TIDMCOA
RNS Number : 5148R
Coats Group PLC
01 March 2019
1 March 2019
Coats Group plc
2018 Full Year Results
Coats Group plc ('Coats,' the 'Company' or the 'Group'), the
world's leading industrial thread manufacturer, announces its
unaudited Full Year Results for the year ended 31 December
2018.
Organic
2017 (restated CER change change
Continuing operations (4) 2018 (5) ) Change (1) (1)
-------------------------------------- -------- --------------- ------- ----------- --------
Revenue $1,415m $1,356m 4% 6% 3%
Adjusted (1)
Operating profit $195m $161m 21% 24% 23%
Operating margin 13.8% 11.8% 190bps 200bps 220bps
Basic earnings per share 6.9c 5.7c 21%
Free cash flow $96m $76m 26%
Return on capital employed
(ROCE) 43% 35% 800bps
Reported (3, 4)
Operating profit $147m $154m (5)%
Basic earnings per share 3.9c 5.1c (25)%
Net cash generated by operating
activities (2) $102m $(232)m n/a
Full year dividend per share 1.66c 1.44c 15%
(Loss)/profit from discontinued
operations $(16)m $10m n/a
Financial highlights
-- Revenue growth of 6% on a CER basis (4% reported), with 3%
organic growth and a 3% contribution from the acquisition of
Patrick Yarn Mill.
-- Continued organic revenue growth in Apparel and Footwear
(thread up 4%) and accelerated organic growth in Performance
Materials (up 7%).
-- Adjusted operating profit up 24% on a CER basis; adjusted
operating margin up 200bps to 13.8%.
-- Adjusted EPS up 21% to 6.9 cents as a result of higher
adjusted operating profits, a further reduction in effective tax
rate, a lower pension finance charge, with some offset from foreign
exchange and interest.
-- Adjusted free cash flow of $96 million; up 26% on prior year
due to increased adjusted operating profits and controlled NWC,
whilst maintaining capital expenditure ahead of depreciation.
-- Reported operating profit of $147 million (down 5%) and basic
EPS of 3.9 cents (down 25%), primarily due to increased exceptional
costs of $48 million (mostly not tax deductible) in relation to
Connecting for Growth, the UK guaranteed minimum pension
equalisation, and Lower Passaic River legal costs.
Strategic highlights
-- Sale of non-core North America Crafts business completed on
20 February 2019 for $37 million, with resulting exceptional
impairment to recognise net assets at fair value.
-- Connecting for Growth programme benefits being realised
faster than initially anticipated; $15 million net benefits
delivered in 2018 (reorganisation cost of $23 million incurred in
year).
-- Agreement in principle of Coats UK Pension Scheme triennial
valuation with agreed annual deficit contributions (including
estimated administrative expenses) of $31 million p.a. from 1 April
2019 (currently $24 million p.a.).
Commenting Rajiv Sharma, Group Chief Executive, said:
'Coats delivered a strong performance in 2018. Our Apparel and
Footwear business delivered continued market share gains by
providing on-going high service levels, and we saw increased
momentum in our Performance Materials business. In an environment
of rising input costs, we were able to grow our operating margins,
through realising price increases, delivering productivity and
procurement gains, as well as keeping tight control of our cost
base and delivering significant savings from our Connecting for
Growth programme in its first year. Following this strong
performance in 2018 we have announced a full year dividend per
share of 1.66 cents, which represents a 15% year-on-year increase,
and reflects the Board's confidence in our strategy.
'To further support delivery of our strategy, we completed the
acquisition of Threadsol whose cloud-based software solutions
incorporate artificial intelligence and provide an excellent fit
with the existing Coats Global Services business. We now have a
complementary suite of software solutions for the apparel and
footwear industries that will enable brands, retailers and
manufacturers to drive productivity gains, supply chain control and
speed to market. In addition to Threadsol, we also made a strategic
investment in Twine Solutions, who have developed a revolutionary
digital thread dyeing system, which aims to address the key needs
of our customers of speed, innovation and sustainability.
'We enter 2019 in a strong position, with continued positive
momentum in our core Apparel and Footwear and hi-tech Performance
Materials businesses. The exit of our non-core North American
Crafts business will ensure complete focus on growing our remaining
businesses organically and identifying further value-add bolt-on
acquisitions.
'Whilst we are cautious around the current macroeconomic
uncertainties, based on our current assessment of business trends
we remain confident in delivering another year of improving
performance through effective execution of our strategy.'
1 All Non-statutory measures (Alternative Performance Measures)
are reconciled to the nearest corresponding statutory measure
in note 14. Organic growth is on a CER basis excluding contributions
from bolt-on acquisitions. Constant exchange rate (CER) figures
are 2017 restated at 2018 exchange rates. Revenue figures are
an IFRS measure; however CER and Organic growth rates constitute
Alternative Performance Measures.
Net cash generated by operating activities includes $373 million
2 payments into the three UK defined benefit schemes in 2017.
Reported refers to values contained in the IFRS column of the
primary financial statements in either the current or comparative
3 period.
All figures on a continuing basis (i.e. exclude North America
Crafts which is presented as a discontinued operation), unless
4 otherwise stated.
Restated to include continuing results following NA Crafts disposal
5 and to reflect the adoption of IFRS15
Conference call
Coats Management will discuss this report in a webcast /
conference call with analysts and investors at
0900 GMT today (1 March 2019). The webcast can be accessed via
www.coats.com/investors/fy2018. The conference call can be accessed
by dialling +44 (0)20 3936 2999 and using participant access code
'92 90 68'. The webcast will also be made available in archive form
on www.coats.com.
_________________________________________________________________________________________
Enquiry details
+44 (0)20 8210
Investors Rob Mann Coats Group plc 5175
Richard Mountain / Nick +44 (0)20 3727
Media Hasell FTI Consulting 1374
_________________________________________________________________________________________
About Coats Group plc
Coats is the world's leading industrial thread company. At home
in some 50 countries, Coats has a workforce of 18,000 people across
six continents. Revenues in 2018 were US$1.4bn. Coats' pioneering
history and innovative culture ensure the company continues leading
the way around the world. It provides complementary and value added
products, services and software solutions to the apparel and
footwear industries. It applies innovative techniques to develop
high technology Performance Materials threads, yarns and fabrics in
areas such as automotive composites, fibre optics and Oil and Gas.
Headquartered in the UK, Coats is a FTSE 250 company and is a
constituent of the FTSE4Good Index Series. To find out more about
Coats visit www.coats.com.
Operating review
Inc / 2017 CER CER (1) Organic
2018 2017 (6) (dec) (1) inc/(dec) (5) inc/(dec)
------------------------
Industrial continuing
operations $m $m % $m % %
------------------------ ------ --------- ------- --------- ----------- ---------------
Revenue (2)
By business
Apparel and Footwear
(3) 1,083 1,081 0% 1,059 2% 2%
Performance Materials 332 275 20% 271 23% 7%
------ --------- ---------
Total 1,415 1,356 4% 1,329 6% 3%
By region
Asia 791 759 4% 750 5% 5%
Americas (3) 349 323 8% 312 12% (1)%
EMEA 275 274 0% 267 3% 3%
------ --------- ---------
Total 1,415 1,356 4% 1,329 6% 3%
Adjusted operating
profit (2,4) 195 161 21% 157 24% 23%
Adjusted operating
margin (2,4) 13.8% 11.8% 190bps 11.8% 200bps 220bps
1 2017 figures at 2018 exchange rates
Includes contribution from bolt-on acquisitions made during the
2 period
3 Now includes Latin America Crafts
On an adjusted basis which excludes exceptional and acquisition
4 related items.
5 On a CER basis excluding contributions from bolt-on acquisitions
Restated to include continuing results following NA Crafts disposal
6 and to reflect the adoption of IFRS15
Revenues from Industrial continuing operations increased 4% on a
reported basis, with 6% growth on a CER basis offset by a 2%
foreign exchange translation headwind. The 6% CER growth consisted
of 3% organic growth and a 3% contribution from the acquisition of
Patrick Yarn Mill (acquired in December 2017). This strong
performance was due to continued momentum in the Apparel and
Footwear business (75% of Group revenues) which was up 2% on a
restated basis, and accelerated growth in our Performance Materials
business with 23% growth (7% organic growth and 16% contribution
from the Patrick Yarn Mill acquisition).
Adjusted operating profit from Industrial continuing operations
increased 24% to $195 million on a CER basis (2017: $157 million)
and operating margins were up 200 bps to 13.8% (2017: 11.8%).
Year-on-year productivity and procurement improvements broadly
offset other structural inflation (e.g. wages and energy) and
manufacturing variances due to lower activity levels in certain
territories (e.g. Americas). The raw material cost increases seen
during the year (partly linked to the rising oil price) were
recovered in full through price however this one-to-one value
recovery resulted in a dampening of the reported gross margin
percentage. Operating margin progression was driven by continued
cost control and the initial benefits from the Connecting for
Growth programme that have been realised faster than initially
anticipated ($15 million net savings, after reinvestments).
On an organic basis, operating margins increased by 220bps,
which is above the CER increase of 200bps, as the latter was
impacted by the anticipated initial dilution of margins from the
Patrick Yarn Mill acquisition. Over time and in line with the
business plan, it is anticipated that Patrick Yarn margins will
trend towards Group levels.
On a reported basis, operating profit (which is after
exceptional and acquisition related items) decreased 5% to $147
million (2017: $154 million), primarily due to the initial
exceptional reorganisation cost incurred in relation to the
Connecting for Growth programme, the UK guaranteed minimum pension
equalisation, and a further accrual for Lower Passaic River (LPR)
legal costs.
Apparel and Footwear (A&F)
In A&F, our core thread business continued its strong growth
(up 4%) as key Asian markets performed strongly, although the
headline growth of 2% was impacted by slower demand for zips due to
certain in year fashion trends, and a 15% decline in Latin America
Craft sales (previously reported within the Crafts division). This
strong thread performance delivered further market share gains,
despite continued mixed demand from retailers, and was underpinned
by our continued focus on product innovation, digital solutions and
our strong corporate responsibility and sustainability
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. For example, there were further enhancements to our
customer facing eCommerce platform, such as automated payment
reminders via the use of data analytics. In addition, revenue
growth was further supported by the launch of innovative new
products, for example providing an engineered footwear yarn
solution for the China domestic market, and we have developed
various new innovative threads to enhance customers' quality of
products in high impact end uses (e.g. denim and anti-wicking). Our
innovation credentials have been further enhanced by the opening of
our first global Innovation Hub in North Carolina, US, and two new
hubs will be opened in Turkey and China in H1 2019. These
facilities provide opportunities to collaborate with our customers
and brands, and work with them to create innovative new product
solutions to meet their specific design needs.
Performance Materials
Performance Materials revenues grew 23% in the period on a CER
basis (20% reported), which includes a 16% contribution from the
acquisition of Patrick Yarn Mill (acquired in December 2017).
Organic growth of 7% showed an accelerating trend during the year
(5% organic growth in H1) and was driven by strong growth in many
of our key emerging markets as we continued to drive geographic
expansion of existing products across the Coats portfolio, and
leveraging Coats' global customer base.
Growth in hi-tech end uses (for example flame retardant yarns
and telecommunications) which now account for around 60% of
Performance Materials revenues remained strong throughout the
period delivering 21% organic growth. The business also continued
to grow revenues in new, innovative products, and over 20% of our
organic Performance Materials revenues were in relation to products
that did not exist five years ago (for example, Coats Synergex and
Flamepro). The US consumer durables market (e.g. "traditional" end
uses such as bedding) remained relatively soft.
Geographical performance
By geography, we saw strong organic revenue growth in Asia (up
5% on a CER basis) as momentum in key A&F markets (e.g.
Vietnam, Indonesia, Bangladesh and India) continued. Revenues in
EMEA rose 3%, which followed the strong growth seen in 2017 of 9%.
This reduced growth was partly due to lost revenues from certain
peripheral markets that were exited in the period (as part of the
Connecting for Growth programme), and softer zips demands. In the
Americas, organic revenues decreased marginally, where an
encouraging performance in certain Latam markets (e.g. Performance
Materials revenues in Brazil and Mexico which both saw strong
double digit growth), was offset by the US consumer durables market
remaining relatively soft, and a 15% decline in Latin America
Crafts revenues (previously reported within Crafts division) due to
weakness in the key markets of Brazil and Argentina.
Connecting for Growth programme
As announced in February 2018, Connecting for Growth is a
two-year transformation programme designed to drive speed, agility,
innovation and lower costs across the organisation, whilst enabling
the next phase of growth at Coats and accelerating our transition
from the industrial age to the digital age.
The majority of the programme savings are to be achieved from
reducing complexity in the existing Group. For example, we have
transitioned from market-focused support functions (e.g. Finance,
HR, Technology) to realigned globally integrated support functions;
we have redesigned the way we service a number of our peripheral
markets; and we have moved from a business operated by individual
local management teams into eight scalable clusters.
Good progress was made in 2018, and as a result, initial net
benefits (after reinvestments), are being realised faster than
initially anticipated with $15 million net benefits to adjusted
operating profit realised in 2018 (previous guidance $10 million).
$23 million of the anticipated $30 million total exceptional
reorganisation charge has been incurred in 2018, with the remainder
anticipated to be incurred in 2019.
As a result of the good progress made to date we anticipate net
benefits (after reinvestments) of $23 million in 2020 when the
programme is scheduled to complete.
UK pensions triennial valuation update
Following the merger of its three UK pension schemes in June
2018, the Group and the scheme Trustee have successfully concluded
the first valuation of the Coats UK Pension Scheme with a 1 July
2018 effective date, subject to completion of formal
documentation.
The Group has agreed in principle ongoing annual deficit
recovery payments of GBP20 million ($26 million) per annum
increasing annually by the increase in the Retail Price Index
(first increase in January 2020) based on a Technical Provisions
deficit of around GBP250 million ($319 million). The latest
Technical Provisions deficit is significantly lower than the last
triennial valuation deficit (31 March 2015) of GBP582 million ($743
million) due to upfront lump-sum payments into the scheme of GBP329
million ($420 million), the ongoing deficit recovery payments, with
some offset from other valuation factors (primarily as a
consequence of a reduction in real UK discount rates since March
2015).
As before, the Group will also meet Scheme administrative
expenses and levies estimated at GBP4 million ($5 million) per
annum in the future (i.e. total ongoing payments of GBP24 million
($31 million) per annum). The new deficit recovery payments will be
effective from 1 April 2019 and are payable until 31 December 2028.
The Scheme's next triennial valuation will have an effective date
of 31 March 2021 to realign with the valuation cycle of the
previous three UK schemes.
The previously agreed level of deficit recovery contributions
was GBP17.5 million ($24 million), including estimated
administration expenses and levies. As a result of the timing of
the start of the new contributions, 2019 deficit recovery
contributions, including estimated administration expenses and
levies, are anticipated to be GBP22 million ($29 million).
Discontinued operations - sale of North America Crafts
On 22 January 2019, it was announced that we had agreed to sell
the non-core North America Crafts business to Spinrite Acquisition
Corp, a leading provider of craft products in North America. This
transaction was subsequently completed on 20 February 2019. The
headline acquisition proceeds were $37m, which was on a debt and
cash free basis, and was subject to an adjustment for the level of
net working capital as at the time of completion.
The sale of our standalone North America Crafts business allows
the Group to focus completely on the high performing
business-to-business global Apparel and Footwear, and Performance
Materials businesses. The sale proceeds will initially be used to
reduce Group net debt, and subsequently to fund further value
accretive bolt-on acquisitions principally in the strategic focus
areas of high growth and hi-tech Performance Materials and Software
Solutions businesses.
In 2018 the North America Crafts business generated sales of
$128 million (2017: $150 million) and an operating profit of $3
million (pre an allocation of corporate costs) (2017: $13 million).
The declining revenues in 2018 reflect the impact of the first half
sale of the smaller lifestyle fabrics business ($10 million
revenues in H2 2017), the introduction of own-label handknitting
products at a major customer (which commenced in H2 2017), and
general weak market conditions.
North America Crafts results, which include the results of the
smaller lifestyles fabrics business, are reported as discontinued
operations in the Group financial results (2017 results also
restated), and an exceptional impairment charge to reduce the net
assets to fair value of $18 million (which includes costs to
complete the transaction) has been recorded in 2018 accordingly. We
anticipate approximately $2 million of stranded costs will remain
with the continuing Industrial business in North America following
the disposal of the Crafts business.
The segmental reporting of Coats Group plc has been amended
(with 2017 comparatives restated accordingly) to report the smaller
Latin America Crafts business within the Industrial segment
following its integration with the wider Latin America business.
Following the sale of the North America Crafts business future
segmental reporting is under review, and is anticipated to be
reflected in the H1 2019 financial results due to be released in
August.
Board change
Mike Allen, a non-executive director since 2010, will not be
standing for re-election as a Director at the 2019 AGM, to be held
on 23 May 2019. The Board would like to thank Mike for his
insightful guidance and contribution to the Board over the nine
years of his tenure. Mike has played a key part in steering
significant change to the Group, as we restructured the Guinness
Peat Group and Coats Boards, transitioned from an investment
holding company to a UK headquartered manufacturing business,
normalised our UK pension obligations following the settlement of
the regulatory investigations, and entered the FTSE 250.
Pioneering a sustainable future
Coats remains committed to adopting a leadership position within
the industries it operates, in the areas of Corporate
Responsibility and Sustainability, in order to ensure we meet the
ever growing expectations of our various stakeholder groups (e.g.
consumers, customers, employees, communities and shareholders) and
continue to underpin our market share gains. We have today launched
our annual Sustainability Report (see www.Coats.com) which sets out
our strategy and future targets in this area, which are above and
beyond the significant progress that we are proud to have made to
date.
Our five identified key priority areas, and associated 2022
targets, to drive accelerated progress are as follows:
-- Water - without water we cannot, today, make thread. It is a
vital and shared resource and we need to make sure we use it
efficiently, particularly as water is scarce in some parts of the
world - by 2022 we will reduce our usage of water by 40%.
-- Energy - the use of fossil fuels and the associated
greenhouse emissions contribute to climate change. Coats has a
responsibility to reduce our contribution and mitigate these risks
- by 2022 we will source significantly more renewables and we will
reduce our use of energy by 7%.
-- Effluent and emissions - we aim to ensure that the water we
discharge is safe and will not damage the environment around our
factories - we aim to build on Coats existing global standards and
be able to comply with the Zero Discharge of Hazardous Chemical
(ZDHC) effluent standards by 2022.
-- Social - we attach great importance to creating an inclusive
workplace where diversity is valued. We will continue to support
and have a positive impact in the communities we live and work in
through all of our employees participating in community events. By
2022 we will have "Great Place to Work" or equivalent awards for
all of our key sites.
-- Living sustainably - to ensure growth, now and in the future,
it is important that we use resources efficiently and explore
innovative solutions. We will use more sustainable raw materials
and reduce our waste - by 2022 we will deliver a reduction in waste
of 25% and by 2024 100% of our premium polyester threads will be
made from recycled materials.
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 2018, the Board is proposing a final
dividend of 1.16c per share which, combined with the interim
dividend of 0.50c per share, gives a total dividend for the year of
1.66c (2017 full year dividend: 1.44c 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 28 May 2019 to
ordinary shareholders on the register at 3 May 2019, with an
ex-dividend date of 2 May 2019.
Outlook
We enter 2019 in a strong position, with continued positive
momentum in our core Apparel and Footwear and hi-tech Performance
Materials businesses. The exit of our non-core North American
Crafts business will ensure complete focus on growing our remaining
businesses organically and identifying further value-add bolt-on
acquisitions.
Whilst we are cautious around the current macroeconomic
uncertainties, based on our current assessment of business trends
we remain confident in delivering another year of improving
performance through effective execution of our strategy.
Financial Review
Adjusted operating profit from continuing operations increased
24% to $195 million on a CER basis (2017: $157 million) and
operating margins were up 200 bps to 13.8% (2017: 11.8%). On a
reported basis, operating profit (which is after exceptional and
acquisition related items) decreased 5% to $147 million (2017: $154
million), primarily due to the initial exceptional reorganisation
cost incurred in relation to the Connecting for Growth programme,
the UK guaranteed minimum pension equalisation, and a further
accrual for LPR legal costs.
Financials on a reported basis were impacted by the relative
strength of the US Dollar compared to 2017, resulting in 4% growth
in reported revenues year on year (vs a 6% growth on a CER basis),
and 21% growth in adjusted operating profit (vs a 24% growth on a
CER basis). As the Company reports in US Dollars and given that its
global footprint generates significant revenues and expenses in a
number of other currencies, a translational currency impact can
arise. The main currency impact during the year was the
strengthening US Dollar against the Indian Rupee, Chinese Yuan, and
Turkish Lira. If the reported 2018 results had been translated at
exchange rates as at 31 December 2018 then Group revenue and
adjusted operating profit would have been $30 million and $4
million lower respectively, and therefore we expect a further FX
headwind to continue into 2019.
Adjusted earnings per share ('EPS') for the year increased 21%
to 6.9 cents (2017: 5.7 cents) due to higher adjusted operating
profits (21% reported growth), a 100bps reduction in underlying
effective tax rate to 31% (excluding 2017 benefits from US tax
reforms), and a $6 million reduction in the IAS19 pension finance
charge. These year-on-year improvements were offset by certain
foreign exchange impacts, notably a $1.6 million MTM foreign
exchange losses on future hedging contracts (vs a $1.3 million MTM
gain in 2017), and an increase in interest costs.
On a reported basis, the Group generated an attributable profit
from continuing operations of $55 million compared to $71 million
in 2017. The reduction primarily being due to a $35 million
increase in exceptional and acquisition related items (net of tax)
arising mainly from the initial Connecting for Growth programme
reorganisation charges, the UK guaranteed minimum pension
equalisation, and a further accrual for LPR legal costs (see later
for details). Including the impact of discontinued operations in
relation to North America Crafts, and the associated loss on
disposal, reported attributable profit for the Group was $39
million compared to $81 million in 2017.
The Group delivered an adjusted free cash flow of $96 million in
2018 (2017: $76 million) which reflects the strong adjusted
operating profit performance and controlled working capital, whilst
sustaining the previously indicated higher levels of capital
expenditure. As a percentage of revenues, net working capital as at
31 December 2018, is broadly in line with the same time last year
at 9.5% (continuing operations).
Return on capital employed (ROCE) improved significantly on 2017
to 43%, due to higher adjusted operating profits from continuing
operations and controlled working capital.
Non-operating results
Net finance costs in the year were $24.4 million, marginally up
from $23.3 million in 2017. The key drivers of the increase in net
finance costs in the period were higher interest on borrowings
($1.1 million increase) due to a larger proportion of fixed rate
debt (following the USPP issuance in December 2017) and increasing
rates on the floating debt element, a $1.6 million MTM foreign
exchange loss (Dec 2017 $1.3 million MTM foreign exchange gain),
and a $2 million increase in other finance costs (e.g. local FX
impacts and interest on VAT balances (vs a credit in 2017)). These
were offset by a $5.6 million reduction in the pensions finance
charge (as a result of the significant reduction in IAS19 pension
deficit following the lump-sum cash settlement payments made in
2017).
The taxation charge for the year was $49 million (2017: $44
million) resulting in a reported tax rate of 40% (2017: 34%).
Excluding exceptional and acquisition related items, the impact of
IAS19 finance charges and the one-off impact of the US tax reform
(in 2017), the underlying effective rate on pre-tax profits reduced
year-on-year by 100bps to 31% (2017: 32%) which was driven by
Advanced Pricing Agreement ("APA") negotiations with India and
Indonesia and a reduction in the total unrelieved losses in the
year compared to the prior year, partially offset by an
unfavourable movement in profit mix.
Profit attributable to minority interests was $19 million (2017:
$14 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 $48 million in the period. These primarily relate to the
exceptional reorganisation charge arising from the Connecting for
Growth programme ($23 million out of a total expected charge of $30
million for the programme), the UK guaranteed minimum pension
equalisation ($10 million), and an increase to the legal provision
costs in relation the to the Lower Passaic River (LPR)
environmental matter ($8 million).
In addition, there was amortisation of intangible assets
acquired in the recent acquisitions ($2.3 million), contingent
consideration in relation to these acquisitions ($4.3 million),
offset by an exceptional pension gain following the wind up of the
three UK pension schemes ($1.8 million). In 2017 net exceptional
and acquisition related items before taxation totalled $9.1
million.
UK Guaranteed Minimum Pension Equalisation
During the year an estimated past service charge of $10 million
has been recognised following the Lloyds Banking Group judgement in
October 2018 and the requirement for all UK pension schemes to
equalise male and female members' benefits for the effect of
Guaranteed Minimum Pensions. This represents an increase of
approximately 0.35% of pension scheme liabilities and is included
in the Technical Provisions deficit of around GBP250 million
resulting from the recent triennial valuation.
Lower Passaic River
In 2010, the US Environmental Protection Agency ('EPA') notified
Coats & Clark, Inc. ('CC') that it 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.
On 30 June 2018, Occidental Chemical Corporation ('OCC'), the
party that has been identified as being responsible for the most
significant contamination in the river, filed a lawsuit against
approximately 120 defendants, including CC, seeking recovery of
past environmental costs and contribution toward future
environmental costs. OCC has since released claims for certain past
costs from 41 of the defendants, including CC, and is not seeking
recovery of those past costs from CC. OCC's lawsuit seeks
resolution of many of the same issues being addressed in the EPA
sponsored allocation process, and does not alter CC's defences or
CC's belief that it is a de minimis party.
During the year ended 31 December 2018, an additional provision
of $8.0 million has been recorded as an exceptional item to cover
legal and professional fees for continuation of the EPA allocation
and defence of OCC's litigation against approximately 120 parties,
including CC. The Group will continue to mitigate additional costs
as far as possible through insurance and other avenues. There has
been no change to the level of provision for potential remediation
costs, beyond the $9.0 million provision made in 2015, which was
based on the estimated share of CC's de minimis costs. As a result
of this further provision for legal and professional fees the total
LPR provision at 31 December 2018 was $17.6 million (31 December
2017 $11.3 million).
Following the sale of North America Crafts, which was announced
on 22 January 2019 and subsequently completed on 20 February 2019,
Coats retains the control and responsibility for the eventual
outcome of the ongoing Lower Passaic River environmental matters.
There is no change in the Group's overall position in relation to
this matter as a result of the sale of North America Crafts.
See note 10 for further details.
Discontinued operations
In addition to the above exceptional and acquisition related
items, and as referred to earlier, as a result of the disposal of
the non-core North American Crafts business (completed on 20
February 2019) an exceptional loss on disposal of $18.4 million has
been incurred in 2018. This relates to a partial write down of
operating assets to the level of sales proceeds, as well as the
costs incurred to complete the transaction.
Investment
Capital expenditure in the year, in addition to ongoing
maintenance requirements, related to new product development (e.g.
on-going development of our three global innovation hubs, the first
of which opened in North Carolina, US, in the second half of the
year), process improvements, digital tools, capacity expansion,
health and safety, and environmental spend. The latter includes
projects such as effluent treatment plants (of which one went live
in our Honduras facility during the year) 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 benefiting the local communities that we do
business in. Total capital spend for the year amounted to $48
million (1.3x depreciation and amortisation).
In order to continue to support our growth strategy and further
reinforce our strong environmental compliance credentials we
anticipate capital spend to be in the $45-55 million range for
2019.
Corporate activity
On 4 December 2018, the Group announced that it had become a
strategic investor in Twine Solutions, an Israeli based technology
start-up that has developed a revolutionary digital thread dyeing
system, having invested $5 million for a 9.5% share in the company
and a seat on the Board. Twine has created a proprietary digital
thread dyeing system which combines the features of small-scale
digital printing with the traditional dyeing process and enables
thread to be produced, on demand, to any colour and length which
aims to directly address the key needs of our customers: speed,
innovation and sustainability.
On 20 December 2018, the Group agreed to acquire ThreadSol, a
cloud-based digital application provider whose technology focuses
on fabric usage optimisation in apparel manufacturing, for a cash
consideration of up to $12 million. The initial cash outflow is
circa. $5 million, with further payments of up to $7 million over
the period to 2022 based on certain performance criteria. The
acquisition was subsequently completed on 12 February 2019.
ThreadSol's cloud-based digital applications provide an
excellent fit with the existing Coats Global Services business. The
complementary suite of software solutions for the apparel and
footwear industries will enable brands, retailers and manufacturers
to drive productivity gains, supply chain control and speed to
market.
Cash flow
The Group generated $96 million of adjusted free cash flow in
2018. This was a 26% increase on 2017 ($76 million) due to the
increase in adjusted operating profit, controlled net working
capital, alongside continued capital expenditure ($48 million)
which was in excess of depreciation. This free cash flow measure is
before annual pension recovery payments, acquisitions and
dividends, and excludes exceptional items such as the Connecting
for Growth exceptional reorganisation cost.
Adjusted EBITDA (defined as pre-exceptional operating profit
before depreciation and amortisation) from continuing operations
for the year was $231 million (2017: $198 million). Net working
capital as a percentage of sales (continuing operations) remained
broadly in line with 2017 at 9.5% as working capital continues to
be effectively controlled. Interest paid was $19 million, $5
million higher than 2017 due to marginally higher interest on
floating rate debt. Tax paid (continuing operations) was $52
million, a $5 million reduction on 2017, primarily due to the
initial APA benefits in India and the timing of a US refund for tax
overpaid in 2017.
On a non-adjusted basis, there was a free cash inflow of $25
million in the year, compared to a $330 million outflow in 2017.
The improvement was primarily related to $373 million of payments
into the three UK defined benefit pension schemes in H1 2017
following settlement with their respective trustees (including $348
million of upfront payments out of parent group cash) and the
acquisition of Patrick Yarn Mill ($20 million).
Net debt as at 31 December 2018 was $223 million, $19 million
below 31 December 2017 ($241 million), which reflects the $25
million free cash inflow and $6 million adverse foreign exchange.
The $25 million free cash inflow reflects adjusted free cash flow
for the year of $96 million offset by exceptional cash costs of $27
million (primarily in relation to the Connecting for Growth
programme), the strategic investment in Twine Solutions of $5
million, shareholder dividends of $21 million, and ongoing pension
deficit recovery payments $24 million.
Balance sheet
An important metric for the operating business is the leverage
ratio of net debt to adjusted EBITDA, which improved to 1.0x
adjusted EBITDA (from continuing operations) at 31 December 2018
(1.2x at 31 December 2017), and is at the lower end of the 1-2x
stated target leverage range. The recent sale of the North America
Crafts business further supports our strong balance sheet and will
enable us to invest in our business organically, self-finance
further bolt-on acquisitions, as well as meet our other key capital
demands of funding our pension schemes and making returns to
shareholders.
Pensions and other post-employment benefits
Following agreement with the UK Pension Schemes' Trustees and
with effect from the 1 July 2018 the assets and liabilities of the
Coats UK, Brunel and Staveley schemes (the Current Schemes) have
been transferred to a single new scheme (named the Coats UK Pension
Scheme). The consolidation of the three UK schemes into a single
scheme is expected to result in future savings in administration
expenses and efficiencies in investment management.
The net obligation for the Group's retirement and other
post-employment defined benefit liabilities (UK and other group
schemes), on an IAS19 financial reporting basis, was $168 million
as at 31 December 2018, which is broadly in line with the $163
million at 31 December 2017.
The Group's UK defined benefit schemes, namely the Coats UK
Pension Scheme, shows a $109 million IAS19 deficit at 31 December
2018 (GBP85 million), which is in line with the deficit position at
31 December 2017 ($107 million, GBP79 million). The movement in the
period of $3 million consisted of an exceptional charge of $10
million in relation to the guaranteed minimum pension equalisation,
employer contributions of $16 million (excludes administrative
expenses and levies), a $14 million net actuarial loss (primarily a
combination of a change in actuarial assumptions (e.g. reduced
discount rate) offset by asset underperformance during the year),
and some year-on-year movement in the sterling exchange rate.
Following consolidation of the UK schemes and completion of the
2018 actuarial valuation the Trustee of the Coats UK Pension Scheme
currently hedges over 80% of interest rate and inflation-linked
liabilities.
Following the disposal of North America Crafts, Coats retains
the previously incurred pensions obligations from the business. The
pension scheme, which includes both Crafts and Industrial
operations in North America, was in a surplus position of $65
million at 31 December 2018 (recoverable surplus of $48 million
recognised on the Balance Sheet under accounting standards).
Consolidated income statement
For the year ended
31 December 2018 2017 *
Before Before
exceptional Exceptional exceptional Exceptional
and and and and
acquisition acquisition acquisition acquisition
related related related related
items items Total items items Total
Notes Unaudited Unaudited Unaudited Audited Audited Audited
US$m US$m US$m US$m US$m US$m
-------------------------- ------ ------------- ------------- ----------- ------------- ------------- ---------
Continuing operations
Revenue 1,414.7 - 1,414.7 1,356.1 - 1,356.1
Cost of sales (901.9) (4.4) (906.3) (849.7) - (849.7)
------------- ------------- ----------- ------------- ------------- ---------
Gross profit 512.8 (4.4) 508.4 506.4 - 506.4
Distribution costs (142.7) (4.5) (147.2) (150.4) - (150.4)
Administrative
expenses (176.0) (38.9) (214.9) (195.5) (6.5) (202.0)
Other operating
income 0.8 - 0.8 0.1 - 0.1
------------- ------------- ----------- ------------- ------------- ---------
Operating profit 194.9 (47.8) 147.1 160.6 (6.5) 154.1
Share of profits/(losses)
of joint ventures 0.1 - 0.1 1.3 (2.6) (1.3)
Investment income 4 1.7 - 1.7 2.1 - 2.1
Finance costs 5 (26.1) - (26.1) (25.4) - (25.4)
------------- ------------- ----------- ------------- ------------- ---------
Profit before
taxation 170.6 (47.8) 122.8 138.6 (9.1) 129.5
Taxation 6 (53.8) 4.8 (49.0) (44.6) 0.7 (43.9)
------------- ------------- ----------- ------------- ------------- ---------
Profit from continuing
operations 116.8 (43.0) 73.8 94.0 (8.4) 85.6
Discontinued operations
Profit/(loss)
from discontinued
operations 13 2.8 (18.4) (15.6) 9.5 - 9.5
Profit for the
year 119.6 (61.4) 58.2 103.5 (8.4) 95.1
------------- ------------- ----------- ------------- ------------- ---------
Attributable to:
-------------------------- ------ ------------- ------------- ----------- ------------- ------------- ---------
EQUITY SHAREHOLDERS
OF THE COMPANY 100.4 (61.2) 39.2 89.2 (8.4) 80.8
-------------------------- ------ ------------- ------------- ----------- ------------- ------------- ---------
Non-controlling
interests 19.2 (0.2) 19.0 14.3 - 14.3
------------- ------------- ----------- ------------- ------------- ---------
119.6 (61.4) 58.2 103.5 (8.4) 95.1
------------- ------------- ----------- ------------- ------------- ---------
Earnings per share
(cents) 7
Continuing operations
Basic 3.85 5.10
Diluted 3.78 5.00
Continuing and discontinued operations
Basic 2.76 5.78
Diluted 2.70 5.67
Adjusted earnings
per share 14 6.87 5.70
* Restated to reflect the results of the North America Crafts
business as a discontinued operation and to reflect the impact of
the adoption of IFRS 15 'Revenue from contracts with customers'
(see note 1).
Consolidated statement of comprehensive income
2018 2017
Year ended 31 December Unaudited Audited
US$m US$m
Profit for the year 58.2 95.1
Items that will not be reclassified
subsequently to profit or loss:
Actuarial (losses)/gains on retirement
benefit schemes (21.8) 145.2
Tax on items that will not be reclassified 1.2 1.0
----------- ---------
(20.6) 146.2
Items that may be reclassified subsequently
to profit or loss:
Losses on cash flow hedges arising during
the year (1.0) (1.1)
Transferred to profit or loss on cash
flow hedges (0.6) 0.2
Exchange differences on translation
of foreign operations (20.5) (6.1)
(22.1) (7.0)
Other comprehensive income and expense
for the year (42.7) 139.2
----------- ---------
Net comprehensive income and expense
for the year 15.5 234.3
----------- ---------
Attributable to:
--------------------------------------------- ----------- ---------
EQUITY SHAREHOLDERS OF THE COMPANY (2.7) 219.9
---------------------------------------------- ----------- ---------
Non-controlling interests 18.2 14.4
15.5 234.3
----------- ---------
Consolidated statement of financial position
31 December 31 December
2018 2017*
Notes Unaudited Audited
US$m US$m
Non-current assets
Intangible assets 284.2 292.9
Property, plant and equipment 282.2 297.3
Investments in joint ventures 10.6 12.0
Other equity investments 6.1 1.2
Deferred tax assets 19.2 24.6
Pension surpluses 42.6 57.9
Trade and other receivables 21.4 21.5
------------ ------------
666.3 707.4
Current assets
Inventories 185.4 232.2
Trade and other receivables 253.8 268.9
Other investments 0.6 0.2
Pension surpluses 6.1 6.9
Cash and cash equivalents 11(f) 135.7 118.4
Assets of disposal group
and non-current assets classified
as held for sale 51.4 0.2
------------ ------------
633.0 626.8
Total assets 1,299.3 1,334.2
------------ ------------
Current liabilities
Trade and other payables (302.7) (330.4)
Current income tax liabilities (15.5) (8.7)
Bank overdrafts and other
borrowings (20.3) (1.7)
Retirement benefit obligations:
- Funded schemes (16.0) (16.9)
- Unfunded schemes (6.0) (7.4)
Provisions (16.3) (18.3)
Liabilities of disposal
group classified as held
for sale (17.9) -
------------ ------------
(394.7) (383.4)
Net current assets 238.3 243.4
------------ ------------
Non-current liabilities
Trade and other payables (23.1) (27.2)
Deferred tax liabilities (10.5) (17.9)
Borrowings (338.1) (358.2)
Retirement benefit obligations:
- Funded schemes (99.5) (101.1)
- Unfunded schemes (95.5) (102.6)
Provisions (39.0) (33.5)
------------ ------------
(605.7) (640.5)
Total liabilities (1,000.4) (1,023.9)
------------ ------------
Net assets 298.9 310.3
------------ ------------
Equity
Share capital 8 88.5 87.5
Share premium account 10.4 7.7
Own shares 8 (6.8) (7.7)
Translation reserve (68.5) (48.8)
Capital reduction reserve 59.8 59.8
Other reserves 244.2 245.8
Retained loss (56.7) (58.6)
-------------------------------------------- ------------ ------------
EQUITY SHAREHOLDERS' FUNDS 270.9 285.7
-------------------------------------------- ------------ ------------
Non-controlling interests 28.0 24.6
------------ ------------
Total equity 298.9 310.3
------------ ------------
* Restated to reflect adjustments to provisional fair value
amounts relating to the acquisition of Patrick Yarn Mill Inc. (see
note 12).
Consolidated statement of changes in equity
For the year ended 31 December 2018
Share Capital Non-
Share premium Own Translation reduction Other Retained controlling Total
capital account shares reserve reserve reserves loss Total interests equity
US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m
-----------
Audited
Balance as at
1 January
2017 127.0 11.6 (10.5) (121.1) 85.2 250.9 (274.6) 68.5 22.5 91.0
Change in
functional
currency
(see note 1) (39.9) (10.8) 1.8 78.5 (25.4) (4.2) - - - -
Net
comprehensive
income and
expense
for the year - - - (6.2) - (0.9) 227.0 219.9 14.4 234.3
Dividends - - - - - - (17.8) (17.8) (12.3) (30.1)
Issue of
ordinary
shares 0.4 2.6 - - - - - 3.0 - 3.0
Movement in
own
shares - 4.3 1.0 - - - (5.2) 0.1 - 0.1
Share based
payments - - - - - - 6.4 6.4 - 6.4
Deferred tax
on
share schemes - - - - - - 5.6 5.6 - 5.6
-------------- -------- ------- ---------------- ------------ --------- --------- --------- ------- ----------- -------
Balance as
at
31 December
2017 87.5 7.7 (7.7) (48.8) 59.8 245.8 (58.6) 285.7 24.6 310.3
Unaudited
Net
comprehensive
income and
expense
for the year - - - (19.7) - (1.6) 18.6 (2.7) 18.2 15.5
Dividends - - - - - - (21.1) (21.1) (14.8) (35.9)
Issue of
ordinary
shares 1.0 2.7 - - - - (0.7) 3.0 - 3.0
Movement in
own
shares - - 0.9 - - - - 0.9 - 0.9
Share based
payments - - - - - - 7.4 7.4 - 7.4
Deferred tax
on
share schemes - - - - - - (2.3) (2.3) - (2.3)
----------- -------
Balance as
at
31 December
2018 88.5 10.4 (6.8) (68.5) 59.8 244.2 (56.7) 270.9 28.0 298.9
-------------- -------- ------- ---------------- ------------ --------- --------- --------- ------- ----------- -------
Consolidated cash flow statement
For the year ended 31 December 2018 2017
Unaudited Audited
Note US$m US$m
Cash inflow/(outflow) from
operating activities
Net cash inflow/(outflow) from 11
operations (a) 171.1 (157.4)
Interest paid (19.1) (13.7)
11
Taxation paid (b) (50.1) (60.5)
---------- ----------
Net cash generated by/(absorbed
in) operating activities 101.9 (231.6)
---------- ----------
Cash outflow from investing
activities
11
Investment income (c) 1.6 1.3
Net capital expenditure and 11
financial investment (d) (45.6) (49.7)
11
Acquisitions and disposals (e) (0.1) (23.1)
Net cash absorbed in investing
activities (44.1) (71.5)
---------- ----------
Cash outflow from financing
activities
Receipts from exercise of share
options 3.0 3.0
Dividends paid to equity shareholders (21.1) (17.6)
Dividends paid to non-controlling
interests (14.8) (12.3)
Net decrease in debt and finance
leasing (20.4) (41.1)
---------- ----------
Net cash absorbed in financing
activities (53.3) (68.0)
---------- ----------
Net increase/(decrease) in
cash and cash equivalents 4.5 (371.1)
Net cash and cash equivalents
at beginning of the year 116.8 470.3
Foreign exchange (losses)/gains
on cash and cash equivalents (5.6) 17.6
---------- ----------
Net cash and cash equivalents 11
at end of the year (f) 115.7 116.8
---------- ----------
Reconciliation of net cash
flow to movement in net debt
Net increase/(decrease) in
cash and cash equivalents 4.5 (371.1)
Net decrease in debt and lease
financing 20.4 41.1
---------- ----------
Change in net debt resulting
from cash flows
(Free cash flow) 24.9 (330.0)
Other non-cash movements (0.7) (5.0)
Foreign exchange (losses)/gains (5.4) 15.3
---------- ----------
Decrease/(increase) in net
debt 18.8 (319.7)
Net (debt)/cash at start of
year (241.5) 78.2
---------- ----------
11
Net debt at end of year (f) (222.7) (241.5)
---------- ----------
Notes to the consolidated financial information for the year
ended 31 December 2018
1. Basis of preparation
The preliminary financial information (the 'financial
information') set out in this report is based on Coats Group plc's
unaudited consolidated financial statements, which are prepared in
accordance with International Financial Reporting Standards
('IFRS') as adopted by the European Union, and complies with the
disclosure requirements of the Listing Rules of the UK Financial
Services Authority. The accounting policies adopted by the Group
have been applied consistently to all periods presented.
The financial information set out in this report does not
constitute the Coats Group plc's statutory accounts for the years
ended 31 December 2018 and 2017. The financial information for the
year ended 31 December 2017 is derived from the statutory accounts
for that year which have been filed with the Registrar of
Companies. The audit report on those accounts did not contain
statements under Sections 498(2) or 498(3) of the Companies Act
2006. The audit opinion contained in that report was unmodified.
The audit of the statutory accounts for the year ended 31 December
2018 is not yet complete. Those accounts will be finalised on the
basis of the financial information presented by the Directors in
this preliminary announcement and will be delivered to the
Registrar of Companies following the Company's Annual General
Meeting.
Whilst the financial information included in this report has
been compiled in accordance with the recognition and measurement
principles of applicable IFRS, this report does not itself contain
sufficient information to comply with IFRS. Coats Group plc expects
to publish full consolidated financial statements that comply with
IFRS; these will be available to shareholders in March 2019.
New standards, interpretation and amendments adopted by the
Group
The same accounting policies, presentation and methods of
computation are followed in the preliminary financial information
as applied in the Group's annual audited financial statements for
the year ended 31 December 2017 other than the following new and
revised standards that were effective as of 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.
The adoption of these standards has not had a material impact on
the financial statements of the Group. Additional details on the
adoption of IFRS 9 'Financial instruments' and IFRS 15 'Revenue
from contract with customers' are given below:
IFRS 9 'Financial Instruments'
IFRS 9 replaces IAS 39 'Financial Instruments: Recognition and
Measurement' and concerns the classification, measurement and
derecognition of financial assets and financial liabilities. The
new standard introduces the expected credit loss model for the
assessment of impairment of financial assets, introduces new
classification and measurement rules for financial assets affecting
the Group's other investments previously classified as available
for sale and changes the hedge accounting requirements.
An accounting policy choice is available with regards to
applying the new hedge accounting requirements or retaining the
requirements of IAS 39. The Group has elected to retain the
requirements of IAS 39.
IFRS 9 contains three principal classification categories for
financial assets: measured at amortised cost, fair value through
other comprehensive income (FVOCI) and fair value through profit
& loss (FVTPL). The classification of financial assets under
IFRS 9 is generally based on the business model in which a
financial asset is managed and its contractual cash flow
characteristics. IFRS 9 eliminates the previous IAS 39 categories
of held to maturity, loans and receivable and available for sale.
As such the Group's other investments previously classified as
available-for-sale under IAS 39 and held at fair value have been
designated on transition as FVOCI, after which the Group will
record their fair value movements in other comprehensive
income.
IFRS 9 largely retains the existing requirements in IAS 39 for
the classification and measurement of financial liabilities and
therefore there has been no impact on the Group's accounting
policies relating to financial liabilities.
The Group has adopted the simplified approach to provide for
losses on receivables within the scope of IFRS 9. Due to the
quality and short-term nature of the Group's trade receivables
losses experienced are not significant. Therefore, no material
impact to the primary financial statements has arisen on the
adoption of IFRS 9 and the Group has not restated prior periods on
adoption of IFRS 9.
IFRS 15 'Revenue from contracts with customers'
IFRS 15 replaces IAS 18 Revenue and related interpretations,
introducing a single, principles-based approach to the recognition
and measurement of revenue from all contracts with customers. The
new approach requires identification of performance obligations in
a contract and revenue to be recognised when or as those
performance obligations are satisfied, as well as additional
disclosures.
The Group completed a review of the requirements of IFRS 15
against existing policy and practice for both timing and amount of
revenue recognised, in particular considering the accounting
policies adopted for the Global services business, where contracts
include several performance obligations, and variable
consideration.
The review concluded that timing of revenue recognition was
materially consistent with the requirements of IFRS 15. For the
majority of the Group's contracts, the performance obligation is
the delivery of goods, which under IFRS 15 would be recognised at a
single point of time, consistent with the current accounting
treatment under IAS 18. The Group's accounting policies for
services revenue already allocated revenue to performance
obligations on a basis consistent with IFRS 15 and no change in
policy was required.
As part of the review, the Group identified rebates and
discounts under certain arrangements which were recorded as
operating costs under IAS 18 which under IFRS 15 are treated as a
reduction of revenue.
The Group previously expected that it would adopt IFRS 15 using
the modified retrospective approach. After careful consideration
the Group has adopted IFRS 15 using the full retrospective approach
and comparative amounts for the year ended 31 December 2017 have
been restated.
The rebates and discounts outlined above that are treated as
reductions of revenue from continuing operations for the year ended
31 December 2018, rather than reported as operating costs, amounted
to $11.7 million (2017: $11.9 million). Amounts for the year ended
31 December 2017 have been restated as set out below:
IFRS 15 restatement impact on continuing As As
operations reported Adjustment restated
for the year ended 31 December 2017 US$m US$m US$m
-------------------------------------------- ---------- ------------- ----------
Revenue 1,368.0 (11.9) 1,356.1
Gross profit 518.3 (11.9) 506.4
Distribution costs (162.3) 11.9 (150.4)
---------- ------------- ----------
There have been no changes in Group operating profit, total
equity or cash flows as a result of the adoption of IFRS 15.
Discontinued operations and disposal group held for sale
In January 2019 the Group announced the agreement to sell the
North America Crafts business to Spinrite Acquisition Corp. The
North America Crafts business has been classified as held for sale
at 31 December 2018 and its results presented as a discontinued
operation. Prior years amounts in the consolidated income statement
have also been restated to reclassify the results of North America
Crafts from continuing operations to discontinued operations. The
sale was completed on 20 February 2019, the date which control
passed to the acquirer. Note 13 provides further details on the
results of North America Crafts.
Functional currency
The functional currency of Coats Group plc continued to be
United States dollars ('USD') during the year ended 31 December
2018. In the prior year following the UK pensions settlement, the
functional currency of Coats Group plc was changed from Great
Britain pounds sterling to USD, effective 1 March 2017.
Prior to the UK pensions settlement in February 2017, Coats
Group plc and the parent group were considered to operate
autonomously from the Coats operating business. Cash within the
parent group was primarily denominated in Great Britain Pounds,
held separately from the Coats operating business and represented a
significant proportion of the Group's value at that time. Following
the UK pensions settlement and payment of upfront pension
contributions the parent group became largely dormant with minimal
cash maintained. In addition dividend payments recommenced to
external shareholders having been suspended during the period of
the investigation by the UK Pension Regulator. Following the
settlement payments made into the UK pension schemes the functional
currency of Coats Group plc was reassessed and changed from Great
Britain pounds sterling to USD, effective 1 March 2017. The
presentation currency of the Group is USD.
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 Group is a
going concern and this financial information is prepared on that
basis.
Principal exchange rates
The principal exchange rates (to the US dollar) used are as
follows:
2018 2017
------------ ---------------- ------ ------
Average Sterling 0.75 0.78
Euro 0.85 0.89
Brazilian Real 3.65 3.19
Indian Rupee 68.41 65.09
----------------- ----------- ------ ------
Period end Sterling 0.78 0.74
Euro 0.87 0.83
Brazilian Real 3.87 3.31
Indian Rupee 69.77 63.87
----------------- ----------- ------ ------
2. Operating segments
Operating segments are components of the Group's business
activities about which separate financial information is available
that is evaluated regularly by the chief operating decision maker
(the Coats Group plc Board). Reportable segments for the year ended
31 December 2018 comprised the continuing industrial thread
business and the discontinued North America Crafts business which
was sold in February 2019. Previously the Group had two reportable
segments being Industrial and Crafts. The smaller Latin America
Crafts business has been reported within Industrial Continuing
Operations following its integration with the wider Latin America
business. The results of the operating segments are set out below.
The change has been applied retrospectively with comparative
information restated on a consistent basis. Following the sale of
the North America Crafts business, future segmental reporting is
under review and is anticipated to be reflected in the H1 2019
financial results.
Segment revenue and results
Year ended 31 December 2018:
North America
Industrial Crafts
Continuing Discontinued
Operations Operations Total
Unaudited US$m US$m US$m
------------------------------------------- ------------- -------------- --------
Revenue 1,414.7 121.8 1,536.5
------------- -------------- --------
Segment profit 201.9 2.7 204.6
-------------- --------
UK pension scheme administrative expenses (7.0)
-------------
Operating profit before exceptional and
acquisition related items 194.9
Exceptional and acquisition related items
(note 3) (47.8)
-------------
Operating profit 147.1
Share of profits of joint ventures 0.1
Investment income 1.7
Finance costs (26.1)
-------------
Profit before taxation from continuing
operations 122.8
-------------
The elimination of intersegment revenue from Industrial
Continuing Operations to North America Crafts Discontinued
Operations of $5.7 million for the year ended 31 December 2018
(2017: $6.8 million) is presented within the North America Crafts
Discontinued Operations segment. Excluding these amounts revenue
for the North America Crafts Discontinued Operations segment for
the year ended 31 December 2018 was $127.5 million (2017: $149.1
million).
North America
Industrial Crafts
Continuing Discontinued
Year ended 31 December 2017 (Restated): Operations Operations Total
Audited US$m US$m US$m
------------------------------------------- ------------- -------------- --------
Revenue 1,356.1 142.3 1,498.4
------------- -------------- --------
Segment profit 166.9 13.1 180.0
-------------- --------
UK pension scheme administrative expenses (6.3)
-------------
Operating profit before exceptional and
acquisition related items 160.6
Exceptional and acquisition related items
(note 3) (6.5)
-------------
Operating profit 154.1
Share of losses of joint ventures (1.3)
Investment income 2.1
Finance costs (25.4)
-------------
Profit before taxation from continuing
operations 129.5
-------------
3. Exceptional and acquisition related items
The Group's consolidated income statement format is presented
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 to
provide 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 14.
Judgement is used by the Group in assessing the particular
items, which by virtue of their scale and nature, are 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.
Exceptional items
Exceptional items are set out below:
2018 2017
Unaudited Audited
US$m US$m
--------------------------------------------------- ---------- --------
Exceptional items:
Connecting for Growth programme reorganisation
costs:
* Cost of sales 4.4 -
* Distribution costs 4.5 -
* Administrative expenses 13.9 -
---------- --------
22.8 -
Administrative expenses:
US environmental costs 8.0 -
UK pension scheme consolidation (0.5) -
UK Guaranteed Minimum Pension Equalisation 10.2 -
Exceptional items charged to operating profit from
continuing operations 40.5 -
---------- --------
Connecting for Growth programme reorganisation costs -
Connecting for Growth is a two year transformation programme
designed to drive speed, agility, innovation and lower costs across
the organisation, whilst enabling the next phase of growth at Coats
and accelerating our transition from the industrial age to the
digital age. The programme is focussing on simplification across
many aspects of the organisation and includes transitioning from
market-focussed support functions to realigned globally integrated
support functions, redesigning the way the Group services a number
of its peripheral markets and moving from a business operated by
individual local management teams to scalable clusters. Exceptional
reorganisation costs of $22.8 million have been incurred in the
year ended 31 December 2018 comprising severance costs of $20.5
million, fixed asset disposals and write offs of $0.6 million and
closure and other one off costs of $1.7 million.
US environmental costs - In 2010, the US Environmental
Protection Agency ('EPA') 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. An additional provision of $8.0 million
has been made during the year ended 31 December 2018 to cover legal
and professional fees in respect of this matter (see note 10).
UK pension scheme consolidation - Following agreement with the
UK Pension Schemes' Trustees and with effect from the 1 July 2018
the assets and liabilities of the Coats UK, Brunel and Staveley
schemes (the Previous Schemes) have been transferred to a single
new scheme (named the Coats UK Pension Scheme). The Previous
Schemes were wound-up and as part of this process a number of the
Previous Schemes' members with small pension entitlements were
given the option to exchange their pension entitlement for a cash
lump sum. This process resulted in an exceptional credit of $1.8
million during the year ended 31 December 2018. Costs incurred in
connection with the UK pension scheme consolidation were $1.3
million and as a result the net credit for the year was $0.5
million.
UK Guaranteed Minimum Pension Equalisation - During the year
ended 31 December 2018 an estimated past service charge of $10.2
million has been recognised following the Lloyds Banking Group
judgement in October 2018 and the requirement for all UK pension
schemes to equalise male and female members' benefits for the
effect of Guaranteed Minimum Pensions. This represents an increase
of approximately 0.35% of pension scheme liabilities.
Exceptional items: Joint venture - Share of losses of joint
ventures for the year ended 31 December 2018 is after exceptional
costs of $nil (2017: $2.6 million) relating to the sale and closure
of the business of Australia Country Spinners, a joint venture in
Australia.
Exceptional items: Discontinued operations - During the year
ended 31 December 2018 exceptional charges in relation to
discontinued operations were $18.4 million (2017: $nil). See note
13 for further details.
Acquisition related items
Acquisition related items are set out below:
2018 2017
Unaudited Audited
US$m US$m
-------------------------------------------- ---------- --------
Acquisition related items:
Administrative expenses:
Contingent consideration 4.3 4.0
Acquisition transaction costs 0.7 0.4
Amortisation of acquired intangible assets 2.3 2.1
Total acquisition related items before
taxation 7.3 6.5
========== ========
The Group has made acquisitions with earn outs to allow part of
the consideration to be based on the future performance of the
businesses acquired and to lock in key management. Where
consideration paid or contingent consideration payable in the
future is employment linked, it is treated as an expense and part
of statutory results. However, all consideration of this type is
excluded from adjusted operating profit and adjusted earnings per
share, as in management's view, these items are part of the capital
transaction.
Acquisition transaction costs and amortisation of intangible
assets acquired through business combinations are not included
within adjusted earnings. These costs are acquisition related and
management consider them to be capital in nature and they do not
reflect the underlying trading performance of the Group.
Excluding amortisation of intangible assets acquired through
business combinations and recognised in accordance with IFRS 3
"Business Combinations" from adjusted results also ensures that the
performance of the Group's acquired businesses is presented
consistently with its organically grown businesses. It should be
noted that the use of acquired intangible assets contributed to the
Group's results for the years presented and will contribute to the
Group's results in future periods as well. Amortisation of acquired
intangible assets will recur in future periods. Amortisation of
software is included within adjusted results as management consider
these cost to be part of the underlying trading performance of the
business.
4. Investment income
2018 2017
Unaudited Audited
US$m US$m
--------------------------------------- ------------- ----------
Income from investments 0.1 0.3
Other interest receivable and similar
income 1.6 1.8
1.7 2.1
============= ==========
5. Finance costs
Restated
2018 2017
Unaudited Audited
US$m US$m
------------------------------------------------- -------------- ---------
Interest on bank and other borrowings 15.9 14.8
Net interest on pension scheme assets
and liabilities 3.8 9.4
Other finance costs including unrealised
gains and losses on foreign exchange contracts 6.4 1.2
-------------- ---------
26.1 25.4
============== =========
6. Taxation
Restated
2018 2017
Unaudited Audited
US$m US$m
UK taxation based on profit for
the year:
Corporation tax at 19% (2017: 19.25%) - 7.1
Double taxation relief - (7.1)
----------- ---------
- -
Overseas taxation:
Current taxation 53.6 51.8
Deferred taxation (4.3) (12.5)
----------- ---------
49.3 39.3
Prior year adjustments:
Current taxation (0.6) 4.3
Deferred taxation 0.3 0.3
------ ----
(0.3) 4.6
----------- ---------
49.0 43.9
=========== =========
In December 2017 the US Government introduced tax reform
measures in the Tax Cuts & Jobs Act. As a result of the
provisions of this Act, the Group recognised a one-off non-cash tax
credit of $3.0 million in the consolidated income statement for the
year ended 31 December 2017 as a result of the revaluation of the
net US deferred tax liabilities using the new headline Corporate
Income Tax rate of 21% effective from 1 January 2018. Of this $3.0
million credit, $2.1 million relates to continuing operations and
$0.9 million relates to discontinued operations. A further tax
credit of $2.9 million for the year ended 31 December 2017 was
taken directly to the consolidated statement of comprehensive
income in relation to the revaluation of deferred tax liabilities
in respect of US defined benefit pension arrangements.
7. Earnings per share
The calculation of basic earnings per ordinary share from
continuing operations is based on the profit from continuing
operations attributable to equity shareholders and the weighted
average number of Ordinary Shares in issue during the year,
excluding shares held by the Employee Benefit Trust but including
shares under share incentive schemes which are not contingently
issuable.
The calculation of basic earnings per ordinary share from
continuing and discontinued operations is based on the profit
attributable to equity shareholders. The weighted average number of
ordinary shares used for the calculation of basic earnings per
ordinary share from continuing and discontinued operations is the
same as that used for basic earnings per ordinary share from
continuing operations.
For diluted earnings per ordinary share, the weighted average
number of ordinary shares in issue is adjusted to include all
potential dilutive ordinary shares. The Group has two classes of
dilutive potential Ordinary Shares: those share options granted to
employees where the exercise price is less than the average market
price of the Company's ordinary shares during the year and those
long-term incentive plan awards for which the performance criteria
would have been satisfied if the end of the reporting period were
the end of the contingency period.
Restated
2018 2017
Unaudited Audited
US$m US$m
------------------------------------------------- ----------- ---------
Profit from continuing operations attributable
to equity shareholders 54.8 71.3
Profit from continuing and discontinued
operations attributable to equity shareholders 39.2 80.8
----------- ---------
2018 2017
Unaudited Audited
Number Number
of shares of shares
m m
----------------------------------------- ----------- -----------
Weighted average number of ordinary
shares in issue for basic earnings per
share 1,420.1 1,399.2
Adjustment for share options and LTIP
awards 27.3 27.4
----------- -----------
Weighted average number of ordinary
shares in issue for diluted earnings
per share 1,447.4 1,426.6
----------- -----------
Restated
2018 2017
Unaudited Audited
cents cents
----------------------------------------- ----------- ---------
Continuing operations:
Basic earnings per ordinary share 3.85 5.10
Diluted earnings per ordinary share 3.78 5.00
----------- ---------
Continuing and discontinued operations:
Basic earnings per ordinary share 2.76 5.78
Diluted earnings per ordinary share 2.70 5.67
----------- ---------
8. Issued share capital
During the year ended 31 December 2018 the Company issued
14,191,384 Ordinary shares of 5p each (2017: 5,688,366) following
the exercise of awards under the Group's share based incentive
plans as set out below:
Number of
Shares US$m
-------------------------- -------------- -----
At 1 January 2018 1,413,300,648 87.5
Issue of ordinary shares 14,191,384 1.0
At 31 December 2018 1,427,492,032 88.5
============== =====
The own shares reserve of $6.8 million at 31 December 2018
(2017: $7.7 million) represents the cost of shares in Coats Group
plc purchased in the market and held by an Employee Benefit Trust
to satisfy awards under the Group's share based incentive plans.
The number of shares held by the Employee Benefit Trust at 31
December 2018 was 17,165,314 (2017: 19,025,392).
9. Dividends
2018 2017
Unaudited Audited
US$m US$m
----------------------------------------- ----------- ---------
2018 interim dividend paid - 0.50 cents
per share 7.0 -
2017 final dividend paid - 1.00 cents
per share 14.1 -
2017 interim dividend paid - 0.44 cents
per share - 6.1
2016 final dividend paid - 0.84 cents
per share - 11.7
----------- ---------
21.1 17.8
=========== =========
The proposed final dividend of 1.16 cents per ordinary share for
the year ended 31 December 2018 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 28 May 2019 to
shareholders on the register at the close of business on 3 May
2019.
10. US 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. Over 100 PRPs have been identified by EPA.
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 March 2016, EPA issued a Record of Decision selecting a
remedy for the lower 8 miles of the LPR 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 a remedial alternative proposed by
the CPG 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 8 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 allocation
process is expected to be completed by the end of 2019, although
that date may be extended.
On 30 June 2018, OCC filed a lawsuit against approximately 120
defendants, including CC, seeking recovery of past environmental
costs and contribution toward future environmental costs. OCC
released claims for certain past costs from 41 of the defendants,
including CC, and is not seeking recovery of those past costs from
CC. OCC's lawsuit seeks resolution of many of the same issues being
addressed in the EPA sponsored allocation process, and does not
alter CC's defences or CC's belief that it is a de minimis
party.
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. During
the year ended 31 December 2018, an additional provision of $8.0
million has been recorded as an exceptional item (see note 3) to
cover legal and professional fees for continuation of the EPA
allocation and defence of OCC's litigation against approximately
120 parties, including CC. The Group will continue to mitigate
additional costs as far as possible through insurance and other
avenues.
As at 31 December 2018, $6.2 million of this provision had been
utilised. The remaining provision at 31 December 2018, taking into
account insurance reimbursement, was $17.6 million. The process
concerning the LPR continues to evolve and these estimates are
subject to change based upon legal defence costs associated with
the EPA sponsored allocation and OCC's lawsuit, the scope of the
remedy selected by EPA for the upper nine miles, the share of
remedial costs to be paid by the major polluters on the river, and
the share of remaining remedial costs apportioned among CC and
other companies.
Coats believes that CC's predecessor did not generate any of the
contaminants which are driving the current and anticipated remedial
actions in the LPR, that it has valid legal defences which are
based on its own analysis of the relevant facts, that it is a de
minimis party, and that additional parties not currently in the CPG
will be responsible for a significant share of the ultimate costs
of remediation. However, as this matter evolves, CC could record
additional provisions and such provisions could increase materially
based on further decisions by EPA, negotiations among the parties,
and other future events.
Following the sale of the North America Crafts business,
including CC, announced on 22 January 2019, Coats North America
Consolidated Inc. (the seller) retains the control and
responsibility for the eventual outcome of the ongoing LPR
environmental matters, including related insurance
reimbursements.
11. Notes to the consolidated cash flow statement
a) Reconciliation of operating profit to net cash inflow/(outflow) from operations
2018 2017
Unaudited Audited
US$m US$m
------------------------------------------- ----------- ---------
Operating profit 147.1 154.1
Depreciation 29.5 28.4
Amortisation of intangible assets 6.9 9.3
Exceptional and acquisition related
items (see note 3) 47.8 6.5
----------- ---------
Pre-exceptional operating profit before
depreciation and amortisation (Adjusted
EBITDA) 231.3 198.3
Increase in inventories (6.8) (13.5)
Increase in debtors (18.5) (11.3)
Increase in creditors 8.8 20.9
Provision movements (1) (49.5) (374.4)
Foreign exchange and other non-cash
movements 5.6 6.2
Discontinued operations 0.2 16.4
----------- ---------
Net cash inflow/(outflow) from operations 171.1 (157.4)
=========== =========
(1) Includes cash flows in respect of exceptional and
acquisition related items (see note 14(e)).
b) Taxation paid
2018 2017
Unaudited Audited
US$m US$m
------------------------- ----------- ---------
Overseas tax paid (51.4) (55.9)
Discontinued operations 1.3 (4.6)
(50.1) (60.5)
=========== =========
c) Investment income
2018 2017
Unaudited Audited
US$m US$m
---------------------------------------- ----------- ---------
Interest and other income - 0.2
Dividends received from joint ventures 1.6 1.1
1.6 1.3
=========== =========
d) Capital expenditure and financial investment
2018 2017
Unaudited Audited
US$m US$m
---------------------------------------------- ----------- ---------
Acquisition of property, plant and equipment
and intangible assets (47.6) (48.5)
Acquisition of other equity investments (5.4) -
Disposal of property, plant and equipment 3.2 0.4
Discontinued operations 4.2 (1.6)
(45.6) (49.7)
=========== =========
e) Acquisitions and disposals
2018 2017
Unaudited Audited
US$m US$m
----------------------------- ----------- ---------
Acquisition of businesses (1.8) (19.9)
Investment in joint venture - (3.2)
Discontinued operations 1.7 -
(0.1) (23.1)
=========== =========
f) Summary of net debt
2018 2017
Unaudited Audited
US$m US$m
--------------------------------- ----------- ---------
Total cash and cash equivalents 135.7 118.4
Bank overdrafts (20.0) (1.6)
----------- ---------
Net cash and cash equivalents 115.7 116.8
Other borrowings (338.4) (358.3)
Total net debt (222.7) (241.5)
=========== =========
12. 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(R) 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 $1.4 million was paid
in April 2018 following 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 2018 was $2.3 million (2017: $0.2 million).
Fair values of the identifiable assets and liabilities of
Patrick Yarn Mill as at the date of acquisition were as
follows:
Fair value
recognised
on acquisition
US$m
---------------------------------------- ----------------
Assets
Intangible assets (excluding computer
software) 1.3
Computer software 0.1
Property, plant and equipment 11.9
Inventories 6.7
Trade and other receivables 4.9
Cash and cash equivalents 1.3
----------------
26.2
Liabilities
Trade and other payables (2.5)
Deferred tax liabilities (3.6)
Total identifiable net assets acquired
at fair value 20.1
Goodwill recognised on acquisition 2.3
----------------
22.4
================
Total consideration 22.4
================
In accounting for the acquisition, adjustments were made to the
book values of the net assets of the companies acquired to reflect
their fair values to the Group. Previously unrecognised assets and
liabilities at acquisition are included and accounting policies
have been aligned with those of the Group where appropriate. The
assessment of the fair value of assets and liabilities acquired was
completed during the year ended 31 December 2018 within 12 months
of the acquisition date.
Due to their contractual dates, the fair value of receivables
acquired (shown above) approximate to the gross contractual amounts
receivable. The amount of gross contractual receivables not
expected to be recovered is immaterial. There are no material
contingent liabilities recognised in the amounts above in
accordance with paragraph 23 of IFRS 3 (revised).
As part of the assessment of the fair value of the net assets
acquired, an uplift of $4.6 million was made to the book values of
land and buildings during the year ended 31 December 2018.
Adjustments to increase trade and other payables by $0.4 million
and deferred tax liabilities by $3.6 million were also made. The
excess of the fair value of the consideration paid over the fair
value of the assets and liabilities acquired is represented by
brands and trade names of $0.6 million and know how related
intangibles of $0.7 million, with residual goodwill now arising of
$2.3 million compared to $4.6 million previously recognised. As a
result, comparative amounts as of 31 December 2017 in the
consolidated statement of financial position have been restated,
with no change in net assets at 31 December 2017.
The goodwill represents:
-- the technical expertise of the acquired workforce;
-- the opportunity to leverage this expertise across the Group; and
-- the ability to exploit the Group's existing customer base.
None of the goodwill arising on the acquisition is expected to
be deductible for tax purposes.
13. Sale of North America Crafts
In January 2019, Coats agreed to sell its non-core North America
Crafts business to Spinrite Acquisition Corp for cash consideration
payable at completion of $37 million. The sale proceeds, which is
on a debt and cash free basis, will be subject to an adjustment for
the level of net working capital as at the time of completion.
The assets and liabilities at 31 December 2018 of the North
America Crafts business have been reclassified as a disposal group
held for sale and the results have been reclassified as
discontinued operations in the income statement, including prior
period amounts. The sale was completed on 20 February 2019, the
date which control passed to the acquirer.
a) Discontinued operations
The results of discontinued operations are presented below. All
amounts relate to the North America Crafts business unless
stated:
2018 2017
Unaudited Audited
US$m US$m
-------------------------------------------- ----------- ---------
Revenue 128.3 149.9
Cost of sales (88.5) (90.8)
----------- ---------
Gross profit 39.8 59.1
Distribution costs (29.2) (30.9)
Administrative expenses (11.5) (15.1)
Other operating income 3.6 -
----------- ---------
Operating profit 2.7 13.1
Finance costs (net) - 0.3
----------- ---------
Profit before tax 2.7 13.4
Tax on profit 0.1 (3.9)
----------- ---------
Profit from discontinued operations 2.8 9.5
Loss arising on measurement to fair
value less costs to sell
(see note 13 (b)) (18.4) -
----------- ---------
(Loss)/profit from discontinued operations (15.6) 9.5
----------- ---------
Revenue in the table above includes inter-company sales of $0.8
million for the year ended 31 December 2018 (2017: $0.8 million).
External revenue of the North America Crafts business for the year
ended 31 December 2018 was $127.5 million (2017: $149.1
million).
The (loss)/profit per ordinary share from discontinued
operations is as follows:
2018 2017
Unaudited Audited
cents cents
------------------------------------------ ----------- ---------
(Loss)/profit per ordinary share from
discontinued operations:
Basic (loss)/earnings per ordinary share (1.09) 0.68
Diluted (loss)/earnings per ordinary
share (1.08) 0.67
----------- ---------
The table below sets out the cash flows from discontinued
operations:
2018 2017
Unaudited Audited
US$m US$m
--------------------------------------------- ----------- ---------
Net cash inflow from operating activities 1.5 11.8
Net cash inflow/(outflow) from investing
activities 5.9 (1.6)
Net cash flows from discontinued operations 7.4 10.2
=========== =========
Net cash outflow from operating activities for the year ended 31
December 2018 includes an outflow of $0.1 million (2017: $0.6
million) in respect of a business discontinued in previous
years.
b) Assets and liabilities held for sale
The assets and liabilities of North America Crafts have been
classified as a disposal group held for sale. Assets and
liabilities classified as held for sale consist of the
following:
2018 2017
Unaudited Audited
US$m US$m
---------------------------------------------- ----------- ---------
Assets of the disposal group classified 50.6 -
as held for sale
Other non-current assets classified
as held for sale (1) 0.8 0.2
----------- ---------
Total assets of the disposal group and
non-current assets classified as held
for sale 51.4 0.2
Liabilities of the disposal group classified (17.9) -
as held for sale
Total net assets classified as held
for sale 33.5 0.2
----------- ---------
(1) The other non-current assets held for sale of $0.8 million
(31 December 2017: $0.2 million) are property, plant and equipment
that do not relate to North America Crafts.
The major classes of assets and liabilities held for sale
relating to North America Crafts at 31 December 2018 are as
follows:
31 December
2018
US$m
Property, plant and equipment -
Inventories 34.0
Trade and other receivables 16.6
Total assets of the disposal group classified
as held for sale 50.6
------------------------------------------------- ------------
Trade and other payables 17.4
Deferred tax liabilities 0.5
Total liabilities of the disposal group
classified as held for sale 17.9
------------------------------------------------- ------------
As at the date of reclassification of the North America Crafts
disposal group to held for sale, the fair value less cost to sell
was less than the carrying amounts. The loss arising on measurement
to fair value less costs to sell was $18.4 million which has been
included as an exceptional charge within the loss from discontinued
operations and includes transaction costs incurred for the year
ended 31 December 2018.
The loss arising on measurement to fair value less costs to sell
have been applied to reduce the carrying amounts of property plant
and equipment by $10.8 million to $nil and inventories by $3.5
million to $34.0 million with additional liabilities and costs of
$4.1 million being recognised.
Following the sale of the North America Crafts business, Coats
North America Consolidated Inc. (the seller) retains the control
and responsibility for the eventual outcome of the ongoing LPR
environmental matters (see note 10).
In addition Coats retains the previously incurred pensions
obligations and post-retirement medical liabilities from the
business. The pension scheme, which includes both Crafts and
Industrial operations in North America, was in a surplus position
of $64.7 million at 31 December 2018 with a recoverable surplus of
$48.1 million recognised on the balance sheet. As a consequence of
the disposal it is anticipated that during the year ended 31
December 2019 the recoverable surplus recognised on the balance
sheet will reduce by approximately $11 million (although there will
be no change in the gross surplus in the scheme) and a curtailment
gain will arise on the post-retirement medical liabilities.
14. Alternative performance measures
This preliminary announcement 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 below.
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
profit 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 profit 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 3 for further
details).
Restated
2018 2017
Unaudited Audited
US$m US$m % Growth
------------------------------------ ------------- -------------------- ---------
Revenue from continuing operations 1,414.7 1,356.1 4%
Constant currency adjustment - (27.2)
------------- -------------------- ---------
Revenue on a CER basis 1,414.7 1,328.9 6%
Revenue from acquisitions (41.0) -
------------- -------------------- ---------
Organic revenue on a CER basis 1,373.7 1,328.9 3%
============= ==================== =========
Restated
2018 2017
Unaudited Audited
US$m US$m % Growth
------------------------------------- ------------- ------------------ ---------
Operating profit from continuing
operations(1) 147.1 154.1 (5)%
Exceptional and acquisition related
items (note 3) 47.8 6.5
------------- ------------------ ---------
Adjusted operating profit from
continuing operations 194.9 160.6 21%
Constant currency adjustment - (3.4)
------------- ------------------ ---------
Adjusted operating profit on
a CER basis 194.9 157.2 24%
Operating profit from acquisitions (2.1) -
------------- ------------------ ---------
Organic adjusted operating profit
on a CER basis 192.8 157.2 23%
============= ================== =========
(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 from continuing operations before exceptional
and acquisition related items and before depreciation and
amortisation (Adjusted EBITDA) for the year ended 31 December 2018
was $231.3 million (2017: $198.3 million).
Net debt at 31 December 2018 was $222.7 million (2017: $241.5
million).
This gives a leverage ratio of net debt to Adjusted EBITDA at 31
December 2018 of 1.0 (2017: 1.2).
Refer to notes 11(a) and 11(f) for definitions and calculations
of Adjusted EBITDA and net debt.
c) Underlying effective tax rate
The underlying effective tax rate removes the tax impact of
exceptional and acquisition related items and net interest on
pension scheme assets and liabilities to arrive at a tax rate based
on the underlying profit before taxation.
A significant proportion of the Group's net interest on pension
scheme assets and liabilities relates to UK pension plans for which
there is no related current or deferred tax credit or charge
recorded in the income statement. The Group's net interest on
pension scheme assets and liabilities is adjusted in arriving at
the underlying effective tax shown below and, in management's view,
were this not adjusted would distort the alternative performance
measure. This is consistent with how the Group monitors and manages
the underlying effective tax rate.
Restated
2018 2017
Unaudited Audited
US$m US$m
-------------------------------------------- ------------- -------------------
Profit before taxation from continuing
operations 122.8 129.5
Exceptional and acquisition related items
(note 3) 47.8 9.1
Net interest on pension scheme assets
and liabilities 3.8 9.4
------------- -------------------
Underlying profit before taxation from
continuing operations 174.4 148.0
------------- -------------------
Taxation charge from continuing operations 49.0 43.9
Tax credit in respect of exceptional and
acquisition related items
and net interest on pension scheme assets
and liabilities 4.9 0.8
------------- -------------------
Underlying tax charge from continuing
operations 53.9 44.7
------------- -------------------
Underlying effective tax rate 31% 30%
------------- -------------------
The taxation charge from continuing operations for the year
ended 31 December 2017 includes a one-off non-cash tax credit of
$2.1 million as a result of the revaluation of the net US deferred
tax liabilities following the tax reform measures introduced by the
US Government in the Tax Cuts & Jobs Act. The Group's
underlying effective tax rate for the year ended 31 December 2017
excluding this one-off impact was 32%.
d) Adjusted earnings per share
The calculation of adjusted earnings per share is based on the
profit from continuing operations attributable to equity
shareholders before exceptional and acquisition related items as
set out below.
Adjusted earnings per share growth measures the underlying
progression of the benefits generated for shareholders.
Restated
2018 2017
Unaudited Audited
US$m US$m
------------------------------------------------ ------------- -----------------
Profit from continuing operations 73.8 85.6
Non-controlling interests (19.0) (14.3)
------------- -----------------
Profit from continuing operations attributable
to equity shareholders 54.8 71.3
Exceptional and acquisition related items
net of non-controlling interests (note
3) 47.6 9.1
Tax credit in respect of exceptional and
acquisition related items (4.8) (0.7)
------------- -----------------
Adjusted profit from continuing operations 97.6 79.7
------------- -----------------
Weighted average number of Ordinary Shares 1,420,069,352 1,399,209,804
Adjusted earnings per share (cents) 6.87 5.70
===== =====
Adjusted earnings per share (growth %) 21%
=====
The weighted average number of Ordinary Shares used for the
calculation of adjusted earnings per share for the year ended 31
December 2018 is 1,420,069,352 (2017: 1,399,209,804), the same as
that used for basic earnings per ordinary share from continuing
operations (see note 7).
e) Adjusted free cash flow
Net cash generated by/(absorbed in) operating activities, a GAAP
measure, reconciles to changes in net debt resulting from cash
flows (free cash flow) as set out in the consolidated cash flow
statement. A reconciliation of free cash flow to adjusted free cash
flow is set out below. Adjusted free cash flow measures the Group's
underlying cash generation that is available to service capital
demands.
Restated
2018 2017
Unaudited Audited
US$m US$m
------------------------------------------------ ----------- ----------
Change in net debt resulting from cash
flows (free cash flow) 24.9 (330.0)
Acquisition of business (note 11(e)) 1.8 19.9
Acquisition of other equity investment 5.0 -
Net cash flows from discontinued operations
(note 13) (7.4) (10.2)
Net cash outflow in respect of exceptional
reorganisation costs 20.7 0.2
UK Pensions Regulator ('tPR') investigation
and UK pension consolidation costs 2.2 3.5
Payments to UK pension schemes 24.0 373.2
Net cash flows in respect of other exceptional
and acquisition related items 7.5 5.8
Receipts from exercise of share options (3.0) (3.0)
Dividends paid to equity shareholders 21.1 17.6
Tax inflow in respect of adjusted cash
flow items (0.6) (0.6)
----------- ----------
Adjusted free cash flow 96.2 76.4
=========== ==========
f) Return on capital employed
Return on capital employed ('ROCE') is defined as operating
profit before exceptional and acquisition related items divided by
period end capital employed as set out below.
ROCE measures the ability of the Group's assets to deliver
returns.
Restated
2018 2017
Unaudited Audited
US$m US$m
--------------------------------------------- ------------ ---------
Operating profit from continuing operations
before exceptional and acquisition related
items (1) 194.9 160.6
------------ ---------
Non-current assets
Acquired intangible assets 40.0 44.1
Property, plant and equipment 282.2 284.2
Trade and other receivables 21.4 20.1
Current assets
Inventories 185.4 190.6
Trade and other receivables 253.8 255.5
Current liabilities
Trade and other payables (302.7) (313.5)
Non-current liabilities
Trade and other payables (23.1) (27.3)
------------ ---------
Capital employed 457.0 453.7
------------ ---------
ROCE 43% 35%
============ =========
(1) Refer to note 3 for details of exceptional and acquisition
related items.
The amounts shown above for non-current assets, current assets,
current liabilities and non-current liabilities at 31 December 2017
have been adjusted to exclude the discontinued North America Crafts
business.
15. Post balance sheet events
On 12 February 2019 the Group completed the acquisition of
ThreadSol a cloud-based digital applications provider. ThreadSol's
technology focuses on fabric usage optimisation in apparel
manufacturing and helps customers reduce fabric waste and cost, and
establish accurate product costing. The Group has acquired
ThreadSol in order to expand the offerings of the existing Coats
Global Services business. The initial cash outflow for the
acquisition is $5 million with further consideration of up to $7
million payable over the period to 2022 based on certain
performance criteria.
On 20 February 2019 the Group completed the sale of the North
America Crafts business (see note 13 for further details).
16. Directors
The following persons were, except where noted, directors of
Coats Group plc during the whole of the year ended 31 December 2018
and up to the date of this report:
M Clasper CBE
R Sharma
M Allen
R Anderson (Resigned 16 May 2018)
S Boddie
N Bull
A Fahy (Appointed 1 March 2018)
D Gosnell OBE
H Lu
F Philip
A Rosling CBE
On behalf of the Board
M. Clasper
Chairman
1 March 2019
United Kingdom
------------------------------------------- -------------
1 The Square, Stockley Park, Uxbridge, Tel: 020 210
UB11 1TD 5000
Registered in England No. 103548
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contact rns@lseg.com or visit www.rns.com.
END
FR PGUBCPUPBGBR
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