ANNUAL REPORT AND ACCOUNTS 2018 Extraordinary days every day Our clients, John and Ann Marie Mellings, met 10 years ago and romance blossomed at Cranleigh Court in Wigan. They married in June 2018 and this is a picture of the happy couple. 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. 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. Financial and Operational Highlights Revenue Underlying EBITDA(i) Statutory financial highlights £40.2m EBITDA(iv) increased by 10.4% (2017: £36.4m) £20.2m Operating profit decreased by 11.0% (2017: £22.7m) 14.06p Diluted earnings per share reduced by 44.8% (2017: 25.48p) £185.7m increased by 11.9% (2017: £166.0m) Underlying profit before tax(ii) £32.9m increased by 11.9% (2017: £29.4m) £43.9m increased by 10.0% (2017: £39.9m) Underlying basic earnings per share(ii) 35.07p (2017: £38.03p) Net cash inflows from operating activities Overall care capacity increased by 88(v) £30.9m (2017: £22.1m) with net debt(iii) of £147.0m (2017: £147.1m) 2,622 places (2017: 2,534) Occupancy 2,438 (2017 2,159) Property portfolio Final dividend per share £424m independently valued (2017: £329m) 7.50p increased by 13.6% (2017: 6.60p) (i) Underlying EBITDA is operating profit stated before depreciation, share-based payments charge and non-underlying items. (ii) Underlying profit before tax and underlying basic 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 and share-based payments. (v) Overall capacity has increased by 88 with 69 additional beds in reconfigured services and new services, 69 new beds in Children’s Services and 50 beds were withdrawn for reconfiguration. Contents Financial and Operational Highlights Strategic Review 1 2 Group at a glance 10 Group Chairman’s Statement 14 Strategic Report 14 Creating sustainable value in our markets 16 A strategy to drive future growth 18 Our key performance indicators Principal risks and our strategic 20 response 22 Group Chief Executive’s Statement and Performance Review 28 Corporate Social Responsibility 30 Group Financial Review Governance 34 Board of Directors 36 Corporate Governance Report 43 Directors’ Report 45 Remuneration Report 48 Statement of Director’s Responsibilities in respect of the Annual Report and the Financial Statement Financial Statements 49 Independent Auditor’s Report to the members of CareTech Holdings PLC 53 Consolidated Statement of Comprehensive Income 54 Consolidated Statement of Financial Position 55 Consolidated Statement of Changes in Equity 56 Consolidated Statement of Cash Flow 57 Notes to the Financial Statements Company Statement of Financial 81 Position Company Statement of Changes in Equity 82 83 Company Statement of Cash Flow 84 Company Notes to the Financial Statements 89 Directors and Advisers Find out more online: www.caretech-uk.com/about-us CareTech Holdings PLC – Annual Report and Accounts 2018 1 Strategic ReviewGovernanceFinancial Statements Group at a glance Extraordinary care ADULT SERVICES Social care services for adults over the age of 18 Caring every day The Company was formed in 1993 and was admitted to the AIM market at the London Stock Exchange in October 2005. Since the CareTech Group came to the AIM market 13 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 CareTech Group provides care and support to individuals in need. This is mainly for people who have a learning disability, some of whom may have associated physical or psychological impairment. However, the company also supports a number of people with other disorders including those with autism, sensory impairment, physical disabilities or mental health problems. Many of the services are offered in residential care settings in community-based settings, including a number of nursing homes. All the residential homes are registered with the UK Government regulator, mainly with the Care Quality Commission, Ofsted and also with other regulators. CareTech also provides care and support to a significant number of people who have their own tenancies (supported living) and in various day centres or hostel type accommodation. 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. Care capacity 2018: 1,754 (2017: 1,735) Contribution to Group revenue: 54.4% (2017: 52.9%) Split by: – Residential care – Independent supported living – Community support services Care capacity 2018: 214 (2017: 214) Contribution to Group revenue: 8.2% (2017: 9.3%) Split by: – Residential care – Independent supported living – Community outreach 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. 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. 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. 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. 2 CareTech Holdings PLC – Annual Report and Accounts 2018 CHILDREN SERVICES Social care services for children and young people up to the age of 18 LEARNING SERVICES Care capacity 2018: 301 (2017: 301) Contribution to Group revenue: 4.4% (2017: 5.2%) Split by: – Residential care of children and young people – Family assessments in the home Care capacity 2018: 353 (2017: 284) Contribution to Group revenue: 31.6% (2017: 26.4%) Split by: – Residential care of children and young people – Education services for children and young people Apprentices 2018: 266 (2017: 509) Contribution to Group revenue: 1.4% (2017: 6.2%) Split by: – Pre-employment programmes – Development programmes – Apprenticeships 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. 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. 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 approach to move into a more normalised family style environment as soon as it is practicable to do so. These services are highly integrated operations with dedicated staff ratios and may also include on site or dedicated educational facilities. LEARNING SERVICES 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 21,200 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. Dawn Hodge Associates received an “Outstanding” from Ofsted earlier this year and has 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 decline in companies offering apprenticeships. However, the Government has a target of 3 million apprenticeships by 2020. (Sourced from Gov.UK). CareTech Holdings PLC – Annual Report and Accounts 2018 3 Strategic ReviewGovernanceFinancial Statements Group at a glance continued Extraordinary quality QUALITY AND EXPERTISE Delivering quality to achieve positive outcomes for our individuals is at the heart of the organisation. 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 2018 CareTech Holdings PLC – Annual Report and Accounts 2018 5 Strategic ReviewGovernanceFinancial Statements Group at a glance continued 6 CareTech Holdings PLC – Annual Report and Accounts 2018 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 support 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. CareTech Holdings PLC – Annual Report and Accounts 2018 7 Strategic ReviewGovernanceFinancial 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. We continue to consolidate in a growing and highly fragmented market. 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 and value base with the benefits of scale, operating within friendly and trusted local service businesses. 8 CareTech Holdings PLC – Annual Report and Accounts 2018 CareTech Holdings PLC – Annual Report and Accounts 2018 9 Strategic ReviewGovernanceFinancial Statements Group Chairman’s Statement Celebrating 25 years in business Another successful year creating a transformational platform for further expansion. Farouq Sheikh Chairman I am privileged to present our results for the period ended 30 September 2018 being our 25th year in business. This is a real milestone for CareTech and has proven to be another exceptionally busy and successful year, with the key highlights being: – Accelerated organic initiatives including property purchases and reconfigurations – Further strengthening of our management team and investment in IT systems – Strengthening of our Care Pathways and outcomes for our service users – Improvement on CQC and OFSTED Quality Ratings across the Group – Exciting initiatives and partnerships launched by the CareTech Charitable Foundation – Agreed highly complementary and significantly accretive acquisition of Cambian Group plc It is really pleasing to note that, over these years, we continue to maintain our position as a leading care provider with our improved quality ratings across the Group. As previous press releases have mentioned, the sad and untimely death of the Group Finance Director, Michael Hill, I wish to express my own thoughts on this tragic event. I first met and started working with Michael in 2010. Michael very quickly became an integral part of the CareTech family and in the ensuing years, particularly throughout significant periods of growth in the Group and its structure, I came to rely on Michael’s financial wisdom and his calmness during long periods of negotiations. His innate professionalism and exemplary work ethic was widely respected by his peers. Michael had a charming and exuberant personality and was much loved both by all who worked for Caretech. He was a shining light in treating people with both fairness and compassion. Michael was my good friend and colleague for over eight years and I will miss him. 10 CareTech Holdings PLC – Annual Report and Accounts 2018 I am personally reminded of our very humble beginnings all the way back in 1993, from our very first home in 44 The Avenue, Watford. Having just completed the Cambian acquisition post year end, we now have a national presence with over 450 homes and schools in the UK with around 10,000 staff supporting some 4,500 vulnerable young people and adults. This has been an incredible journey that has only been possible due to the hard work and dedication of each and everyone one of our staff that make up the CareTech family! As we celebrated our 4th year of our National Care Awards on the 23rd of November many of our staff were there and received acknowledgement and thanks for their hard work. Personally it was so touching to have one of the parents, whose son was placed in our second home known as Morven Park back in 1994, pay tribute to the company for the care and support provided to her son for the 17 years he was with us. We are pleased that we still have an active engagement with her after her son sadly passed away. It is a testament to the relationship we build with the nearest and dearest of those we support. When we set up CareTech all those years ago our underlying vision was very simple. We wanted to build the very best designed homes, furnish them to the highest of standards and match this with an innovative person centric care and support package. We wanted to be different and create a feeling that parents, carers, care managers felt so overwhelmed with our unique offering that they instantly wanted to move in themselves! We saw this reaction over many of the homes we opened and this created a buzz in the sector! And so 25 years on, our underlying vision remains the same. We will endeavour to develop the best designed and furnished homes – ones that we would be happy to live in ourselves. Coupled with this we will provide the bespoke support for our service users as we would want to provide for our nearest and dearest. If we sincerely stick to these simple principles we will always be at the forefront of our industry and, as a result, the financial metrics will take care of themselves. Accordingly below is a summary of our financial results for this year are where: – Revenue has increased by 11.9% to £185.7m – Underlying EBITDA has increased by 10.0% to £43.9m – Underlying profit before tax has increased by 11.9% to £32.9m – Underlying basic EPS at 35.07p per share – Net Assets increased by 2.0% to £208.2m (2017: £204.2m) – Cash inflows from operating activities before non-underlying items of £39.1m (2017: £32.7m) with net debt (iii) of £147.0m (2017: £147.1m) – Full year dividend increased by 13.6% to 7.5p 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 results are especially pleasing as management have had an extremely busy year producing solid financial year on year metrics whilst: – continuing with a significant number of organic and reconfiguration initiatives – improving care quality ratings across all service segments – maintaining strong occupancy across the portfolio of homes – achieving industry leading staff retention rates – completing post year end, the transformational and highly complementary and accretive acquisition of Cambian Group plc – enlarged Group property portfolio valuation updated as part of the transaction at £774m Management have done extremely well to manage these various work streams whilst ensuring the core business moves forward on all fronts. 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. Continuing with our strong organic growth, once again the Group has purchased a number of properties including Red Rock, Thorngarth, and Oaklea. Further investment has also been made during the year on previous purchases with over £1.2m invested in Beacon Reach, a school run by ROC Northwest, and £1.1m on Hidelow school in Shropshire. All of these projects will deliver incremental earnings as they reach mature occupancy. Pleasingly, ROC Northwest has won the coveted Laing and Buisson Award in Social Care for Children’s Services. During 2018, we again closed several services for reconfiguration which impacted the growth in revenue. Offsetting this, there are improved 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 2019 we have a strong pipeline of development opportunities with one property purchased soon after the year end. The Group continue to look at a number of other acquisition opportunities and are confident that there will be further opportunities in the coming year. In the 13 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. CareTech Holdings PLC – Annual Report and Accounts 2018 11 Strategic ReviewGovernanceFinancial Statements Group Chairman’s Statement continued Shortly after the year end the acquisition of Cambian Group plc was completed. Cambian is a leading children’s specialist education and behavioural health service provider. The Cambian Group’s services have a specific focus on children who present high severity needs with challenging behaviours and complex care requirements. Cambian currently looks after over 2,000 children and employs over 4,500 people across a portfolio of 222 residential facilities, specialist schools and fostering offices located in England and Wales. Even with the significant growth we have achieved to date, and also with the Cambian acquisition post year end, we still have less than 5% of this very large and fragmented market. With the increasing regulatory burden, the opportunity for further consolidation is even more attractive. 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 2018 there was a slight reduction in underlying diluted earnings per share of (2.96p) mainly due to the share placement in March 2017, which increased the number of shares in issue. The Board has proposed a final dividend of 7.5p (2017: 6.60p) per share bringing the total dividend for the year to 11.0p (2017: 9.90p) per share. This represents a full year increase of 11.1% year on year. The final dividend will be paid, subject to shareholder approval, on 8 May 2019, with an ex-dividend date of 7 March 2019 and an associated record date of 8 March 2019. 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 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. As stated in the prospectus accompanying the Cambian acquisition it is our intention to add two additional independent non-executive directors to the Board within three months of completion of this acquisition. Alongside additional non-executive appointments it is expected that, following our acquisition of Purple Zest, Mike Adams will become an Executive Director of the Group. 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 early in 2019 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 were 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. Post Balance Sheet events – acquisition of Cambian Group plc and new banking facilities As mentioned in my report above, I am extremely pleased to report that we completed the acquisition of Cambian Group plc on 19 October 2018 following the Rule 2.7 Offer on 16 August 2018 and the Prospectus on 19 September 2018. Work began on this project at the beginning of the year and after several approaches and considerable due diligence it was pleasing to issue the Rule 2.7 Offer in August. This offer could only be made with Shareholder support, Banking support and the agreement of the Cambian Board of Directors. Shareholder support through Rule 2.4 Irrevocable Undertakings in July to the revised possible offer was important to being able to make a Recommended Offer for Cambian Group plc in August. The Rule 2.7 Offer was made with 9 Irrevocable Undertakings from Cambian plc Shareholders plus the Directors and 2 CareTech Holdings PLC Shareholders plus the Directors. I am very grateful for the support of our Shareholders during this acquisition. I also welcome to the enlarged Group the new CareTech Shareholders who were Cambian Shareholders that took the Headline Offer. Financing support was provided by Lloyds Bank PLC and National Westminster Bank PLC as Mandated Lead Arrangers who provided a Term and Revolving Facilities Agreement with total commitments of £438.7m in support to the Rule 2.7 Offer. Subsequently this was successfully syndicated and the final Bank draw down was £427.1m. I am grateful to the Banks for their backing. The Board of Cambian Group plc played a key role in professionally dealing with our approaches and working well with the CareTech team during the due diligence process. Now that the acquisition has completed we are working with the Competition and Markets Authority and planning IT integration. This is an exciting phase post acquisition and in the coming months I look forward to meeting more members of the Cambian team when I visit services. 12 CareTech Holdings PLC – Annual Report and Accounts 2018 Outlook and prospects We operate in a growing social care market worth over £10bn 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 new long-term Banking facilities and solid free cash flow generated from the enlarged Group, we look forward to the integration of Cambian during 2019. Their focus on children who present high severity needs with challenging behaviours and complex care requirements is an excellent fit alongside the CareTech Children Services, and this extension of current Care Pathways and geographic presence is a major opportunity to the enlarged Group. We have major investment plans for 2019 and beyond with key new organic developments and bolt-on acquisitions. Importantly, we also continue to see how we can enhance further, the use of technology as a validation of our work as well as for diagnostic and assessment purposes, whilst exploring international market opportunities and in particular the GCC. We will 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 Group Executive Chairman 20 December 2018 CareTech Holdings PLC – Annual Report and Accounts 2018 13 Strategic ReviewGovernanceFinancial Statements Strategic Report Creating sustainable value in our markets The Directors present their Strategic Report on the Group for the year ended 30 September 2018. 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. 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. 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. ADULT SERVICES* ADULT LEARNING DISABILITIES – Residential care – Independent supported living – Community support services SPECIALIST SERVICES – Residential care – Independent supported living – Community outreach CHILDREN SERVICES** FOSTER CARE – Fostering – Family assessments in the home YOUNG PEOPLE RESIDENTIAL SERVICES – Residential care of children and young people – Education services for children and young people 14 CareTech Holdings PLC – Annual Report and Accounts 2018 ADULT SERVICES* CHILDREN SERVICES** HIGHLIGHTS 78,000 People in the UK cannot live independently £5.8bn Market for residential learning disabilities and supported living HIGHLIGHTS 13% Of the UK population have specific mental disorders £10.1bn NHS/LA total spend on specialist services HIGHLIGHTS 51,850 People placed in foster care in England HIGHLIGHTS £1.57bn Foster care market across England 1.5% pa Market growth rate 10,085 Children in UK looked after outside foster care £1.39bn Residential children’s market across UK 1.2% pa Market growth rate * Data from Laing and Buisson Adult Specialist Care 2nd edition 2015/2016 report. ** Data from Laing and Buisson Children’s Services Market Report 3rd edition 2017 report. CareTech Holdings PLC – Annual Report and Accounts 2018 15 Strategic ReviewGovernanceFinancial 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 MENTAL HEALTH Safeguarding Committee Extraordinary days every day Strong brand Experienced and committed management Care Pathway FOSTER CARE AND FAMILY SERVICES YOUNG PEOPLE RESIDENTIAL SERVICES 16 CareTech Holdings PLC – Annual Report and Accounts 2018 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 2018 17 Strategic ReviewGovernanceFinancial 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 (£m) £43.9m (2017: £39.9m) 2014 2015 2016 2017 2018 30.7 32.5 37.1 39.9 43.9 UNDERLYING PROFIT AFTER TAX AND NON CONTROLLING INTEREST (£m) £26.5m (2017: £26.6m) 2014 2015 2016 2017 2018 UNDERLYING BASIC EPS (p) 35.07p (2017: 38.03p) 16.1 18.3 24.0 26.6 26.5 2014 2015 2016 2017 2018 31.01 31.79 38.03 38.03 35.07 18 CareTech Holdings PLC – Annual Report and Accounts 2018 HOW THIS IS CALCULATED Underlying EBITDA is the Earnings before Interest, Tax, Depreciation for the year excluding non-underlying items such as amortisation of intangible assets which are fully described in note 5 to the Financial Statements. PERFORMANCE THIS YEAR The underlying EBITDA has improved by £4.0m – 10% 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. 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. PERFORMANCE THIS YEAR The underlying profit after tax is 0.4% lower than 2017. This reflects the improved underlying EBITDA, but with higher finance charges and an increased tax provision the profit after tax fell slightly. 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 basic earnings per share has reduced to 35.07p mainly due to the full impact of the shares issued in March 2017. NET DEBT (£m) £147.0m (2017: £147.1m) 2014 2015 2016 2017 2018 CAPACITY 2,622 places (2017: 2,534 places) MATURE ESTATE OCCUPANCY (%) 93% (2017: 93%) BLENDED OCCUPANCY (%) 86% (2017: 86%) 166.1 158.5 156.4 147.1 147.0 2014 2015 2016 2017 2018 2,074 2,116 2,319 2,534 2,622 2014 2015 2016 2017 2018 92 93 93 93 93 2014 2015 2016 2017 2018 86 86 86 86 86 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 2018 was £147.0m which is a reduction of £0.1m from 30 September 2017 of £147.1m. Finance leases with the Group’s bankers at the year-end were £4.7m (2017: £6.0m) with the decrease due principally to the lease repayments net of the new investment in 36 new home vehicles during the year, which take our fleet to 480 vehicles. Net Debt in total reduced by £0.1m between 30 September 2017 and 30 September 2018. 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 88 which is a 3.4% increase. Adult Learning new homes increased capacity by 69. There were 69 new beds in Children Services and 50 beds were withdrawn for reconfiguration. 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 2018 19 Strategic ReviewGovernanceFinancial 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. 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 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 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. 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 Group Executive Chairman 20 December 2018 20 CareTech Holdings PLC – Annual Report and Accounts 2018 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. 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. 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 in particular during its Budget and forecasting processes. 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 2018 21 Strategic ReviewGovernanceFinancial Statements Group Chief Executive’s Statement and Performance Review A strong foundation built over 25 years I am pleased 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. Haroon Sheikh Group Chief Executive Officer 22 CareTech Holdings PLC – Annual Report and Accounts 2018 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 also continued to develop through organic growth and reconfigurations and has further strengthened an experienced management team with skilled leaders. In 2017, I was extremely proud with the establishment of the CareTech Charitable Foundation which is devoted to supporting the social care sector. There have been a number of key long-term projects started in the year both in the UK and abroad. This is further discussed in the Corporate Social Responsibility section of the report. There have 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. On 19 October 2018 the recommended acquisition of Cambian by the Group was completed. I would like to take this opportunity to welcome Anne Marie Carrie as Chief Operating Officer, and the whole Cambian staff team, as well as the 2,000 children who use their services, to the CareTech Group. I strongly believe that the CareTech offerings in learning difficulties and specialist services for adults including residential services and fostering for young people, is highly complementary to Cambian’s positions in children’s residential care, specialist education and therapeutic fostering. Furthermore, the geographic reach of the services has been broadened, now providing a nationwide network. We are now ideally positioned to better serve local authority partners and communities with an integrated care offering, to provide best value to purchasers and successful outcomes for our service users. 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. 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. Overall capacity has increased by 88, with a net 19 in Adult Services whilst Children Services have added 69 beds in the year principally in 9 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. CareTech Holdings PLC – Annual Report and Accounts 2018 23 Strategic ReviewGovernanceFinancial Statements Group Chief Executive’s Statement and Performance Review continued 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 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 offerings. Capacity has increased by 88 places principally because we have continued to reconfigure services and added new beds through acquiring properties. 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 2018 Revenue £101.0m (2017: £87.7m) Contribution to Group Revenue Underlying EBITDA before unallocated costs. 54.4% (2017: 52.9%) £27.0m (2017: £26.3m) Capacity 1,754 (2017: 1,735) 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. 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 50 places in services for reconfiguration into new care models and have developed 26 beds through reconfiguration plus an additional 43 beds have been brought into service. 24 CareTech Holdings PLC – Annual Report and Accounts 2018 2. Specialist Services Year to 30 September 2018 Revenue £15.3m (2017: £15.5m) Contribution to Group Revenue Underlying EBITDA before unallocated costs. 8.2% (2017: 9.3%) £4.4m (2017: £3.9m) Capacity 214 (2017: 214) Specialist Services comprise the Adult Mental Health Services and Oakleaf Care (Hartwell). Capacity is unchanged in Specialist Services during the year. The principal reason for the increase in underlying EBITDA is an improved margin. 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 2019. CareTech Holdings PLC – Annual Report and Accounts 2018 25 Strategic ReviewGovernanceFinancial Statements Group Chief Executive’s Statement and Performance Review continued 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. 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. Unfortunately, the benefits of this change are taking longer to come through and turnover last year was lower than anticipated, although the margin improved by over 1% due to tight cost controls. 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. 3. Foster Care Year to 30 September 2018 Revenue £8.2m (2017: £8.6m) Contribution to Group Revenue Underlying EBITDA before unallocated costs. 4.4% (2017: 5.2%) £1.9m (2017: £1.9m) Capacity 301 (2017: 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 but stable 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 March 2016, 63,718 were looked after in foster care in the UK. Over time independent agencies have absorbed a larger proportion of fostering activity, as local authorities have seen their volumes remain static and their share fall (LaingBuisson Children’s Services Market Report Third Edition 2017). Our Foster Care teams and Young People Residential teams are working closely alongside each other to offer the best outcomes for Young People. 4. Young People Residential Services Year to 30 September 2018 Revenue £58.7m (2017: £43.8m) Contribution to Group Revenue Underlying EBITDA before unallocated costs. 31.6% (2017: 26.4%) £17.0m (2017: £13.2m) Capacity 353 (2017: 284) 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), North Wales (Branas Isaf) and South Wales (Greenfield) 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 69 beds to capacity with additions to Spark of Genius, ROC Northwest and the original Children 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 69 to close at 353 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. 26 CareTech Holdings PLC – Annual Report and Accounts 2018 5. Learning Services Year to 30 September 2018 Revenue £2.5m (2017: £10.4m) Contribution to Group Revenue Underlying EBITDA before unallocated costs. 1.4% (2017: 6.2%) £0.5m (2017: £0.9m) 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. Learning Services comprises Dawn Hodge Associates that is a regional provider specialising in the social care sector and was acquired in 2017. This division has been reconfigured and there has been an impairment to goodwill of £2m. However, it is anticipated that the current year will show an improved performance once the changes made have taken affect. 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. 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. CareTech apprentices continue their training with 266 CareTech support workers undertaking the apprenticeship programme. The Team Leader programme has 22 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, the Learning Service Division 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 2019 is expected to show an improvement on last year. Acquisition of Cambian As we have outlined in the prospectus the two businesses will be run with the CareTech and Cambian brands retained and with no material change to CareTech’s or Cambian’s current operational sites. Over the coming months a dedicated plan to review the two businesses will be undertaken with limited disruption to the underlying operations of each business. Within the enlarged Group the CareTech operations come under John Ivers, Chief Operating Officer of CareTech. Anne Marie Carrie leads the Cambian operations as Chief Operating Officer of Cambian and both John and Anne Marie report to me as Group Chief Executive Officer. I am looking forward to utilising fully the operational expertise across the enlarged Group which will enable the creation of a robust and sustainable operating model to better serve local authority partners and service users. The combined operational expertise will be able to deliver strong service user outcomes, implement positive staff engagement and improve care quality. In particular, through the combination, Cambian should be able to leverage CareTech’s highly developed recruitment and retention functions, which have contributed to CareTech achieving staff turnover rates of 22.5% which I believe is substantially better than the sector average. There is also the opportunity for CareTech’s Learning Services division, which assists young people in obtaining employment opportunities and apprenticeships, to augment Cambian’s service and care pathway. 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. May I also take this opportunity to welcome all staff who have joined the CareTech family and also I would like to thank all of the staff teams across the Group for their hard work and commitment during the past year. Haroon Sheikh Group Chief Executive Officer 20 December 2018 CareTech Holdings PLC – Annual Report and Accounts 2018 27 Strategic ReviewGovernanceFinancial 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 2018 the Group made charitable donations through the Charity Foundation of £380,000 (2017: £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. 2) The CareTech Charitable Foundation’s work is focused on the following three key objectives: Physical and learning disabilities and 1) Specialist Services. Supporting disabled people and those with long-term health difficulties, including those with Specialist Services conditions and complex physical and learning disabilities. Skills development for the care sector. Skills development for those from deprived and disadvantaged backgrounds for careers in the care sector. 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. 3) 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. 28 CareTech Holdings PLC – Annual Report and Accounts 2018 – 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 the 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 2018 following the successes in 2015, 2016 and 2017. 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 in our services we are encouraging more efficient consumption of energy, without compromising service user care. Clinical waste management has an environmental impact and we are focussed 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. 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. 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. Large events were held in November 2016 and 2017 and the fourth care awards ceremony was in November 2018. Out of a total of 5,560 staff at the end of September 2018, 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. The Staff Engagement Survey which took place in 2017 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 3 year scheme launched in 2016. We have repeated the sharesave option scheme in October 2017 with a further 259 staff participating in the new 3 year scheme. It is proposed to launch another scheme in early 2019. 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. 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. 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 Group Chief Executive Officer 20 December 2018 CareTech Holdings PLC – Annual Report and Accounts 2018 29 Strategic ReviewGovernanceFinancial Statements Group Financial Review The Group has continued to make good progress in 2018 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 £21.4m (2017: £20.0m) and increased by £1.4m during the year. In 2017 they represented 12.0% of Group revenue and in 2018 this reduced to 11.5% 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. In the year there has also been a continued focus on purchasing properties which are then converted to new services. The number of employees in management and administration has reduced by 40. 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. Total EBITDA has increased from £36.4m in 2017 to £40.2m in 2018. I am delighted that this year marks CareTech’s 25th year in business looking after service users. In October 2018, after the year end, the Group completed the acquisition of Cambian and also has put in place new banking facilities to provide stability for the coming years. The results reported are for the CareTech operations only and in 2019 the results will reflect the enlarged Group including the Cambian operations. Results Underlying operating profit improved by 10.5% at £37.8m compared with £34.2m 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 five completed in the last four years. Underlying basic earnings per share are 35.07p (2017: 38.03p). In the year underlying profit before taxation increased by 11.9% to £32.9m and underlying profit after tax has risen by 1.9% to £27.1m (2017: £26.6m) due in part to the increase in the effective tax rate. The weighted average number of diluted shares rose to 75.7m (2017: 70.1m) being an increase of 8.0%. Basic earnings per share decreased by 44.8% to 14.07p (2017: 25.48p) and profit after tax reduced by 40.4% to £10.6m (2017: £17.8m). Cash inflows from operating activities before tax and non-underlying items paid were £39.1m (2017: £32.7m), an increase of 19.6%. Net debt to the Group’s bankers (as defined on page 1) at the year end of £147.0m has reduced by £0.1m for the year (2017: £147.1m). The Condensed Income Statement before non-underlying items for the year is summarised in table 1. Revenue Revenue of £185.7m (2017: £166.0m) was 11.9% higher than in 2017. In the established Adult Learning Disabilities segment we continued to experience high levels of occupancy and reported 86% occupancy at 30 September 2018. 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 2018 was 86% of capacity (September 2017: 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 these 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. 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 62.2% in 2017 to 62.6% in 2018 and underlying EBITDA before Group costs moving from 65.3% in 2017 to 61.8% in 2018. The Young People Residential Services total revenue has risen by 34% with Specialist Services falling by 1.1%, Foster Care falling by 4.7% and Learning Services by 76%. Their total proportion of the EBITDA before Group costs has moved from 34.6% in 2017 to 38.2% in 2018 due mainly to the new services opening in the Young People Residential Services. Underlying EBITDA and total EBITDA Underlying EBITDA has grown by 10% from £39.9m in 2017 to £43.9m in 2018. Underlying EBITDA margin has decreased from 24% to 23.6% 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. 30 CareTech Holdings PLC – Annual Report and Accounts 2018 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 Non-controlling interest Weighted average number of diluted shares (millions) Underlying basic earnings per share Full year dividend per share Table 2 – Revenue Growth 11.9% 10.0% 10.5% 11.9% 2018 £m 185.7 65.3 (21.4) 43.9 23.6% (5.9) (0.2) 37.8 (4.9) 32.9 (5.8) 17.5% 27.1 (0.6) 75.7 35.07p 11.00p 2017 £m 166.0 59.9 (20.0) 39.9 24.0% (5.5) (0.2) 34.2 (4.8) 29.4 (2.8) 9.3% 26.6 – 70.1 38.03p 9.90p Adult Learning Disabilities Specialist Services Adult Services Young People Residential Services Foster Care Learning Services Children Services Less unallocated Group costs 2018 Revenue £m 2018 Underlying EBITDA £m 2017 Revenue £m 2017 Underlying EBITDA £m 101.0 15.3 116.3 58.7 8.2 2.5 69.4 – 185.7 27.0 4.4 31.4 17.0 1.9 0.5 19.4 (6.9) 43.9 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 CareTech Holdings PLC – Annual Report and Accounts 2018 31 Strategic ReviewGovernanceFinancial Statements Group Financial Review continued Operating profit and profit before tax The depreciation charge is £5.9m (2017: £5.5m) 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 10.5% to £37.8m (2017: £34.2m). Total operating profit reduced by £2.5m to £20.2m (2017: £22.7m). Net underlying financial expenses increased to £4.9m (2017: £4.8m) due to additional finance leases taken out on new home vehicles during the year. Underlying profit for the year improved to £27.1m (2017: £26.6m). Total profit before tax decreased by 8.4% to £15.4m (2017: £16.8m). Taxation and diluted earnings per share The effective underlying tax rate was 17.5% (2017: 9.3%) and reflects management’s expectations of future capital investment through organic developments and reconfigurations relative to available capital allowances and the impact of the reduction in the main rate of corporation tax in the year, whilst last year also had the release of a provision for tax no longer required. The weighted average number of shares in issue rose by 8.1% mainly due to the share placement in March 2017. The underlying basic earnings per share fell to 35.07p in 2018 from 38.03p in 2017. Basic earnings per share reduced by 44.8% to 14.07p (2017: 25.48p). 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 rise in line with the increase in underlying operating profit and increase to 7.5p per share (2017: 6.60p), bringing the total dividend for the year to 11.00p (2017: 9.90p), a growth of 11.1%. Dividend cover for 2018, based upon diluted earnings per share before non-underlying items, is 3.19 times (2017: 3.84 times). Non-underlying items As fully explained on the face of the Consolidated Statement of Comprehensive Income and in note 5, 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. Table 3 – Cash flow and net debt Total non-underlying items represent a net charge of £17.6m at operating level (2017: £11.5m) and the principal items are the amortisation of intangible assets and integration and reorganisation costs plus costs of the acquisition. Cash flow and net debt The cash flow statement and movement in net debt as defined on page 1 to the Group’s bankers for the year is summarised in table 3. Net debt to the Group’s bankers at 30 September 2018 of £147.0m (2017: £147.1m) has decreased by £0.1m during the financial year, with an investment of £17.1m in acquisitions and capital improvements during the year. Underlying EBITDA (Increase) in working capital Cash inflows from operating activities before non-underlying items Tax paid Interest paid Dividends paid Acquisitions and capital expenditure Share placement 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 Closing net debt to the Group’s bankers 2018 £m 43.9 (4.8) 39.1 (4.1) (4.7) (7.5) (17.1) – 5.7 (5.6) 2017 £m 39.9 (7.2) 32.7 (6.3) (5.0) (5.9) (36.4) 37.4 16.5 (7.2) 0.1 (147.1) 9.3 (156.4) (147.0) (147.1) 32 CareTech Holdings PLC – Annual Report and Accounts 2018 Operating cash flows before non-underlying items The £39.1m (2017: £32.7m) cash inflow from operating activities, before non-underlying items, represents an 89% (2017: 82%) underlying EBITDA cash conversion ratio. Interest and dividend cash flows Interest paid of £4.7m (2017: £5.0m) 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 £17.1m (2017: £36.4m) on capital expenditure. The Group acquired Purple Zest Limited in July 2018 for a total consideration of £0.1m in cash. Capital expenditure of £15.9m (2017: £19.8m) includes £10.9m to update our portfolio of assets. Banking arrangements for the Group for the year The Group had entered into new banking facilities with Lloyds Bank plc and National Westminster Bank plc for committed financing by way of term loans of between 3.5 to 5 years up to £334m and a short-term bridge loan of approximately £80m. The short-term bridge loan was repaid in November 2018 following completion using principally Cambian’s significant cash position. Post Balance Sheet events In October 2018 there were a group of related post Balance Sheet events. There was the acquisition effected by way of a Court Sanctioned Scheme under Part 26 of the Companies Act whereby the Group became the holder of the entire issued and to be issued share capital of Cambian Group plc. The acquisition completed following the Admission of the Enlarged Share Capital to trading on AIM on 19 October 2018. The Headline Offer for each Cambian share was 100p in cash and 0.267 of a new CareTech share; alternatively the Full Cash Alternative for each Cambian share was 190p in cash. The majority of the Cambian shareholders took the Headline Offer and so became shareholders in the enlarged Group with 33.2m new shares in the Group being issued. There was also the financing of the acquisition which is discussed above. 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. Farouq Sheikh Group Executive Chairman 20 December 2018 In addition to the term loans and bridge loan, a £25m revolving credit facility is available to provide working capital for the enlarged Group and an uncommitted accordion facility of up to £30m for general corporate and working capital purposes (including acquisitions). The new facilities of the term loans and bridge loan with an aggregate size up to £414m have been utilised for the cash consideration of the acquisition, following the repayment of the Group’s existing bank debt facilities of approximately £150m and the payment of debt financing fees of up to approximately £6m. The amount available for the draw down under the term loans was reduced in the event that the actual cash consideration payable under the transaction was less than £253m. As part of the acquisition, in September 2018 the Group’s property portfolio was revalued by Cushman and Wakefield and the market value was £424m. The Cambian Group plc property portfolio was revalued by Knight Frank and the market value was £350m. Following completion of the acquisition, Lloyds Bank plc and Nat West Markets plc, who had underwritten the funding, completed the syndication of the Term Loans and revolving credit facility successfully. The syndication was significantly oversubscribed showing strong support for both the Group and the acquisition. The final facility is a term loan of £322m and revolving credit facility of £25m to a group of banks comprising Barclays Bank PLC, HSBC UK Banks plc, Santander UK plc, AIB Group (UK) plc, Clydesdale Bank PLC and Credit Suisse AG, in addition to Lloyds Bank plc and National Westminster Bank plc. The enlarged Group loan to value based only on the property valuations is c42% whilst the proforma net debt to EBITDA of the Enlarged Group is 4.3x which is expected to reduce to under 4x in the short term. CareTech Holdings PLC – Annual Report and Accounts 2018 33 Strategic ReviewGovernanceFinancial Statements Board of Directors An experienced and driven corporate Board Farouq Sheikh Group Executive Chairman (aged 60) Haroon Sheikh BSc Group Chief Executive Officer (aged 62) Karl Monaghan Non-Executive Director (aged 56) 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. 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 35.07p 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. Farouq was a Founder Trustee of the CareTech Charitable Foundation formed in 2017. 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. Haroon was a Founder Trustee of the CareTech Charitable Foundation formed in 2017 and is Chairman of the Trustees. 34 CareTech Holdings PLC – Annual Report and Accounts 2018 Dr Mike Adams OBE Non-Executive Director (aged 47) Jamie Cumming Non-Executive Director (aged 68) 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 utilises 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. Mike has a significant track record in the social care, health and disability sectors. He is currently CEO of Purple Zest Limited, a disability organisation that supports both disabled people and businesses. In previous roles he was Director of the National Disability Team, responsible for policy and practice for disabled students in higher education; Director of Operations for the Disability Rights Commission for two years; and Chief Executive Officer of ecdp, an Essex-based user-led disability organisation. 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 Governments flagship disability employment programme. Mike has been awarded an Honorary Doctor of Education for disability leadership from Anglia Ruskin University. Mike was honoured with an OBE in 2012 for his services to disability. Mike became a Trustee of the CareTech Charitable Foundation in 2017. CareTech Holdings PLC – Annual Report and Accounts 2018 35 Strategic ReviewGovernanceFinancial Statements Corporate Governance Report Do we comply with the UK Corporate Governance Code? CareTech is incorporated in England (Registration Number 4457287) which is also currently its sole country of operation. As a company admitted to trading on AIM, the Company is not required to comply with a particular corporate governance code. However, it is required to provide details of any corporate governance code that it has decided to apply and state how it complies with that code. How the Company complies with the UK Corporate Governance Code The CareTech Board remains committed to achieving the highest standards of integrity, ethics, professionalism and business practice throughout its operations. Accordingly, the CareTech Directors have chosen to report against the Corporate Governance Code. Whilst the Company does not comply with the Corporate Governance Code in full, the Company does comply with a number of areas as set out below. SECTION OF THE CODE HOW THE COMPANY COMPLIES WITH THE CODE BOARD LEADERSHIP AND COMPANY PURPOSE A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. Details of CareTech’s Board are set out on pages 34 and 35. The CareTech Board has collective responsibility for the management, strategic direction and performance of the Company. The CareTech Board provides leadership within a framework of prudent and effective controls seeking to enable risk to be appropriately assessed and managed. The CareTech Board has delivered sustainable and reliable growth since its Admission to trading on AIM. CareTech has aimed to be a defensible stock even in difficult times and has adopted a progressive dividend policy to return 75.5 pence per ordinary shares to Shareholders. The CareTech Group has also had direct involvement in a variety of community-based programmes further improving the CareTech Group’s service reputation and helping to foster a strengthened relationship with local authorities. CareTech’s key strategic priorities include a continual focus on improving the quality and scope of its business, increasing market share and growing shareholder value. The CareTech Board recognises that key to achieving its strategy is the attraction and retention of talented and committed personnel at every level of the organisational hierarchy and the CareTech Board have put in place policies and procedures to achieve this. The CareTech Board ensures that the CareTech Group is appropriately funded to deliver its strategy. The CareTech Board appreciates that effective communication and engagement with the Company’s share-holders and the investment community as a whole is a key objective. The views of both institutional and private shareholders are important. The Group Executive Chairman has overall responsibility for ensuring this communication is effectively conveyed and for making the CareTech Board fully aware of key shareholders’ views, comments and opinions. Contact with investors throughout the year is a priority and the CareTech Board strives to look after their interests. General presentations to major shareholders following the publication of the CareTech Group’s annual and interim results are conducted by the Group Executive Chairman and the Group Finance Director as are regular meetings through the year with fund managers and investment analysts. Effective communication with employees and care commissioners is also vital to achievement of the CareTech Group’s strategy. The CareTech Group has a number of initiatives and policies to engage its employees through training and development, supervision, recognition of achievement through staff awards, staff engagement surveys and development of a communication plan. The CareTech Board believe that its workforce policies, including its in-house training and HR systems support the CareTech Group’s focus on the provision of quality services and allow for sustainable growth. The CareTech Board believe the effectiveness of its staff engagement procedures is reflected in its staff turnover levels, which are below the industry average and in the CareTech Group’s quality ratings, which are above the industry average. The CareTech Board also believe the CareTech Group’s sales and marketing function have established strong relationships with care commissioners and regulators and actively strives to maintain these relationships. Being a socially responsible organisation with a focus on ethical standards aligned with economic objectives re-mains a core aim. The CareTech Directors believe that behaving responsibly and maximising the benefits of a strong relationship with its stakeholders is an integral part of a continuing process of building long-term value. The CareTech Group’s framework of controls includes identification and management of any conflicts of interests. The CareTech Board follows specific procedures to identify potential conflicts of interest, including those in relation to significant shareholders. Firstly, only independent directors (i.e. those that have no interest in the matter under consideration) are able to take relevant decisions. Secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote CareTech’s success. In addition, the CareTech Directors can impose limits or conditions when giving authorisation if they think this is appropriate. It remains the CareTech Board’s intention to report annually on the Company’s procedures for ensuring that the CareTech Board’s power of authorisation in respect of conflicts is operated effectively and that procedures have been followed. 36 CareTech Holdings PLC – Annual Report and Accounts 2018 SECTION OF THE CODE HOW THE COMPANY COMPLIES WITH THE CODE DIVISION OF RESPONSIBILITIES The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information. The board should include an appropriate combination of executive and non-executive (and, in particular, independent non- executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business. Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account. The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently. As Group Executive Chairman, Farouq Sheikh leads the CareTech Board and is responsible for its effective running. The Group Chief Executive is Haroon Sheikh (brother of Farouq Sheikh). Karl Monaghan, the Senior Independent Director, Mike Adams and Jamie Cumming are the CareTech Group’s three Non-Executive Directors. Both Karl Monaghan and Jamie Cumming are considered to be independent. Although Karl Monaghan has served on the CareTech Board for more than nine years, the CareTech Board are satisfied that there are no matters which affects the independence of his judgment and as such that Karl continues to act independently. The CareTech Board has identified areas around board composition whereby it currently does not comply with the Corporate Governance Code: 1. The Group Executive Chairman of the board is not independent; and 2. At least half the board, excluding the Group Executive Chairman, are not independent non-executive directors. Collectively, the Non-Executive Directors bring a valuable range of expertise and experience in assisting the CareTech Group to achieve its strategic aims and provide constructive challenge and strategic guidance. In the furtherance of their duties, all CareTech 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 CareTech Board approves the appointment and removal of the Company Secretary. The CareTech Board have identified areas where it intends to strengthen its corporate governance. In particular the CareTech Board intends to appoint at least two additional non- executive directors within three months of Completion. Alongside these appointments, it is also intended that Mike Adams will become an executive director of CareTech. Mike is chief executive officer of Purple Zest Limited which has received an investment from CareTech for a 60 per cent. shareholding in Purple Zest Limited. The roles and responsibilities of certain members of the CareTech Board and Company Secretary are explained and their respective responsibilities summarised below: GROUP EXECUTIVE CHAIRMAN – Overall leadership of the Board; – Ensuring the Board as a whole plays a full part in the development and determination of the CareTech Group’s strategic objectives; – CareTech Group’s strategic objectives; – Ensuring the effectiveness of the CareTech Board; – Setting the agenda and tone for the CareTech Board; – Ensuring the Board receives accurate, timely and clear information; – Responsibility for reviewing and agreeing the training and development needs of CareTech Board members; and – Promoting the highest standards of integrity, probity and corporate governance throughout the Company and particularly at CareTech Board level. GROUP CHIEF EXECUTIVE OFFICER – Executive leadership of the Company’s business on a day-to-day basis; – Developing the overall commercial objectives of the CareTech Group and proposing and developing the strategy of the CareTech Group in conjunction with the Board as a whole; – Responsibility, together with the senior management team, for the execution of the CareTech Group’s strategy and implementation of CareTech Board decisions; – Recommendations on senior appointments and development of the management team; and – Ensuring that the affairs of the CareTech Group are conducted with the highest standards of integrity, probity and corporate governance. SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR – Acting as a sounding board for the Group Executive Chairman; – Being available to shareholders if they have concerns which cannot be resolved through the Group Executive Chairman or other executive management; and – Acting as an intermediary for the directors where necessary. NON-EXECUTIVE DIRECTORS COLLECTIVELY – Constructively challenging the executive directors; and – Oversight of the delivery of the Company’s strategy within the risk and control frameworks. COMPANY SECRETARY – Ensuring all Board and Committee meetings are properly held; – Assisting the Group Executive Chairman and Group Chief Executive Officer in ensuring the directors are provided with all relevant information; – Organising directors’ training requirements; and – Maintaining the Group’s governance and compliance with the AIM Rules for Companies. – Details of the CareTech Board’s committees, including the Audit Committee, Remuneration Committee and the Care Governance and Safeguarding Committee are set out on pages 40 to 41. CareTech Holdings PLC – Annual Report and Accounts 2018 37 Strategic ReviewGovernanceFinancial Statements Corporate Governance Report continued SECTION OF THE CODE HOW THE COMPANY COMPLIES WITH THE CODE COMPOSITION, SUCCESSION AND EVALUATION Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed. Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively. AUDIT, RISK AND INTERNAL CONTROL The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements. The board should present a fair, balanced and understandable assessment of the company’s position and prospects. The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives. Matters are delegated to Board Committees, individual Directors or executive management where appropriate. To date, given the stage of the CareTech Group’s development, it has been felt the functions of a Nominations Committee can be adequately fulfilled by deliberation of the full CareTech Board; this will nevertheless be kept under review. When the need for additional Non-Executive Directors are identified, the CareTech Board appoints advisers to nominate experienced relevant and appropriate candidates. Currently CareTech Board members meet the candidates and come to a collective view on appointments. Currently all CareTech 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. Whilst the performance of each of the CareTech Directors is kept under review, no formal evaluation is currently conducted by CareTech. – The CareTech Board has established an Audit Committee, details of which are set out on page 40. – 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 has concluded that this does not impact on the independence of the auditors. – The CareTech Board is ultimately responsible for the CareTech 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 an absolute assurance against material misstatement or loss. – The CareTech Directors consider robust risk management to be crucial to the CareTech 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 CareTech Group. Risks facing the CareTech Group are described on pages 20 to 21 in this report. 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 CareTech Board. – A process of control and hierarchical reporting provides for a documented and auditable trail of accountability. These procedures are relevant across all CareTech Group operations: they provide for successive assurances to be given at increasingly higher levels of management and, finally, to the Board. – The new General Data Protection Regulations (GDPR) have changed how the Group manages, protects and administers data. A team of Senior Managers are responsible for how data flows in and out, and where it is stored throughout the CareTech Group. – The processes used by the CareTech 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 those on the actions taken on problem areas identified by CareTech 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; and – 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. 38 CareTech Holdings PLC – Annual Report and Accounts 2018 SECTION OF THE CODE HOW THE COMPANY COMPLIES WITH THE CODE REMUNERATION Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances. The composition and role of the Remuneration Committee is described on page 41 and includes details of CareTech Directors’ remuneration, shareholdings and share options scheme information. A key CareTech Group strategy is to attract and retain talented and committed personnel at every level of the organisational hierarchy and the Remuneration Committee aims to foster remuneration philosophy, policies and procedures to achieve this. The CareTech Group operates in a highly competitive environment. For the CareTech 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 CareTech Group. In 2017, 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 CareTech 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 CareTech Group’s fundamental values of fairness, competitiveness and to support the CareTech 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 CareTech Group’s strategic goals. The Remuneration 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. The remuneration for Non-Executive Directors is set by the full Board on the recommendation of the Executive Directors. In line with the UK Corporate Governance Code, remuneration for Non-Executive Directors does not include share options or other performance-related elements. Pensions for Executive Directors are based on their basic salary but pension contribution rates are not aligned with those available to the workforce. At every Board meeting the CareTech Board covers an AIM continuing obligations questionnaire and declaration of connected party transactions. This sets the tone for corporate behaviour and helps make CareTech’s governance meaningful and focused on improving the business and protecting shareholder value. The CareTech 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. The CareTech Board holds other Board meetings specifically for significant transactions involving raising money like a ground rent transaction, or spending money like a significant acquisition. The CareTech Board delegates certain of its responsibilities to Board Committees, individual Directors or executive management where appropriate. However, there are certain matters that are considered to be so important to the long-term success of CareTech that they are reserved for the CareTech Board for specific consideration and decision including: – 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. CareTech Holdings PLC – Annual Report and Accounts 2018 39 Strategic ReviewGovernanceFinancial Statements Corporate Governance Report continued Who is on our Board? As Group Executive Chairman, Farouq Sheikh leads the Board and is responsible for its effective running. The Group Chief Executive is Haroon Sheikh. The Directors’ biographies appear on pages 34 to 35 and detail their experience and suitability for leading and managing the Group. Farouq Sheikh as Group Executive Chairman leads the Company’s strategic development and takes a special responsibility in respect of acquisitions and investor relations. Haroon Sheikh is the Group Chief Executive and accountable to the Board for the day-to-day running of the Company as well as management of the strategic plan. 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. Karl Monaghan is a member of the Audit Committee (Chairman) and both the Care Governance and Safeguarding Committee and the Remuneration Committee. Mike Adams OBE is a member of the Audit Committee and the Remuneration Committee, as well as the Care Governance and Safeguarding Committee (Chairman). Jamie Cumming is a member of the Audit Committee and Care Governance and Safeguarding Committee as well as the Remuneration Committee (Chairman). Gareth Dufton has been appointed as Interim Group Finance Director following the death of Michael Hill. 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. 40 CareTech Holdings PLC – Annual Report and Accounts 2018 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. The Directors attended the following meetings in the year to 30 September 2018: Board Audit Committee Remuneration Committee 14 14 14 14 13 14 – – *2 2 2 2 *1 – *4 4 4 4 Care Governance and Safeguarding Committee – – – 2 3 3 Farouq Sheikh Haroon Sheikh Michael Hill Karl Monaghan Mike Adams Jamie Cumming * By invitation. The Board holds other Board Meetings specifically for significant transactions like the Cambian acquisition and its financing. What decision-making responsibilities does the Board have? Matters which are reserved for 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 is responsible for making recommendations to the Board on the appointment of auditors and the audit fee; for reviewing the conduct and control of the annual audit fee; for reviewing the conduct and control of the annual audit and for reviewing the internal financial controls. 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. 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 45 to 47. Also detailed in that report are Directors’ remuneration, shareholdings and share options scheme information. The Committee will review the performance of Executive Directors and set the scale and structure of their remuneration. The Committee will review the basis of the executive service agreements with due regard to the interests of shareholders and determine from time to time the allocation of share options to employees. 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. In 2017 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 will closely examine and pursue improvement to all matters relating to care governance and the safeguarding of those we support. 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 Group has 144 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. 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 96% 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 3% of services and below is “Inadequate” for 1%. For the Group’s services the published reports are as follows with the services in the outcomes as set out: Ratings National CareTech Outstanding 3% 1% Good 79% 85% Requires improvement Inadequate 17% 13% 1% 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 2017 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 “Outstanding” 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. CareTech Holdings PLC – Annual Report and Accounts 2018 41 Strategic ReviewGovernanceFinancial Statements Corporate Governance Report continued 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 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; 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. – management reports and external audit reports on the system of internal controls and any material control weaknesses that are identified; 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. – 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. 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. By order of the Board Farouq Sheikh Group Executive Chairman 20 December 2018 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 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 page 14 to 21. 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 have been changes to the governance of data and the new General Data Protection Regulations (G.D.P.R.) changed how the Group manages, protects and administers data. A team of Senior Managers looked at how data flows in and out, and where it is stored throughout the Group. 42 CareTech Holdings PLC – Annual Report and Accounts 2018 Directors’ Report The Directors present their report and the audited Group financial statements for the year ended 30 September 2018. Business review and future developments The consolidated statement of comprehensive income detailed on page 53 sets out the Group’s financial results for the year. Key performance indicators are set out in the “Highlights” on page 1. 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 14 to 21. Dividends Dividends of £7.5m have been paid during the year. The Directors propose a final dividend of 7.5p per share (2017: 6.60p) 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 new sharesave share option schemes for eligible employees in both 2016 and 2017, 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 6 March 2018 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. Resolutions for the renewal of the above will be proposed at the forthcoming Annual General Meeting and also a resolution to give the Directors 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. 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 6 December 2018, 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 page 46. Number of ordinary shares of 0.5p Percentage % Lion Asset Mgt Richard I Griffiths (Guernsey) Teleos Capital Partners (Zug) 1798 Volantis (London) Hof Hoorneman Bankiers (Netherlands) 15,035,845 10,576,972 9,236,241 8,089,515 6,410,400 Canaccord Genuity Wealth Mgt (London) 6,360,969 Majedie Asset Mgt (London) 3,657,412 13.81 9.71 8.48 7.43 5.89 5.84 3.36 Directors The names of the current Directors together with brief biographical details are shown on pages 34 to 35. In accordance with the articles of association, M Adams and J Cumming 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 With effect from 10 December 2018 Gareth Dufton has been appointed as Interim Group Finance Director. It is expected that he will join the Board on an interim basis in due course. 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 on pages 45 to 47. Directors’ insurance The Company maintains appropriate Directors’ and Officers’ liability insurance, as permitted by the Companies Act 2006. CareTech Holdings PLC – Annual Report and Accounts 2018 43 Strategic ReviewGovernanceFinancial Statements Directors’ Report continued Post Balance Sheet Events In October 2018 the Group completed the acquisition of the Cambian Group plc when the admission of the Enlarged Share Capital of the Group to trading on AIM occurred. In August 2018 the Group had entered a new committed Term and Revolving Facilities Agreement with its Bankers which enabled it to make the recommended offer for Cambian Group plc. Following completion the committed facility was syndicated and the monies drawn totalling £322m under the term loan. This was utilised to clear the existing Bank facilities and also the Cambian shareholders. On 22 November 2018 an interim dividend of 3.50p per share was paid to shareholders. 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 including the Cambian Group plc they are able to meet all banking covenants which are reviewed regularly. For this reason the Directors continue to adopt the going concern basis for the enlarged Group 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 Farouq Sheikh Group Executive Chairman 20 December 2018 Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG 44 CareTech Holdings PLC – Annual Report and Accounts 2018 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, was 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. In 2017 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 were paid in the year 2017/18 regarding the financial years 2016 and 2017 to Executive Directors and were triggered by the achievement of Underlying EBITDA targets. The potential Bonus for the financial year 2018 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 2018 45 Strategic ReviewGovernanceFinancial Statements Remuneration Report continued Directors’ Remuneration (audited) The various elements of the remuneration received by each Director were as follows: Current Directors Farouq Sheikh Haroon Sheikh Karl Monaghan Mike Adams Michael Hill Jamie Cumming Total Salary and fees Benefits 2018 £000 2017 £000 2018 £000 2017 £000 Annual bonus 2018 £000 2017 £000 Total 2018 £000 Pension 2017 £000 2018 £000 2017 £000 396 453 53 42 278 42 336 326 50 40 211 40 21 58 – – 26 – 1,264 1,003 105 22 52 – – 21 – 95 315 283 – – 180 – 778 77 52 – – 37 – 732 794 53 42 484 42 435 430 50 40 269 40 166 2,147 1,264 – – – – 30 – 30 – – – – 12 – 12 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 Pension Fund(2) Farouq Sheikh Haroon Sheikh Michael Hill Karl Monaghan Mike Adams 30 September 2018 Number of ordinary 0.5p shares 30 September 2017 Number of ordinary 0.5p shares 9,763,519 170,000 638,919 690,226 137,405 34,250 2,145 9,763,519 170,000 638,919 690,226 137,405 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 Pension Fund is a self-administered scheme established for the benefit of Farouq Sheikh and Haroon Sheikh. 46 CareTech Holdings PLC – Annual Report and Accounts 2018 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 2017 (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 were included in a 12-month lock-in covering in aggregate, 2% of the Company’s issued share capital which has now expired. 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 3 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 2017 and this is a HMRC limit. None of the Directors have any other share options in the Company. On 29 March 2017 the Group’s Executive Shared Ownership Plan 2017 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 2017 (see note 20). By order of the Board On 17 March 2017 the Company granted options in aggregate over 474,581 ordinary shares pursuant to the CareTech Holdings PLC Sharesave Scheme 2017. It is a 3 year contract with a start date of 1 May 2017 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. Jamie Cumming Chairman of the Remuneration Committee 20 December 2018 Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG CareTech Holdings PLC – Annual Report and Accounts 2018 47 Strategic ReviewGovernanceFinancial 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 information 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; 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. – state whether applicable IFRSs have been followed, subject to any By order of the Board 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. Farouq Sheikh Group Executive Chairman 20 December 2018 Metropolitan House 3 Darkes Lane Potters Bar Hertfordshire EN6 1AG 48 CareTech Holdings PLC – Annual Report and Accounts 2018 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 2018 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, notes to the financial statements and company 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 2018 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 twelve months from the date when the financial statements are authorised for issue. Overview of our audit approach – Overall materiality: £1,760,000, which represents 4% of the group’s underlying EBITDA; – Key audit matters were identified as occurrence of revenue, capitalisation of plant, property and equipment and the validity of 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; and – 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. We did not identify any Key Audit Matters relating to the audit of the financial statements of the parent company. CareTech Holdings PLC – Annual Report and Accounts 2018 49 Strategic ReviewGovernanceFinancial Statements Independent Auditor’s Report to the members of CareTech Holdings PLC continued Key audit matter – Group Occurrence of revenue Revenue is comprised of a number of different revenue streams, including the provision of care services, fostering services and learning services. Under International Standard on Auditing (UK) 240 ‘The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements’, there is a rebuttable presumed risk that revenue may be misstated due to fraud. There are a significant number of service users and sites within the group. Due to the manual nature of the information on which billing and credit notes are based on, we identified occurrence 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 £297,170,000 at 30 September 2017 to £301,109,000 at 30 September 2018. There were additions in the year totalling £15,616,000. 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. The validity of capitalisation of development costs The group capitalises intangible assets within software and licences The amount capitalised in the year amounted to £2,538,000 (2017: £3,414,000). The capitalisation of development costs under IAS 38 ‘Intangible Assets’ involves significant judgement as to whether they should be recognised and therefore there is a risk that a material error could occur if items have been incorrectly capitalised. We therefore identified the validity of 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 occurrence 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 validity of capitalisation of development costs during the year. Our audit work included, but was not restricted to: – considered the revenue recognition policies to check these were appropriately applied to the revenue streams and to ensure compliance with applicable accounting standards; – evaluating 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; – completing substantive analytical procedures on revenue based on occupancy numbers across the group to identify unusual trends in the year; and – selecting and testing a sample of 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: – agreeing a sample of capital expenditure in the year to supporting documentation and tested that the accounting treatment was appropriate and in accordance with the requirements of International Accounting Standard (IAS) 16 ‘Property, Plant and Equipment’; – agreeing that appropriate de-recognition of assets has occurred when replacement or refurbishment projects have taken place in the year on a sample basis; and – obtaining 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: – evaluate the group’s accounting policy for consistency under IAS 38 and whether these policies have been applied accurately and consistently; – agreeing the development costs meet the criteria for capitalisation stated within IAS 38 on a sample basis; – obtaining 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; – confirming that salaries were capitalised in accordance with IAS 38 on a sample basis, in particular that the developments meet the technical and commercial feasibility criteria; and – agreeing a sample of relevant payroll costs to payroll records. The group’s accounting policy on development costs is shown in note 2(e) to the financial statements and related disclosures are included in note 13. 50 CareTech Holdings PLC – Annual Report and Accounts 2018 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 £1,760,000, which is 4% 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. Materiality for the current year is higher than the level that we determined for the year ended 30 September 2017 to reflect the increase in the underlying EBITDA of the group compared to the prior period. Parent We determined materiality for the audit of the parent company financial statements to be £1,574,000, which is 0.5% of the parent’s total assets. This benchmark is considered the most appropriate as the parent company does not trade. Materiality for the current year is higher than the level that we determined for the year ended 30 September 2017 based on the increased level of total assets. Performance materiality used to drive the extent of our testing 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. 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 £88,000. 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 £78,000. 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 2018 51 Strategic ReviewGovernanceFinancial 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 included: – Evaluation by the group audit team of identified components 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; 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 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 – Management prepare and report on the results on a group basis – certain disclosures of directors’ remuneration specified by law are not 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, apart from Spark of Genius (North East) LLP which is 50% owned, Purple Zest Limited which is 60% owned 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; and – 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 48, 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 in accordance with applicable legal requirements. 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. made; or – we have not received all the information and explanations we require for our audit Responsibilities of directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities set out on page 48 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 20 December 2018 52 CareTech Holdings PLC – Annual Report and Accounts 2018 Consolidated Statement of Comprehensive Income for the year ended 30 September 2018 Revenue Cost of sales Gross profit Administrative expenses Operating profit EBITDA(ii) Depreciation Amortisation of intangible assets Acquisition cost Acquisition adjustments Share-based payments charge Operating profit Financial expenses Profit before tax Taxation Profit for the year Non-controlling interest Profit and comprehensive income for the year attributable to equity shareholders of the parent Earnings per share Basic Diluted Note Underlying £000 4 185,689 (120,387) 65,302 2018 Non- underlying(i) £000 Total £000 Underlying £000 – – – 185,689 166,018 (120,387) (106,110) 65,302 59,908 2017 Non- underlying(i) £000 – – – Total £000 166,018 (106,110) 59,908 12 5,13 5 5 5,8 5,9 (27,543) 37,759 (17,573) (17,573) (45,116) 20,186 (25,758) 34,150 (11,483) (11,483) (37,241) 22,667 43,862 (5,906) – – – (197) 37,759 (4,867) 32,892 (5,751) 27,141 (596) (3,620) 40,242 – (7,428) (4,062) (2,463) – (17,573) 51 (17,522) 1,625 (15,897) – (5,906) (7,428) (4,062) (2,463) (197) 20,186 (4,816) 15,370 (4,126) 11,244 (596) 39,885 (5,525) – – – (210) 34,150 (4,770) 29,380 (2,744) 26,636 – (3,487) 36,398 – (7,190) (806) – – (11,483) (1,118) (12,601) 3,814 (8,787) – (5,525) (7,190) (806) – (210) 22,667 (5,888) 16,779 1,070 17,849 – 26,545 (15,897) 10,648 26,636 (8,787) 17,849 10,11 10,11 35.07p 35.06p 14.07p 14.06p 38.03p 38.02p 25.48p 25.48p (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 and share-based payments charge. CareTech Holdings PLC – Annual Report and Accounts 2018 53 Strategic ReviewGovernanceFinancial Statements Consolidated Statement of Financial Position as at 30 September 2018 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 Non-controlling interest 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 2018 £000 2017 £000 12 13 13 15 16 21 21 21 21 21 17 19 23 24 17 18 24 24 301,109 40,128 43,689 297,170 40,954 43.098 384,926 381,222 898 31,747 9,421 42,066 426,992 835 23,519 6,402 30,756 411,978 379 379 120,820 120,778 (4,750) 9,023 639 82,122 (4,750) 9,023 – 78,771 208,233 204,201 2,580 7,244 18,854 – – 145,872 7,294 17,843 1,133 172 28,678 172,314 153,830 24,875 50 966 3,372 6,836 152 190,081 218,759 426,992 7,662 15,709 50 2,420 1,762 7,092 768 35,463 207,777 411,978 These financial statements were approved by the Board of Directors and authorised for issue on 20 December 2018 and were signed on its behalf by: Farouq Sheikh Group Executive Chairman 20 December 2018 Company number: 04457287 54 CareTech Holdings PLC – Annual Report and Accounts 2018 Consolidated Statement of Changes in Equity as at 30 September 2018 At 1 October 2016 Profit for the year Total comprehensive in come Share capital £000 321 – – Shares held by Executive Shared Ownership Plan £000 (6,072) Share premium £000 81,750 Retained earnings £000 66,645 Total attributable to owners of the parent £000 151,667 Merger reserve £000 9,023 – – – – 17,849 17,849 Issue of ordinary shares 58 39,028 1,322 – Equity settled share-based payments charge Dividends Transactions with owners recorded directly in equity – – – – – – 210 (5,933) 58 39,028 1,322 (5,723) – – – – – – 17,849 17,849 40,408 210 (5,933) 34,685 At 30 September 2017 379 120,778 (4,750) 78,771 9,023 204,201 At 1 October 2017 379 120,778 (4,750) 78,771 9,023 204,201 Profit for the year Total comprehensive income Issue of ordinary shares Equity settled share-based payments charge Dividends Minority interest Transactions with owners recorded directly in equity – – – – – – – – – 42 – – – 42 – – – – – – – 10,648 10,648 – 197 (7,494) – (7,297) – – – – – – – 10,648 10,648 42 197 (7,494) – (7,255) Non- controlling Interest £000 – – – – – – – – – – – – – – 639 639 Total equity £000 151,667 17,849 17,849 40,408 210 (5,933) 34,685 204,201 204,201 10,648 10,648 42 197 (7,494) 639 (6,616) At 30 September 2018 379 120,820 (4,750) 82,122 9,023 207,594 639 208,233 CareTech Holdings PLC – Annual Report and Accounts 2018 55 Strategic ReviewGovernanceFinancial Statements Consolidated Statement of Cash Flow for the year ended 30 September 2018 Cash flows from operating activities Profit before tax Adjustments for: Financial expenses Depreciation Amortisation Charitable foundation donation Share-based payments charge Acquisition transaction cost Costs arising from placement of shares Integration and restructuring costs Release of deferred consideration Termination of onerous contracts Impairment of goodwill Adjustments relating to prior acquisitions Operating cash flows before movement in working capital Increase in Inventory Increase in trade and other receivables Increase/(decrease) in trade and other payables Operating cash flows before adjustment items Integration and restructuring costs Payment of Charitable donations 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 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 Loan arrangement fees Repayment of borrowings Payment of finance lease liabilities Dividends paid Net cash arising (used in)/from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 October Cash and cash equivalents at 30 September 56 CareTech Holdings PLC – Annual Report and Accounts 2018 Note 2018 £000 2017 £000 15,370 16,779 8 12 13 20 5 5 5 5 5 5 5 5 5 23 13 21 22 4,816 5,906 7,428 380 197 4,062 – 2,863 (1,095) 377 2,000 1,558 43,862 (63) (8,228) 3,875 39,446 (3,652) (380) (377) 35,037 (4,135) 30,902 1,201 (72) (14,519) (2,537) (839) 5,888 5,525 7,190 – 210 806 348 2,852 – 287 – – 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) (16,767) (37,560) 42 (4,650) (649) 11,035 (1,436) (5,775) (2,189) (7,494) (11,116) 3,019 6,402 9,421 37,829 (4,955) (776) 30,911 – (37,400) (2,139) (5,933) 17,537 2,094 4,308 6,402 Notes to the Financial Statements 1 Background and basis of preparation 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 2018 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 81 to 88 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 20 December 2018. 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 13 and pages 22 to 27. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 30 to 33. 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. The Group had entered into new Banking facilities with Lloyds Bank plc and National Westminster Bank plc for committed financing by way of term loans of between 3.5 to 5 years up to £334m and a short-term bridge loan of approximately £80m. The short-bridge loan was repaid in November 2018 following completion using principally Cambian’s significant cash position. In addition to the term loans and bridge loan, a £25m revolving credit facility is available to provide working capital for the enlarged Group and an uncommitted accordion facility of up to £30m for general Corporate and Working Capital purposes (including acquisitions). The new facilities of the term loans and bridge loan with an aggregate size up to £414m have been utilised for the cash consideration of the acquisition, following the repayment of the Group’s existing bank debt facilities of approximately £150m and the payment of debt financing fees of up to approximately £6m. The amount available for the draw down under the term loans was reduced in the event that the actual cash consideration payable under the transaction was less than £253m. As part of the acquisition, in September 2018 the Group’s property portfolio was revalued by Cushman and Wakefield and the market value was £424m. The Cambian Group plc property portfolio was revalued by Knight Frank and the market value was £350m. These valuations are not reflected in the Consolidated Statement of Financial Position. Following completion of the acquisition, Lloyds Bank plc and Nat West Markets plc, who had underwritten the funding, completed the syndication of the term loans and revolving credit facility successfully. The syndication was significantly oversubscribed showing strong support for both the Group and the acquisition. The final facility is a term loan of £322m and revolving credit facility of £25m to a group of banks comprising Barclays Bank PLC, HSBC UK Bank plc, Santander UK plc, AIB Group (UK) plc, Clydesdale Bank PLC and Credit Suisse AG, in addition to Lloyds Bank plc and National Westminster Bank plc. The enlarged Group loan to value based only on the property valuations is c.42% whilst the proforma net debt to EBITDA of the enlarged Group is 4.3x which is expected to reduce to under 4x in the short term. 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 Directors forecast that including the Cambian Group plc they are able to meet all banking covenants which are reviewed regularly. For this reason the Directors continue to adopt the going concern basis for the enlarged Group in preparing the financial statements. 2 Accounting policies (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. Adopted IFRS not yet applied At the date of authorisation 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) – IFRS 16 Leases (effective 1 January 2019) – Clarification and Measurement of Share-based Payment Transactions (Amendment to IFRS 2) (effective 1 January 2018) IFRS 16 will replace IAS 17 for accounting periods commencing on or after 1 January 2019 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 from Customers. CareTech Holdings PLC – Annual Report and Accounts 2018 57 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 2 Accounting policies (continued) (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. (c) Basis of consolidation The Group financial statements consolidate those of the parent Company and all of its subsidiaries as of 30 September 2018. 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. (e) Intangible assets and goodwill 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. (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: 2% straight-line to residual value; – freehold buildings over the life of the lease; – long leasehold property over the life of the lease; – short leasehold property 15% straight line; and – fixtures, fittings and equipment 25% reducing balance. – motor vehicles Expenditure on research activities is recognised as an expense in the period in which it is incurred. Included within software and licences are development costs in relation to software which are capitalised when the related projects meet the recognition criteria of an internally generated intangible asset, the key criteria being as follows: (a) technical feasibility of the completed intangible asset has been established; (b) it can be demonstrated that the asset will generate probable future economic benefits; (c) adequate technical, financial and other resources are available to complete the development; (d) the expenditure attributable to the intangible asset can be reliably measured; and (e) management has the ability and intention to use or sell the asset. These projects are designed to enhance the existing software within the Group. Salaries associated with development time and directly attributable overheads are capitalised within intangible assets. Development costs recognised as assets are amortised on a straight-line basis over their expected useful life. Development expenditure is only amortised over the period the Group is expected to benefit and is subject to annual impairment testing. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. 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. (f) Inventories 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. 58 CareTech Holdings PLC – Annual Report and Accounts 2018 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. 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 the 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. 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. (i) Impairment (excluding deferred tax assets) 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. Reversals of impairment Any 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. Any impairment loss in respect of goodwill is not reversed. CareTech Holdings PLC – Annual Report and Accounts 2018 59 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 2 Accounting policies (continued) 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. (j) Interest-bearing borrowings 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. (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 as services provided. 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 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. 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. (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. (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. 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. 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. 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. (l) Provisions 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. 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. 60 CareTech Holdings PLC – Annual Report and Accounts 2018 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 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. Underlying EBITDA is EBITDA before non-underlying items (see (n) and note 5). 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. 3 Accounting estimates and judgements 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. 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. 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. 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 Capitalised development costs Capitalisation of development costs within software and licences requires the Directors to make judgements in allocating staff time appropriately to relevant projects and in assessing the technical feasibility and economic potential of those projects. An impairment test is a comparison of the carrying value of assets to their recoverable amount. Where it is higher than the recoverable amount, an impairment results. Amortisation and any impairment charges are included in administration expenses in the statement of comprehensive income. Intangible assets not yet ready for use are tested for impairment at least annually. Amortisation of each asset begins from the date the asset becomes available for use. Recoverable amounts have been measured based on value in use. Forecasts for the remaining life of each asset have been used (maximum five years). 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. CareTech Holdings PLC – Annual Report and Accounts 2018 61 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 4 Segmental information 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 2018, for the year ended 30 September 2017 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 2018 Continuing Operations Client capacity Revenue (£’000) Underlying EBITDA before allocated cost (£’000) Year ended 30 September 2017 Continuing Operations Client capacity Revenue £’000) Underlying EBITDA before allocated cost (£’000) ALD 1,754 SS 214 Adult 1,968 YPR 353 FC 301 Learning Children 0 654 Total 2,622 100,965 15,316 116,281 58,707 8,246 2,455 69,408 185,689 26,995 4,442 31,437 17,024 1,898 448 19,370 50,807 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 Reconciliation of EBITDA to profit after tax: Underlying EBITDA before unallocated costs Unallocated costs Underlying EBITDA Depreciation Share-based payments charge Non-underlying items Operating profit Financial expenses Profit before tax Taxation Non-controlling interest Profit after tax 2018 £000 50,807 (6,945) 43,862 (5,906) (197) (17,573) 20,186 (4,816) 15,370 (4,126) (596) 10,648 2017 £000 46,228 (6,343) 39,885 (5,525) (210) (11,483) 22,667 (5,888) 16,779 1,070 – 17,849 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. 62 CareTech Holdings PLC – Annual Report and Accounts 2018 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: Integration and restructuring costs Termination of onerous leases Share placement Charitable donations EBITDA adjustments Amortisation Acquisition expenses Impairment of goodwill Adjustment to deferred consideration Adjustment re acquisitions Included in administrative expenses Financial expenses Fair value movements relating to derivative financial instruments Other financing cost relating to ground rent Charges relating to derivative financial instruments IAS 17 lease imputed interest Included in financial expenses Tax on non-underlying items Current Deferred tax Included in taxation Total non-underlying items Note (i) (i) (ii) (ii) (ii) (iii) 2018 £000 2,863 377 – 380 3,620 7,428 4,062 2,000 (1,095) 1,558 2,463 17,573 (787) – 513 223 (51) (1,004) (621) (1,625) 15,897 2017 £000 2,852 287 348 – 3,487 7,190 806 – – – – 11,483 (1,107) 1,173 829 223 1,118 (1,138) (2,676) (3,814) 8,787 (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 £2,863,000 (2017: £2,852,000). Included in the year are acquisition expenses of £4,062,000 (2017: £806,000). Included in the cash flow statement are integration and reorganisation costs of £3,652,000 (2017: 4,006,000) and acquisition expenses of £839,000 (2017: £1,419,000) which were paid in the year. 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 £377,000 (2017: £287,000) being the present value of any onerous element of the remaining lease life. (ii) 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. (iii) 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 2018 £000 (134) 846 (124) – 39 (6) 621 2017 £000 (188) (981) 730 14 3,101 – 2,676 CareTech Holdings PLC – Annual Report and Accounts 2018 63 Strategic ReviewGovernanceFinancial Statements 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 Company secretarial All other non-assurance services 2018 £000 163 12 11 – 9 543 2017 £000 150 22 13 – – 11 Other non-assurance services of £543k represents the reporting accountant work carried on the acquisition of Cambian Group plc. 7 Staff numbers and costs 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 2018 5,149 29 261 5,439 2017 4,414 44 286 4,744 2018 £000 2017 £000 93,137 77,386 197 8,618 1,527 160 7,382 976 103,479 85,904 2018 £000 2017 £000 4,527 340 4,867 (274) 223 4,816 4,439 331 4,770 895 223 5,888 In accordance with IAS 23, borrowing costs at £155,000 (2017: £262,000) 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%. 64 CareTech Holdings PLC – Annual Report and Accounts 2018 9 Taxation (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 Adjustment in respect of 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 19.0% (2017: 19.5%) Non-deductible expenses including impairment charge Other tax adjustments Corporation and deferred tax overprovided in previous periods Total tax in the consolidated statement of comprehensive income 2018 £000 2017 £000 (4,622) 1,004 (359) (3,977) (873) 103 621 (149) (4,126) 2018 £000 15,370 2,920 1,059 27 120 4,126 (4,809) 1,138 (80) (3,751) 825 1,320 2,676 4,821 1,070 2017 £000 16,779 3,272 636 (613) (4,365) (1,070) Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2017 (on 7 September 2017). 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 2018 £000 2017 £000 10,648 17,849 75,690,422 70,037,602 25,235 24,389 75,715,657 70,061,991 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 14.07p 14.06p 25.48p 25.48p 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 Underlying profit attributable to ordinary shareholders Underlying earnings per share (pence per share) Basic Diluted 2018 £000 10,648 15,897 26,545 2017 £000 17,849 8,787 26,636 35.07p 35.06p 38.03p 38.02p CareTech Holdings PLC – Annual Report and Accounts 2018 65 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 12 Property, plant and equipment Cost At 1 October 2016 Acquisition through business combinations Additions Disposals At 30 September 2017 At 1 October 2017 Acquisitions through business combinations Additions Reclassification (see note 23) Disposals At 30 September 2018 Depreciation and impairment At 1 October 2016 Depreciation charge for the year Disposals At 30 September 2017 At 1 October 2017 Depreciation charge for the year Disposals At 30 September 2018 Net book value At 1 October 2016 At 30 September 2017 At 30 September 2018 Land and buildings £000 Motor vehicles £000 Fixtures, fittings and equipment £000 252,917 17,338 10,858 – 10,516 31 1,500 (441) 21,401 199 5,294 – Total £000 284,834 17,568 17,652 (441) 281,113 11,606 26,894 319,613 281,113 11,606 26,894 319,613 260 8,781 (4,997) (852) – 862 – (670) 20 5,973 – (4,475) 280 15,616 (4,997) (5,997) 284,305 11,798 28,412 324,515 5,420 517 – 5,937 5,937 558 (6) 6,489 3,137 1,728 (249) 4,616 4,616 1,582 (462) 5,736 8,610 3,280 – 17,167 5,525 (249) 11,890 22,443 11,890 3,766 (4,475) 11,181 22,443 5,906 (4,943) 23,406 247,497 275,176 277,816 7,379 6,990 6,062 12,791 15,004 17,231 267,667 297,170 301,109 Included in the result for the year is a profit of £146,000 (2017: nil 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 £4,665,000 (2017: £5,990,000). Land and buildings The net book value of land and buildings is as follows: Freehold Leasehold 2018 £000 243,675 34,141 277,816 2017 £000 241,329 33,847 275,176 The Directors believe that the market value of the Group’s current freehold property portfolio is £424m as at 30 September 2018. There was an independent valuation of the Group’s property portfolio in September 2018. All of the Group’s freehold properties are pledged as security for bank borrowings. 66 CareTech Holdings PLC – Annual Report and Accounts 2018 13 Intangible assets Cost At 1 October 2016 Acquisition through business combinations Additions At 30 September 2017 At 1 October 2017 Acquisitions through business combinations Additions Reclassification At 30 September 2018 Amortisation and impairment At 1 October 2016 Impairment Amortisation for the year At 30 September 2017 At 1 October 2017 Impairment Amortisation for the year At 30 September 2018 Net book value At 1 October 2016 At 30 September 2017 At 30 September 2018 Goodwill £000 Software and licences £000 Customer relationships £000 Total £000 43,049 13,999 58,532 115,580 77 – 43,126 – 3,414 17,413 296 452 373 3,866 59,280 119,819 43,126 17,413 59,280 119,819 906 – 1,685 45,717 – 2,538 – – 752 3,312 906 3,290 4,997 19,951 63,344 129,012 28 – – 28 28 2,000 – 2,028 43,021 43,098 43,689 6,663 21,886 28,577 – 2,653 9,316 9,316 – 3,281 12,597 7,336 8,097 7,354 – 4,537 26,423 26,423 – 4,147 30,570 36,646 32,857 32,774 – 7,190 35,767 35,767 2,000 7,428 45,195 87,003 84,052 83,817 Amortisation The amortisation charge is recognised in the following line items in the consolidated statement of comprehensive income: Administrative expenses 2018 £000 7,428 2017 £000 7,190 CareTech Holdings PLC – Annual Report and Accounts 2018 67 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 13 Intangible assets (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 2018 1 year 0% 8% 10% 8–12% 8–12% 12% 2017 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 2018 £000 22,090 1,148 23,238 9,377 7,162 3,912 20,451 43,689 2017 £000 19,912 1,148 21,060 8,964 7,162 5,912 22,038 43,098 68 CareTech Holdings PLC – Annual Report and Accounts 2018 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 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 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 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 2018 % 100d 100q 100a 100c 100c 100c 100a 100 100 100c 100c 100h 100h 100h 100g 100h 100h 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 Ownership 2017 % 100d 100q 100a 100c 100c 100c 100a 100 100 100c 100c 100h 100h 100h 100g 100h 100h 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 CareTech Holdings PLC – Annual Report and Accounts 2018 69 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 14 Group undertakings (continued) Company name EQL Solutions Limited Caretech International Limited Fostering Support Group Limited Franklin Homes Limited Glenroyd House Limited Gloucestershire Autism Services Limited Greenfields Adolescent Development Limited Greenfields Care Group Limited 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 Purple Zest Limited Roborough House Limited Rosedale Children’s Services Limited Selwyn Care Limited South East Care Services Limited St Michael’s Support & Care Limited CareTech Consulting 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 70 CareTech Holdings PLC – Annual Report and Accounts 2018 Registration number 08758477 06902547 02359399 03002865 04326288 03091510 04068839 04642100 FC015967 04385252 04668317 04778674 03039698 04583599 02834141 02958528 05444649 04308273 04136284 04534652 04357704 04050739 04861395 SC427502 SC254555 02736242 04129564 04803769 04771613 11421082 05054294 04932054 03737832 02296352 05978585 07186925 04589719 02816119 04824925 03488896 03941224 04099715 04454845 04778676 04351559 04319271 SC479758 Country of incorporation England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales 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 England and Wales Scotland 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 Ownership 2018 % 100 100 100k 100a 100c 100q 100f 100a 100e 100a 100a 100c 100q 100c 100a 100q 100d 100g 100a 100b 100a 100c 100a 100a 100a 100q 100a 100g 100r 60 100a 100a 100a 100q 100a 100a 100a 100a 100l 100l 100r 100 100d 100c 100a 100c 100a Ownership 2017 % 100 100 100k 100a 100c 100q 100f 100a 100e 100a 100a 100c 100q 100c 100a 100q 100d 100g 100a 100b 100a 100c 100a 100a 100a 100q 100a 100g 100r 60 100a 100a 100a 100q 100a 100a 100a 100a 100l 100l 100r 100 100d 100c 100a 100c 100a Company name 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 (1) Has a UK designated trading branch, Hazeldene UK Limited a subsidiary of CareTech Community Services Limited a a subsidiary of Community Support Project Limited b a subsidiary of Beacon Care Holdings Limited c a subsidiary of Beacon Care Investments Limited d a subsidiary of H20 Limited e a subsidiary of Greenfields Care Group Limited f a subsidiary of Branas Isaf (Holdings) Limited g a subsidiary of Branas Isaf Personal Development Centre Limited h a subsidiary of Coveberry Limited i Registration number SC196146 SC453152 OC384807 05225317 97291 05564417 05513162 08339192 Country of incorporation 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 Ownership 2018 % 100n 100o 50o 100a 100a 100a 100a 100s Ownership 2017 % 100n 100o 50o 100a 100a 100a – – a subsidiary of Outlook Fostering Services Limited a subsidiary of CareTech Foster Care Limited a subsidiary of Professional Integrated Care Services Limited j k l m a subsidiary of CareTech Fostering Holdings Limited n o q r s a subsidiary of Spark of Genius Limited a subsidiary of Spark of Genius (Training) Limited a subsidiary of The Community Care Company UK Limited a subsidiary of Valeo Limited a subsidiary of Selborne Care Limited 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 2018 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 2018 as detailed above with the exception of CareTech Community Services Limited, Hazeldene UK Limited, H2O 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 2018 £000 21,421 10,326 31,747 2018 £000 9,421 2017 £000 14,688 8,831 23,519 2017 £000 6,402 CareTech Holdings PLC – Annual Report and Accounts 2018 71 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 17 Interest-bearing loans and borrowings 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 2018 £000 2017 £000 – 2,580 2,580 141,818 4,054 145,872 151,748 2,082 153,830 5,726 1,936 7,662 Currency Nominal interest rate (%) £ £ 2.25 (2017: 2.25)(1) 2.25 (2017: 2.25)(1) Year of maturity 2019 2019 Book value 2018 £000 Book value 2017 £000 120,499 31,249 151,748 126,441 21,103 147,544 (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 had entered into new banking facilities with Lloyds Bank plc and National Westminster Bank plc for committed financing by way of term loans of between 3.5 to 5 years up to £334m and a short-term bridge loan of approximately £80m. The short-term bridge loan was repaid in November 2018 following completion using principally Cambian’s significant cash position. In addition to the term loans and bridge loan, a £25m revolving credit facility is available to provide working capital for the enlarged Group and an uncommitted accordion facility of up to £30m for general Corporate and Working Capital purposes (including acquisitions). The new facilities of the term loans and bridge loan with an aggregate size up to £414m have been utilised for the cash consideration of the acquisition, following the repayment of the Group’s existing bank debt facilities of approx. £150m and the payment of debt financing fees of up to approximately £6m. The amount available for the draw down under the term loans was reduced in the event that the actual cash consideration payable under the transaction was less than £253m. As part of the acquisition, in September 2018 the Group’s property portfolio was revalued by Cushman and Wakefield and the market value was £424m. The Cambian Group plc property portfolio was revalued by Knight Frank and the market value was £350m. Following completion of the acquisition, Lloyds Bank plc and Nat West Markets plc, who had underwritten the funding, completed the syndication of the term loans and revolving credit facility successfully. The syndication was significantly oversubscribed showing strong support for both the Group and the acquisition. The final facility is a term loan of £322m and revolving credit facility of £25m to a group of banks comprising Barclays Bank PLC, HSBC UK Bank plc, Santander UK plc, AIB Group (UK) plc, Clydesdale Bank PLC and Credit Suisse AG, in addition to Lloyds Bank plc and National Westminster Bank plc. The enlarged Group loan to value based only on the property valuations is c.42% whilst the proforma net debt to EBITDA of the enlarged Group is 4.3x which is expected to reduce to under 4x in the short term. 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 Minimum lease payments 2018 £000 2,200 2,802 5,002 Interest 2018 £000 118 222 340 Principal 2018 £000 2,082 2,580 4,662 Minimum lease payments 2017 £000 2,067 4,273 6,340 Interest 2017 £000 131 219 350 Principal 2017 £000 1,936 4,054 5,990 72 CareTech Holdings PLC – Annual Report and Accounts 2018 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 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 Derivative financial instruments Intangible assets Share options Rolled-over gains on property Movement in deferred tax during the previous year Property, plant and equipment Capitalised revenue costs Derivative financial instruments Intangible assets ROC and Oakleaf intangibles Share options Rolled-over gains on property 2018 £000 3,808 21,067 24,875 2017 £000 2,338 13,371 15,709 2018 Assets £000 Liabilities £000 2017 Assets £000 – – – (443) – (443) – – 1,901 14,395 (59) – 3,060 19,297 (443) 18,854 – – – (443) – (443) – – Liabilities £000 1,978 13,408 (160) – 3,060 18,286 (443) 17,843 1 October 2017 £000 Recognised in income £000 Equity movement £000 Acquired in business combination £000 30 September 2018 £000 1,978 (160) 13,408 (443) 3,060 17,843 (77) 101 125 – – 149 – – – – – – – – 1,901 (59) 862 14,395 – – 862 (443) 3,060 18,854 1 October 2016 £000 Recognised in income £000 Adjustment £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 CareTech Holdings PLC – Annual Report and Accounts 2018 73 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 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 £1,527,000 (2017: £976,000) of which £286,000 (2017: £nil) was outstanding at the year end. Share-based payments The Company operates five 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 Sharesave Scheme; the CareTech Holdings 2016 Share-Save Scheme; and the CareTech Holdings 2017 Sharesave Scheme. The Executive Shared Ownership Plan (“ExSOP”) was formed in March 2017. 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 17 March 2016 29 March 2016 Scheme Options granted Options lapsed to 30 Sept 2018 Options exercised to 30 Sept 2018 Options remaining 30 Sept 2018 Option price (pence) Approved Scheme 114,070 (104,700) (9,370) Unapproved Scheme Approved Scheme Unapproved Scheme Approved Scheme Unapproved Scheme Sharesave Scheme 23,843 191,121 165,050 283,754 210,653 474,581 Executive Share Ownership Plan 2016 1,919,000 (23,843) (137,447) (114,574) (215,514) (149,577) (133,361) – – (25,452) (27,145) (34,694) (27,203) – – 28,222 23,331 33,546 33,873 – – – 341,220 1,919,000 220,600 410 410 332.5 332.5 305 305 194 247.5 308 1 December 2017 Share save scheme 2017 254,681 (34,081) The charge for the year of £197,000 (2017: £210,000) relates to the ExSOP Scheme 2017, the CareTech Holdings 2016 Sharesave Scheme and the CareTech Holdings 2017 Sharesave Scheme. 74 CareTech Holdings PLC – Annual Report and Accounts 2018 21 Equity Share Capital Allotted, called up and fully paid: 75,691,423 (2017: 75,679,937) ordinary shares of 0.5p each 53,402 deferred shares of 0.5p each 2018 £000 2017 £000 379 – 379 379 – 379 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: 2018 Ordinary shares of 0.5p each Deferred shares of 0.5p each 2017 Ordinary shares of 0.5p each Deferred shares of 0.5p each At 1 October 2017 Issued following share option exercises At 30 September 2018 75,679,937 11,486 75,691,423 53,402 – 53,402 At 1 October 2016 Issued in connection with acquisitions Issued in connection with share placing Issued following share option exercises At 30 September 2017 64,196,903 344,305 11,000,000 138,729 75,679,937 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 2017 Premium on issue of shares At 30 September 2018 2018 £000 120,778 42 2017 £000 81,750 39,028 120,820 120,778 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 2017 At 30 September 2018 2018 £000 9,023 9,023 2017 £000 9,023 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 2018 75 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 22 Dividends The aggregate amount of dividends comprises: Interim dividend paid in respect of prior year but not recognised as liabilities in that year (3.30p per share (2017: 3.00p per share)) Final dividend paid in respect of the prior year (6.60p per share (2017: 6.25p per share)) Aggregate amount of dividends paid in the financial year (9.90p per share (2017: 9.25p per share)) 2018 £000 2,498 4,996 7,494 2017 £000 1,923 4,010 5,933 The aggregate amount of dividends proposed and not recognised as liabilities as at the year end is 11.00p per share, £8,166,018 (2017: 9.90p per share, £7,493,075). 23 Business combinations (a) Selborne Care Limited (acquisition from 2017 financial statements) 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 £13,807,000 net assets and provisional fair value and adjustments were £4,397,000. The provisional acquisition table provided was: Intangible assets Property, plant and equipment Trade and other receivables Cash Trade and other payables Deferred tax Net assets on acquisition Cash paid Goodwill The acquisition accounting has been finalised and revised as follows: Intangible assets Property, plant and equipment Trade and other receivables Cash Trade and other payables Deferred tax Net assets on acquisition Cash paid Goodwill Book values £000s Fair value adjustment £000s 296 12,571 989 2,590 (1,526) (1,113) 13,807 18,281 – 4,997 (250) – (350) – 4,397 Book values £000s Fair value adjustment £000s 296 12,571 989 2,590 (1,526) (1,113) 13,807 18,281 3,312 – (250) – (350) (862) 1,850 Total £000s 296 17,568 739 2,590 (1,876) (1,113) 18,204 18,281 77 Total £000s 3,608 12,571 739 2,590 (1,876) (1,975) 15,657 18,281 2,624 Goodwill that arose can be attributed to the workforce in place and other intangible assets which do not qualify for separate recognition. The remaining disclosures in relation to the acquisition of Selbourne Care Limited remain unchanged as stated in the 2017 financial statements. (b) Acquisitions 2018 The Group acquired one company during the year. On 6 July 2018, the Group acquired 60% of the share capital of Purple Zest Limited for a total consideration of £0.1m with goodwill of £0.05m. The investment in Purple Zest Limited reflects CareTech’s commitment to support a deeper understanding of disability issues and will build on Purple Conversation’s innovative approach to supporting disabled people to attain employment and to support businesses, of all sizes and across all sectors, to have greater awareness and understanding of disability and to increase the number of disabled people employed. The business has generated revenues of £0.3m and EBITDA of £nil in the year from acquisition to 30 September 2018. The Group incurred legal and professional costs of £48k in relation to this acquisition, which were recognised in administration expenses. 76 CareTech Holdings PLC – Annual Report and Accounts 2018 (c) Acquisition after balance sheet date Subsequent to the year end the Group acquired Cambian Group plc and the details of this transaction are: On 19 October 2018, the Group acquired 100% of the share capital of Cambian Group plc for a total consideration of £366m. Cambian is a leading Children’s specialist education and behavioural health service provider looking after around 2,000 children across a portfolio of 222 residential facilities, specialist schools and fostering offices. It employs over 4,500 people. – The acquisition of Cambian is a unique opportunity for investors to enhance exposure to the growing UK market for social care services for children and adults. – Highly complementary service offering and geographical coverage providing a nationwide integrated care pathway focused on higher acuity social care. – Combined operational expertise to better service local authority partners, deliver strong user outcomes, implement positive staff engagement and improve care quality. – Opportunity to unlock significant value through a compelling strategic fit, tangible near-term synergies and enhanced trading liquidity. A full announcement and prospectus was issued on 19 September 2018. Given the proximity of the announcement to the completion date of the transaction and as previously announced the requirement of merger clearance from the Competition and Market Authority under Enterprise Act 2002, it is not possible to give a preliminary acquisition table at this time. The Group incurred legal and professional costs of £3.5m in relation to this acquisition in the year which were recognised in administration expenses. As a result of this acquisition the Group entered into new bank facilities: On 19 October 2018, the Group had entered into new banking facilities with Lloyds Bank plc and National Westminster Bank plc for committed financing by way of term loans of between 3.5 to 5 years for up to £322m and a short-term bridge loan of approximately £80m. The short-term bridge loan was repaid in November 2018 following completion using principally Cambian’s significant cash position. In addition to the term loans and bridge loan, a £25m revolving credit facility is available to provide working capital for the enlarged Group and an uncommitted accordion facility of up to £30m for general Corporate and Working Capital purposes (including acquisitions). 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 charge to the consolidated statement of comprehensive income for bad or doubtful debts of £46,000 (2017: credit £100,000). 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) 2018 £000 10,918 5,021 5,482 21,421 2017 £000 7,240 3,060 4,388 14,688 CareTech Holdings PLC – Annual Report and Accounts 2018 77 Strategic ReviewGovernanceFinancial Statements Notes to the Financial Statements continued 24 Financial instruments (continued) The movement in provisions for impairment of trade receivables are as follows: At 1 October 2016 Charged to the consolidated statement of comprehensive Income At 1 October 2017 Charged to the consolidated statement of comprehensive Income At 30 September 2018 £000 815 (100) 715 46 761 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 4 hedging instruments, details of which are as follows: – a 3 year swap commencing 28 January 2016 at pre-determined amounts initially starting at £35.2 million at LIBOR fixed at 1.032% – a 3 year swap commencing 9 February 2016 at pre-determined amounts initially starting at £38.2 million at LIBOR fixed at 1.097% – a 3 year swap commencing 9 February 2016 at pre-determined amounts initially starting at £18.1 million at LIBOR fixed at 1.097% – a 3 year swap commencing 12 February 2016 at pre-determined amounts initially starting at £18.5 million at LIBOR fixed at 1.097% 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 Effective interest rate % 5% 11% Effective interest rate % 5% 11% Carrying amount £000 (24,875) (7,294) 2018 Contractual cash flows £000 < 1 year £000 1–5 years £000 (24,875) (24,875) (7,294) (50) (151,748) (151,748) (151,748) (4,662) (4,662) (2,082) (2,580) (966) (152) (966) (152) (966) (152) – – – (198) – 5 years and over £000 – (7,046) – – – – (189,697) (189,697) (179,873) (2,778) (7,046) 2017 Carrying amount £000 (15,709) (7,344) Contractual cash flows £000 (15,709) (7,344) (147,544) (161,716) (5,990) (3,553) (940) (5,990) (3,553) (940) < 1 year £000 (15,709) (50) (5,775) (1,936) (2,420) (768) 1–5 years £000 – (198) (155,941) (4,054) (1,133) (172) 5 years and over £000 – (7,096) – – – – (181,080) (195,252) (26,658) (161,498) (7,096) 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 54) 2018 £000 146,989 208,233 2017 £000 147,132 204,201 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 7.5p per share demonstrating a confident view of the Group’s fundamental strength. 78 CareTech Holdings PLC – Annual Report and Accounts 2018 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 2018 £000 2017 £000 9,421 6,402 (151,748) (147,544) (4,662) (5,990) (146,989) (147,132) 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 2018, 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 £410,000 (2017: £430,000). 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 2018 £000 Fair value 2018 £000 Carrying amount 2017 £000 Fair value 2017 £000 9,421 21,421 9,421 21,421 6,402 14,688 6,402 14,688 (3,808) (3,808) (2,338) (2,338) (151,748) (151,748) (147,544) (147,544) (966) (966) (3,553) (3,553) (152) (152) (940) (940) 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; and – 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; – for contingent consideration, this was entered into as part of the acquisition of Spark of Genius. The fair value will be determined with reference to: – Spark of Genius’s EBITDA performance over the four financial years ending 30 September 2019. 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 (2017: £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 £152,000 (2017: liability £940,000). – Level 3 – inputs for the asset or liabilities that are not based on observable market data: liability £966,000 (2017: liability £3,5553,000). The financial liability measured at fair value in the consolidated statement of financial position at 30 September 2018 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. CareTech Holdings PLC – Annual Report and Accounts 2018 79 Strategic ReviewGovernanceFinancial Statements 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 2018 2017 Land and buildings £000 3,974 8,156 119,466 131,596 Other £000 244 265 – 509 Land and buildings £000 3,764 8,635 121,190 133,589 Other £000 293 286 – 579 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 2018 2017 Land and buildings £000 4,345 4,345 Other £000 759 759 Land and buildings £000 3,653 3,653 Other £000 673 673 26 Related parties During the year, CareTech Community Services Limited paid rent totalling £198,000 (2017: £188,250) in respect of properties in which F. Sheikh and H. Sheikh have an interest. At the year-end rent of £104,000 (2017: £81,000) was prepaid. Dividends paid to Directors in the year totalled £147,000 (2017: £90,000). Mike Adams, who is a Non-Executive Director is also the Chief Operating Officer of Purple Zest Limited, a company in which Caretech Holdings acquired a 60% shareholding in July 2018. Transactions with key management personnel Salary Benefits Bonus Total short-term remuneration Post-employment benefits Share-based payments 2018 £000 3,007 134 871 4,012 – – 2017 £000 2,493 132 186 2,811 – – 4,012 2,811 Key management personnel are defined as Directors of the Company and members of the Senior Management Team. Directors’ emoluments are set out on page 46. 80 CareTech Holdings PLC – Annual Report and Accounts 2018 Company Statement of Financial Position as at 30 September 2018 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 2018 £000 2017 £000 35,623 35,623 35,301 35,301 30 278,108 269,304 466 278,574 314,197 748 270,052 305,353 31 32 31 151,748 1,446 153,194 – – 153,194 161,003 5,755 1,130 6,885 142,532 142,532 149,417 155,936 33 379 379 120,820 120,778 9,023 30,781 9,023 25,756 161,003 155,936 These financial statements were approved by the Board of Directors and authorised for issue on 20 December 2018 and were signed on its behalf by: Farouq Sheikh Group Executive Chairman 20 December 2018 Company number: 04457287 CareTech Holdings PLC – Annual Report and Accounts 2018 81 Strategic ReviewGovernanceFinancial Statements Company Statement of Changes in Equity as at 30 September 2018 At 1 October 2016 Profit for the year Total comprehensive income Issue of shares Dividends Transactions with owners recorded directly in equity At 30 September 2017 At 1 October 2017 Profit for the year Total comprehensive income Issue of shares Dividends Transactions with owners recorded directly in equity Share capital £000 321 Share premium £000 81,750 Merger reserve £000 9,023 Retained earnings £000 Total equity £000 17,800 108,894 – – 58 – 58 – – 39,028 – 39,028 – – – – – 13,889 13,889 13,889 13,889 – (5,933) (5,933) 39,086 (5,933) 33,153 379 120,778 9,023 25,756 155,936 – – – – – – 42 42 – – – – 12,519 12,519 – (7,494) (7,494) 12,519 12,519 42 (7,494) (7,452) At September 2018 379 120,820 9,023 30,781 161,003 82 CareTech Holdings PLC – Annual Report and Accounts 2018 Company Statement of Cash Flow for the year ended 30 September 2018 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 generated from/(used in) operating activities Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired Cash flows from financing activities Dividends paid Proceeds from the issue of new shares (net of costs) Bank loans drawdown/(repayments) Net cash (used in)/generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 October Cash and cash equivalents at 30 September 2018 £000 2017 £000 12,519 12,519 316 (8,804) 4,031 13,889 13,889 (709) (39,551) (26,371) (322) – (7,494) 42 3,461 (3,991) (282) 748 466 (5,933) 39,086 (6,301) 26,852 481 267 748 CareTech Holdings PLC – Annual Report and Accounts 2018 83 Strategic ReviewGovernanceFinancial Statements 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 £12,519,000 (2017: £13,889,000). (b) Investments 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. (d) Interest-bearing borrowings 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 2017 At 30 September 2018 2018 £000 9,023 9,023 2017 £000 9,023 9,023 84 CareTech Holdings PLC – Annual Report and Accounts 2018 28 Dividends The aggregate amount of dividends comprises: Interim dividend paid in respect of prior year but not recognised as liabilities in that year (3.30p per share (2017: 3.00p per share)) Final dividend paid in respect of the prior year (6.60p per share (2017: 6.25p per share)) Aggregate amount of dividends paid in the financial year (9.90p per share) (2017: 9.25p per share)) 2018 £000 2,498 4,996 7,494 2017 £000 1,923 4,010 5,933 The aggregate amount of dividends proposed and not recognised as liabilities as at the year end is 11.00p per share, £8,166,018 (2017: 9.90p per share, £7,493,075). 29 Investments Cost and net book value At beginning of year Acquisition At end of year 30 Trade and other receivables Amounts owed by Group undertakings Shares in Group undertakings £000 35,301 322 35,623 2018 £000 2017 £000 278,108 269,304 31 Interest-bearing loans and borrowings 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 2018 £000 2017 £000 – 142,532 2018 £000 2017 £000 151,748 5,755 Currency Nominal interest rate (%) £ £ 2.25 (2017: 2.25)(1) 2.25 (2017: 2.25)(1) Year of maturity 2019 2019 Book value 2018 £000 Book value 2017 £000 120,499 31,249 151,748 127,184 21,103 148,287 (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 had entered into new banking facilities with Lloyds Bank plc and National Westminster Bank plc for committed financing by way of term loans of between 3.5 to 5 years up to £334m and a short-term bridge loan of approximately £80m. The short-term bridge loan was repaid in November 2018 following completion using principally Cambian’s significant cash position. In addition to the term loans and bridge loan, a £25m revolving credit facility is available to provide working capital for the enlarged Group and an uncommitted accordion facility of up to £30m for general Corporate and Working Capital purposes (including acquisitions). The new facilities of the term loans and bridge loan with an aggregate size up to £414m have been utilised for the cash consideration of the acquisition, following the repayment of the Group’s existing bank debt facilities of approximately £150m and the payment of debt financing fees of up to approximately £6m. The amount available for the draw down under the term loans was reduced in the event that the actual cash consideration payable under the transaction was less than £253m. CareTech Holdings PLC – Annual Report and Accounts 2018 85 Strategic ReviewGovernanceFinancial Statements Notes to the Company Financial Statements continued 31 Interest-bearing loans and borrowings (continued) As part of the acquisition, in September 2018 the Group’s property portfolio was revalued by Cushman and Wakefield and the market value was £424m. The Cambian Group plc property portfolio was revalued by Knight Frank and the market value was £350m. Following completion of the acquisition, Lloyds Bank plc and Nat West Markets plc, who had underwritten the funding, completed the syndication of the term loans and revolving credit facility successfully. The syndication was significantly oversubscribed showing strong support for both the Group and the acquisition. The final facility is a term loan of £322m and revolving credit facility of £25m to a group of banks comprising Barclays Bank PLC, HSBC UK Bank plc, Santander UK plc, AIB Group (UK) plc, Clydesdale Bank PLC and Credit Suisse AG, in addition to Lloyds Bank plc and National Westminster Bank plc. The enlarged Group loan to value based only on the property valuations is c.42% whilst the proforma net debt to EBITDA of the enlarged Group is 4.3x which is expected to reduce to under 4x in the short term. 32 Trade and other payables Other creditors 33 Called up share capital Allotted, called up and fully paid: 75,679,937 (2017: 64,196,903) ordinary shares of 0.5p each 53,402 deferred shares of 0.5p each 2018 £000 1,446 2017 £000 1,130 2018 £000 2017 £000 379 – 379 379 – 379 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 (2017: £nil). Share-based payments There was no expense for share-based payments relating to the Company in the year (2017: £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 45 and 47. This analysis forms part of these financial statements. 36 Staff numbers and costs The Company has no employees (2017: none) other than the Directors. Directors’ emoluments are paid by a subsidiary undertaking. 37 Related parties During the year the Company received dividends of £9,800,000 (2017: £13,000,000) and received interest of £8,083,000 (2017: £6,409,000) and fees of £70,000 (2017: £70,000) from its subsidiary undertakings. The amount due to the Company from its subsidiary undertakings at the balance sheet date amounted to £278,108,000 (2017: £269,304,000). 86 CareTech Holdings PLC – Annual Report and Accounts 2018 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 (2017: £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. 2018 £000 2017 £000 278,108 269,304 – – – – – – 278,108 269,304 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. 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 Trade and other payables Secured bank loans Effective interest rate % – 5% Effective interest rate % – 5% 2018 Carrying amount £000 (1,446) Contractual cash flows £000 (1,446) < 1 year £000 (1,446) (151,748) (151,748) (151,748) (153,194) (153,194) (153,194) 1–5 years £000 5 years and over £000 – – – – – – 2017 Carrying amount £000 (1,130) Contractual cash flows £000 (1,130) (148,287) (162,528) (149,417) (163,658) < 1 year £000 (1,130) (5,755) (6,885) 1–5 years £000 – (156,773) (156,773) 5 years and over £000 – – – CareTech Holdings PLC – Annual Report and Accounts 2018 87 Strategic ReviewGovernanceFinancial Statements Notes to the Company Financial Statements continued 38 Financial instruments (continued) 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 2018 £000 151,748 161,003 2017 £000 148,287 155,936 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 7.5p 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 2018 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 £410,000 (2017: £430,000). 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 2018 £000 Fair value 2018 £000 Carrying amount 2017 £000 Fair value 2017 £000 466 466 748 748 278,108 278,108 269,304 269,304 (1,466) (1,466) (1,130) (1,130) (151,748) (151,748) (148,287) (148,287) 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. 88 CareTech Holdings PLC – Annual Report and Accounts 2018 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 Karl Monaghan Mike Adams Jamie Cumming (Group Executive Chairman) (Group Chief Executive Officer) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) This annual report is printed on FSC® certified material. 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