Annual Report and Accounts 2017 Financial and Operational Highlights Revenue Underlying EBITDA(i) £166.0m increased by 11.4% (2016: £149.0m) £39.9m increased by 7.5% (2016: £37.1m) Underlying profit before tax(ii) £29.4m increased by 12.6% (2016: £26.1m) Underlying basic earnings per share(ii) 38.03p (2016: £38.03p) Cash inflows from operating activities before adjustment items £32.7m (2016: £34.2m) with net debt(iii) of £147.1m (2016: £156.4m) Property portfolio £329m valued (2016: £304m) Overall care capacity increased by 215(v) 2,534 places (2016: 2,319) Occupancy 2,159 (2016: 1,983) Final dividend per share 6.60p increased by 5.6% (2016: 6.25p) Statutory financial highlights £35.6m EBITDA(iv) decreased by 13.8% (2016: £41.3m) £22.7m Operating profit reduced by 25.6% (2016: £30.5m) 25.48p Diluted earnings per share reduced by 29.6% (2016: 36.17p) £32.7m Cash inflows from operating activities (2016: £34.2m) (i) Underlying EBITDA is operating profit stated before depreciation, share-based payments charge and non-underlying items. (ii) Underlying profit before tax and underlying diluted earnings per share are stated before non-underlying items. (iii) Net Debt as defined by the Group’s Banking facilities and comprises cash and cash equivalents net of all Loans and Borrowings due to the Group’s Bankers. (iv) EBITDA is operating profit stated before depreciation, share-based payments charge and amortisation of intangible assets. (v) Overall capacity has increased by 215 reflecting the net of 161 additional beds in reconfigured services and new services, 87 beds from the acquisition of Selborne Care, 36 beds withdrawn for reconfiguration, and three places more in small supported living packages. Find out more online: www.caretech-uk.com About us Our purpose Delivering innovative social care on behalf of local authority and health service commissioners throughout the UK, CareTech has a long established reputation as a provider of high quality and safe services. CareTech offers a comprehensive outsourcing service to commissioners with the experience and commitment to provide exactly what is required. Focusing on the high acuity social care population we support children and adults through solutions that are both individual and tailor made to each of our service users. Our core services provide for adults with learning disabilities, individuals who have or are recovering from mental illness, people with autistic spectrum disorder, people who have one or more physical impairments and provide care and rehabilitation for men with acquired brain injury (“ABI”). We deliver support through residential services and a wide choice of creative home-based options. Our children services cover assessment, residential care, education and fostering options, including specialist provision for very complex young people. We carefully and professionally support any child irrespective of their reasons for being in public care. We can provide the right solution for complex and difficult situations through our nationally recognised expertise in provision for children and young people who present with sexually offending behaviours or who have emotional and behavioural disorders. Our comprehensive service includes education in Ofsted registered schools of very high quality. CareTech pioneered transition services for young people leaving care and for adults who are making the move into their own home after a lifetime in residential or institutional settings. We remain a national leader in the drive to enable people to live in a home of their own. We believe in opportunity and have developed an enviable reputation as a leading provider and organiser of modern apprenticeships within exciting projects across the UK. CareTech provides high quality support and care for individuals who often have complex needs. Delivering a safe and secure support of very high quality, ensuring that all our service users enjoy extraordinary days, every day. Contents Strategic Review IFC Financial and Operational Highlights 2 Group at a glance 10 Chairman’s Statement 12 Strategic Report 12 Creating sustainable value in our markets 14 A strategy to drive future growth 16 Our key performance indicators Principal risks and our strategic 18 response 20 Chief Executive’s Statement and Performance Review 24 Corporate Social Responsibility 26 Financial Review Governance 30 Board of Directors 32 Corporate Governance Report 35 Directors’ Report 37 Remuneration Report 40 Statement of Directors’ Responsibilities Financial Statements 41 Independent Auditor’s Report to the members of CareTech Holdings PLC 45 Consolidated Statement of Comprehensive Income 46 Consolidated Statement of Financial Position 47 Consolidated Statement of Changes in Equity 48 Consolidated Statement of Cash Flow 49 Notes to the Financial Statements Company Statement of Financial 74 Position Company Statement of Changes in Equity 75 76 Company Statement of Cash Flow 77 Notes to the Company Financial Statements 81 Directors and Advisers CareTech Holdings PLC – Annual Report and Accounts 2017 1 Strategic ReviewGovernance––Financial Statements Group at a glance Extraordinary care Adult Services Social care services for adults over the age of 18 Adult Learning Disabilities CareTech has always operated at the highest acuity range on the social care spectrum, providing individual tailor made solutions for people living in their own homes, residential care or independent supported living schemes. We believe that we should continue supporting those with the greatest need and this accords with local authority commissioning trends. Adults with learning disabilities are increasingly being provided with direct funding to enable them to purchase their own care and support. We work actively with service users and advisory bodies to deliver self-directed support packages and see this as an increasingly important aspect of our service model, as well as offering commercial opportunity. Specialist Services Specialist services provision continues to dominate the health and social care agenda. Good specialist services is a significant contributor to a healthy community and national economy, while mental ill health is devastating to individuals and their families. Most commissioners are driven by a wish to reduce patient time in acute care and rely on creative outsourcing to dramatically cut the cost of specialist services care in hospital and within the criminal justice system. CareTech’s specialist services team works in partnership with the NHS and social service departments to ensure a successful transition out of acute care and the prison service, delivering pathways to an ordinary life. For many people with the most complex intellectual or physical challenges, residential care will continue to be the preferred option although the services will change in their approach as we move toward a more enabling, modern type of service. An alternative to residential care is the opportunity for people to live in a home of their own, sometimes shared with others. CareTech is a leader in the provision of supported living and offers packages of individualised self-directed support to people in their own homes. We also have an outstanding track record for diverting people away from acute care and supporting them in their own homes. CareTech’s highly effective care teams are developing new ways to offer community support solutions and we believe that this will be an important growth platform in years to come. For men with Acquired Brain Injury (ABI) we provide a range of pathways from rehabilitation through to long-term and end of life care. CareTech offers highly specialised rehabilitation beds as well as a step down provision of community-based beds. Contribution to Group revenue: 52.9% (2016: 53.3%) Care capacity 2017: 1,735 (2016: 1,567) Split by: – Residential care – Independent supported living – Community support services Contribution to Group revenue: 9.3% (2016: 7.2%) Care capacity 2017: 214 (2016: 216) Split by: – Residential care – Independent supported living – Community outreach The segmental figures of the Specialist Services division for 2016 have been restated due to the inclusion of “ABI” (Acquired Brain Injury). This is the first full year of Oakleaf Care Limited’s results and it was decided this change would give the shareholders greater clarity. Find out more online: www.caretech-uk.com/about-us 2 CareTech Holdings PLC – Annual Report and Accounts 2017 Caring every day Since the CareTech Group came to the AIM market over 12 years ago, it has evolved through a mix of organic and prudent acquisitive growth that has led to our current position as one of the best-established and reputable national social care providers. We have national coverage across England, Wales and Scotland in a highly fragmented UK social care market. We cover the majority of the social care spectrum except elderly care. The total market value is estimated (Laing and Buisson 2017) to be worth £7bn for children services and £5bn for the care of younger adults (below 65 years of age) in the learning disability and specialist services categories. The private sector share of this market has developed through successful outsourcing of services over the last 20 years and this trend is expected to continue. Local Authorities have largely protected their budgets for children and complex younger adults. Children Services Social care services for children and young people up to the age of 18 Foster Care Foster Care is undoubtedly the best care solution for most “looked after” children. Most children thrive in foster care where they are supported within an ordinary family home and with trained foster carers. CareTech provides for both mainstream and specialist foster care through local agencies across the UK. Unusually we offer a highly respected service for physically and intellectually disabled children as well as support for children with sensory impairments. We provide foster care family assessments and ongoing support to children who remain with their birth families and in their family home. Contribution to Group revenue: 5.2% (2016: 5.8%) Split by: – Residential care of children and young people Care capacity 2017: 301 (2016: 301) – Family assessments in the home Contribution to Group revenue: 26.4% (2016: 26.2%) Care capacity 2017: 284 (2016: 235) Split by: – Residential care of children and young people – Education services for children and young people Learning Services Contribution to Group revenue: 6.2% (2016: 7.5%) Apprentices 2017: 509 (2016: 564) Split by: – Pre-employment programmes – Development programmes – Apprenticeships Young People Residential Services For a relatively small number of children, residential care offers a safe and helpful solution for their care needs and CareTech has developed an extensive range of highly technical care and education environments where those children will thrive. Our residential provision offers high staff ratios and highly skilled carers, capable of ensuring both safety and progression. These are high cost services where we aim for an intensive period of care and a strict timetable that delivers results at a fair price to commissioners. As far as practicable we aim to help these children through our therapeutic care move into a more normalised family style environment as soon as it is wise to do so. These services are highly intensive operations with exceptional staff ratios and include on site or dedicated educational facilities. EQL Solutions and Dawn Hodge Associates Since modern apprenticeships started several years ago we have witnessed a dramatic shift in the way young people enter the adult workforce. People are increasingly opting for an apprenticeship as an alternative to or as well as attending University. This was especially true of the Care Sector but a whole new generation of young people are now looking at the apprenticeship model as their further training of choice. Through acquisition and the development of established apprenticeship providers CareTech has embraced the opportunity to capitalise on this change and to work closely with government agencies to improve the quality and skill base of our national workforce. We have chosen to call our apprenticeship scheme a Learning Service to reflect the aspiration of the young people we work with. Although Learning Services provide training across the whole workforce we have naturally developed expertise within the very extensive social care sector. Learning services addresses an adult social care workforce in England of some 1.16m people, 905,000 of whom work within the independent sector (Skills for Care 2013). There are 17,300 organisations providing Adult Social Care in England and the majority of these are operating at far too low a scale to deliver their own training or apprenticeship programmes. EQL Solutions and Dawn Hodge Associates, which received an “Outstanding” from Ofsted earlier this year, have significant market presence in social care and are well positioned to support both smaller companies as well as corporate providers. The introduction of the apprenticeship levy has caused a declined in companies offering apprenticeships. However, the Government has a target of 3 million apprenticeships by 2020 and so far in the 2016/17 academic year the number of people signing up for apprenticeships was 491,300. (Sourced from Gov.UK). CareTech Holdings PLC – Annual Report and Accounts 2017 3 Strategic ReviewGovernance––Financial Statements Group at a glance continued Extraordinary quality Quality and expertise Quality is not simply compliance with the requirements of regulation, although that remains important. Our approach is to employ well qualified and skilled professionals who can ensure that we consistently exceed the expectation of our service users, their families, social workers and commissioners. Placing people in the care of organisations that you can trust The business of care is predicated on relationships, as much as it is on the practical support and guidance that we offer on a daily basis. Troubled children need the warmth and challenging support of their care workers while disabled adults make best progress within the trust that a great relationship brings. We are also mindful that social workers will prefer to place people in the care of organisations that share their commitment to optimism for service users, that they can rely on and deliver outstanding value. 4 CareTech Holdings PLC – Annual Report and Accounts 2017 CareTech Holdings PLC – Annual Report and Accounts 2017 5 Strategic ReviewGovernance––Financial Statements Group at a glance continued Extraordinary choice We fundamentally believe in choice for all our clients and our determination to provide this choice in all our services is uppermost in our commercial thinking. Client focused innovative care pathway approach Care and support is characterised by optimism and a genuine belief in the abilities of our service users. Everyone we support has an opportunity to make progress in their lives and our professional teams work hard to help those people understand how to move forward. Many years ago we began to describe our services as a Care Pathway, making clear our intention to break away from the old belief that care is for life. We have delivered on this commitment and everyone we support, from young children to profoundly disabled adults, shares our approach to maximise their independence. This is great for service users, rewarding for our staff and strongly supported by those who commission and sponsor our services. Innovate care pathways One of the characteristics that differentiates CareTech from the average provider is our commitment to opportunity. Long before it became fashionable we introduced the concept of a Care Pathway to reflect our optimism that users of our services can make progress in their lives. We were never content to accept that someone in residential care should always be in residential care and developed alternatives at an early stage in our development as a Group. 6 CareTech Holdings PLC – Annual Report and Accounts 2017 CareTech Holdings PLC – Annual Report and Accounts 2017 7 Strategic ReviewGovernance––Financial Statements Group at a glance continued Extraordinary growth CareTech is a public company which operates throughout England, Scotland and Wales. Our target in the next few years is to continue to grow and to combine this with care excellence. National presence CareTech is very well known as a care company in public ownership that operates throughout England, Scotland and Wales. Our national presence is reinforced through conferences and publications where the CareTech view is frequently sought and taken into account. Strong brand Financial security, probity and reliability combine to offer confidence in the CareTech brand. We offer high quality services with a strong ethical base with the benefits of scale, operating within friendly and trusted local service businesses. 8 CareTech Holdings PLC – Annual Report and Accounts 2017 CareTech Holdings PLC – Annual Report and Accounts 2017 9 Strategic ReviewGovernance––Financial Statements Chairman’s Statement A successful 2017 creating a platform for further expansion I am pleased to present our results for the year ended 30 September 2017. Set out below is a summary of our financial results where: – Revenue has increased by 11.4% to £166.0m – Underlying EBITDA has increased by 7.5% This has been another successful and exceptionally busy year, with the key highlights being: – Share placement raised £37.4m for acquisitions (net of expenses) – Accelerated organic initiatives including property purchases and reconfigurations – Completion of the acquisition of Selborne Care during the year which added to our geographic and Adults Service offering – Further strengthening of our management team and investment in IT systems – Benefit from the improved terms of the banking facilities – Established the CareTech Charitable to £39.9m Foundation and its registration with the Charity Commission It is really pleasing to note that we have continued to maintain our position as a leading care provider with our improved quality ratings across the Group. Moreover, we have extended our care pathways through successful outcomes for the people we support. As a result we have improved our capacity during the year which has led to an increase in all key financial KPIs and our underlying EBITDA. Farouq Sheikh Chairman – Underlying PBT has increased by 12.6% to £29.4m – Underlying basic EPS remained at 38.03p – Net Assets increased by 34.6% to £204.2m (2016: £151.7m) – Cash inflows from operating activities reduced by 4.4% to £32.7m – Full year dividend increased by 7.0% to 9.90p All of the above mentioned initiatives demonstrate a solid performance on delivery of both the key financial and non-financial metrics and put the Group in a strong position to target further underlying EPS growth going forward. The Group has stood out from its peers as a company that can successfully combine quality, integrity and sound financial acumen and has consistently achieved good care quality ratings. Our credibility as the provider of choice has never been stronger and we continue our successful growth strategy with a confident outlook. On 23 March 2017 the Company announced an oversubscribed placing which raised £37.4m (net of expenses) through the issue of 11,000,000 new ordinary shares. I am extremely grateful for the support from our existing shareholders and take the opportunity to also welcome new shareholders. A number of organic growth projects and potential bolt-on acquisitions had been identified prior to the placing. In June 2017 the Company announced the acquisition of Selborne Care Limited for a total consideration of £16.6m in cash. Selborne Care is a high quality provider of specialist residential care, supported living and day care services for adults with learning disabilities and challenging behaviours. It has 57 residential beds in eight freehold sites and supported living services are provided to 30 service users. 10 CareTech Holdings PLC – Annual Report and Accounts 2017 In addition, the Group has purchased a number of properties including Beacon Reach, a Children’s Residential and Education facility near Preston for £4m, which is a substantial Education and Residential facility for ROC NW who recently won the Laing and Buisson Award in Social Care for Children’s Services. Even with the significant growth we have achieved to date we still have less than 2% of this very large and fragmented market. With the increasing regulatory burden, the opportunity for further consolidation is even more attractive. The Group continue to look at a number of other acquisition opportunities and are confident that the remainder of the share placement proceeds will be deployed in a timely manner on earnings enhancing businesses or projects. During 2017, we again closed several services for reconfiguration which impacted the growth in revenue. Offsetting this, there are better fees following reconfiguration plus the impact of cost saving initiatives and the time and attendance system has further improved underlying EBITDA. The Group’s organic development programme will continue with further reconfigurations and, for 2018 we have a strong pipeline of development opportunities with two property purchases registered soon after the year end. On 28 March 2017, 344,305 new ordinary shares were issued as part of the arrangements for full and final settlement of the earn-out agreed with the vendors of ROC North West which was acquired in 2015. In the 12 years since joining AIM, the business has transformed from being very focused on supporting adults with a learning disability through residential and day care settings to one where today we cater for young people and children with complex needs across a range of settings, be it residential, supported living or community support. We focus on the most complex and vulnerable young people and the market for this client group stands at over £10bn. There is currently an undersupply of specialist beds in this niche area and the market is growing by almost 3% per annum. Over the years we have developed a range of care pathways and helped many that we support to live more independently. This is a fantastic outcome for both us and the individuals that we support and it also helps local authorities meet the ever increasing cost of social care provision. Dividend The Group policy has been to increase the total dividend per year broadly in line with the movement in underlying diluted earnings per share. In 2017 there was a slight reduction in underlying diluted earnings per share of (0.01p) mainly due to the share placement in March 2017. The Board has proposed a final dividend of 6.60p (2016: 6.25p) per share bringing the total dividend for the year to 9.90p (2016: 9.25p) per share. This represents a full year increase of 7.0% year on year. The final dividend will be paid, subject to shareholder approval, on 8 May 2018, with an ex-dividend date of 8 March 2018 and an associated record date of 9 March 2018. Our Board There have been no changes to the Board during the year. Providing the foundation for further growth, the Senior Executive Team at CareTech has been further strengthened by a number of senior appointments during the year. During the year the Remuneration Committee, the Audit Committee and the Care Governance and Safeguarding Committee were unchanged. Our people We have completed our planned evolution into two well defined operating divisions, Children Services and Adult Services, and this has generated organisational efficiencies. Simplifying the structure has also supported planning and service delivery with a more powerful approach to development. Our continuing growth, measurable success and forward-looking approach are a reflection of the hard work and dedication of staff and managers throughout the organisation. I am always drawn to the achievements of our excellent front line staff, which is inevitable as we are first and foremost a care organisation. Their care and commitment would be much less without the dedicated support of our administrators and support teams whose hard work and energy is critical to the success of our Company and the care we provide. In March 2016, the Company announced the creation of the CareTech Sharesave Scheme, a Government supported method for any of our staff to have the opportunity to participate in the Company’s equity. In October 2017, we announced a second CareTech Sharesave Scheme and 259 members of staff chose to join this new saving scheme. We plan to introduce another CareTech Sharesave Scheme in 2018 as this is one part of our staff retention strategy. With the launch of the CareTech Charitable Foundation in May 2017 I am pleased that we will be able to support members of the CareTech family even more. The Foundation has ambitious and clear sighted objectives to deliver meaningful impact to communities in the UK and overseas about which the staff of the Group and its service users feel proud and strongly-engaged, providing a unique contribution to the charitable marketplace consistent with the Group’s values and approach. Outlook and prospects We operate in a growing social care market worth over £10 billion per annum and we are well positioned to meet market demand. We have developed outcome-based care pathways which deliver value-based services for our Local Authority partners. With the money raised from shareholders, solid free cash flow generated from the business plus access to bank funding, we have major investment plans for 2018 and beyond with key new organic developments and bolt-on acquisitions. Importantly, we have also, and continue to, further strengthen our management team, offering a forceful blend of experience, commercial wisdom and dedication to care. I have no doubt that the next few years will see continuing growth and care excellence which will help deliver our target of double digit growth in underlying EPS. Farouq Sheikh Chairman 18 December 2017 CareTech Holdings PLC – Annual Report and Accounts 2017 11 Strategic ReviewGovernance––Financial Statements Strategic Report Creating sustainable value in our markets The Directors present their Strategic Report on the Group for the year ended 30 September 2017. In preparing this report, the Directors have complied with S414C of the Companies Act 2006. The Strategic Report should be read in conjunction with the Strategic Review for the Group which includes the Highlights, Group at a glance, Chairman’s Statement, Strategic Report, the Chief Executive’s Statement and Performance Review and Financial Review. Adult Services* Social care services for adults over the age of 18 Adult Learning Disabilities Description – Residential care – Independent supported living – Community support services Although the available resources to purchase social care remain largely static there is a known increase in demand across the whole spectrum, presenting purchasing bodies with a conundrum. One response has been to move money away from the NHS in order to allow local authorities greater purchasing power. However, the most significant change has been to a system of aggressive rationing. This has focused money on the areas of highest need such as complex children, very disabled or complex people with learning difficulties and hospital discharge schemes. This is where CareTech has developed its provision and helps to explain why spending cuts have had minimal impact on the Group. Specialist Services Description – Residential care – Independent supported living – Community outreach Children Services** Social care services for children and young people up to the age of 18 Foster Care Description – Fostering – Family assessments in the home Young People Residential Services Description – Residential care of children and young people – Education services for children and young people Our market The care market in which the Group operates is a UK market worth an estimated £10bn per annum across the Adult Services for adults over the age of 18 and Children Services for children and young people up to the age of 18. The principal driver for commissioners in local authorities and the NHS is value. This is interpreted by them as the optimum balance between quality and price, but has an underpinning criterion determined by “outcomes”. CareTech has been aligned to this set of purchasing principals and we work closely with commissioners to ensure that we stay in tune with their approach to market management. Most providers of social care have fewer than three services and this huge, fragmented range of providers dominates the market. However, the market has been steadily consolidating and a very small number of large “corporate” providers have emerged, with CareTech being one of the bigger players within the non-elderly care sector. Numerically the large providers will have a very small minority of the market capacity and all the evidence suggests that consolidation will continue, perhaps accelerate, during the foreseeable future. 12 CareTech Holdings PLC – Annual Report and Accounts 2017 Adults with learning disabilities in the UK cannot live independently Annual value of market for residential learning disabilities and supported living Highlights 78,000 Highlights 13% Of the UK population have specific mental disorders Highlights 51,850 People are placed in foster care in England Highlights 10,085 Children in England are looked after outside foster care £5.8bn £10.1bn Value per annum of NHS/LA total spend on specialist services £1.57bn Value of foster care market across England £1.39bn Value of residential children’s market across England Market growth rate +1.5% pa Market growth rate +1.2% pa Adult Services* Social care services for adults over the age of 18 Adult Learning Disabilities Description – Residential care – Independent supported living – Community support services Specialist Services Description – Residential care – Independent supported living – Community outreach Children Services** Social care services for children and young people up to the age of 18 Foster Care Description – Fostering – Family assessments in the home Young People Residential Services Description – Residential care of children and – Education services for children and young people young people Highlights 78,000 Adults with learning disabilities in the UK cannot live independently Highlights 13% Of the UK population have specific mental disorders £5.8bn Annual value of market for residential learning disabilities and supported living £10.1bn Value per annum of NHS/LA total spend on specialist services Highlights 51,850 People are placed in foster care in England Highlights 10,085 Children in England are looked after outside foster care £1.57bn Value of foster care market across England £1.39bn Value of residential children’s market across England * Data from Laing and Buisson Adult Specialist Care 2nd edition. ** Data from Laing and Buisson Children’s Services Market Report 3rd edition 2017 report. Market growth rate +1.5% pa Market growth rate +1.2% pa CareTech Holdings PLC – Annual Report and Accounts 2017 13 Strategic ReviewGovernance––Financial Statements Strategic Report continued A strategy to drive future growth Our Business Model Our resources The key resources that we require to provide care are: People to provide care Staff and carers who have appropriate skills and qualities to look after children or adults in need of care and who remain fully trained. People with skills to manage, train and support our people who provide care Skilled staff to provide the management and training to our people who provide care. Buildings, homes and land The land and buildings to provide accommodation for residential services or supported living. Financial resources Financial stability to be able to employ the right staff and to provide the right land and buildings. Setting out our key strategic priorities We shall continue to improve the quality and scope of our services, increase market share and grow shareholder value. Our Business Model represents how we aim to generate revenue and profit from our operations. The Group aims to operate throughout mainland Britain in England, Wales and Scotland in partnership with local authorities and the NHS, facilitating the outsourcing process, driving value and removing risk. During the period, the Group continued to develop and grow organically four existing operating divisions, which come under the two outcome-based sectors of Adult Services and Children Services. These four operating divisions are supported by the Learning Services Division. The growth going forward is underpinned by the strong starting position that we have built carefully over the past few years. We continue to extend both our geographic coverage and our outcome-based Care Pathway range of services organically and through the purchase and sale of properties to meet the needs of our marketplace, specifically the requirement for greater acuity service provision. This ensures that CareTech is in a very strong position to address the demands of our evolving marketplace. N a tional presence Adult Learning Difficulties Care Governance Learning Services Safeguarding Committee Extraordinary days every day Strong brand Mental Health Experienced and committed management Care Pathway Foster Care and Family Services Young People Residential Services 14 CareTech Holdings PLC – Annual Report and Accounts 2017 Shareholder value CareTech has delivered sustainable and reliable growth since the day it listed. It has aimed to be a defensible stock even in difficult times and for some time has offered a good quality dividend policy. We have every reason to believe that growth will continue and the management team remains enthusiastic about the Group’s future. Our strategy Our understanding of the social care market and our relationships with local authority commissioners is vital to our strategy. We are sensitive to the complex financial position that local authorities are in and their need to have trusted business partners who can help them deliver statutory duties efficiently and with care. Social care expertise Employing numerous qualified and skilled care workers, foster carers, teachers and managers, the CareTech front line teams are supported by a wide range of high level professionals such as social workers, nurses, therapists, psychologists and a skilled Medical Director with oversight of all interventions. High quality The driver for social care is an organisation’s ability to deliver high quality care, with reliable outcomes at a fair price. We believe that the market has recognised that CareTech offers the best possible balance between quality and value and understands the need for progressive thinking and innovation to deliver ongoing results. Nationwide locations The CareTech strategy is to offer a strong national presence with local brands and regional service delivery points. This supports development of local relationships while offering the comfort and security of a well resourced and strong Group. Excellent reputation The CareTech brand is strong and our extensive relationships across the UK are robust. This is reinforced by our presence at major industry events where we have been reliable sponsors and commentators. The most effective way that we sustain our reputation is by delivering what we promise for the people we support and by treating our staff well. High occupancy CareTech services are in demand and occupancy has remained high despite fears of local authority austerity impacting referrals. What’s more, the nature of referrals in recent years has been toward the more complex end of the spectrum. Continued growth It is well known that demographic trends show growth in social care in the foreseeable future. CareTech Holdings PLC – Annual Report and Accounts 2017 15 Strategic ReviewGovernance––Financial Statements Strategic Report continued Our key performance indicators Our KPIs help us to measure the Group’s performance against its strategy and objectives. Underlying EBITDA £39.9m (2016: £37.1m) Underlying profit after tax £26.6m (2016: £24.0m) Underlying basic EPS 38.03p (2016: 38.03p) 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 £26.4m £30.7m £32.5m How this is calculated Underlying EBITDA is the Earnings before Interest, Tax, Depreciation and Amortisation for the year excluding non-underlying items such as amortisation of intangible assets which are fully described in note 5 to the Financial Statements. £37.1m £39.9m Performance this year The underlying EBITDA has improved by £2.8m or 7.5% year on year. This reflects the organic growth achieved by the core business which has been in part reduced by the reconfiguration work on some properties, improved margins and acquisitions. £14.1m £16.1m £18.3m How this is calculated Underlying is the Group’s profit after provision for taxation excluding non-underlying items such as amortisation of intangible assets after tax which are fully described in note 5 to the Financial Statements. £24.0m £26.6m Performance this year The underlying profit after tax has improved by £2.6m 10.8% year on year. This reflects the improved underlying EBITDA and lower finance charges offset by an increased tax provision. 27.43p 31.01p 31.79p 38.03p 38.03p How this is calculated Underlying basic earnings per share is the profit after tax divided by the weighted number of ordinary shares which are fully described in notes 10 and 11 to the Financial Statements. Performance this year The underlying based earnings per share has remained at 38.03p. The increase in underlying profit after tax offset by the increase of 11 million shares from the share placement during the year. 16 CareTech Holdings PLC – Annual Report and Accounts 2017 Net Debt £147.1m (2016: £156.4m) Capacity 2,534 places (2016: 2,319 places) Mature Estate Occupancy 93% (2016: 93%) Blended occupancy 86% (2016: 86%) 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 £168.5m £166.1m £158.5m £156.4m £147.1m How this is calculated Net Debt is defined in the Group’s banking facilities and comprises the balance at the year-end for cash and cash equivalents net of bank loans outstanding and finance lease and hire purchase contract monies outstanding to the Group’s bankers. It does not include the finance lease obligations as calculated under IAS 17 arising from the ground rent transaction which is not owed to the Group’s bankers. Performance this year Bank debt at 30 September 2017 was £147.1m which is a reduction of £9.3m from 30 September 2016 of £156.4m. Finance leases with the Group’s bankers at the year-end were £6.0m (2016 £6.6m) with the decrease due principally to the lease repayments net of the new investment in 53 new home vehicles during the year, which take our fleet to 515 vehicles. Net Debt in total reduced by £9.3m or 5.9% between 30 September 2016 and 30 September 2017. 2,116 2,074 2,116 2,319 2,534 How this is calculated The Group’s capacity is the total number of Adult Service and Children Service places that the Group is able to offer at that date. It is a total including residential care beds, independent supported living accommodation, community support service users and children that foster carers can currently look after. Performance this year Overall capacity has increased by 215 which is 9.3% increase. ROC Northwest and Spark of Genius have increased their capacity in the year to provide education to 46 more children but this is not included in the overall capacity, in total the Group is able to provide education to 312 Young People. 92% 92% 93% 93% 93% 84% 86% 86% 86% 86% How this is calculated The Mature Estate Occupancy is the total number of Adult and Children Service Users placed in services that were open throughout the year. Performance this year The ratio has remained unchanged at 93% and reflects the long length of stay that the majority of service users have in our services. How this is calculated Blended occupancy is the total number of Adult and Children Service Users actually placed as a percentage of the Group’s total capacity and so reflects facilities undergoing development and reconfiguration. Performance this year The ratio has remained at 86% and reflects the additional beds in reconfigured services brought back into capacity and the reduction in those withdrawn for reconfiguration plus new beds coming into service. CareTech Holdings PLC – Annual Report and Accounts 2017 17 Strategic ReviewGovernance––Financial Statements Strategic Report continued Principal risks and our strategic response Social care is a long-term contract with the public sector and is inherently free of risk so long as quality is maintained, outcomes are achieved and the price is right. However, social care does carry risks that will always be at the forefront of our minds. The most obvious risk is that a tragedy will occur and that the Company will be held to blame. To date this has not occurred but we take the risk very seriously. Our principal risk management strategy is to ensure that our staff are recruited well, are trained and supervised properly and are subject to rigorous quality oversight. In addition, we know from experience that processes and documentation must be very carefully observed and constantly reviewed to ensure that it protects service users and provides the Company with a defendable position in the case of tragedy. These matters, along with general safeguarding, are subject to intense scrutiny by our in house compliance and quality teams and Board level oversight. Managing risk and mitigating risk Social care is not a high risk business proposition but there are several unique factors that could cause difficulties. These centre on the way in which care and support are provided and the reliability of those front line staff who provide it. CareTech approaches these issues with considerable care and diligence, building in quality and training wherever it is required but also through its established scrutiny protocols and firm leadership. We care a great deal about what we do and have established a reputation for careful management of all those processes that could expose us to risk. We have thoroughly reviewed our operations. The Group trades only within the UK and has no foreign exchange exposure. We have limited exposure to nursing staff and the EU labour market. Our primary recruitment is focused on the UK labour market for support staff and the recruitment of new staff is the factor that we are managing and we continue to monitor closely. In 2017 the Apprenticeship Levy was introduced and we are confident that the Learning Division through EQL and DHA is well placed to take full advantage of the new market structure. Our risks All providers of health and social care are conscious of the need for management vigilance and the requirement to have a thorough commitment to delivering care that is safe and of a high quality. CareTech’s approach to quality and safe service delivery is characterised by a mixture of a dedicated compliance team carrying out regular audits of inspection and a commitment to building quality into everything we do. The market for the provision of social care services continues to be dynamic, presenting both risks and opportunities. The overall number of people needing support will increase, and a smaller proportion of them will be placed into residential services. Those who do need a residential care solution will have more complex needs and are likely to require a wider range of services, including clinical and therapeutic support. Our operational management teams are already focusing on the delivery of high quality care. As we move forward this will become increasingly specialised with the benefit of professional qualified care co-ordinators who will prepare and direct personalised care plans within the services. Most service users will be supported in their own homes through domiciliary care or in more formal supported living arrangements. This is a major growth area for care providers and CareTech already has a solid reputation for its high quality and flexible solutions. We are building this to a higher level and refining our organisational structure to build more rapidly on our successes to date. By order of the Board Farouq Sheikh Chairman 18 December 2017 18 CareTech Holdings PLC – Annual Report and Accounts 2017 Principal risks 1. Service offer and user needs We have to create and staff a service offering which matches the needs of the service user and can be communicated to commissioners so it is carefully recorded locally at every service in order to reduce the risk of service users moving to other service providers. 3. Service value The service offer has to be provided to meet the needs of the commissioners at a fair price and this is coming under increased scrutiny as commissioners regularly review value for money so the Group communicates frequently with its commissioners locally. 5. Growth funding So that the Group can keep growing adequate funding has to be anticipated and put in place and the Group ensures that all of its facilities are monitored and reviewed regularly, particularly during its Budget and forecasting processes. 2. Quality and safety A health and safety breach would impact reputation, brand and compromise the safety of those in our care. This could impact on the demand for our business as well as incur costs to rectify. We have to provide and deliver safe care of a high quality and the Group utilises Acoura, an independent supplier, to audit and report monthly on Health and Safety matters as well as all RIDDORS (Reporting of Injuries, Diseases and Dangerous Occurrences Regulations) so that all incidents are recorded and acted upon. 4. Reputation The Group has to have a reputation for delivering a service that is good value and takes account of all risks. The Group maintains a Risk Register which includes all key risks, including reputational risk, and how they are mitigated through quality of service and good communication with service users and Local Authorities and this Risk Register is reviewed monthly. 6. Manage debt The level of debt obtained to fund operations and ensure that growth can occur has to be carefully managed and the different forms of leasing and debt are reviewed quarterly when all of the covenants are also reviewed. CareTech Holdings PLC – Annual Report and Accounts 2017 19 Strategic ReviewGovernance––Financial Statements Chief Executive’s Statement and Performance Review A strong basis for advancement It gives me considerable satisfaction to report again on a successful year that reflects the hard work of our management team, the enthusiasm of our staff and the support of our Board. Overview The Group has continued to build upon its solid foundations and remains in a strong position to continue as a leading provider of high quality specialist social care services in a large and growing UK market which remains fragmented. The Group has continued to develop through organic growth and reconfigurations and, with the acquisition of Selborne Care Limited in June 2017, it has gained an experienced management team with skilled leaders. The new business has integrated and settled well, and our focus on organic growth also remains strong. In 2017, I am extremely proud of the establishment of the CareTech Charitable Foundation which is devoted to supporting the social care sector. This is further discussed in the Corporate Social Responsibility section of the report. There have also been a number of staff initiatives to aid retention including the second Sharesave Scheme and a Level 5 in Care Management training scheme for Managers. Consolidation and creating new opportunities CareTech remains at the forefront of social care outsourcing in the UK across both Children and Adult services and, in the year, there has been a further increase in working closely with commissioners and regulators. Haroon Sheikh Chief Executive Officer 20 CareTech Holdings PLC – Annual Report and Accounts 2017 National public policy continues to be a significant driver of local authority commissioning intentions and behaviour. For a number of years, public policy has encouraged greater personalisation of health and social care for adults. Commissioners and leading providers are driving change that will mean offering people more choice and control over the care, treatment and support they receive while at the same time maintaining the quality and safety of those services. Our care priorities drive successful outcomes for our service users and follow closely the guidance from central Government. Our key focus for delivering quality services and positive outcomes is supported by the following key factors: Communication – We have open and frank dialogue with our service users, their families and social workers, as well as the Regulators. Independence – In our social care and health contracts we aim to help our service users to return to an ordinary independent life. It may be children who can return to their birth families or live independently. It may be adults who we can help on the pathway to recovery following a specialist services breakdown, or acquired brain injury or people with learning disability who we can support towards independent living. Housing care and support – We know that most people aspire to have a place of their own, employment and ongoing support. We have structured our services, developing new provision and creative partnerships with housing providers to enable these aspirations to be achieved whenever possible and we are tailoring training to assist young people and adults leaving our services to gain employment. Self-directed support – It is pivotal to government policy that adults and children receiving social care are fully engaged in the support that they require. With some adults this extends to the provision of a cash sum enabling them to purchase their care and support directly. CareTech managers have been further reviewing our systems and delivering training throughout the organisation to ensure that we are able to deliver the requirements of self-directed support. Quality and dignity – CareTech has always delivered high quality care in well maintained premises. However, we have never been complacent about this and have undertaken reviews to ensure that we deliver the right quality at a reasonable price. We have also learned a great deal from the experience of our NHS colleagues and developed a Dignity Test to ensure that our front line and administrative staff treat all our clients in ways that promote dignity. Progress in the year The year has seen continued progress as the Group concentrates on the introduction of innovative new services developed in partnership with local authority commissioners reconfigured from within our existing portfolio of properties or through new properties either purchased or rented for service users for supported living. In June 2017 the Group acquired Selborne Care Limited for a total consideration of £16.6m in cash. Selborne is a high quality provider of specialist residential care, supported living and day care services for adults with learning disabilities and challenging behaviours. It had at acquisition 57 residential beds and 30 Supported Living Service users. Excluding Selborne Care our Adult Services have added a net 81 beds in the year, being 75 in Supported Living and six in Residential. Children Services have added 49 beds in the year principally in eight services. The Group also continues to realise the benefit of organisational improvements put in place over the past few years. We have continued to strengthen our management structure with further senior appointments planned and to improve the efficiency of our processes following further investment in new systems which have gone live or we are working on now. We are seeing the benefits of new executive appointments which continue to have a positive impact across the services. New systems were procured during the year for the Group’s recruitment and training solutions including e-learning with standard automated reports as well as for maintenance, hosting, data analytics and e-compliance in order to benefit from cutting edge technology. These improvements have put us in a strong position to benefit from a number of the commissioning opportunities by working in partnership with the NHS and Local Authorities. Care Pathway Range and Services The Group’s focus remains the provision of specialist social care through its five divisions. This is underpinned by a well-defined range of provisions which meet the commissioner requirements. These services are now even more extensive and focused on providing high quality care and positive outcomes for all of our service users. The Group has continued to develop and grow its existing five operating divisions, which come under the two outcome-based sectors of Adult Services and Children Services. We continue to extend both our geographic coverage and our outcome- based Care Pathway range of services organically by acquisition and through the purchase of properties to meet the needs of our marketplace, specifically the requirement for greater acuity service provision for both Children and Young People and Adults. This ensures that CareTech is in a very strong position to address the demands of our evolving marketplace. We remain committed to the growth of residential care solutions for adults and children with the most complex needs and the Group has embraced the development of home-based solutions including foster care where demand for more specialist services remains strong. Our residential care services for children cater for young people with particularly difficult issues and offer a national service; with strong growth seen in the North of England with ROC Northwest which has expanded both in care and educational services. In the year we have purchased properties in Scotland and North West England for both Spark of Genius and ROC Northwest to develop into new services. Our adult services offer a solid and reliable provision across the whole spectrum of service offerings which now includes acquired brain injuries and we see a particular volume demand in the area of supported living, balanced by renewed demand for more specialised residential care solutions. Our strategy is to offer a bespoke range of options so that we can maintain the Care Pathways that distinguish us from other providers. Overview of progress Our focus during the past year has continued to be further building on the businesses which established the Care Pathways whilst introducing innovative new solutions to meet the challenges faced by care commissioners and then adding newly acquired businesses with complementary skills. Capacity has increased by 215 places principally because we have continued to reconfigure services and acquired Selborne Care Limited with its 87 places. Occupancy levels within our mature services remain at a creditable 93%, or 86% when taking into account our services under development and transition. Much has been written about personalisation and I felt it would be useful to set out our own understanding and commitment to personalisation. Personalisation to us means recognising people as individuals who have strengths and preferences and putting them at the centre of their own care and support. The traditional service-led approach has often meant that people have not been able to procure the kind of support they need, or receive tailored care assistance. Personalised approaches such as self-directed support and personal budgets involve enabling people to identify their own needs and make choices about how and when they are supported to live their lives. Our two business divisions of Adult Services and Children Services comprise the following four Care Pathways and our Learning Services division. 1. Adult Learning Disabilities Year to 30 September 2017 Revenue £87.7m (2016: £79.4m) Contribution to Group Revenue 52.9% (2016: 53.3%) Underlying EBITDA* £26.3m (2016: £25.4m) Capacity 1,735 (2016: 1,567) Adult Learning Disabilities provides individually tailor-made solutions for people living in their own homes, residential care or independent supported living schemes. We can work with clients to deliver self-directed support packages. For some people residential care will continue as the preferred option and we increasingly offer several types of supported living and packages of individualised self-directed support to people in their own homes. This includes adult residential care homes, independent supported living and community support services. CareTech Holdings PLC – Annual Report and Accounts 2017 21 Strategic ReviewGovernance––Financial Statements Chief Executive’s Statement and Performance Review continued We have continued to work closely with Local Authority and NHS commissioners and this has helped us to achieve our growth through the past year. We take a long-term view, recognising that change will continue and with this in mind I am pleased to report that redevelopment of some of our long stay residential provision has been a great success over the past year and will continue to meet the changing requirements of commissioners and families. The market for high acuity care and the support of people with learning disability is growing year on year. Demand for lower acuity support has been impacted by the cuts in local authority expenditure but this is not an area of activity in which CareTech operates. Conversely, resources for those with the highest level of need are being maintained and increased in some local authorities. During the past year we have withdrawn 36 places in services for reconfiguration into new care models and have developed 47 beds through reconfiguration plus an additional 70 beds have been brought into service. Further new provision is under development. 2. Specialist Services Year to 30 September 2017 Revenue £15.5m (2016: £10.7m) Contribution to Group Revenue 9.3% (2016: 7.2%) Underlying EBITDA* £3.9m (2016: £2.7m) Capacity 214 (2016: 216) In March 2016, Oakleaf Care (Hartwell) was acquired and added its range of pathways from rehabilitation through to long-term and end of life care for men with acquired brain injury. This acquisition builds on the Group’s existing neurological services and represents a further regional growth platform for the Group. It has been put alongside the Mental Health Services to form the Specialist Services. The reduction in capacity in Specialist Services arises because there have been a small number of beds reconfigured and transferred to Adult Learning Disabilities. The principal reason for the increase in underlying EBITDA of £1.2m was due to Oakleaf Care (Hartwell) being included for the whole of 2017. Specialist Services works in partnerships with the NHS to ensure a successful transition out of acute care, delivering pathways to independence. We have an outstanding track record for helping people away from acute care and supporting them in their own homes. The adult services for this Care Pathway include a community-based hospital, adult residential care homes, independent supported living and community outreach with some transitional services transferred within the Group. Community Specialist Services has always been a critical but relatively neglected area of social care. However, this is changing as the NHS drives to lower bed capacity and accelerated early discharge from acute psychiatric hospital care. The growth of social care is certain and the response by Government to one of the key difficulties is progressing. There has been some progress in the removal of large numbers of learning disabled people from the controversial “Treatment and Assessment Centres” operating at various locations throughout the UK. CareTech has never operated any centres of this type but we understand that the CEO of NHS England has been tasked with ensuring that these centres are re-provided as a matter of urgency. CareTech is seeking opportunities to support the project and to offer a comprehensive solution within its community homes. We are well positioned for expansion in Specialist Services and have a sustainable infrastructure to deliver growth including plans to provide care for women with acquired brain injury in 2018. 3. Foster Care Year to 30 September 2017 Revenue £8.6m (2016: £8.7m) Contribution to Group Revenue 5.2% (2016: 5.8%) Underlying EBITDA* £1.9m (2016: £2.2m) Capacity 301 (2016: 301) Foster Care provides for both mainstream and specialist foster care in small supportive groups across England and Wales for children with disabilities. We also provide foster care family assessments in the home rather than in a residential setting. The unchanged capacity and fall in revenue and underlying EBITDA in Foster Care is due to the competitive nature of the market as well the change to family assessments in the home. It is also due to capacity being reported on the basis of the children that carers are able to look after rather than the number that they are approved for. This trend is driven by cost considerations, where fostering is considerably less expensive than residential care and by perceived quality care factors. It is generally held that fostering in an ordinary family home delivers better quality than any residential setting. However, the rising tide of fostering has been constrained by the challenge of finding foster carers with the right skill and motivation alongside preference by social workers to place within local authority services rather than the independent sector. In 2013, 46% of children placed in foster homes were outsourced to the independent sector. This compares with 67% placed in residential homes operated by independent providers. Our Foster Care teams and Young People Residential teams are working closely alongside each other to offer the best outcomes for Young People. Our market intelligence suggests that most, if not all, independent sector fostering agencies are still experiencing some degree of “hold back” at present. However, the consensus view is that this will not last long and local authorities will inevitably return to progressive outsourcing of foster care provision. Outsourcing is well established in the culture of most local authorities, but the current austerity measures have led a small number of authorities to reflect on the 50% fee premium paid for independent fostering. This disparity of cost can be attributed in part to the fact that the most complex and therefore high cost cases are placed in the care of independent providers. However, it is also clear that local authorities fail to undertake a full cost analysis of their in-house provision. Wherever this has been done, outsourcing is demonstrably much better value. Demand for foster care has increased overall but we have noted an increasing trend among some local authorities to make provision in-house for all but the most complex children. In our view this is an expensive and unsustainable approach that exposes local authority commissioners to risk. Our own services are being maintained at an acceptable level. 22 CareTech Holdings PLC – Annual Report and Accounts 2017 In October 2017 the All Wales Framework for the provision of foster care services outcome was that TLC (Wales) was ranked 1 and was placed in the New Tier 1. This should really assist in the growth of TLC (Wales) due to the level of referrals now being received. Looking forward we are training our foster carers with the skills required to manage more complex work and have linked the fostering division with our residential team for children so that we can maintain an effective care pathway. 4. Young People Residential Services Year to 30 September 2017 Revenue £43.8m (2016: £39.0m) Contribution to Group Revenue 26.4% (2016: 26.2%) Underlying EBITDA* £13.2m (2016: £11.8m) Capacity 284 (2016: 235) A number of children and young people need to live in specialised residential services and receive education. As far as practicable we aim to help these children move into a more normalised family style environment. This segment contains children’s residential care homes, which includes facilities for children with learning difficulties and emotional behavioural disorders (“EBD”), and small specialist schools. In December 2015 ROC Northwest was added and gave a further geographic spread to fit between the current Children residential services in Scotland (Spark of Genius and ACAD) and North Wales (Branas Isaf) and services in Staffordshire and Yorkshire. It also strengthened the residential care and education services for young people with complex needs, especially EBD. In the year this segment benefited from new services which have added 49 beds to capacity with additions to Spark of Genius, ROC Northwest and the original Childrens services. Spark of Genius provides significant benefits across the division due to their well-established education facilities across Scotland and North East England which complement the ROC Northwest and Welsh education facilities. In the year the Education capacity increased by 46 to close at 312 Young People. At the Laing Buisson Awards in November 2017 the winners in Social Care for Children’s Services was ROC Northwest. Children residential services have been growing as our reputation for quality care and support spreads. We are currently developing new beds and places that have been commissioned during the past year. The Aspire programme developed as a unique and innovative scheme that will ensure all CareTech’s support workers receive mandatory and statutory training to the highest standard whilst also being offered the opportunity to complete a Level 2 or Level 3 Apprenticeship which has been carefully tailored to suit their role and 140 completed this apprenticeship in the last academic year. CareTech apprentices continue their training with 321 CareTech support workers undertaking the apprenticeship programme. The Team Leader programme has 47 staff members on Level 5 programmes. In early 2016 Dawn Hodge Associates retained its Ofsted “Outstanding” which is an achievement that we are very pleased to have attained and provides an excellent base to build upon. During 2017 with the introduction of the Apprenticeship Levy there have been significant changes to the Learning sector, but we believe that we are well placed to take advantage of the new market conditions. However, both EQL Solutions and Dawn Hodge Associates faced a challenging start to the new Learning sector year. A reorganisation of the management of the division was undertaken and the budget for the rest of 2018 shows an improvement on last year. Haroon Sheikh Chief Executive Officer 18 December 2017 5. Learning Services Year to 30 September 2017 Revenue £10.4m (2016: £11.2m) Contribution to Group Revenue 6.2% (2016: 7.5%) Underlying EBITDA* £0.9m (2016: £1.0m) Learning Services comprises EQL Solutions which was acquired in 2013 and is a national provider specialising in employment and training services to young people and adults and Dawn Hodge Associates, a regional provider specialising in the social care sector, was acquired in 2016. Their intensive pre-employment, development and apprenticeship programmes use public funds from the Skills Funding Agency to lay the foundations for individuals to achieve their career goals while helping to provide businesses with the vital skills they need in their workforce. As well as supporting the workforce, Learning Services has also developed programmes for service users by enhancing the pathways to independent living and employment. Young People leaving care, for example, often do not know where to find the right job opportunities or have the opportunity to access employer- focused training. We can now bridge that gap by supporting young people as they make the transition to adult life. We are also exploring how best to help individuals return to employment after mental illness and to give people with learning disabilities the skills and confidence to gain employment so that they are able to live more independently. Good progress has been made in identifying the potential for Learning Services to add value to CareTech’s attraction and recruitment of staff and their retention, helping new employees gain the skills and qualifications to grow a successful career in care through an Apprenticeship. * Before unallocated costs. CareTech Holdings PLC – Annual Report and Accounts 2017 23 Strategic ReviewGovernance––Financial Statements Corporate Social Responsibility We have continued to strive for long-lasting improvements in our services in a way that is consistent with the interests and concerns of our stakeholder community. As always, the driving force underpinning CareTech’s operation continues to be the provision of the highest quality of care to our service users. Established during 2017, the CareTech Foundation is an independent grant-making corporate foundation registered with the Charity Commission. Funded and founded by the Group, the Foundation has an independent Board of trustees responsible for delivering its Charitable Objects. The Foundation has ambitious and clear-sighted objectives to deliver meaningful impact to communities in the UK and overseas about which the staff of the Group and its service users feel proud and strongly engaged, providing a unique contribution to the charitable marketplace consistent with the Group’s values and approach. In the year to September 2017 the Group made charitable donations through the Charity Foundation of £4,970. The CareTech Foundation is the first corporate foundation in the UK social care sector, demonstrating the Company’s commitment to wider society and to its staff and its desire to play a strong leadership role within the social care sector. The CareTech Charitable Foundation’s work is focused on the following three key objectives: (1) Physical and learning disabilities and Specialist Services. Supporting disabled people and those with long-term health difficulties, including those with Specialist Services conditions and complex physical and learning disabilities. (2) Skills development for the care sector. Skills development for those from deprived and disadvantaged backgrounds for careers in the care sector. (3) Supporting our communities and the CareTech family. Developing an ambitious corporate social responsibility programme in partnership with the Group, supporting the family and friends of the Group’s staff facing significant financial, health or similar challenges. The Foundation’s focus is devoted to supporting those in need in the UK and in developing countries overseas. The CareTech Charitable Foundation delivers its key objectives through the following key approaches: – Partnership Grant-giving. The CareTech Charitable Foundation supports a small number of significant partnerships with credible and high-quality charities and social enterprises consistent with its three key objectives. To be considered for the Foundation’s support, any partnership must: – Involve medium to long-term investments in innovative and high- impact programmes that will deliver one or more of the Foundation’s objectives. – Demonstrate and be contingent upon any investment by the Foundation leveraging additional investment. – Enable the Foundation to provide wider in-kind support through the expertise of the Group’s staff, supply chain and wider network. – Responsible Business. Strengthening the Group’s strong track record in recognising its responsibilities to the environment and communities in which it operates, the Foundation is funded to bring together and enhance the Company’s responsible business activities. In particular, the Foundation seeks to mobilise a significant staff volunteering programme, building a portfolio of high-quality and credible opportunities available to staff and relevant to the skills of the business staff and the local communities in which the Group operates. – Match-funding. The Foundation provides match-funding to CareTech staff’s individual fundraising efforts for charitable causes in line with the Foundation’s Charitable Objects. – Family & Friends grants. Modest funding support will be available through the Foundation to support the family and friends of CareTech staff facing significant challenges over and above that properly covered by virtue of staff members’ employment contracts. We care about our service users Service users are the reason for our existence and satisfying their needs remains our key objective. As our organisation grows, we strive to maintain a culture which never forgets the important relationship we have with our service users. We seek to nurture these relationships and see them as partnerships of mutual interest and respect, with our person-centred approach ensuring service user interests are safeguarded and vulnerabilities minimised. The further expansion of our Care Pathway strategy seeks to provide our service users with “whole of life” solutions to their needs, maximising independence where possible by encouraging education, promoting choice, being proactive with family members, providing training for employment where feasible and nurturing personal ambition where helpful. In the year we have been celebrating the achievements of our service users across the country, they have been busy creating art pieces for an Art Competition and the finalists are having another series of local awards presentations with a national presentation in November 2017 following the successes in 2015 and 2016. We are determined to preserve the dignity of those we care for and fully support Government initiatives to this end. We see making each day as fulfilled as possible for our service users as a vital ingredient to their, and our, success. We care about the environment We seek to maximise environmental standards in all areas of our organisation. Energy costs are now more closely monitored centrally and with the installation of smart meters being rolled out across our services we are seeking to encourage more efficient consumption of energy, without compromising service user care. Clinical waste management has an environmental impact and we are focused on ways to make this more effective whilst still adhering to statutory requirements. We aim for minimal waste production and waste-free processes. Encouraging the involvement of our workforce in seeking new ways to “be green” is important and we are striving to reduce our carbon footprint in all commercial areas including promoting recycling initiatives, developing a carbon offset scheme for paper usage, using public transport where feasible and improving our energy efficiency. 24 CareTech Holdings PLC – Annual Report and Accounts 2017 We care about our staff We remain committed to ensuring employees share in the success of the Group and fully appreciate that Group performance is affected by the relationship we have with them. We care about quality and safety As a Group, our aim is to provide a safe working environment for service users, staff and visitors. We value the well-being of all stakeholders and develop policies to this end. Sustaining the retention and development of employees is also critical to our continued success and we remain of the belief that fostering a positive workplace culture is the best way for our employees to thrive. Supporting them with regular supervision, training and clear career development programmes promotes staff continuity and leads to improved standards of care quality. In early December 2015 we held our first staff awards ceremony with 10 categories for staff and staff teams across each Division. A larger event was held in November 2016 and the third care awards ceremony was in November 2017. Out of a total of 5,192 staff at the end of September 2017, 69% are female and equal opportunity for all remains at the heart of our recruitment policies and the diversity of our workforce bears this out. We value our staff at all levels and work closely with them through our robust human resources department to foster consultation in all matters, ensure fair pay for all, maximise conditions of service and facilitate flexible working where feasible. During the year we undertook a Staff Engagement Survey which involved all staff and looked at values and questions across five engagement drivers. The feedback has led to a Communication Plan that will lead to improved communication across the Group. We have a team of in-house training staff delivering courses on all relevant subjects, enabling our workforce to gain the skills, knowledge and confidence to provide the care and support to our service users on a daily basis. Our Sharesave share option scheme had been launched in March 2016 with a plan to offer new invitations regularly and to be available to all our employees. Over 200 staff participated in the three-year scheme launched in 2016. We have repeated the sharesave option scheme in 2017 with a further 259 staff participating in the new three-year scheme. It is proposed to launch another scheme in 2018. This participation, along with regular senior management share option awards, contributes to the fulfilment of our desire to reward staff for loyalty, diligence and commitment to high standards of service. Maintaining workplace infrastructures is a core objective and sustained investment in Information Technology, furniture, facilities and equipment enable working environments, be they operational or administrative, to be safe and productive. Regulation is vigorously applied with routine and regular inspections being made by the Care Quality Commission (“CQC”) and Ofsted in England and the services are regulated by the Care and Social Services Inspectorate Wales (“CSSIW”) in Wales and by the Care Inspectorate for Scotland. We continue to resource our own highly experienced internal quality and compliance teams which undertake a programme of regular inspection and assessment and give constructive feedback backed by training and supervision if the requirement is there. We engage the services of outsourced expert advisers ensuring best practice and procedures are maintained. We care about our communities Doing business the right way is of fundamental importance to us. A successful business needs to operate in healthy, thriving communities and needs to be seen as a good neighbour to those communities. We have direct involvement in a variety of community-based programmes further improving our service reputation and helping to foster a strengthened relationship with local authorities. Being a socially responsible organisation with a focus on developing our ethical standards aligned with our economic objectives remains a core aim and we strive to identify the real value of our organisation, beyond its financial bottom line. Considering non-financial values such as reputation, employee commitment and service user fulfilment helps us develop longer-term opportunities, ultimately adding to the financial bottom line. Behaving responsibly and maximising the benefits of a strong relationship with our stakeholders is an integral part of a continuing process of building long-term value. Outlook The coming year shows every sign of being good for health and social care providers and especially for those with an established reputation for quality and innovation. This year there has been significant policy development and we see some indicators that local authorities have recognised the need to maintain or grow their social care budgets. In our view we are in a period in which consolidation will again feature strongly within the corporate sector and we are alert to quality opportunities that may arise. However, we are mindful about acquisition and have robust criteria which must be satisfied to ensure that any acquired business fits our long-term strategic objectives. This has been another progressive year for CareTech and I am indebted to the strong management team who have overseen the provision of diligent and tailored services in what has been a challenging environment for the care sector. CareTech provides high quality care, support and outcomes to our service users. I remain proud to lead the Group, delivering a quality of care that makes a difference to so many lives. Haroon Sheikh Chief Executive Officer 18 December 2017 CareTech Holdings PLC – Annual Report and Accounts 2017 25 Strategic ReviewGovernance––Financial Statements Financial Review The Group has a platform for further acquisitions and growth The Group has continued to make good progress in 2017, and has raised additional funds through a share placement for further acquisitions. Having made one acquisition in the year, the Group is well placed to make further acquisitions and continue the growth in 2018. Results Underlying operating profit improved by 6.9% at £34.2m compared with £32.0m last year. Until 2013 the Group had been making strategic acquisitions to gain market share and extend the care pathway range of services. Since 2013 the focus had been on both organic development and cost efficiencies as well as acquisitions. With two share placements, improved banking facilities and a Ground Rent fund transaction the Group has raised £87m which has been used for acquisitions with four completed in the last two years and one more during 2017. Underlying basic earnings per share remained at 38.03p (2016: 38.03p). In the year underlying profit before taxation increased by 12.6% and underlying profit after tax has risen by 10.8% to £26.6m (2016: £24.0m) due in part to the increase in the effective tax rate. The placing on 23 March 2017, which raised £37.4m (net of expenses) for acquisitions increased the number of shares by 11.0m so the weighted average number of diluted shares rose to 70.1m (2016: 63.2m) being an increase of 10.9%. Basic and diluted earnings per share decreased by 29.55% to 25.48p (2016: 36.17p) and profit after tax reduced by 22.3% to £17.8m (2016: £22.9m). Michael Hill Group Finance Director Cash inflows from operating activities before tax and non-underlying items paid were £32.7m (2016: £34.2m), a reduction of 4.4%. Net debt to the Group’s bankers (as defined in the Financial and Operational Highlights on the inside front cover) at the year end of £147.1m has reduced by £9.3m for the year (2016: £156.4m). The Condensed Income Statement before non-underlying items for the year is summarised in table 1. Revenue Revenue of £166.0m (2016: £149.0m) was 11.4% higher than in 2016. In the year there was the acquisition of Selborne and revenue includes £3.9m from this acquisition. In the established Adult Learning Disabilities segment we continued to experience high levels of occupancy and reported 93% occupancy at 30 September 2017. When this is blended with the facilities that are being reconfigured and so are under development, the overall occupancy level during the second half of the year and at 30 September 2017 was 86% of capacity (September 2016: 86%). As in recent years the demand for residential services continues to be encouraging for high acuity users. As set out in the Chief Executive’s statement and note 4 to the Accounts, we are again reporting segmental information for the financial year and last year which includes information on client capacity and revenue for each segment. Specialist Services has been created from the old Mental Health Services plus the ABI business Oakleaf Care acquired in March 2016, Adult numbers have been restated. The continued development of our care pathways and a growing range of service options has led to the proportion of Adult services revenue rising from 60.5% in 2016 to 62.2% in 2017 and underlying EBITDA before Group Costs moving from 65.2% in 2016 to 65.4% in 2017. 26 CareTech Holdings PLC – Annual Report and Accounts 2017 Table 1 – Condensed Income Statement before non-underlying items Revenue Gross profit Administrative expenses excluding depreciation and share-based payments Underlying EBITDA Underlying EBITDA margin Depreciation Share-based payments charge Underlying operating profit Net financial expenses Underlying profit before tax Underlying taxation Underlying effective tax rate Underlying profit for the year Weighted average number of diluted shares (millions) Growth 11.4% 7.5% 6.9% 12.6% 2017 £m 166.0 59.9 (20.0) 39.9 2016 £m 149.0 54.3 (17.2) 37.1 24.0% 24.9% (5.5) (0.2) 34.2 (4.8) 29.4 (2.8) 9.3% 26.6 70.1 (5.0) (0.1) 32.0 (5.9) 26.1 (2.1) 7.8% 24.0 63.2 Underlying basic earnings per share Full year dividend per share 38.03p 9.90p 38.03p 9.25p Table 2 – Revenue Adult Learning Disabilities Specialist Services Adult Services Young People Residential Services Foster Care Learning Services Children Services Less unallocated Group costs 2017 Revenue £m 2017 Underlying EBITDA £m 2016 Revenue £m 2016 Underlying EBITDA £m 87.7 15.5 103.2 43.8 8.6 10.4 62.8 – 166.0 26.3 3.9 30.2 13.2 1.9 0.9 16.0 (6.3) 39.9 79.4 10.7 90.1 39.0 8.7 11.2 58.9 – 149.0 25.4 2.7 28.1 11.8 2.2 1.0 15.0 (6.0) 37.1 The Young People Residential Services total revenue has risen by 12.3% with Specialist Services growing by 44.9%, Foster Care falling by 1.1% and Learning Services by 7.1%. Their total proportion of the EBITDA before Group costs has moved from 34.8% in 2016 to 34.6% in 2017 due mainly to the acquisitions in the Adult Division Services. Underlying EBITDA and total EBITDA Underlying EBITDA has grown by 7.5% from £37.1m in 2016 to £39.9m in 2017. Underlying EBITDA includes £0.5m from the acquisition of Selborne Care Limited. Underlying EBITDA margin has decreased from 24.9% to 24.0% mainly due to the margin in the total of the acquired businesses being at a lower rate than the other businesses, and the growth in services businesses that require little capital expenditure like Foster Care and the Learning Division. The Adult Learning Disabilities, Specialist Services and Young People Residential Services segments have higher margins but normally require considerable capital expenditure to increase capacity, whilst Supported Living, Foster Care and Learning Services operate at a lower margin in part because they do not require capital expenditure to increase capacity and are not reliant on the Group’s properties. Administrative expenses, before depreciation and share-based payments charges, were £20.0m (2016: £17.2m) and increased by £2.8m during the year. In 2016 they represented 11.5% of Group revenue and in 2017 this further increased to 12.0% of Group revenue. There has been a further considerable effort in the year to tighten administrative expenses with further back office systems centralisation and procurement successes for the Group. The reconfiguration of services is a central part of the Board’s strategy to grow organically. It enhances average fee rates and maintains the Group’s reputation as a provider of highest quality of care. CareTech Holdings PLC – Annual Report and Accounts 2017 27 Strategic ReviewGovernance––Financial Statements Financial Review continued In the year there has also been a greater focus on purchasing properties which are then converted to new services. The number of employees in management and administration has increased by 17 as a result of both the acquisition in the year as well as organic growth. The Time and Attendance system has been implemented across all of the residential services in the year which will further our back office centralisation and ensure that staff are paid more accurately and quickly, as well as giving reliable data on staff rotas and attendance in each service. A new integrated Recruitment system has been implemented in the year. Taxation and diluted earnings per share The effective underlying tax rate was 9.3% (2016: 7.8%) and reflects management’s expectations of future capital investment through organic developments and reconfigurations relative to available capital allowances, the impact of the reduction in the main rate of corporation tax in the year and also the release of a provision for tax no longer required. The weighted average number of shares in issue rose by 10.8% mainly due to the share placement in March 2017. The underlying basic earnings per share remained at 38.03p in 2017 from 38.03p in 2016. Total EBITDA has reduced from £41.3m in 2016 to £35.6m in 2017. Basic and diluted earnings per share reduced by 29.6% to 25.48p (2016: 36.17p) Operating profit and profit before tax The depreciation charge is £5.5m (2016: £5.0m) and reflects the investment in land and buildings, motor vehicles and fixtures, fittings and equipment. After this charge and the share-based payments, underlying operating profit grew 6.9% to £34.2m (2016: £32.0m). Dividends Our policy has been to increase the total dividend per year broadly in line with the movement in underlying diluted earnings per share. The final dividend will therefore increase to 6.60p per share (2016: 6.25p), bringing the total dividend for the year Total operating profit decreased by 25.6% to £22.7m (2016: £30.5m). Underlying EBITDA (Increase) in working capital to 9.90p (2016: 9.25p), a growth of 7.0%. Dividend cover for 2017, based upon diluted earnings per share before non-underlying items is 3.84 times (2016: 4.11 times). Non-underlying items As more fully explained on the face of the Consolidated Statement of Comprehensive Income and in note 5 to the Accounts, the Directors have separately disclosed a number of non-underlying items in order to improve understanding of the underlying trading performance achieved by the Group. Total non-underlying items represent a net charge of £11.4m at operating level (2016: £1.5m) and the principal items are the amortisation of intangible assets and integration and reorganisation costs plus costs of the acquisition. In 2016 non-underlying items were stated net of the IAS 17 profit of £5.6m arising from the ground rent transaction. Cash flow and net debt The cash flow statement and movement in net debt as defined on page 17 to the Group’s bankers for the year is summarised below: 2017 £m 39.9 (7.2) 32.7 (6.3) (5.0) (5.9) (36.4) 37.4 – 16.5 (7.2) 2016 £m 37.1 (2.9) 34.2 (1.5) (5.5) (5.2) (41.9) – 29.9 10.0 (7.9) Net underlying financial expenses of £4.8m (2016: £5.9m) decreased again over the previous year due to the effects of the share placement monies and the new banking facilities, though there were additional finance leases taken out on new home vehicles during the year. Cash inflows from operating activities before non-underlying items Tax paid Interest paid Dividends paid Acquisitions and capital expenditure Underlying profit before tax was £29.4m (2016: £26.1m) which is an increase of 12.6%. Share placement Ground rent transaction Total profit before tax decreased by 25.3% to £16.8m (2016: £22.5m). Cash flow before adjustments Non-underlying cash flows including derivative financial instruments Movement in net debt to the Group’s bankers Opening net debt to the Group’s bankers 9.3 2.1 (156.4) (158.5) Closing net debt to the Group’s bankers (147.1) (156.4) 28 CareTech Holdings PLC – Annual Report and Accounts 2017 At 30 September 2017 the Group has available bank facilities totalling £195m which are sufficient, with cash flow from operating activities, to fund present commitments. The Bank loans not drawn are £16.1m and the £30.0m accordian facility has not been utilised. Outlook The Group is now in a better position than ever before to continue its growth as a pioneering provider of specialist social care services in a UK market which is continuing to grow yet remains fragmented. Michael Hill Group Finance Director 18 December 2017 Net debt to the Group’s bankers at 30 September 2017 of £147.1m (2016: £156.4m) has decreased by £9.3m during the financial year, with an investment of £36.4m in acquisitions and capital improvements during the year. Operating cash flows before non-underlying items The £32.7m (2016: £34.2m) cash inflow from operating activities, before non-underlying items, represents an 82% (2016: 92%) underlying EBITDA cash conversion ratio. Interest and dividend cash flows Interest paid of £5.0m (2016: £5.5m) is reflective of the financial expenses per the Consolidated Statement of Comprehensive Income, whilst dividends paid are consistent with the relevant section earlier in the review. Acquisitions and capital expenditure During the year we invested total funds of £36.4m (2016: £41.9m) on an acquisition and capital expenditure. The Group acquired Selborne Care Limited in June 2017 for a total consideration of £16.6m in cash. The acquisition utilised part of the £37.4m share placement monies raised in March 2017 and there are plans for further acquisitions. Further details of the acquisitions are explained in the Chief Executive’s Statement and Performance Review as well as in the notes to the financial statements. Capital expenditure of £19.8m (2016: £14.3m) includes £10.9m to update our portfolio of assets. Banking arrangements The Group is pleased to have continued its strong relationships with Royal Bank of Scotland, Lloyds TSB, Santander and Allied Irish following the last refinancing in July 2016 when the Group agreed improvements to its banking facilities. The facility was extended to January 2019 and the cost of borrowing was reduced through a reduction in the interest rate. The four banks in the Group’s banking syndicate agreed on 28 March 2017 to defer repayment of the loan instalments due on 1 April 2017 and on 10 October 2017 until January 2019. In total four loan repayments, which were due between 2016 and October 2017 amounting to £21.6m, have been deferred. In addition, there is an uncommitted accordion facility of up to £30m which, together with the deferral of loan repayments, give further support to the Group’s acquisition strategy. It is planned to undertake the re-financing in the first half of 2018 when the most appropriate and cost effective types of funding will be considered. The total of the Group’s current freehold property portfolio is £329m as at 30 September 2017 (2016: £304m). There was an independent valuation by Christie & Co of the Group’s property portfolio of £284m following the ground rent transaction in February 2016 and this increased by £20m in the period to September 2016 due to the cost price of the freehold properties purchased in the two acquisitions and other freehold properties purchased. In the year to September 2017 freehold properties increased by £23.2m with the cost price of the Selborne Care Limited freehold properties being £12.3m and other properties purchased in the year £10.9m. CareTech Holdings PLC – Annual Report and Accounts 2017 29 Strategic ReviewGovernance––Financial Statements Board of Directors An experienced and driven corporate Board Farouq Sheikh Executive Chairman (aged 59) Haroon Sheikh BSc Chief Executive Officer (aged 61) Michael Hill Group Finance Director (aged 66) Michael qualified as a chartered accountant with Deloitte in 1975 and then did an MBA before joining Kimberley Clark as a Financial Analyst managing marketing projects. Michael then had senior financial roles in retailing with the launch of Next, the Electricity privatisation and as Finance Director of quoted Mersey Docks. He was involved from 2001 with the Care Charity, Community Integrated Care, as a Trustee and then Director of Finance and from 2006 as Finance Director of National Fostering Agency. Michael joined CareTech in 2010 to establish the Foster Care division and oversaw its growth. He became Group Finance Director on 2 August 2011 and he is also Company Secretary. Farouq Sheikh has been a key architect in CareTech’s growth, having been co-founder of the Group and involved in the vision and strategy from the outset in 1993. With a background in law and a good understanding of finance and commerce, Farouq has been instrumental in securing debt and equity funding for the Group as well as leading the management team in winning a number of long-term contracts from local and health authorities. Farouq is a leading business entrepreneur, philanthropist and investor within the UK. Farouq has initiated and overseen the successful equity investments and the subsequent exits for 3i Group PLC (in 1996 and 2002) and Barclays Private Equity (in 2002 and 2005). His intimate knowledge of the marketplace, and his commercial and negotiating expertise assisted in the Group’s growth. Under his stewardship, CareTech’s earnings per share has grown significantly from 4.1p in 2005 to 25.48p in the current financial year. Farouq has been presented with a number of Entrepreneur of the Year awards by prestigious organisations including Laing and Buisson, Coutts Bank and Ernst & Young. He also presents widely at healthcare conferences, raising awareness of the learning disability sector. As Patron and Enterprise Fellow of the prestigious Prince’s Trust and as a member of the Mosaic National Advisory Board, Farouq supports young people by passing on his experience and expertise to inspire the next generation of entrepreneurs. Haroon Sheikh, a London University graduate, is one of the UK’s leading entrepreneurs, philanthropists and community figureheads and one of the founders of CareTech. Haroon brings commercial acumen, related industry experience and property knowledge which has been essential in the growth of the business. As Chief Executive Officer, he is actively involved in the day-to-day running of the business and over time has been instrumental in nurturing and supporting the senior management team, bringing together disciplines in care, commerce and property. He has a deep commitment and passion to delivering high-quality care and support to people with a learning disability. In 2008, Haroon and his brother Farouq were winners of the highly valued Coutts Family Business Prize and widely applauded for the quality and social integrity of the company they created. Haroon is Patron and Enterprise Fellow of the Prince’s Trust and is also Vice Chair of the UK Advisory Council of the British Asian Trust under the patronage of HRH Prince Charles. Haroon’s most recent social enterprise was establishing the COSARAF Charitable Foundation to benefit communities and individuals in the UK and abroad. As trustee for International Development, Haroon established the COSARAF Feeding Project which supports the feeding of over 1,500 women and children daily as well as supporting education and water projects in various rural villages across Africa and Asia. 30 CareTech Holdings PLC – Annual Report and Accounts 2017 Karl Monaghan Non-Executive Director (aged 55) Dr Mike Adams OBE Non-Executive Director (aged 46) Jamie Cumming Non-Executive Director (aged 67) After graduating from University College Dublin with a Bachelor of Commerce Degree, Karl trained as a chartered accountant with KPMG in Dublin. He has worked in the corporate finance departments at a number of merchant banks and stockbrokers, latterly at Credit Lyonnais Securities for seven years and Robert W. Baird for two years until June 2002. Karl set up Ashling Capital LLP in December 2002 to provide consultancy services to quoted and private companies. He sits on a number of AIM quoted and private company boards. Mike has a significant track record in the social care, health and disability sectors. For five years he was Director of the National Disability Team, responsible for policy and practice for disabled students in higher education. Mike was Director of Operations for the Disability Rights Commission for two years and was until July 2017 Chief Executive Officer of ecdp, an Essex-based user-led disability organisation. Mike is currently CEO of Purple, a new not for profit organisation launched in July 2016 which provides disability services and products to both disabled people and business. Mike spent nine months as acting Chair of a large acute hospital trust in Essex and has previously chaired an expert panel on Access to Work, the Government’s flagship disability employment programme. Mike has been awarded an Honorary Doctor of Education for disability leadership from Anglia Ruskin University. Jamie Cumming joined the Board as a Non-Executive Director in 2013. Following a long career in corporate advisory and broking in the City, including acting as Chief Executive Officer of N+1Brewin LLP, and latterly as Senior Adviser to Canter Fitzgerald Europe, Jamie has significant experience in working with small and mid-sized UK companies. Jamie currently utilizes his commercial experience in supporting growth companies in non- executive roles, is an associate of Ruffena Capital and has qualified as a fellow of the Chartered Institute of Securities & Investment. CareTech Holdings PLC – Annual Report and Accounts 2017 31 Strategic ReviewGovernance––Financial Statements Corporate Governance Report Do we comply with the UK Corporate Governance Code? The CareTech Board of Directors (the “Board”) remains committed to achieving the highest standards of integrity, ethics, professionalism and business practice throughout its operations. Board and Committee meetings The Board meets in formal session regularly, usually once each month, and members are supplied with financial and operational information in good time for scrutiny in advance of these meetings. We do not comply with the UK Corporate Governance Code. However, we have reported on our corporate governance arrangements by drawing upon best practice available, including those aspects of the UK Corporate Governance Code we consider to be relevant to the Company and best practice. In July 2016 Market Abuse Regulation (MAR) strengthened the existing UK market abuse framework by extending its scope to new markets, new platforms and new behaviours. It also contains prohibitions for insider dealing and market manipulation, and provisions to prevent and detect these. At every Board meeting the Board of Directors covers an AIM continuing obligations questionnaire and declaration of connected party transactions. This sets the tone for corporate behaviour and helps make our governance meaningful and focused on improving our business and protecting Shareholder Value. Who is on our Board? As Executive Chairman, Farouq Sheikh leads the Board and is responsible for its effective running. The Chief Executive is Haroon Sheikh and Michael Hill is the Group Finance Director. The Directors’ biographies appear on pages 30 to 31 and detail their experience and suitability for leading and managing the Group. Karl Monaghan, the Senior Independent Director, Mike Adams and Jamie Cumming are the three Non-Executive Directors and the Board considers each of them as independent. Collectively, the Non-Executive Directors bring a valuable range of expertise and experience in assisting the Group to achieve its strategic aims. In the furtherance of their duties, all Directors are able to take independent professional advice at the expense of the Company and those newly-appointed are made aware of their responsibilities by the Company Secretary. The Board approves the appointment and removal of the Company Secretary. All Directors are required to submit themselves for re-election at least every three years and new Directors are subject to election by shareholders at the first opportunity following their appointment. How do we deal with conflicts of interest? Following amendments to the Company’s Articles of Association in 2008 to reflect certain provisions of the Companies Act 2006 relating to conflicts of interest that came into force on 1 October 2008, the Board will follow a specific procedure when deciding whether to authorise a conflict or potential conflict of interest. Firstly, only independent Directors (i.e. those that have no interest in the matter under consideration) will be able to take the relevant decision. Secondly, in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success. In addition, the Directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate. It remains the Board’s intention to report annually on the Company’s procedures for ensuring that the Board’s power of authorisation in respect of conflicts is operated effectively and that procedures have been followed. The Directors attended the following meetings in the year to 30 September 2017: Board Audit Committee Remuneration Committee 11 11 11 11 11 10 – – 2* 2 2 2 2* – 4 4 4 4 Care Governance and Safeguarding Committee – – – 1 1 1 Farouq Sheikh Haroon Sheikh Michael Hill Karl Monaghan Mike Adams Jamie Cumming * By invitation. The Board holds other Board Meetings specifically for significant transactions involving raising money like the ground rent transaction, or spending money like a significant acquisition. What decision-making responsibilities does the Board have? Matters which are reserved to the Board for specific consideration and decision include: – financial reporting and controls including statutory matters such as the approval of final and interim financial statements and dividend declarations; – Board membership and other senior, key personnel, appointments; – review of corporate governance arrangements; – Group strategy matters including the approval of annual budgets, acquisitions and disposals; – review of the processes for monitoring and evaluating risk and the effectiveness of the Group’s system of internal control and operational efficiency; – review and supervision of treasury and financial policies; and – shareholder communications. Matters are delegated to Board Committees, individual Directors or executive management where appropriate. The Directors believe the Board is soundly constituted although, at this stage of the Group’s development, it is felt the functions of a Nominations Committee can be adequately fulfilled by deliberation of the full Board; this will nevertheless be kept under review. When the need for an additional Non-Executive Director is identified the Board appoints advisers to nominate experienced relevant and appropriate candidates. Board members meet the candidates and come to a collective view on appointments. Who is on the Audit Committee and what do they do? The Audit Committee comprises Karl Monaghan (Chairman), Mike Adams and Jamie Cumming. The Group Finance Director and representatives of the external auditor attend meetings by invitation as required. The Committee meets at least twice each year and receives reports from the Company’s management and external auditor relating to the annual and interim accounts and the accounting and internal control systems throughout the Group. The Committee has direct and unrestricted access to the external auditor and reviews all services being provided by them to evaluate their independence and objectivity, taking into consideration relevant professional and regulatory requirements in order to ensure that said independence and objectivity are not impaired by the provision of permissible, non-audit services. The Committee has carefully considered the level of non-audit services and have concluded that this does not impact on the independence of the auditors. Details of the amount paid to the external auditor during the year, for audit and other services, are set out in note 6 to the financial statements. 32 CareTech Holdings PLC – Annual Report and Accounts 2017 Who is on the Remuneration Committee and what do they do? The composition and role of the Remuneration Committee is set out in the Remuneration Report on pages 37 to 39. Also detailed in that report are Directors’ remuneration, shareholdings and share options scheme information. The Group has 150 adult services regulated by the Care Quality Commission (CQC) who assess the services against approved essential standards of quality and safety. The regulators test and publicly record whether services are compliant or non-compliant against those standards. A key Group strategy is to attract and retain talented and committed personnel at every level of the organisational hierarchy and the Committee aims to foster remuneration philosophy, policies and procedures to achieve this. The Group operates in a highly competitive environment. For the Group to continue to compete successfully, it is essential that the level of remuneration and benefits offered achieve the objectives of attracting, retaining, motivating and rewarding the necessary high calibre of individuals at all levels across the Group. During the year Deloitte LLP were commissioned to prepare a Benchmarking report which has been used to provide a useful analysis of the market for each element of pay. The Group therefore sets out to provide competitive remuneration to all its employees, appropriate to the business environment in the market in which it operates. To achieve this, the remuneration package is based upon the following principles: – total rewards should be set to provide a fair and attractive remuneration package; – appropriate elements of the remuneration package should be designed to reinforce the link between performance and reward; and – Executive Directors’ incentives should be aligned with the interests of shareholders. The remuneration strategy is designed to be in line with the Group’s fundamental values of fairness, competitiveness and to support the Group’s corporate strategy. A cohesive reward structure consistently applied and with links to corporate performance, is seen as critical in ensuring attainment of the Group’s strategic goals. Who is on the Care Governance and Safeguarding Committee and what do they do? The Care Governance and Safeguarding Committee is chaired by Mike Adams and the other members of the Board Committee are Karl Monaghan and Jamie Cumming plus the Chief Operating Officer John Ivers and the Director of Compliance and Regulation Amanda Sherlock. The Committee was formed because the Board is sensitive to the public’s increased awareness and anxiety about care governance and safeguarding. In 2013 the Whistleblowing “Tell Us” Campaign was introduced by this Committee and it is pioneering because it provides direct access to the CEO. The Group has always been regarded as a careful and thoughtful provider of care and the Committee was formed to closely examine and pursue improvements to all matters relating to the care governance and the safeguarding of those we support, including health and safety, across the Group. Last year it included external attendees to its meetings such as the Head of Safeguarding for Hertfordshire County Council and received external presentations such as Conflict Management from Maybo to help the Committee understand best practice and in 2017 met with CQC. We have held several useful meetings with regulators and also invited key regulation managers to attend our Care Governance and Safeguarding Committee. The Committee is seen as a pioneering initiative that has won friends and encouragement from regulators and commissioners alike. The Committee brings Non-Executive Directors into a much closer relationship with our everyday work and they have adopted a robust scrutiny approach to care practice. This in itself has had a positive impact on care quality and the executive team has been encouraged to introduce quality initiatives across the Company. The new monitoring system has four levels of CQC reporting outcomes and has been applied so far by CQC to all of our Adult Services. The National distribution across the four outcomes is shown in the table below with 97% of services being either “Good” or “Requires Improvement” is a service which has a requirement that needs to improve to achieve good. Above “Good” is Outstanding for 1% of services and below is “Inadequate” for 2%. For the Group’s services the published reports are as follows with the services in the outcomes as set out: Ratings National CareTech Outstanding 1% – Good 71% 82% Requires improvement Inadequate 26% 17% 2% 1% Adult services in Wales are regulated under different national legislation and are not currently rated on any form of scale, though all are compliant. Our Children division is regulated by the Office for Standards in Education (Ofsted) in England and these services are rated as Outstanding or Good under the old monitoring system. Since April 2016 for Residential Services there is no longer an overall rating and services are rated under three domains and the Group has had 15 published reports. The Fostering services in England are regulated by Ofsted and all three services are rated Good. In Wales the services are regulated by the Care and Social Services Inspectorate Wales (CSSIW) and are not currently rated on any form of scale. The Care Inspectorate of Scotland who regulate both Adults and Children Services have the majority of the Group’s rated Residential Services as Excellent or Very Good for both the established services and the acquired services in Scotland. The Care Governance and Safeguarding Committee has oversight of all issues and reports relating to the well-being of service users, commissions enquiries into matters of concern and ensures that the Executive Team operates to the highest possible level of professional care standards. Throughout the past year the Care Governance and Safeguarding Committee has invited operational managers, regulators and local safeguarding lead officers to attend its meetings. The Care Governance and Safeguarding Committee works in close association with the Group’s internal regulatory compliance team who operate across all divisions, reporting direct to the CEO. Have we maintained an effective relationship with our shareholders? The Board appreciates that effective communication with the Company’s shareholders and the investment community as a whole is a key objective. The views of both institutional and private shareholders are important, and these can be varied and wide-ranging, as is their interest in the Company’s strategy, reputation and performance. The Executive Chairman has overall responsibility for ensuring this communication is effectively conveyed and for making the Board fully aware of key shareholders’ views, comments and opinions. Contact with investors throughout the year is a priority and the Board strives to look after their interests. General presentations to major shareholders following the publication of the Group’s annual and interim results are conducted by the Executive Chairman and the Group Finance Director as are regular meetings through the year with fund managers and investment analysts. CareTech Holdings PLC – Annual Report and Accounts 2017 33 Strategic ReviewGovernance––Financial Statements Corporate Governance Report continued Robust year-on-year dividend growth is an objective and all shareholders are encouraged to attend the Company’s Annual General Meeting, which all Board members attend, as this provides an opportunity to address questions to the Directors. The Group’s annual and interim reports are sent to all shareholders and all results, Company announcements and related investor information can be accessed via the Group’s website, www.caretech-uk.com. The website is under constant review in an effort to maximise the effectiveness of information made available to shareholders. How do we manage our internal controls and risks? The Board is ultimately responsible for the Group’s system of internal controls and for reviewing its effectiveness. The role of management is to implement Board policies on risk and control. The system of internal controls is designed to manage rather than eliminate the risk of failure of the achievement of business objectives. In pursuing these objectives, internal controls can only provide reasonable and not absolute assurance against material misstatement or loss. The processes used by the Board to review the effectiveness of the system of internal controls include the following: – annual budgets are prepared for each operating business. Monthly management reporting focuses on actual performance against these budgets for each operating business; – management reports and external audit reports on the system of internal controls and any material control weaknesses that are identified; – discussions with management including discussions on the actions taken on problem areas identified by Board members or in the external audit reports; – policies and procedures for such matters as delegation of authorities, capital expenditure and treasury management as well as regular updates; – review of the adequacy of the level of experienced and professional staff throughout the business and the expertise of individual staff members so that they are capable of carrying out their individual delegated responsibilities; and – review of the external audit work plans. By order of the Board Michael Hill Company Secretary 18 December 2017 The recent challenging business climate has resulted in a sustained focus on the approach to risk. The Directors consider robust risk management to be crucial to the Group’s success and give a high priority to ensuring that adequate systems are in place to evaluate and limit risk exposure. They have overseen the further development of processes and procedures for identifying, analysing and managing the significant risks faced by the Group. These risks have been discussed in the Strategic Report on pages 12 to 19. These processes have been implemented during the year under review and up to the date of approval of this annual report and financial statements. The processes and procedures are regularly reviewed by the Board. A process of control and hierarchical reporting provides for a documented and auditable trail of accountability. These procedures are relevant across all Group operations: they provide for successive assurances to be given at increasingly higher levels of management and, finally, to the Board. In 2018 there will be changes to the governance of data and the new General Data Protection Regulations (GDPR) will change how the Group manages, protects and administers data. A team of Senior Managers are looking at how data flows in and out, and where it is stored throughout the Group. 34 CareTech Holdings PLC – Annual Report and Accounts 2017 Directors’ Report The Directors present their report and the audited Group financial statements for the year ended 30 September 2017. Business review and future developments The consolidated statement of comprehensive income detailed on page 45 sets out the Group’s financial results for the year. Key performance indicators are set out in the Financial and Operational Highlights. Key risks and uncertainties There are a number of risks and uncertainties which could impact on the Group’s long-term performance. These are set out in the Strategic Report on pages 18 and 19. Dividends Dividends of £5,933,000 have been paid during the year. The Directors propose a final dividend of 6.60p per share (2016: 6.25p) subject to the approval at the forthcoming Annual General Meeting. Share listing The Company’s ordinary shares are admitted to and traded on AIM, a market operated by the London Stock Exchange. Further information regarding the Company’s share capital, including movements during the year, are set out in note 21 to the financial statements. Financial instruments The Group is exposed to a combination of price, credit, interest rate and cash flow risks. The Group uses financial instruments including cash, borrowings and interest rate swaps, the main purpose of which are to raise finance for the Group’s activities and to manage interest rate risks. Disclosures in respect of these instruments are set out in note 24 to the financial statements. Employees The Directors recognise the benefits which arise from keeping employees informed of the Group’s progress and plans and through their participation in the Group’s performance. The Group is therefore committed to providing its employees with information on a regular basis, to consulting with them on a regular basis so that their views and/or concerns may be taken into account in taking decisions which may affect their interests, and to encouraging their participation in schemes through which they will benefit from the Group’s progress and profitability. CareTech aims to foster a working environment in which all employees are treated with courtesy and respect and seeks at all times to provide opportunities to develop and reach their full potential. The Group established a new sharesave share option scheme for eligible employees in 2016, details of which can be found in note 20 along with options remaining on previous schemes. The Board feels that share ownership among employees fosters team spirit and motivation and will contribute to the ultimate success of the Group. It is the Group’s policy to ensure that disabled persons are treated fairly and consistently in terms of recruitment, training, career development and promotion and that their employment opportunities should be based on a realistic assessment of their aptitudes and abilities. Wherever possible, the Group will continue the employment of persons who become disabled during the course of their employment through retraining, acquisition of special aids and/or equipment or the provision of suitable alternative employment. Authority to allot shares Pursuant to resolutions approved at the Annual General Meeting on 7 March 2017 the Directors were granted authority to allot shares with an aggregate nominal value of up to the value of one third of the share capital of the Company. The Directors were also granted authority to allot equity securities for cash to the holders of ordinary shares as the Directors may determine on the register on a fixed record date in proportion (as nearly as may be) to their respective shareholding or in accordance with the rights attached thereto. Resolutions for the renewal of both of the above will be proposed at the forthcoming Annual General Meeting, further details of which, together with explanations of the resolutions to be proposed at the meeting, appear in the “Notice of AGM and explanatory circular to shareholders” which will be sent to shareholders in good time prior to the meeting. Substantial shareholdings As at 7 December 2017, being the date of the preliminary results announcement, the Company had been notified of, or was otherwise aware of, the following substantial interests of 3% or more in the ordinary share capital of the Company, other than those in respect of the Directors which are set out in the Remuneration Report on pages 37 to 39. Liontrust Asset Mgt Hof Hoorneman Bankiers 1798 Volantis Hargreave Hale BlackRock Investment Mgt Majedie Asset Mgt Mr Hendrik M Van Heijst Brooks Macdonald Asset Mgt Theodoor Gillisen Bankiers Polygon Investment Partners Number of ordinary shares of 0.5p Percentage 11,052,612 4,426,500 4,406,791 4,116,680 3,694,326 3,074,682 2,870,000 2,819,265 2,456,705 2,400,000 14.6 5.85 5.82 5.44 4.88 4.06 3.79 3.72 3.25 3.17 Directors The names of the current Directors together with brief biographical details are shown on pages 30 to 31. In accordance with the articles of association, M Hill and K Monaghan retire by rotation and, being eligible, offer themselves for re-election. The names of all Directors who held office in the year are as follows: Farouq Sheikh Haroon Sheikh Karl Monaghan Mike Adams Michael Hill Jamie Cumming The terms of the Directors’ service contracts and details of the Directors’ interests in the shares of the Company, together with details of share options granted and any other awards made to the Directors, are disclosed in the Remuneration Report commencing on page 38. CareTech Holdings PLC – Annual Report and Accounts 2017 35 Strategic ReviewGovernance––Financial Statements Directors’ Report continued Directors’ insurance The Company maintains appropriate Directors’ and Officers’ liability insurance, as permitted by the Companies Act 2006. Going concern After making appropriate enquiries and reviewing the year end balance sheet position, the Directors have reasonable expectations that the Group is well placed to manage its business risks successfully and has adequate resources to continue in operational existence for at least the next 12 months. The Group has prepared detailed budgets and cash flow forecasts and have considered the capital and working capital requirements. There are a number of Banking Covenants which ratchet depending upon time and Group performance. The Directors forecast that they are able to meet all banking covenants which are reviewed regularly. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements. Auditor Grant Thornton UK LLP have expressed their willingness to continue in office and, in accordance with section 489 of the Companies Act 2006, a resolution for their reappointment will be proposed at the forthcoming Annual General Meeting. By order of the Board Michael Hill Company Secretary 18 December 2017 Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG 36 CareTech Holdings PLC – Annual Report and Accounts 2017 Remuneration Report The Remuneration Committee comprises three Non-Executive Directors, Jamie Cumming (Chairman), Karl Monaghan and Mike Adams, and meets at least twice each year. The Company Secretary, Michael Hill, is the secretary of the Remuneration Committee. The Committee members have no personal financial interest, other than as shareholders, in the matters to be decided. They have no conflicts of interest arising from cross-directorships or from being involved in the day-to-day business of the Group. They do not participate in any bonus, share option or pension arrangements. The Committee’s principal duties are to review the scale and structure of the remuneration and service contracts for Executive Directors and Senior Management and it also administers the Company’s share option schemes. The Committee takes into consideration environmental, social and governance (“ESG”) issues, in relation to corporate performance, when setting the remuneration of Executive Directors and takes steps to ensure that the incentive structure for Senior Management does not raise ESG risks by inadvertently motivating irresponsible behaviour. Remuneration Policy CareTech’s remuneration policy is to provide for each of its Executive Directors and key personnel a package which is adequate to attract, retain and motivate individuals of the appropriate calibre, whilst at the same time not paying more than is necessary for this purpose. The Remuneration Committee has the objective of ensuring that remuneration packages are offered which: – are set at a level reflecting the competitive market in which the Group operates; – have a significant part of remuneration linked to the achievement of performance targets; – have due regard to actual and expected market conditions; – are structured in accordance with the interests of shareholders; and – foster the development of a high-performance culture across the Group. The following comprised the principal elements of remuneration for Executive Directors and Executive Management for the year under review: – basic salary; – bonus; – benefits, including car allowance, vehicle expenses and healthcare insurance; and – pension contribution. The remuneration for Non-Executive Directors is set by the full Board on the recommendation of the Executive Directors. Non-Executive Directors are not eligible to participate in any of the Company’s bonus or share option schemes. During the year Deloitte LLP were commissioned to prepare a Benchmarking report which provided for each benchmarking group a quartile analysis of the different elements of pay for a number of management roles and Non-Executive Director roles. Bonuses paid in 2017 and 2016 to Executive Directors are triggered by the achievement of Underlying EBITDA targets. The potential Bonus for the financial year 2017/18 will be triggered by Underlying EBITDA and also comprises other measures of quality, EPS and occupancy. Directors’ service agreements All Executive Directors’ service contracts are subject to 12 months’ notice of termination on either side. The Non-Executive Directors have each been appointed under contracts which are subject to three months’ notice of termination on either side. CareTech Holdings PLC – Annual Report and Accounts 2017 37 Strategic ReviewGovernance––Financial Statements Remuneration Report continued Directors Remuneration (audited) The various elements of the remuneration received by each Director were as follows: Year to 30 September Current Directors Farouq Sheikh Haroon Sheikh Karl Monaghan Mike Adams Michael Hill Jamie Cumming Total 1,003 Salary and fees 2017 £000 2016 £000 Benefits 2017 £000 Annual bonus 2016 £000 2017 £000 2016 £000 Total 2017 £000 2016 £000 Pension 2017 £000 2016 £000 336 326 50 40 211 40 336 275 50 40 173 40 914 22 52 – – 21 – 95 23 48 – – 19 – 90 77 52 – – 37 – 76 52 – – 37 – 435 430 50 40 269 40 435 375 50 40 229 40 166 165 1,264 1,169 – – – – 12 – 12 – – – – 11 – 11 Directors’ interests The Directors who held office at the end of the financial year had the following interests in the ordinary share capital of the Company according to the register of Directors’ interests: Westminster Holdings Limited(1) Cosaraf Trust(2) Cosaraf Pension Fund(3) Farouq Sheikh Haroon Sheikh Michael Hill Karl Monaghan Mike Adams 30 September 2017 Number of ordinary 0.5p shares 9,763,519 – 170,000 638,919 690,226 137,405 34,250 2,300 30 September 2016 Number of ordinary 0.5p shares 11,263,519 2,060,091 170,000 485,000 485,000 47,619 34,250 2,300 (1) Westminster Holdings Limited is a company owned by a trust, the beneficiaries of which include Farouq Sheikh and Haroon Sheikh. (2) Cosaraf Trust is a trust whose beneficiaries are the children of Farouq Sheikh and Haroon Sheikh. Farouq Sheikh and Haroon Sheikh are the trustees of this trust. (3) Cosaraf Pension Fund is a self-administered scheme established for the benefit of Farouq Sheikh and Haroon Sheikh. 38 CareTech Holdings PLC – Annual Report and Accounts 2017 Directors’ share options and Sharesave options Farouq Sheikh, Haroon Sheikh and Michael Hill had owned 285,000, 380,000 and 166,250 ordinary shares of 0.5p respectively under the Group’s Executive Shared Ownership Plan established in April 2012 which completed the three-year period in April 2016 (see note 20). As part of the placing announced on 22 March 2017, Farouq Sheikh, Haroon Sheikh and Michael Hill have each now taken sole ownership of 153,919, 205,226 and 89,786 ordinary shares. These ordinary shares are included in a 12-month lock-in covering in aggregate, 2% of the Company’s issued share capital. On 29 March 2016 the Group’s Executive Shared Ownership Plan 2016 was created. Farouq Sheikh, Haroon Sheikh and Michael Hill own 320,000, 320,000 and 189,000 ordinary shares of 0.5p respectively under the Group’s Executive Shared Ownership Plan 2016 (see note 20). On 17 March 2016 the Company granted options in aggregate over 474,581 ordinary shares pursuant to the CareTech Holdings PLC Sharesave Scheme 2016. It is a three-year contract with a start date of 1 May 2016 with options exercisable at a price of 194p per share between 1 May 2019 and 31 October 2019. Within the options described above, there were options granted to Farouq Sheikh, Haroon Sheikh and Michael Hill of 9,278 each under the Sharesave Scheme. On 17 October 2017 the Company granted options in aggregate over 254,681 ordinary shares pursuant to the CareTech Holdings PLC Sharesave scheme 2017. It is a three-year contract with a start date of 1 December 2017 with options exercisable at a price of 308p per share between 1 December 2020 and 31 May 2021. Farouq Sheikh, Haroon Sheikh and Michael Hill did not participate in the sharesave scheme 2017 as they already save £500 a month under the sharesave scheme 2016 and this is a HMRC limit. None of the Directors have any other share options in the Company. By order of the Board Jamie Cumming Chairman of the Remuneration Committee 18 December 2017 Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG CareTech Holdings PLC – Annual Report and Accounts 2017 39 Strategic ReviewGovernance––Financial Statements Statement of Directors’ Responsibilities The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. The Directors confirm that: – so far as each Director is aware, there is no relevant audit Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. information of which the Company’s auditor is unaware; and – the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board Michael Hill Company Secretary 18 December 2017 Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG 40 CareTech Holdings PLC – Annual Report and Accounts 2017 Independent Auditor’s Report to the members of CareTech Holdings PLC Our opinion on the financial statements is unmodified We have audited the financial statements of CareTech Holdings PLC (the “parent Company”) and its subsidiaries (the “Group”) for the year ended 30 September 2017 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flow, the Company Statement of Financial Position, the Company Statement of Changes in Equity, the Company Statement of Cash Flow and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: – the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 30 September 2017 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; – the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group and the parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Who we are reporting to This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: – the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or – the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from the date when the financial statements are authorised for issue. Overview of our audit approach – Overall materiality: £1.58m, which represents 4% of the Group’s underlying EBITDA. – Key audit matters were identified as completeness of revenue, capitalisation of plant, property and equipment and capitalisation of development costs. – We performed a full scope audit of the financial information of the UK head office, in respect of the parent Company and the Group consolidation. – There were no key changes in the scope of the audit from the prior year. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. CareTech Holdings PLC – Annual Report and Accounts 2017 41 Strategic ReviewGovernance––Financial Statements Independent Auditor’s Report to the members of CareTech Holdings PLC continued Key audit matter – Group Completeness of revenue Revenue is comprised of a number of different revenue streams, including the provision of care services, fostering services and learning services. The Group’s revenue has increased from £149.0m to £166.0m as a result of: – The acquisition of ROC North West Limited and Oakleaf Care (Hartwell) Limited in the prior period whereby a full year of revenue has been recognised in the current year. – The acquisition of Selbourne Care Limited in the current year. – Organic growth within the core care and fostering services. Due to the nature of the occupancy and billing processes and systems and the significant number of sites within the Group, we identified completeness of revenue as a significant risk, which was one of the most significant assessed risks of material misstatement. Capitalisation of plant, property and equipment The Group’s net book value of plant, property and equipment increased from £267.7m in 2016 to £297.2m in 2017. There were additions in the year totalling £35.2m (£17.6m of which related to the acquisition of Selbourne Care Limited during the year). The Group invests significant amounts in plant, property and equipment annually and therefore there is a risk that a material error could occur if items have been incorrectly capitalised. We therefore identified capitalisation of plant, property and equipment as a significant risk, which was one of the most significant assessed risks of material misstatement. Capitalisation of development costs The Group capitalises development costs within software and licences The amount capitalised in the year amounted to £3.4m (2016: £3.6m). The capitalisation of development costs under IAS 38 involves judgement and therefore there is a risk that a material error could occur if items have been incorrectly capitalised. We therefore identified capitalisation of development costs as a significant risk, which was one of the most significant assessed risks of material misstatement. How the matter was addressed in the audit Key observations Our testing did not identify any material misstatements in relation to the completeness of revenue. Our testing did not identify any material misstatements in the capitalisation of plant, property and equipment during the year. Our testing did not identify any material misstatements in the capitalisation of development costs during the year. Our audit work included, but was not restricted to: – We tested the design and implementation of key controls around the revenue cycle including the admissions and discharge process for service users. – For a sample of both new and existing service users, we agreed the receipt of revenue to remittance advice from Local Authorities. – We performed substantive analytical procedures on revenue based on occupancy numbers across the Group. – We tested credit notes raised during the year and subsequent to the year-end to confirm there was no gross up of revenues. The Group’s accounting policy on revenue recognition is shown in note 2(m) to the financial statements and related disclosures are included in note 4. Our audit work included, but was not restricted to: – We agreed a sample of capital expenditure in the year to supporting documentation and confirmed that the accounting treatment was appropriate and in accordance with the requirements of IAS 16 ‘Property, Plant and Equipment’. – We agreed that appropriate de-recognition of assets has occurred when replacement or refurbishment projects have taken place in the year. – We obtained finance and operating lease schedules and agreed that new leases were correctly recognised in line with third party documentation. The Group’s accounting policy on plant, property and equipment is shown in note 2(d) to the financial statements and related disclosures are included in note 12. Our audit work included, but was not restricted to: – We agreed that the development costs meet the criteria for capitalisation stated within IAS 38 ‘Intangible Assets’. – We gained an understanding of the projects under development through the analysis of papers prepared by management to agree these projects meet the recognition criteria under IAS 38. – We confirmed that salaries were capitalised in accordance with IAS 38, in particular that the developments meet the technical and commercial feasibility criteria. – We agreed, on a sample basis, relevant payroll costs to payroll records. 42 CareTech Holdings PLC – Annual Report and Accounts 2017 Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work. Materiality was determined as follows: Materiality measure Group Financial statements as a whole We determined materiality for the audit of the Group financial statements as a whole to be £1.6m, which is 4% (2016: £1.9m, which is 5%) of the Group’s underlying operating profit stated before depreciation, amortisation of intangible assets, and share-based payments charge (EBITDA). This benchmark is considered the most appropriate because of the nature of the listing of the Group on the AIM market and hence the focus by various stakeholders on this balance. Underlying EBITDA represents a key performance measure for the Group and due to the non-recurring nature of the exceptional items, we consider it appropriate that these are excluded. This approach is consistent with prior year. Parent We determined materiality for the audit of the parent Company financial statements to be £1.5m, which is 0.5% (2016: £1.3m, which is 0.5%) of the parent’s total assets. This benchmark is considered the most appropriate as the parent Company does not trade. Performance materiality used to drive the extent of our testing Materiality for the current year is lower than the level that we determined for the year ended 30 September 2016 to reflect emerging market practice and guidance issued by the Financial Reporting Council. We use a different level of materiality, performance materiality, to drive the extent of our testing and this was set at 60% of financial statement materiality for the audit of the Group financial statements. Materiality for the current year is higher than the level that we determined for the year ended 30 September 2016 based on the increased level of total assets. We use a different level of materiality, performance materiality, to drive the extent of our testing and this was set at 60% of financial statement materiality for the audit of the parent company financial statements. Specific materiality We also determine a lower level of specific materiality for certain areas such as Directors’ remuneration and related party transactions. We also determine a lower level of specific materiality for certain areas such as related party transactions. Communication of misstatements to the Audit Committee We determined the threshold at which we will communicate misstatements to the Audit Committee to be £79,000. In addition we will communicate misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. We determined the threshold at which we will communicate misstatements to the Audit Committee to be £74,000. In addition we will communicate misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. CareTech Holdings PLC – Annual Report and Accounts 2017 43 Strategic ReviewGovernance––Financial Statements Independent Auditor’s Report to the members of CareTech Holdings PLC continued An overview of the scope of our audit Our audit approach was a risk-based approach founded on a thorough understanding of the Group’s business, its environment and risk profile and in particular include: – Evaluation by the Group audit team of identified components Matters on which we are required to report by exception We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: – adequate accounting records have not been kept by the parent to assess the significance of that component and to determine the planned audit response based on a measure of materiality, considering each as a percentage of total Group assets, liabilities, revenues and underlying EBITDA. – Management prepare and report on the results on a Group basis rather than on a Company basis, all of which conduct activities within the UK. The subsidiaries in the Group are 100% controlled by CareTech Holdings PLC and the Company provides a guarantee for all the subsidiary liabilities apart from a limited number of subsidiaries as stated in note 14 of the financial statements. All accounting records and the finance team are located at head office within a shared service centre and accordingly, our work was conducted there. At the parent entity level, we have also tested the consolidation process. – We evaluated controls over the financial reporting systems identified as part of our risk assessment and addressed critical accounting matters. We tested the controls around revenue recognition and operating expenses to confirm the controls were designed and operating effectively. We then undertook substantive testing on significant transactions and material account balances. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report set out on pages 1 to 40, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion, based on the work undertaken in the course of the audit: – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the Strategic Report and the Directors’ Report have been prepared Company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent Company financial statements are not in agreement with the accounting records and returns; or – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit Responsibilities of Directors As explained more fully in the Statement of Directors’ Responsibilities set out on page 40 the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Malcolm Gomersall Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountant Milton Keynes in accordance with applicable legal requirements. 18 December 2017 Matters on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the Group and the parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. 44 CareTech Holdings PLC – Annual Report and Accounts 2017 Consolidated Statement of Comprehensive Income for the year ended 30 September 2017 Revenue Cost of sales Gross profit Administrative expenses Operating profit EBITDA(ii) Depreciation Amortisation of intangible assets Share-based payments charge Operating profit Financial expenses Profit before tax Taxation Note Underlying £000 4 166,018 (106,110) 59,908 2017 Non- underlying(i) £000 Total £000 Underlying £000 – – – 166,018 148,979 (106,110) (94,682) 59,908 54,297 2016 Non- underlying(i) £000 – – – Total £000 148,979 (94,682) 54,297 (25,758) 34,150 (11,483) (11,483) (37,241) (22,328) 22,667 31,969 (1,510) (1,510) (23,838) 30,459 12 13 5,8 39,885 (5,525) (210) 34,150 (4,770) 29,380 (4,293) 35,592 – (7,190) – (11,483) (1,118) (12,601) (5,525) (7,190) (210) 22,667 (5,888) 16,779 37,056 (5,026) – (61) 31,969 (5,887) 26,082 4,233 – (5,743) – (1,510) (2,037) (3,547) 41,289 (5,026) (5,743) (61) 30,459 (7,924) 22,535 5,9 (2,744) 3,814 1,070 (2,035) 2,371 336 Profit and comprehensive income for the year attributable to equity shareholders of the parent 26,636 (8,787) 17,849 24,047 (1,176) 22,871 Earnings per share Basic Diluted 10,11 10,11 38.03p 38.02p 25.48p 25.48p 38.03p 38.03p 36.17p 36.17p (i) Non-underlying items comprise: amortisation of intangibles, acquisition expenses, fair value adjustments on acquisitions, changes in value and additional finance payments in respect of derivative financial instruments, integration, reorganisation and redundancy costs and provision for onerous leases. See note 5. (ii) EBITDA is operating profit stated before depreciation, amortisation of intangible assets and share-based payments charge. CareTech Holdings PLC – Annual Report and Accounts 2017 45 Strategic ReviewGovernance––Financial Statements Consolidated Statement of Financial Position as at 30 September 2017 Assets Non-current assets Property, plant and equipment Other intangible assets Goodwill Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity Share capital Share premium Shares held by Executive Shared Ownership Plan Merger reserve Retained earnings Total equity Liabilities Non-current liabilities Loans and borrowings Ground rent liabilities arising under IAS 17 Deferred tax liabilities Deferred and contingent consideration payable Derivative financial instruments Current liabilities Loans and borrowings Trade and other payables Ground rent liabilities arising under IAS 17 Deferred and contingent consideration payable Deferred income Corporation tax Derivative financial instruments Total liabilities Total equity and liabilities Note 2017 £000 2016 £000 12 13 13 15 16 21 21 21 21 21 297,170 267,667 40,954 43,098 43,982 43,021 381,222 354,670 835 23,519 6,402 30,756 815 18,508 4,308 23,631 411,978 378,301 379 120,778 (4,750) 9,023 78,771 204,201 321 81,750 (6,072) 9,023 66,645 151,667 17 145,872 153,742 19 23 24 17 18 23 24 7,294 17,843 1,133 172 7,343 21,552 2,025 964 172,314 185,626 7,662 15,709 50 2,420 1,762 7,092 768 35,463 207,777 411,978 6,990 17,666 50 3,850 2,119 9,250 1,083 41,008 226,634 378,301 These financial statements were approved by the Board of Directors and authorised for issue on 18 December 2017 and were signed on its behalf by: Farouq Sheikh Chairman Company number: 04457287 Michael Hill Group Finance Director 46 CareTech Holdings PLC – Annual Report and Accounts 2017 Consolidated Statement of Changes in Equity as at 30 September 2017 At 1 October 2015 Profit for the year Total comprehensive income Issue of ordinary shares Equity settled share-based payments charge Dividends Transactions with owners recorded directly in equity Share capital £000 311 Share premium £000 76,985 Shares held by Executive Shared Ownership Plan £000 (1,280) Merger reserve £000 8,748 Retained earnings £000 48,935 Total equity £000 133,699 – – 10 – – 10 – – – – 4,765 (4,792) – – – – 4,765 (4,792) – – 275 – – 275 22,871 22,871 – 61 (5,222) (5,161) 22,871 22,871 258 61 (5,222) (4,903) At 30 September 2016 321 81,750 (6,072) 9,023 66,645 151,667 At 1 October 2016 321 81,750 (6,072) 9,023 66,645 151,667 Profit for the year Total comprehensive income Issue of ordinary shares Equity settled share-based payments charge Dividends Transactions with owners recorded directly in equity – – 58 – – 58 – – – – 39,028 1,322 – – – – 39,028 1,322 – – – – – – 17,849 17,849 17,849 17,849 – 210 (5,933) (5,723) 40,408 210 (5,933) 34,685 At 30 September 2017 379 120,778 (4,750) 9,023 78,771 204,201 CareTech Holdings PLC – Annual Report and Accounts 2017 47 Strategic ReviewGovernance––Financial Statements Consolidated Statement of Cash Flow for the year ended 30 September 2017 Cash flows from operating activities Profit before tax Adjustments for: Financial expenses Onerous lease provision charge Depreciation Amortisation Share-based payments charge Acquisition transaction cost Costs arising from placement of shares Integration and restructuring costs Profit on disposal of property, plant and equipment Operating cash flows before movement in working capital Increase in Inventory Increase in trade and other receivables Decrease in trade and other payables Operating cash flows before adjustment items Integration and restructuring costs Payments made under onerous contracts Cash inflows from operating activities Tax paid Net cash from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Payments for business combinations net of cash acquired Acquisition of property, plant and equipment Acquisition of software Payment of acquisition costs Net cash used in investing activities Cash flows from financing activities Proceeds from the issue of share capital Interest paid Cash outflow arising from derivative financial instruments Bank loans drawdown Repayment of borrowings Payment of finance lease liabilities Dividends paid Net cash arising from/(used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 October Cash and cash equivalents at 30 September 48 CareTech Holdings PLC – Annual Report and Accounts 2017 Note 2017 £000 2016 £000 16,779 22,535 8 5 12 13 20 5 5 5 12 5(i) 23 13 21 22 5,888 287 5,525 7,190 210 806 348 2,852 – 39,885 (20) (2,641) (4,519) 32,705 (4,006) (287) 28,412 (6,295) 22,117 200 (16,586) (15,888) (3,867) (1,419) 7,924 – 5,026 5,743 61 660 – 1,780 (5,623) 38,106 (253) (3,498) (163) 34,192 (1,780) – 32,412 (1,458) 30,954 29,854 (27,603) (10,765) (3,580) (3,654) (37,560) (15,748) 37,829 (4,955) (776) 30,911 75 (5,544) (779) 27,507 (37,400) (28,377) (2,139) (5,933) 17,537 2,094 4,308 6,402 (2,260) (5,222) (14,600) 606 3,702 4,308 Notes to the Financial Statements Background and basis of preparation 1 CareTech Holdings PLC (the ”Company”) is a company registered and domiciled in England and Wales. The consolidated financial statements of the Company for the year ended 30 September 2017 comprise the Company and its subsidiaries (together referred to as the “Group”). The consolidated financial statements are presented in GBP (£), which is the Company’s functional currency, rounded to the nearest thousand. The parent Company financial statements on pages 74 to 80 present information about the Company as a separate entity and not about its Group. The consolidated financial statements were approved for release by the Board of Directors on 18 December 2017 Going concern The Group’s business activities together with the factors likely to affect its future development, performance and position are set out in the Chairman’s Statement and Chief Executive’s Statement and Performance Review on pages 10 to 11 and pages 20 to 23. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 26 to 29. In addition, note 24 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk, interest rate risk and liquidity risk. As highlighted in that note, the Group meets its day-to-day working capital requirements through a mixture of bank facilities which are sufficient, with cash flow from profits, to fund present commitments. Term facilities are utilised to fund capital expenditure and short-term flexibility is achieved by the utilisation of cash resources in respect of financial liabilities, which are shown in the table in note 24 and indicates their contractual cash flow maturities. There are a number of Banking Covenants which ratchet depending on time and Group performance. The Directors forecast that they are able to meet all Banking Covenants which are reviewed regularly. An extension to the existing bank facilities was agreed with our bankers in 2016. The facility which was due to expire in January 2017 has been extended to January 2019. The cost of borrowing has been reduced through a reduction to the interest rate and four loan repayments, which were due between April 2017 and October 2017 amounting to £21.6m, have been deferred. In addition, there is a new uncommitted accordion facility of up to £30m which, together with the deferral of loan repayments, gives further support to the Group’s acquisition strategy. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months from the date of signing these financial statements. The Group has prepared detailed budgets and cash flow forecasts and has considered the capital and working capital requirements. Thus the Directors continue to adopt the going concern basis of accounting in preparing the annual financial statements. Accounting policies 2 (a) Applicable Accounting Standards The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”) and those parts of the Companies Act 2006 relevant to those companies which report in accordance with IFRS. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. New and revised accounting standards applied for the first time in the current year The Group has adopted the following new standards, or net provisions of amended standards: – Annual Improvements to IFRSs 2010–2012 Cycle – Annual Improvements to IFRSs 2011–2013 Cycle There has been no material impact on either amounts reported or disclosure in the financial statements arising from first time adoption. Adopted IFRS not yet applied At the date of authorization of these financial statements, certain new standards, amendment and interpretations to existing standards have been publishing by the IASB but are not yet effective and have not been applied early by the Group. Management anticipates that the following pronouncements relevant to the Group’s operation will be adopted in the Group’s accounting policies for the first period beginning after the effective date of the pronouncement, once adopted by the EU: – IFRS 9 Financial Instruments (effective 1 January 2018) – IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018) – Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) (effective 1 January 2017) – Annual Improvements to IFRSs 2012–2014 Cycle (effective 1 January 2017) – Disclosure Initiative: Amendments to IAS 1 Presentation of Financial Statements (effective 1 January 2017) – IFRS 16 Leases (effective 1 January 2019) – Clarification and Measurement of Share-based Payment Transactions (Amendment to IFRS 2) (not yet adopted by the EU) – Disclosure Initiative: Amendments to IAS 7 (not yet adopted by the EU) IFRS 16 will replace IAS 17 for accounting periods commencing on or after 1 January 2017 and from the perspective of the Group as lessee will require (subject to certain practical expedients) most of the Group’s lease obligations (including the recent sale and leaseback transaction) to be reflected on balance sheet with a corresponding asset reflecting the right to use the underlying leased asset. Management are currently performing a detailed review of the Group’s lease arrangements and are deciding on how IFRS 16 will be implemented and are considering which practical expedients might apply and whether or not the standard will be implemented on a full or partial retrospective basis. The full impact of IFRS 16 is therefore not yet known. The Group’s current lease accounting policy and lease disclosures are included in notes 17 and 25. There are other standards and interpretations in issue but these are not considered to be relevant to the Group. The Directors expect that the adoption of the standards listed below, other than IFRS 16, will not have a material impact on the financial information of the Group in future reporting periods. This includes both IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. (b) Measurement convention The financial statements are prepared on the historical cost basis except that derivative financial instruments are stated at their fair value and contingent consideration is stated at fair value through profit or loss. CareTech Holdings PLC – Annual Report and Accounts 2017 49 Strategic ReviewGovernance––Financial Statements Accounting policies (continued) 2 (c) Basis of consolidation The Group financial statements consolidate those of the parent Company and all of its subsidiaries as of 30 September 2017. All subsidiaries have a reporting date of 30 September. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-Group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a Group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. (d) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in the profit or loss as incurred. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment and depreciated separately. Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Where land and buildings are held under leases the accounting treatment of the land is considered separately from that of the buildings. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Lease payments are accounted for as described in note (n). Depreciation is charged to the consolidated statement of comprehensive income over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The Directors reassess the residual value estimates, particularly in respect of properties, on an annual basis. The estimated useful lives are as follows: – freehold buildings – long leasehold property – short leasehold property – fixtures, fittings and equipment – motor vehicles 2% straight-line to residual value; over the life of the lease; over the life of the lease; 15% straight line; and 25% reducing balance. Intangible assets and goodwill (e) All business combinations are accounted for by applying the acquisition method as described in note (r). Goodwill represents the excess of the fair value of the consideration over the fair value of the assets, liabilities and contingent liabilities acquired on acquisition of subsidiaries. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. Negative goodwill (bargain purchase credit) arising on an acquisition is recognised in the consolidated statement of comprehensive income. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the consolidated statement of comprehensive income on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. The estimated useful lives are as follows: – customer relationships – software and licences 1–20 years; and 5 years. Inventories (f) Inventories are valued at the lower of cost and net realisable value. The cost of inventories is based on a first-in first-out cost basis. (g) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from inception. (h) Financial Instruments Recognition, initial measurement and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Classification and subsequent measurement of financial assets For the purpose of subsequent measurement, financial assets are classified into the following categories upon initial recognition: – loans and receivables; and – financial assets at fair value through profit or loss (FVTPL). All financial assets except for those at FVTPL are subject to review for impairment at least at each reporting date to identify whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below. All income and expenses relating to financial assets that are recognised in the consolidated statement of comprehensive income are presented within finance costs or finance income, except for impairment of trade receivables which is presented within other administrative expenses. 50 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued Derivative financial instruments. From time to time, the Group enters into derivative financial instruments, such as interest rate swaps, to manage its exposure to interest rate risk. Derivatives are initially recognised at fair value at the date a derivative is entered into and are subsequently remeasured to their fair value at each balance sheet date. A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. The resulting gain or loss is recognised in the consolidated statement of comprehensive income immediately. A derivative is presented as a non-current asset or non-current liability if the Group has an unconditional right to defer payment beyond 12 months. Otherwise derivatives are presented as current assets or liabilities. Impairment (excluding deferred tax assets) (i) The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill and assets that have an indefinite useful life, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated statement of comprehensive income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Calculation of recoverable amount The recoverable amount of the Group’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these are measured at amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups, which are determined by reference to shared credit risk characteristics. The impairment loss estimate is then based on recent historical counterparty default rates for each identified group. Financial assets at FVTPL Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category. Assets in this category are measured at fair value with gains or losses recognised in the consolidated statement of comprehensive income. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists. Classification and subsequent measurement of financial liabilities The Group’s financial liabilities include borrowings, trade and other payables and derivative financial instruments. Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for financial liabilities held for trading or designated at FVTPL, that are carried subsequently at fair value with gains or losses recognised in the consolidated statement of comprehensive income. All derivative financial instruments that are not designated and effective as hedging instruments are accounted for at FVTPL. All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in consolidated statement of comprehensive income are included within finance costs or finance income. From time to time, the long-term debts held by the Group are either refinanced as these come to maturity or the margin on these facilities moves in line with the ratio of the Group’s net debt to EBITDA. In either scenario, the Group reviews whether the debt is accounted for as a modification or an extinguishment of the liability. A substantial modification should be accounted for as an extinguishment of the existing liability and the recognition of a new liability. A non-substantial modification should be accounted for as an adjustment to the existing liability. Both the quantitative and qualitative aspects of the modification are taken into account to ascertain whether the medication is substantial and these can include the change in covenants, repayment dates and the effective interest rate. If modification accounting is adopted, the carrying value of the existing liability is adjusted for fees paid or costs incurred and the effective interest rate is amended at the modification date. If extinguishment accounting is adopted, the existing liability is de-recognised and the new or modified liability is recognised at its fair value, the gain or loss equal to the difference between the carrying value of the old liability and the fair value of the new one is recognised, any incremental costs or fees incurred and any consideration paid or received is recognised in profit or loss and a new effective interest rate for the modified liability is calculated and used in future periods. CareTech Holdings PLC – Annual Report and Accounts 2017 51 Strategic ReviewGovernance––Financial Statements Accounting policies (continued) 2 Reversals of impairment An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist or there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Interest-bearing borrowings (j) Interest-bearing borrowings are recognised initially at fair value less directly attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between proceeds (net of transaction costs) and the redemption value being recognised in the consolidated statement of comprehensive income over the period of the borrowings on an effective interest basis. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Interest on qualifying assets is capitalised in accordance with IAS 23 borrowing costs. Refer to note 8. (k) Employee benefits Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the consolidated statement of comprehensive income as incurred. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payment transactions The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised on exercise as an expense is adjusted to take into account an estimate of the number of shares that are expected to vest as well as to reflect the actual number of share options that vest, except where forfeiture is due only to share prices not achieving the threshold for vesting. Options lapsed are expunged from the relevant scheme. Employee Benefit Trust The assets and liabilities of the Employee Benefit Trust (EBT) have been included in the consolidated financial statements. Any assets held by the EBT cease to be recognised on the consolidated statement of financial position when the assets vest unconditionally in identified beneficiaries. The costs of purchasing own shares held by the EBT are shown as a deduction against equity. The proceeds from the sale of own shares held increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the consolidated statement of comprehensive income. Provisions (l) A provision, other than provisions for deferred taxation, is recognised in the balance sheet where a reliable estimate can be made when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected, risk adjusted, future cash flows at a pre-tax risk-free rate. (m) Revenue Revenue in respect of the provision of care services is measured as the fair value of fee income received or receivable in respect of the services provided and is recognised in respect of the care that has been provided in the relevant period. Any additional services provided by the Group are recognised on provision of the service. Fostering revenue is recognised on the basis of the daily placements made with a full day’s revenue recognised for every night a placement is with a foster carer. Revenue in respect of learning services is directly linked to specific achievements, and milestones reached by apprentices at which point the funding from the Skills Funding Agency is receivable and recognised. A corresponding balance is recognised in receivables. Income which has been invoiced but is irrecoverable is treated as a bad debt expense. Revenue invoiced in advance is included in deferred income until the service is provided. Revenue is recognised net of VAT and credit notes. 52 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued (n) Expenses Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Non-underlying items Non-underlying items are events or transactions which, in the opinion of the Directors, by virtue of size and incidence are disclosed separately in order to improve a reader’s understanding of the financial statements. Details are included in note 5. Financing costs Financing costs, comprising interest payable on bank loans and overdrafts, finance charges on finance leases, the unwinding of the discount on provisions and the costs incurred in connection with the arrangement of borrowings are recognised in the consolidated statement of comprehensive income using the effective interest method. Interest payable is recognised in the consolidated statement of comprehensive income as it accrues, using the effective interest method. Financing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalised as part of the cost of that asset. Financing costs also include losses arising on the change in fair value of derivatives that are recognised in the consolidated statement of comprehensive income. (o) Operating leases Payments made under operating leases are recognised in the consolidated statement of comprehensive income on a straight-line basis over the term of the lease. Lease incentives received are recognised in the consolidated statement of comprehensive income on a straight-line basis over the lease term. (p) Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the consolidated statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The carrying amounts of deferred tax assets are reviewed at each balance sheet date. (q) Underlying EBITDA and underlying earnings per share EBITDA is operating profit stated before depreciation, amortisation of intangible assets and share-based payments charge and is the key profit measure used by the Board to assess the trading performance of the Group as a whole. A measure of underlying earnings and underlying earnings per share has been presented in order to present the earnings of the Group after non-underlying items which are not considered to impact an assessment of the trading performance of the Group. (r) Business combinations The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. The calculation of contingent consideration is based on the provisions included in the sale and purchase agreement of each acquisition and is updated if circumstances change. Acquisition costs are expensed as incurred. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. (s) Sale and leaseback A sale and leaseback transaction is one where the Group sells an asset and immediately reacquires the use of the asset by entering into a lease with the buyer. The accounting treatment of the sale and leaseback depends upon the substance of the transaction (by applying the lease classification principles described in note (d)) and whether or not the sale was made at the asset’s fair value. For sale and finance leasebacks, any profit from the sale is deferred and amortised over the lease term. For sale and operating leasebacks, generally the assets are sold at fair value, and accordingly the profit or loss from the sale is recognised immediately in the Group profit and loss account. CareTech Holdings PLC – Annual Report and Accounts 2017 53 Strategic ReviewGovernance––Financial Statements Accounting estimates and judgements 3 The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions which affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Property, plant and equipment It is Group policy to depreciate property, plant and equipment items to their estimated residual value over their estimated useful lives. This applies an appropriate matching of the revenue earned with the capital costs of delivery of services. A key element of this policy is the annual estimate of the residual value of such assets and in particular of freehold property. Similarly the Directors estimate the useful life applied to each category of property, plant and equipment which, in turn, determines the annual depreciation charge. Variations in residual values or asset lives could impact significantly Group profit through an increase in the depreciation charge. In the process of applying the Group’s accounting policies, the Directors have made the following estimates and judgements which have the most significant effect on the amounts recognised in the financial statements: Goodwill The Directors use their judgement to determine the extent to which goodwill has a value which will benefit the performance of the Group over future periods. To assist in making this judgement, the Directors undertake an assessment, at least annually, of the carrying value of the Group’s capitalised goodwill, using discounted cash flow forecasts to derive the “value in use” to the Group of the capitalised goodwill. In the assessment undertaken in 2017 value in use was derived from discounted 10- to 20-year cash flow projections using a year-on-year growth rate of 0% and discount rates relevant to the cost of capital adjusted for risks associated with the cash-generating unit. The projection period is, in the opinion of the Directors, an appropriate period over which to view the future results of the Group’s businesses for this purpose. Changes to the assumptions of discount rates, growth rates, expected changes to costs and selling prices used in making these forecasts could significantly alter the Directors’ assessment of the carrying value of goodwill. Customer relationships The Group’s management team assess each acquisition in the historical financial information period to identify the intangible assets that were acquired in each transaction that qualify for separate recognition. The assessment of the future economic benefits generated from acquired customer relationships, and the determination of the related amortisation profile, involves a significant degree of judgement based on management estimation of future potential revenue and profit and the useful lives of the assets. The valuation method used to value customer relationships is a multi-period excess earnings method. The useful economic life has been assessed as ranging from 1 to 20 years across the acquisitions. Annual reviews are performed to ensure the recoverability of this intangible asset. Contingent consideration payable on a business combination When, as part of a business combination, the Group defers a proportion of the total purchase consideration payable for an acquisition, the amount provided for is the acquisition date fair value of the consideration. Changes in estimated contingent consideration payable on acquisition are recognised in the consolidated income statement unless they are measurement period adjustments which arise as a result of additional information obtained after the acquisition date about the facts and circumstances existing at the acquisition date, which are adjusted against carried goodwill. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity. Judgements Current asset provisions In the course of normal trading activities, judgement is used to establish the net realisable value of various elements of working capital, principally trade receivables. Provisions are established for bad and doubtful debts. Provisions are based on the facts available at the time and are also determined by using profiles, based upon past practice, applied to aged receivables. In estimating the collectability of trade receivables, judgement is required assessing their likely realisation, including the current creditworthiness of each customer and related ageing of past due balances. Specific accounts are assessed in situations where a customer may not be able to meet its financial obligations due to deterioration of its financial condition, credit ratings or bankruptcy. 54 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued Segmental information 4 IFRS 8 requires operating segments to be determined based on the Group’s internal reporting to the Chief Operating Decision Maker (“CODM”). The CODM has been determined to be the Chief Executive Officer as he is primarily responsible for the allocation of resources to segments and the assessment of the performance of each of the segments. The CODM uses underlying EBITDA as reviewed at monthly Executive Committee and Performance meetings as the key measure of the segments’ results as it reflects the segments’ underlying trading performance for the period under evaluation. Underlying EBITDA is a consistent measure within the Group. Inter-segment revenue between the operating segments is not material. Our two key segments are Adult Services (Adult) and Children Services (Children). Adult Services comprises the Adult Learning Disabilities (ALD) and Specialist Services (SS) divisions and the Children Services comprises Young People Residential Services (YPR), Foster Care (FC) and Learning Services (Learning). There has been no aggregation of the operating segments in arriving at these reportable segments. The segment results for the year ended 30 September 2017, for the year ended 30 September 2016 and the reconciliation of the segment measures to the respective statutory items included in the consolidated financial information are as follows: Year ended 30 September 2017 Continuing Operations Client capacity Revenue (£’000) Underlying EBITDA before allocated cost (£’000) Year ended 30 September 2016 Continuing Operations Client capacity Revenue £’000) Underlying EBITDA before allocated cost (£’000) ALD 1,735 87,752 SS 214 Adult 1,949 YPR 284 FC 301 Learning Children – 585 Total 2,534 15,486 103,238 43,798 8,626 10,356 62,780 166,018 26,331 3,862 30,193 13,205 1,870 960 16,035 46,228 ALD 1,567* SS 216* Adult 1,783 YPR 235 79,445 10,654 90,099 38,980 FC 301 8,714 Learning Children – 536 Total 2,319 11,186 58,880 148,979 25,383 2,676 28,059 11,806 2,187 1,013 15,006 43,065 * The segmental figures of the Specialist Services division for 2016 have been restated due to the inclusion of “ABI” (Acquired Brain Injury). This is the first full year of Oakleaf Care Limited’s results and it was decided this change would give the shareholders greater clarity. Reconciliation of EBITDA to profit after tax: Underlying EBITDA before unallocated costs Unallocated costs Underlying EBITDA Depreciation Amortisation Share-based payments charge Non-underlying items Operating profit Financial expenses Profit before tax Taxation Profit after tax 2017 £000 46,228 (6,343) 39,885 (5,525) (7,190) (210) (4,293) 22,667 (5,888) 16,779 1,070 17,849 2016 £000 43,065 (6,009) 37,056 (5,026) (5,743) (61) 4,233 30,459 (7,924) 22,535 336 22,871 All operations of the Group are carried out in the UK, the Company’s country of domicile. All revenues therefore arise within the UK and all non-current assets are likewise located in the UK. No single external customer amounts to 10% or more of the Group’s revenues. No asset and liability information is presented above as this information is not allocated to operating segments in the regular reporting to the Group’s Chief Operating Decision Maker and is not a measure used by the CODM to assess performance and to make resource allocation decisions. CareTech Holdings PLC – Annual Report and Accounts 2017 55 Strategic ReviewGovernance––Financial Statements 5 Non-underlying items Non-underlying items are those items of financial performance that, in the opinion of the Directors, should be disclosed separately in order to improve a reader’s understanding of the underlying trading performance achieved by the Group as these are one-off significant costs which are not part of the ordinary course of the business. Non-underlying items comprise the following: Acquisition expenses Integration and restructuring costs Profit arising from the ground rent transaction under IAS 17 Costs arising from placement of shares Acquisition and development costs Onerous lease provision Included in EBITDA Amortisation of intangible assets (note 13) Included in administrative expenses Fair value movements relating to derivative financial instruments Other financing cost relating to ground rent Charges relating to derivative financial instruments (note 5) IAS 17 lease imputed interest Included in financial expenses Tax on non-underlying items (note 9) Current Deferred tax Included in taxation Total non-underlying items Note (i) (i) (ii) (iii) (iv) 2017 £000 806 2,852 – 348 4,006 287 4,293 7,190 11,483 (1,107) 1,173 829 223 1,118 (1,138) (2,676) (3,814) 8,787 2016 £000 (390) 1,780 (5,623) – (4,233) – (4,233) 5,743 1,510 1,258 – 646 133 2,037 (84) (2,287) (2,371) 1,176 (i) The Group incurred a number of exceptional costs relating to the integration of recent acquisitions and the reorganisation of the internal operating and management structure and redundancy costs totalling £2,852,000 (2016: £1,780,000). Included in the cash flow statement are acquisition expenses of £806,000 (2016: £660,000) and integration and reorganisation costs of £2,852,000 (2016: £1,780,000), which were paid in the year. (ii) The present value of the future cash flows receivable from the operation of certain leased assets has been assessed as being lower than the present value of the rental payments to which the Group is committed. Therefore, the Group has provided for £287,000 (2016: £nil) being the present value of any onerous element of the remaining lease life. (iii) Non-underlying items relating to derivative financial instruments include the movements during the year in the fair value of the Group’s interest rate swaps which are not designated as hedging instruments and therefore do not qualify for hedge accounting, together with the quarterly cash settlement, and accrual thereof. (iv) Deferred tax arises in respect of the following: Derivative financial instruments Full provision for deferred tax under IAS 12 Intangible assets Roll over relief Prior year adjustment Other adjustments 2017 £000 (188) (981) 730 14 3,101 – 2,676 2016 £000 190 1,184 – – – 913 2,287 56 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued 6 Auditor’s remuneration Fees payable to the Group’s auditor for the audit of the consolidated and parent Company’s annual accounts Audit of the accounts of subsidiaries Audit-related assurance services Tax advisory services All other non-audit services 2017 £000 150 22 13 – 11 2016 £000 121 42 13 23 11 Other non-audit services relate to Company Secretarial services. Staff numbers and costs 7 The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows: Operational and service delivery staff Maintenance Management and administration The aggregate payroll costs of these persons (including Directors) were as follows: Wages and salaries Share-based payments charge Social security costs Other pension costs 8 Finance expenses Interest expense on financial liabilities at amortised cost: On bank loans and overdrafts Finance charges in respect of finance leases Underlying financial expenses Derivative financial instruments (note 5) IAS 17 lease imputed interest (note 5) Total financial expenses Number of employees 2017 4,414 44 286 4,744 2016 3,864 37 269 4,170 2017 £000 2016 £000 77,386 68,907 160 7,382 976 85,904 61 6,000 867 75,835 2017 £000 2016 £000 4,439 331 4,770 895 223 5,888 5,560 327 5,887 1,904 133 7,924 In accordance with IAS 23, borrowing costs at £262,000 (2016: £150,000) have been capitalised in the year on qualifying assets within property plant and equipment. The capitalisation rate used to determine the amount of borrowing costs capitalised is 5%. CareTech Holdings PLC – Annual Report and Accounts 2017 57 Strategic ReviewGovernance––Financial Statements Taxation 9 (a) Recognised in the consolidation statements of comprehensive income Current tax expense Current year Current tax on non-underlying items (note 5) Corporation tax overprovided in previous periods Total current tax Deferred tax expense Current year Prior year Deferred tax on non-underlying items (note 5) Total deferred tax Total tax in the consolidated statement of comprehensive income (b) Reconciliation of effective tax rate Profit before tax for the year Tax using the UK corporation tax rate of 19.5% (2016: 20%) Non-deductible expenses Other tax adjustments Corporation and deferred tax overprovided in previous periods Utilisation of brought forward losses Total tax in the consolidated statement of comprehensive income 2017 £000 2016 £000 (4,809) 1,138 (80) (3,751) (4,471) 84 2,281 (2,106) 825 (1,027) 1,320 2,676 4,821 1,070 2017 £000 16,779 3,272 636 (613) (4,365) – (1,070) 1,182 2,287 2,442 336 2016 £000 22,535 4,507 (820) (1,284) (2,692) (47) (336) Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2016 (on 7 September 2016). This includes a reduction to the main rate to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using this enacted tax rate and reflected in these financial statements. 10 Earnings per share Profit attributable to ordinary shareholders Weighted number of shares in issue for basic earnings per share Effects of share options in issue Weighted number of shares for diluted earnings per share 2017 £000 2016 £000 17,849 22,871 70,037,602 63,229,346 24,389 – 70,061,991 63,229,346 Diluted earnings per share is the basic earnings per share adjusted for the dilutive effect of the conversion into fully paid shares of the weighted average number of share options outstanding during the period. Earnings per share (pence per share) Basic Diluted 2017 25.48p 25.48p 2016 36.17p 36.17p 11 Underlying earnings per share A measure of underlying earnings and underlying earnings per share has been presented in order to present the earnings of the Group after adjusting for non-underlying items which are not considered to reflect the underlying trading performance of the Group. Profit attributable to ordinary shareholders Non-underlying items (note 5) Underlying profit attributable to ordinary shareholders Underlying earnings per share (pence per share) Basic Diluted 58 CareTech Holdings PLC – Annual Report and Accounts 2017 2017 £000 17,849 8,787 26,636 2016 £000 22,871 1,176 24,047 38.03p 38.02p 38.03p 38.03p Notes to the Financial Statements continued 12 Property, plant and equipment Cost At 1 October 2015 Acquisition through business combinations Additions Disposals At 30 September 2016 At 1 October 2016 Acquisitions through business combinations Additions Disposals At 30 September 2017 Depreciation and impairment At 1 October 2015 Depreciation charge for the year Disposals At 30 September 2016 At 1 October 2016 Depreciation charge for the year Disposals At 30 September 2017 Net book value At 1 October 2015 At 30 September 2016 At 30 September 2017 Land and buildings £000 Motor vehicles £000 Fixtures, fittings and equipment £000 Total £000 239,712 9,889 20,124 269,725 17,744 6,434 (10,973) 252,917 252,917 17,338 10,858 – 119 1,101 (593) 10,516 876 4,428 (4,027) 21,401 18,739 11,963 (15,593) 284,834 10,516 21,401 284,834 31 1,500 (441) 199 5,294 – 17,568 17,652 (441) 281,113 11,606 26,894 319,613 4,950 470 – 5,420 5,420 517 – 5,937 1,748 1,814 (425) 3,137 3,137 1,728 (249) 4,616 6,475 2,742 (607) 8,610 8,610 3,280 – 13,173 5,026 (1,032) 17,167 17,167 5,525 (249) 11,890 22,443 234,762 247,497 275,176 8,141 7,379 6,990 13,649 12,791 15,004 256,552 267,667 297,170 Included in the result for the year is a profit of £nil (2016: £5,623,000 profit) on the disposal of freehold property, plant and equipment and motor vehicles. Included in property, plant and equipment are amounts held under finance leases of £5,990,000 (2016: £6,629,000). Land and buildings The net book value of land and buildings is as follows: Freehold 2017 £000 275,176 275,176 2016 £000 247,497 247,497 The Directors believe that the market value of the Group’s current freehold property portfolio is £329m as at 30 September 2017. There was an independent valuation of the Group’s property portfolio following the ground rent transaction of £284m plus the cost price of the freehold properties purchased in the two acquisitions, plus other freehold properties purchased in the year. All of the Group’s freehold properties are pledged as security for bank borrowings. CareTech Holdings PLC – Annual Report and Accounts 2017 59 Strategic ReviewGovernance––Financial Statements 13 Intangible assets Cost At 1 October 2015 Acquisition through business combinations Additions At 30 September 2016 At 1 October 2016 Acquisitions through business combinations Additions At 30 September 2017 Amortisation and impairment At 1 October 2015 Impairment Amortisation for the year At 30 September 2016 At 1 October 2016 Impairment Amortisation for the year At 30 September 2017 Net book value At 1 October 2015 At 30 September 2016 At 30 September 2017 Goodwill £000 Software and licences £000 Customer relationships £000 Total £000 95,708 16,292 3,580 38,651 4,398 – 43,049 10,419 – 3,580 13,999 46,638 11,894 – 58,532 115,580 43,049 13,999 58,532 115,580 77 – 43,126 – 3,414 17,413 296 452 373 3,866 59,280 119,819 – 28 – 28 28 – – 28 38,651 43,021 43,098 4,663 18,143 22,806 – 2,000 6,663 – 3,743 21,886 28 5,743 28,577 6,663 21,886 28,577 – 2,653 9,316 5,756 7,336 8,097 – 4,537 26,423 – 7,190 35,767 28,495 36,646 32,857 72,902 87,003 84,052 Amortisation The amortisation charge is recognised in the following line items in the consolidated statement of comprehensive income: Administrative expenses 2017 £000 7,190 2016 £000 5,743 60 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued Impairment testing for cash-generating units containing goodwill The Group tests goodwill for impairment on an annual basis by considering the recoverable amount of individual cash-generating units against carrying value. Cash-generating units comprise operating segments. This is the lowest level at which goodwill is monitored for impairment by management. There are no intangible assets with indefinite useful lives (other than goodwill). For the purpose of impairment testing, the recoverable amount of each cash-generating unit has been calculated with reference to value in use. The key assumptions for the period over which management approved forecasts are based and, beyond this, for the value in use calculations overall, are those regarding discount rates, growth and occupancy rates, achievement of future revenues, expected changes in direct costs during the periods and residual values of freehold properties (which include an assumption for the growth of the House Prices Index of 2% per annum and that residual values will be 75% of the indexed market value). In arriving at the values assigned to each key assumption management make reference to past experience and external sources of information regarding the future – for example changes in tax rates. The assumptions have been reviewed in light of the current economic and public spending environment. The key features of these calculations are shown below: Period over which management approved forecasts are based Growth rate applied beyond approved forecast period Pre-tax discount rate Adult Learning Disabilities division Specialist Services division Young People Residential Services division Foster Care division Learning Services division 2017 1 year 0% 8% 10% 8–12% 8–12% 12% 2016 1 year 0% 8% 10% 8–12% 8–12% 12% In preparing value in use calculations for cash-generating units, cash flow periods of between 10 and 20 years have been used in order to match the period of goodwill with the average period of time service users are expected to remain in their relevant home. The discount rates used in each value in use calculation have been based upon divisional specific risk taking account of factors such as the nature of service user need, cost profiles and the barriers to entry into each market segment as well as other macro-economic factors. The Directors believe that, even in the current economic and public spending environment and taking into account the nature of the Group’s operations, any reasonably possible change in the key assumptions on which the recoverable amounts are based would not cause the cash- generating units’ carrying amount to exceed the recoverable amount. The carrying value of goodwill is split between the following cash-generating units: Adult Learning Disabilities division Specialist Services division Adult Young People Residential Services division Foster care division Learning Services division Children 2017 £000 19,912 1,148 21,060 8,964 7,162 5,912 22,038 43,098 2016 £000 19,835 1,148 20,983 8,964 7,162 5,912 22,038 43,021 CareTech Holdings PLC – Annual Report and Accounts 2017 61 Strategic ReviewGovernance––Financial Statements 14 Group undertakings The Group has the following investments in trading subsidiaries included in the consolidated results for the year: Company name Addington House Limited Advances In Autism Care & Education Limited Applied Care and Development Limited Ashcroft House Limited Ashring House Limited Ashview House Limited Barleycare Limited Beacon Care Holdings Limited Beacon Care Investments Limited Beacon Care Limited Beech Care Limited Branas Isaf (Ashfield House) Limited Branas Isaf (Bythnod & Hendre Llwyd) Limited Branas Isaf (Dewis Cyfarfod & Cysgod Cyfarfod) Limited Branas Isaf (Education Centre) Limited Branas Isaf (Llyn Coed) Limited Branas Isaf (Personal Development & Approach Training) Limited Branas Isaf (Therapeutic Provision Limited) Branas Isaf Holdings Limited Branas Isaf Personal Development Centre Limited Bright Care Limited Cameron Care Limited Care Support Services Limited CareTech Community Services (No 2) Limited CareTech Community Services Limited CareTech Estates (No 2) Limited CareTech Estates (No 3) Limited CareTech Estates (No 4) Limited CareTech Estates (No 5) Limited Caretech Estates (No 6) Limited Caretech Estates (No 7) Limited CareTech Estates Limited CareTech Foster Care Limited Caretech Fostering Holdings Limited Caretech Fostering Services Limited CareTech Housing Services Colerene Community Care (Kent) Limited Community Support Project Limited Complete Care & Enablement Services Limited Counticare Limited Coveberry Limited Daisybrook Limited Dawn Hodge Associates Limited Delam Care Limited Delham Care Limited Emeraldpoint Limited EQL Solutions Limited Family Assessment Services (Birmingham) Limited Fostering Support Group Limited Franklin Homes Limited Glenroyd House Limited Gloucestershire Autism Services Limited Greenfields Adolescent Development Limited Greenfields Care Group Limited 62 CareTech Holdings PLC – Annual Report and Accounts 2017 Registration number 04404355 03252453 SC224352 03390658 03370991 03304446 05156601 03293998 04351554 03160894 04050685 05761962 04826628 04828115 04826662 04826774 04826959 05355404 04827227 03744583 04050733 SC283940 05356025 03894564 02804415 06518327 06518491 06543818 07027116 08420656 08628141 05964868 05185612 07206363 07205262 03438332 02755757 05941774 05905163 02585666 01208511 03026221 04130146 02995783 02748991 03098166 08758477 06902547 02359399 03002865 04326288 03091510 04068839 04642100 Country of incorporation England and Wales England and Wales Scotland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Scotland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ownership 2017 % 100d 100q 100a 100c 100c 100c 100a 100 100 100c 100c 100h 100h 100h 100g 100h 100g 100h 100a 100h 100c 100a 100a 100a 100 100 100 100 100 100 100 100 100l 100a 100m 100a 100q 100 100a 100a 100a 100a 100a 100a 100q 100c 100 100 100k 100a 100c 100q 100f 100a Ownership 2016 % 100d 100q 100a 100c 100c 100c 100a 100 100 100c 100c 100h 100h 100h 100g 100h 100g 100h 100a 100h 100c 100a 100a 100a 100 100 100 100 100 100 100 100 100l 100a 100m 100a 100q 100 100a 100a 100a 100a 100a 100a 100q 100c 100 100 100k 100a 100c 100q 100f 100a Notes to the Financial Statements continued Company name Hazeldene UK Limited(1) Hereson House Limited Huntsmans Lodge Limited Kirkstall Lodge Limited K O B Care Limited Leigham Lodge Limited Lonsdale Midlands Limited Lyndhurst Psychiatric Residential Care Magnolia Court Limited Mason Property Development Company Limited One Six One Limited One Step (Support) Limited Outlook Fostering Services Limited Palm Care Limited Park Foster Care Limited Park Foster Care Services Scotland Limited Phoenix Therapy and Care Limited Pinnacle Supported Living Limited Prestwood Residential Homes Limited Primrose Court Limited Professional Integrated Care Services Roborough House Limited Rosedale Children’s Services Limited Selwyn Care Limited South East Care Services Limited St Michael’s Support & Care Limited St Michael’s Support & Care Properties Limited Sunnyside Care Homes Limited The Community Care Company UK Limited TLC (Wales) Independent Fostering Limited Uplands (Fareham) Limited Valeo Community Projects Limited Valeo Limited Victoria Lodge Limited Vosse Court Limited White Cliffs Lodge Limited Wyatt House Limited Spark of Genius Limited Spark Of Genius (Training) Limited Trojan Spark Limited Spark Of Genius (North East) LLP Oakleaf Care (Hartwell) Limited H2O ROC North West Limited Selborne Care Limited One True Step Limited Registration number FC015967 04385252 04668317 04778674 03039698 04583599 02834141 02958528 05444649 04308273 04136284 04534652 04357704 04050739 04861395 SC427502 SC254555 02736242 04129564 04803769 04771613 05054294 04932054 03737832 02296352 05978585 07186925 04589719 02816119 04824925 03488896 03941224 04099715 04454845 04778676 04351559 04319271 SC479758 SC196146 SC453152 OC384807 05225317 97291 05564417 05513162 08339192 Country of incorporation Gibraltar England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Scotland Scotland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Scotland Scotland Scotland England and Wales England and Wales Gibraltar England and Wales England and Wales England and Wales Class of shares held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ownership 2017 % 100e 100a 100a 100c 100q 100c 100a 100q 100d 100g 100a 100b 100a 100c 100a 100a 100a 100q 100a 100g 100r 100a 100a 100a 100q 100a 100a 100a 100a 100l 100l 100r 100 100d 100c 100a 100c 100a 100n 100o 50p 100a 100a 100a 100a 100s Ownership 2016 % 100e 100a 100a 100c 100q 100c 100a 100q 100d 100g 100a 100b 100a 100c 100a 100a 100a 100q 100a 100g 100r 100a 100a 100a 100q 100a 100a 100a 100a 100l 100l 100r 100 100d 100c 100a 100c 100a 100n 100o 50p 100q 100a 100q – – (1) Has a UK designated trading branch, Hazeldene UK Limited a a subsidiary of CareTech Community Services Limited b a subsidiary of Community Support Project Limited c a subsidiary of Beacon Care Holdings Limited d a subsidiary of Beacon Care Investments Limited e a subsidiary of H20 Limited f g a subsidiary of Branas Isaf (Holdings) Limited h a subsidiary of Branas Isaf Personal Development Centre Limited i j k a subsidiary of CareTech Foster Care Limited a subsidiary of Coveberry Limited a subsidiary of Outlook Fostering Services Limited a subsidiary of Greenfields Care Group Limited a subsidiary of Professional Integrated Care Services Limited l m a subsidiary of CareTech Fostering Holdings Limited n a subsidiary of Spark of Genius Limited o a subsidiary of Spark of Genius (Training) Limited p a joint venture of Spark of Genius Limited (The Directors are of the opinion that joint venture is not material to the results of the Group and hence have not included the disclosures required under IFRS 12 “Disclosure of Interests in Other Entities”) q a subsidiary of The Community Care Company UK Limited r a subsidiary of Valeo Limited s a subsidiary of Selborne Care Limited CareTech Holdings PLC – Annual Report and Accounts 2017 63 Strategic ReviewGovernance––Financial Statements 14 Group undertakings (continued) Exemption from audit by parent guarantee The Company being the ultimate sole shareholder of its subsidiaries has decided to take the exemption from audit of a number of subsidiaries for the year ended 30 September 2017 under Sections 479A and 479C of the Companies Act 2006 and the Company will provide a guarantee for all the liabilities of those entities as at 30 September 2017 as detailed above with the exception of CareTech Community Services Limited, Hazeldene UK Limited, H2O Limited, Selborne Care Limited and Spark of Genius (North East) LLP. CareTech Community Services Limited as the main trading entity will not take the exemptions as stakeholders require audited financial statements to be produced. Hazeldene UK Limited and H2O Limited will not be covered by the parent Company guarantee as they are incorporated in Gibraltar. 15 Trade and other receivables Trade receivables (note 24) Other debtors and prepayments 16 Cash and cash equivalents Cash and cash equivalents 2017 £000 14,688 8,831 23,519 2016 £000 10,055 8,453 18,508 2017 £000 6,402 2016 £000 4,308 Interest-bearing loans and borrowings 17 This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate risk, see note 24. Non-current liabilities Secured bank loans Finance lease liabilities Current liabilities Secured bank loans Finance lease liabilities Terms and debt repayment schedule Term loan Revolving credit facility term loan 2017 £000 2016 £000 141,818 148,883 4,054 4,859 145,872 153,742 5,726 1,936 7,662 5,220 1,770 6,990 Currency Nominal interest rate (%) £ £ 2.25 (2016: 2.25)(1) 2.25 (2016: 2.25)(1) Year of maturity 2019 2019 Book value 2017 £000 Book value 2016 £000 126,441 126,544 21,103 147,544 27,559 154,103 (1) The margin on the facilities has initially been set at 2.75% over LIBOR but reduces based on the ratio of the Group’s net debt to EBITDA. The overall margin in the year is 2.25% over LIBOR. The Group have reviewed the present value of the cash flows under the new margin and determined the modification to not be substantial under IAS 39. Hence the modification has been accounted for as an adjustment to the existing liability. At 30 September 2017 the Group has available bank facilities totalling £195m, sufficient, with cash flow from profits, to fund present commitments. Term facilities are used to fund capital expenditure and short-term flexibility is achieved by the utilisation of cash resources. The term loans are secured by way of a charge over certain assets, primarily property, plant and equipment of the Group. Finance lease liabilities The finance leases relate to company vehicles used in the business. Finance lease liabilities are payable as follows: Less than one year Between one and five years 64 CareTech Holdings PLC – Annual Report and Accounts 2017 Minimum lease payments 2017 £000 2,067 4,273 6,340 Interest 2017 £000 Principal 2017 £000 131 219 350 1,936 4,054 5,990 Minimum lease payments 2016 £000 1,930 5,148 7,078 Interest 2016 £000 Principal 2016 £000 160 289 449 1,770 4,859 6,629 Notes to the Financial Statements continued 18 Trade and other payables Trade payables Accrued expenses 19 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Property, plant and equipment Intangible assets Derivative financial instruments Share-based payments Rolled-over gains on property, plant and equipment Capitalised revenue costs Tax (assets)/liabilities Net of tax assets Net deferred tax liabilities There are no unrecognised deferred tax assets or liabilities. Movement in deferred tax during the year Property, plant and equipment Capitalised revenue costs – depreciation allowed Derivative financial instruments Intangible assets ROC and Oakleaf intangibles Share options Rolled-over gains on property Movement in deferred tax during the previous year Property, plant and equipment Intangible assets Rolled-over gains Derivative financial instruments Share-based payments Capitalised revenue costs 2017 £000 2,338 13,371 15,709 2016 £000 3,116 14,550 17,666 2017 2016 Assets £000 Liabilities £000 Assets £000 Liabilities £000 – – – (443) – – 1,978 13,408 (160) – 3,060 – (443) 18,286 – – (443) 17,843 – – – (19) – – (19) – – 4,014 15,320 (348) – 3,457 (872) 21,571 (19) 21,552 1 October 2016 £000 Recognised in income £000 Equity movement £000 Acquired in business combination £000 30 September 2017 £000 4,014 (872) (348) 12,511 2,809 (19) 3,457 21,552 (2,036) 872 188 (639) (2,809) – (397) (4,821) – – – – – (424) – (424) – – – 1,978 – (160) 1,536 13,408 – – – 1,536 – (443) 3,060 17,843 1 October 2015 £000 Recognised in income £000 Adjustment £000 Acquired in business combination £000 30 September 2016 £000 4,590 13,728 3,037 (158) (131) – 21,066 (576) (1,217) 420 (190) – (872) (2,435) – – – – 112 – 112 – 2,809 – – – – 4,014 15,320 3,457 (348) (19) (872) 2,809 21,552 CareTech Holdings PLC – Annual Report and Accounts 2017 65 Strategic ReviewGovernance––Financial Statements 20 Employee benefits Defined contribution plans The Group operates a number of defined contribution pension plans. The total expense relating to these plans in the current year was £976,000 (2016: £867,000) of which £nil (2016: £37,000) was outstanding at the year end. Share-based payments The Company operates four share option schemes: The CareTech Holdings 2005 Approved Share Option Scheme (“The Approved Scheme”); the CareTech Holdings 2005 Unapproved Share Option Scheme (“The Unapproved Scheme”); the CareTech Holdings 2005 Share-Save Scheme; and the CareTech Holdings 2016 Share-Save Scheme. The Executive Shared Ownership Plan (“ExSOP”) was formed in March 2016. Under the provisions of the ExSOP, shares (the “ExSOP shares”) are jointly owned by nominated senior employees and by an employees’ share trust. The ExSOP awards are subject to a time-related performance condition measured over a three-year period beginning with the date of the grant. To the extent the performance condition is satisfied, the participant can benefit from any growth of the share price in excess of the issue price. The options have been valued using the Black Scholes option pricing model in line with IFRS 2 “Share Based Payments”. The assumptions used as part of the model include the following: – Expected volatility – Expected dividend yield – Risk free interest rate – Vesting period 25% 3.90% 2.39% 3 years Grant of the ExSOP scheme requires specific performance conditions being satisfied. These criteria are set out below: – EPS Target requires the growth in the Company’s underlying Diluted EPS over the Performance Period to be at least 15% (being an average 5% annual growth rate, calculated without compounding). Approved and Unapproved scheme options are exercisable at any time from the third anniversary of the date of grant to the tenth anniversary, other than nominal cost options which may become exercisable at the earliest after a period of 30 dealing days following the third anniversary of being granted. SAYE scheme options are normally exercisable within six months following the third anniversary of the date of grant. Options granted under the above schemes, together with those remaining at 30 September 2017, are as follows: Date of grant 2 May 2008 2 May 2008 4 August 2009 4 August 2009 3 August 2010 3 August 2010 15 November 2010 15 November 2010 4 April 2012 17 March 2016 29 March 2016 Scheme Approved Scheme Unapproved Scheme Approved Scheme Unapproved Scheme Approved Scheme Unapproved Scheme Approved Scheme Unapproved Scheme Options granted 114,070 23,843 191,121 165,050 283,754 210,653 8,108 18,243 Options lapsed to 30 Sept 2017 (87,164) (19,278) (135,975) (114,574) (213,909) (149,577) – – Options exercised to 30 Sept 2017 Options remaining 30 Sept 2017 Option price (pence) (5,355) – (23,791) (23,145) (32,884) (27,203) (8,108) (18,243) 21,551 4,565 31,355 27,331 36,961 33,873 – – – 410 410 332.5 332.5 305 305 370 370 153.1 194 247.5 Executive Shared Ownership Plan 2012 1,608,337 (261,668) (1,346,669) Sharesave Scheme 474,581 (98,825) Executive Share Ownership Plan 2016 1,919,000 – – – 375,756 1,919,000 The charge for the year £210,000 (2016: £61,000) relates entirely to the ExSOP Scheme 2016 and the CareTech Holdings 2016 Sharesave Scheme. 66 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued 21 Equity Share Capital Allotted, called up and fully paid: 75,679,937 (2016: 64,196,903) ordinary shares of 0.5p each 53,402 deferred shares of 0.5p each 2017 £000 2016 £000 379 – 379 321 – 321 Share capital represents the nominal (par) value of shares that have been issued. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. The deferred shares have no such rights. Movements in the number of issued shares were as follows: 2017 Ordinary shares of 0.5p each Deferred shares of 0.5p each 2016 Ordinary shares of 0.5p each Deferred shares of 0.5p each At 1 October 2016 Issued in connection with acquisitions Issued in connection with share placing Issued following share option exercises Issued in connection with ExSOP Scheme At 30 September 2017 64,196,903 344,305 11,000,000 138,729 53,402 – – – – 75,679,937 – 53,402 At 1 October 2015 Issued in connection with acquisitions Issued following share option exercises Issued in connection with ExSOP scheme At 30 September 2016 62,133,535 100,000 44,368 1,919,000 64,196,903 53,402 – – – 53,402 Reserves Share Premium Account – During the year, the issue of new shares charged to the share premium account are as follows: Opening balance 1 October 2016 Premium on issue of shares At 30 September 2017 2017 £000 81,750 39,028 120,778 2016 £000 76,985 4,765 81,750 Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits. Merger reserve – The merger reserve represents the premium arising on the ordinary shares issued as consideration for the acquisition of shares in another company (merger relief). Merger reserve Opening balance 1 October 2016 Shares issued for Acquisition At 30 September 2017 2017 £000 9,023 – 9,023 2016 £000 8,748 275 9,023 Shares held by Executive Shared Ownership Plan Further information relating to the EBT reserve of the Group is detailed in note 20 to the consolidated financial statements of the Group. Retained earnings – Retained earnings includes all current and prior period retained profits and share-based employee remuneration. Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a general meeting prior to the reporting date. CareTech Holdings PLC – Annual Report and Accounts 2017 67 Strategic ReviewGovernance––Financial Statements 22 Dividends The aggregate amount of dividends comprises: Interim dividend paid in respect of prior year but not recognised as liabilities in that year (3.00p per share (2016: 2.80p per share)) Final dividend paid in respect of the prior year (6.25p per share (2016: 5.60p per share)) Aggregate amount of dividends paid in the financial year (9.25p per share (2016: 8.40p per share)) 2017 £000 1,923 4,010 5,933 2016 £000 1,739 3,483 5,222 The aggregate amount of dividends proposed and not recognised as liabilities as at the year end is 9.90p per share, £7,493,075 (2016: 9.25p per share, £5,938,214). 23 Business combinations (a) Acquisitions 2017 The Group made one acquisition in the year which has been accounted for as business combinations under IFRS 3 (revised). The following table of fair values summarises the acquisition made during the financial year. On 19 June 2017 the Group acquired the equity of Selborne Care Limited, which provides a range of supported living, residential care and day opportunity services in Birmingham, Sandwell, Coventry and Warwickshire, Worcestershire, Wolverhampton, Bristol, South Gloucestershire, Bath and North East Somerset, Devon, Plymouth and Cornwall. The book values attributable to the acquisition were £18,281,289 net assets and fair value and adjustments were £4,397,000. Intangible assets Property plant and equipment Trade and other receivables Cash Trade and other payables Deferred tax Net assets on acquisition Satisfied as follows: The Acquisition accounting is draft and will be finalised when the properties have been revalued and any separate identifiable intangibles (such as customer relationships) will be adjusted in next year’s financial statements. Cash Goodwill Book values £000s 296 12,571 989 2,590 (1,526) (1,113) Fair value adjustment £000s – 4,997 (250) – (350) – Total £000s 296 17,568 739 2,590 (1,876) (1,113) 13,807 4,397 18,204 18,281 18,281 77 The acquisition was undertaken to enhance the Group’s position in the respective industries. Control was obtained through the acquisition of share capital. The book values of the assets and liabilities were extracted from the underlying accounting records of the acquired entities on the date of acquisition. The book value of receivables represents the gross contractual amounts receivable, all of which are considered recoverable. The fair value adjustments made to property, plant and equipment, trade and other receivables and creditors are to reflect their value on a going concern market value basis. The remaining goodwill of £77,000 relates to the assembled workforce acquired on acquisition. Goodwill which is not expected to be tax deductible arises due to the requirement to recognise deferred tax in respect of the fair value adjustments to intangible assets and property, plant and equipment, together with synergies expected to arise from combining operations, workforce in place and other intangible assets which do not qualify for separate recognition. 68 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued (b) Reconciliation to Group Cash Flow Cash consideration paid on acquisitions in the year Deferred and contingent consideration payable is analysed as follows: Contingent consideration Due within one year Due over one year 2017 £000 18,281 18,281 2016 £000 28,536 28,536 2017 £000 2016 £000 2,420 1,133 3,553 3,850 2,025 5,875 (c) Proforma results The underlying result for the combined entity for the year as though the acquisition date for all business combinations had been the beginning of the year is as follows: Revenue Operating profit 2017 £000 175,431 35,454 2016 £000 154,583 29,852 CareTech Holdings PLC – Annual Report and Accounts 2017 69 Strategic ReviewGovernance––Financial Statements 24 Financial instruments The use of financial instruments is managed under policies and procedures approved by the Board. These are designed to reduce the financial risks faced by the Group, which primarily relate to credit, interest and liquidity risks, which arise in the normal course of the Group’s business. Credit risk Financial instruments which potentially expose the Group to credit risk consist primarily of cash equivalents and trade receivables. Cash equivalents are deposited only with major financial institutions that satisfy certain credit criteria. Management has a credit policy in place and exposure to credit risk is monitored on an ongoing basis. Credit evaluations are carried out on all significant prospective customers and all existing customers requiring credit beyond a certain threshold. Varying approval levels are set on the extension of credit depending upon the value of the sale. Where credit risk is deemed to have risen to an unacceptable level, remedial actions including the variation of terms of trade are implemented under the guidance of senior management until the level of credit risk has been normalised. The Group provides credit to customers in the normal course of business with a provision for specific doubtful receivables. The balance includes the amounts considered recoverable which also equals their fair value. The Group does not require collateral in respect of financial assets. During the year there was a credit to the consolidated statement of comprehensive income for bad or doubtful debts of £100,000 (2016: debit £259,000). At the balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. Based on past experience, the Group believes that no impairment allowance is necessary in respect of trade receivables not past due. The trade receivables as at 30 September are aged as follows: Not due Not more than three months past due More than three months but not more than six months past due Trade receivables (note 15) The movement in provisions for impairment of trade receivables are as follows: At 1 October 2015 Charged to the consolidated statement of comprehensive Income At 1 October 2016 Charged to the consolidated statement of comprehensive Income At 30 September 2017 2017 £000 7,240 3,060 4,388 2016 £000 6,337 2,591 1,127 14,688 10,055 £000 556 259 815 (100) 715 Interest rate risk The Group finances its operations through called up share capital, retained profits, bank borrowings, and the sale of assets if appropriate. The Group’s income is by its nature relatively stable and its growth is, inter alia, impacted by inflation. Group policy is to balance interest rate fixes between the short, medium and long term. The benchmark rate for bank borrowings is LIBOR. As at 30 September, the Group carried ten hedging instruments, details of which are as follows: – a three-year swap commencing 28 January 2017 at pre-determined amounts initially starting at £35.2m at LIBOR fixed at 1.032% – a three-year swap commencing 9 February 2017 at pre-determined amounts initially starting at £38.2m at LIBOR fixed at 1.097% – a three-year swap commencing 9 February 2017 at pre-determined amounts initially starting at £18.1m at LIBOR fixed at 1.097% – a three-year swap commencing 12 February 2017 at pre-determined amounts initially starting at £18.5m at LIBOR fixed at 1.097% 70 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued Liquidity risk The Group prepares annual cash flow forecasts reflecting known commitments and anticipated projects. Borrowing facilities are arranged as necessary to finance requirements. The Group has available bank facilities, sufficient, with cash flow from profits, to fund present commitments. Term facilities are utilised to fund capital expenditure and short-term flexibility is achieved by the utilisation of cash resources in respect of financial liabilities. The following table indicates their contractual cash flow maturities. Trade and other payables IAS 17 Ground rent payable Secured bank loans Finance lease liabilities Deferred and contingent consideration Derivative financial instruments Trade and other payables IAS 17 Ground rent payable Secured bank loans Finance lease liabilities Deferred and contingent consideration Derivative financial instruments 2017 Effective interest rate % Carrying amount £000 Contractual cash flows £000 < 1 year £000 1–5 years £000 (15,709) (15,709) (15,709) – 5 years and over £000 – (7,344) (7,344) (50) (198) (7,096) 5% 11% (147,544) (161,716) (5,775) (155,941) (5,990) (3,553) (940) (5,990) (3,553) (940) (1,936) (2,420) (768) (4,054) (1,133) (172) – – – – (181,080) (195,252) (26,658) (161,498) (7,096) Effective interest rate % 2016 Carrying amount £000 (17,666) (7,393) Contractual cash flows £000 (17,666) (7,393) < 1 year £000 (17,666) (48) 1–5 years £000 – (198) 5% 11% (154,103) (175,617) (13,324) (162,293) (6,629) (5,875) (2,047) (6,629 (5,875) (2,047) (1,770) (3,850) (1,083) (4,859) (2,025) (964) 5 years and over £000 – (7,147) – – – – (193,713) (215,227) (37,741) (170,339) (7,147) Capital risk management The Group manages its capital to ensure that activities of the Group will be able to continue as a going concern whilst maximising returns for shareholders through the optimisation of debt and equity. The Group’s capital structure is as follows: Net debt Equity (see page 46) 2017 £000 147,132 204,201 2016 £000 156,424 151,667 Our policy is to increase the total dividend per year broadly in line with the movement in underlying diluted earnings per share. The final dividend will therefore increase to 6.60p per share demonstrating a confident view of the Group’s fundamental strength. Net debt Net debt as defined by the Group’s banking facilities and comprises cash and cash equivalents net of all Loans and Borrowings due to the Group’s bankers. Net debt in the balance sheet comprises: Cash and cash equivalents Bank loans Finance lease and hire purchase contracts Net debt at 30 September Note 16 17 17 2017 £000 2016 £000 6,402 4,308 (147,544) (154,103) (5,990) (6,629) (147,132) (156,424) CareTech Holdings PLC – Annual Report and Accounts 2017 71 Strategic ReviewGovernance––Financial Statements 24 Financial instruments (continued) Foreign currency risk The Group operates entirely in the UK and is not exposed to any foreign currency risks. Sensitivity analysis In managing interest rate risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer term, however, permanent changes in interest rates would have an impact on consolidated earnings. At 30 September 2017, it is estimated that a general increase of 1% in interest rates would impact finance expense and decrease the Group’s profit before tax and equity by approximately £430,000 (2016: £450,000). Economic hedging instruments have been included in this calculation. Fair values The fair values together with the carrying amounts shown in the balance sheet are as follows: Loans and receivables: Cash at bank and in hand (note 16) Trade receivables (note 15) Amortised cost: Trade payables (note 18) Secured bank loans (note 17) Contingent consideration (note 23) Held at fair value through profit and loss: Derivative financial instruments Carrying amount 2017 £000 Fair value 2017 £000 Carrying amount 2016 £000 Fair value 2016 £000 6,402 14,688 6,402 14,688 4,308 10,055 4,308 10,055 (2,338) (2,338) (3,116) (3,116) (147,544) (147,544) (154,103) (154,103) (3,553) (3,553) (5,875) (5,875) (940) (940) (2,047) (2,047) Where market values are not available, fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at prevailing interest rates with the following assumptions being applied: – for trade and other receivables and payables with a remaining life of less than one year the carrying amount is deemed to reflect the fair value; – for cash and cash equivalents the amounts reported on the balance sheet approximates to fair value; – for secured bank loans at floating rate the carrying value is deemed to reflect the fair value as it represents the price of the instruments in the market place; – for finance lease liabilities, all amounts are due within five years and are on terms similar to those estimated to be achievable in the market; – for the derivatives financial instruments, these were entered into to manage the Group’s exposure to interest rate risk on its external borrowings; and – for contingent consideration, this was entered into as part of the acquisition of Spark of Genius, Oakleaf Care (Hartwell) Limited. The fair value will be determined with reference to: – Spark of Genius’s EBITDA performance over the four financial years ending 30 September 2019; – Oakleaf Care (Hartwell)’s EBITDA performance over the two financial years ending 31 March 2018. Fair value hierarchy The financial instruments carried at fair value by valuation method are analysed as follows: – Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities: £nil (2016: £nil). – Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either as a direct price or indirectly derived from prices: liability £940,000 (2016: liability £789,000). – Level 3 – inputs for the asset or liabilities that are not based on observable market data: liability £3,553,000 (2016: liability £5,875,000). The financial liability measured at fair value in the Consolidated Statement of Financial Position at 30 September 2017 is deferred consideration. The fair value of deferred consideration relates to the acquisitions completed in current and prior years and is the estimated cash flows payable. The cash flows are not discounted as management deem this to be immaterial to the future cash flows payable. The effects on the fair value of risk and uncertainty in the future cash flows are dealt with by adjusting the estimated cash flows. Should any of the acquired businesses not achieve its performance targets then the estimated cash flows may be reduced. 72 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Financial Statements continued 25 Operating leases Non-cancellable operating lease rentals are payable as follows: Within one year Between two and five years More than five years 2017 2016 Land and buildings £000 3,764 8,635 121,190 133,589 Other £000 293 286 – 579 Land and buildings £000 3,743 9,365 123,003 136,111 Other £000 355 420 – 775 Included in the operating lease rentals for land and buildings in more than five years are leases relating to the land element for the properties sold to third parties and then leased back on 150-year leases. The payments shown for the 150-year leases are 75% of the total lease payments. During the year the following was recognised as an expense in the consolidated statement of comprehensive income in respect of operating leases: Charge for amounts currently payable Total recognised in the consolidated statement of comprehensive income 2017 2016 Land and buildings £000 3,653 3,653 Other £000 673 673 Land and buildings £000 3,569 3,569 Other £000 660 660 26 Related parties During the year, CareTech Community Services Limited paid rent totalling £188,250 (2016: £188,000) in respect of properties in which F. Sheikh and H. Sheikh have an interest. At the year end rent of £81,000 (2016: £nil) was prepaid. Dividends paid to Directors in the year totalled £90,000 (2016: £88,000). Transactions with key management personnel Salary Benefits Bonus Total short-term remuneration Post-employment benefits Share-based payments 2017 £000 2,493 132 186 2,811 – – 2016 £000 1,899 152 238 2,289 – – 2,811 2,289 Key management personnel are defined as Directors of the Company and members of the Senior Management Team. Directors’ emoluments are set out on page 38. CareTech Holdings PLC – Annual Report and Accounts 2017 73 Strategic ReviewGovernance––Financial Statements Company Statement of Financial Position as at 30 September 2017 Non-current assets Investments Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Loans and borrowings Trade and other payables Non-current liabilities Loans and borrowings Total liabilities Net assets Equity Share capital Share premium Merger reserve Retained earnings Total equity attributable to equity shareholders of the parent Note 29 2017 £000 2016 £000 35,301 35,301 35,301 35,301 30 269,304 229,753 748 270,052 305,353 267 230,020 265,321 31 32 31 33 5,755 1,130 6,885 5,433 1,839 7,272 142,532 142,532 149,417 155,936 149,155 149,155 156,427 108,894 379 120,778 9,023 25,756 321 81,750 9,023 17,800 155,936 108,894 These financial statements were approved by the Board of Directors and authorised for issue on 18 December 2017 and were signed on its behalf by: Farouq Sheikh Chairman Company number: 04457287 Michael Hill Finance Director 74 CareTech Holdings PLC – Annual Report and Accounts 2017 Company Statement of Changes in Equity as at 30 September 2017 At 1 October 2015 Profit for the year Total comprehensive income Issue of shares Dividends Transactions with owners recorded directly in equity At 30 September 2016 At 1 October 2016 Profit for the year Total comprehensive income Issue of shares Dividends Transactions with owners recorded directly in equity At September 2017 Share capital £000 311 Share premium £000 76,985 Merger reserve £000 8,748 Retained earnings £000 9,634 13,388 13,388 – (5,222) (5,222) Total equity £000 95,678 13,388 13,388 5,050 (5,222) (172) – – 275 – 275 9,023 17,800 108,894 – – – – – 13,889 13,889 13,889 13,889 – (5,933) (5,933) 39,086 (5,933) 33,153 – – 10 – 10 321 – – 58 – 58 – – 4,765 – 4,765 81,750 – – 39,028 – 39,028 379 120,778 9,023 25,756 155,936 CareTech Holdings PLC – Annual Report and Accounts 2017 75 Strategic ReviewGovernance––Financial Statements Company Statement of Cash Flow for the year ended 30 September 2017 Cash flows from operating activities Profit for the year Operating cash flows before movement in working capital Movement in payables Movement in intercompany balance Net cash (used in)/generated from operating activities Cash flows from financing activities Dividends paid Proceeds from the issue of new shares Repayment of borrowings Net cash generated/(used in) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 October Cash and cash equivalents at 30 September 2017 £000 2016 £000 13,889 13,889 (709) (39,551) (26,371) (5,933) 39,086 (6,301) 26,852 481 267 748 13,388 13,388 (399) (12,942) 47 (5,222) 5,050 (128) (300) (253) 520 267 76 CareTech Holdings PLC – Annual Report and Accounts 2017 Notes to the Company Financial Statements 27 Accounting policies (a) Basis of preparation The financial statements of the Company have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”) and those parts of the Companies Act 2006 relevant to those companies which report in accordance with IFRS. Under section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own comprehensive statement of income. The profit for the year dealt with in the financial statements of the Company was £13,889,000 (2016: £13,388,000). Investments (b) Investments in subsidiary undertakings are stated in the balance sheet of the Company at cost less impairment written off. (c) Cash and liquid resources Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand and those with maturities of three months or less from inception, less overdrafts payable on demand. Interest-bearing borrowings (d) Interest-bearing borrowings are recognised initially at fair value less directly attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between proceeds (net of transaction costs) and the redemption value being recognised in the consolidated statement of comprehensive income over the period of the borrowings on an effective interest basis. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. (e) Financial Instruments Recognition, initial measurement and derecognition Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss which are measured initially at fair value. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. (f) Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (g) Revenue Revenue represents management fees receivable, in respect of the period to which management services relate. (h) Share-based payments The share option programme allows employees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. Where the Company grants options over its own shares to the employees of its subsidiaries it recognises an increase in the cost of investment in its subsidiaries equivalent to the equity settled share-based payment charge recognised in its subsidiary’s financial statements with the corresponding credit being recognised directly in equity. (i) Dividends on shares presented within shareholders’ funds Dividends unpaid at the balance sheet date are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements. (j) Merger reserve The merger reserve represents the premium arising on the ordinary shares issued as consideration for the acquisition of shares in another company (merger relief). Merger reserve Opening balance 1 October 2016 Shares issued for Acquisition At 30 September 2017 2017 £000 9,023 – 9,023 2016 £000 8,748 275 9,023 CareTech Holdings PLC – Annual Report and Accounts 2017 77 Strategic ReviewGovernance––Financial Statements Notes to the Company Financial Statements continued 28 Dividends The aggregate amount of dividends comprises: Interim dividend paid in respect of prior year but not recognised as liabilities in that year (3.00p per share (2016: 2.80p per share)) Final dividend paid in respect of the prior year (6.25p per share (2016: 5.60p per share)) Aggregate amount of dividends paid in the financial year (9.25p per share (2016: 8.40p per share)) 2017 £000 1,923 4,010 5,933 2016 £000 1,739 3,483 5,222 The aggregate amount of dividends proposed and not recognised as liabilities as at the year end is 9.90p per share, £7,493,075 (2016: 9.25p per share, £5,938,214). 29 Investments Cost and net book value At beginning of year At end of year 30 Trade and other receivables Amounts owed by Group undertakings Shares in Group undertakings £000 35,301 35,301 2017 £000 2016 £000 269,304 229,753 Interest-bearing loans and borrowings 31 This note provides information about the contractual terms of the Company’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate risk, see note 24. Non-current liabilities Secured bank loans Current liabilities Current portion of secured bank loans Terms and debt repayment schedule Term loan Revolving credit facility term loan 2017 £000 2016 £000 142,532 149,155 2017 £000 2016 £000 5,755 5,433 Currency Nominal interest rate (%) £ £ 2.25 (2016: 2.25)(1) 2.25 (2016: 2.25)(1) Year of maturity 2019 2019 Book value 2017 £000 Book value 2016 £000 127,184 21,103 127,029 27,559 148,287 154,588 (1) The margin on the facilities has initially been set at 2.75% over LIBOR but reduces based on the ratio of the Group’s net debt to EBITDA. The overall margin is 2.25% over LIBOR. The Group have reviewed the present value of the cash flows under the new margin and determined the modification to not be substantial under IAS 39. Hence the modification has been accounted for as an adjustment to the existing liability. At 30 September 2017 the Group has available bank facilities totalling £195m, sufficient, with cash flow from profits, to fund present commitments. Term facilities are used to fund capital expenditure and short-term flexibility is achieved by the utilisation of cash resources. The term loans are secured by way of a charge over certain assets of the Group. 32 Trade and other payables Other creditors 2017 £000 1,130 2016 £000 1,839 78 CareTech Holdings PLC – Annual Report and Accounts 2017 33 Called up share capital Allotted, called up and fully paid: 75,679,937 (2016: 64,196,903) ordinary shares of 0.5p each 53,402 deferred shares of 0.5p each 2017 £000 2016 £000 379 – 379 321 – 321 The holders of the ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. The deferred shares have no such rights. Details in respect of the reserves are given in note 21 to the Group financial statements. 34 Employee benefits Defined contribution plans The Company operates a number of defined contribution pension plans. The total Company expense relating to these plans in the current year was £nil (2016: £nil). Share-based payments There was no expense for share-based payments relating to the Company in the year (2016: £nil). The grants and related accounting treatment adopted by the Company is identical to that operated by the Group under IFRS 2 “share-based payments” (see note 20). 35 Directors’ remuneration The analysis of Directors’ emoluments and share options is included within the Remuneration Report on pages 37 to 39. This analysis forms part of these financial statements. 36 Staff numbers and costs The Company has no employees (2016: none) other than the Directors. Directors’ emoluments are paid by a subsidiary undertaking. 37 Related parties During the year the Company received dividends of £13,000,000 (2016: £13,500,000) and received interest of £6,409,000 (2016: £6,109,000) and fees of £70,000 (2016: £70,000) from its subsidiary undertakings. The amount due to the Company from its subsidiary undertakings at the balance sheet date amounted to £269,304,000 (2016: £229,753,000). 38 Financial instruments The use of financial instruments is managed under policies and procedures approved by the Board. These are designed to reduce the financial risks faced by the Company, which primarily relate to credit, and liquidity risks, which arise in the normal course of the Company’s business. Credit risk Management has a credit policy in place and exposure to credit risk is monitored on an ongoing basis. The Company provides credit to subsidiaries in the normal course of business. The balance includes the amounts considered recoverable which also equals to their fair value. The Company has collateral in respect of the investments it holds in its subsidiary undertakings. During the year there was no charge to the income statement for bad or doubtful debts (2016: £nil). At the balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The receivables as at 30 September are inter-company balances as follows: Not due Not more than three months past due More than three months but not more than six months past due More than six months past due Trade receivables (note 30) The fair values of these balances is equal to their carrying value. 2017 £000 2016 £000 269,304 229,753 – – – – – – 269,304 229,753 Interest rate risk The Company finances its operations through called up share capital, retained profits, bank borrowings, and the sale of assets if appropriate. Group policy is to balance interest rate fixes between the short, medium and long term. The benchmark rate for bank borrowings is LIBOR. CareTech Holdings PLC – Annual Report and Accounts 2017 79 Strategic ReviewGovernance––Financial Statements Notes to the Company Financial Statements continued 38 Financial instruments (continued) Liquidity risk The Company prepares annual cash flow forecasts reflecting known commitments and anticipated projects. Borrowing facilities are arranged as necessary to finance requirements. The Company has available bank facilities, sufficient, with cash flow from profits, to fund present commitments. Term facilities are utilised to fund capital expenditure and short-term flexibility is achieved by the utilisation of cash resources in respect of financial liabilities, the following table indicates their contractual cash flow maturities. Trade and other payables Secured bank loans – 5% Effective interest rate % Carrying amount £000 Contractual cash flows £000 2017 (1,130) (1,130) < 1 year £000 (1,130) 1–5 years £000 – (148,287) (162,528) (5,755) (156,773) (149,417) (163,658) (6,885) (156,773) Trade and other payables Secured bank loans Effective interest rate % – 5% 2016 Carrying amount £000 Contractual cash flows £000 (1,839) (1,839) < 1 year £000 (1,839) 1–5 years £000 – (154,588) (176,173) (13,347) (162,826) (156,427) (178,012) (15,186) (162,826) 5 years and over £000 – – – 5 years and over £000 – – – Capital risk management The Company manages its capital to ensure that activities of the Company will be able to continue as a going concern whilst maximising returns for shareholders through the optimisation of debt and equity. The Company’s capital structure is as follows: Net debt Equity 2017 £000 148,287 155,936 2016 £000 154,588 108,894 Our policy is to increase the total dividend per year broadly in line with the movement in underlying diluted earnings per share. The final dividend will therefore increase to 6.60p per share demonstrating a confident view of the Group’s fundamental strength. Foreign currency risk The Company operates entirely in the UK and is not exposed to any foreign currency risks. Sensitivity analysis In managing interest rate risks the Company aims to reduce the impact of short-term fluctuations on the Company’s earnings and equity. Over the longer term, however, permanent changes in interest rates would have an impact on consolidated earnings and equity. At 30 September 2017 it is estimated that a general increase of 1% in interest rates would impact finance expense and decrease the Company’s profit before tax and equity by approximately £430,000 (2016: £450,000). Hedging instruments have been included in this calculation. Fair values The fair values together with the carrying amounts shown in the balance sheet are as follows: Loans and receivables: Cash at bank and in hand Trade receivables (note 30) Amortised cost: Other payables (note 32) Secured bank loans (note 31) Carrying amount 2017 £000 Fair value 2017 £000 Carrying amount 2016 £000 Fair value 2016 £000 748 748 267 267 269,304 269,304 229,753 229,753 (1,130) (1,130) (1,839) (1,839) (148,287) (148,287) (154,588) (154,588) Where market values are not available, fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at prevailing interest rates with the following assumptions being applied: – for trade and other receivables and payables the carrying amount is deemed to reflect the fair value; – for cash and cash equivalents the amounts reported on the balance sheet approximates to fair value; – for secured bank loans at floating rate the carrying value is deemed to reflect the fair value as it represents the price of the instruments in the market place. 80 CareTech Holdings PLC – Annual Report and Accounts 2017 Directors and Advisers Company Number 04457287 Registered Office 5th Floor, Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG Directors Farouq Sheikh Haroon Sheikh Michael Hill Karl Monaghan Mike Adams Jamie Cumming (Executive Chairman) (Chief Executive Officer) (Group Finance Director) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) Company Secretary Michael Hill This annual report is printed on FSC® certified material. 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