £10,000
per month until May 2018 reducing to £5,000 net per month for a subsequent period of 12 months and thereafter reducing to nil.
The Company are also responsible for relocation expenses in addition which may include airfares and shipping costs, tax compliance
assistance, tax equalisation to an effective Singaporean tax rate until May 2018 (reducing by half in the second 12 months and thereafter
ceasing) and a one-off relocation payment of £12,000 net to cover expenses and costs not directly specified or reimbursed by the
Company in connection with the relocation or acquisition of a permanent UK residence. Simon Boddie will continue to receive a
base salary of £412,000 per annum, a pension allowance of 20%, a car allowance, medical insurance, life insurance and income
replacement insurance.
The 2018 annual bonus incentive opportunities and Long Term Incentive award grants will be unchanged from 2017 and will be
implemented in accordance with the Remuneration Policy. There is a compulsory three-year deferral into shares of the 2018 bonus
outcome of 33% of annual bonus.
Annual bonus
Measure
Attributable Profit
Earnings Before Interest and
Taxation
Free Cash Flow
Individual objectives
Long Term Incentive
Weighting
Measure
25%
25%
30%
20%
Earnings Per Share CAGR
Free Cash Flow
Total Shareholder Return
The Long Term Incentive awards granted in 2018 are subject to the following targets:
Measure
EPS CAGR over three years
Vesting % for EPS measure
Cumulative Free Cash Flow ($m) over three years
Vesting % for FCF measure
Total Shareholder Return vs FTSE250 excluding investment trusts
Vesting % of each measure for TSR measure
Straight line vesting occurs between Threshold, Mid and Maximum.
66
Threshold
7%
25%
$305m
25%
Median
25%
Weighting
40%
40%
20%
Maximum
15%
100%
$365m
100%
Mid
10%
47.5%
$335m
62.5%
62.5 Percentile
Upper Quartile
62.5%
100%
DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 DECEMBER 2017
CONTINUED
The cumulative Free Cash Flow target is subject to adjustment and is calculated before dividends and before any deficit repair
contributions to UK pension schemes. EPS growth is based on EPS growth adjusted to exclude the impact of any variation in
the pension finance charge.
The Committee have decided to increase the challenge of the Long Term Incentive targets that will apply for the three-year performance
period commencing on 1 January 2018. The Company announced to shareholders on 27 February 2018 the commencement of a
Connecting For Growth (C4G) programme that is intended to increase the profitability and efficiency of the Group going forward and
to support its stretching growth plans. The programme will, in the short term, initially incur certain exceptional costs which have been
disclosed to shareholders but will result in longer term improvement to shareholder value. Accordingly, the Committee feels that it
appropriate to increase the challenge of the EPS growth targets for the 2018 LTIP award; the threshold EPS CAGR target for the 2018
award will be increased from 5% to 7% and a mid-point target of 10% EPS CAGR will be introduced with will vest at 47.5%. The Free
Cash Flow targets have been based on plans that anticipate future benefits of the C4G programme. The future benefits should be
reflected in the TSR performance of the company and so no adjustment is required to the targets for the TSR measure.
Consideration by the Directors of matters relating to Directors’ remuneration
The members of the Committee were: David Gosnell (Chairman), Mike Allen, Echo Lu (joined 1 December 2017), Fran Philip
and Alan Rosling.
The responsibilities of the Committee are set out in the Corporate Governance section of the Annual Report. The Committee also
received assistance from Stuart Morgan (who also acted as Secretary to the Committee), Andrew Speak (Group HR Director) until
31 August 2017 and Brendan Fahey (Reward Director). No Directors are involved in deciding their own remuneration.
The Company received advice from Herbert Smith Freehills LLP in relation to legal matters relating to the Group’s incentive plans. Kepler,
a brand of Mercer, provided independent advice to the Company principally in relation to the design and performance targets set for
the Group’s incentive plans, benchmarking of Executive Directors pay, review of the Directors’ Remuneration Report and amendments to
the 2017 Remuneration Policy. Kepler were paid fees of £20,486 for time spent and materials used in providing advice to the Company
during the period to 31 December 2017. Kepler provide no other advice to the Company and the Committee is satisfied that the advice
provided was fair and objective.
Statement of voting at the General Meeting
At the AGM of the Company on 17 May 2017 the results of the vote regarding Resolution 2 (to approve the Annual Report on
Remuneration) were:
Number
1,070,050,902
Votes for
%
99.9
Number
134,798
Votes against
%
Votes
Total
0.01
1,070,185,700
Votes
Withheld
145,706
At the AGM of the Company on 17 May 2017 the results of the vote regarding Resolution 3 (to approve the Directors Remuneration
Policy were):
Number
1,048,569,448
Votes for
%
99.9
Number
153,415
Votes against
%
Votes
Total
0.01
1,048,722,863
Votes
Withheld
150,924
Prior to the AGM vote the Remuneration Committee Chairman consulated with all shareholders with a holding of more than 1% of the
company to explain the key terms of the proposed policy and to highlight the changes that were proposed.
A copy of the Remuneration Policy will be made available at www.coats.com/governance
The Remuneration Report was approved by a Committee of the Board of Directors on 6 March 2018 and signed on its behalf by:
David Gosnell
Chairman, Remuneration Committee
6 March 2018
67
UK CORPORATE GOVERNANCE
CODE REPORT
A1 The role of the Board
The Board’s agenda is set by the Chairman and deals with those matters specifically reserved
to the Board including matters relating to the Group’s strategic plan, financial matters and
corporate governance policies. Matters delegated to the Group Chief Executive and executive
management include managing the Group’s business in line with the strategic plan and
approved risk appetite, and responsibility for the operation of the internal control framework.
Each year the Board agrees a schedule of regular business, financial and operational matters
to be addressed by the Board and its Committees during the course of the year and this
ensures that all areas for which the Board has responsibility are reviewed.
The Board’s standard agenda covers standing items, such as Health & Safety, a revolving
review of principal risks, pensions and financial matters. When relevant, M&A and specific
strategic and financial projects were considered.
Directors are expected to attend all meetings of the Board, and the Committees on which they
sit, and to devote sufficient time to the Company’s affairs to enable them to fulfil their duties
as Directors. The Directors were located in the UK, USA, New Zealand and Hong Kong and this
geographical diversity meant that it was not always possible for every Director to attend all
Board and Committee meetings in person. In the event that Directors were unable to attend
a meeting, they were given time to comment on papers to be considered at the meeting and
discussions were held in advance with the Chairman so that their contribution could be
included in the wider Board discussion.
In addition to the formal Board meetings, the Chairman seeks to ensure that he meets on a
periodic basis with the Non-Executive Directors without the Executive Directors present. These
meetings support the constructive contribution of the Non-Executive Directors, and allow the
Chairman to ensure that all views are taken into account and aired, as appropriate, at full
Board meetings. All Directors are aware that, should they have concerns about the way the
Board operates, those concerns should be raised and will be recorded within the minutes.
No such concerns were raised during the reporting period.
A2 Division of responsibilities
The separate roles of the Chairman and Group Chief Executive are clearly defined and
documented in writing and approved by the Board. Mike Clasper, the Chairman, is responsible
for leading the Board while Rajiv Sharma as Group Chief Executive is responsible for the
day-to-day management of the Company within the strategy set by the Board.
A3 The Chairman
The Chairman is responsible for leading the Board and ensuring its effectiveness. In
conjunction with the Group Company Secretary, he sets the agendas for meetings, manages
the meetings, administers the meeting timetable and encourages an open and constructive
dialogue during the meetings.
A4 Non-Executive Directors
The Board is strengthened by an open and constructive dialogue in the boardroom and the
Chairman actively invites the views of all Board members. The Chairman is available to the
Non-Executive Directors and, over the course of the year, the Non-Executive Directors have
met in the absence of the Executive Directors and also in the absence of the Chairman,
when appropriate.
B1 The composition of the Board
The Nomination Committee is responsible for reviewing the composition of the Board and
making recommendations for appointments to the Board. The Committee considers the
balance of skills, experience, gender, diversity and knowledge needed in order to enhance
the Board and support the Company in the execution of its strategy and promote the success
of the Company. Details of the work undertaken by the Nomination Committee are set out
on pages 48 and 49.
The Board aims to maintain a balance of independence, tenure, skills, experience and diversity.
Compliance with the 2016
UK Corporate Governance Code
(the Code)
A full version of the UK
Corporate Governance Code
can be found on the Financial
Reporting Council’s website:
www.frc.org.uk
68
UK CORPORATE GOVERNANCE
CODE REPORT CONTINUED
B1 The composition of the Board (continued)
As at the date of this report, the Board comprises the Chairman, eight Non-Executive Directors
(all of whom are considered to be independent) and two Executive Directors. The Board is
therefore in compliance with the requirement of the Code that, excluding the Chairman,
at least half the Board should comprise independent Non-Executive Directors.
B2 Appointments to the Board
The Nomination Committee is responsible for leading the process of appointing new Directors
to the Board. The Committee is committed to ensuring that all appointments are made on
merit above all else with due regard for the benefits of all types of diversity, including gender.
B3 Commitment
The Non-Executive Directors’ letters of appointment set out the time commitment expected
from them. This time commitment is reviewed regularly in the light of the strategic and
operational issues arising through the year. External interests, which may impact existing
time commitments, must be agreed with the Chairman and the Board. The significant
commitments of each of the Directors are included in the biographies on pages 39 to 41.
B4 Development
The Board places great value on the inductions that are offered to new Non-Executive
Directors and the ongoing training opportunities made available to all Board members.
On joining the Board, all Directors are offered a thorough and tailored induction
programme, the key elements of which comprise meetings with Executive Directors and senior
management across the Group, site visits, specific training relating to current issues affecting
the Group, meetings with advisers, provision of training material and other documents.
Details of Echo Lu’s induction programme can be found in the Nomination Committee
Report on page 49.
The Chairman is responsible for reviewing the training needs of each Director, and for ensuring
that the Directors continually update their skills and knowledge of the Company.
All Directors are advised of changes in relevant legislation and regulations and changing risks,
with the assistance of the Company’s advisers where appropriate. The Directors are also
provided with regular corporate governance updates to highlight changes in governance
regulations and best practice.
B5 Information and support
Procedures are in place to ensure that Board members receive accurate and timely information
via a secure electronic portal. All Directors have access to independent professional advice at
the Company’s expense. In addition, they have access to the advice and services of the Chief
Legal & Risk Officer and Group Company Secretary who is responsible for providing advice
on corporate governance matters to the Board.
In conjunction with the Group Company Secretary, the Chairman ensures that all Directors
receive papers and other information relevant to matters to be discussed at Board meetings at
least one week before the meeting. As Directors were, during the reporting period, situated in
the UK, New Zealand, Hong Kong and the US, suitable communication and reporting systems
have been established which enable them to monitor, on a timely basis, the Group’s activities.
Senior management and professional advisers are invited to attend Board and Committee
meetings. Where appropriate, they contribute to discussions and advise members of the
Board or its Committees on particular matters. The involvement of the senior management
at Board and Committee discussions strengthens the relationship between the Board and
its operating business and helps to provide the Board with a greater understanding of
operations and strategy.
B6 Evaluation
Following the externally facilitated review in 2016, the Board conducted an internal review of
the effectiveness of the Board and its Committees – details of which are set out on page 45.
B7 Re-election
All Directors were subject to shareholder re-election at the 2017 Annual General Meeting
(AGM). All Directors will be subject to shareholder election or re-election at the 2018 AGM,
apart from Ruth Anderson who will retire from the Board.
69
UK CORPORATE GOVERNANCE
CODE REPORT CONTINUED
C1 Financial and business reporting
The Strategic report can be located on pages 1 to 36, and this sets out the performance
of the Company, the business model, strategy, and the risks and uncertainties relating to
the Company’s future prospects.
C2 Risk management and internal control
The Board sets the Company’s risk appetite and annually reviews the effectiveness of the
Company’s risk management and internal control systems. A description of the principal risks
facing the Company is set out on pages 21 to 26. The Annual Report also sets out how the
Directors have assessed the prospects of the Company, over what period they have done so
and why they consider that period to be appropriate (the ‘Viability Statement’). The activities
of the Audit and Risk Committee, which assist the Board with its responsibilities in relation
to financial reporting, audit matters and the Group’s internal control and risk management
framework and processes, are set out on pages 50 to 54.
C3 Audit and Risk Committee and auditors
The Audit and Risk Committee comprises four independent Non-Executive Directors, two
of whom are considered to have recent and relevant financial experience, and the Board
delegates a number of responsibilities to the Audit and Risk Committee including oversight of
the Group’s financial reporting processes, internal control and risk management framework,
and the work undertaken by the external and internal auditors. The Committee members as a
whole are considered to have relevant sector competence in which Coats operates. The Audit
and Risk Committee Chairman provides regular updates to the Board on key matters regular
updates to the Board on key matters discussed by the Committee.
D1 The level and components of remuneration
The Company aims to reward employees fairly and the Remuneration Policy is designed
to promote the long term success of the Company whilst aligning both the interests of
the Directors and shareholders.
D2 Procedure
The Remuneration Committee is responsible for setting the remuneration for all Executive
Directors. Details of the composition and the work of the Remuneration Committee are
set out in the Directors’ Remuneration Report on pages 55 to 67.
E1 Dialogue with shareholders
The Company’s relations with shareholders is referred to on page 47.
Board members take an active role in engaging with shareholders, both in private meetings
and in wider forums such as the AGM. The Chairman and the Senior Independent Director
aim to meet some of the major institutional investors at least once per year and are available
to meet other investors on request. The Chairman shares feedback from these meetings
with the wider Board. The Board receives regular updates on investor communication
activity, changes to the shareholder register and analysis of share price performance, and
the Chairman ensures that any views expressed by shareholders are communicated to the
Board at the earliest opportunity.
The Board considers transparency and openness to be a key feature of its stated strategy
and endeavours to ensure that both shareholders and the market remain appropriately
informed and that regular updates are released to the market.
E2 Constructive use of General Meetings
The Board values the Annual General Meeting as an important opportunity to engage with
investors. Attendees have the opportunity to ask questions of the Board and are invited to
meet the Board following the formal business of the meeting. This interaction helps the
Board to develop an understanding of the views of the Company’s shareholders. At its
2017 AGM, the Chairman provided an additional report to shareholders.
This year’s AGM will be held on 16 May 2018 in London.
Copies of these presentations
and reports and the results
of proxy voting at the 2017
AGM were released to the
markets and can be found at
www.coats.com/shareholders
70
DIRECTORS’
REPORT
THE DIRECTORS PRESENT THEIR ANNUAL REPORT
AND AUDITED FINANCIAL STATEMENTS FOR THE
YEAR ENDED 31 DECEMBER 2017.
Corporate Governance statement
The Strategic Report, Corporate Governance Report and Audit and Risk Committee Report
found on pages 1 to 76, together with this Report, of which it forms part, fulfils section 414C
of the Companies Act 2006 and is prepared in accordance with rule 7.2 of the Financial
Conduct Authority’s Disclosure Guidance and Transparency Rules by including, by cross
reference, details of the Group’s financial risk management objectives and policies, business
review, future prospects and environmental policy.
Results and dividends
The results of the Group are shown on page 84 and movements in reserves are set out in
note 27 to the financial statements.
On 30 May 2017 a final dividend in respect of 2016 of 0.84 US cents per share was paid.
In addition the Company paid an ordinary interim dividend per share of 0.44 US cents on
17 November 2017 to shareholders recorded on the register on 27 October 2017.
The Company recommends to shareholders payment of a final dividend of 1.00 US cents
per share in respect of the year ended 31 December 2017 on 29 May 2018 to shareholders
recorded on the register on 04 May 2018 (2016: 0.84 US cents per share). The shares will
become ex-dividend on 03 May 2018.
Environmental matters
The involvement of the Group in relation to the Lower Passaic River is reported in the
Principal risks section of the Annual Report and can be found on page 25. Further details
are contained in note 28 to the financial statements.
Going concern
The Company’s business activities, together with the factors likely to affect its future
development, performance and position are set out in the Chairman’s statement.
In addition, note 34 to the financial statements includes the Group’s objectives, policies
and processes for managing its capital; its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.
The Directors believe that the Group is well placed to manage its business risks successfully.
The Board expects to be able to meet any actual and contingent liabilities from existing
resources. Further information on the net cash position of the Group is set out in note 30(e).
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 binding settlement agreement with the Trustees of the UK Coats Pension Plan,
Brunel Holdings Pension Scheme and the Trustee of the Staveley Scheme; and also taking
into consideration the cash flow forecasts prepared by the Group and the sensitivity analysis
associated therewith, the Directors consider that the going concern basis of accounting
is appropriate for the Company and the Group and the financial statements have been
prepared on that basis.
Directors
The names and biographical details of the current Directors are shown on pages 39 to 41.
Particulars of their emoluments and interests in shares are given in the Directors’ Remuneration
Report. Echo Lu was appointed as a Director on 1 December 2017 and there were no other
changes to the composition of the Board during 2017.
On 8 January 2018, the Company announced that Anne Fahy has been appointed as a
Director from 1 March 2018 and will succeed Ruth Anderson as Chair of the Audit and Risk
Committee. Ruth will not seek re-election as a Director at the forthcoming Annual General
Meeting and will retire from the Board in 2018.
71
DIRECTORS’
REPORT CONTINUED
Directors
Changes to the composition of the Board since 1 January 2017 up to the date of this report
are shown in the table below:
Member
Echo Lu
Anne Fahy
Action
Appointed
Appointed
Date
1 December 2017
1 March 2018
Appointment and retirement of Directors
The appointment of Directors is governed by the Company’s Articles of Association, the Code
and the Companies Act 2006. The Directors may, from time to time, appoint one or more
Directors.
In the interests of good governance and in accordance with the provisions of the Code,
all Directors will retire and submit themselves for re-election or election at the forthcoming
AGM, apart from Ruth Anderson who will retire from the Board.
Share capital
Details of the Company’s issued share capital, together with details of the movements in the
Company’s issued share capital during the year, are shown in note 26. The Company has one
class of Ordinary Shares, which does not carry the right to receive a fixed income. Each share
carries the right to one vote at general meetings of the Company. There are no restrictions
or agreements known to the Company that may result in restrictions on share transfers or
voting rights in the Company. There are no specific restrictions on the size of a holding, on
the transfer of shares, or on voting rights, all of which are governed by the provisions of
the Articles of Association and prevailing legislation.
Shareholder authority for the Company to purchase up to 141,113,090 (10%) of its own
shares was granted at the 2017 AGM. No shares were purchased pursuant to this authority
during the year.
Shareholder authority for the Company to allot shares up to an aggregate nominal amount
of £23,518,848 was granted at the 2017 AGM. No shares were allotted pursuant to this
authority during the year. The issued share capital of the Company at 31 December 2017
was £70,665,032 divided into 1,413,300,648 ordinary shares of 5 pence each.
Since 31 December 2017, 2,047,281 new shares have been issued as a result of the exercise of
share options by the Company’s share option scheme participants and the total issued share
capital at 6 March 2018 is 1,415,347,929 ordinary shares of 5 pence each. The Company’s
Ordinary Shares are listed on the London Stock Exchange. The register of shareholders is held
in the UK.
Substantial interests
As at 31 December 2017 the Company had been notified, in accordance with Chapter 5 of the
Disclosure Guidance and Transparency Rules, of the following voting rights as a shareholder of
the Company (see the following table).
Substantial interests
Name of shareholder
FIL Limited
Prudential plc group of companies (M&G)
Invesco
Kempen Capital Management N.V
Threadneedle Asset Management Ltd.
J O Hambro Capital Management Ltd
Odey Asset Management LLP
Soros Fund Management
MSD Capital
Schroders plc
Shares
140,761,228
140,020,355
138,493,196
71,172,011
71,337,869
70,333,801
69,490,000
61,185,245
56,006,443
51,864,254
%
9.99
9.98
9.83
5.06
5.05
4.98
4.94
4.33
3.98
3.69
72
DIRECTORS’
REPORT CONTINUED
As required by Chapter 5 of the Disclosure Rules and Transparency Rules, there have been
no changes in the schedule of substantial interests since the year end.
The Company has not been notified of any other substantial interests in its securities. The
Company’s substantial shareholders do not have different voting rights. Coats, so far as is
known by the Company, is not directly or indirectly owned or controlled by another
corporation or by any government.
Property, plant and equipment
Details of property, plant and equipment are set out in note 14 to the financial statements.
Research and Development (R&D) and future development
The Group has a number of ongoing R&D projects focused on developing value-adding
products aimed at the industrial market segments, as well as continuing to develop its
proprietary colour management systems. Further information on future development
initiatives can be found in note 5.
Employee issues
A description of the Company’s employee policies applied during the year and details of its
Employee Engagement survey can be found on page 16 of this Annual Report.
Employees with disabilities
Applications for employment by people with disabilities are always fully considered, bearing
in mind the aptitudes of the applicant concerned. In the event of members of staff developing
disabilities, every effort is made to ensure that their employment with the Company continues
and that appropriate arrangements are made. It is the policy of the Company that the training,
career development and promotion of employees with disabilities should, as far as possible,
be identical to that of other employees.
Diversity and Inclusion
The Company has an active Diversity and Inclusion employee group which arranges global
meetings, calls and seminar and supports, promotes and encourages a broad range of diversity
and inclusion initiaitives. This activity is summarised in the Our People section of this report on
page 16. Coats supports diversity within its Board of Directors, including gender diversity. The
Board of Directors have recently recruited two further female Non-Executive Directors, Echo Lu
and Anne Fahy. Further details of the Nomination Committee’s approach to diversity are on
page 49 of this Annual Report.
Directors’ indemnities
The Directors of the Company have entered into individual deeds of indemnity with the
Company which constitute ‘qualifying third party indemnity provisions’ for the purposes
of the Companies Act 2006. The deeds indemnify the Directors, and the directors of the
Company’s subsidiary companies, to the maximum extent permitted by law.
The deeds were in force for the whole of the year, or from the date of appointment for
those appointed in the year. In addition the Company had Directors’ and Officers’ liability
insurance cover in place.
Auditor
A resolution to re-appoint Deloitte LLP as auditor will be proposed at the 2018 AGM.
A statement in respect of the auditor, in accordance with Section 418 of the Companies
Act 2006, has been included below.
Disclosure of information to the Auditor
The Directors who held office at the date of approval of this Directors’ Report confirm that,
so far as they are aware, there is no relevant audit information of which the Company’s
Auditor is unaware, and each Director has taken reasonable steps to ascertain any relevant
audit information and to ensure that the Company’s Auditor is aware of that information.
Branches and financial risk management objectives and policies
The Company operates in over 50 countries, through branches and offices in the UK and
overseas. Information about internal control and financial risk management objectives
and policies in relation to the use of financial instruments can be found in note 34 to
the financial statements, which are incorporated into this report by reference.
Further information on risk management more generally can be found on page 21.
73
DIRECTORS’
REPORT CONTINUED
Financial instruments
Disclosure of the use of financial instruments by the Group can be found in note 34 to the
financial statements.
Disclosures required under Listing Rule 9.8.4R
Additional information required to be disclosed by Listing Rule 9.8.4R, where applicable to
the Group, can be found in the following pages of the Annual Report:
Amount of interest capitalised
Publication of unaudited financial information
Details of Long Term Incentive schemes
Allotment of equity securities
Significant contracts
Page
N/a
N/a
61
72
74
Change of control
The Company is not party to any significant agreements that would take effect, alter or
terminate upon a change of control of the Company following a takeover bid. However, the
Group’s Revolving Credit Facility Agreement and US Private Placement would terminate upon a
change of control of the Company. The Company does not have agreements with any director
or employee providing compensation for loss of office or employment that occurs because of a
takeover bid, except for provisions in the rules of the Company’s share schemes which result in
options or awards granted to employees vesting on a takeover.
Political donations
No contributions were made to political parties during the year (2016: £Nil).
Directors and their responsibilities
The current Directors who served during the year and up to the date of this report are
detailed on pages 39 to 41.
Details of those Directors seeking election or re-election at the forthcoming AGM of the
Company will be included in the Notice of Meeting that will be sent to shareholders in
due course.
The Board manages the business of the Company under the powers set out in the Company’s
Articles of Association. These powers include the Directors’ ability to issue or buy back shares.
Shareholders’ authority to empower the Directors to make market purchases of up to 10% of
its own ordinary shares is sought at the AGM each year (as set out in the Share Capital section
above). The Company’s Articles of Association can only be amended, or new Articles adopted,
by a resolution passed by shareholders in a general meeting by at least three quarters of the
votes cast.
Further discussion of the Board’s activities, powers and responsibilities appears within the
Corporate Governance section on pages 37 to 76. Information on compensation for loss of
office is contained in the Directors’ Remuneration report on pages 55 to 67.
Greenhouse gas emissions
For the year ended 31 December 2017, Coats reported the following emissions:
Global tonnes of CO2e
1,2
Direct (Gas, coal, oil)
Indirect (Electricity)
2017
71.8
238.8
2016
70.9
247.6
1 Based on IEA CO2 Emissions from Fuel Combustion, OECD/IEA, Paris, 2016, and the 2015 & 2016 UK DEFRA GHG reporting guidance and
conversion factors. Includes Scope 1 – direct emissions from the combustion of fuel (gas, coal and oil) and Scope 2 – indirect emissions from
the purchase of electricity.
2 Emissions reported are from energy consumption in our global operations.
This represents a decrease of 2% versus 2016 total emissions.
74
DIRECTORS’
REPORT CONTINUED
The methodology for Scope 1 direct emissions is to convert fuel consumed in kWh to GHG
equivalent using DEFRA published global conversion factors.
The methodology for Scope 2 indirect emissions is to convert the electricity or other purchased
energy in each country from KWh to GHG equivalent using the country level conversion factors
published by the IEA for all countries. The resultant figures are then consolidated globally.
Greenhouse gas emissions intensity per unit of production
(kg per kg of dyed product)
20171
4.3
2016
4.6
2015
4.5
2014
5.1
20132
5.3
2012
5.6
2011
6.2
Greenhouse gas emissions intensity per sales value
(tonnes per million $ sales)
20171
206
2016
219
2015
208
2014
201
20132
212
2012
226
2011
249
1 2014 – 2017 reported figures are based on IEA conversion factors for Scope 2 emissions.
2 Scope 2 emissions for 2011 – 2013 continue to be calculated using DEFRA country level figures derived from IEA data.
Further details can be found in the Corporate Responsibility section on pages 18 and 20.
Post balance sheet events
Details of post balance sheet events are set out in note 36 to the financial statements.
This Directors’ Report was approved by order of the Board.
On behalf of the Board
Stuart Morgan
Company Secretary
6 March 2018
75
DIRECTORS’ RESPONSIBILITIES
STATEMENT
Company law requires the Directors to prepare financial statements for each financial year.
Under that law the Directors are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union and Article 4 of the IAS Regulation and have elected to prepare the parent
Company financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law), including
FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.
Under company law the Directors must not approve the accounts unless they are satisfied
that they give a true and fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period.
In preparing the parent Company financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgments and accounting estimates that are reasonable and prudent;
state whether applicable UK Accounting Standards have been followed, subject to any
material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate
to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting Standard 1 requires
that Directors:
properly select and apply accounting policies;
present information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information;
provide additional disclosures when compliance with the specific requirements in IFRSs
are insufficient to enable users to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and financial performance; and
make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient
to show and explain the Company’s transactions and disclose with reasonable accuracy at
any time the financial position of the Company and enable them to ensure that the financial
statements comply with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial
information included on the Company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may differ from legislation in
other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
the financial statements, prepared in accordance with the relevant financial reporting
framework, give a true and fair view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the consolidation taken as a whole;
the strategic report includes a fair review of the development and performance of the business
and the position of the Company and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and uncertainties that it faces; and
the Annual Report and financial statements, taken as a whole, are fair, balanced and
understandable and provide the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
This responsibility statement was approved by the Board of Directors and is signed on its
behalf by:
Mike Clasper
Chairman
6 March 2018
ENSURING OUR ANNUAL
REPORT IS FAIR, BALANCED
AND UNDERSTANDABLE
A number of established and
embedded processes underpin the
compilation of the Annual Report
to help provide the Board with the
assurance that it is fair, balanced
and understandable, including:
reviewing the use of Alternative
Performance Measures and their
appropriateness in aiding users of
our financial statements to better
understand our performance year-
on-year;
drafting of the Annual Report by
appropriate senior management
who monitor regulatory changes
and who are briefed regarding the
fair, balanced and understandable
regulations;
an extensive verification process
undertaken to ensure factual
accuracy which has been
considered by the Disclosure
Committee;
comprehensive reviews of drafts
of the Annual Report undertaken
by senior management, including
members of the Group Executive
Team;
the Audit and Risk Committee
discussing the draft Annual Report
with both management and
Deloitte and, where appropriate,
challenging the content and any
judgements and assumptions
used; and
all Board members receiving
drafts of the Annual Report
with sufficient time for review
and comment.
76
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
Report on the audit of the financial statements
Opinion
In our opinion:
the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at
31 December 2017 and of the group’s profit for the year then ended;
the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and
Republic of Ireland”; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards
the group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements of Coats Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise:
the Consolidated Income Statement;
the Consolidated Statement of Comprehensive Income;
the Consolidated Statement of Financial Position;
the Consolidated Statement of Changes in Equity;
the Consolidated Statement of Cash Flows;
the group related notes 1 to 37;
the Company Balance Sheet;
the Company Statement of Changes in Equity;
the Company Cash Flow Statement; and
the Company related notes 1 to 8.
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs
as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company
financial statements is applicable law and United Kingdom Accounting Standards, including FRS 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of
the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s
Ethical Standard were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
77
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
CONTINUED
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
Lower Passaic River Study Area litigation provision
Material assumptions underlying retirement benefit obligations
Impairment assessment of Brazil tangible assets
Taxation provisions – transfer pricing
The key audit matters are the same as the prior year, except that the impairment risk excludes the risk of
impairment of intangible assets which has reduced since the previous audit following the improved trading
results and significant increase in the group’s overall market capitalisation.
Materiality
The materiality that we used for the group financial statements was $10 million which was determined
on the basis of 7% of profit before tax.
Scoping
Coats Group plc was subject to a full statutory audit by the group auditor. Due to the widespread nature
of the group, the audit is subject to scoping decisions on overseas components. Our full-scope audit of
components provided coverage of 76% of the group’s revenue and 81% of the group’s profit before tax
from profit making components.
Significant
changes in
our approach
In addition to the change in key audit matters as described above, in the current year materiality has been
based on 7% of profit before tax. In the prior year 8% of adjusted profit before tax has been used. In the
current year, the exceptional and acquisition related items were not considered significant and not adjusted
for the purpose of determining materiality.
Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed the directors’ statement in note 1 to the financial statements about whether they considered it appropriate to adopt
the going concern basis of accounting in preparing them and their identification of any material uncertainties to the group’s and
company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.
We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing
Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.
Principal risks and viability statement
Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the
course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the group’s and the company’s
ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in
relation to:
the disclosures on pages 21-25 that describe the principal risks and explain how they are being managed or mitigated;
the directors' confirmation on page 23 that they have carried out a robust assessment of the principal risks facing the group,
including those that would threaten its business model, future performance, solvency or liquidity; or
the directors’ explanation 26 as to how they have assessed the prospects of the group, over what period they have done so and why
they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will
be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing Rule 9.8.6R(3)
is materially inconsistent with our knowledge obtained in the audit.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.
78
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
CONTINUED
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources
in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
Lower Passaic River Study litigation provision
Key audit matter
description
Along with other textile manufacturers, and chemical producers, the group is subject to ongoing litigation
proceedings by the US Environmental Protection Agency (EPA) in regard to environmental damage caused
by historic operations of the group in the Lower Passaic River Study Area.
In March 2016, EPA issued a Record of Decision providing a basis for management to make a provision
of $9 million, in respect of remediation costs net of insurance proceeds. This is currently considered by
management to be the best estimate of the future liability, given the information available.
Judgement is required to estimate what, if any, the group’s share of the total remediation costs is likely to be.
Management identify provisions as a source of significant estimation uncertainty in notes 1, 24 and 28 of the
financial statements and discuss the matter as a significant financial and reporting issue in the Audit and Risk
Committee report on page 51.
How the scope
of our audit
responded to the key
audit matter
We challenged managements’ assumptions including a review of evidence used in determining provisions for
the Lower Passaic River Study Area litigation, both in terms of appropriateness of recognition and in terms of
valuation. We verified the material cash outflows relating to the utilisation of the legal provision and made
enquiries of management to confirm whether any further correspondence had been received in connection
with this matter. We considered the legal advice management had obtained in relation to litigation and directly
challenged and discussed with key legal advisers.
Key observations
We found that management’s provision is within a range of reasonable estimates of the future liability and has
properly taken into account the latest information available from their third party legal advisers.
Material assumptions underlying retirement benefit obligations
Key audit matter
description
How the scope
of our audit
responded to the
key audit matter
The retirement benefit obligations recognised in the statement of financial position in respect of defined
employee benefits are the present values of the defined benefit obligations at the year end less the fair value of
any associated assets. The gross actuarial value of scheme liabilities of Coats Group plc at 31 December 2017
was $3,389 million, and a relatively small change in the assumptions used can result in a material difference in
the net deficit recognised of $163 million.
Key assumptions involved in the determination of the present values of the defined benefit obligations include
discount rates, beneficiary mortality and inflation rates. Changes in any or all of these assumptions could
materially change the employee benefit obligations recognised in the statement of financial position.
The carrying values of the Group’s pension obligations as well as a sensitivity analysis relating to the Group’s
major defined benefit pension arrangements are included in note 10. Management identify Pension and
other employee benefit obligations as a source of significant estimation uncertainty in note 1 of the financial
statements and discuss the matter as a significant financial and reporting issue in the Audit and Risk
Committee report on page 57.
We worked with our own pension specialists to challenge the assumptions such as discount, inflation and
mortality rates underlying management’s calculation of the group defined benefit schemes. We have compared
these assumptions to industry benchmarks and prior year rates.
We evaluated the competence of the experts that management engaged to calculate the defined benefit
pension schemes, by confirming they are qualified and affiliated with the appropriate industry body; and we
evaluated the sensitivity of the pension scheme liabilities to differences between our independent judgements
and those made by management, both individually and in aggregate.
Key observations
The key assumptions used in the calculation of the retirement benefit obligations were within the ranges
expected by our pension specialists.
79
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
CONTINUED
Impairment assessment of Brazil tangible assets
Key audit matter
description
Management performed an assessment of whether any of the Group’s tangible assets, which have a total
carrying value of $293 million, exhibited any indicators of impairment.
Management identified the challenging economic and trading conditions in Brazil as an indicator of potential
impairment and performed a detailed impairment assessment of the assets allocated to this cash generating
unit (CGU) that have a carrying value of $38 million.
Management’s assessment of the recoverable value, with the involvement of a local real estate expert in Brazil,
was based on a valuation of the underlying assets less any costs of disposal as the land held in central Sao
Paulo that was acquired in 1907 has a fair value that is significantly higher than its carrying value and is a key
consideration in determining the fair value of this CGU.
The determination of a reasonable range of valuations for the assets and any disposals costs involves
estimation uncertainty.
Due to the significant level of judgement, we identified this key audit matter as a potential fraud risk area.
Management discuss the matter as a significant financial and reporting issue in the Audit and Risk Committee
report on page 57.
How the scope
of our audit
responded to the
key audit matter
We challenged management’s valuation approach and assumptions to confirm that the asset values assumed
were supportable and that the potential costs of disposal were appropriately assessed. We had direct
discussions with the external real estate expert in Brazil to confirm the range of values for the various
properties in Brazil, and evaluated the competence of the experts used.
We considered the historical property indices and considered potentially contradictory evidence and applied
further sensitivities.
Key observations
We concluded that the assumptions used were reasonable and had been determined and applied on a
consistent basis. No impairments were identified from the work performed.
Taxation provisions – transfer pricing
Key audit matter
description
The Group evaluates uncertain tax items, which are subject to interpretation and agreement of the position
with the local Tax Authorities and consequently agreement may not be reached for a number of years.
We have identified a risk in respect of the provisions which have been made in relation to the interpretation
of transfer pricing legislation and practices across the jurisdictions in which the Group operates.
The Group’s effective tax rate reconciliation is provided in note 9.
How the scope
of our audit
responded to the
key audit matter
We reviewed the changes in effective tax rates in each significant jurisdiction and basis for these changes.
We worked with our tax specialists in key jurisdictions to evaluate and challenge the appropriateness of
judgements and assumptions made by management with respect to their assessment and valuation of transfer
pricing tax risks, including a review of applicable third party evidence and correspondence with tax authorities
to assess the adequacy of associated provision and disclosures.
Key observations
We are satisfied that the provisions raised in respect of the group’s potential transfer pricing taxation exposures
are appropriate.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
80
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
CONTINUED
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Materiality
$10 million (2016: $10 million)
Basis for
determining
materiality
7% of profit before tax and equates to less than 1% of total assets.
In the prior year 8% of adjusted profit before tax has been used. Adjusted profit
was determined as profit before tax excluding exceptional and acquisition related
items. In the current year, the exceptional and acquisition related items did not
have a significant impact on the materiality determined.
Rationale for
the benchmark
applied
We have determined materiality based on professional judgement, the
requirements of auditing standards and the financial measure most relevant to
the user of the financial statements.
Profit before tax is a key measure used by Coats Group plc in reporting results
and is determined to be the most appropriate basis for determining materiality
for a global manufacturer.
Parent company
financial statements
$8.5 million
Parent company materiality
of $8.5 million represents
0.9% of net assets. This
is capped at 85% of the
group materiality.
The parent company is
primarily an investment
holding company and net
assets is considered the
most appropriate basis.
We agreed with the Audit and Risk Committee that we would report to the Committee all audit differences in excess of $0.5 million
(2016: $0.5 million) for the group, as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit and Risk Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Coats Group plc was subject to a full statutory audit by the group auditor. Due to the geographically widespread nature of the
group, the audit is subject to scoping decisions on overseas components. We identified 11 (2016: 12) financially significant
overseas components spread across five continents. One of the overseas components is no longer significant to the group
and our involvement in their audits is as follows:
For all components the group auditor held planning calls, attended closing meetings and also reviewed the work of overseas
component auditors, where considered necessary.
The senior members of the audit team and Senior Statutory Auditor follow a programme of planned site visits. During 2017,
the Senior Statutory Auditor visited Coats operations in Hong Kong, Vietnam, India and China and met with the component
audit teams. Senior members of the engagement team visited Coats North American operations.
The components were selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement
identified above. Our audit work at the components identified above, excluding the parent company, was executed at levels of
materiality which were lower than the group materiality and range from $0.2 million to $7.3 million (2016: $0.2 million to $8.5 million).
Our audit provided coverage of 87% of the Group’s net assets (2016: 86%), 76% of the Group’s revenue (2016: 70%) and, 81%
of the Group’s profit before tax within the Group’s profit making components (2016: 81%).
81
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
CONTINUED
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report,
other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed,
we conclude that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information
include where we conclude that:
Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial statements
taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s
position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
Audit and Risk Committee reporting – the section describing the work of the Audit and Risk Committee does not appropriately
address matters communicated by us to the Audit and Risk Committee; or
Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under
the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for
review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of
the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting
unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
82
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF COATS GROUP PLC
CONTINUED
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them
in an auditor’s 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 and the company’s members as a body, for our audit work, for this report, or for the opinions we have
formed.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
the information given in the strategic report and the directors’ report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and of the parent company and their environment obtained in the
course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration
have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting
records and returns.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit and Risk Committee, we were appointed by the Company on 17 June 2003 to audit
the financial statements for the year ending 31 December 2003 and subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the firm is 15 years, covering the years ending 31 December 2003
to 31 December 2017.
Consistency of the audit report with the additional report to the Audit and Risk Committee
Our audit opinion is consistent with the additional report to the Audit and Risk Committee we are required to provide in
accordance with ISAs (UK).
Timothy Biggs FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
6 March 2018
83
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December
Continuing operations:
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other operating income
Operating profit
Share of (losses)/profits of joint ventures
Investment income
Finance costs
Profit before taxation
Taxation
Profit from continuing operations
Loss from discontinued operations
Profit for the year
Attributable to:
Equity shareholders of the company
Non-controlling interests
Earnings per share (cents):
Continuing operations:
Basic
Diluted
Continuing and discontinued operations:
Basic
Diluted
2017
2016
Before
exceptional
and
acquisition
related
items
US$m
Exceptional
and
acquisition
related
items
US$m
Notes
Before
exceptional
and
acquisition
related
items
US$m
Exceptional
and
acquisition
related
items
US$m
Total
US$m
Total
US$m
–
–
–
–
1,510.3
1,457.3
(932.9)
(892.3)
577.4
565.0
(193.2)
(197.2)
–
–
–
–
1,457.3
(892.3)
565.0
(197.2)
(6.5)
(217.1)
(210.1)
(4.6)
(214.7)
–
0.1
0.2
–
0.2
167.2
157.9
(4.6)
153.3
2,3
1,510.3
(932.9)
577.4
(193.2)
(210.6)
0.1
173.7
1.3
2.1
(25.1)
152.0
(48.5)
103.5
–
2,4,5
15
6
7
5
9
32
11
(6.5)
(2.6)
–
–
(1.3)
2.1
(25.1)
(9.1)
142.9
0.7
(47.8)
(8.4)
95.1
–
–
103.5
(8.4)
95.1
89.2
14.3
103.5
(8.4)
–
(8.4)
80.8
14.3
95.1
5.78
5.67
5.78
5.67
6.37
0.8
4.3
(35.9)
127.1
(47.2)
79.9
(3.3)
76.6
64.7
11.9
76.6
–
–
–
0.8
4.3
(35.9)
(4.6)
122.5
0.4
(4.2)
(1.2)
(5.4)
(5.4)
–
(5.4)
(46.8)
75.7
(4.5)
71.2
59.3
11.9
71.2
4.60
4.53
4.28
4.22
4.91
Adjusted earnings per share
37(d)
Notes on pages 90 to 146 form part of these financial statements.
84
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
Year ended 31 December
Profit for the year
Items that will not be reclassified subsequently to profit or loss:
Actuarial gains/(losses) on retirement benefit schemes
Tax on items that will not be reclassified
Items that may be reclassified subsequently to profit or loss:
Loss on cash flow hedges arising during the year
Transferred to profit or loss on cash flow hedges
Exchange differences on translation of foreign operations
Other comprehensive income and expense for the year
Net comprehensive income and expense for the year
Attributable to:
Equity shareholders of the company
Non-controlling interests
Notes on pages 90 to 146 form part of these financial statements.
2017
US$m
95.1
2016
US$m
71.2
145.2
(324.8)
1.0
0.1
146.2
(324.7)
(1.1)
0.2
(6.1)
(7.0)
(0.9)
1.3
1.3
1.7
139.2
(323.0)
234.3
(251.8)
219.9
(263.0)
14.4
11.2
234.3
(251.8)
85
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
31 December
Non-current assets:
Intangible assets
Property, plant and equipment
Investments in joint ventures
Available-for-sale investments
Deferred tax assets
Pension surpluses
Trade and other receivables
Current assets:
Inventories
Trade and other receivables
Available-for-sale investments
Pension surpluses
Cash and cash equivalents
Non-current assets classified as held for sale
Total assets
Current liabilities:
Trade and other payables
Current income tax liabilities
Bank overdrafts and other borrowings
Retirement benefit obligations:
–
–
Funded
Unfunded
Provisions
Net current assets
Non-current liabilities:
Trade and other payables
Deferred tax liabilities
Borrowings
Retirement benefit obligations:
–
–
Funded schemes
Unfunded schemes
Provisions
Total liabilities
Net assets
86
Notes
2017
US$m
2016
US$m
13
14
15
15
16
10
18
17
18
15
10
293.9
292.7
291.8
265.9
12.0
1.2
24.6
57.9
21.5
11.0
1.1
18.1
50.8
16.1
703.8
654.8
232.2
268.9
0.2
6.9
205.8
248.4
0.2
6.7
30(e)
32(b)
118.4
476.5
0.2
0.2
626.8
937.8
1,330.6
1,592.6
20
(330.4)
(310.8)
22
10
10
24
20
23
22
10
10
24
(8.7)
(1.7)
(8.9)
(7.7)
(16.9)
(309.6)
(7.4)
(6.2)
(18.3)
(17.1)
(383.4)
(660.3)
243.4
277.5
(27.2)
(14.3)
(15.8)
(31.7)
(358.2)
(390.6)
(101.1)
(272.0)
(102.6)
(33.5)
(96.4)
(34.8)
(636.9)
(841.3)
(1,020.3)
(1,501.6)
310.3
91.0
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
CONTINUED
31 December
Equity:
Share capital
Share premium account
Own shares
Translation reserve
Capital reduction reserve
Other reserves
Retained loss
Equity shareholders’ funds
Non-controlling interests
Total equity
Notes
2017
US$m
2016
US$m
26
27
87.5
127.0
7.7
11.6
26, 27
(7.7)
(10.5)
27
27
27
27
27
(48.8)
(121.1)
59.8
85.2
245.8
250.9
(58.6)
(274.6)
285.7
24.6
310.3
68.5
22.5
91.0
Rajiv Sharma
Group Chief Executive
Approved by the Board 6 March 2018
Company Registration No.103548
Simon Boddie
Chief Financial Officer
Notes on pages 90 to 146 form part of these financial statements.
87
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
Share
premium
account
US$m
Own
shares
US$m
Translation
reserve
US$m
Capital
reduction
reserve
US$m
Other
reserves
US$m
Retained
loss
US$m
Non-
controlling
interests
US$m
Total
US$m
11.6
(7.6)
(123.1)
85.2
250.5
(14.3)
329.3
24.7
Balance as at 1 January 2016
Net comprehensive income and
expense for the year
Dividends
Purchase of own shares
Share based payments
Share
capital
US$m
127.0
–
–
–
–
–
–
–
–
–
–
(2.9)
–
2.0
–
–
–
–
–
–
–
–
–
–
–
–
5.1
0.4
(265.4)
(263.0)
11.2
–
(13.4)
(2.9)
5.1
68.5
–
–
–
22.5
–
Balance as at 31 December 2016
127.0
11.6
(10.5)
(121.1)
85.2
250.9
(274.6)
Change in functional currency*
(39.9)
(10.8)
1.8
78.5
(25.4)
(4.2)
–
Net comprehensive income and
expense for the year
Dividends
Issue of ordinary shares
Movement in own shares
Share based payments
Deferred tax on share schemes
Balance as at
31 December 2017
–
–
0.4
–
–
–
–
–
2.6
4.3
–
–
–
–
–
1.0
–
–
(6.2)
–
–
–
–
–
–
–
–
–
–
–
(0.9)
227.0
219.9
14.4
–
–
–
–
–
(17.8)
(17.8)
(12.3)
–
(5.2)
6.4
5.6
3.0
0.1
6.4
5.6
–
–
–
–
87.5
7.7
(7.7)
(48.8)
59.8
245.8
(58.6)
285.7
24.6
* The functional currency of the parent company Coats Group plc was changed during the year 31 December 2017. See note 1 for further details.
Notes on pages 90 to 146 form part of these financial statements.
88
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December
Cash (outflow)/inflow from operating activities:
Net cash (outflow)/inflow from operations
Interest paid
Taxation paid
Net cash (absorbed in)/generated by operating activities
Cash outflow from investing activities:
Investment income
Net capital expenditure and financial investment
Acquisitions and disposals
Net cash absorbed in investing activities
Cash outflow from financing activities:
Purchase of own shares
Receipts from exercise of share options
Dividends paid to equity shareholders
Dividends paid to non-controlling interests
Net (decrease)/increase in debt and lease financing
Net cash absorbed in financing activities
Net decrease in cash and cash equivalents
Net cash and cash equivalents at beginning of the year
Foreign exchange gains/(losses) on cash and cash equivalents
Net cash and cash equivalents at end of the year
Reconciliation of net cash flows to movements in net debt
Net decrease in cash and cash equivalents
Net decrease/(increase) in debt and lease financing
Change in net debt resulting from cash flows (free cash flow)
Other non-cash movements
Foreign exchange gains/(losses)
Increase in net debt
Total net cash at the start of the year
Total net (debt)/cash at the end of the year
Notes on pages 90 to 146 form part of these financial statements.
Notes
2017
US$m
2016
US$m
30(a)
(157.4)
79.4
(13.7)
(60.5)
(14.0)
(57.9)
(231.6)
7.5
30(b)
30(c)
1.3
(49.7)
30(d)
(23.1)
(71.5)
–
3.0
(17.6)
(12.3)
(41.1)
(68.0)
4.0
(38.7)
(40.4)
(75.1)
(2.9)
0.2
–
(13.4)
3.3
(12.8)
(371.1)
(80.4)
470.3
631.4
17.6
(80.7)
30(e)
116.8
470.3
(371.1)
(80.4)
41.1
(3.3)
(330.0)
(83.7)
(5.0)
15.3
(1.6)
(77.1)
(319.7)
(162.4)
78.2
240.6
30(e)
(241.5)
78.2
89
NOTES TO THE FINANCIAL STATEMENTS
1 Principal accounting policies
The following are the principal accounting policies adopted in preparing the financial statements.
Critical accounting judgements and key sources of estimation uncertainty
The principal accounting policies adopted by the Group are set out in this note to the consolidated financial statements. Certain of the
Group’s accounting policies inherently rely on subjective assumptions and judgements, such that it is possible over time the actual results
could differ from the estimates based on the assumptions and judgements used by the Group. Due to the size of the amounts involved,
changes in the assumptions relating to the following policies could potentially have a significant impact on the result for the year and/or
the carrying values of assets and liabilities in the consolidated financial statements:
Critical judgements in applying the Group’s accounting policies
In the course of preparing the financial statements, no judgements have been made in the process of applying the Group’s accounting
policies, other than those involving estimations (which are dealt with separately below) that have had a significant effect on the amounts
recognised in the financial statements.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other sources of estimation uncertainty at the balance sheet date, that may have
a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year, are
discussed below.
UK retirement benefit obligations
The UK retirement benefit obligations recognised in the consolidated statement of financial position are the present values of the
defined benefit obligations at the year end less the fair value of any associated assets. Key assumptions involved in the determination
of the present values of the defined benefit obligations include discount rates, beneficiary mortality and inflation rates. Changes in
any or all of these assumptions could materially change the employee benefit obligations recognised in the consolidated statement
of financial position.
The carrying values of the Group’s pension obligations as well as a sensitivity analysis relating to changes in discount rates, beneficiary
mortality and inflation rates are included in note 10.
Provisioning for Lower Passaic River environmental matters
In determining the level of provision held at year end in respect of the Lower Passaic River environmental matter the Board takes advice
from external experts as appropriate. The nature of the estimates adopted is such that the final liability that crystallises may differ from
these estimates. In particular there is estimation uncertainty as to what, if any, the Group’s share of total remediation and legal costs is
likely to be, for which a provision of $11.3 million, net of insurance reimbursements, has been recorded as set out in notes 24 and 28.
As set out in note 28 the final remediation cost could differ materially from the provision recorded. However, at this stage it is not
possible to reliably estimate the range of possible outcomes.
a) Accounting convention and format
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial
statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore Group’s financial
statements comply with Article 4 of the EU IAS Regulations.
The same accounting policies, presentation and methods of computation have been followed in these consolidated financial statements
as applied in the Group’s annual financial statements for the year ended 31 December 2016.
b) Basis of preparation
Subsidiaries
Subsidiaries are consolidated from the effective date of acquisition or up to the effective date of disposal, as appropriate, or the
subsidiary meets the criteria to be classified as held for sale. The effective date is when control passes to or from the Group. Control is
achieved when the Group has the power over the investee and is exposed, or has the rights to variable returns from its involvement with
the investee and has the ability to use its power to affect its returns. The existence and effect of potential voting rights that are currently
exercisable or convertible are considered in determining the existence or otherwise of control. Where necessary, adjustments are made
to the financial statements of subsidiaries to align their accounting policies with those used by the Group.
Where subsidiaries are not 100% owned by the Group, the share attributable to outside shareholders is reflected in non-controlling
interests. Non-controlling interests are identified separately from the Group’s equity, and may initially be measured at either fair value or
at the non-controlling interests’ share of the fair value of the subsidiary’s identifiable net assets. The choice of measurement is made on
an acquisition-by-acquisition basis. Changes in the Group’s interests in subsidiaries, that do not result in a loss of control, are accounted
for as equity transactions. Where control is lost, a gain or loss on disposal is recognised through the consolidated income statement,
calculated as the difference between the fair value of consideration received (plus the fair value of any retained interest) and the Group’s
previous share of the former subsidiary’s net assets. Amounts previously recognised in other comprehensive income in relation to that
subsidiary are reclassified and recognised through the income statement as part of the gain or loss on disposal.
90
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Joint ventures
Joint ventures are entities in which the Group has joint control, shared with a party outside the Group. The Group reports its interests
in joint ventures using the equity method.
Going concern
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; 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 these financial statements are prepared on that basis. Further detail is contained in the corporate governance section on page 52.
c) Change in functional currency
In February 2017 the Company signed binding settlement agreements with the Trustees of the Coats UK Pension Plan and Brunel
Holdings Pension Scheme. On 28 February 2017 agreed cash payments of £200.0 million and £34.5 million were made into the Coats
UK Pension Plan and Brunel Holdings Pension Scheme respectively. The Company has received written assurances from the UK Pensions
Regulator that its regulatory action has ceased in relation to these two schemes under the Warning Notices that it issued to the
Company in 2013 and 2014.
Following the events noted above, it was determined that the functional currency of Coats Group plc had changed from Great Britain
pounds sterling (‘Sterling’) to United States dollars (‘USD’), effective 1 March 2017. In accordance with IAS 21 this change has been
accounted for prospectively from this date. To give effect to the change in functional currency, the assets, liabilities and equity of
Coats Group plc in Sterling at 1 March 2017 were converted into USD at an exchange rate of US$1:£0.8078.
Share capital and other equity amounts of Coats Group plc reported in the Group’s consolidated statement of financial position were
previously presented in USD converted from Sterling using historical rates of exchange. Exchange differences have therefore arisen
between the historical USD/Sterling exchange rates and the exchange rate used for conversion from Sterling to USD at 1 March 2017.
These exchange differences are reported in the consolidated statement of changes in equity.
The presentation currency of the Group is USD and remains unchanged.
d) Foreign currencies
Foreign currency translation
The Group’s presentation currency is US Dollars. Transactions of companies within the Group are recorded in the functional currency
of that company. Currencies other than the functional currency are foreign currencies.
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated at the rates of exchange ruling at the period end. All currency differences on monetary
items are taken to the consolidated income statement with the exception of currency differences that represent a net investment in a
foreign operation, which are taken directly to equity until disposal of the net investment, at which time they are recycled through the
consolidated income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated
using the exchange rate as at the date of initial transaction.
91
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Group companies
Assets and liabilities of subsidiaries whose presentation currency is not US Dollars are translated into the Group’s presentation currency
at the rates of exchange ruling at the period end and their income statements are translated at the average exchange rates for the year.
The exchange differences arising on the retranslation since 1 January 2004 are taken to a separate component of equity. On disposal of
such an entity, the deferred cumulative amount recognised in equity since 1 January 2004 relating to that particular operation is recycled
through the consolidated income statement. Translation differences that arose before the date of transition to IFRS in respect of all such
entities are not presented as a separate component of equity.
Goodwill and fair value adjustments arising on acquisition of such operations are regarded as assets and liabilities of the particular
operation, expressed in the currency of the operation and recorded at the exchange rate at the date of the transaction and subsequently
retranslated at the applicable closing rates.
The principal exchange rates (to the US dollar) used in preparing these financial statements are as follows:
Average
Period end
Sterling
Euro
Brazilian Real
Indian Rupee
Sterling
Euro
Brazilian Real
Indian Rupee
2017
0.78
0.89
3.19
2016
0.74
0.90
3.48
65.09
67.16
0.74
0.83
3.31
0.81
0.95
3.25
63.87
67.92
e) Operating segments
Operating segments are components of the Group about which separate financial information is available that is evaluated by the
Coats Group plc Board in deciding how to allocate resources and in assessing performance.
f) Operating profit
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.
g) Exceptional and acquisition related items
The Group has adopted an income statement format which seeks to highlight significant items within the Group results for the year.
Exceptional 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, gains or losses arising from de-risking of defined benefit pension obligations,
regulatory investigation costs and impairment of assets. Acquisition related items include amortisation of acquired intangible assets,
acquisition transaction costs, contingent consideration linked to employment and adjustments to contingent consideration.
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.
h) Property, plant and equipment
Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairments.
Leased assets
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.
Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.
Subsequent expenditure
Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including
major inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future
economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement
as an expense as incurred.
92
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Depreciation
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of property, plant and
equipment, and major components that are accounted for separately. Land is not depreciated. The estimated useful lives are as follows:
Freehold buildings
Leasehold buildings
Plant and equipment
Vehicles and office equipment
50 years to 100 years
10 years to 50 years or over the term of the lease if shorter
3 years to 20 years
2 years to 10 years
Assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each period end.
i) Intangible assets
Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the
identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment
at least annually. Any impairment is recognised immediately in the income statement. On disposal of a subsidiary, the attributable
amount of goodwill is included in the determination of the profit or loss on disposal.
Goodwill is allocated to cash-generating units (‘CGUs’) for the purpose of impairment testing. CGUs represent the Group’s investment
in each of its business segments.
Negative goodwill is recognised immediately in the income statement.
Intangible assets acquired in a business combination
Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value
at the acquisition date (which is regarded as their cost).
Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation
and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
The estimated useful lives (other than the Coats Brand) are as follows:
Brands and trade names
Technology
Customer relationships
10 years to 20 years
5 years to 10 years
9 years to 14 years
The useful life of the Coats Brand is considered to be indefinite.
Other intangibles
Acquired computer software licences and computer software development costs are capitalised on the basis of the costs incurred
to acquire and bring to use the specific software and are amortised over their estimated useful lives of up to 5 years.
Intellectual property, comprising trademarks, designs, patents and product development which have a finite useful life, are carried at
cost less accumulated amortisation and impairment charges. Amortisation is calculated using the straight-line method to allocate the
cost over the assets’ useful lives, which vary from 5 to 10 years.
Impairment of assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject
to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable.
An impairment charge is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. For the purposes
of assessing impairment, assets are measured at the CGU level.
Research and development
All research costs are expensed as incurred.
An internally-generated intangible asset arising from development is recognised only if all of the following conditions are met:
an asset is created that can be separately identified;
it is probable that the asset created will generate future economic benefits; and
93
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
the development costs can be measured reliably.
Internally-generated intangible assets are amortised on a straight-line basis over their useful lives.
Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period
in which it is incurred.
j) Financial instruments
Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant
financial instrument.
Financial assets
(i) Available for sale investments
Available for sale investments are recognised and derecognised on a trade date basis and are initially measured at fair value, plus directly
attributable transaction costs and are remeasured at subsequent reporting dates at fair value. Listed investments are stated at market
value. Unlisted investments are stated at fair value based on directors’ valuation, which is supported by external experts’ advice or other
external evidence.
(ii) Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits. For the
purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of
outstanding bank overdrafts.
(iii) Trade and other receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An estimate
for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
Financial liabilities
(i) Trade payables
Trade payables are not interest-bearing and are stated at nominal value.
(ii) Borrowings
Interest-bearing loans and overdrafts are initially measured at fair value, net of direct issue costs. These financial liabilities are
subsequently measured at amortised cost using the effective interest method, with interest expense recognised over the period
of the relevant liabilities.
(iii) Compound instruments
The component parts of compound instruments are classified separately as financial liabilities and equity in accordance with the
substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing
market interest rate for a similar non-convertible instrument, and this amount is recorded as a liability at amortised cost. The equity
component is the fair value of the compound instrument as a whole less the amount of the liability component, and is recognised in
equity, net of income tax effect, without subsequent remeasurement.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of the host contracts, and the host contracts are not measured at fair value with changes
in fair value being recognised in the income statement.
(iv) Derivative financial instruments and hedge accounting
The Group’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates.
The use of financial derivatives is regulated by the Board or that of the relevant operating subsidiary in accordance with their respective
risk management strategies. Changes in values of all derivatives of a financing nature are included within investment income and finance
costs in the income statement.
Derivative financial instruments are initially measured at fair value at contract date and are remeasured at each reporting date.
The Group designates hedging instruments as either fair value hedges, cash flow hedges or hedges of net investments in foreign
operations. Hedges of interest rate risk are accounted for as cash flow hedges.
At the inception of each hedge transaction the issuing entity documents the relationship between the hedging instrument and the
hedged item and the anticipated effectiveness of the hedge transaction, and monitors the ongoing effectiveness over the period of the
hedge. Hedge accounting is discontinued when the issuing entity revokes the hedging relationship, the hedge instrument expires, is sold,
exercised or otherwise terminated, and the adjustment to the carrying amount of the hedged item arising from the hedged risk is
amortised through the income statement from that date.
94
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
(v) Fair value hedges
Changes in the fair values of derivatives that are designated and qualify as fair value hedges are recognised immediately through the
income statement, together with any changes in the fair value of the related hedged items due to changes in the hedged risks. On
discontinuation of the hedge the adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised
through the consolidated income statement from that date.
(vi) Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is deferred in
equity. Once the related hedged item is recognised in the income statement, the amounts deferred in equity are recycled through the
consolidated income statement. The gain or loss arising from any ineffective portion of the hedge is recognised immediately through
the consolidated income statement.
(vii) Hedges of net investments in foreign operations
Gains and losses on hedging instruments relating to the effective portion of such hedges are recognised through the translation reserve,
and recycled through the consolidated income statement on disposal of the respective foreign operations. The gain or loss arising from
any ineffective portion of such hedges is recognised immediately through the consolidated income statement.
k) Revenue
Revenue comprises the fair value of the sale of goods and services, net of sales tax and discounts, and after eliminating sales within
the Group. Revenue is recognised as follows:
(i) Sales of goods
Sales of goods are recognised in revenue when the associated risks and rewards of ownership of the goods have been transferred
to the buyer.
(ii) Sales of services
Sales of services are recognised in the period in which the services are rendered, by reference to the stage of completion of those
services at the period end.
(iii) Income from sales of property
Income from sales of property is recognised on completion when legal title of the property passes to the buyer.
l) Inventories
Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location
and condition are accounted for as follows:
Raw materials are valued at cost on a first-in, first-out basis.
The costs of finished goods and work in progress include direct materials and labour and a proportion of manufacturing overheads
based on normal operating capacity but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary
course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Provision is made for
obsolete, slow-moving and defective inventories.
m) Employee benefits
(i) Retirement and other post-employment obligations
For retirement and other post-employment benefit obligations, the cost of providing benefits is determined using the Projected
Unit Credit Method, with actuarial valuations being carried out at the end of each reporting period by independent actuaries.
Remeasurement comprising actuarial gains and losses, the effect of the asset ceiling (if applicable) and the return on scheme assets
(excluding interest) are recognised immediately in the consolidated statement of financial position with a charge or credit to the
consolidated statement of comprehensive income in the period in which they occur. Remeasurement recorded in the consolidated
statement of comprehensive income is not recycled.
Current and past service costs, along with the impact of any settlements or curtailments, are charged to the consolidated income
statement. The net interest expense on pension plans’ liabilities and the expected return on the plans’ assets is recognised within
finance expense in the consolidated income statement.
In addition, pension scheme administrative expenses including the PPF (Pension Protection Fund) levy and actuary, audit, legal and
trustee charges are recognised as administrative expenses.
The retirement benefit and other post employment benefit obligation recognised in the consolidated statement of financial position
represents the deficit or surplus in the Group’s defined benefit schemes. Any surplus resulting from this calculation is limited to the
present value of any economic benefits available in the form of refunds from the schemes or reductions in future contributions to the
schemes and refunds expected from the schemes to fund other Group defined benefit schemes, in accordance with relevant legislation.
95
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans on a mandatory,
contractual or voluntary basis. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions
are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
(ii) Share-based compensation
Cash-settled
Cash-settled share-based payments are measured at fair value (excluding the effect of non market based vesting conditions) at each
reporting date. The fair value is expensed on a straight-line basis over the vesting period, with a corresponding increase in liabilities.
Equity-settled
The Group operates an equity-settled Long Term Incentive Plan for executives and senior management. Awards under this plan
are subject to both market-based and non-market-based vesting criteria.
The fair value at the date of grant is established by using an appropriate simulation method to reflect the likelihood of market-based
performance conditions being met. The fair value is charged to the consolidated income statement on a straight-line basis over
the vesting period, with appropriate adjustments being made during this period to reflect expected vesting for non market-based
performance conditions and forfeitures. The corresponding credit is to equity shareholders’ funds.
To satisfy awards under this Plan, shares may be purchased in the market by an Employee Benefit Trust over the vesting period.
(iii) Non-share-based long term incentive schemes
The anticipated present value cost of non-share-based incentive schemes is charged to the consolidated income statement on a
straight-line basis over the period the benefit is earned, based on remuneration rates that are expected to be payable.
(iv) Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts
voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed
to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal;
or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than
12 months after the period end are discounted to present value.
n) Taxation
The tax expense represents the sum of the current tax and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated
income statement because it excludes items of income and expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted by
the period end.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred taxation is measured on a non-
discounted basis. The following temporary differences are not provided for: goodwill not deducted for tax purposes, the initial
recognition of assets or liabilities that affect neither accounting, nor taxable profit, and differences relating to investments in subsidiaries
to the extent that they will probably not reverse in the foreseeable future.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and
liabilities, using tax rates enacted or substantively enacted at the period end. A deferred tax asset is recognised only to the extent that
it is probable that future profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent
that it is no longer probable that the related tax benefit will be realised. Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only
recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the
temporary differences and they are expected to reverse in the foreseeable future.
The carrying values of deferred tax assets are reviewed at each period end.
Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other
comprehensive income or equity, in which case the deferred tax is also dealt with in other comprehensive income or equity.
o) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific
borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
96
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
All other borrowing costs, except where otherwise stated, are recognised in the income statement in the period in which they
are incurred.
p) Provisions
A provision is recognised in the consolidated statement of financial position when the Group has a legal or constructive obligation
as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect
is material, a provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the
increase in the provision due to the passage of time is recognised as a borrowing cost.
q) Onerous contracts
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower
than the unavoidable cost of meeting its obligations under the contract.
r) Restructuring
A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the
restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.
s) Assets held for sale and discontinued operations
Non-current assets and businesses which are to be sold (‘disposal groups’) classified as held for sale are measured at the lower of
carrying amount and fair value less costs to sell. Non-current assets (and disposal groups) are classified as held for sale if their carrying
amount is expected to be recovered through a sale transaction rather than through continuing use. This condition is regarded as
met only when such a sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition.
Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
Non-current assets are classified as held for sale from the date these conditions are met, and such assets are no longer depreciated.
Discontinued operations are classified as held for sale and are either a separate business segment or a geographical area of operations
that is part of a single coordinated plan to sell. Once an operation has been identified as discontinued, or is reclassified as discontinued,
the comparative information in the Income Statement is restated.
New IFRS accounting standards and interpretations adopted in the year
During the year, the Group has adopted the following standards and interpretations:
Amendments to IAS 12 (‘Recognition of Deferred Tax Assets for Unrealised Losses’);
Amendments to IAS 7 (‘Disclosure Initiative’); and
Annual Improvements to IFRSs 2014-2016 Cycle.
The adoption of these standards and interpretations has had no significant impact on these consolidated financial statements.
New IFRS accounting standards and interpretations not yet adopted
The following published standards and amendments to existing standards, which have not yet all been endorsed by the EU,
are expected to be effective as follows:
From the year beginning 1 January 2018:
IFRS 9 (‘Financial instruments’);
IFRS 15 (‘Revenue from Contracts with Customers’);
Amendments to IFRS 2 (‘Classification and measurement of share based payment transactions’);
Amendments to IFRS 4 (‘Interaction of IFRS 4 and IFRS 9’);
Amendments to IAS 40 (‘Transfers of property to, or from, investment property’); and
Annual improvements to IFRS’s 2014 – 2016 cycle.
From the year beginning 1 January 2019:
IFRS 16 (‘Leases’);
Amendments to IFRS 9 (‘Prepayment features with negative compensation and modifications of financial liabilities’);
Amendments to IAS 19 (‘Plan amendments, curtailments or settlements’);
Amendments to IAS 28 (‘Long-term interests in Associates and Joint Ventures’); and
97
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Annual Improvements to IFRS’s 2015 – 2017 cycle.
From the year beginning 1 January 2021:
Annual Improvements to IFRS’s 2015 – 2017 cycle.
Other than IFRS 16 the directors do not expect that the adoption of the Standards and Interpretations listed above will have a material
impact on the financial statements of the Group in future periods, although the full assessment is not complete.
IFRS 9 ‘Financial Instruments’
IFRS 9 provides a new expected losses impairment model and includes amendments to classification and measurement of financial
instruments. The Group does not expect that the adoption of IFRS 9 will have a material impact on the financial statements but it will
impact both the measurement and disclosure of financial instruments.
IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 sets out the requirements for recognising revenue from contracts with customers. The standard requires entities to apportion
revenue earned from contracts to individual promises, or performance obligations, on a stand-alone selling price basis, based on a
five-step model. The Group does not expect that the adoption of IFRS 15 will have a material impact on the revenue recorded in
the income statement but it will introduce new disclosures requirements.
IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ is effective for annual periods beginning on or after 1 January 2019 (subject to endorsement by the EU). This standard
provides a single model for lessees which recognises a right of use asset and lease liability for all leases which are longer than one year
or which are not classified as low value. The distinction between finance and operating leases for lessees is removed. As at 31 December
2017, the Group holds a significant number of operating leases which currently, under IAS 17, are expensed on a straight-line basis
over the lease term.
Retrospective application in the comparative year ending 31 December 2018 is optional. The Group expects that it will not take this
optional application and will apply the standard from the transitional date using the modified retrospective approach, adjusting opening
retained earnings and not re-stating comparatives. This involves calculating the right-of-use asset and lease liability based on the present
value of remaining lease payments on all applicable lease contracts as at the transition date.
The Group has initiated a process to collect operating lease information across the business in order to assess the cumulative adjustment
on transition. As at 31 December 2017 data for the Group’s most significant markets has been collected and assessed.
Based on an initial analysis for the Group’s most significant markets, were the new requirements adopted in 2017, operating profit
would increase by an immaterial amount and profit before tax would decrease by an immaterial amount.
The discount rate, the lease term (including consideration of options to extend), changes to the lease portfolio and exchange rates
on translation of financial statements of non-US Dollar operations are all subject to change in future years, which will impact the
actual transitional adjustment as at the expected transition date.
The Group will continue to assess the impact of IFRS 16, including the impact on tax, until the transition date, providing further
quantitative and qualitative measures as progress is made on implementation planning.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of IFRS 16 until the detailed
lease-by-lease review has been completed for all markets and the conclusion on other non-operating lease contractual arrangements
has been reached.
The undiscounted amount of the Group’s operating lease commitments at 31 December 2017 disclosed under IAS 17, the current
leasing standard was $62.4 million (see note 25).
98
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
2 Segmental analysis
The Group has two reportable segments: Industrial and Crafts. Both segments include businesses with similar operating and market
characteristics. These segments are consistent with the internal reporting as reviewed by the Coats Group plc Board (the ‘Chief
Operating Decision Maker’).
a) Segment revenue and results
Year ended 31 December 2017
Revenue
Segment profit
UK pension scheme administrative expenses
Operating profit before exceptional and acquisition related items
Exceptional and acquisition related items (note 4)
Operating profit
Share of losses of joint ventures
Investment income
Finance costs
Profit before taxation from continuing operations
Year ended 31 December 2016
Revenue
Segment profit
UK pension scheme administrative expenses
Operating profit before exceptional and acquisition related items
Exceptional and acquisition related items (note 4)
Operating profit
Share of profits of joint ventures
Investment income
Finance costs
Profit before taxation from continuing operations
Industrial
US$m
Crafts
US$m
Total
US$m
1,296.9
213.4
1,510.3
172.9
7.1
180.0
(6.3)
173.7
(6.5)
167.2
(1.3)
2.1
(25.1)
142.9
Industrial
US$m
Crafts
US$m
Total
US$m
1,221.2
236.1
1,457.3
154.7
10.8
165.5
(7.6)
157.9
(4.6)
153.3
0.8
4.3
(35.9)
122.5
The accounting policies of the reportable operating segments are the same as the Group’s accounting policies described in note 1.
Operating profit is the measure reported to the Company’s directors for the purpose of resource allocation and assessment of segment
performance for continuing operations.
b) Assets and liabilities
Assets
31 December 2017
31 December 2016
Liabilities
31 December 2017
31 December 2016
Adjustments,
eliminations and
unallocated
assets and
liabilities
US$m
5.3
5.3
Industrial
US$m
421.0
370.6
Crafts
US$m
85.9
88.3
Total
US$m
512.2
464.2
(278.3)
(242.4)
(29.5)
(32.5)
(22.5)
(330.3)
(29.0)
(303.9)
99
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Segmental assets includes trade and other receivables (excluding derivative financial instruments and current income tax assets) and
inventories. Segmental liabilities includes trade and other payables (excluding derivative financial instruments and current income tax
payables of $24.2 million (2016: $14.0 million) included in other payables due after one year). Adjustments, eliminations and unallocated
assets and liabilities consist of elimination of intra group balances as well as assets and liabilities which have not been allocated to
reportable segments.
c) Other segment information
Year ended 31 December
Industrial
Crafts
Unallocated
Additions to
non-current assets
Depreciation and
amortisation
2017
US$m
45.6
2.6
2.4
50.6
2016
US$m
34.2
2.2
5.1
41.5
2017
US$m
30.6
5.1
6.3
42.0
2016
US$m
32.0
3.0
5.7
40.7
Depreciation and amortisation excludes amortisation of acquired intangible assets set out in note 4 of $2.1 million (2016: $1.3 million).
d) Geographic information
Year ended 31 December
Europe, Middle East & Africa (EMEA)
UK
Rest of EMEA
Americas
USA
Rest of Americas
Asia & Rest of World
India
China and Hong Kong
Vietnam
Other
Revenue by origin
Revenue by destination
Non-current assets
2017
US$m
2016
US$m
2017
US$m
2016
US$m
2017
US$m
2016
US$m
10.8
7.1
12.0
10.5
266.6
265.0
245.1
249.5
234.9
72.5
246.8
223.5
267.6
217.4
236.8
240.3
173.5
182.9
165.5
242.3
163.0
174.1
148.4
234.6
173.2
163.3
155.8
279.4
256.2
230.1
160.5
161.8
134.8
268.5
59.5
44.9
44.3
40.8
30.6
61.5
269.4
69.1
48.5
43.0
36.7
36.2
28.8
53.9
1,510.3
1,457.3
1,510.3
1,457.3
620.7
585.6
Non-current assets excludes derivative financial instruments, pension surpluses and deferred tax assets.
e) Information about products and customers
The Group’s revenue by product type are as follows:
Year ended 31 December
Industrial – Apparel and Footwear
Industrial – Performance Materials
Crafts – Handknittings
Crafts – Needlecrafts
The Group had no revenue from a single customer, which accounts for more than 10% of the Group’s revenue.
2017
US$m
1,020.8
276.1
108.3
105.1
2016
US$m
974.8
246.4
121.2
114.9
1,510.3
1,457.3
100
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
3 Revenue
An analysis of the Group’s revenue is as follows:
Year ended 31 December
Continuing operations:
Sales of goods
Other operating income
Investment income
Discontinued operations:
Sales of goods
2017
US$m
2016
US$m
1,510.3
1,457.3
0.1
2.1
0.2
4.3
1,512.5
1,461.8
–
–
8.8
8.8
1,512.5
1,470.6
4 Profit before taxation is stated after charging/(crediting):
Exceptional and acquisition related items:
The Group’s consolidated income statement format includes results before and after exceptional and acquisition related items.
Adjusted results exclude exceptional and acquisition related items to reflect the underlying performance of the business and provides
a more meaningful comparison of how the business is managed and measured on a day-to-day basis. Further details on alternative
performance measures are set out in note 37.
Exceptional items
There were no exceptional items charged/(credited) to operating profit during the year ended 31 December 2017 (2016: $Nil).
Shares of losses of joint ventures for the year ended 31 December 2017 is after exceptional costs of $2.6 million (2016: $Nil) relating
to the sale and closure of the business of a joint venture in Australia, Australia Country Spinners.
Judgement is used by the Group in assessing the particular items, which by virtue of their scale and nature, should be presented in the
income statement and disclosed in the related notes as exceptional items. In determining whether an event or transaction is exceptional,
quantitative as well as qualitative factors such as frequency or predictability of occurrence are considered. This is consistent with the way
financial performance is measured by management and reported to the Board.
Acquisition related items
Acquisition related items are set out below:
Year ended 31 December
Acquisition related items:
Administrative expenses:
Contingent consideration
Acquisition transaction costs
Amortisation of acquired intangibles
Total acquisition related items before taxation
2017
US$m
2016
US$m
4.0
0.4
2.1
6.5
2.4
0.9
1.3
4.6
The Group completed the acquisition of Patrick Yarn Mill during the year ended 31 December 2017 (see note 31 for further details)
and completed the acquisitions of Gotex S.A. and Fast React Systems Limited during the year ended 31 December 2016.
The Group has made acquisitions with earn outs to allow part of the consideration to be based on the future performance of the
businesses acquired and to lock in key management. Where consideration paid or contingent consideration payable in the future is
employment linked, it is treated as an expense and part of statutory results. However, all consideration of this type is excluded from
adjusted operating profit and adjusted earnings per share as in management’s view, these items are part of the capital transaction.
Acquisition transaction costs and amortisation of intangible assets acquired through business combinations are not included within
adjusted earnings. These costs are acquisition related and management consider them to be capital in nature and they do not reflect
the underlying trading performance of the Group.
101
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Excluding amortisation of intangible assets acquired through business combinations and recognised in accordance with IFRS 3 “Business
Combinations” from adjusted results also ensures that the performance of the Group’s acquired businesses is presented consistently with
its organically grown businesses. It should be noted that the use of acquired intangible assets contributed to the Group’s results for the
years presented and will contribute to the Group’s results in future periods as well. Amortisation of acquired intangible assets will recur
in future periods.
Amortisation of software is included within adjusted results as management consider these cost to be part of the underlying trading
performance of the business.
2017
US$m
2016
US$m
13.2
30.9
10.1
31.9
0.5
1.6
0.3
0.1
2.5
6.4
12.7
2.1
0.4
(2.2)
(0.4)
0.4
1.8
0.4
0.2
2.8
4.9
11.3
1.6
2.3
4.1
(0.5)
534.6
514.8
0.6
1.5
2017
US$m
2016
US$m
0.1
1.7
0.3
2.1
2.2
1.6
0.5
4.3
5 Profit before taxation from continuing operations
Year ended 31 December
Profit before taxation is stated after charging/(crediting):
Amortisation of intangible assets
Depreciation of property, plant and equipment
Fees charged by Deloitte LLP
Group audit fees:
– Fees payable for the audit of the Company’s annual accounts
– Fees payable for the audit of the Company’s subsidiaries
Other Deloitte services:
– Taxation services
– Other services
Total fees charged by Deloitte LLP
Operating lease rentals:
– Plant and equipment
– Other
Research and development expenditure
Bad and doubtful debts
Net foreign exchange (gains)/losses
Rental income from land and buildings
Inventory as a material component of cost of sales
Inventory write-downs to net realisable value
6 Investment income
Year ended 31 December
Interest receivable on Parent Group cash1
Other interest receivable and similar income
Income from other investments
1 Cash relating to the realisation of investments previously held by Coats Group plc.
102
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
7 Finance costs
Year ended 31 December
Interest on bank and other borrowings
Net interest on pension scheme assets and liabilities
Other finance costs including unrealised gains and losses on foreign exchange contracts
8 Staff costs
The average monthly number of employees was:
Year ended 31 December
Continuing operations:
Direct
Indirect
Other staff
Discontinued operations:
Total number of employees
Comprising:
UK
Overseas
The total numbers employed at the end of the year were:
UK
Overseas
Year ended 31 December
Their aggregate remuneration comprised (including directors):
Continuing operations:
Wages and salaries
Social security costs
Other pension costs (note 10)
Discontinued operations
2017
US$m
14.5
9.4
1.2
25.1
2016
US$m
14.4
13.6
7.9
35.9
2017
US$m
2016
US$m
12,169
12,171
2,475
4,441
2,353
4,522
19,085
19,046
–
58
19,085
19,104
175
220
18,910
18,884
19,085
19,104
160
163
19,110
18,927
19,270
19,090
2017
US$m
2016
US$m
327.3
300.7
33.1
11.9
29.8
12.0
372.3
342.5
–
2.2
372.3
344.7
103
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
9 Tax on profit from continuing operations
Year ended 31 December
UK Corporation tax at 19.25% (2016: 20.0%)
Overseas tax charge
Deferred tax credit
Total tax charge
The tax charge for the year can be reconciled as follows:
2017
US$m
–
2016
US$m
–
(61.0)
(59.6)
13.2
12.8
(47.8)
(46.8)
Year ended 31 December
Profit before tax
2017
2016
Exceptional
and
acquisition
related
items
US$m
Other
adjustments1
US$
Underlying
US$m
Exceptional
and
acquisition
related
items
US$m
Other
adjustments1
US$
Total
US$m
Total
US$m
Underlying
US$m
161.4
(9.1)
(9.4)
142.9
140.7
(4.6)
(13.6)
122.5
Expected tax charge/(credit) at the UK statutory rate
of 19.25% (2016: 20.00%)
Differences between overseas and UK taxation rate
Non-deductible expenses
Non-taxable income
Local tax incentives
Utilisation of unrecognised losses
Recognition of previously unrecognised deferred
tax assets
Potential deferred tax assets not recognised
Impact of changes in tax rates
Impact of US Tax reform
Prior year adjustments
Withholding tax on remittances (net of double tax
credits) and other taxes not based on profits
Income tax expense/(credit)
Effective tax rate
31.0
6.9
7.3
(0.7)
(1.5)
(2.5)
(4.7)
5.3
0.4
–
3.9
6.2
51.6
32%
(1.7)
(0.1)
1.1
–
–
–
–
–
–
–
–
–
(1.8)
27.5
28.1
–
–
–
–
–
–
1.7
–
6.8
8.5
(0.7)
(1.5)
(2.5)
(4.7)
7.0
0.4
(3.0)
(3.0)
–
–
3.9
6.2
47.8
33%
7.3
3.7
(0.3)
(2.6)
(3.4)
(5.5)
11.9
0.3
–
(2.9)
10.6
47.2
34%
(0.9)
(0.1)
0.4
–
–
–
0.2
–
–
–
–
–
(0.4)
9%
(2.7)
(0.1)
0.8
–
–
–
–
2.0
–
–
–
–
–
0%
24.5
7.1
4.9
(0.3)
(2.6)
(3.4)
(5.3)
13.9
0.3
–
(2.9)
10.6
46.8
38%
(0.7)
8%
(3.1)
33%
1 Other adjustments consist of net interest on pension scheme assets and liabilities of $9.4 million (2016: $13.6 million) and the one off non-cash impact of US Tax Reform.
The Group’s underlying effective tax rate is higher than the blended rate of the countries we operate in primarily due to the impact of
unrelieved tax losses in countries where we are not currently able to recognise deferred tax assets in respect of those losses and the
impact of withholding taxes on the repatriation of earnings and royalties to the UK.
Excluding exceptional and acquisition related items, the impact of net interest on pension scheme assets and liabilities and the impact of
US Tax reform, the underlying effective rate on pre-tax profits reduced by 200bps to 32% (2016: 34%). The lower tax rate was driven by
a reduction in unrelieved losses, together with a favourable change in profit mix for the period.
The tax reform measures introduced by the US Government in the Tax Cuts & Jobs Act resulted in a one-off non-cash tax credit of
$3.0 million (200 bps) as a result of the revaluation of the net US deferred tax liabilities. A further tax credit of $2.9 million was taken
directly to the consolidated statement of comprehensive income in relation to the revaluation of deferred tax liabilities in respect of
US defined benefit pension arrangements.
104
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The Group has reviewed the available detail of the Tax Cuts & Jobs Act but do not expect the changes to have a significant impact
on the Group’s future underlying effective tax rate despite the reduction in the headline US Corporate Income Tax rate from 35% to
21% with effect from 1 January 2018. The benefit of the rate reduction is offset by provisions to limit net interest expense to 30%
of adjusted taxable income and the loss of the domestic production activities deduction, which the Group’s US operations have
historically benefitted from. Further detail and guidance is expected to be released in the coming months and the Group will
continue to monitor this.
Uncertain tax positions
The Group’s current tax liability includes a number of tax provisions, which although individually are relatively small, together they
total $13.3 million (2016: $8.4 million). These provisions relate to management’s estimate of the amount of tax payable on open tax
returns yet to be agreed with the local tax authorities. The Group evaluates uncertain tax items, which are subject to interpretation
and agreement of the position with the local Tax Authorities and consequently agreement may not be reached for a number of years.
Primarily the tax items for which a provision has been made relate to the interpretation of transfer pricing legislation and practices
across the jurisdictions in which the Group operates.
The final outcome on resolution of open issues with the relevant local Tax Authorities may vary significantly due to the uncertainty
associated with such tax items and the continual evolution and development of local Tax Authorities. There is a wide range of possible
outcomes and any variances in the final outcome to the provided amount will affect the tax financial results in the year of agreement.
However, it is not expected that a material adjustment would be required to these provisions within the next year.
The amount provided for uncertain tax positions has been made using the best estimate of the tax expected to be ultimately paid,
taking into account any progress on the discussions with local Tax Authorities, together with expert in-house and third party advice
on the potential outcome and recent developments in case law, Tax Authority practices and previous experience.
Taxation paid
During the year the Group made Corporate Income Tax payments (including withholding and dividend distribution taxes) of
$60.5 million (2016: $57.9 million). The amount of tax paid in each jurisdiction is as follows:
Year ended 31 December
India
Vietnam
UK
Indonesia
USA
Singapore
Colombia
Turkey
Mexico
Bangladesh
Argentina
Germany
China
Spain
Romania
Others (25 countries each less than $0.5 million)
Total corporate income tax paid
2017
US$m
10.9
2016
US$m
12.9
9.7
7.1
7.1
6.9
3.8
1.8
1.7
1.7
1.6
1.4
1.3
1.1
0.8
0.5
3.1
9.0
7.1
9.3
2.2
2.2
1.3
1.8
1.3
2.3
0.5
–
2.1
0.7
0.6
4.6
60.5
57.9
105
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The taxes paid in the UK, Singapore and Germany are withholding taxes on royalties, group charges and dividends, deducted and paid at
source in the following jurisdictions:
Indonesia
India
Bangladesh
Turkey
China
Sri Lanka
Others (each less than $0.5 million)
Total withholding taxes paid
10 Retirement and other post-employment benefit arrangements
a) Pension and other post-employment costs
Pension and other post-employment costs charged to operating profit for the year were (continuing operations):
2017
US$m
3.3
2.1
0.9
0.8
0.8
0.5
3.8
12.2
Year ended
31 December
2016
$m
3.4
Year ended
31 December
2017
$m
4.0
$m
–
3.5
–
–
4.4
$m
1.8
3.4
–
–
3.4
7.9
7.5
19.4
8.6
8.7
20.7
Defined contribution schemes
Defined benefit schemes –
Coats UK funded
Coats US funded
Staveley
Brunel
Other funded and unfunded
Administrative expenses for defined benefit schemes
b) Defined contribution schemes
The Group operates a number of defined contribution plans around the world to provide pension benefits.
c) Defined benefit schemes
The Group has three UK defined benefit schemes, namely the Brunel Holdings Pension Scheme ("Brunel"), the Staveley Industries
Retirement Benefits Scheme ("Staveley") and the Coats Pension Plan ("Coats UK") which offer both pensions in retirement and
death benefits to members. These schemes are all closed to new members and future benefit accrual.
The UK defined benefit schemes are administered by trustees, hold assets held in funds that are legally separated from the Group
and are subject to UK legislation with oversight from the Pensions Regulator. The trustee boards of the schemes are composed of
representatives of both the Group and scheme members together with independent trustees. The trustee boards are required by law
and the scheme’s rules to act in the interest of the scheme’s members and other stakeholders in the scheme (for example the Group).
The trustee boards are responsible for setting each scheme’s investment policy following consultation with the Group.
In addition, the Group has the Coats North America Pension Plan ("Coats US") which is a defined benefit scheme the assets of which
are held in funds that are legally separated from the Group.
Finally, the Group also operates various other pension and other post-retirement arrangements in most of the countries in which it
operates (most significantly in Germany). Detailed disclosures in respect of the three UK plans and the Coats US plan are given in this
note as the defined benefit obligations under these schemes represent 96% of all defined benefit obligations.
The UK funded schemes each operate an investment policy specific to the scheme. However these strategies all adopt a similar approach
whereby a portion of the fund is invested in assets (Bonds) that broadly match movements in the value of the scheme’s liabilities and a
portion in assets that are anticipated to deliver a return in excess of the change in value of the liabilities.
The following disclosures do not include information in respect of schemes operated by joint ventures.
106
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
i) Principal risks
The Group is exposed to actuarial and investment risks, the principal risks are:
Risk
Description
Commentary
Interest rate risk
The present value of the defined benefit plan liabilities is
calculated using a discount rate determined by reference
to bond yields. A decrease in bond yield rates will increase
defined benefit obligations.
Inflation
The present value of the defined benefit liabilities are calculated
by reference to assumed future inflation rates. An increase
in inflation rates will increase defined benefit obligations.
Longevity risk
Investment risk
The present value of the defined benefit plan liability is
calculated by reference to the best estimate of member
life expectancies. An increase in life expectancy will
increase liabilities.
The scheme assets are shown on a marked-to-market basis.
A decrease in asset values at a relevant measurement date,
to the extent assets do not hedge liabilities, would lead to
an increased disclosed deficit or reduced surplus.
The impact of the movement in discount rates are
shown on page 114. The Trustees of the UK and US
schemes hedge these sensitivities through physical
bonds and derivatives. The UK schemes are in
aggregate approximately 70% hedged against
interest rate movements.
The impact of the movement in inflation rates are
shown on page 114. The Trustees of the UK and US
schemes hedge these sensitivities through physical
bonds and derivatives. The UK schemes are in
aggregate approximately 70% hedged against
inflation rate movements.
The impact of an increase in life expectancy is shown
on page 114. Currently this is not a risk that is hedged
by the Group’s pension schemes.
The UK funded plans are diversified by asset class, at
individual securities level; geography; and by investment
managers. To the extent that any assets are not Sterling
denominated the schemes hedge a portion of this
currency exposure back to Sterling.
The US scheme is fully funded and has a significant
proportion of fixed income. The fixed income is invested
directly to protect the funded status of the scheme.
Trustees work with fixed income managers to consider
the liabilities (including key period durations, credit
spread duration and convexity) and have created a
custom fix income benchmark to match the liabilities
and protect the funded status.
In addition the schemes’ investment policies recognise
the need to generate cashflows to meet members’
benefits as they fall due.
ii) UK regulatory investigation
In 2013 and 2014 the UK Pension Regulator ('tPR') issued warning notices to the Group in respect of its three UK defined benefit
schemes. During 2017 the Group signed binding settlement agreements with the Trustees of all three UK pension schemes. The binding
settlement agreements in respect of the UK Coats Pension Plan and Brunel Holdings Pension Scheme were signed on 16 February 2017.
The binding settlement agreement in respect of the Staveley Industries Retirement Benefit Scheme was signed on 25 June 2017.
The settlements with the three schemes completed shortly after the signing of the binding settlement agreements, and as a result
tPR confirmed that its regulatory action in respect of the warning notices issued to the Group in respect of the three UK schemes
had ceased.
The principal commercial terms of the combined settlements were:
Financial support on the basis of a combined technical provisions deficit as at April 2015 of £582 million to be repaired as set out
in the UK funding commitments section iii) below; and
Access to sponsor support from Coats Limited for future funding needs together with a Company guarantee.
iii) UK funding commitments
The information provided below for defined benefit plans has been prepared by independent qualified actuaries based on the most
recent actuarial valuations of the schemes, updated to take account of the valuations of assets and liabilities as at 31 December 2017.
For the principal schemes, the date of the most recent actuarial valuations at the year end were 1 April 2015 for the Coats UK scheme,
31 December 2015 for the Coats US scheme, 5 April 2015 for the Staveley scheme and 31 March 2015 for the Brunel scheme.
107
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
At the year end the position of the triennial actuarial valuations of the UK defined benefit pension schemes was as follows:
The triennial valuation of the Coats UK pension plan as at 1 April 2015 showed an actuarial deficit of £405 million, which equated to a
funding level of 79%. A recovery plan has been agreed with the trustees comprising contributions from 1 April 2015 up to settlement, a
one off settlement payment of £200 million in February 2017 and contributions of £8.2 million per annum payable from February 2017
until 30 June 2028.
The triennial valuation of the Brunel scheme as at 31 March 2015 showed an actuarial deficit of £80 million, which equated to a funding
level of 59%. A recovery plan has been agreed with the trustees comprising contributions from 1 April 2015 up to settlement, a one off
settlement payment of £34.5 million in February 2017 and contributions of £1.7 million per annum payable with effect from January
2017 until 31 March 2028.
The triennial valuation of the Staveley scheme as at 5 April 2015 showed an actuarial deficit of £97 million, which equated to a funding
level of 66%. A recovery plan has been agreed with the trustees comprising contributions from 1 April 2015 up to settlement, a one off
settlement payment of £34.5 million in June 2017 and contributions of £2.2 million per annum payable with effect from June 2017 until
31 March 2028.
The Group will also fund the administrative expenses of the three UK schemes; and the next triennial valuations are due as at 31 March
2018 and are anticipated to be completed by 30 June 2019.
The actuarial valuation deficits above are used to determine the level of deficit repair contributions that the Group is required to pay
into the UK pension schemes. The actuarial valuation is different to the IAS 19 accounting valuation (set out below), which are based
on accounting rules concerning employee benefits and shown on the consolidated statement of financial position. The actuarial
valuations are generally based on the more prudent "Technical Provisions" basis than that used for accounting purposes and as a result
the actuarial deficits are generally higher than the accounting deficits. It should also be noted that the accounting deficit figures are
calculated as at the balance sheet date of 31 December 2017. The actuarial valuations were performed on the dates set out above
and are before the one-off pension settlement payments and subsequent deficit repair contributions.
iv) Principal assumptions
For the principal assumptions for the 3 UK schemes and the US scheme are as follows:
Principal assumptions at 31 December 2017
Rate of increase in salaries
Rate of increase for pensions in payment
Discount rate
Inflation assumption
Principal assumptions at 31 December 2016
Rate of increase in salaries
Rate of increase for pensions in payment
Discount rate
Inflation assumption
Coats UK
%
Coats US
%
Staveley
%
Brunel
%
Other
%
–
3.1
2.4
3.2
3.0
–
–
– Various Various
3.6
2.5
2.4
3.2
2.4
3.2
Coats UK
%
Coats US
%
Staveley
%
Brunel
%
–
–
3.2
2.5
3.3
3.0
–
–
Various
Various
4.2
2.5
2.5
3.3
2.5
3.3
4.4
2.8
4.0
3.3
Other
%
3.6
2.7
3.8
2.7
The rate of increase for pensions in payment for the Staveley and Brunel schemes vary in accordance with each member’s period
of membership. For the Staveley scheme the majority of the increases for pensions in payments fall within the range 2.4% – 3.1%
(2016: 2.4% – 3.2%). For the Brunel scheme the majority of the increases for pensions in payments fall within the range 3.1% – 4.0%
(2016: 3.2% – 4.02%).
108
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The assumed life expectancy on retirement is:
Retiring today at age 60:
Males
Females
Retiring in 20 years at age 60:
Males
Females
Year ended 31 December 2017
Year ended 31 December 2016
Coats UK
Years
Coats US
Years
Staveley
Years
Brunel
Years
Coats UK
Years
Coats US
Years
Staveley
Years
Brunel
Years
25.7
27.5
25.0
27.2
25.4
28.2
26.0
28.5
25.8
27.8
26.2
28.6
25.5
28.7
26.2
28.8
27.3
29.1
26.7
28.9
27.0
29.9
27.6
30.1
27.7
29.6
28.0
30.4
27.4
30.7
28.1
30.9
v) Amounts recognised in the consolidated income statement
Amounts recognised in income in respect of these defined benefit schemes are as follows:
For the year ended 31 December 2017
Current service cost
Administrative expenses
Interest on defined benefit obligations – unwinding of discount
Interest income on pension scheme assets
Effect of asset cap
For the year ended 31 December 2016
Current service cost
Administrative expenses
Interest on defined benefit obligations – unwinding of discount
Interest income on pension scheme assets
Effect of asset cap
Coats UK
US$m
Coats US
US$m
Staveley
US$m
Brunel
US$m
Other
US$m
Group
US$m
–
(4.1)
(4.1)
(59.7)
53.0
–
(6.7)
(3.5)
(1.1)
(4.6)
(5.8)
8.7
(0.5)
2.4
–
(1.5)
(1.5)
(8.1)
7.5
–
–
(0.7)
(0.7)
(5.6)
4.9
–
(0.6)
(0.7)
(4.4)
(0.1)
(4.5)
(5.2)
1.7
(0.3)
(3.8)
Coats UK
US$m
Coats US
US$m
Staveley
US$m
Brunel
US$m
Other
US$m
(1.8)
(4.6)
(6.4)
(77.1)
68.6
–
(8.5)
(3.4)
(1.0)
(4.4)
(6.0)
8.7
(0.2)
2.5
–
(1.8)
(1.8)
(10.8)
8.9
–
–
(1.2)
(1.2)
(7.5)
5.3
–
(1.9)
(2.2)
(3.4)
(0.1)
(3.5)
(4.8)
1.6
(0.3)
(3.5)
(7.9)
(7.5)
(15.4)
(84.4)
75.8
(0.8)
(9.4)
Group
US$m
(8.6)
(8.7)
(17.3)
(106.2)
93.1
(0.5)
(13.6)
vi) Amounts recognised in the consolidated statement of comprehensive income
Actuarial gains and losses were as follows:
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurement on assets (excluding interest income)
Adjustment due to surplus cap
Included in the statement of comprehensive income
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
10.2
(40.7)
(15.1)
199.9
(9.1)
145.2
(5.0)
(567.8)
50.7
205.3
(8.0)
(324.8)
109
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
vii) Amounts recognised in the consolidated statement of financial position
The amounts included in the consolidated statement of financial position arising from the Group's defined benefit arrangements
are as follows:
As at 31 December 2017
Cash and cash equivalents
Equity instruments:
US
UK
Eurozone
Other regions
Debt instruments:
Corporate bonds (Investment grade)
Corporate bonds (Non-investment grade)
Government/sovereign instruments
Global real estate
Derivatives:
Total return, interest and inflation swaps
Assets held by insurance company:
Insurance contracts
Diversified investment fund
Other
Total market value of assets
Actuarial value of scheme liabilities
Coats UK
US$m
Coats US
US$m
Staveley
US$m
Brunel
US$m
61.1
2.1
17.0
8.8
Other
US$m
4.9
Total
US$m
93.9
307.7
30.9
24.7
74.2
98.1
2.9
8.1
128.1
21.1
809.3
120.4
72.4
474.9
317.0
(25.9)
1.3
32.1
–
–
9.5
7.1
7.1
29.9
72.4
78.2
–
–
31.0
5.2
10.3
5.2
26.7
19.2
39.1
2.2
396.5
–
–
91.8
123.6
7.3
168.8
5.8
992.1
–
–
165.3
624.3
–
0.2
317.2
(2.3)
–
(28.2)
2.9
97.1
0.5
0.5
–
112.8
–
6.8
–
0.6
77.2
–
1.3
7.3
0.4
5.8
294.4
7.2
2,416.9
226.2
359.2
221.0
29.4
3,252.7
(2,495.2)
(145.4)
(357.3)
(251.2)
(140.2) (3,389.3)
Gross net (liability)/asset in the scheme
(78.3)
80.8
1.9
(30.2)
(110.8)
(136.6)
Adjustment due to surplus cap
–
(22.8)
–
–
(3.8)
(26.6)
Recoverable net (liability)/asset in the scheme
(78.3)
58.0
1.9
(30.2)
(114.6)
(163.2)
110
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
For the year ended 31 December 2016 (Restated*)
Cash and cash equivalents
Equity instruments:
US
UK
Eurozone
Other regions
Debt instruments:
Corporate bonds (Investment grade)
Corporate bonds (Non-investment grade)
Government/sovereign instruments
Global real estate
Derivatives:
Total return, interest and Inflation swaps
Assets held by insurance company:
Insurance contracts
Diversified investment fund
Other
Total market value of assets
Actuarial value of scheme liabilities
Gross net (liability)/asset in the scheme
Adjustment due to surplus cap
Recoverable net (liability)/asset in the scheme
* The above table has been restated to present asset categories on a consistent basis to 2017.
Coats UK
US$m
Coats US
US$m
Staveley
US$m
59.3
2.4
11.7
Brunel
US$m
12.6
Other
US$m
0.1
42.2
31.9
25.8
1.3
Total
US$m
86.1
390.3
149.1
77.0
–
–
8.4
183.4
6.0
0.2
–
0.4
1,041.8
60.5
404.1
156.7
4.3
8.6
4.3
27.1
17.3
32.6
–
(2.2)
–
(27.7)
0.7
26.5
–
1.3
7.2
0.5
6.1
33.7
(2.5)
289.1
137.8
55.4
3.5
7.0
3.5
6.0
137.9
21.1
11.7
712.0
106.3
190.4
40.1
321.4
156.3
(25.5)
2.7
–
–
2.2
33.1
–
–
0.5
–
(3.0)
0.7
17.0
–
–
0.9
–
–
1,886.5
215.3
273.8
157.6
25.4
2,558.6
(2,353.0)
(146.2)
(318.6)
(222.1)
(129.1)
(3,169.0)
(466.5)
–
(466.5)
69.1
(13.1)
56.0
(44.8)
(64.5)
(103.7)
(610.4)
–
–
(3.2)
(16.3)
(44.8)
(64.5)
(106.9)
(626.7)
The amounts are presented in the consolidated statement of financial position as follows:
31 December
Non-current assets:
Funded
Current assets:
Funded
Current liabilities:
Funded
Unfunded
Non-current liabilities:
Funded
Unfunded
2017
2016
57.9
50.8
6.9
6.7
(16.9)
(309.6)
(7.4)
(6.2)
(101.1)
(272.0)
(102.6)
(96.4)
(163.2)
(626.7)
111
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
For the Staveley scheme contributions payable within the next 12 months have been included as a current liability, resulting in a
non-current asset of $4.8 million. In addition, the schemes disclosed as part of the 'other' column in the tables above include surplus
positions of $2.0 million (2016: $1.5 million).
Movements in the present value of defined benefit obligations were as follows:
At 1 January
Current service cost
Interest on defined benefit obligations – unwinding of discount
Actuarial losses on obligations
Contributions from members
Benefits paid
Exchange difference
At 31 December
Movements in the fair value of scheme assets were as follows:
At 1 January
Interest income on scheme assets
Remeasurement on assets (excluding interest income)
Contributions from members
Contribution from sponsoring companies
Benefits paid
Administrative expenses paid from plan assets
Exchange difference
At 31 December
Administrative expenses paid from plan assets excludes those expenses paid directly by the Company.
The reconciliation of the effect of the asset ceiling is as follows:
Unrecognised surplus at 1 January
Interest cost on unrecognised surplus
Changes in the effect of limiting a net defined benefit asset to the asset ceiling (excluding interest)
Exchange difference
Unrecognised surplus at 31 December
Year
ended 31
December
2017
US$m
Year
ended 31
December
2016
US$m
(3,169.0)
(3,249.1)
(7.9)
(8.6)
(84.4)
(106.2)
(45.6)
(522.1)
(0.2)
(0.4)
198.1
(280.3)
190.1
527.3
(3,389.3)
(3,169.0)
2,558.6
2,787.3
75.8
93.1
199.9
205.3
0.2
0.4
374.5
104.9
(198.1)
(190.1)
(1.9)
(8.5)
243.7
(433.8)
3,252.7
2,558.6
16.3
0.8
9.1
0.4
7.6
0.5
8.0
0.2
26.6
16.3
viii) Assets without a quoted price in an active market
For the Coats UK scheme, included in the tables above are $Nil (2016: $80.8 million) of UK equity instruments, $50.8 million (2016: $Nil)
of corporate bonds (Non-investment grade), $Nil (2016: $10.9 million) of government/sovereign instruments, Global real estate of
$80.3 million (2016: $Nil), derivative liabilities of $25.9 million (2016: $25.5 million), diversified investment funds of $97.1million
(2016: $Nil) and $2.9million (2016: $2.7 million) of insurance contracts without a quoted price in an active market. All other assets
have a quoted price in an active market.
For the Coats US scheme, included in the tables above are $120.4 million (2016: $106.3 million) of corporate bonds (Investment grade),
$1.3 million (2016: $2.2 million) of corporate bonds (Non-investment grade), government/sovereign instruments of $12.0 million (2016:
$13.8 million), $0.5 million (2016: $0.5 million) of insurance contracts and $6.2 million (2016: $3.6 million of liabilities) of other assets
without a quoted price in an active market. All other assets have a quoted price in an active market.
112
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
For the Staveley scheme, included in the tables above are $24.7 million (2016: $31.9 million) of US equity instruments, $9.5 million
(2016: $3.5 million) of UK equity instruments, $7.1 million (2016: $6.0 million) of Eurozone equity instruments, $7.1 million
(2016: $11.7 million) of other region equity instruments, $29.9 million (2016: $98.7 million) of corporate bonds (Investment grade),
$72.4 million (2016: $Nil) of corporate bonds (Non-investment grade), $78.2 million (2016: $17.0 million) of government/sovereign
instruments, $112.8 million of diversified investment funds (2016: $Nil) and $0.5 million (2016: $0.5 million) of insurance contracts
without a quoted price in an active market. All other assets have a quoted price in an active market.
For the Brunel scheme, included in the tables above are $31.0 million (2016: $25.8 million) of US equity instruments, $5.2 million
(2016: $4.3 million) of UK equity instruments, $10.3 million (2016: $8.6 million) of Eurozone equity instruments, $5.2 million
(2016: $4.3 million) of other region equity instruments, $26.7 million (2016: $27.1 million) of corporate bonds (Investment grade),
$19.2 million (2016: $17.3 million) of corporate bonds (Non-investment grade), derivative liabilities of $2.3 million (2016: $2.2 million),
$77.2 million of diversified investment funds (2016: $26.5 million) and $0.6 million (2016: $0.7 million) of insurance contracts
without a quoted price in an active market. All other assets have a quoted price in an active market.
ix) Basis of asset valuation
Under IAS 19, plan assets must be valued at the bid market value at the balance sheet date. For the main asset categories:
Equities and bonds listed on recognised exchanges are valued at closing bid prices;
Other bonds are measured using a combination of broker quotes and pricing models making assumptions for credit risk, market
risk and market yield curves;
Global real estate assets are valued on either a fair value approach as provided by the investment manager or notional bid valuations
provided by the investment managers due to investments being held within a single priced pooled investment vehicle;
Certain unlisted investments, for example derivatives and insurance contracts, are valued using a model based valuation such as a
discounted cash flow; and
Diversified investment funds are valued at fair value which is typically the Net Asset Value provided by the investment manager.
x) Recoverability of plan surplus
The recoverable surplus on the Coats US scheme has been recognised in line with the benefit from contribution holidays, plus annual
refunds expected from the scheme to fund the US post-retirement medical scheme in accordance with relevant US legislation.
For the Coats UK scheme, which is in IAS 19 deficit, committed contributions to the plan at the balance sheet date are expected to put
the scheme into an IAS 19 surplus position. In addition the Staveley scheme is in an IAS 19 surplus at the balance sheet date. The Group
notes that, for the Staveley scheme and in the event that a surplus emerges in the Coats scheme, it would have an unconditional right
to a refund of the surplus assuming the gradual settlement of the liabilities over time and therefore no additional minimum funding
requirement have been recognised.
For the Brunel scheme, which is in IAS19 deficit at the balance sheet date, committed contributions to the plan at the balance sheet
date would not put the plan in an IAS19 surplus position and therefore no adjustments are required in respect of minimum funding
requirements. This position will be kept under review.
xi) Duration of plan liabilities
The weighted average duration of benefit obligations is 15 years (2016: 15 years) for the Coats UK scheme and 8 years (2016: 9 years)
for the Coats US scheme, 14 years (2016: 13 years) for the Staveley scheme and 13 years (2016: 12 years) for the Brunel scheme.
113
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
xii) Sensitivities
Sensitivities regarding the discount rate, inflation (which also impacts the rate of increases in salaries and rate of increase for pension in
payments assumptions for the UK scheme) and mortality assumptions used to measure the liabilities of the principal schemes, along with
the impact they would have on the scheme liabilities, are set out below. Interrelationships between assumptions might exist and the
analysis below does not take the effect of these interrelationships into account:
Coats UK discount rate
Coats US discount rate
Staveley discount rate
Brunel discount rate
Coats UK inflation rate
Coats US inflation rate
Staveley inflation rate
Brunel inflation rate
Year ended
31 December
2017
-0.25%
$m
95.1
3.4
12.4
8.5
(76.3)
(0.1)
(7.5)
(4.0)
+0.25%
$m
(89.9)
(3.2)
(11.8)
(8.1)
78.6
0.1
7.7
5.3
Year ended
31 December
2016
-0.25%
$m
86.8
3.3
9.7
6.4
(71.5)
(0.1)
(8.2)
(3.1)
+0.25%
$m
(83.5)
(3.2)
(9.4)
(6.2)
73.6
0.1
8.4
3.1
If members of the Coats UK scheme live one year longer the scheme liabilities will increase by $120.3 million (2016: $104.6 million).
If members of the Coats US scheme live one year longer scheme liabilities will increase by $4.0 million (2016: $3.8 million), however,
the would be no overall impact on the recoverable surplus. If members of the Staveley and Brunel schemes live one year longer scheme
liabilities will increase by $15.2 million (2016: $12.3 million) and $11.5 million (2016: $10.4 million) respectively. The 2016 sensitivity
for life expectancies for the Coats and Brunel schemes have been updated to ensure consistency with the 2017 numbers.
In presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected
unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation
liability recognised in the consolidated statement of financial position. There was no change in the methods and assumptions used in
preparing the sensitivity analysis from prior years.
Sensitivity of medical schemes to medical cost trend rate assumptions:
Effect on total service cost and interest cost components
of other schemes
Effect on defined benefit obligation of other schemes
Year ended
31 December
2017
-1%
$m
(0.1)
(1.9)
+1%
$m
0.1
2.2
Year ended
31 December
2016
-1%
$m
(0.1)
(2.1)
+1%
$m
0.1
2.4
xiii) Expected contributions for 2018
The total estimated amount to be paid in respect of all of the Group's retirement and other post-employment benefit arrangements
during the 2018 financial year (excluding administrative expenses paid by the Company) is $23.5 million.
11 Earnings per ordinary share
The calculation of basic earnings per ordinary share from continuing operations is based on the profit from continuing operations
attributable to equity shareholders and the weighted average number of Ordinary Shares in issue during the year, excluding shares
held by the Employee Benefit Trust but including shares under share incentive schemes which are not contingently issuable.
The calculation of basic earnings per ordinary share from continuing and discontinued operations is based on the profit attributable to
equity shareholders. The weighted average number of ordinary shares used for the calculation of basic earnings per ordinary share from
continuing and discontinued operations is the same as that used for basic earnings per ordinary share from continuing operations.
For diluted earnings per ordinary share, the weighted average number of ordinary shares in issue is adjusted to include all potential
dilutive ordinary shares. The Group has two classes of dilutive potential Ordinary Shares: those share options granted to employees
where the exercise price is less than the average market price of the Company’s ordinary shares during the year and those long-term
incentive plan awards for which the performance criteria would have been satisfied if the end of the reporting period were the end
of the contingency period.
114
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Profit from continuing operations attributable to equity shareholders
Profit from continuing and discontinued operations attributable to equity shareholders
Weighted average number of ordinary shares in issue for basic earnings per share
Adjustment for share options and LTIP awards
Weighted average number of ordinary shares in issue for diluted earnings per share
Year ended 31 December
Continuing operations:
Basic earnings per ordinary share
Diluted earnings per ordinary share
Continuing and discontinued operations:
Basic earnings per ordinary share
Diluted earnings per ordinary share
12 Dividends
Year ended 31 December
2017 interim dividend paid – 0.44 cents per share
2016 final dividend paid – 0.84 cents per share
2017
US$m
80.8
80.8
2016
US$m
63.8
59.3
2017
Number
of shares
m
2016
Number
of shares
m
1,399.2
1,386.6
27.4
20.5
1,426.6
1,407.1
2017
cents
5.78
5.67
5.78
5.67
2017
US$m
6.1
11.7
17.8
2016
cents
4.60
4.53
4.28
4.22
2016
US$m
–
–
–
The proposed final dividend of 1.00 cents per ordinary share for the year ended 31 December 2017 is not recognised as a liability in the
consolidated statement of financial position in line with the requirements of IAS 10 Events after the Reporting Period and, subject to
shareholder approval, will be paid on 29 May 2018 to shareholders on the register at the close of business on 4 May 2018.
115
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
13 Intangible Assets
Cost
At 1 January 2016
Currency translation differences
Acquisition of subsidiaries
Additions
Disposals
At 31 December 2016
Currency translation differences
Acquisition of subsidiaries
Additions
Disposals
Acquired intangibles
Goodwill
US$m
Brands &
trade names
US$m
Technology
US$m
Customer
relationships
US$m
5.5
(2.3)
18.1
–
–
242.8
(0.4)
1.4
–
–
21.3
243.8
2.4
4.6
–
–
0.3
–
–
–
0.4
(1.2)
12.5
–
–
11.7
1.6
–
–
–
0.9
(0.8)
6.1
–
–
6.2
0.8
–
–
–
Total
acquired
US$m
244.1
(2.4)
20.0
–
–
Computer
software
US$m
77.1
(0.4)
–
8.7
(4.7)
Total
US$m
326.7
(5.1)
38.1
8.7
(4.7)
261.7
80.7
363.7
2.7
–
–
–
2.3
0.1
5.6
7.4
4.7
5.6
(0.8)
(0.8)
At 31 December 2017
28.3
244.1
13.3
7.0
264.4
87.9
380.6
Cumulative amounts charged
At 1 January 2016
Currency translation differences
Amortisation charge for the year
Disposals
At 31 December 2016
Currency translation differences
Amortisation charge for the year
Disposals
At 31 December 2017
–
–
–
–
–
–
–
–
–
0.1
–
0.1
–
0.2
–
2.2
–
2.4
–
–
0.9
–
0.9
0.2
1.3
–
2.4
Net book value at 31 December 2017
Net book value at 31 December 2016
28.3
21.3
241.7
243.6
10.9
10.8
0.1
–
0.3
–
0.4
–
0.5
–
0.9
6.1
5.8
0.2
–
1.3
–
1.5
0.2
4.0
–
5.7
258.7
260.2
65.3
(0.6)
8.8
(3.1)
70.4
2.0
9.2
(0.6)
81.0
6.9
10.3
65.5
(0.6)
10.1
(3.1)
71.9
2.2
13.2
(0.6)
86.7
293.9
291.8
The carrying value of Coats brands at 31 December 2017 and 31 December 2016 is $239.6 million. There is no foreseeable limit to the
net cash inflows from royalties, which are generated from continued sales of thread resulting from the Coats brands, and those brands
are therefore assessed as having indefinite useful lives. The recoverable amount of these brands has been estimated using the relief from
royalty method to calculate the fair value and is re-assessed annually by reference to the discounted cash flow arising from the royalties
generated by those brands. The valuation has been based on the latest budget and medium term plan approved by the Board, covering
the period to 31 December 2020, applying a pre-tax discount rate of 9.8% and long term growth of 2.6%. Management believes that
no reasonable potential change in any of the above key assumptions would cause the carrying value to exceed its recoverable amount.
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (‘CGUs’) that are expected to
benefit from that business combination. The carrying amount of goodwill has been allocated as follows:
31 December
Gotex
Patrick Yarn
Fast React Systems
GSD
Other
116
2017
US$m
13.7
4.6
4.4
3.5
2.1
2016
US$m
12.0
–
4.0
3.1
2.2
28.3
21.3
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The carrying value of the goodwill allocated to the CGUs has been tested for impairment during the year by comparing the carrying
value of the CGU to their value in use. The value in use calculations were based on projected cash flows, derived from the latest budgets
approved by the Board, discounted at CGU specific, risk adjusted, discount rates to calculate the net present value.
The calculation of ‘value in use’ is most sensitive to the following assumptions:
CGU specific operating assumptions that are reflected in the budget and medium term plan periods for the financial year
to December 2020;
discount rates; and
growth rates used to extrapolate risk adjusted cash flows beyond the medium term period.
CGU specific operating assumptions are applicable to the cash flows for the years 2018 to 2020 and relate to revenue forecasts,
expected project outcomes and forecast operating margins. A short-term growth rate is applied to the December 2020 plan to derive
the cash flows arising in 2021–2022 and a long term rate is applied to 2022 to determine a terminal value.
The discount rate is based on estimations of the assumptions that market participants operating in similar sectors to Coats would make,
using the Group’s economic profile as a starting point and adjusting appropriately. Directors do not currently expect any significant
change in the present base discount rate of 9.8%. The base discount rate has been adjusted for economic risks that are not already
captured in the specific operating assumptions. This results in the impairment testing using a 13.6% to 17.2% pre-tax discount rates.
Management believes that no reasonable potential change in any of the above key assumptions would cause the carrying value of
any of the above CGUs to materially exceed their recoverable amount.
117
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
14 Property, plant and equipment
Cost
At 1 January 2016
Currency translation differences
Subsidiaries bought externally
Additions
Transfer to non-current assets held for sale
Disposals
At 31 December 2016
Currency translation differences
Subsidiaries bought externally
Additions
Disposals
At 31 December 2017
Cumulative amounts charged
At 1 January 2016
Currency translation differences
Depreciation charge for the year
Disposals
At 31 December 2016
Currency translation differences
Depreciation charge for the year
Disposals
At 31 December 2017
Net book value at 31 December 2017
Net book value at 31 December 2016
Assets charged as security for borrowings:
31 December 2017
31 December 2016
Analysis of net book value of land and buildings
31 December
Freehold
Leasehold:
Over 50 years unexpired
Under 50 years unexpired
118
Land and
buildings
US$m
Plant and
equipment
US$m
Vehicles and
office
equipment
US$m
153.4
577.1
(3.8)
(10.5)
–
7.9
(0.2)
1.0
19.2
–
98.5
(0.5)
–
5.7
–
Total
US$m
829.0
(14.8)
1.0
32.8
(0.2)
–
(12.7)
(5.4)
(18.1)
157.3
574.1
98.3
829.7
5.4
6.9
3.7
16.3
0.1
36.0
1.8
0.3
5.3
23.5
7.3
45.0
(0.1)
(13.9)
(1.8)
(15.8)
173.2
612.6
103.9
889.7
76.1
(1.7)
3.8
–
402.7
77.2
556.0
(6.2)
24.3
(11.1)
(0.3)
3.8
(4.8)
(8.2)
31.9
(15.9)
78.2
409.7
75.9
563.8
2.8
3.5
12.3
23.7
2.0
3.7
17.1
30.9
(0.5)
(12.7)
(1.6)
(14.8)
84.0
433.0
80.0
597.0
89.2
79.1
179.6
164.4
23.9
22.4
292.7
265.9
–
–
0.4
0.4
–
–
0.4
0.4
2017
US$m
74.1
1.4
13.7
89.2
2016
US$m
64.3
1.4
13.4
79.1
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
15 Non-current investments
31 December
Interests in joint ventures (see below)
Available for sale investments:
Unlisted investments
2017
US$m
12.0
1.2
13.2
Available for sale investments included within current assets were $0.2 million at 31 December 2017 (2016: $0.2 million).
Interests in joint ventures
At 1 January 2017
Additions
Dividends receivable
Share of loss after tax
At 31 December 2017
31 December
Share of net assets on acquisition
Share of post-acquisition retained profits
Share of net assets
2017
US$m
10.6
1.4
12.0
2016
US$m
11.0
1.1
12.1
US$m
11.0
3.4
(1.1)
(1.3)
12.0
2016
US$m
10.6
0.4
11.0
The following table provides summarised financial information on the Group’s share of its joint ventures, relating to the period during
which they were joint ventures, and excludes goodwill:
Year ended 31 December
Summarised income statement information:
Revenue
(Loss)/profit before tax
Taxation
Loss after tax
31 December
Summarised balance sheet information:
Non-current assets
Current assets
Liabilities due within one year
Net assets
2017
US$m
2016
US$m
30.8
(0.6)
(0.5)
(1.1)
31.0
0.2
(0.4)
(0.2)
2017
US$m
2016
US$m
8.3
12.4
20.7
(7.8)
12.9
7.9
13.0
20.9
(15.1)
5.8
119
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
16 Deferred tax assets
31 December
Deferred tax assets
The Group’s deferred tax assets are included within the analysis in note 23.
The movements in the Group’s deferred tax asset during the year were as follows:
At 1 January
Currency translation differences
Transfer from deferred tax liability
Transfer to current tax
Credited to the income statement
Credited to other comprehensive income and expense
Credited to equity
At 31 December
17 Inventories
31 December
Raw materials and consumables
Work in progress
Finished goods and goods for resale
18 Trade and other receivables
31 December
Non-current assets:
Trade receivables
Income tax assets
Other receivables
Derivative financial instruments
Current assets:
Trade receivables
Amounts due from joint ventures
Current income tax assets
Prepayments and accrued income
Derivative financial instruments
Other receivables
2017
US$m
24.6
2016
US$m
18.1
2017
US$m
18.1
0.4
(9.2)
–
9.2
0.5
5.6
2016
US$m
12.5
(1.3)
–
(2.4)
9.1
0.2
–
24.6
18.1
2017
US$m
91.7
39.5
101.0
232.2
2016
US$m
75.7
40.4
89.7
205.8
2017
US$m
2016
US$m
–
2.8
18.1
0.6
21.5
0.1
1.2
14.5
0.3
16.1
216.1
198.4
–
4.6
8.6
2.4
0.3
1.3
6.7
3.3
37.2
38.4
268.9
248.4
The fair value of trade and other receivables is not materially different to the carrying value.
The average credit period taken on sale of goods is 55 days (2016: 51 days). Interest charged in respect of overdue trade receivables
is immaterial.
120
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Credit risk is minimised as the exposure is spread over a large number of customers. An allowance has been made for estimated
irrecoverable amounts on trade receivables of $10.4 million (2016: $11.8 million). This allowance has been determined by reference
to past default experience, and the movements in the allowance are analysed as follows:
At 1 January
Currency translation differences
Charged to the income statement
Amounts written off during the year
At 31 December
19 Derivative financial instruments – assets
Derivative financial instruments within non-current and current assets comprise:
31 December
Fair value through the income statement:
Forward foreign currency contracts
Fair value hedges through the statement of comprehensive income:
Other derivative financial instruments
Amounts shown within non-current assets
Amounts shown within current assets
2017
US$m
11.8
0.4
0.4
(2.2)
10.4
2016
US$m
11.3
(0.3)
2.3
(1.5)
11.8
2017
US$m
2016
US$m
1.9
3.1
1.1
3.0
0.6
2.4
0.5
3.6
0.3
3.3
The fair values of these financial instruments are calculated by discounting the future cash flows to net present values using appropriate
market interest and foreign currency rates prevailing at the year end.
20 Trade and other payables
31 December
Amounts falling due within one year:
Trade payables
Amounts owed to joint ventures
Other tax and social security payable
Other payables
Accruals and deferred income
Derivative financial instruments
Employee entitlements (excluding pensions)
Amounts falling due after more than one year:
Other payables
Employee entitlements (excluding pensions)
Derivative financial instruments
The fair value of trade and other payables is not materially different to the carrying value.
Interest paid to suppliers in respect of overdue trade payables is immaterial.
2017
US$m
2016
US$m
195.1
176.4
13.0
6.9
43.2
52.7
1.8
17.7
11.5
7.8
37.9
53.7
8.7
14.8
330.4
310.8
24.6
14.6
1.3
1.3
1.2
–
27.2
15.8
121
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
21 Derivative financial instruments – liabilities
Derivative financial instruments within non-current and current liabilities comprise:
31 December
Fair value through the income statement:
Forward foreign currency contracts
Fair value hedges through the statement of comprehensive income:
Other derivative financial instruments
Amounts shown within non-current liabilities
Amounts shown within current liabilities
2017
US$m
2016
US$m
1.5
8.7
1.6
3.1
1.3
1.8
–
8.7
–
8.7
The fair values of these financial instruments are calculated by discounting the future cash flows to net present values using appropriate
market interest and foreign currency rates prevailing at the year end.
22 Borrowings
31 December
Bank overdrafts
Borrowings repayable within one year
Due within one year
Borrowings repayable between one and two years
Borrowings repayable between two and five years
Due after more than five years
Due after more than one year
Bank overdrafts
Series A and Series B Senior Notes
Bank and other borrowings
2017
US$m
2016
US$m
1.6
0.1
1.7
0.3
132.9
225.0
358.2
1.6
225.0
133.3
359.9
6.2
1.5
7.7
58.5
332.1
–
390.6
6.2
–
392.1
398.3
On 6 December 2017 the Group issued $125.0 million of 3.88% Series A Senior Notes due 6 December 2024 and $100.0 million of
4.07% Series B Senior Notes due 6 December 2027 in a US private placement. Interest is payable semi-annually in arrears on 6 June
and 6 December of each year beginning on 6 June 2018. The Senior Notes are unsecured and rank equally with all the Group’s other
unsecured and unsubordinated indebtedness.
On 6 December 2017 the Group also agreed a new $350.0 million five year bank facility. The Senior Notes and the new bank facility
replace the Group’s $680.0 million bank facility that was due to mature in March 2020.
At 31 December 2017, the Group’s borrowings shown above comprised $133.3 million of secured borrowings (2016: $394.6 million)
and $226.6 million of unsecured borrowings (2016: $3.7 million).
The currency and interest rate profile of the Group’s borrowings is included in note 34 on page 137.
122
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
23 Deferred tax liabilities
At 1 January
Currency translation differences
Acquisition of subsidiaries
Reclassified from deferred tax assets
Transfer to current tax
Credited to the income statement
(Credited)/charged to the other comprehensive income and expense
At 31 December
The Group’s net deferred tax liabilities/(assets) are analysed as follows:
Accelerated tax depreciation on tangible fixed assets
Other temporary differences
Revenue losses carried forward
Capital losses carried forward
Investment in subsidiaries
Brands
Retirement benefit obligations offset against brands
Retirement benefit obligations
2017
US$m
31.7
0.8
–
(9.2)
(4.5)
(4.0)
(0.5)
14.3
2016
US$m
33.0
(0.4)
4.8
–
(2.1)
(3.7)
0.1
31.7
2016
2017
Provided/
(recognised)
US$m
Unprovided/
(unrecognised)
US$m
Provided/
(recognised)
US$m
Unprovided/
(unrecognised)
US$m
12.1
(14.9)
(16.4)
–
7.1
40.7
(40.7)
1.8
(10.3)
(7.3)
(25.3)
(313.8)
(265.2)
3.9
–
–
(5.3)
(613.0)
14.7
(6.7)
(12.6)
–
10.6
40.7
(40.7)
7.6
13.6
(5.8)
(13.0)
(258.3)
(242.5)
4.1
–
–
(43.9)
(559.4)
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for
financial reporting purposes:
Deferred tax assets (note 16)
Deferred tax liabilities
(24.6)
14.3
(10.3)
(18.1)
31.7
13.6
At the year end, the Group had approximately $1.5 billion (2016: $1.2 billion) of unused gross income tax losses and approximately
$1.5 billion (2016: $1.4 billion) of unused gross capital losses available for offset against future profits. A deferred tax asset of
$16.4 million (2016: $12.6 million) has been recognised in respect of $66.0 million (2016: $45.0 million) of such income tax losses.
No deferred tax asset has been recognised in respect of the remaining losses due to lack of certainty regarding the availability of future
taxable income. Such losses are only recognised in the financial statements to the extent that it is considered more likely than not that
sufficient future taxable profits will be available for offset.
123
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The Group’s income tax losses can be analysed as follows:
Expiring within 5 years
Expiring in more than 5 years
Available indefinitely
2017
US$m
30.0
11.0
2016
US$m
30.8
7.2
1,486.3
1,188.1
1,527.3
1,226.1
At 31 December 2017, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which
deferred tax liabilities have not been recognised is $3.9 million (2016: $4.1 million). Deferred tax on distribution of these profits has not
been provided on the grounds that the Group is able to control the timing of the reversal of the remaining temporary differences and it
is probable that they will not reverse in the foreseeable future.
24 Provisions
31 December
Provisions are included as follows:
Current liabilities
Non-current liabilities
Provisions are analysed as follows:
31 December
Onerous leases
Other provisions
At 1 January 2017
Currency translation differences
Utilised in year
(Credited)/charged to the income statement
At 31 December 2017
2017
US$m
2016
US$m
18.3
33.5
51.8
2017
US$m
4.0
47.8
51.8
Onerous
leases
US$m
Other
provisions
US$m
17.1
34.8
51.9
2016
US$m
4.8
47.1
51.9
Total
US$m
51.9
1.7
4.8
0.4
(0.4)
(0.8)
4.0
47.1
1.3
(9.0)
(9.4)
8.4
47.8
7.6
51.8
Provisions for onerous leases are held in respect of leasehold properties for which the Group has rent and other commitments in respect
of properties which are vacant or sublet. The majority of head leases expire before 2020.
The currency profile of onerous leases is included in note 34 on page 137 and the maturity of onerous leases in included in note 34
on page 139.
Other provisions include the following amounts set aside to cover certain legal and other regulatory claims, including in respect of the
Lower Passaic River (see note 28 for further details), which are expected to be substantially utilised within the next ten years.
124
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
25 Operating lease commitments
31 December
Outstanding commitments under non-cancellable operating leases:
Payable within one year
Payable between one and five years
Payable after more than five years
2017
US$m
2016
US$m
17.1
31.5
13.8
62.4
15.6
25.0
6.7
47.3
At the balance sheet date, the Group had contracted with tenants for receipt of the following minimum lease payments:
31 December
Receivable within one year
Receivable between one and five years
2017
US$m
2016
US$m
0.2
0.5
0.7
0.2
0.5
0.7
Operating leases relate principally to land and buildings and vehicles.
26 Share capital
31 December
Ordinary Shares of 5p each
Number
2017
US$m
Number
1,413,300,648
87.5
1,407,612,282
2016
US$m
127.0
During the year ended 31 December 2017 the Company issued 5,688,366 Ordinary shares of 5p each (2016: Nil) following the exercise
of share options as set out below:
At 1 January 2017
Issue of ordinary shares
Change in functional currency (see note 1 (c))
At December 2017
Number
of shares
US$m
1,407,612,282
127.0
5,688,366
0.4
–
(39.9)
1,413,300,648
87.5
The own shares reserve at 31 December 2017 of $7.7 million (2016: $10.5 million) represents the cost of shares in Coats Group plc
purchased in the market and held by an Employee Benefit Trust to satisfy awards under the Group’s share based incentive plans.
The number of shares held by the Employee Benefit Trust at 31 December 2017 was 19,025,392 (2016: 25,746,861).
Options outstanding under the Group’s 2002 share option scheme at 31 December 2017 were as set out below:
Share Option Scheme
2002 Share Option Scheme:
Ordinary
Ordinary
Number
Date granted
Exercise price
(pence per share)
Exercise period
6,245,700
589,706
10.04.08
30.06.09
49.9961
10.04.11 to 10.04.18
25.9529
30.06.12 to 30.06.19
During the year ended 31 December 2017 10,554,440 (2016: 947,389) options under the Group’s 2002 share option scheme were
exercised and 6,809,255 (2016: 13,150,014) options lapsed.
Details of share awards outstanding under the Group’s LTIP and Deferred Bonus Plans are set out in note 35.
125
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
27 Reserves and non-controlling interests
At 1 January 2017
Change in functional currency
Dividends
Currency translation differences
Decrease in fair value of cash flow hedges
Transfer to income statement
Actuarial gains on employee benefits
Tax on actuarial gains and losses
Issue of ordinary shares
Movement in own shares
Share based payments
Deferred tax on share schemes
Profit for the year
At December 2017
Share
premium
account
US$m
Own
shares
US$m
Translation
reserve
US$m
Capital
reduction
reserve
US$m
Other
reserves
US$m
Retained
loss
US$m
Non-
controlling
interests
US$m
11.6
(10.5)
(121.1)
85.2
250.9
(274.6)
22.5
(10.8)
1.8
78.5
(25.4)
(4.2)
–
–
(17.8)
(12.3)
–
–
–
–
–
–
2.6
4.3
–
–
–
–
–
–
–
–
–
–
1.0
–
–
–
–
(6.2)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.1)
0.2
–
–
–
–
–
–
–
–
–
–
145.2
1.0
–
(5.2)
6.4
5.6
80.8
7.7
(7.7)
(48.8)
59.8
245.8
(58.6)
0.1
–
–
–
–
–
–
–
–
14.3
24.6
The table below shows financial information of non-wholly owned subsidiaries of the Group that have non-controlling interests:
EMEA
Asia & Rest of World
Profit allocated to non-
controlling interests
Accumulated non-
controlling interests
Year ended
31
December
2017
US$m
Year ended
31
December
2016
US$m
31
December
2017
US$m
31
December
2016
US$m
0.4
13.9
14.3
0.5
11.4
11.9
1.8
22.8
24.6
2.2
20.3
22.5
The proportion of ownership interests and voting rights of non-wholly owned subsidiaries of the Group held by non-controlling interests
is set out on pages 153 to 159.
126
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
28 Contingent liabilities and environmental matters
Guarantees
The Group previously provided a guarantee of the banking facilities of Australian Country Spinners Ltd (‘ACS’), a joint venture, on
a joint and several basis with the other shareholder. During the year ended 31 December 2017 ACS repaid amounts outstanding
under the bank facilities. The Group’s liability under the guarantee amounted to $1.9 million at 31 December 2016.
Environmental matters
As noted in previous reports, the US Environmental Protection Agency (‘EPA’) has notified Coats & Clark, Inc. (‘CC’) that CC is a
‘potentially responsible party’ (‘PRP’) under the US Superfund law for investigation and remediation costs at the 17 mile Lower Passaic
River Study Area (‘LPR’) in New Jersey in respect of alleged operations of a predecessor’s former facilities in that area prior to 1950.
Approximately 50 PRPs are currently members of a cooperating parties group (‘CPG’) of companies, formed to fund and conduct a
remedial investigation and feasibility study of the area. CC joined the CPG in 2011.
CC has analysed its predecessor’s operating history prior to 1950, when it left the LPR, and has concluded that it was not responsible for
the contaminants and environmental damage that are the primary focus of the EPA process. CC also believes that there are many parties
that will participate in the LPR’s remediation that are not currently funding the study of the river, including those that are the most
responsible for its contamination.
In April 2014, the EPA released a Focused Feasibility Study and Proposed Plan (FFS) for the lower 8 miles of the LPR. The FFS analyses a
series of remedial alternatives. In March 2015, CC and other companies submitted a petition to EPA, asserting that they are de minimis
parties and seeking a meeting to commence settlement discussions.
In March 2016, EPA issued a Record of Decision selecting a remedy for the lower 8 miles of the LPR pursuant to the FFS at an estimated
cost of $1.38 billion on a net present value basis. The EPA’s Record of Decision did not include a remedial decision for the upper 9 miles
of the LPR. The EPA may consider the CPG’s proposed remedial alternative for the upper 9 miles, or it may select a different remedy.
Discussions with EPA regarding the nature and timing of such a decision are ongoing.
EPA has entered into an administrative order on consent (‘AOC’) with Occidental Chemical Corporation (‘OCC’), which has been
identified as being responsible for the most significant contamination in the river, concerning the design of the selected remedy for the
lower eight miles of the LPR. Maxus Energy Corporation (‘Maxus’), which provided an indemnity to OCC that covered the LPR, has been
granted Chapter 11 bankruptcy protection, but OCC remains responsible for its remedial obligations even in the absence of Maxus’
indemnity. The approved bankruptcy plan also created a liquidating trust to pursue potential claims against Maxus’ parent entity, YPF SA,
and potentially others, which could result in additional funding for the LPR remedy. While the ultimate costs of the remedial design and
the final remedy are expected to be shared among hundreds of parties, including many who are not currently in the CPG, the allocation
of remedial costs among those parties has not yet been determined.
In March 2017, EPA notified 20 parties not associated with the disposal or release of any contaminants of concern as being eligible for
early cash out settlements. As expected, EPA did not identify CC as one of the 20 parties. EPA has invited approximately 80 other parties,
including CC, to participate in an allocation process to determine their respective allocation shares and potential eligibility for future
cash out settlements. In the upcoming allocation, CC intends to present factual and scientific evidence that it is not responsible for the
discharge of dioxins, furans or PCBs – the contaminants that are driving the remediation of the LPR – and that it is a de minimis party.
The duration and scope of the allocation process have yet to be finally determined.
In 2015, a provision of $9.0 million was recorded for remediation costs for the entire 17 miles of the LPR. This provision was based on
CC’s estimated share of de minimis costs for EPA’s selected remedy for the lower 8 miles of the LPR and the remedy proposed by the
CPG for the upper 9 miles. A separate provision of $6.8 million was recorded for associated legal and professional costs in defence of
CC’s position. Both of these charges to the income statement were net of insurance reimbursements and were stated on a net present
value basis. As at 31 December 2017, $4.5 million of this provision had been utilised. The remaining provision at 31 December 2017,
taking into account insurance reimbursement, was $11.3 million. The process concerning the LPR continues to evolve and these
estimates are subject to change based upon the scope of the remedy selected by EPA for the upper 9 miles, the share of remedial costs
to be paid by the major polluters on the river, and the share of remaining remedial costs apportioned among CC and other companies.
Coats believes that CC’s predecessor 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 the ultimate costs of remediation.
However, as this matter evolves, CC could record additional provisions and such provisions could increase materially based on further
decisions by EPA, negotiations among the parties, and other future events.
127
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
29 Capital commitments
As at 31 December 2017, the Group had commitments of $7.4 million in respect of contracts placed for future capital expenditure
(2016: $5.6 million).
30 Notes to the consolidated cash flow statement
a) Reconciliation of operating profit to net cash (outflow)/inflow from operations
31 December
Operating profit
Depreciation
Amortisation of intangible assets
Other operating exceptional and acquisition related items (see note 4)
Pre-exceptional operating profit before depreciation and amortisation (EBITDA)
Increase in inventories
(Increase)/decrease in debtors
Increase/(decrease) in creditors
Provision movements
Foreign exchange and other non-cash movements
Discontinued operations
Net cash (outflow)/inflow from operations
b) Investment income
31 December
Interest and other income
Dividends received from joint ventures
c) Capital expenditure and financial investment
31 December
Acquisition of property, plant and equipment and intangible assets
Disposal of available-for-sale investments
Disposal of property, plant and equipment
d) Acquisitions and disposals
31 December
Acquisition of businesses
Investment in joint venture
Discontinued operations
128
2017
US$m
2016
US$m
167.2
153.3
30.9
11.1
6.5
31.9
8.8
4.6
215.7
198.6
(14.6)
(7.2)
15.6
(3.7)
5.9
(5.7)
(372.8)
(113.3)
6.5
(0.6)
2.5
(4.9)
(157.4)
79.4
2017
US$m
2016
US$m
0.2
1.1
1.3
3.0
1.0
4.0
2017
US$m
2016
US$m
(50.1)
(40.1)
–
0.4
0.3
1.1
(49.7)
(38.7)
2017
US$m
2016
US$m
(19.9)
(36.3)
(3.2)
–
(0.4)
(3.7)
(23.1)
(40.4)
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
e) Summary of net (debt)/cash
31 December
Parent Group cash and cash equivalents1
Other group cash and cash equivalents
Total cash and cash equivalents
Bank overdrafts
Net cash and cash equivalents
Other borrowings
Total net (debt)/cash
2017
US$m
0.5
117.9
118.4
2016
US$m
343.1
133.4
476.5
(1.6)
(6.2)
116.8
470.3
(358.3)
(392.1)
(241.5)
78.2
1 Parent group cash and cash equivalents at 31 December 2016 related to the realisation of investments previously held by Coats Group plc. During the year ended 31 December 2017, upfront pension
payments were made into the UK Coats Pension Plan, the Brunel Holdings Pension scheme and the Staveley Industries Retirement Benefit Scheme out of Parent group cash following the signing of
binding settlement agreements with the Trustees of the schemes.
31 Acquisitions
In December 2017, the Group acquired 100% of the voting equity of Patrick Yarn Mill Inc., a company based in North Carolina, US that
manufactures high-performance engineered yarns. It specialises in cut-resistant and flame retardant yarns. It also produces yarns from
recycled fibres marketed under its earthspun® trademarks and with its large solar installation promotes its earth friendly yarns as 'Spun
by the Sun'. Patrick Yarn Mill's unique spinning competencies in engineered performance yarns offer an opportunity to expand Coats'
existing Performance Materials portfolio as well as to extend its innovation capability. Coats will support Patrick Yarn Mill's expansion
into high-growth markets by leveraging Coats' unrivalled geographic footprint, breadth of global customer relationships and strong
corporate brand.
The initial consideration transferred on the date of acquisition was $21.0 million and net of cash and cash equivalents acquired was
$19.7 million.
Additional consideration of approximately $1.8 million is expected to be payable in early 2018 subject to finalisation of certain
completion consideration adjustments based on the amount of cash and net working capital at the acquisition date.
Contingent deferred consideration amounts are also payable that have been treated as remuneration. For these amounts to be paid,
in addition to financial targets being met, certain employees must also remain with the Group. Amounts are therefore charged to
the income statement over the period of service they relate to. Up to $4.0 million is payable over a service period of three years to
31 December 2020. The charge to the income statement for the year ended 31 December 2017 was $0.2 million.
Given the date of the acquisition of Patrick Yarn Mill, it has not been practicable to complete the assessment of the fair value of assets
and liabilities acquired, including any intangible assets. Therefore, as permitted by IFRS 3, the excess of the consideration over the
provisional net assets acquired has all been provisionally allocated to goodwill amounting to $4.6 million.
None of the goodwill arising on the acquisition is expected to be deductible for tax purposes.
129
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The provisional fair values of the identifiable assets and liabilities of Patrick Yarn Mill as at the date of acquisition were as follows:
Assets:
Computer software
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Liabilities:
Trade and other payables
Total identifiable net assets acquired at fair value
Goodwill recognised on acquisition (provisional)
Purchase consideration paid
Additional purchase consideration estimated to be payable
Total consideration
Provisional
fair value
recognised on
acquisition
US$m
0.1
7.3
6.7
4.9
1.3
20.3
(2.1)
18.2
4.6
22.8
21.0
1.8
22.8
In accounting for the acquisition, adjustments will be made to the book values of the net assets of the companies acquired to reflect
their provisional fair values to the Group. Previously unrecognised assets and liabilities at acquisition are included and accounting policies
will be aligned with those of the Group where appropriate. There are no material contingent liabilities recognised in the provisional
amounts above in accordance with paragraph 23 of IFRS 3 (revised).
From the date of acquisition, Patrick Yarn Mill contributed $1.8 million to revenues and a loss of $0.3 million, after acquisition related
items, to the profit before tax from continuing operations of the Group in the year to 31 December 2017.
If the acquisition had taken place at the beginning of the year, it is estimated that revenue from continuing operations for the year
ended 31 December 2017 would have been $42 million and the profit before tax from continuing operations for the year ended
31 December 2017 would have been $2 million based on unaudited management accounts.
Transaction costs relating to the acquisitions totalling $0.4 million have been expensed and are included in administrative expenses
in the consolidated income statement (see note 4). Transaction costs paid in the year ended 31 December 2017 were $0.2 million
and are included in cash flows absorbed in investing activities in the consolidated cash flow statement.
130
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
32 Discontinued operations
a) Discontinued operations
The results of discontinued operations are presented below. All amounts relate to the UK Crafts business which ceased operations
during 2016.
31 December
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating loss and loss before taxation
Tax on loss
Total loss from discontinued operations
2017
US$m
2016
US$m
–
–
–
–
–
–
–
–
8.8
(6.7)
2.1
(3.8)
(2.8)
(4.5)
–
(4.5)
The UK Crafts results for the year ended 31 December 2016 include exceptional closure related costs of $1.2 million included in
administrative expenses.
The loss per ordinary share from discontinued operations is as follows:
Loss per ordinary share from discontinued operations:
Basic and diluted
The table below sets out the cash flows from discontinued operations:
Net cash outflow from operating activities
Net cash outflow from investing activities
Net cash flows from discontinued operations
b) Assets held for sale
The major classes of assets and liabilities comprising the operations classified as held for sale are as follows:
31 December
Property, plant and equipment
2017
Cents
2016
Cents
–
(0.32)
2017
US$m
(0.6)
–
(0.6)
2016
US$m
(4.9)
(3.7)
(8.6)
2017
US$m
0.2
0.2
2016
US$m
0.2
0.2
33 Related party transactions
Remuneration of key management personnel
The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the
categories specified in IAS 24 – Related Party Disclosures. Further information regarding the remuneration of individual directors is
provided on pages 55 to 67 in the audited part of the Directors’ remuneration report.
Year ended 31 December
Short-term employee benefits
Share based payments
2017
US$m
2016
US$m
3.6
0.9
4.5
5.1
1.3
6.4
131
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Trading transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
Joint ventures
Sale of goods
Purchase of goods
2017
US$m
2.9
2016
US$m
2.8
2017
US$m
52.7
2016
US$m
46.2
During the year ended 31 December 2017 funding of $3.2 million was provided to the joint venture, Australian Country Spinners Ltd,
in connection with the sale and closure of its business.
Amounts owing by/(to) joint ventures at the year end are disclosed in notes 18 and 20.
34 Derivatives and Other Financial Instruments
The Group’s main financial instruments comprise:
Financial assets:
cash and cash equivalents;
trade and other receivables that arise directly from the Group’s operations; and
derivatives, including forward foreign currency contracts and interest rate swaps.
Financial liabilities:
trade, other payables and certain provisions that arise directly from the Group’s operations;
bank borrowings and overdrafts; and
derivatives, including forward foreign currency contracts and interest rate swaps.
Financial assets
The Group’s financial assets are summarised below:
31 December
Financial assets carried at amortised cost (loans and receivables):
Cash and cash equivalents
Trade receivables (note 18)
Due from joint ventures (note 18)
Other receivables (note 18), net of non-financial assets $24.8 million (2016: $22.2 million)
Financial assets carried at fair value through the income statement:
Derivative financial instruments (note 19)
Other financial assets carried at fair value through the statement of comprehensive income:
Available-for-sale investments (note 15)
Derivative financial instruments (note 19)
Total financial assets
132
2017
US$m
2016
US$m
118.4
216.1
–
30.5
476.5
198.5
0.3
30.7
365.0
706.0
1.9
1.9
1.4
1.1
2.5
3.1
3.1
1.3
0.5
1.8
369.4
710.9
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Financial liabilities
The Group’s financial liabilities are summarised below:
31 December
Financial liabilities carried at amortised cost:
Trade payables (note 20)
Due to joint ventures (note 20)
Other financial liabilities
Provisions (note 24)
Borrowings (note 22)
Financial liabilities carried at fair value through the income statement:
Derivative financial instruments (note 21)
Derivatives designated as effective hedging instruments and carried at fair value through
the statement of comprehensive income:
Derivative financial instruments (note 21)
Total financial liabilities
Other financial liabilities include other payables, other than taxation and other statutory liabilities.
Fair value of financial assets and liabilities
The fair value of the Group’s financial assets and liabilities is summarised below:
2017
US$m
2016
US$m
195.1
176.4
13.0
11.5
114.2
109.5
4.0
359.9
686.2
4.8
398.3
700.5
1.5
8.7
1.6
–
689.3
709.2
Primary financial instruments:
Cash and cash equivalents
Trade receivables
Due from joint ventures
Other receivables
Available-for-sale investments
Trade payables
Due to joint ventures
Other financial liabilities and provisions
Borrowings
Derivative financial instruments:
Forward foreign currency contracts
Interest rate swaps
Net financial (liabilities)/assets
Book
value
US$m
2017
Fair
value
US$m
118.4
118.4
216.1
216.1
–
30.5
1.4
–
30.5
1.4
Book
value
US$m
476.5
198.5
0.3
30.7
1.3
2016
Fair
value
US$m
476.5
198.5
0.3
30.7
1.3
(195.1)
(195.1)
(176.4)
(176.4)
(13.0)
(13.0)
(11.5)
(11.5)
(118.2)
(118.2)
(114.3)
(114.3)
(359.9)
(359.9)
(398.3)
(398.3)
0.4
0.4
(5.6)
(5.6)
(0.5)
(0.5)
(319.9)
(319.9)
0.5
1.7
0.5
1.7
Market values have been used as proxies for the fair value of all listed investments. Unlisted investments are stated at fair value. For
floating rate financial assets and liabilities, and for fixed rate financial assets and liabilities with a maturity of less than 12 months, it has
been assumed that fair values are approximately the same as book values. Fair values for forward foreign currency contracts have been
estimated using applicable forward exchange rates at the year end. All other fair values have been calculated by discounting expected
cash flows at prevailing interest rates.
133
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Fair value measurements recognised in the statement of financial position
The following tables provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value,
grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 fair value measurements are those derived from inputs other than quoted prices that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 fair value measurements are those derived from valuation techniques which include inputs for the asset or liability that are not
observable market data (unobservable inputs).
Financial assets measured at fair value
31 December
2017
Financial assets measured at fair value through the income statement:
Trading derivatives
Financial assets measured at fair value through the statement of
comprehensive income:
Equity investments
Derivatives designated as effective hedging instruments
2016
Financial assets measured at fair value through the income statement:
Trading derivatives
Financial assets measured at fair value through the statement of
comprehensive income:
Equity investments
Derivatives designated as effective hedging instruments
Financial liabilities measured at fair value
Total
US$m
Level 1
US$m
Level 2
US$m
Level 3
US$m
1.9
1.4
1.1
4.4
3.1
1.3
0.5
4.9
–
–
–
–
–
–
–
–
1.9
–
–
1.1
3.0
1.4
–
1.4
3.1
–
–
0.5
3.6
1.3
–
1.3
Total
US$m
Level 1
US$m
Level 2
US$m
Level 3
US$m
2017
Financial liabilities measured at fair value through the income statement:
Trading derivatives
(1.5)
–
(1.5)
Financial liabilities measured at fair value through the statement of
comprehensive income:
Derivatives designated as effective hedging instruments
2016
Financial liabilities measured at fair value through the income statement:
Trading derivatives
Financial liabilities measured at fair value through the statement of
comprehensive income:
Derivatives designated as effective hedging instruments
(1.6)
(3.1)
(8.7)
–
(8.7)
–
–
–
–
–
(1.6)
(3.1)
(8.7)
–
(8.7)
–
–
–
–
–
–
134
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Level 1 financial instruments are valued based on quoted bid prices in an active market. Level 2 financial instruments are measured by
discounted cash flow. For interest rates swaps future cash flows are estimated based on forward interest rates (from observable yield
curves at the end of the reporting period) and contract interest rates, discounted at a rate that reflects the credit risk of the various
counterparties. For foreign exchange contracts future cash flows are estimated based on forward exchange rates (from observable
forward exchange rates at the end of the reporting period) and contract forward rates, discounted at a rate that reflects the credit risk
of the various counterparties. For equity instruments that are classified as level 3 financial instruments the carrying value approximates
to fair value.
The main risks arising from the Group’s financial instruments are as follows:
currency risk;
interest rate risk.
capital risk;
market price risk;
liquidity risk; and
credit risk.
The Group’s policies for managing those risks are described on pages 135 to 141 and, except as noted, have remained unchanged
since the beginning of the year to which these financial statements relate.
Currency risk
The income and capital value of the Group’s financial instruments can be affected by exchange rate movements as a significant portion
of both its financial assets and financial liabilities are denominated in currencies other than US Dollars, which is the Group’s
presentational currency. The accounting impact of these exposures will vary according to whether or not the Group company holding
such financial assets and liabilities reports in the currency in which they are denominated.
The Board recognises that the Group’s US Dollar statement of financial position will be affected by short term movements in exchange
rates, particularly the value of Sterling, Euro, Indian Rupee and Brazilian Real. The Board takes the view that the major currencies in
which the Group is invested move within a relatively stable range and that currency fluctuations should even out over the long term.
The Group uses forward foreign currency contracts to mitigate the currency exposure that arises on business transacted in currencies
other than its own functional currency. Such foreign currency contracts are only entered into when there is a firm commitment to the
underlying transaction. The contracts used to hedge future transactions typically have a maturity of between three months and one year.
Interest rate risk
In 2017, the Group financed its operations through shareholders’ funds, bank borrowings, Senior Notes and overdrafts. The Group’s
trading subsidiaries use a mixture of fixed and floating rate debt. The Group also has access to committed bank facilities amounting to
some $350 million, of which $135 million had been drawn down at year end and $225 million of Senior Notes (see note 22).
Interest rate risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings using interest rate swap
contracts. Hedging activities are evaluated regularly to align with interest rate views and risk appetite.
The Group’s interest income does not vary significantly from the returns it would generate through investing surplus cash at floating
rates of interest since the interest rates are re-set on a regular basis.
A reasonably possible change of one per cent in market interest rates would reduce profit before tax by approximately $0.7 million
(2016: increase of $1.9 million), and would reduce shareholders’ funds by approximately $7.0 million (2016: increase of $6.0 million).
Trade and other receivables and trade and other payables are excluded from the following disclosure (other than the currency
disclosures) as there is limited interest rate risk.
Capital risk management
The Group manages its capital so as to ensure that the Company and the Group will be able to continue as a going concern.
The Group’s capital structure comprises cash and cash equivalents and borrowings (see Summary of net debt on page 129), and share
capital and reserves attributable to the equity shareholders of the Company.
Currency exposure
The table below shows the extent to which Group companies have financial assets and liabilities, excluding forward foreign currency
contracts, in currencies other than their functional currency. Foreign exchange differences arising on retranslation of these assets and
liabilities are taken to the Group income statement. The table excludes loans between Group companies that form part of the net
investment in overseas subsidiaries on which the exchange differences are dealt with through reserves, but includes other Group
balances that eliminate on consolidation.
135
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Functional currency 2017
Sterling
US dollars
Euros
Indian Rupees
Brazilian Reals
Other currencies
Functional currency 2016
Sterling
US dollars
Euros
Indian Rupees
Brazilian Reals
Other currencies
Net foreign currency financial assets/(liabilities)
Sterling
US$m
US dollars
US$m
–
(21.1)
(2.7)
–
–
5.3
–
4.1
1.6
(3.1)
2.3
(33.3)
(21.5)
(25.4)
Euro
US$m
(2.8)
(1.4)
–
–
(0.1)
12.7
8.4
Indian
Rupees
US$m
Brazilian
Reals
US$m
–
–
–
–
–
(0.3)
(0.3)
–
–
–
–
–
–
–
Other
US$m
0.8
30.4
0.5
–
–
(0.7)
31.0
Total
US$m
3.3
7.9
1.9
1.6
(3.2)
(19.3)
(7.8)
Net foreign currency financial assets/(liabilities)
Sterling
US$m
US dollars
US$m
Euro
US$m
Indian
Rupees
US$m
Brazilian
Reals
US$m
–
(13.2)
0.5
–
–
0.2
(12.5)
(0.2)
–
(0.7)
(7.8)
10.9
(24.4)
(22.2)
1.8
(1.3)
–
(0.2)
–
7.0
7.3
–
0.1
–
–
–
–
–
0.7
–
–
–
–
0.1
0.7
Other
US$m
(0.4)
29.2
0.6
–
–
(2.1)
27.3
Total
US$m
1.2
15.5
0.4
(8.0)
10.9
(19.3)
0.7
The following table shows the impact on pre-tax profit and shareholders’ funds of reasonably possible changes in exchange rates against
each of the major foreign currencies in which the Group transacts:
Sterling
US$m
Euro
US$m
Indian
Rupees
US$m
Brazilian
Reals
US$m
10%
10%
10%
10%
(3.9)
(0.6)
(0.2)
(12.3)
(0.9)
4.5
0.3
4.4
Sterling
US$m
10%
(1.3)
(24.2)
Euro
US$m
10%
(0.1)
1.5
Indian
Rupees
US$m
Brazilian
Reals
US$m
10%
10%
0.8
6.1
(1.0)
1.7
2017
Increase in US dollar exchange rate
Increase/(decrease) in profit before tax
Increase/(decrease) in shareholders’ funds
2016
Increase in US dollar exchange rate
Increase/(decrease) in profit before tax
Increase/(decrease) in shareholders’ funds
136
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Currency profile of financial assets
The currency profile of the Group’s financial assets was as follows:
31 December
2017
Investments
US$m
Cash and
cash
equivalents
US$m
Trade and
other
receivables
US$m
Derivative
financial
instruments
US$m
Total
US$m
Investments
US$m
Cash and
cash
equivalents
US$m
Trade and
other
receivables
US$m
Derivative
financial
instruments
US$m
2016
Total
US$m
–
0.4
6.7
(75.9)
(68.8)
–
343.4
4.5
–
347.9
0.1
0.1
1.2
–
–
56.0
3.9
5.1
3.1
101.5
27.4
102.5
260.1
2.1
33.5
26.7
(16.2)
16.8
17.6
1.4
22.1
49.9
66.7
(10.9)
105.7
0.1
0.1
1.1
–
–
48.4
6.5
94.6
22.5
8.4
151.5
(22.3)
6.8
12.6
21.8
20.0
55.5
5.5
14.5
(1.4)
18.6
60.1
71.6
(1.1)
130.6
1.4
118.4
246.6
3.0
369.4
1.3
476.5
229.5
3.6
710.9
Currency
Sterling
United
States
dollars
Euros
Indian
Rupees
Brazilian
Reals
Other
currencies
Total
financial
assets
The investments included above comprise listed and unlisted investments in shares and bonds.
Currency and interest rate profile of financial liabilities
The currency and interest rate profile of the Group’s financial liabilities was as follows:
31 December
Currency:
Sterling
Floating
rate
US$m
Fixed
rate
US$m
Interest
free
US$m
Derivative
financial
instruments
US$m
2017
Total
US$m
Floating
rate
US$m
Fixed
rate
US$m
Interest
free
US$m
Derivative
financial
instruments
US$m
2016
Total
US$m
–
–
15.1
(16.3)
(1.2)
–
–
12.9
(81.8)
(68.9)
United States dollars
136.8
220.2
144.1
–
–
–
1.6
–
–
1.1
0.2
20.8
42.7
17.8
85.8
(8.0)
40.1
–
–
(12.7)
493.1
156.4
200.3
141.0
165.4
663.1
60.9
42.7
18.9
74.9
37.5
0.4
–
3.5
–
–
–
0.2
17.9
39.3
14.7
76.4
(27.8)
(18.5)
2.3
(30.9)
27.6
21.2
17.0
49.2
Euros
Indian Rupees
Brazilian Reals
Other currencies
Total financial
liabilities
138.4
221.5
326.3
3.1
689.3
197.8
200.5
302.2
8.7
709.2
The benchmark for determining floating rate liabilities in the UK is LIBOR for both sterling and US$ loans.
137
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Details of fixed and non interest-bearing liabilities (excluding derivatives and trade and other payables) are provided below:
31 December
Currency:
Sterling
United States dollars
2017
Financial
liabilities
on
which no
interest
is paid
Fixed rate
financial
liabilities
Weighted
average
period
for which
rate is
fixed
(months)
Weighted
average
period
until
maturity
(months)
Weighted
average
interest
rate
%
2016
Financial
liabilities
on
which no
interest
is paid
Weighted
average
period
until
maturity
(months)
Fixed rate
financial
liabilities
Weighted
average
interest
rate
%
Weighted
average
period
for which
rate is
fixed
(months)
–
3.40%
–
70
18
–
–
2.80%
–
19
19
17
–
17
Weighted average
3.40%
70
18
2.80%
Currency profile of foreign exchange derivatives
31 December
Currency:
Sterling
United States dollars
Euros
Indian Rupee
Brazilian Real
Other currencies
2017
US$m
103.8
82.6
10.2
16.9
–
Assets
2016
US$m
Liabilities
2017
US$m
2016
US$m
83.6
60.5
28.8
19.8
(10.3)
(1.8)
(174.7)
(176.2)
(52.3)
(33.3)
–
–
–
(1.3)
(2.3)
50.6
38.9
(25.1)
(23.6)
264.1
231.6
(263.7)
(237.2)
Market price risk
The Group has equity and bond available-for-sale investments at 31 December 2017 of $1.4 million ($1.3 million) held for strategic
rather than trading purposes. The Group does not actively trade these investments and is not materially exposed to price risk.
The sensitivity analyses below have been determined based on the exposure to reasonably possible price changes for the investments
held at the year end.
31 December
Impact of a 10% increase in prices:
Increase in pre-tax profit for the year
Increase in equity shareholders’ funds
138
2017
US$m
2016
US$m
–
0.1
–
0.1
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Liquidity risk
The Group typically holds cash balances in deposits with a short maturity. Additional resources can be drawn through committed
borrowing facilities at operating subsidiary level. During the year the Group has complied with all externally imposed capital
requirements.
The Group had the following undrawn committed borrowing facilities in respect of which all conditions precedent had been met
at the year-end:
31 December
Expiring between two and five years
Maturity of undiscounted financial assets (excluding derivatives)
The expected maturity of the Group’s financial assets, using undiscounted cash flows, was as follows:
31 December
In one year or less, or on demand
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
Maturity of undiscounted financial liabilities (excluding derivatives)
The expected maturity of the Group’s financial liabilities, using undiscounted cash flows, was as follows:
31 December
In one year or less, or on demand
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
2017
US$m
2016
US$m
215.0
239.9
2017
US$m
2016
US$m
351.3
692.0
7.8
1.7
5.6
7.5
3.5
5.3
366.4
708.3
2017
US$m
2016
US$m
323.9
303.0
7.0
136.8
225.0
692.7
36.6
360.4
–
700.0
The above table comprises the gross amounts payable in respect of borrowings (including interest thereon), trade and other non-
statutory payables and certain provisions, over the period to the maturity of those liabilities.
Maturity of undiscounted financial derivatives
The maturity of the Group’s financial derivatives (on a gross basis), which include interest rate and foreign exchange swaps, using
undiscounted cash flows, was as follows:
31 December
In one year or less, or on demand
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
Assets
2016
US$m
Liabilities
2017
US$m
2016
US$m
2017
US$m
264.7
232.0
(264.3)
(237.2)
0.6
0.2
–
0.1
0.2
–
(0.6)
(1.7)
(1.1)
–
–
–
265.5
232.3
(267.7)
(237.2)
139
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Credit risk
31 December
The Group considers its maximum exposure to credit risk to be as follows:
Cash and cash equivalents
Derivative financial instruments
Trade receivables (net of bad debt provision)
Due from joint ventures
Other receivables
Financial assets considered not to have exposure to credit risk:
Available-for-sale investments
Total financial assets
Analysis of trade receivables over permitted credit period:
Trade receivables up to 1 month over permitted credit period
Trade receivables between 1 and 2 months over permitted credit period
Trade receivables between 2 and 3 months over permitted credit period
Trade receivables between 3 and 6 months over permitted credit period
Trade receivables in excess of 6 months over permitted credit period
Total gross trade receivables in excess of permitted credit period
Trade receivables within permitted credit period
Total net trade receivables
Analysis of trade receivables impairment provision:
Trade receivables up to 1 month over permitted credit period
Trade receivables between 1 and 2 months over permitted credit period
Trade receivables between 2 and 3 months over permitted credit period
Trade receivables between 3 and 6 months over permitted credit period
Trade receivables in excess of 6 months over permitted credit period
Total impairment provision
2017
US$m
2016
US$m
118.4
476.5
3.0
3.6
216.1
198.5
–
30.5
0.3
30.7
368.0
709.6
1.4
1.3
369.4
710.9
17.5
20.3
5.6
1.7
1.3
0.2
26.3
189.8
216.1
0.2
0.3
0.3
0.6
9.0
10.4
4.6
1.1
1.6
–
27.6
170.9
198.5
0.2
0.3
0.1
0.4
10.8
11.8
Trade receivables consist of a large number of customers, spread across diverse geographical areas and industries.
Customers requesting credit facilities are subject to a credit quality assessment, which may include a review of their financial strength,
previous credit history with the Group, payment record with other suppliers, bank references and credit rating agency reports.
All active customers are subject to an annual review, or more frequent if appropriate, review of their credit limits and credit periods.
The Group does not have a significant credit risk exposure to any single customer.
140
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Hedges
During 2017, the Group has hedged the following exposures:
interest rate risk – using interest rate swaps; and
currency risk – using forward foreign currency contracts.
At 31 December 2017, the fair value of such hedging instruments was a net liability of $0.1 million (2016: $5.1 million).
Cash flow hedges outstanding at 31 December are expected to impact the income statement in the following periods:
Within one year
Within one to two years
Within two to five years
In more than five years
2017
US$m
Profit/(loss)
2016
US$m
Profit/(loss)
–
0.2
(0.5)
(0.2)
(0.5)
0.2
0.1
0.1
–
0.4
The interest rate swaps settle on a quarterly basis. The floating rate on the interest rate swaps is three months’ LIBOR.
The Group holds both interest rate swaps exchanging floating rate amounts for fixed rate amounts and exchanging fixed rate amounts
for floating amounts. This ensures that the Group holds an appropriate level of both fixed rate and floating rate borrowings, in line with
Board approved policies. The amount accumulated in equity is reclassified to profit or loss over the period that the interest payments on
debt affect profit or loss.
35 Share-based payments
The total cost recognised in the consolidated Income Statement in respect of share-based payment plans was as follows:
Year ended 31 December
Long term incentive plan (‘LTIP’)
Deferred bonuses
Equity-
settled
US$m
Cash-
settled
US$m
5.5
0.9
6.4
–
–
–
2017
Total
US$m
5.5
0.9
6.4
Equity-
settled
US$m
4.7
0.4
5.1
Cash-
settled
US$m
(1.6)
–
(1.6)
2016
Total
US$m
3.1
0.4
3.5
The average share price for the year ended 31 December 2017 was 71.4p (2016: 30.7p).
LTIP
Under the terms of the Coats Group LTIP, executive directors and key senior executives may be awarded each year conditional
entitlements to ordinary shares in the Company (in the form of nil cost options). The vesting of awards is subject to the satisfaction
of a three year performance condition, which is determined by the Remuneration Committee at the time of grant. The performance
condition includes both market and non-market based measures.
Details of options outstanding under equity settled awards:
Outstanding at 1 January
Granted during the year
Vested during the year
Lapsed during the year
Exercised during the year
Outstanding at 31 December
Exercisable at 31 December
2017
Options
2016
Options
81,328,453
54,034,129
17,201,479
33,425,357
(11,333,072)
–
(11,026,303)
(6,131,033)
(6,329,587)
–
69,840,970
81,328,453
2,429,441
–
141
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
The options outstanding at 31 December 2017 had a weighted average remaining contractual life of 8.0 years (2016: 8.3 years).
The fair value of the market-based component of these awards was calculated using the Monte Carlo simulation method to reflect the
likelihood of the market-based Total Shareholder Return (‘TSR’) performance condition, which attach to 20% (2016: 20%) of the award,
being met, using the following assumptions:
Vesting period
Share price at valuation date
Exercise price
Risk free rate
Expected dividend yield
Expected volatility
Fair value per share
2017
2016
3 years
3 years
52.0p
26.0p
Nil
Nil
0.12%
0.37%
0%
0%
28.04%
26.14%
38.6p
14.9p
Deferred bonuses
Under the terms of the Coats Group Deferred Bonus Plan, any bonuses awarded to executive directors and key senior management
will be the subject of a mandatory 25% to 33% deferred into shares, to be held for a three year retention period. Annual bonuses will
be determined by reference to performance, in the normal course measured over one financial year. Awards are normally exercisable
after three years.
The options outstanding at 31 December 2017 had a weighted average remaining contractual life of 1.3 years (2016: 2.0 years).
Share option scheme
The Company granted a number of awards under a share option scheme prior to 2010. All share options under this scheme have
fully vested and can be exercised up to 10 years from the date of grant.
Outstanding options granted after November 2002 are as follows:
Outstanding at 1 January
Lapsed during the year
Exercised during the year
Outstanding at 31 December
Exercisable at 31 December
Options
24,199,101
(6,809,255)
(10,554,440)
6,835,406
6,835,406
2017
Weighted average
exercise price
50.46p
56.55p
48.18p
47.92p
47.92p
Options
38,296,504
(13,150,014)
(947,389)
24,199,101
24,199,101
2016
Weighted average
exercise price
52.18p
57.23p
25.95p
50.46p
50.46p
The options outstanding at 31 December 2017 had a weighted average remaining contractual life of 0.4 years (2016: 0.9 years).
142
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
36 Post balance sheet events
Connecting for Growth is a two year transformation programme to drive agility across the organisation, enabling the next phase of
growth at Coats and accelerating our transition from the industrial age to the digital age. This programme will focus on simplification
across many aspects of the organisation, connecting the business end to end, and releasing funds for reinvestment in customer-focussed
initiatives and people.
Subsequent to the 31 December 2017 year end, on 27 February 2018 it was announced that estimated exceptional reorganisation costs
of $30 million are expected to be incurred in connection with this programme, with the majority of these costs expected to be incurred
in the year ending 31 December 2018.
It is expected that the majority of savings from this transformation programme will be achieved from reducing complexity in the existing
Group. For example transitioning from market-focussed support functions (e.g. Finance, HR and Technology) to realigned globally
integrated support functions, redesigning the way the Group services a number of its peripheral markets, and moving from a business
which is currently operated by individual local management teams into 10 scalable clusters.
37 Alternative Performance Measures
This Annual Report contains both statutory measures and alternative performance measures which, in management’s view, reflect the
underlying performance of the business and provide a more meaningful comparison of how the Group’s business is managed and
measured on a day-to-day basis.
The Group’s alternative performance measures and key performance indicators are aligned to the Group’s strategy and together
are used to measure the performance of the business. A number of these measures form the basis of performance measures for
remuneration incentive schemes.
Alternative performance measures are non-GAAP (Generally Accepted Accounting Practice) measures and provide supplementary
information to assist with the understanding of the Group’s financial results and with the evaluation of operating performance for all the
periods presented. Alternative performance measures, however, are not a measure of financial performance under International Financial
Reporting Standards (‘IFRS’) as adopted by the European Union and should not be considered as a substitute for measures determined
in accordance with IFRS. As the Group’s alternative performance measures are not defined terms under IFRS they may therefore not be
comparable with similarly titled measures reported by other companies.
A reconciliation of alternative performance measures to the most directly comparable measures reported in accordance with IFRS is
provided on pages 143 to 146.
a) Organic growth on a constant exchange rate (CER) basis
Organic growth measures the change in revenue and operating profit before exceptional and acquisition related items after adjusting
for acquisitions. The effect of acquisitions is equalised by:
removing from the year of acquisition, their revenue and operating profit; and
in the following year, removing the revenue and operating profit1 for the number of months equivalent to the pre-acquisition
period in the prior year.
The effects of currency changes are removed through restating prior year revenue and operating profit1 at current year exchange rates.
Organic revenue growth on a CER basis measures the ability of the Group to grow sales by operating in selected geographies and
segments and offering differentiated cost competitive products and services.
Adjusted organic operating profit growth on a CER basis measures the underlying profitability progression of the Group.
Adjusted operating profit is calculated by adding back exceptional and acquisition related items (see note 4 for further details).
Year ended 31 December
Revenue from continuing operations
Constant currency adjustment
Revenue on a CER basis
Revenue from acquisitions
Organic revenue on a CER basis
2017
US$m
2016
US$m
%
Growth
1,510.3
1,457.3
4%
–
0.1
1,510.3
1,457.4
4%
(14.9)
–
1,495.4
1,457.4
3%
143
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
Year ended 31 December
Operating profit from continuing operations1
Exceptional and acquisition related items (note 4)
Adjusted operating profit from continuing operations
Constant currency adjustment
Adjusted operating profit on a CER basis
Operating profit from acquisitions1
Organic adjusted operating profit on a CER basis
2017
US$m
2016
US$m
%
Growth
167.2
153.3
9%
6.5
4.6
173.7
157.9
10%
–
(1.0)
173.7
156.9
11%
(2.9)
-
170.8
156.9
9%
1 Refer to the consolidated income statement for a reconciliation of profit before taxation to operating profit from continuing operations.
b) Adjusted EBITDA
Adjusted EBITDA is presented as an alternative performance measure to show the underlying operating performance of the Group
excluding the effects of depreciation, amortisation and impairments and excluding exceptional and acquisition related items.
Operating profit before exceptional and acquisition related items and before depreciation and amortisation (Adjusted EBITDA) for
the year ended 31 December 2017 was $215.7 million (2016: $198.6 million).
Net debt for the Coats operating business (excluding Parent Group cash) at 31 December 2017 was $242.0 million
(2016: $264.9 million).
This gives a leverage ratio of net debt to Adjusted EBITDA at 31 December 2017 of 1.1 (2016: 1.3).
Refer to notes 30(a) and 30(e) for definitions and calculations of Adjusted EBITDA and net debt.
c) Underlying effective tax rate
The underlying effective tax rate removes the tax impact of exceptional and acquisition related items and net interest on pension
scheme assets and liabilities to arrive at a tax rate based on the underlying profit before taxation.
A significant proportion of the Group’s net interest on pension scheme assets and liabilities relates to UK pension plans for which there is
no related current or deferred tax credit or charge recorded in the income statement. The Group’s net interest on pension scheme assets
and liabilities is adjusted in arriving at the underlying effective tax shown below and, in management’s view, were this not adjusted
would distort the alternative performance measure. This is consistent with how the Group monitors and manages the underlying
effective tax rate.
Year ended 31 December
Profit before taxation
Exceptional and acquisition related items (note 4)
Net interest on pension scheme assets and liabilities
Underlying profit before taxation
Taxation charge
Tax credit in respect of exceptional and acquisition related items and net interest on pension scheme assets and liabilities
Underlying tax charge
Underlying effective tax rate
2017
US$m
142.9
9.1
9.4
161.4
47.8
0.8
48.6
30%
2016
US$m
122.5
4.6
13.6
140.7
46.8
0.4
47.2
34%
The taxation charge for the year ended 31 December 2017 includes a one-off non-cash tax credit of $3.0 million as a result of the
revaluation of the net US deferred tax liabilities following the tax reform measures introduced by the US Government in the Tax Cuts
& Jobs Act (see note 9). The Group’s underlying effective tax rate for the year ended 31 December 2017 excluding this one-off impact
is 32%.
144
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
d) Adjusted earnings per share
Adjusted earnings per share growth measures the underlying progression of the benefits generated for shareholders.
Year ended 31 December
Profit from continuing operations
Non-controlling interests
Profit from continuing operations attributable to equity shareholders
Exceptional and acquisition related items (note 4)
Tax credit in respect of exceptional and acquisition related items
Adjusted profit from continuing operations
Weighted average number of Ordinary Shares
Adjusted earnings per share (cents)
Adjusted earnings per share (growth %)
2017
US$m
95.1
(14.3)
80.8
9.1
(0.7)
89.2
2016
US$m
75.7
(11.9)
63.8
4.6
(0.4)
68.0
1,399,209,804 1,386,628,130
6.37
30%
4.91
The weighted average number of Ordinary Shares used for the calculation of adjusted earnings per share for the year ended
31 December 2017 is 1,399,209,804 (2016: 1,386,628,130), the same as that used for basic earnings per Ordinary Share from
continuing operations (see note 11).
e) Adjusted free cash flow
Net cash (absorbed in)/generated by operating activities, a GAAP measure, reconciles to changes in net debt resulting from cash flows
(free cash flow) as set out in the consolidated cash flow statement. A reconciliation of free cash flow to adjusted free cash flow is set
out below. Adjusted free cash flow measures the Group’s underlying cash generation that is available to service capital demands.
Year ended 31 December
Change in net debt resulting from cash flows (free cash flow)
Acquisition of businesses (note 30(d))
Net cash flows from discontinued operations (note 32)
Net cash outflow in respect of reorganisation costs
UK Pensions Regulator (‘TPR’) investigation costs
Payments to UK pension schemes
Net cash flows in respect of other exceptional items
Purchase of own shares by Employee Benefit Trust
Receipts from exercise of share options
Dividends paid to equity shareholders
Tax inflow in respect of adjusted cash flow items
Adjusted free cash flow
2017
US$m
2016
US$m
(330.0)
(83.7)
19.9
36.3
0.6
0.2
3.5
8.6
8.0
3.7
373.2
99.1
5.8
–
(3.0)
17.6
(0.6)
87.2
4.2
2.9
(0.2)
–
(0.8)
78.1
145
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
f) Return on capital employed
Return on capital employed (‘ROCE’) is defined as operating profit before exceptional and acquisition related items divided by period end
capital employed as set out below.
ROCE measures the ability of the Group’s assets to deliver returns.
31 December
Operating profit before exceptional and acquisition related items1
Non-current assets:
Acquired Intangible assets2
Property, plant and equipment
Trade and other receivables
Current assets:
Inventories
Trade and other receivables
Current liabilities:
Trade and other payables
Non-current liabilities:
Trade and other payables
Capital employed
ROCE
2017
US$m
2016
US$m
173.7
157.9
45.2
37.9
292.7
265.9
21.5
16.1
232.2
268.9
205.8
248.4
(330.4)
(310.8)
(27.2)
(15.8)
502.9
447.5
35%
35%2
1 Refer to note 4 for details of exceptional and acquisition related items.
2 With effect from 1 January 2017 capital employed used in the definition of ROCE includes intangible assets acquired in connection with the acquisitions of GSD, Fast React, Gotex and Patrick Yarn Mill.
ROCE for the prior year has been restated consistent with the current year definition. This change has been made to better measure the ability of the Group’s assets to deliver returns by including
intangible assets acquired through acquisitions of businesses by Coats.
146
COMPANY BALANCE SHEET
31 December
Fixed assets:
Investments
Current assets:
Trade and other receivables
Cash at bank and in hand
Creditors: amounts falling due within one year:
Loans from subsidiary undertakings
Trade and other payables
Net current liabilities
Total assets less current liabilities
Provisions for liabilities
Net assets
Capital and reserves:
Share capital
Share premium account
Capital redemption reserve
Share options reserve
Capital reduction reserve
Own shares
Functional currency reserve
Profit and loss account
Shareholders’ funds
Notes
2017
$m
2016
$m
4
1,235.7
465.7
0.1
0.3
0.4
–
–
–
(70.9)
(256.9)
(0.6)
-
(71.1)
(256.9)
1,164.6
208.8
5
(0.8)
(3.3)
1,163.8
205.5
7
87.5
7.7
14.1
18.5
59.8
7
(7.7)
–
983.9
127.0
11.6
18.3
18.4
85.2
(10.5)
(78.9)
34.4
1,163.8
205.5
The Company reported a profit for the financial year ended 31 December 2017 of $144.7 million (2016: loss of $3.7 million).
Rajiv Sharma
Group Chief Executive
Approved by the Board 6 March 2018
Company Registration No.103548
Simon Boddie
Chief Financial Officer
147
COMPANY STATEMENT OF
CHANGES IN EQUITY
1 January 2016
Change in functional currency*
Net comprehensive income
and expense for the year
Issue in ordinary shares
Movement in own shares
31 December 2016
Change in functional currency*
(39.9)
(10.8)
Net comprehensive income
and expense for the year
Issue of ordinary shares
Movement in own shares
Dividend received in specie
Dividends to equity shareholders
–
0.4
–
–
–
–
2.6
4.3
–
–
Share
capital
$m
127.0
Share
premium
account
$m
Capital
redemption
reserve
$m
11.6
18.3
–
–
–
–
–
–
–
–
127.0
11.6
Share
options
reserve
$m
17.0
(3.2)
–
4.6
–
18.4
0.1
Capital
reduction
reserve
$m
85.2
–
–
–
–
85.2
(25.4)
–
–
–
–
–
–
–
–
–
–
Own
shares
$m
(7.6)
–
–
–
(2.9)
(10.5)
1.8
–
–
1.0
–
–
Functional
currency
reserve
$m
Profit and
loss account
$m
(49.0)
(29.9)
–
–
–
(78.9)
78.9
45.0
(6.9)
(3.7)
–
–
34.4
0.2
Total
$m
247.5
(40.0)
(3.7)
4.6
(2.9)
205.5
0.7
–
–
–
–
–
–
144.7
144.7
–
–
3.0
5.3
822.4
822.4
(17.8)
(17.8)
983.9
1,163.8
–
–
–
–
18.3
(4.2)
–
–
–
–
–
31 December 2017
87.5
7.7
14.1
18.5
59.8
(7.7)
* The functional currency of the Company was changed during the year ended 31 December 2017. See note 1 to the Company financial statements for further details.
148
COMPANY CASH FLOW STATEMENT
For the year ended 31 December
Net cash flows from operating activities:
Operating profit/(loss)
Decrease in debtors
(Decrease)/increase in creditors
Impairment of investments in subsidiary undertakings
Non cash dividend
Movement in provisions
Foreign exchange
Net cash flows from operating activities
Net cash flows from financing activities:
Purchase of own shares
Proceeds from sale of own shares
Receipts from exercise of share options
Dividends paid to equity shareholders
Net cash flows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash at bank and in hand at the beginning of the year
Cash at bank and in hand at the end of the year
2017
$m
2016
$m
153.7
0.3
(8.1)
54.9
(187.8)
(2.5)
(0.7)
9.8
–
5.1
3.0
(17.6)
(9.5)
0.3
–
0.3
(0.1)
3.8
4.6
–
–
(8.4)
–
(0.1)
(3.9)
–
0.4
–
(3.5)
(3.6)
3.6
–
149
NOTES TO THE COMPANY FINANCIAL STATEMENTS
CONTINUED
1 Accounting policies
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and to the
preceding year.
a) General information and basis of accounting
The financial statements have been prepared under the historical cost convention, modified to include certain items at fair value,
and in accordance with Financial Reporting standard 102 (FRS 102) as issued by the Financial Reporting Council.
Change in functional currency
Following the settlement reached with the Trustees of the UK Coats Pension Plan and the Brunel Holdings Pension scheme it was
determined the functional currency of Coats Group plc had changed from Great Britain pounds (‘Sterling’) to United States dollars
(‘USD’), effective 1 March 2017. To give effect to the change in functional currency, the assets, liabilities and equity of Coats Group plc
in Sterling at 1 March 2017 were converted into USD at an exchange rate of US$1:£0.8078.
Comparative financial information for the year ended 31 December 2016 was originally presented in GBP, the Company’s functional
currency at that time. The comparative financial information has been restated from Sterling into USD as follows:
Income and expenses were translated into USD at the average exchange rate for the year ended of US$1:£0.738;
Assets and liabilities were translated into USD at the 31 December 2016 year end exchange rate of US$1:£0.8106; and
Opening balances as of 1 January 2016 were translated into USD at the 31 December 2015 exchange rate of US$1:£0.678.
The comparative financial information for equity items has been restated from Sterling into USD as follows:
Share capital, share premium account, capital redemption reserve, capital reduction reserve and own shares reserve were stated in USD
in the Coats Group plc consolidated financial statements. In order to keep these balances consistent with the Group’s consolidated
financial statements the balances have not been retranslated as at 1 January 2016 or 31 December 2016. The resulting exchange
differences were held temporarily within a functional currency translation reserve.
The share options reserve and profit and loss account reserve balances were originally stated in Sterling and were retranslated USD as
follows:
as at 1 January 2016 using an exchange rate of US$1:£0.678.
as at 31 December 2016 using an exchange rate of US$1:£0.8106.
b) Fixed assets – investments
Investments in subsidiary undertakings are reflected at cost less provisions for any impairment.
c) Financial assets and liabilities
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the
instrument. All financial assets and financial liabilities are initially measured at transaction price. If an arrangement constitutes a financing
transaction, the financial asset or financial liability is measured at the present value of future payments discounted at a market rate of
interest for a similar debt instrument.
d) Impairment of assets
Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective
evidence of impairment, an impairment loss is recognised in the profit and loss and the assets is reduced to its recoverable amount. The
recoverable amount is the higher of its fair value less costs to sell and its value in use.
e) Share-based payments
Cash-settled
Cash-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at each
reporting date. The fair value is expensed on a straight-line basis over the vesting period, with a corresponding increase in liabilities.
Equity-settled
The Group operates an equity-settled Long Term Incentive Plan for executives and senior management, settlement is in the form of
Coats Group plc shares. Awards under this plan are subject to both market-based and non-market-based vesting criteria.
The fair value at the date of grant is established by using an appropriate simulation method to reflect the likelihood of market-based
performance conditions being met. As the Long Term Incentive Plan relates to employees of a subsidiary, when there is no recharge of
the cost, the fair value is charged to Investments on a straight-line basis over the vesting period, with appropriate adjustments being
made during this period to reflect expected vesting for non market-based performance conditions and forfeitures. The corresponding
credit is to shareholders’ funds.
150
NOTES TO THE COMPANY FINANCIAL STATEMENTS
CONTINUED
To satisfy awards under this Plan, shares may be purchased in the market by an Employee Benefit Trust (‘EBT’) over the vesting period.
Coats Group plc is the sponsoring employer of the EBT and its activities are considered an extension of the Company’s activities.
Therefore the shares purchased by the EBT are included as a deduction from shareholders’ funds and other assets and liabilities
of the EBT are recognised as assets and liabilities of Coats Group plc.
f) Taxation
Provision is made for taxation assessable on the profit or loss for the year as adjusted for disallowable and non-taxable items. Deferred
taxation is provided in full in respect of timing differences which have arisen but not reversed at the balance sheet date, except that
deferred tax assets (including those attributable to tax losses carried forward) are only recognised if it is considered more likely than
not that they will be recovered. Deferred taxation is measured on a non-discounted basis.
g) Dividends
Dividends proposed are recognised in the period in which they are formally approved for payment.
h) Critical accounting judgements and key sources of estimation uncertainty
Carrying value of investments:
The carrying values of investments are assessed annually for indicators of impairment. If an impairment review is required judgement
is involved in calculating the recoverable amount.
2 Result for the year
The Company has not presented its own profit and loss account as permitted by section 408 of the Companies Act 2006. The profit
for the year attributable to shareholders was $144.7 million (2016: loss of $3.7 million).
Details of directors’ remuneration are set out on pages 55 to 67 within the Remuneration Report and form part of these
financial statements.
3 Dividends
Dividends amounting to $17.8 million in respect of the year ended 31 December 2017 were paid to Coats Group plc shareholders during
the year (2016: $nil). Details of the proposed final dividend for the year ended 31 December 2017 are set out in note 12 of the
consolidated financial statements.
4 Investments
At 1 January 2016
Change in functional currency
Additions
At 31 December 2016
Change in functional currency
Additions
Impairment
At 31 December 2017
Investments
in subsidiary
undertakings
$m
551.8
(90.7)
4.6
465.7
1.6
823.3
(54.9)
1,235.7
Additions to investments during the year ended 31 December 2017 of $823.3 million represents additional investments in existing
subsidiary undertakings. Further information about subsidiaries is provided on pages 153 to 159.
5 Provisions
Provisions are analysed as follows:
At 1 January 2017
Utilised in year
At 31 December 2017
Other
provisions
$m
3.3
(2.4)
0.9
Total
$m
3.3
(2.4)
0.9
Other provisions includes costs expected to be incurred in connection with the Group’s three UK pension schemes. Settlements with
the three UK pension schemes were completed in the first half of 2017, and as a result the UK Pensions Regulator confirmed that its
regulatory action has ceased in relation to the warning notices issued to the Company in 2013 and 2014.
151
NOTES TO THE COMPANY FINANCIAL STATEMENTS
CONTINUED
6 Share capital
There are 1,413,300,648 Ordinary Shares of 5p issued at 31 December 2017 (2016: 1,407,612,282).
The movement in share capital during the year is set out in note 26 of the consolidated financial statements.
The own shares reserve at 31 December 2017 of $7.7 million (2016: $10.5 million) represents the cost of shares in Coats Group plc
purchased in the market and held by an Employee Benefit Trust to satisfy awards under the Group’s share based incentive plans.
The number of shares held by the Employee Benefit Trust at 31 December 2017 was 19,025,372 (2016: 25,746,861).
7 Related party transactions
Amounts due from and to other Group companies are disclosed on the face of the Balance sheet on page 147.
Interest payable to other Group companies during 2017 was $2.6 million (2016: $3.4 million).
8 Share based payments
The cost of equity share based payments of $4.6 million were charged to investments during the year ended 31 December 2016
as no amounts were recharged to subsidiaries in that year.
The charge related to the Long Term Incentive Plan and Deferred bonuses. Further details on these schemes are set out in note 33
of the consolidated financial statements.
152
GROUP STRUCTURE
Unless otherwise indicated, all shareholdings owned directly or indirectly by the Company represents 100% of issued share capital of
the subsidiary.
Subsidiaries:
Direct holdings of the Company
Country of
Incorporation
Company Name
Registered Office address
Share class
Bermuda
Guinness Peat International Capital Assets Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
BMD1.00 Ordinary
British Virgin Islands
Coats Group (BVI) Ltd
Craigmuir Chambers, PO Box 71, Road Town, Tortola, Virgin Islands, British
£0.01 Ordinary
United Kingdom
Arrow HJC
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
B. M. Estates Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Blackwood Hodge Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
BMM (Predecessors) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
CE (Predecessors) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Contractors' Aggregates Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG (UK) Holdings Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG Coats Finance Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG March 2004 Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG Pension Investments Trustees Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
MFC (Predecessors) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
S G Warburg Group Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Staveley Guarantee Company Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
Guarantee Company
United Kingdom
Thomas Robinson Industrial Controls Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
Subsidiaries:
Indirect holdings of the Company
Country of
Incorporation
Company Name
Registered Office address
Argentina
Coats Cadena S.A. - Argentina
Tucuman 1, 4th Floor, (1049) Capital Federal, Argentina
Australian Country Spinners Pty Limited1
Australian Country Spinners Unit Trust1
c/o JGL Investments Pty. Ltd, Level 9 South, 161 Collins Street,
Melbourne VIC 3000, Australia
c/o JGL Investments Pty. Ltd, Level 9 South, 161 Collins Street,
Melbourne VIC 3000, Australia
Coats Australian Pty Ltd
Unit 2, 56 Keys Road, Moorabbin VIC 3189, Australia
Gosford Quarries Investments Pty Limited
Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
GPG (Australia Trading) Pty. Limited
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary
GPG (No.6) Pty Limited
GPG Nominees Pty Ltd
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary
GPG Services Pty Limited
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary
GPG Tyndall Holdings Pty. Limited
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary
Guinness Peat Group (Australia) Pty Limited
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary,
AUD14,977.77
Redeemable Preference
Kuvondo Pty Limited
Sabatica Pty Limited
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
AUD1.00 Ordinary
c/o BDO, Level 11, 1 Margaret Street, Sydney NSW 2000, Australia
Bangladesh
Coats Bangladesh Limited
Novo Tower, 270 Tejgaon Industrial Area, Dhaka 1208, Bangladesh
1 100% owned by the joint venture ACS Nominees Pty Limited.
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Share class
ARS1.00 Ordinary
Nominal
AUD1.00 Ordinary
AUD1.00 Units
AUD0.54 Ordinary
AUD1.00 Ordinary,
AUD1.00 7%
Cumulative Preference
AUD1.00 Ordinary
BDT100.00 Ordinary
(80%)
153
GROUP STRUCTURE
CONTINUED
Country of
Incorporation
Company Name
Registered Office address
Bangladesh
Coats Crafts Bangladesh Limited
Novo Tower, 270 Tejgaon Industrial Area, Dhaka 1208, Bangladesh
Share class
BDT100.00 Ordinary
(80%)
Bermuda
Guinness Peat CH Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Bolivarian Republic
of Venezuela
Brazil
Brazil
Bulgaria
Canada
Canada
Chile
Chile
China
China
China
China
China
China
Colombia
Ecuador
Egypt
Egypt
Egypt
Coats Cadena SA - Venezuela
Coats Moderm Accessories C.A. (Comaca)
Cothilca S.A.
Distribuidora El Costurero, S.A. (DICOSA)
Hilanderia San Joaquin, S.A.
Hilos Cadena, S.A.
Hilos Elefante C.A.
Hilos Francia S.A.
Informatica Robox, S.R.L
International Kroob CA
Circunscripcion Judicial, del Distrito Capital y Estado Miranda, Bolivarian
Republic of Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
VEB1,000.00 Ordinary
VEB1.00 Ordinary
VEB1.00 Ordinary
(97%)
VEB1,000.00 Ordinary
VEB1.00 Ordinary
VEB1.00 Ordinary
VEB1,000.00 Ordinary
US$1.385 Ordinary
US$84.746 Ordinary
US$0.6835 Ordinary
Representaciones Glenifa, S.A.
Av Principal de los Ruices Don Diego Cisneros, Caracas, Venezuela
US$1,000.00 Ordinary
Venexport S.R.L
Ciudad Industrial la Union, Sector Fundo la Union - Autopisa Regional del Centro,
Parcela L-23, Galpones G38, G39 and G40, San Diego District, Valencia - Estado
Carabobo, Venezuela
US$26.59 Ordinary
Cambridge Medical Production CA (Cameproca)
Av. Principal de los Ruices, "Don Diego Cisneros", Caracas, Venezuela
VEB1.00 Ordinary
Coats Corrente Ltda
Rua do Manifesto, N 705, Bloco A, Ipiranga, Sao Paulo, SP BR, Brazil
BRL1.00 Ordinary
Coats Corrente Textil Ltda
British Virgin Islands
Coats Andean Limited
Distrito Industrial, Rodovia RN 160, s/n, Km 2, Sao Goncalo do Amarante - RN, CEP
59290-000, Brazil
Newhaven Trustees (BVI) Limited, 3rd Floor, Omar Hodge Building, Road Town,
Tortola, Virgin Islands, British
Coats Bulgaria Eood
Coats Canada Inc
Tharigradsko shouse bld 7th Km, Sofia 1748, Bulgaria
10 Roybridge Gate Blvd, Vaughan ON L4H 3M8, Canada
Staveley Services Canada Inc
44 Chipman Hill, Suite 1000, Saint John NB E2L 2A0, Canada
Coats Cadena Ltda
Marathon 4046, Macul, Santiago, Chile
The Central Agency Limited - Chile
Marathon 4046, Macul, Santiago, Chile
BRL1.00 Ordinary
US$1.00 Ordinary
BGL50.00 Ordinary
Common (no par value)
CAD Common, CAD
Class A Pref 1, CAD
Class A Pref 2
US$1.00 Ordinary
US$1.00 Ordinary
Coats Opti Shenzhen Limited
Shenzhen Coats Industrial Park, Fuyong Town, Baoan District, Shenzhen, China
US$1.00 Ordinary (90%)
Coats Shenzhen Limited
Shenzhen Coats Industrial Park, Fuyong Town, Baoan District, Shenzhen, China
US$1.00 Ordinary (90%)
Dalian Coats Limited
48-1 Shengli Road, Nanshan Complex, Jinzhou Economic Development Zone,
Jinzhou District, Dalian, China
Guangzhou Coats Limited
Art Street 11, 1106 Xin Gang Road, Haizhu District, Guanghou, 510310, China
Qingdao Coats Limited
Shanghai Coats Limited
Qingdao Huanhai, Economic+Technological Development Zone, Chengyang,
Qingdao 266108, China
No.8 Building, Export Processing Garden, Songjiang Industrial Zone 201613,
Shanghai, China
Coats Cadena Andina SA - Colombia
Avenida Santander, N.5E-87, Pereira, Colombia
Coats Cadena SA Ecuador
De las Avellanas E, 2-74 y El Juncal, Quito, Ecuador
US$1.00 Ordinary (90%)
HKD1.00 Ordinary
(90%)
US$1.00 Ordinary (90%)
US$1.00 Ordinary (90%)
COP20.63 Ordinary
US$1.00 Ordinary
Coats Craft Egypt
Industrial Area Zone B3, Plot 78, 10th of Ramadan City, Cairo, Egypt
EGP1.00 Ordinary
Coats Egypt for manufacturing and dyeing sewing
thread SAE
Industrial Area Zone B3, Plot 78, 10th of Ramadan City, Cairo, Egypt
US$10.00 Ordinary
Coats Industrial Trading Egypt
Industrial Area Zone B3, Plot 78, 10th of Ramadan City, Cairo, Egypt
EGP100.00 Ordinary
El Salvador
Coats El Salvador, S.A. de C.V.
Zona Franca Export Salva, Edificio No 18C, San Salvador, El Salvador
SVC100.00 Ordinary
154
GROUP STRUCTURE
CONTINUED
Country of
Incorporation
Company Name
Registered Office address
Share class
Estonia
Finland
France
Germany
Germany
Germany
Germany
Guatemala
Guatemala
Guatemala
Guatemala
Guatemala
Honduras
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hungary
India
India
Coats Eesti AS - Estonia
Ampri tee 9/4, Haabaneeme, 74010 Viimsi Vald, Harjumaa, Estonia
€63.90 Ordinary
Coats Opti Oy
Coats France S.A.S.
Coats GmbH
Ayritie 8A, Vantaa, 01510, Finland
8 avenue Hoche, 75008, Paris, France
Huefingerstrasse 28, D-78199, Braunlingen, Germany
Coats Opti Germany GmbH
1 Suedwieke 180, 26817 Rhauderfehn, Germany
Coats Thread Germany GmbH
Huefingerstrasse 28, D-78199, Braunlingen, Germany
€312.682902 Ordinary
€0.60 Ordinary
€12,000,000.00
Ordinary
€1.00 Ordinary
€1.00 Ordinary
Schwanenwolle Tittel & Krueger AG i. L
RHS, Stadtstrasse 29, 79104 Freiburg, Germany
DEM1.00 Ordinary
Centraltex de Guatemala, S.A.
26 Avenida No. 7-27, Zona 4, Mixco oficina 11, Guatemala
GTQ100.00 Ordinary
Coats de Guatemala, S.A.
13-78 Zona 10, Edif. Intercontinental Plaza Torre Citigroup Nivel 17,
Oficina 1702, Ciudad, Guatemala
GTQ1.00 Ordinary
Crafts Central America, S.A.
26 Avenida No. 7-27, Zona 4, Mixco oficina 11, Guatemala
GTQ100.00 Ordinary
Distribuidora Coats de Guatemala, Sociedad Anomina 39 Avenida, 3-47 Zona 7, Colonia El Rodeo, Guatemala, Guatemala
GTQ1.00 Ordinary
Guatemala Thread Company Sociedad Anonima
39 Avenida, 3-47 Zona 7, Colonia El Rodeo, Guatemala, Guatemala
GTQ10.00 Ordinary
Coats Honduras, S.A.
Edificio #13 Zona Libre Inhdelva, 800 mts. Carretera a la Jutosa, Choloma,
Cortes, Honduras
China Thread Development Company Limited
21/F, 9 Chong Yip Street, Kwun Tong, Kowloon, Hong Kong
Coats (China) Limited
21/F, 9 Chong Yip Street, Kwun Tong, Kowloon, Hong Kong
Coats China Holdings Limited
21/F, 9 Chong Yip Street, Kwun Tong, Kowloon, Hong Kong
Coats Hong Kong Limited
21/F, 9 Chong Yip Street, Kwun Tong, Kowloon, Hong Kong
Coats Opti Hong Kong Limited
21/F, 9 Chong Yip Street, Kwun Tong, Kowloon, Hong Kong
Coats Thread HK Limited
21/F, 9 Chong Yip Street, Kwun Tong, Kowloon, Hong Kong
HNL100.00 Ordinary
HKD10.00 Ordinary
HKD10.00 Ordinary
HKD10.00 Ordinary
HKD10.00 Ordinary
(90%)
HKD1.00 Ordinary
HKD10.00 Ordinary
Fast React Asia (HK) Limited
Room 2203 22/F, Tower 1, Lippo Centre, 89 Queensway, Hong Kong
HKD1.00 Ordinary
Fastreact Systems (Far East) Co Limited
Room 2203 22/F, Tower 1, Lippo Centre, 89 Queensway, Hong Kong
HKD1.00 Ordinary
Coats Magyarorszag Cernagyarto es Ertekesito
Korlatolt Felelossegu Tarsasag
1044 Budapest, Vaci ut 91, Hungary
Kor Investments Private Limited
144 M.G. Road, Bangalore - 560 001, India
HUF100,000.00
Ordinary
INR10.00 Ordinary
Madura Coats Private Limited
Head Office, 144 Mahatma Gandhi Road, Bangalore 560 001, India
INR10.00 Ordinary
Indonesia
PT. Coats Rejo Indonesia
JI RA Kartini No 26, Jakarta 12430, Indonesia
IDR415.00 Ordinary-A,
IDR627.00 Ordinary-B,
US$100,000.00
Preference
Indonesia
PT Coats Trading Indonesia
Ventura Building, 4th Floor, Jl RA Kartini No 26, Cilandak, Jakarta 12430, Indonesia
USD1.00 Ordinary
Israel
Italy
Coats (Israel) Ltd
Coats Thread Italy Srl
2 Shidlovsky Road, Yavne, Israel
Viale SARCA, No. 223, Milano, Italy
Korea, Republic of
Coats Korea Co., Limited
74 Siu-ro, Danwon-gu, Ansan, Korea, Republic of
Latvia
Lithuania
Coats Latvija SIA
Coats Lietuva UAB
Delu iela 4, Riga, LV-1004, Latvia
Juozapaviciaus 6/2, LT - 09310 Vilnius, Lithuania
Madagascar
Coats (Madagascar) International
Madagascar
Coats (Madagascar) S.AR.L (EPZ)
First Immo, Galaxy Industrial Estate, Rue du Dr. Raseta, Andraharo, Antananarivo,
Madagascar
First Immo, Galaxy Industrial Estate, Rue du Dr. Raseta, Andraharo, Antananarivo,
Madagascar
Malaysia
Mauritius
Mauritius
Mexico
Mexico
Mexico
Coats Thread (Malaysia) Sdn. Bhd.
49-B Jalan Melaka Raya 8, Taman Melaka Raya, 75000 Melaka, Malaysia
J & P Coats (Mauritius) Ltd
Allee des Mangues, Pailles, Mauritius
Coats Indian Ocean Holding Co Limited
2nd Floor, IBL House, Caudan, Port-Louis, Mauritius
Administraciones Timon SA de CV
Coats Assets de Mexico SA de CV
Coats Mexico S.A. de C.V.
Periferico Sur #3325 Piso 8, Col. San Jerónimo Lídice, Magdalena Contreras,
Mexico City, CP10200, Mexico
Periferico Sur #3325 Piso 8, Col. San Jerónimo Lídice, Magdalena Contreras,
Mexico City, CP10200, Mexico
Periferico Sur #3325 Piso 8, Col. San Jerónimo Lídice, Magdalena Contreras,
Mexico City, CP10200, Mexico
US$400.00 Ordinary
€5,000,000.00 Quota
KRW10,000.00
Ordinary
€28.00 Ordinary
€289.62 Ordinary
MGF100,000.00
Ordinary
MGF100,000.00
Ordinary
RM10.00 A, RM10.00
B, RM10.00 C (99%)
Rs100.00 Ordinary
US$100.00 Ordinary
MXP1.00 Ordinary-A,
MXP1.00 Ordinary-B
MXN1.00 Series A Fixed
MXP1.00 Ordinary-A,
MXP1.00 Ordinary-B
155
Share class
MXP10.00 B1,
MXP10.00 B2,
MXP10.00 B2 SPECIAL
SERIES
MAD100.00 Ordinary
MAD100.00 Ordinary
GROUP STRUCTURE
CONTINUED
Country of
Incorporation
Company Name
Registered Office address
Mexico
Grupo Coats Timon S A de C V
Periferico Sur #3325 Piso 8, Col. San Jerónimo Lídice, Magdalena Contreras,
Mexico City, CP10200, Mexico
Morocco
Morocco
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Coats Maroc
220 Bld Chefchaouni, Ain Sebaa, Casablanca, Morocco
Mercerie Industrielle de Casablanca
220 Bld Chefchaouni, Ain Sebaa, Casablanca, Morocco
Coats Industrial Europe Holdings B.V.
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
Coats Industrial Thread Holdings B.V
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
Coats Northern Holdings B.V.
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
Coats South America Holdings B.V.
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
Coats South Asia Holdings B.V.
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
Coats Southern Holdings B.V.
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
Guinness Peat Group International Holdings BV
Strawinskylaan 1113, 1077XX, Amsterdam, 1077XX, The Netherlands
€500.00 Ordinary
New Zealand
Australian Country Spinners (NZ) Limited2
c/o David Barker & Co Limited, 52 Cashel Street, Christchurch, New Zealand
NZD1.00 Ordinary
New Zealand
Coats Patons (New Zealand) Ltd
3 Mana Place, Wira, Auckland, New Zealand
NZD1.00 Ordinary
Nicaragua
Pakistan
Peru
Peru
Poland
Portugal
Portugal
Romania
Coats de Nicaragua SA
Altamira d'este, Rotonda Madrid #235, Managua, Nicaragua
NIO100.00 Ordinary
J & P Coats Pakistan (Pvt) Limited
Office No. 112-113, Park Towers, Sharae Firdousi, Clifton, Karachi, 75600, Pakistan
PKR100.00 Ordinary
Coats Cadena Investment SA
Av Nicolas de Ayllon No.2925, Lima 10, Peru
Coats Cadena SA - Peru
Av Nicolas de Ayllon No.2925, Lima 10, Peru
Coats Polska Spolka z oganiczona odpowiedzialnoscia 91-214 Lodz, ul, Kaczencowa 16, Poland
Coats - Comercio de Linhas, Fechos e Acessorios,
Para a Industria SA
Praca do Almada, No 10, 4490, Povoa do Varzim, Portugal
PEN0.01 Ordinary
(99%)
PEI0.01 Ordinary
(99%)
PLN1,000.00 Ordinary
€1.00 Ordinary Bearer
Shares
Companhia de Linha Coats & Clark S.A.
Quinta De Cravel, Oporto, Vila Nova de Gaia, 4430 073, Mafamude, Portugal
€1.00 Bare Shares
Coats Romania SRL
Municipiul Odorheiu Secuiesc, Str. Nicolae Balcescu, Nr. 71, Judetul Harghita
ROL169.38 Ordinary
Russian Federation
Coats LLC
House 53a, Lenin Str., pos. Oktyabrsky, Luberetskij District, 140060,
Moscow Region, Russia
SUR173.55 Ordinary
Singapore
Singapore
Coats International Pte. Limited
10 Changi Business Park Central 2, #05-01 HansaPoint, 486030, Singapore
SGD1.00 Ordinary
Coats Overseas Pte Ltd
10 Changi Business Park Central 2, #05-01 HansaPoint, 486030, Singapore
SGD1.00 Ordinary
South Africa
Coats South Africa (Proprietary) Limited
14 Kelly Road, PO Box 14, Hammarsdale, 3700, KZN, Natal, South Africa
ZAR0.01 Ordinary,
ZAR0.01 Cumulative
Redeemable Preference,
ZAR0.01 Non-
redeemable Preference
Shares, ZAR0.01 Non-
redeemable Non-
cumulative Variable Rate
Convertible Preference
South Africa
Cotnat Properties (Proprietary) Limited
14 Kelly Road, PO Box 14, Hammarsdale, 3700, KZN, Natal, South Africa
ZAR1.00 Ordinary
Coats Spain, S.L.
Gotex S.A.
Poligono Industrial Can Roqueta, Avda.Ca N'Alzina nr.79, Calle N'Alzina, Sabadell,
Barcelona, Spain
€1.00 Ordinary
Poligono Industrial Can Roqueta, Calle N'Alzina, 79 Sabadell, Barcelona, Spain
€6.02 Ordinary
Coats Thread Exports (Private) Limited
479, 8th Floor, HNB Towers, T.B. Jayah Mawatha, Colombo 4, Sri Lanka
Coats Thread Lanka (Private) Limited
479, 8th Floor, HNB Towers, T.B. Jayah Mawatha, Colombo 4, Sri Lanka
Coats Expotex AB
Box 25, Stationsvagen 2, SE-516 21, Dalsjofors, Sweden
Coats Industrial Scandinavia AB
Box 109, SE-516 22 Dalsjofors, Sweden
Switzerland
Coats Stroppel AG
Untersiggenthal, Postfach, 5300 Turgi, Switzerland
Coats Threads (Thailand) Ltd
Coats Industrial Tunisie
Coats Trading Tunisie
39/60 Moo 2 Tambol Bangkrachaw, Amphur Muang, Samutsakorn Province
74000, Thailand
THB1,000.00 Ordinary
52, rue du Tissage, Douar Hicher, Manouba, 2086, Tunisia
52, rue du Tissage, Douar Hicher, Manouba, 2086, Tunisia
Coats (Turkiye) Iplik Sanayii AS
Organize Sanayi Bolgesi Mavi Cad. No 2, 16371 Bursa, Turkey
Coats Ukraine Ltd
Moskovskiy ave. 28A, litera B, Kiev, 04655, Ukraine
LKR100.00 Ordinary
(99%)
LKR10.00 Ordinary
(99%)
SEK10.00 Bearer
SEK1,000.00 Bearer
CHF10,000.00
TND10.00 Ordinary
TND10.00 Ordinary
TRY1.00 New
Ordinary (92%)
UAH1.00 Ordinary
Spain
Spain
Sri Lanka
Sri Lanka
Sweden
Sweden
Thailand
Tunisia
Tunisia
Turkey
Ukraine
2 100% owned by Australian Country Spinners Pty Limited.
156
GROUP STRUCTURE
CONTINUED
Country of
Incorporation
Company Name
Registered Office address
Share class
United Kingdom
Allen, Solly & Company Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Allied Mutual Insurance Services Ltd
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Anfield 1 Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Anfield 2 Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary, £1.00
Deferred
United Kingdom
Barbour Threads Limited
Cornerstone, 107 West Regent Street, Glasgow, G2 2BA, United Kingdom
£10.00 Ordinary
United Kingdom
Blackwood Hodge Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.25 Ordinary
United Kingdom
Brown Shipley Asset Management Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Brown Shipley Holdings Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Brown Shipley Investment Management
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Brunel Pension Trustees Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
BSH Acquisition Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Cardpad Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats (UK) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary, £1.00
Ordinary-A
United Kingdom
Coats Finance Co. Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Global Services Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Group Finance Company Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.33 Ordinary
United Kingdom
Coats Holding Company (No. 1) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.125 Ordinary
United Kingdom
Coats Holding Company (No. 2) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.25 Ordinary
United Kingdom
Coats Holdings Ltd
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.000000000554
Ordinary
United Kingdom
Coats Industrial Thread Brands Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Industrial Thread Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Patons Limited
Cornerstone, 107 West Regent Street, Glasgow, G2 2BA, United Kingdom
£0.25 Ordinary
United Kingdom
Coats Pensions Trustee Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Property Management Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Shelfco (BDA) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Coats Shelfco (CV Nominees) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
United Kingdom
Coats Shelfco (VV) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
United Kingdom
Coats Shelfco (WMB) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
£0.01 Ordinary,
£0.075 Deferred
£1.00 Ordinary
United Kingdom
Coats Thread (UK) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Corah Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.25 Ordinary, £1.00
4.2% Cumulative
Preference
United Kingdom
CV Woven Fabrics Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
D. Byford & Co Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.20 Ordinary, £1.00
Preference
United Kingdom
Embergrange
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Fast React Systems (Bangladesh) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Fast React Systems Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
United Kingdom
GPG (UK) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary, £1.00
Special redeemable
non-voting shares
£1.00 Ordinary,
AUD1.00 Ordinary
United Kingdom
GPG Acquisitions No. 3 Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG Europe Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
€1.00 Ordinary
United Kingdom
GPG Finance Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG Pension Trustees Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GPG Securities Trading Ltd
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
157
GROUP STRUCTURE
CONTINUED
Country of
Incorporation
Company Name
Registered Office address
Share class
United Kingdom
Griffin SA Ltd
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GSD (Corporate) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
GSD Holdings Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
United Kingdom
Guinness Peat Overseas Holdings Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary-A,
£1.00 Ordinary-B
£1.00 Ordinary
United Kingdom
Hicking Pentecost Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.50 Ordinary
United Kingdom
I.P. Clarke & Co. Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
J.& P. Coats, Limited
1 George Square, Glasgow, Scotland, G2 1AL, United Kingdom
£1.00 Ordinary
United Kingdom
John Murgatroyd Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.05 Ordinary, £1.00
6% Preference, £1.00
Deferred
United Kingdom
KEP (Predecessors) Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Marshaide Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
MCG LIMITED
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary, £1.00
Preference
United Kingdom
Needle Industries Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
NUH No. 1 Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Patons & Baldwins Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Patons Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary, £1.00
7% Preference
United Kingdom
Simpson, Wright & Lowe, Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Sir Richard Arkwright & Co. Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
SIRBS Pension Trustee Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Staveley 2005 No 3 Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Staveley Industries Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Staveley Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Staveley Services Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
The Central Agency Limited
Cornerstone, 107 West Regent Street, Glasgow, G2 2BA, United Kingdom
£10.00 Ordinary
United Kingdom
The Coats Trustee Company Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United Kingdom
Thomas Burnley & Sons, Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£10.00 Ordinary
United Kingdom
Tootal Group Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£0.25 Ordinary, £1.00
3.5 % Cumulative
Preference
United Kingdom
Tootal Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
£1.00 Ordinary
United States
Coats & Clark Inc
CT Corporation System, Corporation Trust Centre, 1209 Orange Street, Wilmington,
DE 19801, USA
US$100.00 Ordinary
United States
Coats & Clark's Sales Corporation
CT Corporation System, 820 Bear Tavern Road, West Trenton, NJ 08628, USA
US$100.00 Ordinary
United States
Coats American Inc
CT Corporation System, 820 Bear Tavern Road, West Trenton, NJ 08628, USA
US$10.00 COMMON,
US$5.00 5%
Cumulative Preference
United States
Coats American, LLC
Corporation Trust Center, 1209 Orange Street, Wilmington DE, United States
US$1.00 Ordinary
United States
Coats Garments (USA) Inc
United States
Coats Holdings Inc
United States
Coats North America Consolidated Inc
United States
Coats North America de Republica Dominica Inc
CT Corporation System, Corporation Trust Centre, 1209 Orange Street, Wilmington,
DE 19801, USA
CT Corporation System, Corporation Trust Centre, 1209 Orange Street, Wilmington,
DE 19801, USA
CT Corporation System, Corporation Trust Centre, 1209 Orange Street, Wilmington,
DE 19801, USA
c/o CT Corporation System, 225 Hillsborough Street, Raleigh, Wake County,
North Carolina 27603, USA
US$1.00 Ordinary
US$1.00 Ordinary
US$0.10 Ordinary,
US$1.00 Class B
Voting Shares
US$1.00 Ordinary
United States
Coats Puerto Rico Inc
CT Corporation System, 150 Fayetteville Street, Box 1011, Raleigh NC 27601, USA
US$1.00 Ordinary
United States
Jaeger Sportswear Ltd
CT Corporation System, 111 8th Avenue, New York, NY 10011, USA
United States
Patrick Yarn Mill, Inc.,
700 S Railroad Avenue, Kings Mountain NC 28086-3360, USA
United States
Staveley Inc
401 Merritt 7, NORWALK, Connecticut, 06856
US$ Common
US$1.00 Class A
voting, Class B non-
voting
US$0.01 Ordinary
158
GROUP STRUCTURE
CONTINUED
Country of
Incorporation
Company Name
Registered Office address
United States
The Calico Printers Association (U.S.A.) Limited
CT Corporation System, 111 8th Avenue, New York, NY 10011, USA
United States
Westminster Fibres, Inc.
c/o The Corporation Trust, 1209 Orange Street, Wilmington, Delaware
Coats Cadena S.A. - Uruguay
Rufino Dominguez 1864, Montevideo, Uruguay
Coats Phong Phu Limited Liability Company
No. 48 Tang Nhon Phu Street, Tang Nhon Phu B Ward, District 9, Ho Chi Minh City,
Vietnam
US$1.00 Ordinary
(64%)
Uruguay
Vietnam
Joint Ventures
Country of
Incorporation
Company Name
Registered Office address
Australia
ACS Nominees Pty Limited
c/o JGL Investments Pty. Ltd, Level 9 South, 161 Collins Street, Melbourne
VIC 3000, Australia
China
China
India
Guangying Spinning Company Limited
2 Yuan Cun Xi Jie Guangzhou, 510655, China
Tianjin Jinying Spinning Co Ltd
Jinlai Road Liqizhuang, Xi Qing District, Tianjin, 300381, China
S&P Threads Private Limited
Delite Theatre Building, III Floor, Asaf Ali Road, New Delhi, 110 002, India
United Kingdom
Coats VTT Limited
1 The Square, Stockley Park, Uxbridge, Middlesex, UB11 1TD, England
Share class
US$1.00 Ordinary
US$1.00 Common
shares
UYU0.05 Ordinary
Share class
AUD1.00 Ordinary
(50%)
US$1.00 Ordinary
(50%)
US$1.00 Ordinary
(50%)
INR10.00 Ordinary
(50%)
US$0.01 Ordinary
(50%)
159
FIVE-YEAR SUMMARY
For the year ended 31 December
Continuing operations (before exceptional and acquisition related items):
Revenue
Cost of sales
Gross profit
Operating costs
Operating profit
Share of profits from joint ventures
Investment income
Finance costs4
Profit before taxation
Taxation
Profit from continuing operations
Adjusted earnings per share (cents)
Dividend per share (cents)
Adjusted free cash flow ($m)
Return on capital employed (%)
20133
US$m
20142
US$m
2015
US$m
2016
US$m
2017
US$m
1,531.1
1,539.1
1,472.5
1,457.3
1,510.3
(989.7)
(982.1)
(921.2)
(892.3)
(932.9)
541.4
557.0
551.3
565.0
577.4
(418.2)
(434.7)
(411.4)
(407.1)
(403.7)
123.2
122.3
139.9
157.9
173.7
0.7
14.1
1.5
11.5
1.5
10.5
0.8
4.3
1.3
2.1
(46.2)
(19.5)
(41.7)
(35.9)
(25.1)
91.8
115.8
110.2
127.1
152.0
(50.8)
(45.0)
(46.2)
(47.2)
(48.5)
41.0
70.8
64.0
79.9
103.5
2.36
3.01
4.00
–
65.9
21%
–
86.9
25%
–
71.0
33%
4.91
1.251
78.1
35%
6.37
1.44
87.2
35%
Notes:
1 On a pro-forma basis (final dividend in 2016: 0.84c per share).
2 Restated following the closure of UK Crafts in 2016, and disposal of EMEA Crafts in 2015.
3 Presented on a pro-forma basis to include an allocation of amounts from Guinness Peat Group plc, whilst Coats was still a subsidiary company of the investment Group. Restated following the
disposal of EMEA Crafts and closure of UK Crafts. Adjusted earnings per share based on 2014 share numbers as Guinness Peat Group plc performed share buybacks in 2013, significantly changing the
capital structure.
4 Includes foreign exchange gains / losses on parent group cash balances.
160
DELIVERING TODAY
TRANSFORMING FOR TOMORROW
SHAREHOLDER INFORMATION
WE ARE COATS. CONTINUING TO DELIVER
SUSTAINABLE VALUE FOR OUR STAKEHOLDERS
TODAY, AND TRANSFORMING TO REALISE THE
OPPORTUNITIES OF TOMORROW.
Our focus on business performance and meeting customer needs means we deliver benefits
to our investors, employees and customers today. Our global reach and relationships, and our
evolving expertise enable us to anticipate and meet their future needs.
We operate with one common purpose --- to harness talent and technology to benefit our
customers and their industries, our shareholders and our people and the communities in
which we operate.
We are committed to operating responsibly and in a sustainable manner with regard to all
our stakeholders and the environment.
For over 200 years we have been helping to connect and form the fabric of daily life on
our planet.
Managing your shareholding online
UK registered members
To manage your shareholding online,
please visit: www.investorcentre.co.uk
United Kingdom
1 The Square, Stockley Park, Uxbridge,
Middlesex UB11 1TD
Tel: 020 8210 5000
www.coats.com
Incorporated and registered
in England No. 103548
Registered offi ce: 1 The Square,
Stockley Park, Uxbridge,
Middlesex UB11 1TD
Location of share registers
The Company’s register of members is maintained in the UK
Register enquiries may be addressed direct to the Company’s share registrars named below:
Registrar
Computershare Investor
Services PLC
Telephone and postal enquiries
Inspection of Register
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
Tel: 0370 707 1022 Facsimile: 0370 703 6143
The Pavilions,
Bridgwater Road,
Bristol BS99 6ZZ
Find out more online:
See our online ‘Year in Review for 2017’ – for a more visually engaging way to read about our
progress in the year www.coats.com/ara2017
A full copy of this Annual Report can be downloaded along with other relevant documents from
www.coats.com/investors
Throughout this document you will see references to where supporting information can also be
found online at www.coats.com
For more on our Corporate Responsibility (CR) performance in 2017, our approach to CR,
our policies and their impact see online at www.coats.com/cr
CONTENTS
Strategic report
01 2017 Full year results
and highlights
02 Coats at a glance
03 Our investment case
04 Chairman’s statement
06 Group Chief Executive’s
statement
08 Market trends
10 Business model
12 Our strategic goals
14 Key Performance Indicators
16 People
18 Corporate Responsibility
21 Principal risks and
uncertainties
26 Long term viability statement
27 Operating review
31 Financial review
Corporate governance
37 Chairman’s Introduction
39 Board of Directors
42 Group Executive Team
43 Corporate Governance Report
48 Nomination Committee Report
50 Audit and Risk Committee
Report
55 Directors’
Remuneration Report
68 Corporate Governance
Code Report
71 Directors’ Report
76 Directors’ Responsibilities
Statement
Financial statements
77
Independent auditor’s report
84 Primary financial statements
90 Notes to the
financial statements
147 Company financial statements
150 Notes to Company
financial statements
Other information
153 Group structure
160 Five-year summary
IBC Shareholder information
.
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COATS GROUP PLC
ANNUAL REPORT 2017
Delivering today
Transforming for
tomorrow
WWW.COATS.COM/ARA2017
A full copy of our Annual Report can be downloaded,
along with other relevant documents from
www.coats.com/ara2017
Coats Group plc
1 The Square
Stockley Park
Uxbridge
Middlesex UB11 1TD
Tel: 020 8210 5000
www.coats.com
Incorporated and registered in England No. 103548
Registered office: 1 The Square, Stockley Park
Uxbridge, Middlesex UB11 1TD
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