Annual Financial Report

RNS Number : 9979R
Coats Group PLC
11 March 2021


Annual Financial Report 2020

Coats Group plc ('Coats' or the 'Company') has today submitted to the Financial Conduct Authority's national storage mechanism its Annual Financial Report for the year ended 31 December 2020 ('Annual Report 2020'), as required by UK Listing Rule 9.6.1.

The Annual Report 2020 is available from the Company's website, , and will also be available for viewing at the Financial Conduct Authority's national storage mechanism at .

This announcement also contains as appendices additional information for the purposes of compliance with Disclosure Guidance and Transparency Rule 6.3.5, including principal risk factors, a responsibility statement and details of related party transactions. This information is extracted, in full unedited text, from the Annual Report 2020. The Preliminary Announcement released on 4 March 2021 contained a condensed set of financial statements together with extracts of the Company's management report, and is also available to view on the Company's website . These announcements should be read in conjunction with and are not a substitute for reading the full Annual Report 2020. All page and note references in the extracted information below refer to page and note references in the Annual Report 2020.

Stuart Morgan

Company Secretary

11 March 2021



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Victoria Huxster

Coats Group plc

+44 (0)7880 471 350


Richard Mountain / Nick Hasell

FTI Consulting

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About Coats Group plc

Coats is the world's leading industrial thread company. At home in some 50 countries, Coats has a workforce of 17,000 people across six continents. Revenues in 2020 were US$1.2bn. 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 Transportation, Telecommunications and Energy, and Personal Protection. Headquartered in the UK, Coats is a FTSE 250 company, a constituent of the FTSE4Good Index Series, a participant in the UN Global Compact and a member of the Ellen MacArthur Foundation. It has also committed to developing a long-term target to reach net-zero emissions by 2050, the highest level of ambition on climate under the Science Based Target initiative. To find out more about Coats visit .



Principal Risks overview

A description of the principal risks the company faces is extracted from pages 36 to 43 of the Annual Report 2020.


Throughout the year, the Board has kept each of the principal risks under review with support from the GET and the GRMC. The Board also undertook a comprehensive assessment of the principal risks facing the Group, along with the current levels of risk tolerance for each of those risks. Due to the ever- changing global risk environment, the following risks have been updated since the last report:



Climatechangeriskhasmovedfrombeingcategorisedasanemergingrisktoaprincipalrisktobetterreflect  itsprimaryimportancefortheGroupanditsvariousstakeholders.



Riskofever-increasingcustomerexpectationshasmovedfrombeingcategorisedasakeyrisktoaprincipalrisk toreflectitsimportantroleintheGroup'sstrategicgrowthambitions.



M&A scale ambition risk has moved from being categorised as a key risk to a principal risk to reflect its important role in the Group's strategic growth ambitions.









Our principal risks, along with a summary of the measures we have put in place to manage and mitigate them, are set out in the table below. As stated above, the Board will continue to keep these principal risks, as well as the appropriateness of this list and the constantly changing broader risk environment, under ongoing review.





1. Strategic


Mergers and Acquisitions (M&A)

scale ambition risk in light of the Group's increasing ambition in scale of its acquisition programme and its ability to source and satisfactorily acquire suitable targets.


All M&A projects are overseen and closely monitored by the Board and by senior executive management. The Board has approved a set of criteria to evaluate acquisition opportunities against, which include both financial and non-financial parameters. Clear M&A processes have been developed and include identification and evaluation of opportunities, specified roles and responsibilities for all aspects of M&A projects along with focused project management resources during both execution and integration phases. In addition to internal resources, use is made of external advisors in specialist areas such as negotiation, financing and due diligence. Post-completion / integration reviews are conducted to ensure that learnings are identified and built into subsequent projects as part of a continuous improvement process.


Risk of ever- increasing customer expectations and the Group's continuing ability to meet and exceed those expectations as part of its strategic growth ambitions.


In this fast-changing world, the Group has continued to invest in understanding and exceeding our customer expectations. In order to fully understand what our customers expect in terms of product, service, price and experience, we carry out hundreds of customer engagements each day. In 2020, these engagements ranged from senior leader face-to-face meetings; attending brand and retailer supplier summits; joining virtual customer and innovation forums; communicating with industry associations; working with external consultancies; and sharing industry-specific studies. We also conduct regular customer surveys and we track complaints on an ongoing basis. We take these learnings and build differentiation for our customers as a value-adding partner focusing on specific drivers to deliver for our customers. With the ever-increasing demand for speed, we developed the new Speedline capability in South-East Asia, and throughout the pandemic we enhanced material supply management and software solutions for more rapid production planning. We have focused on personalisation as we continue to lead the market in the agile supply of complex product and colour palettes to meet the increasing consumer and retail trend for personalised offerings.


Our innovation ecosystem gives us dedicated capacity to develop new product solutions as well as products in collaboration with customers. In 2020, we launched 22 new products across multiple industry segments (from personal protection to oil and gas to sports and athleisure). Our leading Technical Services teams helped our customers to improve productivity and optimise product costs through significant customer engagements, pivoting quickly to virtual support. We launched a lattice composite solution which allows customers to adopt lightweight technologies at more affordable prices by virtually eliminating material waste. We developed digital tools like our Synthesizer App which reduces customer development costs by simulating high performance yarn properties for flame retardant and cut resistant fabrics. We also provide bespoke production lines and manufacturing solutions for highly engineered products as diverse as those used in energy markets, to those used in feminine hygiene markets.


Coats is known for the quality of its products and services, and we continued to help customers to improve seam quality and garment performance resulting in lower returns through our technical services offering and high-quality products. We work responsibly as a business, supporting brands and retailers with supply chain transparency, both with our trusted product supply and our Coats Digital software solutions portfolio. A key part of our Company purpose is to make a better and more sustainable world and we have continued to invest in helping our customers meet their sustainability goals, both as a trusted and responsible industry leader in ESG, and with our product portfolio of recycled threads and zips, Cradle to Cradle and circular economy R&D.


Appropriate talent  and capabilitydevelopment risk

Risk of failure toattract and retaintalent and capability given businesschangesandgrowth innewareas.


This year the Board and senior management teams heightened their focus on talent development and wellbeing during the Covid crisis. We pivoted all of our in-house learning to 100% virtual learning which included our Manager Capability Development and Supervisory Skills Programme with sessions still being held globally in various clusters. To provide and enhance critical targeted capability development, we created Learning Zone sessions which promoted topics on improving productivity whilst remote working; balancing work life and family life; and sessions were also available on promoting mental wellbeing for employees and their families. These were provided in local languages in all of our clusters.


For the first time we conducted surveys using the Glint platform. We initiated two lifecycle surveys on onboarding and exits. We conducted a series of pulse surveys on: Covid and wellbeing; our five Coats Priorities; and cluster office re-openings to gauge and action the views of our employees on these topics. Our annual employee engagement survey has been delayed to 2021 to ensure that we have the best process for ensuring safety in our manufacturing sites to deploy the survey. Additionally, we have launched a new subject matter expert programme. These are peer-to-peer webinars led by our employees who have specialist skills in specific areas throughout the business. These webinars will become a valuable source of technical expertise and enable us to build a resource library accessible for all of our workforce.


2. External


Economic andgeopolitical risk arising from political   and demanduncertainty

across both keyAsian and developed  markets

including risks tofree tradeconventions.


The Covid pandemic has had a significant impact on GDP in our markets and demand for our products in 2020. Whilst demand has subsequently recovered, albeit not to 2019 levels, increased uncertainty over the global economic environment remains. To the extent that the pandemic has a longer and more prolonged impact on the global economic environment, there may be a further negative impact on consumer spending and further potential disruption to our operations and supply chain. In the longer term there are also implications for regional supply chains. In addition, risks to free trade, from ongoing US / China trade discussions, and the potential consequences for economic growth, add to this uncertainty. The Group continues to monitor the Covid pandemic and its impact on the global economic environment as well as other aspects of economic risk, and any direct or indirect influence on our business.


The Group closely monitors the impact of the Covid pandemic on demand as well as monitoring the implications of other areas of economic risk on the Group. Our global reach and local knowledge give us the agility and insights needed to operate and develop our business prudently and successfully during periods of economic volatility. Additionally, the Group's global footprint allows us to quickly respond to any changes in regional supply chains that may arise as a result of the pandemic.


As a global industrial manufacturing company with no UK manufacturing facilities and minimal direct sales in the UK, Coats is of the view that there will be limited direct adverse impacts on the Group from the UK leaving the European Union (Brexit). Both the UK and the European Union, however, are significant markets for both Apparel & Footwear and Performance Materials. Therefore, any impact on sales and future growth expectations for these markets could have an indirect consequence for our business. Many years of exposure to emerging markets have given us experience of operating and developing our business successfully during periods of economic and political volatility. We continually monitor and analyse economic and demand indicators to ensure that our supply chain remains flexible and our product portfolio remains relevant. This analysis provides a key input to our product development, business planning and pricing strategies. The Group's international footprint and comprehensive portfolio also provide a mitigating balance in our exposure to both European Union and non-European Union markets.



Risk of cyberincidentsleadingto  corruption ofapplications, critical  IT infrastructure,compromisednetworks,operationaltechnologyand/or  lossofdata.


In 2020, Coats, like many other global organisations, saw a dramatic shift in where our employees worked from, due to the Covid pandemic. This required us to make changes to some of our procedural and technical controls to address the changing risk landscape. Part of our adjustments included refining our policies and procedures, such as updates to our Acceptable Use Policy and updated Work From Home guidance. We educated our workforce on how their diligence and adherence to processes was even more important than previously as employees were outside the traditional perimeter protections. This awareness training was not just a single mandatory annual training but rather a more comprehensive set of awareness engagements that included live calls, videos, weekly and monthly newsletters, as well as computer-based training delivered through our Learning Management System (LMS). Our phishing simulations were already an established process and we continued these along with targeted follow-up to those who failed to properly identify the simulated phishing messages to further educate them on how to identify and handle phishing messages.


Coats was able to identify two main attack vectors which, though not new, saw dramatic increases in exploitation attempts: phishing and brute-force login attempts. In our 2019 report, we reported enabling of multifactor authentication (MFA) which proved to be an effective control against the brute-force attempts. For 2020, we added additional controls to enhance our security posture, in addition to raising awareness through the above programmes. An example control was additional conditional access controls to block login attempts from high-risk countries or countries where we have no physical presence. Additionally, in early Q2 we applied two pre-planned technical controls to further protect corporate data. This enabled more comprehensive blocking of access to public cloud storage sites as well as implementing further controls to restrict data being copied to USB storage devices. What this allowed us to do was better maintain control of our data from a global perspective without allowing it to be copied to unmanaged locations where we could lose visibility and / or manageability.


As reported in the 2019 report, Coats has employed a managed Security Operations Center (SOC). We have continued to work with our managed SOC provider to verify that the organisation is protected and properly monitored. We are pleased with the partnership and plan to continue the relationship in 2021 with potential enhancements to make certain that Coats is able to continue to detect and properly respond to the new threats while still managing current protection levels.


Climate change   risk

arising from either

1. the impact of failing  to sufficientlyaddress the need to  decarbonise thecompany'soperations andreduce emissions,leadingprincipallytocommercial andreputational risks(potentially causingloss of sales andshare price pressure) andthefinancialrisk  ofemissionstaxesor  other legislativechanges, or

2. thephysical impact ofclimate change onthe company'soperations andbusiness model andthatofitscustomers in the textile supplychain.



During 2020 we undertook our first in-depth risk analysis on climate change. After reviewing the analysis and in recognition of the risk's primary importance for the Group and its various stakeholders, the Board agreed that this is a principal risk that will be subject to ongoing Board review.


The analysis has been carried out using the Taskforce on Climate-related Financial Disclosures (TCFD) methodology, published as a technical supplement to their 2017 report. We developed three scenarios for our business based on publicly available data prepared for the next Intergovernmental Panel on Climate Change (IPCC). The first one is a low carbon scenario with significant short term decarbonisation and achievement of net-zero emissions by mid-century, alongside good global collaboration and continued economic growth and reduced regional inequalities. The second is a high carbon but low growth scenario, with increasing regional inequalities and low levels of global cooperation. The third is a fossil-fueled, high growth scenario with consequent very high emissions levels. For this first iteration, the analysis has been qualitative and we are planning to continue the work done in 2020 by developing quantitative financial analysis which will allow us to report fully in line with TCFD recommendations in our next assessment in 2021.


The primary short-term risks revolve around the commercial and reputational risks of not taking concerted action to reduce climate change, together with the risk of increasing emissions taxes. If not adequately mitigated, these risks could lead, respectively, to loss of customer specifications and hence loss of sales, share sales by investors and hence downward pressure on share price, and increased operational costs, and hence lower margins. Physical risks to our plants and supply chains, and potentially significant geographic shifts in our customer footprint, caused by wider industry reorganisation and withdrawal from areas most impacted by climate change, are longer term, and likely to impact on us from 2030 onwards in the high carbon scenarios.

The main opportunities are the commercial and reputational opportunities from being a leader in moving to a low emissions model and some growing product areas, especially around light-weighting.


We have analysed a broad range of mitigating actions and have identified those that have the most important impact on the identified risks. Many of these, such as having proactive and ethical communications, a low carbon product strategy, developing products for circular business models and investing in new technologies, are currently underway within Coats, and only need to be dialled up to be more focused on the climate change risks. The one very significant new action that needs to be taken is to develop achievable emissions reduction targets that are in line with the 2015 Paris COP 21 low carbon targets. In order to address this, Coats has committed to the SBTi, at the more challenging Business Ambition for 1.5°C level. We have also committed to developing a long-term target to reach net-zero emissions by 2050, the highest level of ambition on climate under the SBTi. This initiative is supported by the United Nations Global Compact, the World Resources Institute, CDP (formerly Carbon Disclosure Project) and WWF (formerly World Wide Fund for Nature). SBTi is the low emissions programme that has received most support within the textile industry, and hence is the appropriate programme for Coats to join. Having made this commitment we now have two years to develop and have approved plans to reduce our absolute emissions in line with the COP 21 target.


Environmentalnon-performance risk

given changingstandards andincreased scrutinyresulting indisruptionofexisting business, fines and / or reputationaldamage.


Our Sustainability Strategy, launched in 2019, is fundamental to our mitigation plan for this risk as many of the actions required are part of that strategy implementation. As for the last two years, the progress on delivery of our strategy is detailed in our 2020 Sustainability Report that is published simultaneously with our Annual Report. Covid did impact our progress with actions during the year because of plant closure and other disruptions, and also because we had to halt any activities that required internal or external visitors on our sites. This impacted plant audits and effluent testing routines. During Q4 we were able to resume normal activities in some locations, but there are ongoing disruptions in some sites and these are likely to continue in early 2021. Detailed below are the principal actions taken during 2020 that impact on this risk.


We are implementing a harmonised global system to effectively manage our energy and environmental impacts in a documented, systematic way. This includes an environmental management system (EMS) aligned to ISO 14001 and an energy management system aligned to ISO 50001 with many elements of the EMS now digitised.


We improved our monitoring and measurement platform for sustainability reporting to incorporate a digital analytical tool that assists us to perform deep dives on sustainability metrics down to manufacturing site level. This allows us to target underperforming sites whilst using best practice from those sites consistently meeting interim targets. Together with the sustainability projects tracking application, these tools will help us meet our 2022 sustainability targets for water, energy and waste.


We completed Environmental Health and Safety (EHS) legal compliance audits and raised findings and compliance actions for all of our global manufacturing units using our compliance tracking application thereby improving our compliance to EHS legal requirements. We also manage all environmental permits and licences we hold in each country we operate in on the permits management application.


Our environmental incident application ensures that we have a consistent and transparent way of managing environmental incidents that occur and implementing corrective and preventative actions to prevent reoccurrence through a risk-based approach.


Online analytical monitoring equipment provides real-time data for our effluent treatment plants that discharge direct to natural waterways to ensure we meet local permit conditions and Zero Discharge of Hazardous Chemicals (ZDHC) limits and to meet our 2022 effluent treatment plant targets.


We already had robust business continuity plans (BCPs) in place before the pandemic. These were tested and stood up well during Covid in what was clearly a live stress test. But in the spirit of continuous improvement, we identified and collated all the lessons learned from Covid and used these to refresh the BCPs to make them even more robust.


Our global Business Continuity Plan includes environmental emergency preparedness and response plans and we have added an environmental aspects and impacts application to our digitised, global environmental management system. The environmental aspects and impacts register is essentially a global environmental risk register for the business.


These environmental and governance measures have contributed to us making further upward progress in the FTSE4Good Index.


3. Operational


Health and Safety risk

The risk of (i) safety incident(s) leading to injury or fatality involving our employees or other interested parties such as contractors, visitors, onsite suppliers, etc. along with potential resulting prosecution, financial costs, business disruption and / or reputational damage; and / or (ii) physical and mental health issues, including as a result of the Covid pandemic, impacting wellbeing, engagement, productivity and talent retention.


The Board has continued to receive and discuss with management - as a priority at each Board meeting - detailed reviews of health and safety performance and monitoring of progress against established annual health and safety targets and objectives. Senior management and employees throughout the Group likewise remain intently focused on creating an injury-free work environment.


Following the great safety successes of our Journey to Zero strategy launched in 2019, the deeply embedded health and safety culture served as a solid foundation and it continued with nearly 40,000 preventive actions completed, and 518,000 H&S training hours in 2020. It also enabled a rapid and effective response to the Covid pandemic.


The widespread Covid pandemic posed significant health risk to the Coats workforce throughout the year. These risks were quickly mitigated through world-wide implementation of a pandemic response plan based on the international emergency management principles of Preparedness, Prevention, Response and Recovery (PPRR). The PPRR plan was implemented and deployed two weeks before the pandemic was declared and included comprehensive case tracing. All health and safety efforts were focused on two main fronts, (1) prevention of virus spread within the workplace, and (2) prevention of transmission to employees from outside of the workplace. The early action we took to change working practices, introduce safety measures and track contacts to four levels meant that we did not have a single confirmed case of infection transmission happening in our operations, and a small handful of infections where the source is unconfirmed and could have occurred on site. The results of our prevention efforts within the workplace were widely successful and will continue into 2021. Despite these efforts, 14 of our employees contracted Covid outside of the workplace and sadly died.


In 2021, continuing our effective pandemic response and recovery will be our primary focus. Additionally, the Group has set specific targets and objectives to reduce other health and safety risks as well. The Journey to Zero campaign will continue and the Group will continue to refine this approach to identify and mitigate key health and safety risks and to further increase the Group's focus on creating an injury-free environment. See pages 23-27 for more information.


Bribery and anti- competitive behaviour risk

The risk of breach of anti-corruption law or competition law resulting in material fine and / or reputational damage.


The Group continues to maintain clear and well publicised policies and processes, spanning bribery and anti-competitive behaviour along with a number of other ethics issues, including in relation to partners, contractors and suppliers. These are reinforced through a comprehensive Supplier Code (covering initial due diligence processes, onboarding, training, ongoing compliance and auditing). These policies are reviewed annually. There is extensive online and face-to-face training and regular communications through a range of channels, including through our global ethical culture champions network. During the pandemic, the ethical culture champions were asked to emphasise key ethical messages in light of the potential heightened risk of corruption during these uncertain times. A sub-committee of the GRMC comprising key business and functional leaders meets quarterly to consider a range of ethics risks (including key risk indicators for those risks), legislative and regulatory developments and mitigation plans.


The Group actively maintains a whistleblower system, enabling employees and others who are aware of, or suspect, unethical behaviour to report it confidentially. Awareness of the system, together with the risks and the policies, has been increased through an ongoing Ethical Culture Campaign which operates at a Group and local level. See pages 23-27 for more details. Raising awareness of this risk is a priority for the Group and it was encouraging that the Group Communications team won the Gold award for Best Use of Social Media at Communicate Magazine's Internal Communications and Engagement Awards for Global Ethics Day 2020, demonstrating that the Group is at the forefront of proactive engagement in its ethical business training for employees across the business.


4. Legacy risks


Pension schemedeficitfundingrisk

  Risk of potentialvolatility in UKpension grossliabilities and totalassets leading toincreased annualcostofrepairplantofund deficit (whichcould impact one or  more of free cashflow and dividendpayments).



The funded UK pension scheme is overseen by its Trustee Board, which is required to have the appropriate knowledge and understanding in this area. Independent professional Trustee Directors are appointed to the Trustee Board to provide additional expertise. In particular, professional investment advice is taken as necessary; investment strategy aligns with funding objectives; and scheme assets are diversified accordingly.


The Group has agreed ongoing annual deficit recovery payments effective from 1 April 2019 and these are payable until 31 December 2028. The Scheme's next triennial valuation will have an effective date of 31 March 2021. The impact of Covid has been largely mitigated through diversification, risk management and interest rate hedging. The Coats UK Pension Scheme is currently over 85% (2019: 80%) hedged against interest rate and inflation movements by reference to the Technical Provisions liability.


The Group and the Trustee Board routinely review de-risking of the scheme through liability management and investment strategies. The de-risking framework in place also enables the pension scheme to take advantage of any out-performance.


See note 10 on pages 134-143 for more details.


Lower Passaic River legacy environmental matter risk

Detail of the Lower Passaic River legacy environmental matter can be found in note 28 on pages 158-159.





Responsibility statement

The following responsibility statement is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from page 78 of the Annual Report 2020. Responsibility is for the full Annual Report 2020 and not the extracted information presented in this announcement or the Preliminary Announcement released on 4 March 2021.


We confirm that to the best of our knowledge:


the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;


the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and


the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 3 March 2021


Related party transactions

A description of the related party transactions of the Company is extracted from page 163 of the Annual Report 2020:


Remuneration of key management personnel


The Group Executive Team are deemed to be the key management personnel of the Group. The remuneration of the Group Executive Team, is set out below in aggregate for each of the categories specified in IAS 24 - Related Party Disclosures. Furtherinformation regarding the remuneration of individual directors is provided on pages 79 to 95 in the audited part of the Directors'Remuneration Report.

Year ended 31 December














Trading transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.

During the year, Group companies entered into the following transactions with related parties who are not members of the Group:






















Amounts owing by / (to) joint ventures at the year end are disclosed in notes 19 and 21. All transactions with joint ventures are at an arm's length and payment terms are consistent with normal trading terms with third parties.




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Coats Group (COA)
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