(cid:202)(cid:241)(cid:241)(cid:248)(cid:228)(cid:239)(cid:3)(cid:219)(cid:232)(cid:243)(cid:242)(cid:245)(cid:247)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3)(cid:202)(cid:230)(cid:230)(cid:242)(cid:248)(cid:241)(cid:247)(cid:246)(cid:3)(cid:34)(cid:32)(cid:33)(cid:39) (cid:202)(cid:241)(cid:241)(cid:248)(cid:228)(cid:239)(cid:3)(cid:219)(cid:232)(cid:243)(cid:242)(cid:245)(cid:247)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3)(cid:202)(cid:230)(cid:230)(cid:242)(cid:248)(cid:241)(cid:247)(cid:246)(cid:3)(cid:34)(cid:32)(cid:33)(cid:39) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) Improv Growing (cid:242)(cid:248)(cid:245)(cid:3)(cid:246)(cid:232)(cid:245)(cid:249)(cid:236)(cid:230)(cid:232)(cid:3)(cid:242)(cid:233)(cid:233)(cid:232)(cid:245)(cid:236)(cid:241)(cid:234)(cid:3)(cid:3) (cid:228)(cid:241)(cid:231)(cid:3)(cid:234)(cid:232)(cid:242)(cid:234)(cid:245)(cid:228)(cid:243)(cid:235)(cid:236)(cid:230)(cid:3)(cid:245)(cid:232)(cid:228)(cid:230)(cid:235)(cid:3)(cid:3) (cid:247)(cid:242)(cid:3)(cid:240)(cid:228)(cid:251)(cid:236)(cid:240)(cid:236)(cid:246)(cid:232)(cid:3)(cid:247)(cid:235)(cid:232)(cid:3)(cid:245)(cid:232)(cid:247)(cid:248)(cid:245)(cid:241)(cid:3) (cid:247)(cid:242)(cid:3)(cid:246)(cid:235)(cid:228)(cid:245)(cid:232)(cid:235)(cid:242)(cid:239)(cid:231)(cid:232)(cid:245)(cid:246)(cid:3)(cid:247)(cid:235)(cid:245)(cid:242)(cid:248)(cid:234)(cid:235)(cid:3) (cid:242)(cid:245)(cid:234)(cid:228)(cid:241)(cid:236)(cid:230)(cid:3)(cid:234)(cid:245)(cid:242)(cid:250)(cid:247)(cid:235)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3) (cid:228)(cid:230)(cid:244)(cid:248)(cid:236)(cid:246)(cid:236)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:4) UDG Healthcare plc UDG Healthcare plc (cid:220)(cid:248)(cid:243)(cid:243)(cid:242)(cid:245)(cid:247)(cid:236)(cid:241)(cid:234)(cid:3)(cid:230)(cid:239)(cid:236)(cid:232)(cid:241)(cid:247)(cid:246)(cid:3)(cid:247)(cid:242)(cid:3) (cid:236)(cid:240)(cid:243)(cid:245)(cid:242)(cid:249)(cid:232)(cid:3)(cid:243)(cid:228)(cid:247)(cid:236)(cid:232)(cid:241)(cid:247)(cid:3)(cid:242)(cid:248)(cid:247)(cid:230)(cid:242)(cid:240)(cid:232)(cid:246) Ashfield, a division of UDG Healthcare, has been providing patient services in the US for over 12 years. The US Clinical teams have delivered over 40 programmes improving outcomes for over 10,000 patients. “Ashfield’s patient support programmes focus on patient needs first and foremost. To accomplish this, clients are advised on how to engage with patients early and often throughout the clinical trial phase and into commercialisation. This ensures that there is an understanding of patient needs and challenges, not only in starting on a treatment but also around their ability to maintain long term adherence. Ashfield partners with an array of healthcare companies, creating innovative solutions for patients, their caregivers and their prescribers to bring real results that have an impact.” Nareda Mills, SVP and President, Ashfield Clinical Read more on page 24 (cid:3)(cid:33)(cid:32)(cid:32)(cid:135) active programmes across 30 therapeutic areas globally (cid:202)(cid:241)(cid:241)(cid:248)(cid:228)(cid:239)(cid:3)(cid:219)(cid:232)(cid:243)(cid:242)(cid:245)(cid:247)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3)(cid:202)(cid:230)(cid:230)(cid:242)(cid:248)(cid:241)(cid:247)(cid:246)(cid:3)(cid:34)(cid:32)(cid:33)(cid:39) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) Improv Growing (cid:242)(cid:248)(cid:245)(cid:3)(cid:229)(cid:245)(cid:232)(cid:228)(cid:231)(cid:247)(cid:235)(cid:3)(cid:242)(cid:233)(cid:3)(cid:246)(cid:232)(cid:245)(cid:249)(cid:236)(cid:230)(cid:232)(cid:246)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3) (cid:246)(cid:242)(cid:239)(cid:248)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:3)(cid:233)(cid:242)(cid:245)(cid:3)(cid:242)(cid:248)(cid:245)(cid:3)(cid:230)(cid:239)(cid:236)(cid:232)(cid:241)(cid:247)(cid:246)(cid:4) (cid:242)(cid:248)(cid:245)(cid:3)(cid:246)(cid:232)(cid:245)(cid:249)(cid:236)(cid:230)(cid:232)(cid:3)(cid:242)(cid:233)(cid:233)(cid:232)(cid:245)(cid:236)(cid:241)(cid:234)(cid:3)(cid:3) (cid:228)(cid:241)(cid:231)(cid:3)(cid:234)(cid:232)(cid:242)(cid:234)(cid:245)(cid:228)(cid:243)(cid:235)(cid:236)(cid:230)(cid:3)(cid:245)(cid:232)(cid:228)(cid:230)(cid:235)(cid:3)(cid:3) (cid:247)(cid:242)(cid:3)(cid:240)(cid:228)(cid:251)(cid:236)(cid:240)(cid:236)(cid:246)(cid:232)(cid:3)(cid:247)(cid:235)(cid:232)(cid:3)(cid:245)(cid:232)(cid:247)(cid:248)(cid:245)(cid:241)(cid:3) (cid:247)(cid:242)(cid:3)(cid:246)(cid:235)(cid:228)(cid:245)(cid:232)(cid:235)(cid:242)(cid:239)(cid:231)(cid:232)(cid:245)(cid:246)(cid:3)(cid:247)(cid:235)(cid:245)(cid:242)(cid:248)(cid:234)(cid:235)(cid:3) (cid:242)(cid:245)(cid:234)(cid:228)(cid:241)(cid:236)(cid:230)(cid:3)(cid:234)(cid:245)(cid:242)(cid:250)(cid:247)(cid:235)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3) (cid:228)(cid:230)(cid:244)(cid:248)(cid:236)(cid:246)(cid:236)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:4) UDG Healthcare plc (cid:210)(cid:241)(cid:249)(cid:232)(cid:246)(cid:247)(cid:236)(cid:241)(cid:234)(cid:3)(cid:247)(cid:242)(cid:3)(cid:228)(cid:231)(cid:231)(cid:3)(cid:3) (cid:230)(cid:228)(cid:243)(cid:228)(cid:230)(cid:236)(cid:247)(cid:252)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3)(cid:246)(cid:230)(cid:228)(cid:239)(cid:228)(cid:229)(cid:236)(cid:239)(cid:236)(cid:247)(cid:252)(cid:3)(cid:3) (cid:236)(cid:241)(cid:3)(cid:220)(cid:235)(cid:228)(cid:245)(cid:243)(cid:273)(cid:246)(cid:3)(cid:230)(cid:239)(cid:236)(cid:241)(cid:236)(cid:230)(cid:228)(cid:239)(cid:3)(cid:246)(cid:232)(cid:245)(cid:249)(cid:236)(cid:230)(cid:232)(cid:246) “The investment by UDG Healthcare in growing Sharp’s clinical services business is hugely exciting for our team. Through both our expanded UK site at Rhymney, Wales, and our newly acquired state-of-the-art facility in Bethlehem, Pennsylvania, we will be able to offer our clients greater capacity, scalability and automation. This means that we can simultaneously support multiple large scale Phase III studies for our clients through to commercial launch of their products. It will also allow us to build our expertise in Sharp to support current business and to expand our clinical services portfolio to new clients, at a larger scale. The expansion includes the development of software applications in our Interactive Response Technology (IRT) platform that assist our clients in managing their supply chain. Ultimately, we are making these facility investments and resource commitments on behalf of our existing and future clients. We intend to deliver real value for them as an integrated clinical service provider servicing North America, Europe and Asia.” Frank Lis, President, Sharp Clinical Read more on page 30 (cid:3)(cid:33)(cid:6)(cid:37)(cid:32)(cid:32)(cid:6)(cid:32)(cid:32)(cid:32) cubic feet of new clinical services capacity added in 2017 (cid:202)(cid:241)(cid:241)(cid:248)(cid:228)(cid:239)(cid:3)(cid:219)(cid:232)(cid:243)(cid:242)(cid:245)(cid:247)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3)(cid:202)(cid:230)(cid:230)(cid:242)(cid:248)(cid:241)(cid:247)(cid:246)(cid:3)(cid:34)(cid:32)(cid:33)(cid:39) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) Transform Growing (cid:242)(cid:248)(cid:245)(cid:3)(cid:229)(cid:248)(cid:246)(cid:236)(cid:241)(cid:232)(cid:246)(cid:246)(cid:3)(cid:233)(cid:242)(cid:245)(cid:3)(cid:247)(cid:235)(cid:232)(cid:3)(cid:3) (cid:233)(cid:248)(cid:247)(cid:248)(cid:245)(cid:232)(cid:3)(cid:229)(cid:252)(cid:3)(cid:236)(cid:241)(cid:249)(cid:232)(cid:246)(cid:247)(cid:236)(cid:241)(cid:234)(cid:3)(cid:236)(cid:241)(cid:3)(cid:242)(cid:248)(cid:245)(cid:3) (cid:243)(cid:232)(cid:242)(cid:243)(cid:239)(cid:232)(cid:6)(cid:3)(cid:236)(cid:241)(cid:233)(cid:245)(cid:228)(cid:246)(cid:247)(cid:245)(cid:248)(cid:230)(cid:247)(cid:248)(cid:245)(cid:232)(cid:3)(cid:3) (cid:228)(cid:241)(cid:231)(cid:3)(cid:236)(cid:241)(cid:241)(cid:242)(cid:249)(cid:228)(cid:247)(cid:236)(cid:249)(cid:232)(cid:3)(cid:246)(cid:242)(cid:239)(cid:248)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:4) (cid:242)(cid:248)(cid:245)(cid:3)(cid:246)(cid:232)(cid:245)(cid:249)(cid:236)(cid:230)(cid:232)(cid:3)(cid:242)(cid:233)(cid:233)(cid:232)(cid:245)(cid:236)(cid:241)(cid:234)(cid:3)(cid:3) (cid:228)(cid:241)(cid:231)(cid:3)(cid:234)(cid:232)(cid:242)(cid:234)(cid:245)(cid:228)(cid:243)(cid:235)(cid:236)(cid:230)(cid:3)(cid:245)(cid:232)(cid:228)(cid:230)(cid:235)(cid:3)(cid:3) (cid:247)(cid:242)(cid:3)(cid:240)(cid:228)(cid:251)(cid:236)(cid:240)(cid:236)(cid:246)(cid:232)(cid:3)(cid:247)(cid:235)(cid:232)(cid:3)(cid:245)(cid:232)(cid:247)(cid:248)(cid:245)(cid:241)(cid:3) (cid:247)(cid:242)(cid:3)(cid:246)(cid:235)(cid:228)(cid:245)(cid:232)(cid:235)(cid:242)(cid:239)(cid:231)(cid:232)(cid:245)(cid:246)(cid:3)(cid:247)(cid:235)(cid:245)(cid:242)(cid:248)(cid:234)(cid:235)(cid:3) (cid:242)(cid:245)(cid:234)(cid:228)(cid:241)(cid:236)(cid:230)(cid:3)(cid:234)(cid:245)(cid:242)(cid:250)(cid:247)(cid:235)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3) (cid:228)(cid:230)(cid:244)(cid:248)(cid:236)(cid:246)(cid:236)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:4) UDG Healthcare plc (cid:208)(cid:245)(cid:242)(cid:250)(cid:236)(cid:241)(cid:234)(cid:3)(cid:247)(cid:235)(cid:245)(cid:242)(cid:248)(cid:234)(cid:235)(cid:3) (cid:228)(cid:230)(cid:244)(cid:248)(cid:236)(cid:246)(cid:236)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:3) At UDG Healthcare we have a strong history of growth through acquiring businesses that are aligned with our strategy of growing and developing our market leading positions to provide valuable services to the healthcare industry. STEM Healthcare, which was acquired in October 2016, had an established global footprint and presented exciting opportunities to provide new services to existing clients, complementing the services already delivered by Ashfield. STEM Healthcare was founded by Rob Wood in 2007. “As part of our growth journey, we were looking for a partner to help us accelerate our global growth in key geographies as well as providing a broader range of career opportunities for our staff. UDG Healthcare provided us with a strong cultural fit and a supportive infrastructure we are all confident will help us develop and grow both the STEM Healthcare business and UDG Healthcare as a whole.” Rob Wood, CEO, STEM Healthcare Read more on page 24 (cid:3)(cid:38) acquisitions completed in FY2017 (cid:202)(cid:241)(cid:241)(cid:248)(cid:228)(cid:239)(cid:3)(cid:219)(cid:232)(cid:243)(cid:242)(cid:245)(cid:247)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3)(cid:202)(cid:230)(cid:230)(cid:242)(cid:248)(cid:241)(cid:247)(cid:246)(cid:3)(cid:34)(cid:32)(cid:33)(cid:39) (cid:202)(cid:239)(cid:250)(cid:228)(cid:252)(cid:246) Growing (cid:242)(cid:248)(cid:245)(cid:3)(cid:246)(cid:232)(cid:245)(cid:249)(cid:236)(cid:230)(cid:232)(cid:3)(cid:242)(cid:233)(cid:233)(cid:232)(cid:245)(cid:236)(cid:241)(cid:234)(cid:3)(cid:3) (cid:228)(cid:241)(cid:231)(cid:3)(cid:234)(cid:232)(cid:242)(cid:234)(cid:245)(cid:228)(cid:243)(cid:235)(cid:236)(cid:230)(cid:3)(cid:245)(cid:232)(cid:228)(cid:230)(cid:235)(cid:3)(cid:3) (cid:247)(cid:242)(cid:3)(cid:240)(cid:228)(cid:251)(cid:236)(cid:240)(cid:236)(cid:246)(cid:232)(cid:3)(cid:247)(cid:235)(cid:232)(cid:3)(cid:245)(cid:232)(cid:247)(cid:248)(cid:245)(cid:241)(cid:3) (cid:247)(cid:242)(cid:3)(cid:246)(cid:235)(cid:228)(cid:245)(cid:232)(cid:235)(cid:242)(cid:239)(cid:231)(cid:232)(cid:245)(cid:246)(cid:3)(cid:247)(cid:235)(cid:245)(cid:242)(cid:248)(cid:234)(cid:235)(cid:3) (cid:242)(cid:245)(cid:234)(cid:228)(cid:241)(cid:236)(cid:230)(cid:3)(cid:234)(cid:245)(cid:242)(cid:250)(cid:247)(cid:235)(cid:3)(cid:228)(cid:241)(cid:231)(cid:3) (cid:228)(cid:230)(cid:244)(cid:248)(cid:236)(cid:246)(cid:236)(cid:247)(cid:236)(cid:242)(cid:241)(cid:246)(cid:4) UDG Healthcare plc Strategic Report UDG Healthcare plc (cid:209)(cid:236)(cid:234)(cid:235)(cid:239)(cid:236)(cid:234)(cid:235)(cid:247)(cid:246)(cid:3)(cid:242)(cid:233)(cid:3)(cid:247)(cid:235)(cid:232)(cid:3)(cid:226)(cid:232)(cid:228)(cid:245) Continuing Group operating profit* ($’m) (cid:122)(cid:33)(cid:34)(cid:41)(cid:4)(cid:35)(cid:240)(cid:3) +12% Ashfield Sharp Aquilant 115.8 110.6 70.6 68.3 91.3 57.5 69.9 41.7 129.3 81.6 34.0 38.2 41.3 25.9 20.6 7.6 8.0 8.3 2013 2014 2015 6.9 2016 6.4 2017 FORWARD-LOOKING INFORMATION Some statements in this Annual Report are or may be forward-looking statements. They represent expectations for the Group’s business, including statements that relate to the Group’s future prospects, developments and strategies, and involve risks and uncertainties both general and specific. The Group has based these forward-looking statements on assumptions regarding present and future strategies of the Group and the environment in which it will operate in the future. However, because they involve known and unknown risks, uncertainties and other factors including but not limited to general economic, political, financial and business factors, which in some cases are beyond the Group’s control, actual results, performance, operations or achievements expressed or implied by such forward-looking statements may differ materially from those expressed or implied by such forward-looking statements, and accordingly you should not rely on these forward looking statements in making investment decisions. Except as required by applicable law or regulation, neither the Group nor any other party intends to update or revise these forward-looking statements after the date these statements are published, whether as a result of new information, future events or otherwise. Profit before tax* (cid:122)(cid:33)(cid:33)(cid:40)(cid:4)(cid:41)(cid:240) Ashfield operating profit* (cid:122)(cid:40)(cid:33)(cid:4)(cid:38)(cid:240) Sharp operating profit* (cid:122)(cid:36)(cid:33)(cid:4)(cid:35)(cid:240) Aquilant operating profit* (cid:122)(cid:38)(cid:4)(cid:36)(cid:240) Diluted earnings per share* (EPS) (cid:35)(cid:39)(cid:4)(cid:33)(cid:34)(cid:230) Proposed dividend (cid:33)(cid:35)(cid:4)(cid:35)(cid:32)(cid:230) Net operating margin* (cid:33)(cid:34)(cid:4)(cid:38)(cid:93) +17% +16% +8% -7% +17% +7% – * All references to ‘operating profit’ and ‘earnings per share’ included in the Strategic Report are stated excluding the amortisation of acquired intangible assets and transaction costs, and relate to the Group’s continuing operations. The Group reports certain financial measures that are not required under International Financial Reporting Standards (IFRS) which represent the generally accepted accounting principles (GAAP) under which the Group reports. Strategic Report Directors’ Report Financial Statements What We Do UDG Healthcare is a leading international partner of choice delivering advisory, communication, commercial, clinical and packaging services to the healthcare industry. The Group has three divisions delivering the following services to the healthcare industry: Ashfield Sharp Aquilant A global leader in advisory, communications, commercial and clinical services A global leader in contract packaging and clinical trial supply services A leading expert and provider of outsourced services to the medical and scientific sector Services: Services: Services: Advisory Healthcare brand advisory, consulting and commercial audit services. Commercial contract packaging services in multiple formats including biotech, bottling, blistering and kitting. Communications Scientific communication content, behavioural change strategies, digital and creative patient-centred services. Commercial & Clinical Commercialisation and clinical services including sales representatives, nursing services, contact centres and meetings and events. Clinical trial services from pre-clinical through to commercialisation including clinical contract packaging services and Interactive Response Technology (IRT). Packaging design, labelling and printing solutions and industry-leading serialisation solutions. Medical and scientific device sales, marketing, engineering and distribution in areas such as endoscopy, cardiology, radiology, surgical and orthopaedics. % of Group profit 63.1% % of Group profit 31.9% % of Group profit 5.0% Net operating margin % Net operating margin % Net operating margin % 12.9% Employees 7,386 13.7% Employees 1,465 6.6% Employees 266 Read more on page 24 Read more on page 30 Read more on page 36 UDG Healthcare plc Annual Report and Accounts 2017 01 Strategic Report At a Glance 04 A year of excellent progress in our strategic evolution. 06 Delivering on our global growth strategy. 35 The pursuit of constant improvement and focus on client value. 27 Strengthening market position in Germany through organic growth and acquisition. 02 UDG Healthcare plc Annual Report and Accounts 2017 28 Focusing on acquisitions that are a strong strategic and cultural fit with our existing businesses. 42 Developing our people through INSPIRE, our core Group leadership programme. 58 70 Good governance as a state-of-mind. Focused on talent and succession. Strategic Report Directors’ Report Financial Statements Strategic Report At a Glance Chairman’s Statement Chief Executive’s Review Market Opportunity Business Model Strategy Key Performance Indicators Risk Management Principal Risks and Uncertainties Operational Review Sustainability Finance Review Directors’ Report Board of Directors Chairman’s Introduction to Corporate Governance Corporate Governance Audit Committee Report Directors’ Remuneration Report Nominations & Governance Committee Report Risk, Investment & Financing Committee Report Report of the Directors Financial Statements Independent Auditor’s Report Group Income Statement Group Statement of Comprehensive Income Group Statement of Changes in Equity Group Balance Sheet Group Cash Flow Statement Notes forming part of the Group Financial Statements Company Statement of Comprehensive Income Company Statement of Changes in Equity Company Balance Sheet Company Cash Flow Statement Notes forming part of the Company Financial Statements Financial Calendar Additional Information Glossary Contacts for Shareholders 02 04 06 10 12 14 16 19 21 24 40 52 56 58 59 66 70 88 90 92 96 103 104 105 106 107 108 162 163 164 165 166 175 176 179 180 UDG Healthcare plc Annual Report and Accounts 2017 03 Strategic Report Chairman’s Statement Peter Gray A year of excellent progress in our strategic evolution Dear Shareholder, Overview 2017 has been a year of excellent progress in our strategic evolution, with good underlying growth achieved while making significant strides in enhancing and broadening Ashfield (our Advisory, Communications, Commercial & Clinical Division) through acquisition while strengthening Sharp (our Commercial & Clinical Packaging Division) through capital expenditures on new facilities, equipment and technology. Significant currency volatility occurred during the year but, excluding its effect, organic revenue growth was 10% while organic profit growth was 13%. This good organic performance was supplemented significantly by the contribution from newly acquired businesses. Our Return on Capital Employed (ROCE) was 12.8%, compared to 13.6% last year, reflecting the significant investments, both capital and acquisitive, made in FY2017 which have not yet had time to deliver full benefit. Based on the strong results achieved the Board is pleased to recommend a 7% increase in dividend for the year thus continuing our 30 year upward dividend growth trajectory. Strategy As I’ve outlined over the past several years, we have been transitioning the Group away from our traditional lower-growth businesses into ones we believe will offer stronger growth in the years ahead as the pharmaceutical industry and healthcare systems adapt to innovation, increasing costs, more regulation, an ageing population and greater price pressure. We believe that these factors will offer opportunities to service providers who can respond to them with nimble, cost effective and innovative solutions. In the Ashfield Division, during FY2017, we acquired two companies (STEM Healthcare (UK based) and Vynamic (US based)) that provide advisory services to clients to help them improve their efficiency in key areas and respond to the changing market. We believe providing relevant advisory services can help us build strong relationships with clients and give us greater insights into their needs. We also acquired three companies (Cambridge BioMarketing, MicroMass Communications (both US based) and Sellxpert (German based)) to enhance the breadth and depth of our existing communications and commercial services. In the Sharp Division, we acquired an FDA-approved facility in Bethlehem, Pennsylvania which will expand and enhance our packaging services and capabilities, especially in the clinical supplies area. Significant progress was also made in reversing the underperformance in the European operations of Sharp. All in all, during 2017 we reinvested in excess of $270m of the $415m we realised from the sale of the Supply Chain business in 2016. Our evolution in Ashfield will continue and we plan to add further selling, clinical, communications, creative, digital and advisory capabilities in the future, while our investments in Sharp will also continue to expand capacity and introduce new capabilities, both physical and technological. Board and Governance We discuss in the Corporate Governance Report the activities of the Board in 2017, so I won’t repeat them here. Suffice to say 2017 was again active and stimulating for the Board as it continued to oversee the ongoing evolution and growth of the Group. We will bid farewell with great regret to Gerard van Odjik at our upcoming AGM. Gerard has recently taken on a demanding new role and feels he would be unable to give UDG the time it requires. He has been an excellent contributor to our deliberations, which we will miss. We have begun the search for a replacement. As we went to print, Alan Ralph, our CFO, informed the Board of his intention to retire from his role in UDG Healthcare next year. This was not entirely unexpected as Alan had previously signalled his desire to do new things. The process of identifying his successor is now well underway. 04 UDG Healthcare plc Annual Report and Accounts 2017 We were delighted to welcome Myles Lee (see page 57 for his biography) as a new Board member in April and he has now taken over the chairmanship of the Audit Committee. Myles’ experience, both as CEO and CFO of a global FTSE 100 company which was built over a long period through significant M&A, is already proving to be very valuable. Chris Corbin transitioned during the year from being Managing Director of our Ashfield division to the role of Executive Chairman of Ashfield. He continues to be a director and his deep experience and entrepreneurial spirit is hugely valued by the Board. Sadly, shortly after he began this transition, he suffered the loss of his wife, Sam, after a very short illness. She had helped him found Ashfield and up to 2013 had continued to work in the business. We all remember her fondly, acknowledge her contribution to the building of Ashfield, and offer Chris our sympathy and support. As I mentioned last year, the importance of culture is increasingly being focused upon in governance thinking. In my view, no matter how many governance rules or guidelines we create, they are only as good as the culture the Board and management fosters and the example they set. Many of us have seen examples of companies where all the governance boxes are ticked but improper or irresponsible behaviours have still occurred. The Board can influence culture in many ways: its CEO selection and succession oversight is the most obvious. But through its work and through its Committees, the Board also demonstrates what its expectations are, and what it believes to be important. We believe we reinforce a strong ethical culture in UDG Healthcare, and in 2016/2017 a new sub- Committee was formed, the Quality and Compliance Committee. Comprising mainly executives, I also sit on this Committee to emphasise the Board’s commitment to ensuring quality and compliance; key attributes in any healthcare business. Not content to foster and encourage a positive and ethical culture, the Board will review with interest an employee survey which has just been completed for any negative cultural indicators and seek to work with management to address these in the year ahead. Strategic Report Directors’ Report Financial Statements Having undertaken an independent external review of the Board last year, we carried out our Board evaluation internally this year, but used external consultants to do a detailed review of our Remuneration Committee. The outcome of these evaluations was positive, with some further areas for improvement identified. More detail on these evaluations is set out in the Chairman’s Introduction to Corporate Governance on page 58. Outlook The pharmaceutical and biotech sectors which we serve are quite dynamic at present, driven by scientific advances, strong funding to support further research and development and consequent commercial launches. Notwithstanding this, several of the major companies face cost pressures as patents expire and more biosimilar products are approved and become accepted. We believe we are well positioned to benefit from these trends, with the capability of providing broad services to emerging companies and cost-effective solutions to major players. Based on this, we continue to invest heavily in facilities and IT infrastructure to ensure we have the capacity and platforms to capitalise on the opportunities that we expect will present themselves. While making these investments, we enter fiscal 2018 with a good pipeline and an expectation of continued good organic growth, supplemented by the impact of the acquisitions made in the second half of fiscal 2017. Our balance sheet remains strong and we have the capacity and ambition to continue to build our services and scale significantly. I’d like to take this opportunity on behalf of shareholders and the Board to thank our executive team and all our 9,176 employees worldwide for their hard work and dedication in 2017, and offer them our encouragement and support for 2018. Key Governance Activities 25 Board and Committee meetings were held during 2017. Please see pages 64 and 65 for further details of what the Board and its Committees did during the year. The Board engaged external consultants to assist it in the recruitment of an additional non-executive director, and the Board was pleased to announce that Myles Lee would join in April 2017, bringing extensive international, M&A and finance experience to the Board. In addition to regular investor relations activities, the Group engaged with its largest institutional shareholders to discuss corporate governance and related matters and during the year the Chairman personally met with a number of these in both the UK and the US. In addition to conducting an internal review of the Board, the Company engaged an independent external consultant, Independent Audit, to begin reviewing its Committees, starting with the Remuneration Committee in August and September 2017. Given the increasing profile of cyber security attacks, the Board engaged EY to provide it with cyber security training during the year, and a cyber security awareness campaign was initiated. Peter Gray Chairman Read the full story at udghealthcare.com/AR2017 UDG Healthcare plc Annual Report and Accounts 2017 05 Strategic Report Chief Executive’s Review Brendan McAtamney A year of transformational growth Dear Shareholder, It’s been another year of strong growth at UDG Healthcare and I am pleased to report that our Group is excellently positioned to continue to improve, transform and grow as we enter 2018. Healthcare companies, from niche biotech to healthcare providers to large pharmaco’s, are continuing to show an increasing appetite to outsource specialist and non-core activities to global players who have strong service, regulatory and compliance track records like ours. The transformation we have made in the past year has helped position UDG Healthcare to fully capitalise on these sectoral changes. 2017 can be characterised as a year of transformational growth, driven by good underlying growth and supplemented by six strategic acquisitions. This places us in a strong position for 2018. Overall, we made significant progress in the execution of our strategy and this enabled us to deliver on our financial targets. We delivered operating profit growth of 17% on a constant currency basis, which contributed to adjusted diluted earnings per share (EPS) growth of 23% on a constant currency basis. This was ahead of our guidance of between 17% and 19% constant currency EPS growth for the year. Improving, Transforming, Growing In line with our strategy of expanding into higher growth and higher margin areas, 2017 saw us commit more than $270 million to acquisitions. We have now redeployed over two-thirds of the net proceeds we received in 2016 from the sale of the United Drug supply chain business to McKesson. These key acquisitions add further capabilities for our healthcare clients and are a strong strategic and cultural fit with our existing businesses. The six acquisitions included: • STEM Healthcare, a leading global provider of commercial, marketing and medical audits; • A pharmaceutical-grade packaging facility • • • • in Pennsylvania, US; Sellxpert, a German and Swiss contract sales outsourcing business; Vynamic, a US-based healthcare management consultancy; Cambridge BioMarketing, a US-based communications agency focused on orphan and rare diseases; and MicroMass Communications, a US-based communications agency specialising in behavioural change. As well as successfully executing these acquisitions, we remain focused on investing in scalable infrastructure across HR, finance and IT. In April 2017, we launched our Workday human resource information system and commenced the implementation of Ashfield’s new Oracle Fusion finance system which will be rolled-out on a phased basis over the next 18 months. These crucial investments will ensure we have the right infrastructure to deliver long term sustainable growth and will also ensure the seamless integration of acquired businesses. Capitalising on Disruption Our FY2017 acquisitions represent an investment in a global healthcare industry that is concurrently facing significant ‘disruption’ as technological advances change the way the healthcare industry does its business. Our diversity of approach, our breadth of capabilities, that often have a digital component throughout the service provision, together with our patient-centred focus will ensure we are well positioned to capitalise on both the current and future disruption in the healthcare industry. In addition, an increase in the number of new products being approved and the rise in demand for specialty products places us right at the heart of emerging growth opportunities. As healthcare companies outsource specialist activities to trusted partners, we will continue to invest in our business to take advantage of these opportunities. Our mission is to use our ingenuity and expertise to improve the lives of patients around the world every day. This is no small or easy mission; and it can only be achieved if we continue to transform and adapt our business, through technology or otherwise, to embrace the opportunities presented by both this disruption and the ever-changing healthcare landscape. Divisional Highlights Reflecting in more detail on the performance of each of our divisions: Ashfield Ashfield is a global leader in advisory, communication, commercial and clinical services. Benefiting from both good underlying growth and acquisitions, the division delivered a strong financial performance during the year with operating profit increasing by 16%. 06 UDG Healthcare plc Annual Report and Accounts 2017 “2017 was a very good year for UDG Healthcare. We delivered strong earnings growth and made significant progress on the continued execution of our strategic priorities. This puts us in a strong position for continued growth in 2018 and beyond.” Strategic Report Directors’ Report Financial Statements Strategic Highlights Delivered 2017 adjusted diluted earnings per share growth of 17%. Successfully executed six acquisitions with a total capital commitment in excess of $270m. Continued to broaden the Ashfield proposition to deliver a full complement of industry leading advisory, communication, commercial and clinical services to our clients. Continued expansion of the Sharp capacity footprint in the UK and the US. Invested in scalable infrastructure across HR, Finance and IT to support the continued delivery of sustainable future growth. Launched major employee engagement and talent development initiatives. Read more on page 08 Read the full story at udghealthcare.com/ AR2017 UDG Healthcare plc Annual Report and Accounts 2017 07 Strategic Report Chief Executive’s Review (continued) Ashfield Commercial & Clinical Ashfield Commercial & Clinical delivered good underlying net revenue and operating profit growth of 17% and 5% respectively during the year. This growth was principally due to strong growth in the German business and a good performance in the US, driven by increased activity on contract wins from 2016. The acquisition of Sellxpert has further strengthened Ashfield’s capabilities and established it as market leader in Germany. Ashfield’s North American operations also completed the move to a new facility in Fort Washington in the US. This facility is 60% larger than the previous site, enabling continued expansion in the strategically important US market. On the acquisitions front, Sellxpert will significantly enhance Ashfield Commercial & Clinical’s presence and capabilities in Germany and enhance Ashfield’s leading market position in Europe. Ashfield Advisory and Communications Ashfield Advisory and Communications delivered strong growth during the year. Including the benefit of acquisitions, net revenue increased by 39% and operating profit increased by 31%. We focused on building up Ashfield Advisory in 2017, and fuelled by the acquisitions of STEM Marketing and Vynamic, our advisory capability is now not only significant within the Group but provides more differentiated services and solutions to our global clients. Ashfield Communications had a solid year and its capability was further strengthened by the acquisitions of Cambridge BioMarketing, which brings deep experience in the orphan and rare disease segment of the healthcare market, and MicroMass, which develops evidence based solutions to change behaviour and improve healthcare outcomes. In positioning ourselves for future growth in the communications field we also doubled the size of our office in Scotland, and opened new offices in Japan and Ireland. Changes in the Ashfield Leadership Team In September 2017 our leader in Communications, Viv Adshead, announced her intention to retire in 2018. Viv has been working in the communications business for over 25 years and joined UDG Healthcare through the acquisition of KP360 in 2014. During her short tenure with UDG Healthcare and Ashfield, Viv was at all times the supreme professional and a talented leader of people. We will miss her and wish her every success in the next chapter of her life. We also had a number of other leadership changes which will further strengthen our team and help drive future performance. We appointed a new head of Ashfield US, a new head of Ashfield Japan, and in May 2017 we were delighted to announce the appointment of Jez Moulding – the new Executive Vice President of Ashfield and COO of the Group (See below – Executive changes – Chris Corbin and Jez Moulding). Executive Changes – Chris Corbin and Jez Moulding In September 2016, Ashfield co-founder and CEO Chris Corbin announced his intention to retire from the Group in April 2019. In preparation for his retirement Chris has transitioned to the role of Chairman of Ashfield and will remain on the Board. During his time with the Group, both Ashfield and UDG have been transformed and Chris’s depth of experience and knowledge has provided strong, focused leadership during this period. Chris has made an enormous contribution to UDG Healthcare overall and on behalf of myself and the executive team I would like to thank him sincerely. We look forward to working with him in his Chairman role until he finally steps down. In light of Chris’s departure, Jez Moulding has joined the Group as Chief Operating Officer and Executive Vice President of Ashfield. Jez has 20 years of senior international leadership experience within key healthcare global markets. I am delighted 08 UDG Healthcare plc Annual Report and Accounts 2017 The broadening of Ashfield’s value proposition enables us to expand our offering to clients and deliver a full complement of end-to-end advisory, communications, commercial and clinical capabilities to our clients. This enables us to offer clients innovative solutions and provides us with excellent opportunities for growth in collaboration with our global and regional clients. Sharp Sharp is a global leader in commercial packaging and clinical trial supply services. Sharp delivered another good performance in 2017, with operating profit growth of 8%. Sharp US Commercial Sharp US delivered a good performance with underlying operating profit growth of 5% with biotech delivering particularly strong growth. Last year saw the completion of the fit out of Building 4 in our Allentown Campus. This 13-suite facility is fully dedicated to our biotech clients and has further room for expansion. Despite the delay in the enforcement date for serialisation, Sharp continues to actively engage with its clients and is well positioned to benefit from the anticipated demand due to come on-stream in November 2018. to welcome Jez. His appointment will continue to strengthen both the Ashfield and UDG Healthcare senior management team as we drive further international expansion across the Group. Strategic Report Directors’ Report Financial Statements Sharp Europe Commercial We are increasingly optimistic about the prospects for the Sharp Europe business. The business had a solid year generating a small profit following a number of years of operating losses. The relentless focus on, and investments in the provision of high quality services and business development is now coming to fruition. We experienced significant client wins in 2017 particularly in the biotech and biosimilar sector, and this will lead to further momentum over the coming years. Sharp Clinical Sharp Clinical continues to build on strong foundations for future success with the investment in two new facilities; a new clinical facility in Bethlehem, Pennsylvania and a greenfield site in South Wales, more than tripling the size of the current UK facility. These capacity expansions will improve our offering to clients to take advantage of on-going growth in demand for our end to end clinical trial formulation, development, packaging and distribution services. Aquilant Aquilant is a leading expert in and provider of outsourced services to the medical and scientific sector. The division had a challenging year largely due to negative currency movements. Underlying operating profit growth was solid at 4% and the division continued to trade in line with overall expectations. Culture Our values of quality, partnership, ingenuity, expertise and energy continue to influence how we operate. Sustained employee engagement is a long-term commitment for the business and we have some critical initiatives underway, including a comprehensive leadership development programme and group-wide employee engagement survey. The attraction, development and retention of quality people is a critical success factor and continues to underpin the future of the Group. Following the disposal of the United Drug supply chain business in 2016, UDG Healthcare is now a relatively young organisation with over 9,000 people delivering services across 50 countries. We have a diverse, engaged and energetic group of employees and I would like to thank them all for their work in 2017. It has meant that UDG Healthcare delivered another strong set of results and positions us well for further growth and delivery of our strategic objectives for the years ahead. Outlook In 2017, we made significant progress in the execution of our strategy. We are improving our capabilities, transforming the breadth of services and growing our geographic diversity. These changes mean that we are growing; not just in terms of revenues and profits, but also in long-term sustainable shareholder value. The market opportunity for UDG Healthcare remains robust and we are well positioned for future growth and value creation as we enter 2018. +13% Revenue $1,219.8m +12% Operating profit $129.3m +17% Adjusted diluted EPS 37.12c Net debt $53.3m Brendan McAtamney Chief Executive UDG Healthcare plc Annual Report and Accounts 2017 09 Strategic Report Market Opportunity Transforming our business and capitalising on the growth in the global healthcare market Spending in the global drug market increased by 5.8% in 20161, driven by growth in new medicines across developed markets. Forecasted growth remains positive with the global pharmaceutical market expected to reach $1.5 trillion by 2021. New medicines being launched are increasingly specialty in nature and it is forecasted that specialty medicines’ share of global spending will increase to reach 35%* by 2021. Almost 50% of this spend is expected to be in the US and European markets where the Group primarily operates. Specialty drugs are more complex, requiring more patient touch points and greater levels of support thereby increasing the opportunities for the Group to support our healthcare clients. We are uniquely positioned within our chosen markets to benefit from these global market trends. We offer our clients tailored solutions as they outsource to global partners, who offer flexibility, consistency and quality. 1 Medicines Use and Spending in the US, A review of 2016 and Outlook to 2021, QuintilesIMS Institute, May 2017. 2 Outlook for Global Medicines through 2021, Balancing Cost and Value, QuintilesIMS Institute, December 2016. 10 UDG Healthcare plc Annual Report and Accounts 2017 Global Market Healthcare Trends Global pharmaceutical market continues to show good growth with spending on medicines forecasted to grow at 4–7% p.a. to 2021 to reach $1.5 trillion2. Total global volume use of medicines forecasted to reach c. 4.5tr doses by 2021, up from c. 4tr doses in 2016 2. Positive product approvals outlook – FDA approval of new drugs expected to remain high despite lower 2016 approvals 1. Increased complexity from growth of specialty and biotech. By 2021, 35% of global spending expected to be on specialty medicines 2. Growing trend of healthcare outsourcing. Increasing trend to outsource to larger, more global partners. Strategic Report Directors’ Report Financial Statements Divisional Specific Market Opportunities Ashfield Advisory KEY GROWTH DRIVERS: • Outsourcing levels expected to continue to increase • Therapeutic expertise requirements • Changing and increasingly complex healthcare market dynamics • Pricing a growing pressure point • Market access and life cycle product management increasingly important Ashfield Communications KEY GROWTH DRIVERS: • Continued incremental growth in outsourcing • • Migration to digital and patient engagement services • Growth in orphan drug and rare diseases Increasing number of molecules being developed and approved Ashfield Commercial & Clinical KEY GROWTH DRIVERS: • Outsourcing levels expected to continue to increase • • Growth of specialty products resulting in increased complexity and support requirements • Increasing demand for innovative models, multi-channel offerings and multi-country solutions Increasing importance of patient adherence Estimated Market Size* $2.9bn Estimated Market Size* $7.3bn Estimated Market Size* $6.1bn Sharp Commercial Packaging KEY GROWTH DRIVERS: • Continued demand for outsourced solutions driven by a lack of in-house capabilities, the opportunity for efficiency gains and growth of specialty drugs Increasing requirement to access specialist technology solutions and capabilities • • Clients increasingly seeking strategic partnerships US & EU Estimated Market Size* $5bn–7bn Sharp Clinical Services KEY GROWTH DRIVERS: • Continued growth in outsourcing • Demand for end-to-end proposition and integrated services • Growth of digital solutions including IRT services and ‘Track and Trace’ US & EU Estimated Market Size* $6bn–8bn * Sources for market sizes: Derived from BCG, Deloitte and internal analysis. UDG Healthcare plc Annual Report and Accounts 2017 11 Strategic Report Business Model Delivering growth by transforming our business Our business model enables us to improve, transform and grow our business. By living our values of Quality, Partnership, Ingenuity, Expertise and Energy, our people are at the heart of how we deliver shareholder value. We create innovative and high quality service offerings to clients across global healthcare markets. We are uniquely positioned to capitalise on the increasing trend for pharmaceutical, biotech and medtech companies to outsource specialist and non-core activities on an international basis. We aim to leverage our existing market positions, offer innovative solutions and create demand for our specialist services, thereby driving higher levels of growth and profitability. OUR VALUES IN DETAIL Quality For us, only the best is good enough. Quality underpins everything we say and everything we do. We set high standards, develop our people and deliver a quality service that will surpass our clients’ expectations. Partnership We build on trust through delivering on our promises. We work in partnership with each other and with our clients. This way, we build relationships, based on trust, integrity and transparency. Ingenuity We are committed to solving problems and resourcefully thinking every day. We build solutions for our clients using creativity and innovation. Expertise Together we have a wealth of knowledge and skills built over many years. Through strong business and financial leadership, we deliver excellence and enhance our client experience. Energy We achieve our clients’ goals with imagination and passion. We are enthusiastic for success, always ensuring we engage, listen and work together to build the best solutions. 12 UDG Healthcare plc Annual Report and Accounts 2017 WHAT WE DO Outsourced healthcare services The Group is organised and managed in three separate divisions, each providing a specific range of specialist services to healthcare companies. HOW WE DO IT Delivering sustainable growth and achieving our goals SUSTAINABLE GROWTH Profit and Cash Generation All our divisions are focused on growing profits and maximising cash conversion from our operations to support the development and execution of our strategy. Capital Deployment Disciplined financial management will allow for ongoing reinvestment in the business to sustain our growth model and capitalise on the opportunity to grow our services. Shareholder Value Successful delivery of our strategy results in increased shareholder value which can be delivered through share price appreciation and dividend growth. WHAT MAKES US DIFFERENT We have a set of core values which underpin how we operate and are at the heart of who we are: • Quality • Partnership Ingenuity • • Expertise • Energy EXTERNAL INFLUENCES Supported by positive global market healthcare trends Our innovative mindset and service expertise places us at the core of major global market trends in the healthcare industry. We seek to capitalise on the increasing trend by pharmaceutical, biotech and medtech companies to outsource non-core and specialist activities on an international basis. • Global pharmaceutical market growth • Increasing total global volume use of medicines • Positive dynamic in new product approvals • Increasing specialty growth, driving complexity • Growing outsourcing trend Strategic Report Directors’ Report Directors’ Report Financial Statements Financial Statements Ashfield Sharp Aquilant Read more on page 24 Read more on page 30 Read more on page 36 older valu e h re a h S y Q u alit E n e r g y Our people Pro fi t a Partn e r s n d c a s h g e n e r a t i o n h i p y t ui n e Ing Experti s e Capital deplo y m e t n Outputs – Generating returns for our stakeholders Shareholders Our business model delivers long-term value for our shareholders through share price appreciation and our progressive dividend policy. $31.3m Dividend to shareholders Employees We are committed to investing in our employees’ career development to ensure they can perform in their roles to the highest quality. We provide competitive rewards that are linked to performance as well as ongoing opportunities for further career development. $511.1m Remuneration to employees Clients Our focus is to be a leading international partner of choice so that together with our clients we can help improve the lives of patients. 30 We work with the Top 30 global pharmaceutical companies Patients Our service offering provides patients with insights and solutions to help improve their lives. 10,000+ We have supported over 10,000 patients through clinical programmes Local Communities In addition to selecting three official charity organisations every year we partner with a significant number of charity groups globally and proactively encourage our people to engage in volunteer work and fundraising activities that benefit our local communities. 3 Number of officially appointed charities supported UDG Healthcare plc Annual Report and Accounts 2017 13 Strategic Report Strategy Our Strategic Framework will improve, transform and grow our business to deliver on our mission and vision Our strategy is to capitalise on the increasing trend among pharmaceutical, biotech and medtech companies to outsource specialist and non-core activities on an international basis. We aim to leverage our existing strong market positions, offer innovative solutions and create demand for our specialist services, thereby driving higher levels of growth and profitability. We achieve this by focusing on three strategic framework pillars which we apply across each division to deliver our strategy. Key to strategic linkage in this report Grow and Develop Market-Leading Positions Improve Productivity Transform Through People 14 UDG Healthcare plc Annual Report and Accounts 2017 Grow and Develop Market-Leading Positions We believe scale in major markets, international reach and reputation are key to business development success. We aim to be a leading operator in each of our priority markets and to expand our positions in growth markets. Geographic and Services Growth We will continue to grow our activities organically across our core markets of the US, Europe and Japan. Our organic service development and expansion will be enhanced by strategic acquisitions of complementary services and capabilities. The Group has a track record of successfully acquiring and integrating businesses, aiming to deliver a return on capital in excess of 15%. Progress in 2017: Increased our US presence, expanded the Ashfield advisory service offering and delivered Group operating profit growth of 12%. Client Focus and Commercial Excellence We work in partnership with our clients to develop, grow and create new and bespoke solutions to help them achieve their objectives. This helps our clients succeed in a continuously changing and complex operating environment. Progress in 2017: Ashfield launched its innovative Patient Centre of Excellence service. This service specialises in patient engagement activities to ensure that an understanding of patient needs is kept as a key focus. Supplementary Sources of Growth We continually aim to grow, innovate and improve our service offering to capitalise fully on growth opportunities. This allows us to differentiate our service offering and leverage our market positions by enhancing the range of capabilities we can offer our clients. Progress in 2017: Completed six acquisitions. Strategic Report Directors’ Report Financial Statements Improve Productivity We consistently improve our operating efficiencies across the Group. We do this through benchmarking our commercial and financial performance against specific Key Performance Indicators (KPIs). Transform Through People We are a people-based business operating in dynamic healthcare markets that are highly regulated and demand high quality and compliance standards. We are building our culture and transforming our business by living our values. We are focused on attracting, developing and retaining the best talent so that we support and deliver on our clients’ ambitions. Operational Excellence Talent and Leadership We drive continuous improvement across the Group, ensuring we offer best-in-class service to our clients. We monitor our businesses against six financial and three non-financial KPIs. Our KPIs support the execution of our strategy and are important drivers of improved business performance over the short, medium and long term. We invest in the development of our people, empowering and enabling them to be the best they can be to help transform our business for the future. We build, attract and encourage entrepreneurial leadership teams, often from acquired businesses, that can deliver outstanding performance. Progress in 2017: Improvement across most KPIs (see page 16). Margin Expansion We aim to continually increase margins to drive improved profitability. Improving productivity and increasing operational efficiencies are a key focus of our organic growth strategy to drive the expansion of business unit, divisional and Group margins. Progress in 2017: Group net operating margin remained at 12.6%. The positive margin effect of acquisitions was more than offset by the impact of additional Future Fit operating costs and relatively higher growth in the lower margin Ashfield Commercial & Clinical businesses. Progress in 2017: Leadership and management programmes, INSPIRE and DRIVE, launched across the Group with participation by over 800 employees to date. Formal talent review processes have been implemented. Quality and Compliance Our service offerings are underpinned by a strong quality and compliance culture. This enables our clients to outsource with confidence. Progress in 2017: Expansion of the Group’s ComplianceCentre to include all of UDG Healthcare’s key compliance policies (finance, HR, IT and procurement) in addition to legal, data protection and compliance. Capital Deployment Values Based Culture We deploy capital in areas where we identify the greatest strategic benefit and financial return, while maintaining relatively low levels of financial risk in the Group. We will invest in scalable infrastructure to support the delivery of sustainable future growth, ensuring there is a robust infrastructure in place to manage the existing business and to integrate future acquisitions. Progress in 2017: Completed the implementation of Workday HR information system and began the roll-out of Oracle Fusion finance system in Ashfield. Our values define our culture and unite us in delivering our vision of improving patients’ lives. We aim to integrate these values into everything we do, from our people processes to daily interactions with our clients. Progress in 2017: Integrated our values into our employee performance management system. Launched a global employee engagement survey. Established a values based CEO Awards programme. UDG Healthcare plc Annual Report and Accounts 2017 15 Strategic Report Key Performance Indicators FINANCIAL KPI #1 FINANCIAL KPI #2 FINANCIAL KPI #3 Total Shareholder Return (TSR) Earnings per Share (EPS) Growth Net Operating Margin Definition Definition Definition Total shareholder return (TSR) is the total return to an investor, being the capital gain plus reinvested dividends. The return is measured as an average return over three years. Growth in adjusted diluted EPS achieved in the year. Measures operating profit as a percentage of net revenue. Strategic linkage Strategic linkage Strategic linkage TSR is a key metric used to ensure the Group is delivering returns on invested capital and maintaining strong cash flows to support the combined development of the Group and its dividend payment. Principally, it is used to link executive management remuneration to shareholder returns by linking the vesting and quantum of awards under the Long Term Incentive Plan to performance relative to other FTSE 250 companies. 153.4% 90.0% 2016 2017 Performance The Group delivered a three-year average TSR of 153.4% in 2017 compared to 90.0% in 2016. Link to Remuneration This is a performance metric for the Long Term Incentive Plan (LTIP), accounting for 50% of any awards made. 16 UDG Healthcare plc Annual Report and Accounts 2017 EPS is an important financial measure of corporate profitability and the Group’s financial progress. Net operating margin is a key metric in measuring the operating efficiency across the Group, divisions and business units. Continued improvements in net operating margin demonstrate the successful execution of the Group’s strategy. 37.12c 31.79c 12.6% 12.6% 2016 2017 Performance The 17% increase in EPS was primarily driven by the strong operating results from the Ashfield and Sharp divisions, as well as the acquisitions during the year. Foreign exchange translation reduced EPS growth by 6% from 23% constant currency growth to 17% reported growth. Link to Remuneration Adjusted EPS growth is a key measure of growth and a driver of TSR, which accounts for 50% of LTIP awards made. 2016 2017 Performance The overall Group net operating margin was the same in 2016. The positive margin effect of acquisitions was more than offset by the impact of additional Future Fit operating costs and relatively higher growth in the lower margin Ashfield Commercial & Clinical businesses. Link to Remuneration Net operating margin is a key driver of Profit Before Tax (PBT) which represents a significant element of annual bonus potential. Strategic Report Directors’ Report Financial Statements Key to strategic linkage in this report Grow and Develop Market-Leading Positions Improve Productivity Transform Through People FINANCIAL KPI #4 FINANCIAL KPI #5 FINANCIAL KPI #6 Net Revenue Operating Cash Flow Return on Capital Employed (ROCE) Definition Definition Definition Comprises gross revenue as reported in the Group Income Statement, adjusted for revenue associated with pass-through costs for which the Group does not earn a margin. Operating cash flow is net cash inflow from operating activities of the continuing Group per the cash flow statement on page 107. ROCE is profit before interest and tax expressed as a percentage of the Group’s net assets employed. Strategic linkage Strategic linkage Strategic linkage Net revenue is a key metric in measuring growth in operations across the Group, divisions and business units. Continued growth in net revenue demonstrates the successful execution of the Group’s strategy. The generation of cash from operations is a key driver of shareholder returns and also enables the Group to invest in capital expenditure and acquisitions to enhance future growth. ROCE is a key financial benchmark which measures both the return from, and performance of, existing businesses and potential investments. The Group strives to consistently achieve returns well in excess of its cost of capital. $1,028.5m $919.9m $107.8m $94.6m 13.6% 12.8% 2016 2017 Performance The Group’s net revenue increased 12% due to organic growth as well as the acquisitions made in 2017. Link to Remuneration The ability to grow net revenue is a key driver of Profit Before Tax (PBT) which represent a significant element of annual bonus potential. 2016 2017 Performance The Group has achieved operating cash flows of $107.8 million. This has increased from 2016, driven by an increase in operating profit. Link to Remuneration The ratio of operating cash flow to operating profit forms the basis of a performance metric for the Long Term Incentive Plan (LTIP), accounting for 50% of any awards made. Operating cash flow is also an annual bonus performance metric. 2016 2017 Performance ROCE of 12.8% is significantly in excess of our current cost of capital. The decrease in ROCE over the year is due to the impact of capital expenditure and acquisitions, most of which were acquired in the final quarter. Link to Remuneration ROCE is significantly influenced by PBT and cash flow performance, both of which are key annual bonus performance metrics. UDG Healthcare plc Annual Report and Accounts 2017 17 Strategic Report Key Performance Indicators (continued) Key to strategic linkage in this report Grow and Develop Market-Leading Positions Improve Productivity Transform Through People NON-FINANCIAL KPI #1 NON-FINANCIAL KPI #2 NON-FINANCIAL KPI #3 Compliance Environmental, Health and Safety (EHS) Living Our Values Definition Definition Definition During FY2017, a new compliance audit programme was established which included a change to the auditing template and scope for compliance. Environmental, health and safety audits comprise of a comprehensive review of adherence with regulations, standards and practices. How we embed the values into our people processes and the method of measurement for how we live the values in our organisation. Strategic linkage Strategic linkage Strategic linkage Our clients operate in a highly regulated environment and it is important that we adhere to good standards of compliance in order to drive better performance and provide assurance to our clients. Performance Four compliance audits were conducted, two were satisfactory and two required further improvements. Link to Remuneration The compliance audit programme demonstrates our ability to meet regulatory requirements. This ensures that as we expand, we grow our revenue and diversify our service offering with confidence. We will continue to broaden the programme to ensure key compliance related activities in the business are audited, giving our clients confidence in our compliance capabilities and standards. Compliance with regulation and application of industry standards are essential in the delivery of our strategy. Since the introduction of our EHS audit programme in 2014, over 80% of UDG Healthcare businesses have been audited. Re-audits are completed with low scoring sites, with over 70% of those sites achieving higher results on re-audit. Performance We are pleased with our performance against our internal standards and continuously work with and support our businesses to improve results. Link to Remuneration The EHS audit programme has an indirect impact on business revenue as positive audit findings demonstrate compliance with EHS regulatory requirements and industry best practice, supporting business development and retention. Our values define our culture for all employees and enable our strategy. By demonstrating the behaviours underpinning our values, our leaders continue to build a values based culture for the benefit of our clients, our people and the success of our business. 800 leaders 100% of target population The number of leaders who attended the INSPIRE and DRIVE Development Programmes Performance We continue to develop our leaders through the INSPIRE and DRIVE leadership development programmes. Our Global Employee Engagement Survey will provide valuable insight to help our leaders support the delivery of our strategy by bringing our values to life. Link to Remuneration In 2017 we held a Global Employee Engagement Survey and achieved a 74% response rate. We will now focus on implementing actions to further build a values based organisation. 18 UDG Healthcare plc Annual Report and Accounts 2017 Risk Management Our Enterprise Risk Management programme has become embedded throughout the business Our employees understand the benefits of identifying, assessing and managing both risks and opportunities, and see the value in managing these proactively. Board oversight Executive monitoring and review Risk identification and assessment Risk Management Process Business and functional expertise Execution of mitigation plans Executive monitoring and review Mitigation development and planning Board oversight Strategic Report Directors’ Report Financial Statements Risk Management Process As our business continues to improve, transform and grow, UDG Healthcare is focused on both organic growth and the acquisition of new businesses. Given this focus, it is important to ensure that the risks taken by the Group fall within our defined risk appetite which is determined by our Enterprise Risk Management (ERM) programme. ERM is a continuous process which helps us reduce the possibility of failure and the uncertainty of our business achieving its strategic objectives. Our business leaders are asked to be transparent in the identification of all risks: financial, strategic and operational. Risks are reviewed annually within each division as part of our strategy away day. Building on the changes made to our ERM programme last year, our ERM programme ensures that business leaders are actively engaged in the process and understand their responsibilities in both being transparent about risk identification and being accountable for risk mitigation. Our Group Risk Register is tailored to our organisation and is a consolidation of the business unit risks, divisional risks and functional risks. We believe that collectively, it better represents the true business risks which are reflected in our Principal Risks and Uncertainties. Our cross-functional Risk and Viability Sub-committee continues to meet quarterly and critically reviews risks identified by the business and progress made on the implementation of controls. Occasionally this committee will undertake a deep dive on some risks and challenge business leaders on new risks identified. This structure provides better assurance to our Risk, Investment and Financing Committee who report to the Board twice a year. It is also important that new acquisitions take part in our risk workshops so as to understand how their objectives link with the Group objectives and risks involved. UDG Healthcare plc Annual Report and Accounts 2017 19 • • there is significant, defined as 20%, adverse movement in foreign exchange rates of US dollar and sterling relative to the euro, the currency where our biggest exposure from a debt facility perspective lies; and there is an imposition of price controls or price reductions in the US healthcare market. These scenarios have been incorporated into the Risk Management Framework and are reviewed and managed in line with the Group’s risk appetite. Having reviewed and considered the Risk Management Framework (including the scenarios), the directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the next three years. Strategic Report Risk Management (continued) Going Concern The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Financial Statements. Viability Statement The development of the Group’s Viability Statement considers the impact of severe events that could threaten its future business model. The identification and assessment of these potential events is facilitated by the Group’s Risk Management Process, which in turn is underpinned by the Group’s risk appetite. Once plausible and unacceptable risks are identified, plans for mitigation are developed and executed. This process is monitored and reviewed by the Group’s Senior Executive Team, with Board oversight. The Group’s Principal Risks and Uncertainties aggregate the risks identified, as well as the mitigation plans implemented as part of this process, and they include risks that may have short-term impacts as well as those which may threaten the long-term viability of the Group. During 2016, a strategic review of Ashfield was carried out by the Boston Consulting Group (BCG) which ensures that the strategic direction of Ashfield over the next three to five years is aligned with global outsourcing trends. During 2017 a similar review of the Sharp business was conducted by Deloitte with a view to ensuring the strategic direction of our packaging division is aligned with developments in that market. The Board reviewed long-term strategy scenarios for the Group in February 2017. The directors review and renew the Group’s three-year strategic plan at least annually. The assessment period has been decided with reference to the Group’s current position, prospects, strategy, the Principal Risks and Uncertainties and how these are identified, managed and mitigated. Progress against the strategic plan is reviewed regularly by the Board through presentations from senior management on the performance of their respective business units, the assessment of market opportunity within the healthcare sector and the consideration by the Board of its ability to fund its strategic ambitions. Associated risks are considered within the Risk Framework. The directors have made a robust assessment of the potential impact that these risks would have on the Group’s business model, future performance and solvency or liquidity over the assessment period. In May 2017, the Audit Committee meeting considered the appropriate timeframe for the assessment of viability, which of the principal risks and uncertainties would have the greatest impact on viability, and what scenarios would be most appropriate to test the solvency of the Group. They also set out the scenarios they would like to review as part of the Risk Management Process. These scenarios were modelled during the summer and the August 2017 Audit Committee reviewed the output of this analysis. Post year end a further review took place to confirm that there was no fundamental change to the viability scenarios reviewed in August. The strategic plan has been tested for four scenarios which assess the potential impact of severe but plausible risks to the long-term viability of the Group. These scenarios can be summarised as follows: • the largest site by profit generation becomes inoperable for an extended period of time and produces no contribution in 2018 and slowly recovers to 50% of expected 2017 profitability by 2020; • a large-scale acquisition of approximately $330 million produces no profit in year 1 post-acquisition and recovers to a profit level of only $11 million by 2020; 20 UDG Healthcare plc Annual Report and Accounts 2017 Principal Risks and Uncertainties Strategic Report Directors’ Report Financial Statements Key to strategic linkage in this report Grow and Develop Market-Leading Positions Improve Productivity Transform Through People Operational Risks RISK IMPACT MITIGATION Value Generation from Acquisitions Acquisitive growth remains a core element of the Group’s strategy. A failure to execute and properly integrate acquisitions may impact the Group’s projected revenue growth, and its ability to capitalise on the synergies they bring and/or to maintain and develop the associated talent pools. Client Diversification As the Group’s activities consolidate and further acquisitions are completed, the Group’s client base may become more concentrated making the Group more susceptible to competitive, client merger or procurement led threats. All potential acquisitions are assessed and evaluated to ensure the Group’s defined strategic and financial criteria are met. A discrete integration process and post integration review is developed for each acquisition. This process is supported by experienced management with a view to achieving identified benefits, cultivating talent and minimising general and specific integration risks. In individual business units where there is a high dependence on a small number of key clients, the threats and opportunities are reviewed by divisional management at each business review. The impact that any potential acquisition may have on client concentration is considered as part of the acquisition assessment process. Regulatory The Group has many legal and regulatory obligations, including in respect of: (a) protection of patient information (such as HIPAA and GDPR); and (b) patient and employee health and safety. In addition, many of the Group’s activities are subject to stringent licensing regulations, especially FDA, EMEA and national agency manufacturing and packaging licences. A failure to meet any of these could result in an inability to operate, or products and services being defective, harming patients and potentially giving rise to significant liability. Maintenance of legal, regulatory and quality standards is a core value of the Group. The Sharp Division and Ashfield Pharmacovigilance are subjected to routine FDA, EMEA and national agency inspections and so are required to be ‘audit ready’ at all times. The significant change in this period is the requirement to comply with the General Data Protection Regulation (GDPR) by May 2018. A readiness plan has been prepared and circulated, training has been carried out and a full-time Data Protection Officer hired. PROGRESS No Change This risk remains unchanged. Acquisitions remain a significant part of the Group’s growth strategy and as such integration will always be a risk. Integrations to date have been successful, resulting in no material negative business impact and no unexpected loss of key personnel. No Change This risk remains unchanged. Future mitigation plans include the introduction of significantly improved capabilities, e.g., the ability to analyse client name, client concentration etc. through the Oracle Fusion finance system. Increased Risk Risk has become higher due to increases in regulation e.g. GDPR. However, mitigation plans have been expanded and strengthened. Patient Risk Throughout the Group, medicines and medical devices can be packaged, supplied or administered directly to patients. The risk of inappropriate packaging, supply or administration could lead to a negative patient experience. Packaging and supply activity is carried out under licence by local health regulators and a contract with the marketing authorisation holder (MAH). Serialisation is being introduced as a global solution to falsified medicines and to improve MAH product traceability. Administration of medicines to patients is covered by a detailed client contract with the MAH and a divisional clinical governance framework. All of these processes are subject to risk assessment, training, management review and internal quality audits. Increased Risk As clinical services is a strategic growth area, the risk will increase as the number of clinical services increases. Future mitigation will include an increase in automation such as a Group- wide Customer Relationship Management (CRM) System for clinical services. UDG Healthcare plc Annual Report and Accounts 2017 21 Strategic Report Principal Risks and Uncertainties (continued) Operational Risks (continued) Key to strategic linkage in this report Grow and Develop Market-Leading Positions Improve Productivity Transform Through People RISK Talent IMPACT MITIGATION PROGRESS The success of the Group is built upon effective management teams that consistently deliver superior performance. If the Group cannot attract, retain or develop suitably qualified, experienced and motivated employees, this could have an impact on business performance. Talent requirements of the Group are monitored to ensure businesses meet prevailing and future requirements in terms of skills, competencies and performance. There is a strong focus on key talent management practices, including leadership and management development, succession planning and performance management. There has been significant investment in a Group Human Resource information system, which provides an important platform to support our talent management practices. IT Systems The ability of the Group to provide its services effectively and competitively is dependent on technology and information systems that are appropriately integrated and that meet current and anticipated future business, regulatory and security requirements. The Group’s technology and information systems and infrastructure are the subject of an ongoing programme to ensure that they are capable of meeting the Group’s strategic intent and future requirements. Collectively this initiative is referred to as Future Fit IT. Cyber Security The global threat sophistication is increasing due to support from criminal organisations and nation states targeting valuable information. These are advanced persistent threats targeted at both business-critical data using ransomware for financial gain. Business Continuity The Group is exposed to risks that, should they arise, may give rise to the interruption of critical business processes that could adversely impact the Group or its clients. As part of Future Fit IT, the Group is implementing multi-layered information security defences to identify vulnerabilities and protect against attacks. Procedures are being developed to detect and respond effectively to any cyber security events that may occur. The Group has developed a business continuity template based on risk and is currently re-working the operational business continuity plans in line with this. Mitigation strategies and continuity plans are part of a structured risk review process. Contracts The underlying terms of the Group’s commercial relationships drive the profitability of the Group. The nature of the Group’s business means that the Group could be exposed to undue cost or liability if it agrees inappropriate terms. The Group has adopted processes for identifying and mitigating against undue risks in all prospective commercial relationships, supported by personnel with expertise and/or experience in key commercial risk areas. 22 UDG Healthcare plc Annual Report and Accounts 2017 Decreased Risk Senior management transitions have been managed effectively. Development programmes have been extended with high levels of participation from leaders and managers. Increasingly sophisticated talent review processes have been implemented and action plans put in place. All of these combine to reduce the risk. Decreased Risk A number of the key initiatives identified for Future Fit IT have been delivered and others are progressing. These include implementation of a Group- wide single sign-on solution for Workday and Oracle Fusion, delivery of a new Group-wide network (MPLS) and significantly enhanced security solutions. New Risk No Change Decreased Risk This is an ongoing process and progress has been made during the year in identifying and mitigating undue risks, with an increased focus on both legal and financial exposures deriving from contractual relationships. IMPACT MITIGATION PROGRESS Strategic Report Directors’ Report Financial Statements RISK Brexit The trading uncertainty associated with Brexit may result in some UDG Healthcare clients reducing the size of their UK operations or have a negative impact on our ability to conduct business profitably in the UK. While there has been no indication that the UK market for our services is contracting as a result of the Brexit decision, we will continue to monitor the Brexit negotiations to ensure that specific legislation does not have a negative impact on our ability to conduct business profitably in the UK. The overall Group exposure to the UK as a proportion of our total profitability is expected to decline as we acquire businesses with greater exposure to markets other than the UK. Economic and Political Risk The global macroeconomic and geopolitical environment may have a detrimental impact on our client base and their propensity to purchase services from third party suppliers. As a result we may be overly exposed to a weakening segment of the market. The Group continues to review its portfolio of investments through the annual strategic review process and through constant challenge at Senior Executive Team and Board level. Acquisitions are sought which improve the balance of our investments and give greater exposure to innovative and growing market segments. Financial Risks RISK IMPACT MITIGATION Controls The Group’s resources and finances must be managed in accordance with rigorous standards and stringent controls. A failure to meet those standards or implement appropriate controls may result in the Group’s resources being improperly utilised or its financial statements being inaccurate or misleading. Liquidity The Group is exposed to liquidity, interest rate, currency and credit risks. Foreign Exchange UDG Healthcare plc’s reporting currency is US dollar. Given the nature of the Group’s businesses, exposure arises in the normal course of business to other currencies, principally sterling and the euro. The financial controls of the Group, as well as their effectiveness, are monitored by the Board in the context of the standards to which the Group is subject and the expectations of its stakeholders. This monitoring is supported by a dedicated internal audit function. The Group’s financial function, systems and controls are also subject to periodic review to ensure that they remain robust and fit for purpose. The management of the financial risks facing the Group is governed by policies reviewed and approved by the Board. These policies primarily cover liquidity risk, interest rate risk, currency risk and credit risk. The primary objective of the Group’s policies is to minimise financial risk at a reasonable cost. The Group does not trade in financial instruments. The majority of the Group’s activities are conducted in the local currency of the country of operation. As a consequence, the primary foreign exchange risk arises from the fluctuating value of the Group’s net investment in different currencies. The Group changed its reporting currency to US dollars in FY2017 as the US is now the largest source of profit for the Group. Our strategic intent is to proportionally grow the US as a source of earnings at a faster rate than other markets which will lower the foreign exchange risk for the Group. Decreased Risk A Brexit risk paper was prepared during the summer and concluded that while further monitoring was required there were no additional mitigants that could be put in place at this time. Our exposure to the UK market continues to decline as a proportion of the Group’s overall activities. New Risk PROGRESS No Change No Change Decreased Risk The change to US dollar reporting and the increasing proportion of profit from the US reduces the potential volatility due to currency movement. UDG Healthcare plc Annual Report and Accounts 2017 23 Strategic Report Operational Review/Ashfield Growing our service offering, strengthening our market-leading positions and enhancing career opportunities Ashfield at a glance What we offer: Advisory – Healthcare brand advisory, consulting and commercial audit services Communications – Scientific communication content, communications and behavioural change strategies, digital and creative, and patient-centred services Commercial & Clinical – Commercialisation and clinical services including sales representatives, nursing services, contact centres and event management services Sweden Norway United Kingdom Finland Republic of Ireland Switzerland France Denmark Netherlands Germany Belgium Austria Portugal Spain Italy Turkey Canada US Brazil Argentina 24 UDG Healthcare plc Annual Report and Accounts 2017 couccouou China Japan Hong Kong Australia Ashfield Ashfield has had a strong year with five strategically complementary acquisitions and good organic growth across the organisation. I joined the organisation following on from the transition of Chris Corbin to the role of Chairman of Ashfield on 1 April 2017. I have worked as a client of Ashfield for many years and I am delighted to have joined the organisation at such an exciting point in its journey. Jez Moulding Executive Vice President of Ashfield and Chief Operating Officer of UDG Healthcare Ashfield Commerical & Clinical net revenue ($) 442.3 Ashfield Communications net revenue ($) 187.8 Strategic Report Directors’ Report Financial Statements About Ashfield Ashfield is the largest division of UDG Healthcare, with more than 7,300 employees. Over the last year Ashfield has demonstrated strong progress and organic growth by taking market share and consolidating market leading positions in many of its markets. Ashfield operates in three broad areas of activity: Advisory, Communications and Commercial & Clinical services, working with a range of global healthcare clients across 50 countries providing strategic consulting, healthcare communications, field and contact centre sales teams, in-home and contract centre nurse educators, medical information, pharmacovigilance (drug safety) and event management services. Ashfield Advisory comprises of our recent acquisitions STEM Healthcare and Vynamic. Our services now include healthcare brand advisory, strategic consulting and commercial audit services. Ashfield Communications is one of the largest global healthcare communications groups and is well placed to sustain growth. Its agencies and consultancies provide extensive medical, marketing and communications services to over 140 clients. Services include: strategy development, market research, publication planning (medical journals and congresses), content services, including medical writing support and digital strategy and creative campaigns. Ashfield Commercial & Clinical provides multi-channel (field-based and contact centre) sales and nurse education solutions, focusing on educating healthcare professionals on prescription products and medical devices and in educating patients about their disease and its treatment to improve adherence. UDG Healthcare plc Annual Report and Accounts 2017 25 Strategic Report Operational Review (continued) Ashfield Net revenue $630.1m +21% 630.1 487.9 502.1 514.8 521.6 2013 2014 2015 2016 2017 % of Group profit 63.1% Net operating margin % 12.9% Employees 7,386 Ashfield Performance Review Ashfield delivered a strong financial performance during the year, driven by good underlying growth and the benefit of acquisitions. Net revenue was up 21% to $630.1m and operating profit was up 16% to $81.6m. Ashfield generated underlying net revenue growth of 13% and underlying operating profit growth of 5%, after adjusting for the negative impact of currency translation movements and the contribution of acquisitions. Ashfield incurred additional operating costs during the second half of the year (expected to continue into the first half of 2018) related to the Future Fit investments. Ashfield generated 8% underlying operating profit growth during the year before these additional costs which amounted to c. $2.5m in the second half of 2017. Net operating margin (allowing for pass-through costs) declined from 13.5% to 12.9%. The positive margin impact of acquisitions was more than offset by the impact of the additional Future Fit operating costs and higher underlying revenue growth from the lower margin Commercial & Clinical business. Ashfield Communications (including Advisory) delivered strong growth during the year. Including the benefit of acquisitions, net revenue increased by 39% and operating profit increased by 31%. Underlying net revenue growth improved during the second half of the year compared to the first half of the year. Since its acquisition in October 2016, STEM Healthcare has performed strongly and continues to gain momentum. Ashfield Commercial & Clinical delivered good underlying net revenue and operating profit growth of 17% and 5% respectively during the year. This was principally due to strong growth in the German business and a good performance in the US, driven by increased activity on contract wins from 2016. The acquisition of Sellxpert has further strengthened Ashfield’s capabilities and established it as market leader in Germany. In addition to continued organic progress, Ashfield is well positioned for growth in 2018 following the acquisitions of Sellxpert, Vynamic, Cambridge BioMarketing and MicroMass Communications during the final quarter of 2017. Ashfield Gross revenue Commercial & Clinical Communications (including Advisory) Total gross revenue Net revenue1 Commercial & Clinical Communications (including Advisory) Total net revenue Operating profit Commercial & Clinical Communications (including Advisory) Total operating profit Operating margin Operating margin (on gross revenue) Net operating margin (on net revenue) 2017 $’m 2016 $’m Actual Growth Underlying Growth 2 15% 36% 20% 14% 39% 21% 2% 31% 16% 18% 1% 14% 17% 1% 13% 5% 5% 5% 604.7 216.7 821.4 442.3 187.8 630.1 38.6 43.0 81.6 525.1 159.9 685.0 386.3 135.3 521.6 37.8 32.8 70.6 9.9% 12.9% 10.3% 13.5% 1 Net revenue represents gross revenue adjusted for revenue associated with pass-through costs, for which the Group does not earn a margin. There are no pass-through costs in Sharp or Aquilant. 2 Underlying growth adjusts for the impact of currency translation movements and any acquisition or disposal activity. 26 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Improving Strengthening market position in Germany through organic growth and acquisition Ashfield first entered the German Commercial & Clinical market in 2012 through the acquisition of Pharmexx. Since then the business has grown, delivering revenue growth of over 84% between 2012 and 2017. Led by Benjamin Rapp and his team, Ashfield have won multiple projects with the top healthcare companies over the last two years, positioning Ashfield as the leading provider of Commercial & Clinical services in the market. Germany is the largest healthcare market in Europe and therefore it is a core growth market for UDG Healthcare and Ashfield. Complementary to this strong organic growth, in May 2017, UDG Healthcare announced the acquisition of Sellxpert, a German and Swiss contract sales outsourcing business, based in Speyer, Germany and Basel, Switzerland. The acquisition significantly strengthens Ashfield’s presence and capabilities in Germany and accelerates its growth in the DACH* region. Ashfield now works with 75 of the top healthcare companies, and employs approximately 1,100 talented employees in Germany. The focus for Ashfield Germany is on continuing to provide outstanding services for its clients and ensuring that they can attract the right employees to join the ever expanding team. Benjamin Rapp, General Manager, DACH * DACH: Germany, Austria and Switzerland. UDG Healthcare plc Annual Report and Accounts 2017 27 Strategic Report Operational Review (continued) Ashfield Ashfield Advisory The acquisition of STEM Healthcare and Vynamic are Ashfield and UDG Healthcare’s first major move into the Advisory arena. In October 2016, we announced the acquisition of STEM Marketing now known as STEM Healthcare, a leading global provider of commercial, marketing and medical audits to pharmaceutical companies. STEM’s unique service uses a proven, evidence based methodology to quantify and benchmark organisational alignment and quality of execution to create practical action plans to accelerate brand performance. In July 2017, we announced the acquisition of Vynamic LLC, a US based healthcare management consulting firm headquartered in Philadelphia. Vynamic’s primary service offerings include: brand strategy, launch planning, advanced commercial operations capabilities, strategic transformation and integration, product design and implementation, change leadership and business intelligence and analytics. These two acquisitions expand our advisory services to the healthcare industry, providing complementary services to our existing offering and expanding our geographical reach. As our expansion into the advisory space continues, our focus will be on organically growing existing organisations whilst adding complementary offerings to strengthen our service portfolio. Ashfield Communications Ashfield Communications had a good year in 2017 with significant acquisitions contributing to the business. The acquisitions of businesses in the US, together with the launch of a new business in Japan have all enhanced the overall business. Communications, a new agency, in July 2017 to handle an increase in client demand, opening a new office in Dublin and two office moves in Glasgow and Connecticut. Innovation has remained at the core of Ashfield’s business in delivering market-leading solutions. The acquisitions of Cambridge BioMarketing and MicroMass significantly strengthen and expand our healthcare communications offering. Their respective expertise in rare diseases, orphan drug launches and behaviour change are highly complementary of our existing Ashfield offering. See Focus on Acquisitions below for more detail. Ashfield Commercial & Clinical Throughout 2017, organic growth has been a strong focus for Ashfield Commercial & Clinical, growing current client accounts and attracting new clients through the delivery of high quality services internationally. The core areas for growth in the Commercial business are gaining market share in outsourced sales forces by launching innovative services and enhancing our multi-channel contact centre capabilities. The Clinical business has continued to see an increase in the number of Patient Support Programmes being launched on behalf of clients. Ashfield has been providing market-leading sales force solutions for over 20 years across Europe, the US and Japan. 2017 has been a significant year in the development of Ashfield’s presence in the Commercial arena with particularly strong growth in the US and German businesses. The acquisition of Sellxpert in Germany, and entry into the Swiss market through the acquisition of a 50% share of Sellxpert in Switzerland will further enhance the service offering. Ashfield Communications has been steadily growing and expanding its existing agencies with the launch of the Japanese business Ashfield Healthcare Communications K.K. in November 2016, the launch of Cirrus As well as strengthening our geographical presence, Ashfield Commercial is also focused on developing and delivering innovative, high quality services such as our fully integrated field and contact centre solutions. Ashfield now has 11 contact centres with over 750 employees and 65 supervisors, covering over 100 client accounts and 238 ongoing projects delivered in over 20 languages. The US business moved into new premises from February 2017 with larger, state-of-the-art office, meeting and training facilities. The US business has continued to grow and expand and now works with all of the top ten pharmaceutical companies in the US, while continuing to develop further partnerships. As the number of complex, high value medications increases, clients require patient- led initiatives to ensure compliance and provide real-world data to support clinical effectiveness. Ashfield Clinical provides patient-centred solutions in 22 countries including clinical education, consumer/patient information and service design. Ashfield currently employs over 600 nurses globally and is well positioned internationally to provide our clients with leading Patient Support Programmes. What’s Next? The current environment that Ashfield is operating within is strong with opportunities for organic growth and strategic acquisitions to expand our current service offering and geographical reach, ensuring that we have a competitive offering for clients. People and talent are a critical element to the success of Ashfield’s Advisory, Communications and Commercial & Clinical businesses. Nurturing and attracting the right candidates to work with us is a key focus. The division will continue to focus on international and local partnerships with clients, while ensuring local regions are well placed to deliver global contracts. There has been an increase in the number of clients looking for global providers and Ashfield is well placed to deliver innovative, high quality services on behalf of these clients. Focus on Acquisitions In July 2017, we acquired Cambridge BioMarketing LLC, a US based healthcare communications business. Cambridge BioMarketing is an industry leader in rare diseases and orphan drug launches, a fast growing area of drug development and commercialisation. Led by Maureen Franco, we are delighted to welcome Maureen and her team to the Group. In September 2017, we acquired MicroMass Communications LLC, a US based healthcare communications agency specialising in behavioural change. MicroMass designs solutions across all therapeutic areas that improve patient health outcomes by changing patient and provider behaviour. Led by Alyson Connor and Phil Stein we are also delighted to welcome Alyson, Phil and their team into the Group. 28 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Growing Transforming Building a large multidisciplined client account Ashfield has developed a quality partnership with a leading global heart valve manufacturer, Edwards Lifesciences. Initially tasked with publication-related activities in 2016 through one of Ashfield’s agencies, Watermeadow, the account has grown to now include communications strategy across Edwards’ entire external stakeholder framework, delivered through Ashfield Digital & Creative. Ashfield has since solved challenges from targeting therapy awareness through to product differentiation, whilst delivering excellence across events, digital and sales force execution. Commenting on the partnership, Dirk Iden, Senior Manager, Marketing, Transcatheter Heart Valves at Edwards Lifesciences said “Through Ashfield’s sophisticated behavioural change approach we collaborated well to shift from a tactically heavy approach to a refined strategic approach which now allows me to measure success against tangible KPIs. Ashfield is great to work with and it feels like a true partnership”. Vynamic joined UDG Healthcare in July 2017 to become part of a connected global healthcare community Founded in 2002 by Dan Calista, Vynamic now has over 100 employees and is headquartered in Philadelphia, PA. Vynamic works across all sectors of the interwoven healthcare industry and its services include strategic planning, vendor selection and management, process design, systems implementation, and organisational change. Commenting on joining UDG Healthcare, Founder and CEO of Vynamic, Dan Calista, said: “I believe that being part of UDG Healthcare will create long term value for the team of people working at Vynamic with career opportunities and healthy business growth. We will also have more expertise and breadth to share with our healthcare industry clients. We have been really impressed by the calibre of talent and shared values across the UDG Healthcare organisation”. UDG Healthcare plc Annual Report and Accounts 2017 29 Strategic Report Operational Review/Sharp We continue to invest in capabilities and services that position Sharp to capitalise on market opportunities Sharp at a glance What we offer: A comprehensive and integrated Clinical trial supply service, from pre-clinical through to commercialisation Commercial Packaging solutions in multiple formats including bottling, blisters, specialty and biotech (injectables) Clinical Manufacturing services including analytical services, formulation development, over-encapsulation and placebo manufacture Technology to support both commercial and clinical packaging services including design, serialisation ‘track and trace’ and interactive response technology United Kingdom Republic of Ireland Netherlands Belgium USA 30 UDG Healthcare plc Annual Report and Accounts 2017 ccouou coun Sharp Sharp continued with solid growth in 2017. In particular it was satisfying to see significant new business wins in Europe within the injectables packaging market and this will drive considerable growth in our European business over the next two to five years. In the US, while revenue growth was slightly lower than previous years, our improvements in product mix and efficiencies helped deliver our profit expectations. We were also very pleased with the significant investment in capacity with the two new sites (in the US and the EU) for our clinical business. Mike O’Hara Sharp Managing Director US revenue ($) 254.0m EU revenue ($) 48.1m Strategic Report Directors’ Report Financial Statements About Sharp Sharp is a global leader in contract packaging and clinical trial services to the pharmaceutical and life science industries. Our almost 1,500 employees, working from nine different locations, have a shared vision of delivering world-class services in clinical trial, commercial packaging, design and technology services for our global pharma clients. Sharp provides an integrated portfolio of services to the life sciences industry, supporting clients from the early Phase 1 stage of drug discovery through to full commercial launch and delivery. We have built an excellent reputation for the delivery of quality services built on a solid strategy of investment in people, facilities, equipment, technology and a culture of continuous improvement. The Commercial Packaging business offers support for the full range of packaging formats including blister, bottle, pouch, stick pack, vial labelling, pre-filled syringe labelling and assembly, auto-injector pen assembly and labelling and thin film strips solutions. A critical and complementary component of our packaging service is our project management expertise, that includes packaging design and engineering, pre-production, implementation and serialisation services that ensure success from design origination to commercial delivery. Working in partnership with clients and using the very latest technology, we collaborate to develop packaging solutions that contribute to optimal compliance, usability and ensure production efficiencies. The Clinical Services business in Sharp provides the complete spectrum of innovative clinical trial supply and management solutions to support client products from formulation, development and analysis and manufacturing through to clinical supplies packaging, labelling, distribution, IRT services and comparator sourcing. This is supported by an expert professional services and project management team with years of experience in the successful delivery of global clinical trials. Sharp has continued to consolidate its position as a leader in serialisation and ‘track and trace’ technologies with a unique track record in the industry. Sharp has successfully delivered serialisation programmes for 35 pharma companies, across eight different countries and in six different packaging formats and, in 2017, surpassed the milestone of over 50 serialised lines. By leveraging a robust and proven infrastructure and experienced cross-functional team of experts as well as collaborations with industry-leading technology partners, Sharp continues to lead the market in serialisation and technology services. UDG Healthcare plc Annual Report and Accounts 2017 31 Strategic Report Operational Review (continued) Sharp Sharp Performance Review Sharp delivered a good performance in 2017, with operating profit increasing by 8% to $41.3m (11% on an underlying basis). Operating margins increased to 13.7% during the year. Sharp US generated underlying operating profit growth of 5%, with biotech delivering particularly strong growth. This was in part driven by the completion of the fit-out of the additional capacity in Allentown, PA, which contains 13 packaging suites fully dedicated to biotech clients. In addition, a new US state-of-the-art packaging site was acquired in Bethlehem, PA, in April 2017 to expand the commercial and clinical offering to Sharp’s US clients. Sharp’s US Clinical business is currently relocating to this facility. Sharp Europe moved into operating profit following a number of years of operating losses. Underlying revenue growth was 1% as the business exited some unprofitable contracts and shifted its focus to higher margin business. Sharp Europe is increasingly well positioned to deliver future profitable growth given the improving business development pipeline, focused on injectable biotech and biosimilar products. Sharp Revenue US Europe Total revenue Operating profit/(loss) US Europe Total operating profit The ongoing investment in Sharp’s facilities continues to improve capabilities and expand capacity. Notwithstanding the one-year delay in enforcement of the serialisation ‘Track & Trace’ requirement by the US Food and Drug Administration (FDA) and supply chain disruptions with some clients following the recent hurricane in Puerto Rico, Sharp is well positioned to deliver underlying operating profit growth in line with the Group’s medium-term guidance into 2018 and beyond. Sharp Commercial US Throughout 2017, Sharp Commercial in the US has maintained its position as one of the leading contract packaging specialists for pharmaceutical products. We saw growth in new business for secondary packaging of injectables, a trend which aligns with the findings of the research report produced by Deloitte for Sharp earlier this year. Our biotech Centre of Excellence in Allentown continues to offer services and capacity specifically focused on that growing market segment. Our newly acquired facility in Bethlehem was successfully integrated into the Sharp portfolio and with that acquisition we also welcomed a new team to Sharp based at Bethlehem. The facility offers Sharp clients a full portfolio of clinical services, from pre-clinical and large scale Phase III studies through to full commercial launch. 2017 $’m 2016 $’m Actual Growth Underlying Growth 1 254.0 48.1 302.1 40.9 0.4 41.3 246.1 49.9 296.0 39.6 (1.4) 38.2 3% (4%) 2% 3% – 8% 2% 1% 2% 5% – 11% Operating margin % 13.7% 12.9% 1 Underlying growth adjusts for the impact of currency translation movements and any acquisition or disposal activity. +2% Net revenue $302.1m 296.0 302.1 280.2 242.5 219.0 2013 2014 2015 2016 2017 % of Group profit 31.9% Net operating margin % 13.7% Employees 1,465 32 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Transforming Energy and Expertise transform the outlook for Sharp Europe 2017 has been a transformative year for Sharp Europe. The Sharp team, led by Roel Kerkhof, has worked extremely hard to bring the business from a position of weakness to one of growth and opportunity. Through the investment of significant energy and expertise particularly in the areas of quality and process improvements, the two European sites in Belgium and The Netherlands are now planning for increased client capacity demands. “It has been particularly satisfying from the business development point of view, to see our clients’ perception of Sharp transformed. This year, through the hard work and persistence of the team, we were able to enhance the confidence of several clients in our European packaging facilities. We can now say that Sharp is considered a leading commercial packaging provider specialising in injectables in the European market. Participating in that transformation has been personally very rewarding for me”. Alexander Schäfer, Business Development Manager, Sharp Europe “ Having undergone significant quality and process improvements, Sharp is now positioned as a leading specialist in injectables packaging in Europe.” UDG Healthcare plc Annual Report and Accounts 2017 33 Strategic Report Operational Review (continued) Sharp Both investments are consistent with Sharp’s strategy of continued growth and capacity expansion and demonstrate our commitment to attracting larger scale clients with whom Sharp can build long-term, strategic partnerships. These new facilities will allow us to support the increase in the outsourcing demand for clinical trial manufacturing, packaging, analytical, formulation, logistics and IRT services. The Outlook for Sharp In 2017, Sharp conducted a thorough examination of the key markets in which it operates, both in the US and Europe, to better inform its growth strategy – both organic and inorganic – for the next three to five years. With positive underlying market dynamics – the US and EU commercial and clinical supplies market in which we operate is expected to grow at 4-6% CAGR during the next five years 1 – Sharp will continue to develop both the scale and breadth of its service portfolio in clinical, manufacturing, packaging and technology. We expect to see further significant growth in both the US and Europe in biologics and injectable products coming to market, bringing business development opportunities to Sharp. We anticipate the trend towards a fully integrated, full service offering will continue in the clinical services industry which will demand a breadth of expertise in clinical services. The regulatory demand for serialisation throughout the supply chain will continue to drive outsourcing decisions through 2018. Sharp’s strategy is to position itself to capitalise on each of these market trends and to focus on delivering value to clients and building client partnerships for long-term growth. During 2017, Sharp continued to lead the industry in the implementation of serialised solutions for our clients, reaching the milestones of more than fifty serialised lines by the end of FY2017. Serialisation continues to drive opportunity for Sharp, as pharma companies and CMOs look for accelerated serialisation implementation plans. Sharp Clinical 2017 saw Sharp Clinical begin a journey to considerably scale the business in terms of clients, growth and market position. In April of this year, UDG Healthcare made two significant facility investments that will transform the future direction of our Clinical business in both Europe and the US. Sharp Commercial Europe 2017 was a transformative year for Sharp in Europe. At the end of 2016, we completed the remediation and right-sizing of the business and throughout this year, the focus has been on stabilising operations, rebuilding confidence and winning new business. Under the direction of Roel Kerkhof and his management team, both Sharp sites in the Netherlands and Belgium have achieved new standards of excellence in quality and service, process improvement and operational efficiencies. A strong business development pipeline has yielded many new clients for both sites in 2017, with a significant concentration of these in the emerging biosimilar and injectable packaging market. Sharp’s Belgium site has consciously transformed itself into a biotech/biosimilar facility over a number of years and this transformation is beginning to bear fruit. Sharp’s Netherlands site in Heerenveen will now be focused on one pharmaceutical client who has committed to a long-term, strategic partnership with Sharp and an operational plan that will bring more than ten years of business engagement. Sharp is seizing this opportunity to build a state- of-the-art packaging solution to include Electronic Batch Record, EDI, RF scanning and lean methodologies. Other new business opportunities of a similar scale were identified in the second half of 2017, that Sharp Europe will be pursuing during 2018. The strategy in Europe is to continue to seek new strategic partnerships with clients focused on injectable packaging specialities, characterised by high-value, low-volume products, where Sharp’s experience and expertise are a differentiator. The acquisition of the pharmaceutical packaging site in Bethlehem, PA from Daiichi-Sankyo Inc., brings an additional 146,000 sq.ft. of capacity to the Sharp portfolio of facilities in the US. The site, which is FDA-inspected and DEA-approved, will bring our clients a unique proposition in offering the full array of clinical functions, including formulation, manufacturing, packaging, distribution and IRT services, as well as commercial packaging at scale, all from one single location. There are two phases to the fit-out of the site to support the clinical business. Phase 1 sees the clinical storage and distribution services move from Phoenixville, PA to Bethlehem, PA by December 2017. Phase 2, which will begin in December 2017 will include construction of new suites for manufacturing and primary and secondary packaging as well as the expansion of the formulation and analytical testing labs. Therefore, by December 2018, the entire Clinical business will be located at Bethlehem, PA. This co-location of services will allow us offer enhanced service levels and reduce project timelines, ultimately reducing overall time for our client product approvals. Our second major investment was in a new multiple-phase pharmaceutical manufacturing, packaging and distribution facility in Rhymney, Wales. In the future, Sharp will be able to offer manufacturing and analytical capabilities, adding automated bottling, blistering and serialisation as well as IRT services for clinical trial management. At 110,000 sq.ft., the scale of the facility will mean that Sharp will offer full service support for larger global clinical studies. Again, each of these services will be under one roof which means that our clients will enjoy improved client service and a reduction in project timelines. 34 UDG Healthcare plc Annual Report and Accounts 2017 1 Deloitte growth strategy report for Sharp, June 2017. Strategic Report Directors’ Report Financial Statements Improving Transforming Sharp has a continuous focus on improvement and client value At Sharp, continuous improvement and client experience are fundamental drivers of how we work every day. That pursuit of constant improvement and focus on client value – which is recognised by every function in our business – is what we call the Sharp Edge. “Continuous improvement means always questioning whether what we are doing, and how we are doing it, is as efficient and effective as it could be. We work hard to provide an excellent level of service for our clients and continuously review our processes and methodologies to ensure that they are delivering optimal client value.” Partnership and expertise transforms strategic client relationships for Sharp At Sharp, we believe in developing real partnerships with our clients. It means we are better positioned to fully understand their specific needs and methodologies and to optimise how they interface with every function within our organisation. As client services team leader for Biogen at Sharp US, Tonya Schmouder champions the values of expertise and partnership every day. “By establishing dedicated client advocates within Sharp, we can help gain deeper insights and establish clearer communications with our clients, which ultimately leads to a more positive partnership for both parties.” Amy Driesbach Associate Director, Project Management Tonya Schmouder XPReS team Project Management UDG Healthcare plc Annual Report and Accounts 2017 35 Strategic Report Operational Review/Aquilant We continue to invest in the facilities and people that position Aquilant for improvement in its service offering Aquilant at a glance What we offer: Sales and Marketing services including product launch, market development, creating clinical awareness, driving product adoption Product tender administration, liaison with procurement, maintenance of client catalogues Sales order processing, financial billing, cash collection, management of back orders and order fulfilment Republic of Ireland Netherlands United Kingdom 63636 36 UDG Healthcare plc UDG Healthcare plc Annual Report and Acc Annual Report and Accounts 2017 Aquilant Aquilant grew at an underlying level during 2017 and the onboarding of new agencies during the year was particularly effective. While ongoing currency fluctuations have challenged the division we have seen an improvement in the Orthopaedic and Endoscopy business units in the UK and in our Irish and Dutch businesses. Our capital investment in improving Quality and Health and Safety standards across the division leave us well placed to win a higher proportion of available business over the coming years. Sean Coyle Aquilant Managing Director Net revenue ($) 96.3m Strategic Report Directors’ Report Financial Statements About Aquilant Aquilant is a leading provider of services to the Med Tech and Life Sciences industries. It operates within the Republic of Ireland, the UK and the Netherlands to orchestrate appropriate solutions for clients, purchasers, clinicians and patients. Aquilant works with reputable manufacturers of products in a range of diverse therapeutic areas developing bespoke solutions which meet their needs in getting a product to market. Its services range from launching a new product and developing new markets, to creating clinical awareness for a product in the pre-launch and post-launch phase, to promoting and driving adoption of products and related services through the life cycle of the product. Aquilant’s primary focus is on introducing new and leading technologies which have a goal of enhancing patient outcomes. All of this comes while providing a cost effective, quality solution to our clients which is generally more attractive than setting up and operating an in-house sales and distribution network for their product. Aquilant also provides reimbursement advice and product pricing advice to clients and has a specialised tenders administration function for sourcing and submitting of sales tenders to procurement offices. We also maintain clients’ on-line catalogues, online multi-quotes and provide tender usage reporting as required. Other services offered include, sales order processing, financial billing and correspondence, cash collection and the management of back orders with suppliers through to fulfilment. Our vision is to be recognised as the most commercially innovative, patient and client focused market service organisation for the med-tech and scientific sectors – the partner of choice in sales, quality and distribution expertise. UDG Healthcare plc Annual Report and Accounts 2017 37 Strategic Report Operational Review (continued) Aquilant Performance Review Aquilant had a disappointing year from a financial perspective where the significant movement in sterling relative to both the euro and US dollar had a negative impact on the financial results as reported in US dollar terms. Despite recording 4% growth on an underlying basis, currency movements resulted in a 7% decline in reported profit year on year. During 2017 Aquilant continued to provide customised solutions for established brands and niche products and was involved in launching a number of new products for existing clients and new agencies. The 12 new agencies added in the previous year have been bedded in well and are showing decent sales growth with a strong business development pipeline. We added a further four agencies in 2017. The Outlook for Aquilant As we outlined in our outlook last year, we firmly believe that consolidation of the distributor base in Europe is inevitable as quality and regulatory requirements rise. We expect that Aquilant will play a part in that consolidation trend over time. -6% Net revenue $96.3m 132.1 114.1 113.5 102.4 96.3 Revenue Operating profit Operating margin % 2017 $’m 96.3 6.4 6.6% 2016 $’m 102.4 6.9 6.7% Actual Growth Underlying Growth 1 (6%) (7%) 2% 4% 1 Underlying growth adjusts for the impact of currency translation movements. There was no acquisition or disposal activity in 2016 or 2017. 2013 2014 2015 2016 2017 % of Group profit 5.0% Net operating margin % 6.6% Employees 266 38 UDG Healthcare plc Annual Report and Accounts 2017 Growing Aquilant embarks on value-added partnership with Plasma Surgical Plasma Surgical is a global leader in plasma physics, based in the US with distribution in France, Germany, Austria and Netherlands and, with limited success, direct-to-market representation offered in the UK. Their incoming CEO opted to exit this model by inviting Aquilant and other distributors to provide a better solution. Our approach was to understand the existing UK business and what their strategic ambitions were. Aquilant then positioned a long-term business plan to turn around their declining sales over the short term and showed how we would realise their strategic goals for them. Aquilant has since become their business partner with a long-term distribution agreement and has already achieved profitable sales ahead of target, developed in-house service provision as an additional revenue stream and established Key Opinion Leader Panel and Training Centres to enhance overall value-add, building on our growing partnership. Strategic Report Directors’ Report Financial Statements Transforming Early adoption of GS1 Standard Risk of non-compliance by our manufacturers and interruption in supply of medical devices negatively impacting service and revenue was turned into a strategic advantage by Aquilant as an ‘early adopter’ of the Department of Health’s NHS e-procurement strategy in the UK. The challenge was to adopt GS1/PEPPOL standards between 2016 and 2020 of Globally Unique Identification barcoding. This barcoding is to appear in every medical device we distribute for inventory management track and traceability, from its manufacture through to the end patient. Aquilant was faced with convincing its international suppliers to comply and leading a project to engage its suppliers, revise its price management and join a GS1 Global Data Synchronisation Network. This included IT system development on Electronic Data Integration (EDI) for automated ordering, and invoicing to PEPPOL standards and a marketing communication programme. Today, 90% of Aquilant’s clients are compliant (ahead of the 2020 deadline) and Aquilant is able to transact £3.2 million in sales revenue on the first six NHS hospital demonstrator sites. Longer term, adoption of the standard will improve patient safety, client satisfaction, reduce transaction costs and improve order accuracy and cash flow. Turning a risk into an opportunity that has helped set Aquilant apart in the market. UDG Healthcare plc Annual Report and Accounts 2017 39 Strategic Report Sustainability Building a sustainable organisation for the benefit of our clients, our people and our environment IN THIS SECTION: People Our People are crucial to the sustainable success of UDG Healthcare. Our values underpin how we care for and develop our colleagues to reach their full potential. Quality and Compliance Quality and compliance is at the core of what we do as a business. It is important that we provide the best quality service for our clients and their patients and that we demonstrate how compliant we are as a business. We set high standards and expect the same in return from all our stakeholders. Environment Community Involvement Economic Contribution We all have a responsibility to protect our environment. In UDG Healthcare we embrace this responsibility through policy and practice enabling us to carry out our business in a sustainable manner. We want to make a difference to the communities in which we operate. We continually encourage our employees to support their local communities through fundraising and/ or donating their time to worthy causes. We have significant responsibilities to our economic stakeholders in all the locations where we operate. These stakeholders benefit from our continued growth and similarly we rely on their support and commitment to achieve our long term goals. Read more on page 42 Read more on page 46 Read more on page 48 Read more on page 50 Read more on page 51 40 UDG Healthcare plc Annual Report and Accounts 2017 “ In UDG Healthcare we want to build long-term value by implementing our business strategy in a way that is ethical and responsible. We do that by living our values and by caring for our clients, our people, our community and our environment.” Brendan McAtamney Strategic Report Directors’ Report Financial Statements Overview We are committed to building an organisation where people are valued, our commitment to quality underpins our relationships with our clients and our community, and where our economic contribution is based on ethical foundations. We are a people based business and the success of our Group is dependent on attracting, retaining and developing our people. Even more importantly, we wish to provide purposeful work that will support our people in becoming valued contributors in helping to improve patients’ lives. We empower people to realise their full potential. At UDG Healthcare we aim to provide them with interesting work, structured development and opportunities to grow and progress through our diverse and dynamic organisation. We ensure at all times that they are safe in their roles and we recognise that their physical and mental wellbeing is an essential ingredient to enable them to reach their own goals and ambitions. UDG Healthcare plc Annual Report and Accounts 2017 41 Strategic Report Sustainability (continued) People 1 Developing our People Effective talent management is core to our ongoing success and in 2017 we continued to refine and develop our talent review processes and also implemented our Global Senior Executive Team Talent Forum, enabling senior executives to discuss and identify talent across all businesses. We have made a significant investment in the implementation of a global HR information system. This has provided an important platform for our talent management activities. Leadership development has taken a number of forms in 2017. The INSPIRE programme is our core Group leadership programme and in October 2017 we welcomed our 350th participant to this programme. INSPIRE was also nominated for the CIPD Excellence awards in 2017, worthy recognition for the success of the programme. The INSPIRE curriculum is being extended for 2017/2018 to continue our focus on talent development. Allegro’s academy based model will put Ashfield Healthcare Communications at the leading edge of career opportunities in the healthcare communications market and send a strong message to our clients about our capability to deliver volume and quality work on a sustained basis. Within our divisions we implemented our Global Management Programme, DRIVE, which is targeted at first-line managers. All line managers have been through the programme in the last year. Other initiatives to share learning have been created, including the implementation of a Global Learning Community, with representatives from all our businesses, who work together to help share knowledge and build best practice learning solutions. Attracting talent in more competitive markets is a challenge, but we continue to develop innovative mechanisms to ensure we have the skills to meet client demand. Ashfield Healthcare Communications have launched the ALLEGRO programme enabling the business to recruit and fast track medical writers, a highly critical resource for this business. 2 Living Our Values Our values continue to be fundamental to how we act with colleagues, clients and stakeholders. We strongly believe in these values and expect senior leaders to be role models both internally and externally. In 2017 our Senior Executive Team completed a 360 values based feedback assessment, to help create awareness of their own behaviours and this has now been cascaded to the broader Group Executive. Early in the year we were excited to launch the UDG Healthcare CEO Awards, designed to recognise individual and team excellence. The nominees will set an example for all employees, demonstrating how living our values drives business performance. UDG Healthcare headcount by location 9,176 All workers 615 4,980 3,581 Europe Americas Asia UDG Healthcare headcount by division 9,176 266 59 1,465 7,386 Ashfield Sharp Aquilant UDG Head Office 42 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements In September we launched our first global engagement survey. This survey gives our employees an opportunity to tell us what they like about the organisation and where we can make improvements for the future. We are committed to working with our employees on the feedback so that we can ensure that UDG Healthcare is a great place to work. 3 Diversity and Inclusion We respect the importance of diversity and the inclusion of all people in building an environment that is respectful of difference and enables our employees to reach their full potential. In June 2017 we launched our first global Diversity Equality and Inclusion Policy, which outlined our commitment and the expectations we have of all business units within the UDG Group to build a work environment that respects and embraces difference. All our business units promote, develop and attract people on an equal opportunities basis, regardless of age, sex, sexual orientation, religion, race or disability. As part of our commitment we have commenced diversity and inclusion awareness training for all employees, and our first global engagement survey will help us to better understand our employees perceptions and views to build appropriate action plans. We acknowledge that there are opportunities across some parts of our business to achieve more balanced gender representation. In 2018 we will continue with our commitments to increase gender representation in these areas. 4 Wellbeing of our Employees We recognise the importance of our employees’ wellbeing, both mental and physical and in 2017 we increased our focus on creating awareness in this area. A wide range of local initiatives were implemented across all geographies, aimed at improving the work organisation, the working environment and promoting the active participation of employees in health activities. This included a celebration of World Health Day where a variety of activities were held across the globe including heart health education, mindfulness discussions and yoga classes. Our global Environmental, Health and Safety group invests in the wellbeing of our employees by prioritising wellbeing as part of our health and safety programme and developing and communicating initiatives. We are optimistic that 2018 will see even more activities launched both globally and locally across the businesses. 5 Keeping Our People Safe At UDG Healthcare our people matter and we are determined to build a workplace where their health and safety is paramount. We strive to ensure that everyone who works for or with us benefits from our commitment to health and safety. UDG Healthcare gender composition Board gender composition Male Female 39% Male 73% 61% Female 27% We ensure our people’s safety while in the workplace, when travelling, or while carrying out activities for our clients, by regularly monitoring performance, identifying areas for improvement, proactively planning and continuously engaging with stakeholders. Our Health and Safety Policy was revised in 2017 and is applicable throughout the Group. The Policy focuses on three key areas: People • Employee wellbeing • Stakeholder engagement • Education, awareness and training • Control of contractors Place • Application of legislation and regulation • Global location requirements • New markets integration • Cultural developments Performance • Performance KPIs • Audit • Policies and procedures • Programmes of improvement Leadership gender composition Age distribution of employees Male Female 43% Under 22 2% 57% 23-40 41-51 52+ 47% 28% 23% UDG Healthcare plc Annual Report and Accounts 2017 43 Strategic Report Sustainability (continued) Incident Management The aim of our Incident Management Process is to minimise injury or illness, reduce losses and to ensure that there is a demonstrated commitment to the personal safety of employees, contractors, the public and our community. Furthermore, it allows our organisation to comply with legislation and to prioritise health and safety activities to prevent the recurrence of the same or similar incidents. The accuracy of incident reporting across our business has improved year on year reflecting employee training on the importance of incident management and regular communication to the business on the value of proactive incident management. 1. Total number of incidents The total number of incidents includes near miss reporting, minor injury, lost time accidents and fatalities. There have been zero fatalities to date. Total number of incidents 2017 2016 2015 2014 322 333 391 392 The data shows a decrease in the number of incidents year on year since 2014, demonstrating our continued success on incident reduction. 2. Lost Time Accidents (LTAs) Lost Time Accidents 2017 2016 2015 2014 47 38 76 68 Between 2016 and 2017 there was an increase in the number of lost time accidents recorded. We believe that this is principally linked to continued communication to the business on categorisation of incidents and how we record lost time. 3. Total days lost Total days lost 2017 2016 2015 2014 601 738 621 1,131 Since 2015 there has been a significant decrease in the number of days lost as a result of lost time accidents. We believe that this is principally linked to advances in our health and safety incident investigation practices allowing us to understand the root cause of incidents and prevent reoccurrences. 4. Incident rate Total Incident Rate by month in 2017 (Cases per 100 colleagues) 0.60 0.50 0.40 0.30 0.20 0.10 0.00 0.54 0.50 0.35 0.35 0.33 0.30 0.30 0.30 0.29 0.26 0.26 0.25 0.17 t c O v o N c e D n a J b e F r a M r p A y a M n u J l u J g u A p e S Our incident rate is a measurement against an industry average of 0.35. Positively we have seen a significant reduction in our incident rate since the beginning of 2017. During 2017 the top three causes of incident CAUSE SLIP/TRIP/FALL ROAD TRAFFIC ACCIDENT STRIKE AGAINST SOMETHING FIXED Environmental, Health and Safety (EHS) Audit EHS audit is one of the best ways to identify any deficiencies in EHS management and plan preventative actions. Our corporate audit programme has been in place since 2014 and has helped identify key areas of improvement across the organisation whilst also increasing awareness amongst key stakeholders. In 2017, we completed seven corporate EHS audits and three re-audits in the UK and US. Similar to last year, all sites scored higher in the health and safety element than the environmental element of the audit. There was a marked improvement in the sites that were re-audited. Completion of these audits supports our organisation and our people whilst demonstrating to our clients our commitment to the continuous improvement of EHS management. Travel Emergency Response Process UDG Healthcare is based in 24 countries with over 9,000 international employees. As a global organisation, our employees may sometimes be required to travel on company business. We recognise that adverse events can occur whilst an employee is travelling and to ensure our people are fully supported in such an event we have developed a Travel Emergency Response Process which ensures we are aware of employee’s locations when travelling on business. Since its introduction in 2016, we have had to activate this process several times in response to the increased frequency of terrorism attacks and natural disasters. To date we have not had any employees significantly impacted during these events. RoSPA Award Sharp Clinical Services UK, part of UDG Healthcare based in Crickhowell, has achieved the Gold award for occupational health and safety performance in the prestigious annual awards scheme run by the Royal Society for the Prevention of Accidents (RoSPA). 44 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Set out in the accompanying chart is a summary of the mileage driven within our largest corporate fleets. Total mileage (million) driven per fleet 15.0 Our membership with the network of employers for traffic safety (NETS) requires us to record our performance with them to benchmark our driver safety performance against similar industries. NETS is a collaborative group of companies dedicated to road safety. The organisation was founded by the National Highway Traffic Safety Administration (NHTSA) as an employer-led road safety organisation. 8.1 6.1 3.6 2.3 1.9 1.6 i n a p S d e fi h s A l l K U d e fi h s A y n a m r e G d e fi h s A l l i m u g e B d e fi h s A l 0.8 0.8 0.4 0.4 0.2 0.2 l S U d e fi h s A K U x x e m r a h P d n a l e r I l d e fi h s A l a g u t r o P d e fi h s A l l l i h t n o F t n a l i u q A s c i d r o N d e fi h s A l e k o t s g n i s a B t n a l i u q A d e N t n a l i u q A e y W - n o - s s o R t n a l i u q A The RoSPA Awards are one of the most prestigious in the world of occupational health and safety. They demonstrate an organisation’s commitment to maintaining an excellent health and safety record. Driver Safety Driving safely is one of the key areas of focus for UDG Healthcare. Our driver safety programme is designed to give our drivers proactive tools to prevent adverse driving incidents. Our driver safety policy was launched in 2016 and whilst signalling our collective commitment to road safety it has also formed the basis of our evolving driver safety programme. In 2017, we began capturing key performance indicators including collision numbers, miles travelled and collisions per million miles. PROMOTING ENVIRONMENTAL, HEALTH AND SAFETY IN OUR BUSINESS Reporting period Oct 2016 – Sep 2017. UDG Healthcare held its first Environmental Health and Safety (EHS) leaders gathering in October 2016. It was held during European Health and Safety Week which has become UDG Healthcare’s annual EHS week across all jurisdictions. The event, hosted by the Group Environmental, Health and Safety Lead, was held at our Ashfield site in Ashby De La Zouch, UK, involving over 20 attendees from across the globe, and focused on how EHS can add value to our organisation. Since the event, the attendees have split into five groups and been tasked with drafting an action plan for improvement covering the meetings, hot topics and key learnings, that can be applied and adopted across all divisions, some of which include: • Enhancing EHS culture • Wellness of our employees • EHS training for senior managers • Environmental initiatives • Teamworking amongst the EHS network The meeting included external and internal training and group activities and was a great example of cross-divisional collaboration that illustrates partnership and energy and will help improve the quality of EHS at UDG Healthcare. UDG Healthcare plc Annual Report and Accounts 2017 45 Strategic Report Sustainability (continued) Quality and Compliance Quality The UDG Healthcare Quality Policy has been re-launched to improve clarity and relevance to all of the business units. It aligns the diverse businesses under one scalable system and gives a common language for the Quality Management System (QMS). Six fundamental quality processes are the basis for the QMS and are focused on ensuring there is clarity for all employees in what they do, how they do it and how they are trained. Integral to the QMS is measurement of our performance and using that information to inform management, to improve and to change for the better when needed. The Quality Management System A clearly articulated, formal system of Documentation ensuring conformance with regulatory requirements. Development of a robust Training Process. Performance monitoring; a data based approach to measuring service or product delivery. Corrective action and preventative action (CAPA) system to build in Reliability and Improvement. A formal documented Change Management system. Regular Management Review of performance. Compliance Good compliance not only helps prevent unethical behaviour and violations of the law, but also adds value by improving operational efficiencies and avoiding reputational risk. While compliance is important to us, it can be challenging for a global business. Building on our compliance programme, our learning management system, ComplianceCentre, has been upgraded this year to provide a more sustainable infrastructure to our growing global business. It has more capability and allowed us to launch our revised Code of Conduct to all employees. We can also host and seek mandatory compliance with important Group policies relating to anti-modern slavery, anti-bribery and corruption, confidential reporting, etc. Our ComplianceCentre allows us audit compliance with key training programmes. The compliance audit programme was updated in 2017 and will continue to be developed further in 2018. 46 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Improving Quality Department applying Lean Principles Standard Operating Procedure (SOP) rationalisation and re-design at Ashfield Clinical & Commercial US. The Ashfield US Standard Operating Procedure (SOP) process needed improvement. Employees did not value it as often the content was unclear and too lengthy to retain. The project goal was to review and improve the Ashfield US SOP process with the aim of delivering the following: • Clear and streamlined SOP process • A SOP inventory in accordance with new definitions • A documented future state improved process • A training matrix for end of SOP process (input to training on requirements) • A playbook for future state process Identified prioritised opportunities • • Visible benefits to the business through a test run of selected Corporate SOPs In addition, throughout the project, the team were trained in lean methodologies and project management and subsequently applied these skills to the project. The result was a more streamlined process for creating, editing and approving SOPs. RESULTS: 8 pages 3 pages 22.5 hours 8.5 hours $900 per SOP $350 per SOP 30 days 21 days Before project Post project Before project Post project Before project Post project Before project Post project Average pages per SOP Hours taken to prepare and review Cost to prepare and review Time to train (Total training time) UDG Healthcare plc Annual Report and Accounts 2017 47 Strategic Report Sustainability (continued) Environment As a business, we recognise and welcome the greater responsibility that comes with the scope and scale of UDG Healthcare and therefore consider our environmental performance a key pillar of our organisational sustainability. We are committed to limiting the environmental impact of our operations by continuously monitoring our activities, reviewing environmental advances in technology and our responsiveness to environmental challenges. To date we have demonstrated our commitment to environmentally responsible operations by reducing our impact on the environment in multiple areas of our global business. The launch of our Environmental Sustainability policy and the completion of energy efficiency assessments in 2016 identified a requirement to gain a better understanding of our environmental footprint, its impact, and how it is changing. To address this, we have since completed a review of the environmental risk across our organisation. This review has enabled us to identify our main environmental impacts and prioritise our action plans. Energy and Emissions The CDP, formerly the Carbon Disclosure Project runs a global disclosure system that enables companies to measure and manage their environmental impacts. UDG Healthcare discloses emissions and environmental data annually to the CDP. CDP 2017 was the strongest performance for UDG Healthcare in over six years of reporting, with scoring improvements across the main categories of Disclosure, Awareness, Management and Leadership. We will work to make further improvements in CDP 2018, as we embed sustainability targets and objectives into the business. Key environmental impacts identified within UDG Healthcare Geographical chart of energy and emission tonnage of CO2(excluding car fleets) 17,232 High emission fleets Employee travel Water consumption Paper consumption Waste Environmental awareness Energy consumption S U Reporting period Jan – Dec 2016. 48 UDG Healthcare plc Annual Report and Accounts 2017 5,260 3,588 3,487 Reporting period Oct 2016 – Sep 2017. 2,494 1,951 1,765 1,637 K U y e k r u T i n a p S y n a m r e G d n a l e r I n e d e w S 229 a d a n a C 671 s d n a l r e h t e N i m u g e B l Carbon Footprint from Car Fleets This year we have improved the consistency of the methodology used to calculate our fleet CO2 emissions. We are now standardising our measurement of CO2 using the Department for Environment, Food & Rural Affairs (Defra) emission factor calculation to express our fleet carbon footprint for all businesses with the exception of the German business. In Germany our fleet comprises of lower emission vehicles hence they have a lower carbon footprint even though they travel more miles annually. Carbon footprint from car fleets in tonnes of CO2 2,400 1,815 1,478 1,063 701 583 488 i n a p S d e fi h s A l l K U d e fi h s A y n a m r e G d e fi h s A l l i m u g e B d e fi h s A l 228 228 l S U d e fi h s A K U x x e m r a h P d n a l e r I l d e fi h s A l a g u t r o P d e fi h s A l 126 l l i h t n o F t n a l i u q A 71 s c i d r o N t n a l i u q A e k o t s g n i s a B t n a l i u q A 50 49 d e N t n a l i u q A e y W - n o - s s o R t n a l i u q A Strategic Report Directors’ Report Financial Statements Transforming All Sharp Packaging US facilities now landfill free Earlier this year the Sharp US team in Conshohocken undertook a complete review of their waste removal practices in order to gain a greater understanding of their environmental impact. This uncovered significant opportunities for redirecting materials that had previously been sent to landfill, as well as continuing the highest standards of recycling for other materials such as cardboard, shrink-wrap, pallets and fibre drums. For all other materials at Conshohocken, Sharp now converts this waste to clean, renewable energy at a local energy-from- waste (EfW) facility. These facilities convert waste into clean, reliable and renewable sources of energy that produce electricity with less environmental impact than almost any other energy source. Energy produced at EfW facilities typically produces 90% less greenhouse gas than landfill and is classified as Green Renewable Energy, the same category as wind, hydro and solar energy sources. With the recent introduction of the EfW practice at Sharp in Conshohocken, we are delighted to report that all Sharp Packaging facilities in the US are now landfill free. These combined waste management changes have led to a significant positive environmental impact in 2017, which can be expressed as the following energy savings: 1. Waste removed from Sharp Steam turbine energy generated 5. Water vapour released The Process 2. Incineration in combustion unit 4. Air quality control testing 3. Multiple filtration systems applied 680 bath tubs filled from the 683 barrels of oil saved through EfW 34.7 average US homes powered annually with 376 MWh saved through EfW 1,875 mid-size cars, equating to 683 tons of waste diverted from landfill UDG Healthcare plc Annual Report and Accounts 2017 49 Strategic Report Sustainability (continued) There are approximately 55,000 people living with dementia in Ireland and this number is expected to treble in the next 35 years. Employee initiatives For the third consecutive year, UDG Healthcare continued its support of employee initiatives across the globe by making donations out of the UDG Healthcare CSR Fund to support our employees in their charitable endeavours. Employees submitted applications for support to the Fund as they themselves completed multiple activities including marathons, abseiling, coffee mornings, etc. UDG Healthcare also undertook to give more back to the community by encouraging employees to donate toys to the children’s toy appeal at Christmas, completing the ‘Shoebox Appeal’ in aid of children in Africa and Syria and by taking part in a food drive aiming to donate over 10,000 non-perishable food items to families in need. All initiatives are well received by employees who enjoy the opportunity to donate their time and energy to charitable causes. Ashfield Cares Since the launch in June 2016 the Ashfield Cares initiative has gone from strength to strength. Through time, skills and fundraising activities Ashfield Cares looks to support charitable and non-charitable causes in the areas of healthcare, education and community development. Ashfield Cares is led by local committees that organise local activities for the charities of their choice. We all come together for three global campaigns throughout the year. i) Spirit of Giving In true Ashfield Way this saw all of us come together over two weeks in December 2016 to strive towards a common mission of donating 10,000 food items across the globe. We flew past our target of 10,000 items and reached an incredible 17,051. Hunger touches every community, every nation, and every region of the world. The contributions that were made to the local causes will have helped a number of families and individuals. Community Involvement As part of our commitment to living our values, UDG Healthcare actively encourages employees to support their local communities through fundraising and/or donating their time to worthy causes. Sometimes the activity is led by the organisation but on many occasions it is our employees who instigate projects and initiatives. Since 2012, UDG Healthcare has supported various charities across the globe, donating in excess of €400,000. Our main corporate fundraising event is our Annual Golf Day which is held in September each year. In Ireland, the three charities of choice for 2017, were LauraLynn Foundation, Pieta House and The Alzheimer’s Society of Ireland. Charities of Choice LauraLynn is Ireland’s only Children’s Hospice. The charity cares for children with life-limiting conditions, and their families, through their hospice in Dublin and through their homecare team. LauraLynn focuses on enhancing quality of life, physical comfort and wellbeing, as well as the emotional, social and spiritual aspects of care. Pieta House was established in 2006 to provide freely accessible, professional services to anyone in suicidal crisis or engaging in self-harm. Since 2016, the charity also provides suicide bereavement counselling. Pieta House has eight centres across Ireland and has seen over 30,000 clients to date. The Alzheimer Society of Ireland works across the country in local communities providing dementia specific services and support. The charity advocates for the rights and needs of all people living with dementia and their carers. 50 UDG Healthcare plc Annual Report and Accounts 2017 Employees from Ashfield Ireland with their collection during the Spirit of Giving campaign. ii) Impact on Society Week On 12–16 June, employees from around the business volunteered their time, got out into their local community and lent a helping hand to a whole range of different causes across the globe. At Ashfield, our impact on society forms a large part of the Ashfield Way. We can have a positive influence on our community in many different ways, but this year our focus was on Ashfield Cares and giving something back to the many societies we operate in. Ashfield volunteers sprucing up the entrance of their local hospital during Impact on Society Week. iii) Blood Awareness During our Impact on Society Week, we also marked World Blood Donor Day on 14 June with the launch of our ongoing awareness campaign to the importance of donating blood. Blood donors showing their support on World Blood Donor day from Ashfield Ireland. Strategic Report Directors’ Report Financial Statements In the financial year to 30 September 2017, UDG Healthcare added economic value of $640.4 million (being revenue of $1,219.8 million less $579.4 million of input costs paid to suppliers). Remuneration to employees of $511.1 million, corporate taxes of $26.4 million, net interest paid to lenders of $10.4 million and dividends paid to shareholders of $31.3 million resulted in 90% of total value generated being redistributed to our economic community. Total income $1,219.8m Dividend to shareholders $31.3m Adjusted profit after tax $92.5m Corporate taxes $26.4m Interest $10.4m Employee costs $511.1m Cost of goods and services $579.4m Value added $640.4m Blood is an important resource, both for planned treatments and urgent interventions. At Ashfield, we would like to do what we can to help improve lives and as blood is something that unites us all, we are proud to be running an ongoing awareness campaign to encourage employees to give and give often. Economic Contribution An integral part of the Group’s sustainability is the economic value generated from our operations. We are cognisant that our continued growth and economic performance are crucial to our many stakeholders and to each of the communities in which we operate. Sharp Community Support In 2017, Sharp proudly supported our employees in raising $44,000 in charitable donations for eight different community organisations. At Sharp we believe in building strong, rewarding relationships with the communities we work in and serve, by getting involved with local fundraising, projects and organisations. We support many local and national charities that we believe in, directly through financial donations as well as by supporting our employees as they give their time and skills. At each of our sites, we encourage our teams to come up with creative new ways of contributing and working with their community. Sharp has been a long-time supporter of the March of the Dimes Foundation. The Foundation focuses on research that addresses problems such as premature births and polio in children. Other charities Sharp supports include: • United Way; • American Cancer Society; • MacMillan Cancer Support; and • American Red Cross – hurricane relief. Aims for the Future Our aim is to continue to align our sustainability programme to the relevant UN Sustainable Development Goals. We consider that the following seven such goals are the most relevant to our activities within UDG Healthcare: UDG Healthcare plc Annual Report and Accounts 2017 51 Strategic Report Finance Review 2017 has been another strong year for UDG Healthcare with revenue from continuing operations increasing by 13% to $1,219.8m. The combination of good underlying growth and acquisition activity generated 23% constant currency EPS growth. Net debt at the end of the year was $53.3 million. Earnings per share ($) 37.12c +17% (23% constant currency growth) Dividend per share ($) 13.30c +7% 52 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements “ 2017 was another year of strong growth with adjusted earnings per share increasing by 17% (23% on a constant currency basis). All our divisions delivered good underlying growth, supplemented by the benefit of acquisitions.” Alan Ralph Chief Financial Officer Net operating margin 12.6% 12.6% 12.6% 12.2% 10.4% 8.5% 2013 2014 2015 2016 2017 Revenue Revenue of $1,219.8 million for the year was 13% ahead of 2016. Underlying revenue growth was 10% ahead, excluding the impact of foreign exchange and acquisitions. Ashfield increased underlying revenue by 14% while Sharp and Aquilant both reported revenue 2% ahead of 2016 excluding the impact of foreign exchange and acquisitions. Adjusted Operating Profit Adjusted operating profit from continuing operations of $129.3 million is 12% ahead (17% on a constant currency basis) of 2016. Adjusted Net Operating Margin The adjusted net operating margin for the year of 12.6% was the same as 2016. The positive margin effect of acquisitions was offset by the impact of additional Future Fit operating costs and relatively higher revenue growth in the lower margin Ashfield Commercial & Clinical business. UDG Healthcare plc Annual Report and Accounts 2017 53 Strategic Report Finance Review (continued) Overview of Results The Group delivered an adjusted profit before tax of $118.9 million in 2017, the details of which are disclosed in the table below. This is a 17% increase on 2016 (23% increase on a constant currency basis). Continuing operations Revenue Net revenue 2 Operating profit Profit before tax Diluted earnings per share (EPS) (cent) Discontinued operations 3 Diluted earnings per share (cent) IFRS based $’m Adjustments 1 $’m Adjusted $’m Increase/ (decrease) on 2016 % Constant currency increase/ (decrease) on 2016 % 1,219.8 1,028.5 103.2 92.8 28.83 – – 26.1 26.1 8.29 1,219.8 1,028.5 129.3 118.9 37.12 13 12 12 17 17 17 16 17 23 23 – – – (100) (100) Total diluted earnings per share (cent) 28.83 8.29 37.12 Dividend per share (cent) 13.30 – 13.30 (5) 7 (1) 7 1 Adjusted operating profit, profit before tax and diluted EPS are stated before the amortisation of acquired intangible assets ($22.1 million, pre-tax) and transaction costs ($4.0 million, pre-tax). 2 Net revenue represents gross revenue adjusted for revenue associated with pass-through costs, for which the Group does not earn a margin. 3 The Group has classified its joint venture arrangement with Magir Limited as a discontinued operation and an asset held for sale. The discontinued operations in 2016 also included United Drug Supply Chain Services, United Drug Sangers, TCP Group and MASTA. The Group’s disposal of these operations was completed on 1 April 2016. Adjusted Profit Before Tax Net interest costs for the year of $10.4 million are 26% lower than 2016, which is as a result of the repayment of the RCF bank facility in April 2016 and increased interest income following the disposal of the United Drug Supply Chain businesses in 2016. This delivered a profit before tax from operations of $118.9 million which is 17% ahead of 2016 (23% on a constant currency basis). Taxation The effective taxation rate has decreased from 22.7% in 2016 to 22.2% in 2017. Adjusted Diluted Earnings per Share Earnings per share (EPS) from continuing operations is 17% ahead (23% on a constant currency basis) of 2016 at 37.12 $ cent. Underlying EPS increased by 13% excluding acquisitions completed during the year and unfavourable currency movements. US Dollar Reporting In August 2016, the Group announced that it would change its reporting currency to US dollar for the 2017 financial year as the majority of Group profits are now derived from the US. This Annual Report is presented in US dollar and further details on the change in presentational currency are included in Note 32. Discontinued Operations The Group has classified its joint venture arrangement with Magir Limited as a discontinued operation and an asset held for sale. Discontinued operations in the prior year also included United Drug Supply Chain Services, United Drug Sangers, TCP Group and MASTA, which were disposed of on 1 April 2016. The Group operates in 24 countries, with its primary foreign exchange exposure being the translation of local income statements and balance sheets into US dollar for Group reporting purposes. The primary non-dollar currencies are sterling and euro. The re-translation of overseas profits to US dollar has decreased constant currency EPS growth of 23% to a reported EPS growth rate of 17%, which is primarily due to the weakness in sterling in the first nine months of 2017 versus the same period in 2016. The average 2017 exchange rates were $1: €0.9047 and $1: £0.7891 (2016: $1: €0.9002 and $1: £0.7045). Cash Flow The Group moved from a net cash position of $143.2 million in 2016 to a net debt position of $53.3 million in 2017. This was primarily as a result of the 2017 acquisition activity. The net cash inflow from operating activities was $107.8 million. $51.4 million was invested in property, plant and equipment and computer software. This includes IT investment to enable our businesses to grow in an efficient manner and investment in the new facility in Sharp UK. $198.4 million was paid in initial consideration for the acquisition of STEM Healthcare, the Bethlehem packaging facility, Vynamic, Cambridge BioMarketing, Sellxpert and MicroMass while the Group also paid 54 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements 2017 Adjusted profit before tax ($’m) – Continuing Group Continuing Group PBT +17% (+23% constant currency) 101.7 (5.2) 10.2 12.2 118.9 2016 Foreign Exchange Acquisition Underlying 2017 $14.3 million in deferred contingent consideration associated with current and prior year acquisitions. Dividend payments of $31.3 million relating to the final 2016 dividend and the 2017 interim dividend were made during the year. Balance Sheet Net debt at the end of the year was $53.3 million ($187.5 million cash and $240.8 million debt). The net (debt)/cash to annualised EBITDA ratio is 0.32 times debt (2016: 1.05 times cash) and net interest is covered 16.3 times (2016: 10.6 times) by annualised EBITDA. Financial covenants in our principal debt facilities are based on net debt to EBITDA being less than 3.5 times and EBITDA interest cover being greater than three times. The Group has retained its long-term private placement debt as it expects to make acquisitions and other capital investments in the coming years. The Group made a scheduled repayment of $63.3 million in September 2017 of maturing private placement notes. At 30 September 2017 the Group also had $259.7 million of undrawn overdraft and loan facilities. Return on Capital Employed The ROCE for continuing operations was 12.8%, down from 13.6% at the end of 2016. Details on how this was calculated are on page 179. ROCE was 13.2% excluding the impact of acquisitions, most of which were acquired in the final quarter. ROCE has been impacted by capital expenditure investment in 2017. Dividends The directors are proposing a final dividend of 9.72 $ cent per share representing an increase of 7.5% on the 2016 final dividend of 9.04 $ cent per share. This represents 7% growth in the total dividend for the year to 13.30 $ cent per share. This continues the Group’s 30 year history of consistently increasing dividends. Subject to shareholder approval at the Company’s Annual General Meeting, the proposed final dividend of 9.72 $ cent per share will be paid on 5 February 2018 to ordinary shareholders on the Company’s register at 5.00 p.m. on 12 January 2018. Investor Relations UDG Healthcare’s executive management team spend a significant amount of time meeting with shareholders and the international financial community. We have invested in dedicated investor relations resources and are focused on increasing the awareness of the Group among the investor and analyst community. We communicate regularly with our shareholders during the year, specifically following the release of our interim and preliminary results, and at the time of major developments including M&A transactions. During 2017, the executive management team attended and presented at 11 investor conferences, including four in the US, and conducted over 230 institutional investor one-on-one meetings. In addition, our Chairman, Peter Gray, held a number of governance meetings with existing shareholders during the year, in both the UK and the US. The number of independent equity analysts covering the Group increased to ten during the year reflecting the growing interest in UDG Healthcare from the equity markets. The Board considers it important to understand the views of shareholders and receive regular updates on investor perceptions. Our website www.udghealthcare.com is the primary method of communication for the majority of our shareholders. We publish our annual report, preliminary results and other public announcements on our website. In addition, details of our conference calls and presentations are available through our website. Our investor relations department provides a point of contact for shareholders and full contact details are set out in the investor relations section of our website. Shareholders can also submit an information request through the shareholder services section of our website. Alan Ralph Chief Financial Officer UDG Healthcare plc Annual Report and Accounts 2017 55 Directors’ Report Board of Directors y h p a r g o B i e c i f f o f o m r e T t n e d n e p e d n I l a n r e t x E PETER GRAY Chairman (63) BRENDAN McATAMNEY ALAN RALPH Chief Executive Officer (55) Chief Financial Officer (48) CHRIS CORBIN Chairman of Ashfield (62) LINDA WILDING Non-Executive Director (58) Peter Gray is Chairman and non-executive director of UDG Healthcare. Peter formerly held senior executive positions in a number of Irish public companies, the most recent being that of Vice Chairman and Chief Executive of ICON plc, the Irish based multinational pharmaceutical development services company. Brendan McAtamney was appointed Group Chief Executive Officer on 2 February 2016, having previously served as the Group’s Chief Operating Officer since 1 September 2013. Before joining UDG Healthcare, Brendan held various senior management positions with Abbott, latterly as Vice President Commercial and Corporate Officer within the Established Pharmaceuticals division. Alan Ralph joined UDG Healthcare in 1999 and was appointed Chief Financial Officer on 1 June 2013. Alan previously had responsibility for the Supply Chain Services division which was sold in 2016. Alan also held various roles throughout the Group including Managing Director of the Pharma Wholesale division and Group Financial Controller. Prior to working with the Group, Alan worked with Banta Corporation and PriceWaterhouseCoopers. Chris Corbin is executive Chairman of the Ashfield division, having previously served as Managing Director of Ashfield. Chris founded Ashfield Healthcare Limited and previously held sales management positions with Parke Davis, Fisons, Astra and May & Baker. Chris was formerly Patron for SETPOINT Leicestershire, Chairman of Leicestershire Business Awards and a member of Derbyshire Magistrates Bench. Linda Wilding’s career includes 12 years at Mercury Asset Management where she held the position of Managing Director in the Private Equity division. Prior to this, Linda qualified as a chartered accountant while working with Ernst & Young. Peter was appointed Chairman of the Board on 7 February 2012 having served as a non- executive director since 28 September 2004. Brendan was appointed to the Board of UDG Healthcare as an executive director on 16 December 2013. Alan was appointed to the Board of UDG Healthcare as an executive director on 19 June 2008. Chris was appointed to the Board of UDG Healthcare as an executive director on 20 June 2003. Linda was appointed to the Board of UDG Healthcare as a non-executive director on 16 December 2013. Not applicable No No No Yes s t n e m t n o p p a i Peter is currently a non- executive director of Jazz Pharmaceuticals plc, chairman of one other private company and one not-for-profit organisation. Not applicable Not applicable Not applicable Linda is currently a non-executive director of Touchstone Innovations plc, Electra Private Equity plc and one other private company. (cid:27) N (cid:27) e e t t i m m o C i p h s r e b m e m 56 UDG Healthcare plc Annual Report and Accounts 2017 Committee Membership Key (cid:27) (cid:27) (cid:27) Audit Committee Nominations & Governance Committee Risk, Investment & Financing Committee (cid:27) Remuneration Committee Indicates Committee Chair Strategic Report Directors’ Report Financial Statements MYLES LEE Non-Executive Director (64) GERARD VAN ODIJK Non-Executive Director (59) LISA RICCIARDI Non-Executive Director (57) PHILIP TOOMEY Non-Executive Director (64) CHRIS BRINSMEAD CBE Senior Independent Non-Executive Director (58) NANCY MILLER-RICH Non-Executive Director (58) Myles was Group Chief Executive of CRH plc, a FTSE 100 and Fortune 500 company, prior to retiring in December 2013. With more than 30 years’ experience at senior financial and managerial level, Myles has extensive global experience in management, M&A and finance. He is a qualified civil engineer and a Fellow of the Institute of Chartered Accountants in Ireland. Gerard van Odijk has over 25 years’ experience in the European healthcare industry and was formerly President and Chief Executive Officer of Teva Pharmaceuticals Europe. Prior to this, Gerard held various senior management positions with GlaxoSmithKline, latterly holding the position of Senior Vice President and Area Director Northern Europe. Gerard also holds a medical degree from the University of Utrecht. Lisa Ricciardi was recently appointed Chief Operating Officer of ContraFect Corporation, a NASDAQ company. Lisa was formerly Senior Vice President of Foundation Medicine, Inc. and prior to this was Senior Vice President of US and International Business Development at Medco Health Solutions. Lisa also held multiple senior roles in Pfizer, first in operations then leading business development for over a decade. Philip Toomey was appointed a non- executive director of UDG Healthcare on 27 February 2008 and held the position of Senior Independent non- executive Director from 14 June 2013 until 30 June 2017. Philip was formerly Global Chief Operating Officer for the financial services industry practice of Accenture. Philip has wide ranging international consulting experience and was a member of the Accenture Global Leadership Council. Chris Brinsmead CBE was formerly Chairman of AstraZeneca Pharmaceuticals UK, President of AstraZeneca UK and Ireland and President of the Association of the British Pharmaceutical Industry (ABPI). Chris succeeded Philip Toomey as Senior Independent non-executive Director on 1 July 2017. Nancy Miller-Rich was formerly Senior Vice- President, Business Development & Licensing, Strategy and Commercial Support for Global Human Health at MSD, known as Merck in the US and Canada until her retirement in September 2017. With more than 35 years’ experience in the healthcare industry, Nancy’s background includes roles in sales, marketing, and business development for MSD, Schering-Plough, Sandoz (now Novartis), and Sterling Drug. Myles was appointed to the Board of UDG Healthcare as a non- executive director on 1 April 2017. Gerard was appointed to the Board of UDG Healthcare as a non- executive director on 16 December 2013. Gerard will retire from the Board at the 2018 AGM. Lisa was appointed to the Board of UDG Healthcare as a non- executive director on 14 June 2013. Philip was appointed to the Board of UDG Healthcare as a non- executive director on 27 February 2008. Chris was appointed to the Board of UDG Healthcare as a non- executive director on 12 April 2010. Nancy was appointed to the Board of UDG Healthcare as a non- executive director on 20 June 2016. Yes Yes Yes Yes Yes Yes Myles is currently a non-executive director of both Ingersoll Rand Inc., and Babcock International Group plc. Gerard is currently Chairman of Bavarian Nordic A/S and Chairman of HTL Strefa. Lisa is currently an executive director of ContraFect Corporation. Philip is currently a non-executive director and also chairman-elect of Kerry Group plc. Nancy is an adviser with the Gerson Lehrman Group. Chris is currently a non-executive director of the Wesleyan Assurance Society and Datapharm, and is a member of council at Imperial College London and the Chairman of two other private companies. A (cid:27) (cid:27) (cid:27) (cid:27) (cid:27) (cid:27) R (cid:27) (cid:27) (cid:27) UDG Healthcare plc Annual Report and Accounts 2017 57 Directors’ Report Chairman’s Introduction to Corporate Governance UDG Healthcare continues to comply with all aspects of governance in pursing its strategic priorities and growth ambitions. Peter Gray Chairman The essence of good governance is a state-of-mind, not a set of rules. We strive to ensure that we focus on the important issues for the business and its stakeholders, using good sense, transparency, openness, and honesty. Peter Gray Chairman Dear Shareholder, I am pleased to report that for the year ended 30 September 2017, UDG Healthcare is fully compliant with the requirements of the UK Corporate Governance Code. Details of our work during the year are set out in the following pages. The Board conducted a self-evaluation during 2017, including a review of how well we had responded to the recommendations of our external independent review last year. The assessment was positive, noted that we had made good progress, but also identified some further areas for improvement, including recommendations for some changes to the way we conduct our annual strategy session. We engaged an external independent consultant, Independent Audit, to conduct a review of the Remuneration Committee, and some good recommendations came from that exercise, including a suggestion that we amend the terms of reference of the Committee to make clearer whether it decides remuneration, or merely makes recommendations to the Board. While we want Committees to have delegated authority to act, we are also conscious of the high- profile that remuneration issues attract, and want to ensure that the Board is fully aligned with the decisions taken. Diversity and succession are important considerations for the Board, exercised through the Nominations and Governance Committee. We currently have 11 members (which will reduce to ten when Gerard van Odijk stands down at the AGM in February), comprising three executives, myself and seven non-executives, of whom three are female. Four are resident in Ireland (two executives and two non-executives), four are resident in the UK, two are resident in the US and one is resident in mainland Europe. Eight have pharmaceutical company and/or pharma services executive experience, while three come from other industries. In my opinion, we have an excellent mix of skills and styles which ensures good debate and well considered decisions. Philip Toomey will have served on the Board for almost ten years by the time of our next AGM. The Board has determined that Philip remains independent; his lack of close association with management or other directors, coupled with his clear willingness to challenge at Board and Committee meetings makes this manifest. With the pending departure of Gerard van Odijk, the Board has requested Philip to serve one further year, and assist in the selection and induction of at least one additional non-executive director. 58 UDG Healthcare plc Annual Report and Accounts 2017 Corporate Governance UDG Healthcare Governance Framework CHAIRMAN – PETER GRAY BOARD OF DIRECTORS Audit Committee Chair Myles Lee Committee Report on pages 66 to 69 Remuneration Committee Chair Linda Wilding Committee Report on pages 70 to 87 Nominations & Governance Committee Chair Peter Gray Risk, Investment & Financing Committee Chair Chris Brinsmead Committee Report on pages 88 and 89 Committee Report on pages 90 and 91 Strategic Report Directors’ Report Financial Statements CHIEF EXECUTIVE – BRENDAN MCATAMNEY Senior Executive Team Risk & Viability sub-Committee Quality & Compliance sub-Committee Compliance with the UK Corporate Governance Code The 2016 UK Corporate Governance Code (the ‘Code’) applies to companies with a listing on the London Stock Exchange and sets out key principles and specific provisions which establish standards of good governance practice in relation to leadership, effectiveness, accountability, remuneration and relations with shareholders. Copies of the Code can be found on the Financial Reporting Council’s website (www.frc.org.uk). The Board considers that UDG Healthcare has continued to comply with the provisions set out in the Code throughout the year to 30 September 2017. This Corporate Governance Report sets out details of how the Company has applied the key principles of the Code. Leadership Board The Board, led by the Chairman, sets the Group’s strategic direction and is responsible to UDG Healthcare’s shareholders for the leadership, oversight and long-term success of the Group. The Board also has ultimate responsibility for corporate governance, which it discharges either directly, or through its Committees and structures as further described in this report. The Board has, in particular, reserved certain items for its review including the approval of: • Group strategic plans; • Financial Statements and budgets; • significant acquisitions and disposals; significant capital expenditure; • • dividends; and • Board appointments. The roles of Chairman and Chief Executive are separate with a clear division of responsibility between them. The Chairman is responsible for the leadership and governance of the Board as a whole, and the Chief Executive for the management of the Group and the successful implementation of Board strategy. The Board has delegated some of its responsibilities to Board Committees, details of which are set out below. Board Committees The Board has established four Committees to assist in the execution of its responsibilities. These Committees are the Audit Committee (chaired by Myles Lee), the Remuneration Committee (chaired by Linda Wilding), the Nominations & Governance Committee (chaired by Peter Gray) and the Risk, Investment & Financing Committee (chaired by Chris Brinsmead). In addition, a Quality Compliance sub-Committee has been established, comprising mainly of executive directors, the Chairman and members of the Senior Executive Team, reflecting the importance placed on quality and compliance by the Group. UDG Healthcare plc Annual Report and Accounts 2017 59 Directors’ Report Corporate Governance (continued) Each Board Committee has specific terms of reference under which authority is delegated to it by the Board. These terms of reference are reviewed annually and are available on the Group’s website. The Chair of each Committee reports to the Board regularly on its activities, attends the AGM and is available to answer questions from shareholders. Details of activities of each of the Committees throughout the year are set out in pages 66 to 91. The current membership of each Committee, details of attendance and each member’s tenure are set out in each individual Committee report. Meetings The Board met nine times during the year. Details of directors’ attendance at these meetings are set out below. In the event that a director is unavailable to attend a Board meeting, he or she can communicate their views on any items to be raised at the meeting through the Chairman. Number of meetings held during the year when the director was a member Number of meetings attended Chris Brinsmead Chris Corbin (i) Peter Gray Myles Lee (joined the Board on 1 April 2017) Brendan McAtamney Nancy Miller-Rich Gerard van Odijk (ii) Alan Ralph Lisa Ricciardi (iii) Philip Toomey Linda Wilding 9 9 9 5 9 9 9 9 9 9 9 (i) Chris Corbin could not attend these meetings due to personal reasons. (ii) Gerard van Odijk was travelling on 1 August 2017 and, due to technical difficulties, was unable to join the Board meeting scheduled for that afternoon by teleconference. Input was provided to the Chairman after the meeting. (iii) Lisa Ricciardi could not attend a meeting convened at short notice due to prior commitments. Input provided in advance and communicated through the Chairman. Senior Independent Non-Executive Director Chris Brinsmead was appointed Senior Independent non-executive Director (SID) on 1 July 2017, succeeding Philip Toomey, who had held the role since 14 June 2013. The SID’s role is to: • provide a sounding board for the Chairman; • conduct an annual review of the performance of the Chairman; • make himself available to shareholders who have concerns that cannot be addressed through the Chairman, Chief Executive or Chief Financial Officer; and • be available to act as an intermediary for directors, if necessary. Non-Executive Directors The role of the non-executive directors is to: • constructively challenge and debate • management proposals; bring external perspectives and insight to the deliberations of the Board and its Committees; • examine and review management performance in meeting agreed objectives and targets; • assess risk and the integrity of financial information and controls; • determine the appropriate levels of remuneration of executive directors and ensure appropriate succession plans are in place; and input their knowledge and experience in respect of any challenges facing the Group, and in particular, to the development of strategy and strategic plans. • Chairman Peter Gray has served as Chairman of the Board since 7 February 2012. The Chairman leads the Board, ensuring its effectiveness by: • providing a sounding board for the • Chief Executive; setting the agenda, style and tone of Board meetings; • promoting a culture of openness and debate ensuring constructive relations between executive and non-executive directors; • demonstrating ethical leadership and promoting the highest standards of integrity throughout the Group; • ensuring that directors receive accurate, relevant, timely and clear information; • ensuring the effective operation, leadership and governance of the Board; and • ensuring effective communication with shareholders. 60 UDG Healthcare plc Annual Report and Accounts 2017 Effectiveness Board Composition The Board is currently comprised of 11 directors, three executive directors and eight non-executive directors. Biographical details are set out on pages 56 and 57. The Board is satisfied that each director has the necessary time to devote to the effective discharge of their responsibilities and that, between them, the directors have a blend of skills, experience, knowledge and independence suited to the Group’s needs and its continuing development and long-term viability. As previously disclosed, Gerard van Odijk will step down from the Board at the conclusion of the Group’s AGM on 30 January 2018. Induction and Development Non-executive directors are engaged under the terms of a Letter of Appointment, a copy of which is available on request from the Company Secretary. On appointment, directors receive a full, formal induction and are given briefing materials tailored to their individual requirements, in each case, to facilitate their understanding of the Group and its operations. New directors meet with Board members and the Senior Executive Team as part of the induction process. Visits to each of the Group’s main locations are scheduled to provide the director with an Company Secretary Damien Moynagh has served as Company Secretary since 21 September 2016. The Company Secretary assists the Chairman in ensuring the effective operation of the Board, is a member of the Group’s Senior Executive Team and has the following responsibilities: to ensure good information flows • between the Board and its Committees, senior management and non-executive directors; to ensure that Board procedures are followed; to facilitate director induction and assist with professional development; and to advise the Board on corporate governance obligations and developments in best practice. • • • Strategic Report Directors’ Report Financial Statements opportunity to meet divisional management and to get further insight into the businesses. Non-executive directors also receive additional training and presentations from across the businesses to update their knowledge and develop their understanding of the Group. Myles Lee was appointed to the Board on 1 April 2017, bringing extensive global experience in management, M&A and finance to the Board. Details of the process leading to his appointment are summarised in the Nominations & Governance Committee Report on pages 88 and 89. Independence The Board has determined that at least half the Board, excluding the Chairman, is comprised of independent non-executive directors. All of the non-executive directors are considered to be independent. Succession Planning and Diversity As noted in the Chairman’s Introduction to Corporate Governance, the Board believes that diversity is an essential foundation for building long-term sustainability in business and introduces different perspectives into Board debate. This philosophy forms an important element of our succession planning when considering new appointments to the Board. Whilst it is the Group’s policy to ensure the best candidate for the position is selected, the Board will continue to ensure diversity is taken into account when considering any new appointments to the Board. • Board Evaluation Following the engagement of Independent Audit Board Review (‘Independent Audit’) to facilitate an external Board evaluation last year, it was deemed appropriate to conduct. an internally-facilitated evaluation this year. During August 2017, a questionnaire was circulated to the directors on the following aspects of Board effectiveness: • Board responsibilities and oversight; • Board composition and meeting dynamics; • Board information, including improvements during the year; • Board support, administration and logistics; • Board Committees; • the Board’s relationship with management; and the Board’s satisfaction with the progress made in responding to the recommendations of the previous year’s evaluation. Chief Executive Brendan McAtamney was appointed Chief Executive on 2 February 2016. In addition to maintaining a close working relationship with the Chairman, shareholders, potential shareholders and major external bodies to promote the culture and values of the Group, the Chief Executive is responsible for and accountable to the Board for: • • • • the management and operation of the Group; the development of strategic proposals and annual plans for recommendation to the Board; the resourcing of the Group to achieve its strategic goals, including development of the required organisational structure, process and systems; and the implementation of the Group’s strategy and plans as agreed by the Board through the Senior Executive Team. The output from this review was presented to the Board at its September meeting and it indicated that, consistent with Independent Audit’s findings last year, the Board and Committees continue to operate effectively. In addition to the strengths previously identified (e.g., that the Board was made up of enthusiastic and committed directors who were overall a motivated and successful team), the directors noted that opportunities for improvement suggested by Independent Audit last year had been acted upon and changes introduced. The agreed action items out of the 2017 review are summarised below: • Group strategy days – that the time should be wholly devoted to future potentials, and background scene-setting be handled solely in the briefing materials; Increasing governance – that the Group take steps to provide more training to the directors on certain identified areas of interest given increased levels of governance regulation; and • Communication – that the Group • continue to regularly review means of communication with the Board to ensure that these remain up-to-date, appropriate and effective. UDG Healthcare plc Annual Report and Accounts 2017 61 A significant majority of shareholders accepted our explanations and voted in favour, some changing their already cast vote. Some shareholders, while sympathetic, were mandated by their policy to follow the proxy adviser’s and thus had to vote against, and a small number were not persuaded. Since the AGM, the Chairman has met with major shareholders face-to-face to discuss governance in general including remuneration, and the feedback from all shareholder interactions will be factored into future decision making. The Group again presents the Directors’ Remuneration Report for FY2017 in accordance with the requirements of the UK Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘Regulations’). Details of directors’ remuneration and share ownership, as required by the Regulations, are set out in the Directors’ Remuneration Report on pages 70 to 87. Directors’ Report Corporate Governance (continued) Remuneration Consistent with past practice, the Board has adopted remuneration policies that are considered appropriate to promote the long-term success and viability of the Group whilst ensuring that the performance related elements are both stretching and rigorously applied. The current Directors’ Remuneration Policy Report (Policy) was proposed and recommended by the Board, and subsequently approved by shareholders earlier this year at the 2017 AGM. Prior to our 2017 AGM, while Glass Lewis recommended that shareholders vote in favour of our Annual Remuneration Report, ISS recommended a vote against and other proxy advisers abstained. The primary reasons put forward for the vote against were the 8% increase in salary awarded to the CEO within a year of his appointment, at which time he had been granted a salary comparable to his predecessor, and the increase in his LTIP award to 150% of salary without an increase in the stretch of the targets. We consulted extensively with shareholders prior to the vote and explained the rationale: there had only been a net 1% increase in the CEO’s salary in the previous eight years, while there had been a transformation of the Company during that time in terms of profitability, market capitalisation, employee numbers, geographic spread, and complexity. In terms of the LTIP award, we considered that the level of LTIP awarded was appropriate for a Company of our size and complexity and that the targets set were appropriately stretching. Importantly, the Committee also believed it important that the CEO should build up a meaningful equity investment in the business so as to align his interest with that of shareholders. Given the CEO’s short tenure and the five-year vesting period for any such award, and to attain that meaningful shareholding, the Committee was supportive of this increase. The Company Secretary in conjunction with the Chairman of the Board will follow up on these action items and ensure they are implemented in 2018. The performance of individual directors was primarily assessed through discussions held by the Chairman with directors on an individual basis. The performance assessment of the Chairman was led by the SID and reviewed by the Board in the absence of the Chairman. Feedback was communicated by the SID to the Chairman following the review. The Board will continue to review its performance on an annual basis. Accountability The Board is committed to providing a fair, balanced and understandable assessment of the Company’s position and prospects. Responsibility for reviewing the Group’s internal financial control and financial risk management systems and monitoring the integrity of the Group’s financial statements has been delegated by the Board to the Audit Committee. Details of how these responsibilities were discharged are set out in the Audit Committee Report on pages 66 to 69. Responsibility for reviewing the Group’s risk management and risk evaluation procedures has been delegated by the Board to the Risk, Investment & Financing Committee. Details of how these responsibilities were discharged are set out in the Risk, Investment & Financing Committee Report on pages 90 to 91. The Quality & Compliance Committee oversees the Group’s performance in Health & Safety, Quality and Compliance, and ensures a culture of continuous improvement is encouraged and measured throughout the Group. Following the updates to the UK Corporate Governance Code, in particular in relation to the risk management process and long-term viability of the Group, we provide detail, on pages 19 and 20, on these processes and the associated assessments. The Board receives regular updates from the Chair of each Committee. 62 UDG Healthcare plc Annual Report and Accounts 2017 Relations with Shareholders Shareholder Engagement The Board recognises the importance of regular dialogue with shareholders and accordingly, the Group and its senior management team maintains an ongoing investor relations programme. While the Chairman takes overall responsibility for ensuring that the views of our shareholders are communicated to the Board and that all directors are made aware of major shareholders’ issues and concerns, contact with major shareholders is principally maintained by the Chief Executive, the Chief Financial Officer and the Group Head of Investor Relations. A programme of meetings with institutional shareholders, fund managers and analysts takes place each year. There is regular dialogue with institutional shareholders, as well as general presentations at the time of the release of the annual and interim results. In addition to investor relations matters, the Group has engaged with major shareholders and made itself available to meet and discuss any other matters of interest, including matters of corporate governance and on foot of this engagement, the Chairman has met with a number of the Group’s major shareholders to discuss such matters during the year. Shareholder Communications Results announcements are released promptly to shareholders in May and November and trading updates are issued in February and August. In addition, information including acquisition details and other disclosable information are notified to the stock exchange in accordance with the requirements of the Listing Rules, the Disclosure and Transparency Rules and other applicable rules and regulations. General Meetings The Company’s AGM gives shareholders the opportunity to question the Chairman and the Board. The Notice of Annual General Meeting, the Form of Proxy and the Annual Report are issued to shareholders at least 20 working days before the meeting. At the meeting, resolutions are voted on by a show of hands of those shareholders attending, in person or by proxy. After each resolution has been dealt with, details are given of the level of proxy votes cast on each resolution and the number of votes for, against and withheld. If validly requested, resolutions can be voted by way of a poll whereby the votes of shareholders present and voting at the meeting are added to the proxy votes received in advance of the meeting and the total number of votes for, against and withheld for each resolution are announced. Details of proxy votes received are also made available on the Company’s website following the meeting. A quorum for a general meeting of the Company is constituted by three or more shareholders present in person or by proxy and entitled to vote. The passing of resolutions at a meeting of the Company, other than special resolutions, requires a simple majority. To be passed, a special resolution requires a majority of at least 75% of the votes cast. Shareholders have the right to attend, speak, ask questions and vote at general meetings. The Company specifies record dates for general meetings, by which date shareholders must be registered on the Company’s register to be entitled to attend. Record dates are specified in the Notice of AGM. Shareholders may exercise their right to vote by appointing a proxy, by electronic means or in writing, to vote some or all of their shares. The requirements for the receipt of valid proxy forms are set out in the Notice of AGM. The Group’s website (www.udghealthcare.com) provides the full text of the annual and interim reports, investor presentations, trading updates and other stock exchange announcements. The 2018 AGM will be held at 12 noon on Tuesday, 30 January 2018 at the Westbury Hotel in Dublin 2, Ireland. Strategic Report Directors’ Report Financial Statements UDG Healthcare plc Annual Report and Accounts 2017 63 Directors’ Report Corporate Governance What the Board did in 2017 In a busy year, the Board oversaw the deployment of over $270m across acquisitions for Ashfield and Sharp, the investment in new facilities and new contracts and the investment in talent and important IT infrastructure for the Group as a whole. The Board continued to oversee the evolution of the long-term strategy of the Group during FY2017. It evaluated and supported the acquisition of higher margin growth businesses such as STEM in the UK, Sellxpert in Germany, and Vynamic, Cambridge BioMarketing and MicroMass in the US. For Ashfield, these acquisitions helped establish its new Advisory group, adding talented management teams which enhanced its capabilities and extended its geographic reach. Investment in capital assets to provide additional capacity and new capabilities for Sharp was also a priority, with the Board overseeing the acquisition of a new facility for its Clinical business in Bethlehem, Pennsylvania, investment in a new greenfield site for the Clinical EU business in Rhymney, Wales, and enhancements to its Belgian and Dutch facilities. The Board’s attention to succession and talent development continued, which included the addition to the Board of Myles Lee (see page 57 for biography), and the appointment of Jez Moulding as COO of the Group and EVP, Ashfield. 64 UDG Healthcare plc Annual Report and Accounts 2017 October Both the Board and the Risk, Investment & Financing Committee (RIF) met in the first month of UDG Healthcare’s financial year. In a year during which six acquisitions were eventually completed (and many more considered), M&A was high on the agenda during both meetings. A number of the acquisitions discussed were progressed, including the acquisition of STEM Healthcare. STEM Healthcare would kick-start the establishment of Ashfield’s new Advisory group. November The RIF met to conduct a review of the Group’s Internal Control and Risk Management Systems. The Audit Committee also met to review the FY2016 external auditor report and the Group’s draft preliminary announcement of results for FY2016. Later in November, the Audit Committee met again and, receiving an update from the internal audit team, made recommendations which the Board subsequently approved in relation to the Directors’ Compliance Statement, the Group’s Viability Statement, and the Preliminary Announcement of Results for FY2016. The Board also considered the RIF’s recommendations in relation to the Group’s Principal Risks and Uncertainties while the Remuneration Committee met to review performance against the Group’s incentive and bonus schemes. Finally, the Nominations and Governance Committee met to discuss non-executive director recruitment. December As 2016 drew to a close, the Board convened again to approve the 2016 Annual Report and the Remuneration Committee met to agree the grant of awards under one of its incentive schemes and to test performance of executives against the criteria set out in another scheme. February The Audit Committee met in early February to review and approve the draft Q1 Trading Statement. The Group’s AGM took place in the Westbury Hotel in Dublin a week later. The meeting successfully concluded with all resolutions passed, including the Group’s new three-year remuneration policy. While gathered for the AGM, the Board took the opportunity to conduct its annual two-day strategy session with the Group’s Senior Executive Team. The Board met again later in the month to discuss talent, to confirm the appointment of Mr. Myles Lee to the Board as an independent non-executive director, and to receive an M&A update. Strategic Report Directors’ Report Financial Statements September As FY2017 drew to a close, the Board convened in the US, with some newer Board members visiting Sharp, Allentown and the new Clinical facility in Bethlehem, Pennsylvania, in advance of the formal meeting. The Chairman (with the Board in attendance) officially opened the new Ashfield US Headquarters in Fort Washington, Pennsylvania. This overseas trip enabled the Board to meet a broad group of managers from the US businesses both in formal settings and more informal, social settings, something that is facilitated where possible throughout the year. The Board also travelled to Philadelphia and, in the offices of newly- acquired Vynamic, received updates from the Ashfield Communications US business, as well as presentations from the three most recently-acquired businesses, Vynamic, Cambridge BioMarketing and MicroMass. Together with STEM Healthcare, Sellxpert and the Daiichi-Sankyo facility in Bethlehem, the Group made over six acquisitions and deployed $270m during FY2017. July In July, the Remuneration Committee reviewed proposed salary increases for the Senior Executive Team in connection with the preparation of the FY2018 budget and also considered certain incentive arrangements to be entered into in connection with acquisitions. August In early August, the Audit Committee reviewed the draft Q3 Trading Update and approved amendments to its Terms of Reference. The Board also met to approve, in principle, the acquisition of MicroMass, which subsequently completed in September. Later in August, the Audit Committee re- convened during which EY presented its Audit Plan and the Committee reviewed EY’s independence, fees (including its non-audit fee schedule) and engagement terms. The Audit Committee also received a full internal audit update, conducted a review of the Committee’s performance and resources and, in advance of year-end, conducted the goodwill impairment review and reviewed the Group’s long-term viability. The Board subsequently convened again and received updates from the Chairs of the Audit and Remuneration Committees, an update from the CEO and reviewed the draft budget for FY2018. UDG Healthcare plc Annual Report and Accounts 2017 65 March The RIF convened in March to consider a number of potential acquisitions including that of Sellxpert in Germany (which later completed), and the Daiichi-Sankyo clinical packaging facility in Bethlehem, Pennsylvania, adding to both its Ashfield Clinical & Commercial and Sharp Clinical businesses. April In April, an ad hoc meeting of the Remuneration Committee convened to consider and approve the appointment of the Group’s new COO and EVP of Ashfield Jez Moulding. May With the Group’s half-year approaching, the Audit Committee convened with Myles Lee having succeeded Philip Toomey as Chairman of this Committee. The Committee discussed the draft Interim Report and received a corporate governance update from the Group’s new external auditor, EY. The RIF met to approve the Principal Risks and Uncertainties for inclusion in the Interim Report. The Board also convened to review the draft Interim Report, updated FY2017 guidance to the market and the proposed interim dividend. The Board received cyber security training from EY and a detailed M&A update, which included Vynamic and Cambridge BioMarketing, which were subsequently acquired. The Nominations & Governance Committee met to recommend to the Board that Chris Brinsmead succeed Philip Toomey as Senior Independent Director, to confirm the re-appointment of a number of the independent non- executive directors and finally to recommend the appointment of Nancy Miller-Rich to the RIF Committee, effective 1 July 2017. Directors’ Report Directors’ Report Audit Committee Report With a change of Chair and the appointment of new external auditors, 2017 was a year of successful transition for the Audit Committee. Myles Lee Chair of the Audit Committee Attendance Record and Tenure Member Myles Lee (Chair) (i) (joined the Board on 1 April 2017) Philip Toomey (Chair)(ii) (stepped down on 18 May 2017) Gerard van Odijk (iii) Linda Wilding Number of meetings held when director was a member Number of meetings attended 3 4 6 6 Committee tenure 6 months 9 years 3 years 4 years (i) Myles Lee joined the Group as non-executive independent director on 1 April 2017, and succeeded Philip Toomey as Chair of the Audit Committee on 18 May 2017. (ii) Philip Toomey stepped down from the Audit Committee on 18 May 2017. (iii) Gerard van Odijk was travelling on 1 August 2017 and, due to technical difficulties, was unable to join the Audit Committee meeting scheduled to be held that morning by teleconference. Composition At 30 September 2017, the members of the Committee were Myles Lee (Chair), Linda Wilding and Gerard van Odijk, each of whom are considered by the Board to be independent. As set out in the biographical details on pages 56 and 57, the members of the Committee have a strong mix of skills, expertise and experience from a wide variety of industries and as a whole have the relevant competencies for the sector in which we operate. The Board has determined that both Myles Lee, a member of the Institute of Chartered Accountants in Ireland, and Linda Wilding, a member of the Institute of Chartered Accountants in England and Wales, are the Committee’s financial experts. Meetings The Committee met six times during the year ended 30 September 2017. Individual attendance at these meetings, along with the tenure of each member, is set out above. In the event that a director is unavailable to attend a Committee meeting, he or she can communicate their views on any items to be raised at the meeting through the Chair of the Committee. The Chief Executive, the Chief Financial Officer, the Group Finance Director and the Head of Internal Audit together with representatives of the external auditor are invited to attend each meeting of the Committee. In addition, the Chairman of the Board attends meetings at the invitation of the Committee. The Committee regularly meets separately with the Head of Internal Audit and with the external auditor without others being present. The Chair of the Committee reports to the Board, as part of a separate agenda item at Board meetings, on all significant matters reviewed by the Committee. 66 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Role and Responsibilities The Committee supports the Board in fulfilling its responsibilities in relation to financial reporting and reviews the effectiveness of the Group’s internal financial control and financial risk management systems, pursuant to the Committee’s terms of reference which are reviewed annually and are available on the Group’s website. The Committee also monitors and reviews the effectiveness of the Group’s internal audit function and, on behalf of the Board, manages the appointment and remuneration of the external auditor and in addition monitors their performance and independence. The Group has an independent and confidential reporting procedure and the Committee monitors the operation of this facility. Once again, the Board requested that the Committee advise it on both the long-term viability of the Group and also its compliance with certain laws and the associated adoption of a compliance policy and statement by the directors pursuant to section 225 of the Companies Act, 2014. Details of this review of long-term viability and the Group’s Viability Statement are contained in the Risk Report on pages 19 and 20, and details of the Directors’ Compliance Policy and Directors’ Compliance Statement are set out on page 94. The activities undertaken by the Committee in fulfilling its key responsibilities in respect of the year to 30 September 2017 are set out below. Financial Reporting The Group’s Financial Statements are prepared by finance personnel with the appropriate level of qualifications and expertise. The Committee is responsible for monitoring the integrity of the Group’s Financial Statements and reviewing the significant financial reporting judgements contained therein. In respect of the year to 30 September 2017, the Committee reviewed the Group’s Trading Updates issued in February and August 2017, the Interim Report for the six months to 31 March 2017 and the Preliminary Announcement and Annual Report for the year to 30 September 2017. In carrying out these reviews, the Committee considered: • whether the Group had applied appropriate accounting policies and practices; • the significant areas in which judgement had been applied in preparation of the Financial Statements in accordance with the accounting policies set out on pages 108 to 118; • whether the Annual Report and Accounts, taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy; the clarity and completeness of disclosures and compliance with relevant financial reporting standards and corporate governance and regulatory requirements; and the consistency of accounting policies across the Group and on a year-on-year basis. • • The significant areas of judgement considered by the Committee in relation to the Financial Statements for the year to 30 September 2017 and how these were addressed are outlined below. Revenue Recognition The critical area of judgement from a revenue perspective is the determination of the proportion of completion of each revenue contract to ensure revenue is being recognised in line with the accounting policies of the Group. The Committee, through discussions with management, the external auditor and the Head of Internal Audit, considered the judgements applied when determining the appropriate revenue recognition profile applied to the revenue contracts. Given the changing nature of the Group’s business, Internal Audit increased their level of audit emphasis on revenue recognition during the year. Goodwill Impairment The Committee considered the carrying value of goodwill in the 2017 Financial Statements. As part of the annual impairment testing process, management prepare detailed models assessing the recoverable amount of each cash generating unit (CGU), based on a value in use approach. The Committee reviewed these models and, having considered the underlying judgements and assumptions, were satisfied with the methodology used and the result of the assessment. Details of the impairment testing process, including the underlying assumptions, are set out in Note 12 to the Financial Statements. Acquisition Accounting The Committee is conscious that accounting for acquisitions requires management judgement in identifying and valuing the assets acquired, particularly intangible assets, determining the impact of earn-out provisions and assessing whether the Group has control over the acquired entity. A number of acquisitions were made during the course of 2017 and considered by the Committee and the external auditor. Management engaged external specialists to perform the purchase price allocation exercises on these acquisitions. The Committee was satisfied with the judgements made and the accounting for these acquisitions. Each of these areas received particular focus from the external auditor, and the external auditor provided detailed analysis and assessment of the matters in their report to the Committee. UDG Healthcare plc Annual Report and Accounts 2017 67 Directors’ Report Audit Committee Report (continued) Internal Control The Committee is responsible, on behalf of the Board, for reviewing the effectiveness of the Group’s internal financial controls and financial risk management systems. In carrying out these responsibilities, the Committee reviewed reports issued by both internal audit and the external auditor and held regular discussions with the Head of Internal Audit and representatives of the external auditor. The Committee also reviewed the outcome of an assessment of the Group’s internal financial controls which had been co-ordinated by internal audit. This process, which has been in place throughout the financial year up to the date of the approval of the Annual Report and Financial Statements, accords with the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and is regularly reviewed by the Board. This system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Internal Audit The Committee is responsible for monitoring and reviewing the operation and effectiveness of the internal audit function including its focus, plans, activities and resources. At the beginning of the financial year, the Committee reviewed and approved the internal audit plan for the year having considered the adequacy of staffing levels and expertise within the function. During the year, the Committee received regular reports from the Head of Internal Audit summarising findings from the work of internal audit and the responses from management to address these findings. The Committee monitors progress on the implementation of the action plans on significant findings to ensure these are completed satisfactorily. External Audit Appointment, Independence and Performance The Committee manages the relationship with the Group’s external auditor on behalf of the Board. In July 2016, and in line with guidance provided by the UK Corporate Governance Code and EU Directive 2014/56/EU in respect of audit reforms and audit tendering, the Group conducted a formal tender process to engage a new external auditor. Following a rigorous process which included written submissions and presentation by the three invited firms, the Board decided, following a recommendation from the Committee, to appoint EY as the Group’s external auditor from 2017 onward. A resolution proposing this appointment was supported by shareholders at the 2017 AGM. The Committee carried out its annual assessment of the external auditor including a review of the external auditor’s internal policies and procedures for maintaining independence and objectivity and consideration of their approach to audit quality and materiality. The Committee reviewed and approved the external audit plan as presented by the external auditor. The Committee also reviewed the performance of the external auditor and assessed the qualifications and expertise of their resources. The Committee concluded that the external auditor was independent of the Group, that the Committee was satisfied with the performance of the external auditor and that the audit process was effective. The Committee also reviewed the external auditor’s engagement letter and recommended the level of remuneration of the external auditor to the Board having reviewed the scope and nature of the work to be performed. Details of the remuneration of the external auditor are set out in Note 5 to the Financial Statements. In accordance with the Group’s policy on the hiring of former employees of the external auditor, the Committee reviews and approves any appointment of an individual, within three years of having previously been employed by the external auditor, to a senior managerial position in the Group. In accordance with SI 312/2016, the Group has committed to rotate its external auditor at least every ten years. There are no contractual obligations which restrict the Committee’s choice of external auditor. 68 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Non-Audit Services The Committee has a formal policy governing the engagement of the external auditor to provide non-audit services and this policy is reviewed on a regular basis. The policy is designed to safeguard the objectivity and independence of the external auditor and prevents the provision of services which would result in the external auditor auditing its own firm’s work, conducting activities that would normally be undertaken by management, having a mutuality of financial interest with the Group or acting in an advocacy role for the Group. The external auditor is permitted to provide non-audit services that are not, or are not perceived to be, in conflict with auditor independence, provided it has the skill, experience, competence and integrity to carry out the work and is considered by the Committee to be the most appropriate to provide such services in the best interests of the Group. The engagement of the external auditor to provide non-audit services must be pre-approved by the Committee or entered into pursuant to pre-approved policies and procedures established by the Committee and approved by the Board. The nature, extent and scope of non-audit services provided to the Group by the external auditor and the economic importance of the Group to the external auditor were also monitored to ensure that independence and objectivity were not impaired. The Group has decided to adopt the EU Directive being that the non-audit services payable to the auditors will be no more than 70% of the average audit fee for the previous three years. Details of amounts paid to the external auditor for non-audit services are set out in Note 5 to the Financial Statements. These services included the provision of cyber security and corporate governance training to the Board. Confidential Reporting Procedures In line with best practice, the Group has an independent and confidential reporting procedure which allows employees to raise any concerns about business practice. During the year, the Committee reviewed the operation of the procedures in place to allow employees to raise matters in a confidential manner and concluded that this facility was operating effectively. Myles Lee Chair of the Audit Committee UDG Healthcare plc Annual Report and Accounts 2017 69 Directors’ Report Directors’ Remuneration Report Following approval of the Remuneration Policy at the 2017 AGM, the Committee has focused on talent and succession and has recently completed its first external independent Committee evaluation. Linda Wilding Chair of the Remuneration Committee Dear Shareholder, I am pleased to present, on behalf of the Board, our Directors’ Remuneration Report for the year ended 30 September 2017. The Committee continues to monitor best practice developments in remuneration and once again presents this year’s report in accordance with the requirements of the UK Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘Regulations’). We also continue to follow the provisions of the UK Corporate Governance Code, including the alignment of remuneration arrangements with the Group’s strategy. At the 2017 AGM, our revised Directors’ Remuneration Policy Report (Policy) was approved by our shareholders by an advisory vote. Our previous policy had been in place for three years, and the minor changes approved at the last AGM have improved the clarity of the Policy and reflect evolving market practice and shareholders’ expectations. No further changes to the Policy are proposed and therefore the Policy will not be subject to a further vote this year. UDG Healthcare is an Irish incorporated company and is therefore not subject to the UK company law requirement to submit its Policy to a binding vote. However, the Committee takes corporate governance very seriously and therefore we asked shareholders to approve the Policy on an advisory basis last year and we have once again submitted our annual report on remuneration, which is prepared following the format prescribed under UK law, for an advisory vote. Overall Performance and Context The Group delivered a strong financial performance in 2017. A 17% increase in earnings per share was complemented by a strong operating cash flow performance. Our reporting currency is now US dollar, and the Board has proposed a final dividend of 9.72 $ cent per share, giving a total dividend for the year of 13.30 $ cent per share. This dividend represents an increase of 7% over 2016 and, when combined with a share price appreciation of 32.5% over the year to 30 September 2017, represents a very strong return to shareholders. We also note that our Relative Total Shareholder Return (TSR) tested against the constituents of the FTSE 250 index over the last three years to 30 September 2017 was also very strong, ranking the Group at the 95th percentile. Executive Remuneration for 2017 Annual Bonus Annual bonus targets are primarily set by reference to challenging internal financial targets together with an element based on personal performance. For the year to 30 September 2017, the financial performance of the Group resulted in an actual bonus achievement (as a percentage of their maximum opportunity) of 75% for Brendan McAtamney, 75% for Alan Ralph and 53.5% for Chris Corbin. Details of this assessment are on pages 74 and 75. 70 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements 2014 LTIP Scheme Award The Committee has assessed the performance against targets for the 2014 LTIP scheme awards to 30 September 2017. As set out on page 54, the cash flow performance of the Group has been strong (€74.6m) and, as a result, the target for the three-year period to 30 September 2017 has been met in full and 100% of this element of the award will vest in December 2019. As mentioned above, TSR tested against the constituents of the FTSE 250 index over the three-year period was also excellent, ranking the Group at the 95th percentile, up from the 88th percentile in 2016. A portion of the TSR element of the award is also subject to meeting an EPS growth underpin which was achieved over the three-year performance period. As a result, 100% of this element of the award will also vest in 2019 as the targets for both elements of the award have been met in full. Accordingly, 100% of the overall 2014 LTIP award will vest in December 2019 subject to the fulfilment of all other conditions of the LTIP scheme. Executive Remuneration for 2018 During the year, the Committee reviewed executive remuneration arrangements to ensure that they continued to be aligned with shareholders’ interests and the Group’s strategy. Salary We have agreed an increase in salary for executive directors of 2% which is consistent with the increase awarded across the wider workforce. This increase is effective from 1 October 2017 with the exception of Chris Corbin, who, as previously announced, will retire in April 2019 and whose salary remains unchanged. Annual Bonus There are no proposed changes to bonus arrangements for executive directors in 2018. LTIP Scheme In relation to the LTIP, Brendan McAtamney will participate at 150% of base salary respectively. Due to their respective retirement plans, neither Alan Ralph nor Chris Corbin will receive future awards under the LTIP. There are no proposed changes to the performance measures for awards to be granted in FY2018. Linda Wilding Chair of the Remuneration Committee UDG Healthcare plc Annual Report and Accounts 2017 71 Directors’ Report Directors’ Remuneration Report (continued) Directors’ Remuneration The following table sets out the total remuneration for directors for the year ending 30 September 2017 and the prior year. Salary and fees (a) Benefits (b) Annual bonus (c) Long term incentives (d) Pensions (e) Total 2017 €’000 2016 €’000 2017 €’000 2016 €’000 2017 €’000 2016 €’000 2017 €’000 2016 €’000 2017 €’000 2016 €’000 2017 €’000 2016 €’000 Executive directors Chris Corbin (i) Brendan McAtamney Alan Ralph Non-executive directors (ii) Chris Brinsmead Peter Gray Myles Lee (iii) Nancy Miller-Rich Gerard van Odijk Lisa Ricciardi Philip Toomey Linda Wilding 357 650 433 86 205 38 68 67 68 85 84 389 550 (iv) 422 76 188 – 18 66 65 81 78 55 42 32 – – – – – – – – 61 41 32 191 487 324 265 407 321 761 900 843 706 860 806 165 163 108 184 138 114 1,529 2,242 1,740 1,605 1,996 1,695 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 86 205 38 68 67 68 85 84 76 188 – 18 66 65 81 78 2,141 1,933 129 134 1,002 993 2,504 2,372 436 436 6,212 5,868 (i) Chris Corbin’s salary has been converted to Euro at the average rate for each year (0.8722 for 2017 and 0.7826 for 2016). (ii) Variances in non-executive director fees are primarily related to travel allowances. See page 86 for more detail. (iii) Myles Lee joined on 1 April 2017. (iv) Brendan McAtamney was not Chief Executive Officer for the full FY2016. Details on the valuation methodologies applied are set out in Notes (a) to (e) below. These valuation methodologies are as required by the Regulations and are different from those applied within the financial statements which have been prepared in accordance with International Financial Reporting Standards (IFRS). The total expense relating to the directors recognised within the income statement in respect of long-term incentives is €780,422 (2016: €690,214) and in respect of pension benefits is €435,813 (2016: €435,586). Notes to Directors’ Remuneration Table (a) Salary and fees: This is the amount earned in respect of the financial year, whilst a director. (b) Benefits: This is the taxable value of benefits paid in respect of the financial year. These benefits principally relate to death in service, disability and medical insurance, club subscriptions, the provision of a company car, or cash allowances taken in lieu of such benefits. (c) Annual bonus: This is the total bonus earned under the annual bonus scheme in respect of the financial year. For details of performance against targets set for the year see pages 73 to 75. (d) Long term incentives: For the year ended 30 September 2017, this is the market value of the LTIP awards earned based on performance to 30 September 2017. These LTIP awards (structured as nominally priced options) were granted in December 2014 and the performance period was the three-year period from 1 October 2014 to 30 September 2017. They are subject to an additional two-year holding period, vesting in December 2019. These awards are also entitled to dividend equivalents during the vesting period. The value above only includes dividend equivalents earned to 30 September 2017. The Committee has assessed performance for these awards and determined that 100% of the original award will vest at the end of the five-year vesting period. See pages 76 and 77 for details. The share price at the date of vesting is not available at this time and therefore the number of shares that will vest has been multiplied by the difference between the average share price over the quarter ending 30 September 2017 (£8.35) and the exercise price per share option (€0.05) to calculate a representation of the value attributed to these options. For the year ended 30 September 2016, this is the market value of the LTIP awards (structured as nominally priced options) that were granted in February 2014 and the performance period was the three-year period from 1 October 2013 to 30 September 2016. The Committee reviewed actual performance relative to the performance targets in November 2016 and determined that 100% of the original award should vest at the end of the five-year vesting period. The difference between the share price on the third anniversary of the grant date (£6.90) and the exercise price per share option (€0.05) was multiplied by the number of options that vested to calculate the value attributed to the options for each director. This has been updated from the 2016 report where in accordance with the Regulations the disclosure was based on the average share price over the quarter ended 30 September 2016 (£6.08). This gave values of €626,589 for Chris Corbin, €762,104 for Brendan McAtamney and €713,916 for Alan Ralph. The value of dividend equivalents accrued during the vesting period and up to the third anniversary of the grant date is also included. (e) Pension: Please see pages 77 and 78 for further information. 72 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Discussion of Individual Remuneration Elements The following sections set out details on each element of remuneration for the year to 30 September 2017 and detail how we intend to operate our policy with respect to each element of remuneration for the year to 30 September 2018. Salary The base salaries of executive directors are reviewed annually having regard to personal performance, divisional or Group performance, significant changes in responsibilities and competitive market practice in their area of operation as well as the pay and conditions in the wider Group. The principal external comparator groups against which executive directors’ reward is currently reviewed include the FTSE 250. Changes to base salary are generally effective from 1 October. In relation to both Brendan McAtamney and Alan Ralph, the Committee determined that their base salaries for 2017 will increase by 2%, consistent with the increases awarded across the wider Group. As previously announced, Chris Corbin will retire in April 2019 and his salary remains unchanged. The following table sets out the salaries for the executive directors at the start of each financial year. Brendan McAtamney Alan Ralph Chris Corbin 1 October 2017 €’000 €663 €442 £312 1 October 2016 €’000 €650 €433 £312 Benefits Employment related benefits for executive directors principally relate to death in service, disability and medical insurance, club subscriptions, the provision of a company car or cash allowances taken in lieu of such benefits. In the case of recruitment, benefits may include relocation allowances or other benefits considered appropriate by the Committee to facilitate recruitment. Any such benefits are in line with our recruitment remuneration policy. Annual Bonus Bonus for the year ended 30 September 2017 For the year ended 30 September 2017, the maximum bonus opportunity, as a percentage of salary, was 100% for each of Brendan McAtamney and Alan Ralph. The bonus opportunity for on-target performance was 70% for Brendan McAtamney and Alan Ralph. Given Chris Corbin’s planned retirement in April 2019, his bonus opportunity during the period from 1 October 2016 through April 2019 will be reduced in stages throughout this period. As such, during the period from 1 October 2016 to 30 September 2017, Chris Corbin’s maximum bonus opportunity, as a percentage of salary was 75%. Chris Corbin’s bonus opportunity for on-target performance during the period from 1 October 2016 to 30 September 2017 was 45%. The following table sets out the performance measures applied for executive directors for the year ended 30 September 2017. % of maximum bonus Financial targets Profit Cash flow Non-financial targets B. McAtamney A. Ralph C. Corbin 70% 15% 85% 15% 100% 70% 15% 85% 15% 100% 75% 10% 85% 15% 100% The performance targets were set by the Committee at the start of the financial year and comprised both financial and non-financial targets. UDG Healthcare plc Annual Report and Accounts 2017 73 Directors’ Report Directors’ Remuneration Report (continued) Discussion of Individual Remuneration Elements (continued) Annual Bonus (continued) Financial performance Subsequent to the end of the financial year, the Committee reviewed actual performance against the targets set for each executive director. Based on this review, the Committee determined that the executive directors should be awarded bonuses based on the achievement of financial targets as illustrated in the table below. Measure Group basic PBT Stretch PBT Group cash flow Ashfield PBCIT Ashfield Divisional cash flow Total bonus for financial performance B. McAtamney A. Ralph C. Corbin Weighting % Actual % Weighting % Actual % 40.0 30.0 15.0 – – 85.0 22.4 22.6 15.0 – – 60.0 15.0 40.0 – 20.0 10.0 85.0 8.4 30.1 – 0.0 0.0 38.5 The following table summarises performance against target for each of the financial objectives. Measure Group basic PBT Definition Performance targets Actual performance PBT is defined as profit before tax, exceptional items, amortisation of acquired intangibles and transaction costs. Budget PBT was $108.8 million and if achieved, leads to a pay- out of the relevant Group basic PBT bonus. It is measured against budget on a constant currency basis to remove foreign exchange translation impacts. It excludes the impact of unbudgeted acquisitions. Threshold performance equates to $103.3 million or 95% of budget PBT. No portion of basic bonus is paid where actual PBT is at or below threshold performance. Reported PBT was $118.9 million*. Excluding unbudgeted acquisitions and an unbudgeted $0.9 million Sharp business relocation cost gives PBT for bonus purposes of $106.4 million. This resulted in 56% of the bonus % attributed to Group basic PBT being achieved. Stretch PBT The stretch PBT measure is the Group basic PBT including the contribution of unbudgeted acquisitions. Group cash flow Cash flow is defined as net cash inflow from operating activities less capital expenditure and excludes exceptional items, transaction costs, interest and tax. Cash flow generated by acquisitions is excluded from the actual cash flow performance. 74 UDG Healthcare plc Annual Report and Accounts 2017 For the purposes of the stretch PBT bonus, actual PBT was adjusted upwards by $2.1 million for the relocation costs noted above and for other costs related to the Sharp Bethlehem acquisition but taken through the Income Statement. This resulted in 75% of the bonus % attributed to stretch PBT being achieved. Actual cash flow of $86.2 million exceeded the budget target of $68.4 million, and accordingly 100% of this element of the bonus was achieved. Payment for performance between threshold and budget is on a pro-rata basis. Achievement of stretch PBT bonus requires PBT of 115% of budget or $125.1 million. Payment between budget and stretch performance is on a pro-rata basis. The Group’s cash flow target is based on budgeted cash flow of $68.4 million. Threshold performance equates to 95% of budgeted cashflow. No bonus is paid if actual cash flow is at or below threshold target. 100% of bonus is paid if budget cash flow is reached or exceeded. Payment between threshold and budget performance is on a pro-rata basis. Strategic Report Directors’ Report Financial Statements Measure Ashfield PBCIT Ashfield Divisional cash flow Definition Performance targets Actual performance Profit is defined as profit before allocation of Group overheads, exceptional items, amortisation of acquired intangibles, transaction costs, interest and tax. It is measured on a constant currency basis to remove foreign exchange translation impacts and excludes profits from unbudgeted acquisitions and disposals. Cash flow is defined as net cash inflow from operating activities less capital expenditure and excludes exceptional items, transaction costs, interest and tax. Cash flow generated by acquisitions is excluded from the actual cash flow performance. Budget profit was $ 86.2 million and equates to a pay-out of 100% of Ashfield’s divisional profit bonus. Actual profit was $80.2 million and accordingly 0% of this element of the bonus was achieved. Threshold performance for the Ashfield divisional profit target equates to $81.9 million or 95% of budget. No portion of this element of bonus is paid where actual PBT is at or below threshold performance. Payment between threshold and budget performance is on a pro-rata basis. The Ashfield divisional cash flow target is based on budgeted cash flow of $56.0 million and equates to a pay-out of 100% of Ashfield’s divisional cash flow bonus. Threshold performance equates to 95% of budgeted cashflow. No bonus is paid if actual cash flow is at or below threshold target. Payment between threshold and budget performance is on a pro-rata basis. Actual cash flow was $45.0 million and accordingly 0% of this element of the bonus was achieved. * Please see page 177 for further details on this calculation. Non-financial performance 15% of the annual bonus for each executive director was based on the achievement of personal objectives. These objectives include the achievement of operational goals, the executive’s contribution to Group strategy as a member of the Board, and specific goals related to their functional or business unit role. 2017 objectives were set for each executive at the beginning of the financial year, and performance against these objectives was assessed by the Committee at its November 2017 meeting. In the case of Brendan McAtamney, personal objectives included the appointment of a new leader for the Ashfield division, management of the leadership transition and the detailed review of or acquisition of appropriate businesses. The Committee assessed performance against these objectives and judged that very strong performance had been achieved. In particular the transition of the new leader for the Ashfield division had been successfully managed, all operational management programmes had been progressed on time and on budget and a significant number of potential acquisitions had been evaluated, and a number of these delivered, adding value for shareholders. The Committee therefore judged that the personal element for Brendan should payout in full. In the case of Alan Ralph, personal objectives included the management and the on time and on budget delivery of the Future Fit projects, enhancing the effectiveness of the Group’s tax planning and strengthening of our US investor profile. The Committee judged that excellent progress had been made against these objectives with operational management programmes being progressed on time and budget, the Group’s tax planning effectiveness being significantly enhanced and Alan being instrumental in building strong relationships with our US investor base. The Committee therefore judged that the personal element for Alan should payout in full. In the case of Chris Corbin, the primary objective was to support and facilitate a smooth and effective transition of leadership of the Ashfield division which the Committee judged had been delivered in a successful and efficient way. The Committee therefore judged that the personal element for Chris should payout in full. The total bonus payable is therefore 75% of maximum for Brendan McAtamney, 75% of maximum for Alan Ralph and 53.5% of maximum for Chris Corbin. The Committee considers that this level of bonus payout is a fair reflection of the performance achieved during the year and the value created for shareholders. Bonus for the year ending 30 September 2018 For the year ending 30 September 2018, the maximum bonus opportunity for each of Brendan McAtamney and Alan Ralph remains at 100% of base salary and is based on the same balance of financial and non-financial performance measures as for 2017. The bonus opportunity for on-target performance will continue to be 70% for Brendan McAtamney and Alan Ralph. As outlined above, Chris Corbin’s maximum bonus opportunity is reducing from 1 October 2016. As such, the maximum bonus opportunity for Chris Corbin during the period 1 October 2017 to 30 September 2018 shall be 37.5%. Chris Corbin’s bonus opportunity for on-target performance, for the period 1 October 2017 to 30 September 2018, shall be 22.5%. UDG Healthcare plc Annual Report and Accounts 2017 75 Directors’ Report Directors’ Remuneration Report (continued) Discussion of Individual Remuneration Elements (continued) Long Term Incentive Plan (LTIP) The LTIP was approved by shareholders at the Company’s 2010 AGM. Award for which the year to 30 September 2017 was the last year of the performance period The following table sets out details in respect of the December 2014 LTIP award, for which the final year of performance was the year to 30 September 2017. TSR performance (50% of award) Aggregate cash flow performance* (50% of award) Performance against targets The relative TSR performance over the three- year period was at the 95th percentile, and in relation to adjusted diluted EPS growth, FY2014 EPS of €28.77 compounded by 5% for three- years and converted to US dollar (based on an exchange rate of 0.9047 for FY2017) equals $36.81. Actual EPS for FY2017 is $37.12 and therefore exceeded the underpin. Accordingly, 100% of this element of the award will vest. Awards are subject to a two-year holding period and will be delivered to participants in December 2019. The PBIT conversion rate was 112.5% over the three-year period, and aggregate cash generation was $474.8 million. Targets for performance period (1 October 2014 to 30 September 2017) TSR measured against constituents of the FTSE 250 Index Vesting schedule for first 75% for Brendan McAtamney and Alan Ralph and first 50% for Chris Corbin: • Below median = 0% • At median = 25% • Upper quartile = 100% • Pro-rating between points Vesting schedule for final 25% for Brendan McAtamney and Alan Ralph and final 50% for Chris Corbin: • This portion of the LTIP award is subject to the same vesting schedule as above. Additionally, vesting of this element of the TSR award is subject to the following underpin: • adjusted diluted Earnings Per Share (EPS) growth of not less than 5% per annum compounded over the performance period. Company’s aggregate cash flow performance (PBIT to cash conversion rate) Percentage PBIT to cash conversion rate vesting schedule: • Below 80% = 0% • At 80% = 25% 100% or above = 100% • • Pro-rating between points Vesting under the cash flow element is also contingent on an aggregate minimum cash flow generation by the Company of $361 million over the performance period. Total 100% of awards will vest in December 2017 and become exercisable during December 2019. * In line with the plan rules, for the purposes of assessing the level of LTIP awards that should vest, the impact of exceptional items and amortisation of acquired intangible assets has been excluded within both PBIT and cash flow for calculation purposes. For the purposes of assessing the achievement of the minimum cash flow generation target over the performance period, actual cash generation during this period has been adjusted by eliminating cash generated from acquisitions completed after the target level of $361 million had been set. Similarly, cash generated has also been adjusted in respect of disposals completed after the target level of $361 million had been set. LTIP awards made during the year to 30 September 2017 The following table sets out details of LTIP awards made during the year to 30 September 2017. Brendan McAtamney Alan Ralph Number of options 122,180 54,242 Date of award Share price at date of grant £ Face value £’000 Threshold vesting % Maximum vesting % 7 December 2016 7 December 2016 6.72 6.72 821 366 25 25 100 100 The above awards are subject to performance over the three-year period to 30 September 2019. Awards are then subject to a further two-year holding period and the vested portion will be delivered to participants in December 2021. The awards are in the form of nominal value share options over ordinary shares with an exercise price of €0.05 per share. 76 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements The market value of the options granted to Brendan McAtamney (number of options multiplied by the share price at the date of grant) equated to 150% of his base salary. The market value of the options granted to Alan Ralph (number of options multiplied by the share price at the date of grant) equated to 100% of his base salary. Chris Corbin did not receive a 2017 LTIP award. The following table sets out details of performance measures in respect of the LTIP awards granted during the year. TSR performance (50% of award) Targets for performance period (1 October 2016 to 30 September 2019) TSR measured against the FTSE 250 Index Vesting schedule for first 75% of the TSR award: • Below median = 0% • At median = 25% • Upper quartile = 100% • Pro-rating between points Vesting schedule for final 25% of the TSR award: • This portion of the LTIP award is subject to the same vesting schedule as above. Additionally, vesting of this element of the TSR award is subject to the following underpin: • adjusted diluted Earnings per Share (EPS) growth of not less than 5% per annum compounded over the performance period. Aggregate cash flow performance* (50% of award) Company’s aggregate cash flow performance (PBIT to cash conversion rate) Percentage PBIT to cash conversion rate vesting schedule: • Below 80% = 0% • At 80% = 25% 100% or above = 100% • • Pro-rating between points Vesting under the cash flow element is also contingent on an aggregate minimum cash flow generation by the Company of $333.8 million over the performance period. * In line with the plan rules, for the purposes of assessing the level of LTIP awards that should vest, the impact of exceptional items and amortisation of acquired intangible assets will be excluded within both PBIT and cash flow for calculation purposes. For the purposes of assessing the achievement of the minimum cash flow generation target, cash flows from acquisitions shall be excluded and the target shall also be adjusted in respect of lost cash flows from disposals. The proportion of awards that do not meet the performance criteria will lapse on the scheduled vesting date. LTIP awards during the year to 30 September 2018 Award levels will continue to be between 100% and 150% of base salary. In the case of Brendan McAtamney, the Committee has again determined 150% of salary to be the appropriate level of award given the Group’s ambitious growth plans over the next three to five years. It is intended that performance targets for LTIP awards to be granted during the year to 30 September 2018 will continue to be based on the same performance conditions as outlined above. The performance period will be the three years to 30 September 2020 and awards meeting their vesting criteria will vest on the fifth anniversary of their grant. Pensions Irish and UK tax legislation impose penalty taxes on annual pension contributions and increases in pension fund values accruing to individual employees where proscribed maximum amounts are exceeded. The Committee has previously determined that impacted executive directors could either continue to accrue pension benefits as previously entitled, or alternatively, accept pension benefits limited by the proscribed maximum amounts and receive or accrue a supplementary taxable non-pensionable allowance equal to the cost to the Company of the pension benefit foregone. The alternative arrangements were accepted by Chris Corbin with effect from 5 April 2011. The amount of the allowance awarded to each director has been set by the Committee such that there is no additional cost to the Company from the arrangement. All pension benefits are determined solely in relation to base salary. Fees paid to non-executive directors are not pensionable. Brendan McAtamney receives a taxable, non-pensionable cash allowance of 25% of base salary. Alan Ralph participated in a defined benefit pension plan, which accrued annually to provide up to 55% of his final pensionable salary at retirement. This plan was closed to future accrual in December 2015. Since January 2016, Alan has received a taxable non-pensionable cash allowance in lieu of pension of 25% of base salary. In 2017, the amount included in the single figure in relation to this cash allowance was €108,213. UDG Healthcare plc Annual Report and Accounts 2017 77 Directors’ Report Directors’ Remuneration Report (continued) Discussion of Individual Remuneration Elements (continued) Pensions (continued) Chris Corbin is a member of a defined contribution scheme with contributions capped at the permitted level under UK tax legislation. The Group has accrued a supplementary taxable non-pensionable allowance equal to the cost of the pension contribution foregone. The combined cost of these arrangements was £144,000 in 2017. Details of defined benefit pension entitlements Alan Ralph Accumulated accrued pension at 30 September 2017 €’000 Normal retirement date 91 18 September 2029 The normal retirement date of each director is their 60th birthday. In the event that a director retires before their 60th birthday and receives an immediate pension, their pension entitlement shall be reduced on an actuarial basis to reflect earlier payment. Additional Information Payments to Former Directors There were no payments to former directors during the year. Payments for Loss of Office There were no payments for loss of office during the year. Transition Arrangements for Chris Corbin Chris Corbin stepped down from the role of Managing Director, Ashfield on 1 April 2017. He remains in an executive role until 1 April 2019 as Chairman of the Ashfield division. For the period to 1 April 2019 he will continue to be paid his salary and will receive a bonus based on his performance against financial and non-financial objectives. As described above his bonus opportunity will be reduced in stages over this period. For the year to 30 September 2017 he had a maximum bonus opportunity of 75% of salary and for the years to 30 September 2018 and 2019 he will have maximum bonus opportunities of 37.5% and 12.5% of salary respectively. Subject to performance assessment at the normal time being met, his outstanding LTIP awards will continue to vest on their respective vesting dates. He did not receive an LTIP award for 2017 and will receive no further awards. He will continue to be provided with the use of his company car and health benefits until 1 April 2019. Chris Corbin’s retirement date may be brought forward by mutual agreement between both parties. Minimum Shareholding Requirements The Committee has adopted guidelines for executive directors to retain substantial long term share ownership. These guidelines specify that executive directors should, over a period of five years from the date of appointment, build up and then retain a shareholding in the Company with a valuation at least equal to their annual base salary. The table below sets out the percentage of base salary held in shares in the Company by each executive director as at 30 September 2017. Value of Shareholdings as % of Base Salary Pursuant to the Group’s shareholding guidelines, executive directors are generally expected to build and maintain a shareholding of 100% of base salary. Further detail is set out on page 85. Chris Corbin Alan Ralph Brendan McAtamney * All executive directors have met their shareholding guideline. Number of Shares 1,739,481 170,688 80,000 30 September 2017 Share Price £ Value of Shareholding £ 0.8722 converted to euro 8.50 14,785,589 16,952,062.03 1,663,434.99 8.50 779,637.70 8.50 1,450,848 680,000 30 September 2017 Salary £311,657 €432,853 €650,000 % of base salary* 4,744% 384% 120% 78 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Non-executive Directors’ Remuneration Non-executive directors’ fees are set at a level to attract individuals with broad international, commercial and other relevant experience and reward them for fulfilling the relevant role. Non-executive directors receive a basic fee for their role and membership of a Committee. Non-executives who serve as chair of one or more Committees are entitled to an additional fee. Membership of multiple Committees does not accrue any additional fee. Non-executive directors who travel to/from meetings from Europe receive an additional €500 travel allowance per trip and those travelling to/from the US receive an additional €1,000 per trip. The Senior Independent non-executive Director (‘SID’) is also entitled to an additional fee of €10,000 per annum. Non-executive directors’ fees: Basic fee (including Committee membership) Committee chair* SID Fee From 1 June 2016 €65,000 €15,000 €10,000 * This is an additional fee payable to the Chairs of the Audit, Remuneration, and Risk, Investment & Financing Committee. Peter Gray is Chair of the Nominations & Governance Committee and does not receive a separate fee in respect of this role. In addition to the basic fee of €65,000, Peter Gray received a fee of €140,000 in respect of his role as Chairman (i.e., total fees of €205,000 in FY2017). Following a review of the fees of the non-executive directors and the Chairman in November and December 2017, a 2% increase was agreed in each case. This increase will be effective from 1 January 2018. Accordingly, the basic fee for Non-executive directors shall be €66,300 and the total fees for the Chairman shall be €209,100. Directors’ Shareholding and Share Interests Long Term Incentive Plan (LTIP) Details of outstanding share awards, with performance conditions, granted to directors under the LTIP are set out below. Number of shares under award At 1 October 2016 Granted during the year (i) Exercised during the year Lapsed during the year (ii) At 30 September 2017 Market price at date of award Exercise price € Market price at date of vesting Date of award Vesting date Expiry date Chris Corbin 77,212 77,772 54,884 209,868 – – – – Brendan McAtamney Alan Ralph 93,911 92,041 57,954 77,354 – – – – – 122,180 321,260 122,180 87,973 86,220 54,289 – – – – 54,242 228,482 54,242 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 77,212 77,772 54,884 209,868 93,911 92,041 57,954 77,354 122,180 443,440 87,973 86,220 54,289 54,242 282,724 £3.73 £3.78 £5.52 £3.73 £3.78 £5.52 £5.12 £6.72 £3.73 £3.78 £5.52 £6.72 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 n/a n/a n/a 28.02.14 17.12.14 03.12.15 28.02.19 17.12.19 03.12.20 27.02.21 16.12.21 02.12.22 n/a n/a n/a n/a n/a n/a n/a n/a n/a 28.02.14 17.12.14 03.12.15 05.02.16 07.12.16 28.02.19 17.12.19 03.12.20 05.02.21 07.12.21 27.02.21 16.12.21 02.12.22 04.02.23 06.12.23 28.02.14 17.12.14 03.12.15 07.12.16 28.02.19 17.12.19 03.12.20 07.12.21 27.02.21 16.12.21 02.12.22 06.12.23 (i) Details regarding the grant of awards to directors during the year to 30 September 2017 are set out on page 77. (ii) During the year, the Committee determined that 100% of the awards granted in December 2014 will vest. UDG Healthcare plc Annual Report and Accounts 2017 79 Directors’ Report Directors’ Remuneration Report (continued) Executive Share Option Scheme (ESOS) Details of outstanding share options, with performance conditions, granted to directors under the ESOS are set out below. The last awards under this scheme were made in 2009. At 1 October 2016, all Basic tier share options under the ESOS had lapsed or had been exercised, and as such there is no information to disclose in relation to Basic tier. Information relation to Second tier share options under the ESOS is disclosed below. Number of shares under award At 1 October 2016 Exercised during the year Lapsed during the year At 30 September 2017 Exercise price Market price at date of vesting Date of award Vesting date Expiry date Second tier share options Chris Corbin Alan Ralph 40,000 (25,332) (14,668) 40,000 (25,332) (14,668) 45,000 (28,449) (16,502) 45,000 (28,449) (16,502) – – – – €4.06 n/a 20.06.07 06.12.16 19.06.17 €4.06 n/a 20.06.07 06.12.16 19.06.17 Second tier share options were exercisable when EPS growth exceeds the growth of the Irish Consumer Price Index by 10% compounded, over any period of five successive years, subsequent to the granting of the share options. In addition to this requirement, second tier share options may only be exercised if EPS growth over the same period places the Company: (1) in the top 25% of companies listed on the ISEQ index, in which case these share options may be exercised in their entirety; (2) in the midpoint position of companies listed on the ISEQ index, in which case half of the share options may be exercised; (3) between the midpoint and the top 25% of companies listed on the ISEQ index, in which case the proportion of the share options which may be exercised increases on a straight line basis; (4) below the midpoint position of companies listed on the ISEQ index, in which case no share options may be exercised. As disclosed in last year’s Annual Report, 63.33% of the options granted on 20 June 2007 under the ESOS scheme were deemed to vest on 6 December 2016 by the Remuneration Committee, having exercised their discretion in relation to the impact of the disposal of the United Drug Supply Chain businesses during FY2016. s.305 CA 2014 For the purposes of Section 305 of the Companies Act 2014 (Ireland), the aggregate gains by directors on the exercise of share options during the year ended 30 September 2017 was €205,787 (2016: €2,991,360). Directors’ Interests in Share Capital The beneficial interests, including family interests, of the directors and secretary in office at 30 September 2017 in the ordinary share capital of the Company are detailed below. Chris Brinsmead Chris Corbin Peter Gray Myles Lee Brendan McAtamney Nancy Miller-Rich Gerard van Odijk Alan Ralph Lisa Ricciardi Philip Toomey Linda Wilding Damien Moynagh (Company Secretary) 30 September 2017 Ordinary shares 1 October 2016 (or date of appointment if later) Ordinary shares 12,500 1,739,481 100,000 – 80,000 – – 170,688 16,000 84,334 19,304 – 12,500 1,862,681 100,000 – 80,000 – – 170,688 16,000 84,334 19,304 – There were no changes in the above Directors and Secretary’s interests between 30 September 2017 and 4 December 2017. The directors and secretary have no beneficial interests in any Group subsidiary or joint venture undertakings. 80 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Statement of Shareholder Voting The Company is committed to ongoing shareholder dialogue and takes shareholder views into consideration when formulating remuneration policy and practice. To the extent there are substantial numbers of votes against resolutions in relation to directors’ remuneration, the Company will seek to understand the reasons for any such vote and will provide details of any actions in response to such a vote. The following tables set out the actual votes at the 2017 AGM in respect of the Directors’ Remuneration Report for the year to 30 September 2016. Directors’ Remuneration Report Number of votes (millions) Percentage % For Against Withheld* 98.8 79.0 26.3 21.0 20.5 – We have engaged with shareholders following the 2017 AGM to understand any concerns and will endeavour to consult shareholders in advance of any future changes going forward. Further background to the 2017 AGM vote is set out in the Corporate Governance Report at page 62. The following tables set out the actual votes at the 2017 AGM in respect of the last shareholder approved Directors’ Remuneration Policy: Directors’ Remuneration Report Number of votes (millions) Percentage % For Against Withheld* 143.3 98.4 2.3 1.6 11.5 – * A vote withheld is not a vote in law and is not counted in the calculation of the percentage votes for and against a resolution. Remuneration Committee The following table details the members of the Committee, their attendance at meetings held during the year to 30 September 2017 and their tenure. Linda Wilding (Chair) Chris Brinsmead Peter Gray Lisa Ricciardi Philip Toomey Column A – Number of meetings held when director was a member. Column B – Number of meetings attended when director was a member. A 4 4 4 4 4 Committee tenure 3 years 6 years 4 years 3 years 8 years B 4 4 4 2 * 4 * Lisa Ricciardi was unable to attend meetings on 6 Dec 2016 and 3 April 2017, in one case for personal reasons and in the other as it was a short notice ad hoc meeting which coincided with a prior engagement. In both cases, Committee papers had been reviewed and input provided to the Committee Chair in advance. The Committee’s responsibilities include: • setting, reviewing and recommending to the Board the remuneration policy for executive directors and certain other senior executives; setting, reviewing and approving the remuneration arrangements of executive directors and senior executives; and reviewing and approving the rules of any incentive plans subject to final approval by the Board and shareholders. • • External Advisors The Committee seeks and considers advice from independent remuneration advisors where appropriate. During 2012, following a review process, the Committee appointed Deloitte LLP to provide advice on compensation and remuneration matters including advice on best practice market developments. During the year to 30 September 2017, fees payable to Deloitte in respect of services which materially assisted the Committee amounted to £17,050. These fees were charged on a time and expenses basis. Deloitte is one of the founding members of the Remuneration Consultants’ Code of Conduct and adheres to this Code in its dealings. The Committee is satisfied that the advice provided by Deloitte is objective and independent. The Committee is comfortable that the Deloitte engagement team that provide remuneration advice to the Committee do not have connections with UDG Healthcare that may impair their independence. During the year, the Group also received advice and services from Deloitte in respect of consulting services. The Committee is satisfied that the provision of these services does not constitute a conflict of interest. UDG Healthcare plc Annual Report and Accounts 2017 81 Directors’ Report Directors’ Remuneration Report (continued) Performance Graph and Table The table below summarises the single figure of total remuneration for the Chief Executive for the past nine years as well as how the actual awards under the annual bonus and LTIP compare to their respective maximum opportunity. 2017 2016 (i) 2015 2014 2013 2012 2011 2010 2009 Chief Executive Brendan McAtamney Brendan McAtamney Liam FitzGerald Liam FitzGerald Liam FitzGerald Liam FitzGerald Liam FitzGerald Liam FitzGerald Liam FitzGerald Liam FitzGerald Single figure of total remuneration €’000 Annual bonus award against maximum opportunity LTIP award against maximum opportunity 2,242 1,265 683 2,509 2,371 1,709 1,697 1,223 1,342 1,884 75.0% 74.0% 81.2% 70.2% 71.6% 20.0% 90.0% 89.8% 77.5% 0% 100% 100% 100% 100% 89.2% 95.5% 62.5% 0% (ii) 0% (ii) 89.8% (i) Liam FitzGerald was CEO until 1 February 2016. Brendan McAtamney was appointed as Group CEO from 2 February 2016. For 2016, Brendan McAtamney participated in the 2010 LTIP. Liam FitzGerald also participated in the 2010 LTIP in 2012, 2013, 2014 and 2015 financial years. Details on the vesting performance of awards under this plan are set out on pages 76 and 77. In relation to the single figure of total remuneration, both Liam FitzGerald and Brendan McAtamney’s amounts have been pro-rated for their period of service as CEO. (ii) For the 2011 and 2010 financial years, Liam FitzGerald participated in the ESOS. Awards under this scheme did not meet their performance targets in respect of either financial year. Details on the ESOS vesting conditions are set out on page 80. The Company became a member of the FTSE 250 Index on 24 December 2012 and the Committee believes that this is the most appropriate index against which to compare the performance of the Company (prior to this the Company had its primary listing on the Irish Stock Exchange). The chart below compares the performance of the Company relative to the FTSE 250 Index over the nine year period to 30 September 2017. Value (£) 400 350 300 250 200 150 100 50 0 30 Sep 08 30 Sep 09 30 Sep 10 30 Sep 11 30 Sep 12 30 Sep 13 30 Sep 14 30 Sep 15 30 Sep 16 30 Sep 17 FTSE 250 UDG Healthcare This graph shows the value of £100 invested in UDG Healthcare plc on 30 September 2008 compared with the value of £100 invested in the FTSE 250. Values at each year-end date are calculated on a 3-month average basis. Source: Thomson Reuters Percentage Change in Total Remuneration of CEO Versus Average Employee Details of the percentage change in the total remuneration of the Chief Executive relative to employees across the Group as at 30 September 2017 are set out below. Chief Executive* Average employee** Total % 2017 12.3% (2.4%) UDG Healthcare is an international company employing over 9,000 people. The average employee percentage is representative of the multi- national and geographical nature of the Group. * The increase in Chief Executive total remuneration for FY2017 reflects the fact that Brendan McAtamney was promoted Chief Executive in February 2016. Had he been Chief Executive for all of FY2016, the increase in FY2017 would have been 7%, which is in line with the award granted by the Remuneration Committee as previously disclosed. Please see ‘Remuneration’ on Page 62. ** The decrease in average employee remuneration is a reflection of lower bonus payments, currency movements, a change in employee mix arising from acquisitions and disposals, and the broad geographic spread of employees across 24 countries. 82 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Relative Spend on Pay The following table sets out the percentage change in adjusted profit before tax, dividends and overall expenditure on pay (as a whole across the organisation). Both profit and expenditure on pay have been impacted by changes in foreign exchange translation rates, between 2016 and 2017. Adjusted profit before tax Dividends Overall expenditure on pay 2017 $’000 129,280 31,279 511,108 2016 $’000 115,771 30,056 513,001 Change 11.7% 4.1% (0.4%) Directors’ Remuneration Policy Report The previous Directors’ Remuneration Policy Report had been approved by shareholders in 2014 and, in accordance with the remuneration reporting regulations, this Directors’ Remuneration Policy Report (the 2017 Policy) was submitted to, and approved by, shareholders at the AGM on 7 February 2017 with 98.4% of shareholders voting in favour of the resolution. The Policy is unchanged from the version submitted for approval save that the scenario charts have been updated to reflect salaries with effect from 1 October 2017 and reward opportunities for FY2018. As UDG Healthcare is an Irish incorporated company the resolution was subject to an advisory rather than binding vote. The 2017 Policy took effect from the start of the financial year commencing 1 October 2016. The 2017 Policy contained no significant changes to the policy approved by shareholders in 2014. Some minor changes were made to the Policy for clarity and to reflect evolving market practice and shareholder guidance. The following table sets out a discussion of each element of the remuneration package for directors. Purpose and link to strategy Operation Maximum opportunity Performance metrics Element Salary Sufficient to attract and retain individuals of the necessary calibre to execute our business strategy by ensuring base salaries are competitive in the market in which the individual is employed. Reviewed annually. Changes are generally effective from 1 October. The review takes into consideration the scope and responsibilities of the role, the performance and experience of the individual, overall business performance, increases in the size and complexity of the Group and potential retention issues. The principal external comparator groups against which executive directors’ reward is currently reviewed include the FTSE 250. There is no maximum salary. Any salary increases will have regard to increases awarded to the overall employee population, the rate of underlying inflation, and general market conditions as well as reflecting changes in scope of role and responsibilities. There is no maximum benefit value. Benefit entitlements are reviewed periodically. Individual and business performances are considered in setting base salary. Not performance related. Related to salary. Maximum levels of contributions for any new Executive Director is 25% of salary. Legacy arrangements for individuals are honoured and details are provided in the Annual Remuneration Report. UDG Healthcare plc Annual Report and Accounts 2017 83 Benefits Provide competitive benefits within the market in which the individual is employed. Pension Designed to provide market competitive pension arrangements sufficient to attract and retain individuals of the necessary calibre to execute our business strategy and to honour legacy arrangements. Benefits typically include death, disability and medical insurance, club subscriptions, the provision of a company car or cash allowances taken in lieu of such benefits. In the case of recruitment, benefits may include relocation allowances or other benefits which are considered necessary to facilitate recruitment in line with our recruitment remuneration policy. Current Irish resident executive directors receive a cash allowance in lieu of participation in a pension scheme. The current UK resident executive director’s pension entitlement is satisfied through an accrual of a supplementary allowance. Directors’ Report Directors’ Remuneration Report (continued) Directors’ Remuneration Policy Report (continued) Element Purpose and link to strategy Operation Maximum opportunity Performance metrics Maximum bonus opportunity for all executive directors is currently set at 100% of base salary. Under the scheme rules, the maximum value of awards in any one year is limited to 150% of base salary for each individual. Performance is measured against clearly defined objectives set by the Committee. At least 75% of the maximum bonus opportunity is based on financial goals. The remainder may be based on achievement of personal and strategic goals. For financial performance, up to 10% of salary is available at threshold performance. For non-financial targets, the minimum level of performance equates to zero bonus pay-out. Up to half of any award may be based on a share price based measure (e.g. TSR) and up to half of any award may be based on a financial measure (e.g. Cash flow). The Committee retains discretion to introduce measures (e.g. strategic or returns based) for future awards which will account for no more than one third of the award. Annual bonus Rewards the achievement of annual financial and strategic business targets and individual performance. Long Term Incentive Plan (LTIP) Designed to incentivise execution of the business strategy over the longer term and align executives with shareholders’ interests by rewarding sustained increase in shareholder value and strong long term financial performance. Annual bonus performance measures and weightings for each executive director are reviewed at the start of each financial year to ensure they continue to support the achievement of the business strategy and represent appropriately stretching financial and non-financial targets. Pay-outs are determined by the Committee based on actual performance against the targets set at the start of the financial year. The Committee has discretion to determine appropriate bonus entitlement on cessation of employment. Bonus amounts will be based on the circumstances of the termination, the portion of the financial year elapsed and performance against targets and of the individual and other relevant factors. Awards are normally made annually by the Committee following the release of full year financial results. Performance targets are set at the time of award based on: (i) delivering long term stretching financial performance aligned with strategic plans; and (ii) delivering long term superior returns (relative to an appropriate peer group) to shareholders. Performance is normally assessed over three financial years. The vesting period for awards is five years. Dividends or dividend equivalents may be paid. The Committee has discretion to determine appropriate entitlement to unvested LTIP awards on cessation of employment. Typically, pro-rating for time served will apply and performance will be tested at the end of the performance period as part of the normal process. The LTIP scheme rules contain provisions in relation to change of control. In such a scenario, the Committee has discretion to allow outstanding awards to vest to the extent that performance targets have been met. Time pro-rating will generally also be applied. 84 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Shareholder Guidelines Policy The Company operates a shareholding guideline. Executives are generally expected to build and maintain a shareholding of 100% of base salary. New executives have a period of time, being five years from joining, in which to achieve this target. Notes to Future Policy Table LTIP Plan Limits and Clawback Provisions The LTIP scheme rules provide for the granting of awards, up to a maximum of 10% of the Company’s issued share capital over a ten year period, taking account of any other share scheme operated by the Company and also provide for a clawback of awards by the Committee, in the event that within one year of the awards vesting, the basis on which awards were determined to vest is shown to be manifestly misstated. Annual Bonus Arrangements and Clawback Provisions In relation to annual bonuses, clawback provisions apply in the event that within three years of payment the basis upon which a bonus payment was determined or paid, is shown to be manifestly misstated. Legacy Awards For the avoidance of doubt, the Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretion available to it in connection with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before 4 February 2014 (the date the Company’s first shareholder-approved directors’ remuneration policy came into effect) (ii) before the policy set out above came into effect, provided that the terms of the payment were consistent with the shareholder- approved directors’ remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted. Choice of Performance Measures The Committee believes the choice of performance measures for the annual bonus and LTIP represent an appropriate balance between the short and long term focus of the Group’s business strategy, as well as an appropriate balance between external and internal assessments of performance. Differences in Policy Remuneration arrangements throughout the Group are based on the principle that reward should support the business strategy and should be sufficient to attract and retain individuals of the calibre capable of executing that strategy, without paying more than is necessary. The Group is an international organisation with employees at different levels of seniority in a number of different countries. Accordingly, the manner in which the above principle is implemented varies by level of employee and geography in which the employee is located. The practice with regard to the remuneration of senior executives immediately below the level of executive director is consistent with the remuneration policy for executive directors. These executives all have a significant portion of their remuneration package linked to performance. Their financial and non-financial performance targets for annual bonus are cascaded from the targets for the executive directors. They are also eligible to participate either in the LTIP or other similar long term incentive plans. Other senior managers are entitled to participate in appropriate multi-year incentive arrangements and also participate in local bonus plans with performance targets aligned with those of executive directors and senior executives. For employees in general, the Group aims to provide remuneration packages that are market-competitive in the employee’s country of employment. Where practical, the structure of employees’ remuneration cascades from that of executives and senior management. Discretion The Committee has retained the discretionary ability to adjust the value of an award under the annual bonus and LTIP schemes, if the award, in the Committee’s opinion taking all circumstances into consideration, produces an unfair result. In exercising this discretion, the Committee may take into consideration the individual’s or the Group’s performance against non-financial measures. Considerations of Conditions Elsewhere in the Group The Committee does not directly consult with employees when formulating executive director pay policy. However, the Committee does take into consideration information on pay arrangements for the wider employee population when determining the pay of executive directors. Shareholder Considerations The Company has met with a number of its largest shareholders during 2017 (and offered to meet with others), is committed to ongoing dialogue with shareholders and welcomes feedback on directors’ remuneration. We continue to incorporate market developments and shareholder expectations within our remuneration frameworks. UDG Healthcare plc Annual Report and Accounts 2017 85 Directors’ Remuneration Report (continued) Remuneration Policy for Non-executive Directors Non-executive directors are not eligible to participate in the annual bonus plan or LTIP and do not receive any benefits other than fees in respect of their services to the Company. The Company reimburses the non-executives for reasonable expenses in performing their duties and may settle any tax incurred in relation to these. Non-executive directors receive a basic fee which covers their Board role and membership of one or more Board Committees. Additional fees are paid for chairing the Board and for chairing a Committee, but only one such fee can be received by any one individual. A separate fee is paid for acting as Senior Independent Director. An additional modest travel allowance is paid to directors travelling to and from Europe, and to and from the US, for each meeting attended in person. Policy on Payment for Loss of Office The Company operates the following policy in respect of payments concerning loss of office: • notice periods do not exceed 12 months; • termination payments are negotiable but restricted to a maximum of 12 months’ salary and other contractual benefits; the Committee has discretion to determine appropriate bonus amounts and LTIP vesting. Bonus amounts will be determined based on time spent and the performance of the individual whilst fulfilling the duties of the role. Typically, for LTIP awards, pro-rating for time served will apply and performance will be tested at the end of the performance period as part of the normal process; and in any exit payment scenario, the Committee will give due consideration to the circumstances under which the director’s employment terminated. • • Approach to Recruitment Remuneration In the event of appointing a new executive director, the Committee will align the remuneration package of the new director with the policy set out in this Report. However, the Committee retains the discretion to propose remuneration arrangements on hiring a new executive director which are outside the policy set out in the future policy table in order to facilitate the hiring of an individual of the calibre required to deliver the Group’s business strategy. The intention is to stay within limits on variable pay as set out within the future policy table. However, in any event, the maximum level of variable remuneration (i.e. bonus and long term incentive) which may be granted in these circumstances shall not exceed 300% of salary. When determining the appropriate remuneration arrangements for a new executive director, the Committee will take account of the impact on existing remuneration arrangements for other executive directors when setting the type and quantum of remuneration being offered. The Committee may make awards on hiring an external candidate to compensate the individual for variable remuneration arrangements that will be forfeited on leaving their previous employer. In doing so, the Committee will take into consideration such factors as performance conditions, vesting schedules and the form of the awards being forfeited. To the extent possible, buy-out awards will be made on a basis that closely approximates the benefit that the new director could reasonably have expected to receive had they remained with their previous employer. Service Contracts Brendan McAtamney and Alan Ralph’s service contracts can be terminated by either party giving 12 months’ notice. The Company has retained the right to make payment to the director in respect of salary and other contractual entitlements in lieu of the notice period. As previously announced, Chris Corbin has informed the Board of his intentions to retire from the Group on 1 April 2019, and the parties have therefore agreed that formal notice is not required and that they may, by mutual agreement, bring forward the date of retirement. Non-Executive Directors’ Letters of Appointment The terms of engagement of non-executive directors are set out in Letters of Appointment. Non-executive directors are currently appointed for an initial three-year term subject to satisfactory performance and annual re-election by shareholders at Annual General Meetings. The appointment can be terminated by either party on giving one month’s notice. 86 UDG Healthcare plc Annual Report and Accounts 2017Directors’ Report Strategic Report Directors’ Report Financial Statements Remuneration Scenarios Please note the scenario charts have been updated from the version included in the Policy approved by shareholders at the 2017 AGM to reflect new salaries and the intended application of remuneration policy for FY2017. The chart below shows hypothetical values of the remuneration package for executive directors under three assumed performance scenarios and has been constructed based on the Remuneration Policy as set out in this Report and uses the same level of salary, benefits and pensions entitlement of each of the executive directors as at 1 October 2017 under all three of the scenarios. • Minimum remuneration receivable – There is no annual bonus payment and no vesting under the LTIP. • Remuneration for expected performance – There is a target bonus pay-out of 70% for Brendan McAtamney and Alan Ralph and 22.5% for Chris Corbin. There is target vesting under the LTIP of 25% of the maximum award for Brendan McAtamney and Alan Ralph. As Chris Corbin is no longer receiving any grants under the LTIP, this element of remuneration is zero. Maximum remuneration receivable – There is a maximum bonus pay-out of 100% of base salary for each of Brendan McAtamney and Alan Ralph and 37.5% of base salary for Chris Corbin. There Is maximum vesting of 150% of base salary for Brendan McAtamney and 100% for Alan Ralph. As Chris Corbin is no longer receiving any grants under the LTIP, this element of remuneration is zero. • The actual amounts earned by executive directors under the above scenarios will depend on share price performance over the vesting period. For the purpose of these illustrations, any share price appreciation has been ignored. Chris Corbin’s remuneration has been converted to Euros at the average rate for 2017. Brendan McAtamney Alan Ralph Chris Corbin €2,528k 39% €1,583k 16% 29% 26% €871k 0 0 100% 55% 35% €3,000 €2,500 €2,000 €1,500 €1,000 €500 €2,500 €2,000 €1,500 €1,000 €500 €1,466k 30% 30% €1,002k 11% 31% €582k 100% 0 0 58% 40% 0 Minimum On Target Maximum 0 Minimum On Target Maximum €3,000 €2,500 €2,000 €1,500 €1,000 €500 0 €577k 0 0 100% €657k 12% 0 88% €711k 19% 0 81% Minimum On Target Maximum LTIP Annual bonus Fixed remunerations UDG Healthcare plc Annual Report and Accounts 2017 87 Directors’ Report Nominations & Governance Committee Report Succession planning has been at the forefront of the Nominations & Governance Committee’s agenda in 2017, reflecting its desire to ensure the right blend of skills, experience, diversity and stability for the Board and its Committees. Peter Gray Chair of the Nominations & Governance Committee Number of meetings held when director was a member Number of meetings attended 2 2 2 Committee tenure 11 years 5 years 8 years Composition at 30 September 2017 Peter Gray (Chair) Chris Brinsmead Philip Toomey Attendance Record and Tenure Member Peter Gray (Chair) Chris Brinsmead Philip Toomey Key Objective To ensure the Board is comprised of individuals with the skills, knowledge, experience and expertise that are appropriate for the Group’s requirements. Key Responsibilities • to evaluate the balance of skills, knowledge, experience and diversity of the Board and Committees and make recommendations to the Board with regard to any changes; to consider succession planning for directors and other senior executives taking into account what skills and expertise are needed for the future; to identify, and nominate for the approval of the Board, candidates for appointment as directors; to consider the re-appointment of any non-executive director at the conclusion of their specified term of office and recommend their re-appointment to the Board; and to review Corporate Governance developments and ensure the Group remains compliant with all aspects of governance applicable to it. • • • • Meetings The Committee met twice during the year ended 30 September 2017. Individual attendance at these meetings is set out above. The Committee is chaired by the Chairman of the Board and is comprised only of non-executive directors considered by the Board to be independent. The Chief Executive is present occasionally at the invitation of the Committee. 88 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Main Activities During the Year In recognition of Philip Toomey reaching his nine-year tenure in February 2017 the Committee had engaged an independent consultant in Ireland to facilitate a recruitment process to ensure orderly succession, focusing on candidates based in Ireland with a financial background, experience of public companies, governance and international M&A. A list of potential candidates was reviewed by the Committee, and a short-list of candidates were interviewed. Following this process, noting his extensive experience in finance and international M&A, the Committee recommended Myles Lee to the Board as a non-executive director. With the Board’s unanimous approval, he joined the Board on 1 April 2017 and was also appointed a member of the Audit Committee. On 18 May, he succeeded Philip Toomey as Chair of the Audit Committee following a period of transition. Again, with succession in mind, the Committee oversaw the process of considering, then recommending to the Board, a successor to Philip Toomey as Senior Independent Director (SID). Following the Committee’s recommendation, the appointment of Chris Brinsmead as SID was unanimously approved by the Board and he assumed the role from 1 July 2017. In reviewing the composition of each of the Committees to ensure that each of the Committees (like the Board) continues to have the appropriate balance of skills and experience, and considering her extensive industry and M&A experience, the Committee recommended, and the Board unanimously approved, the appointment of Nancy Miller-Rich to the Risk, Investment & Financing Committee, effective from 1 July 2017. The Committee has recently begun the search for additional non-executive directors with relevant experience to ensure that the Board has a panel of candidates as it seeks to plan for succession and add to its diversity of experience and expertise. With the imminent departure of Gerard van Odjik from the Board this process has been given heightened priority and two independent external recruitment specialists have been engaged. Taking into consideration the changes occurring or anticipated on the Board, the Committee, in the absence of Philip Toomey, considered the question of his continuing independence and determining this to be clear, made a recommendation to the Board to consider his reappointment for a further year. The Committee also continues to review all external and internal governance procedures to ensure ongoing compliance and to ensure the Board and its Committees are best structured to meet the future needs of our diverse and ever-evolving Group. The Committee engaged Independent Audit to conduct a first-ever external independent audit of its Committees, starting with the Remuneration Committee. The Committee also conducted a review of the terms of reference of the Committees and, where considered appropriate, recommended changes to the remit of each Committee. The key changes are noted below: • The Audit Committee now formally reviews the Group’s ongoing compliance with relevant obligations under section 225 of the Irish Companies Act, 2014, before recommending adoption of a compliance policy statement and inclusion of the Directors’ Compliance Statement in the Directors’ Report, as set out at page 94; and • The Risk, Investment & Financing Committee, following the introduction of the Quality & Compliance sub-Committee and the Risk & Viability sub-Committee last year, now reviews the findings of each sub-Committee meeting at regular intervals, ensuring appropriate oversight of the functions, particularly against the backdrop of the acquisitions made in 2017. Peter Gray Chair of the Nominations & Governance Committee UDG Healthcare plc Annual Report and Accounts 2017 89 Directors’ Report Risk, Investment & Financing Committee Report Following implementation of enhancements to UDG Healthcare’s Risk Management Process in 2016, it was another busy year for the Committee, with international M&A and investment in facilities at the forefront of its activities. Chris Brinsmead Chair of the Risk, Investment & Financing Committee Composition as at 30 September 2017 Chris Brinsmead (Chair) Gerard van Odijk Lisa Ricciardi Nancy Miller-Rich Attendance Record and Tenure The Committee met four times during the year ended 30 September 2017. Individual attendance at these meetings along with the tenure of each member is set out below. Member Chris Brinsmead (Chair) Gerard van Odijk Lisa Ricciardi Nancy Miller-Rich Number of meetings held when director was a member Number of meetings attended 4 4 4 0 0 Committee tenure 6 years 4 years 4 years 3 months Key Objective To review the risk evaluation and risk management procedures adopted by the Group to ensure relevant risks are identified and managed appropriately. Key Responsibilities • • • • • • to oversee the Group’s risk management systems, including its risk register and internal controls; to oversee the identification and assessment of the Group’s Principal Risks and Uncertainties as well as their associated mitigation strategies, and recommend them to the Board for approval; to oversee the review of the long-term viability of the Group and the development of the Viability Statement for recommendation to the Audit Committee; to consider, review and authorise the commencement of due diligence on potential transactions; to consider, review and approve potential transactions to be made by the Group which have a consideration value of up to €50 million; to evaluate, and recommend to the Board for approval, any proposed capital expenditure requests exceeding €3 million and any debt and equity financing proposals; and • conduct one-year and three-year post-acquisition reviews. 90 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Meetings The Committee met four times during the year ended 30 September 2017. Individual attendance at these meetings is set out above. The Committee is currently comprised of four independent non-executive directors. The Chief Executive, Chief Financial Officer and the Group Head of Quality & Compliance are not members of the Committee but attend meetings at the invitation of the Committee. Main Activities During the Year With the level of M&A activity this year, the Committee was heavily involved in reviewing requests to proceed to due diligence for a number of potential acquisitions, including a number of those which ultimately completed. Pursuant to the Committee’s terms of reference, it also has authority to approve the entry into transactions involving consideration up to €50 million. Accordingly the Committee approved a number of transactions this year including the acquisition by Sharp of the Daiichi-Sankyo facility in Bethlehem, Pennsylvania. The effective understanding and management of risk is critical to the short-term success and long-term viability of the Group. It is in that context that the Group has incorporated quarterly viability reviews within the Risk Management Process ensuring that the risks associated with what the Group does are tackled in the most appropriate way. To support this, the Group has developed and implemented a risk management system that facilitates the identification of the principal or significant risks that face the Group and which allows those risks and their associated resolutions to be actively amended and monitored. This system is dynamic and as part of its ongoing development the Group has focused on a greater facilitation of its risk identification and management, as well as an internal review of its effectiveness. As a consequence, the Committee is satisfied that the Group’s risk management system is effective. The Principal Risks and Uncertainties for the Group are set out on pages 21 to 23. Two executive sub-Committees were established in 2016, the Risk & Viability sub-Committee and the Quality & Compliance sub-Committee, both of which report their annual activities to this Committee. The Chairman of the Board sits on the Quality & Compliance sub-Committee. The process for development of the long-term Viability Statement was to review the internal elements of the Group and, as against the Group’s strategy, to review key aspects of the business environment. Long-term viability forms part of the Group strategy, as one of the objectives of developing a long-term strategy is to ensure the viability of the Group. The scenario selection is based on the risks identified in the Principal Risks and Uncertainties. The Committee reviewed the process and the long-term Viability Statement and recommended it to the Audit Committee for their review and approval. During the year, the Committee also created a standing agenda setting out when its main activities would be addressed during the year. It was determined that a review of financing arrangements in November 2018, would be conducted in May and November each year, with post-acquisition reviews to occur during November. Accordingly, the Committee will carry out one-year post-acquisition reviews of businesses acquired during 2016 and three-year post-acquisition reviews of businesses acquired during 2014/2015. Chris Brinsmead Chair of the Risk, Investment & Financing Committee UDG Healthcare plc Annual Report and Accounts 2017 91 Report of the Directors The directors present their report and audited Financial Statements for the year ended 30 September 2017. Dividends An interim dividend of $3.58 cent (2016: $3.41 cent) per share was paid on 27 June 2017. Subject to shareholder approval at the Company’s AGM, it is proposed to pay a final dividend of $9.72 cent (2016: $9.04 cent) per share on 5 February 2018, to ordinary shareholders on the Company’s register at 5.00 p.m. on 12 January 2017, thereby giving a total dividend for the year of $13.30 cent (2016: $12.45 cent) per share. Board of Directors Myles Lee was appointed to the Board on 1 April 2017. Details of the Board are set out on pages 56 and 57. In accordance with the recommendation contained in the 2016 UK Corporate Governance Code, the Board has adopted the practice of annual re-election for all directors, unless a director is stepping down from the Board. Company Listing and Share Price At 30 September 2017, the Company’s shares were listed solely on the London Stock Exchange. The price of the Company’s shares ranged between £6.15 and £8.67, with an average price of £7.38, during the year ended 30 September 2017. The share price at the end of the 2017 financial year was £8.50 and the market capitalisation of the Group was £2.11 billion. Substantial Interests The Company received notification of the following interests of 3% or more in its ordinary share capital: Fidelity Management & Research Kabouter Management Blackrock Aberdeen Standard Investments Vanguard Group At 24 November 2017* At 29 September 2017 Ordinary shares number % of issued share capital (excluding treasury shares) Ordinary shares number % of issued share capital (excluding treasury shares) 20,091,222 13,677,058 11,382,220 8,008,626 7,564,414 8.09% 5.51% 4.58% 3.23% 3.05% 20,091,222 13,462,928 11,067,201 8,142,655 7,002,748 8.09% 5.42% 4.46% 3.28% 2.82% * 24 November is the last practicable date to verify interests before printing this report. These entities have indicated that the shareholdings are not ultimately beneficially owned by them. Authority to Allot Shares and Disapplication of Pre-emption Rights At the AGM held on 7 February 2017, the directors received the authority from shareholders to allot shares up to an aggregate nominal value representing approximately one-third of the issued share capital of the Company and the power to disapply the statutory pre-emption provisions relating to the issue of new equity for cash. The disapplication is limited to the allotment of shares in connection with the exercise of share options, any rights issue, any open offer or other offer to shareholders and the allotment of shares up to an aggregate nominal value representing approximately 5% of the issued share capital of the Company. The directors also received authority to allot up to 10% of the issued share capital of the Company if the issue was related to an acquisition. These authorities are due to expire at the Company’s 2018 AGM. Consequently, at the forthcoming AGM, shareholders will be asked to renew these authorities until the date of the Company’s AGM to be held in 2019 or the date 15 months after this forthcoming AGM, whichever is the earlier. 92 UDG Healthcare plc Annual Report and Accounts 2017 Directors’ Report Strategic Report Directors’ Report Financial Statements Purchase of Own Shares At the AGM held on 7 February 2017, authority was granted to the Company, or any of its subsidiaries, to purchase a maximum aggregate of 10% of the Company’s shares. Special resolutions will be proposed at the Company’s 2018 AGM to renew the authority of the Company, or any of its subsidiaries, to purchase up to 10% of the issued share capital of the Company and in relation to the maximum and minimum prices at which treasury shares (effectively shares purchased and not cancelled) may be re-issued off-market by the Company. If granted, the authorities will expire on the earlier of the date of the Company’s AGM in 2019 or the date 15 months after this forthcoming AGM. The directors will only exercise the power to purchase shares if they consider it to be in the best interests of the Company and its shareholders as a whole. Takeover Directive The Group’s principal banking and loan note facilities include provisions that, in the event of a change of control of the Company, the Group could be obliged to repay the facilities together with penalties. Certain client and supplier contracts and joint venture arrangements also contain change of control provisions. Additionally, the Company’s Long Term Incentive Plan and share option schemes contain change of control provisions which potentially allow for the acceleration of the exercisability of awards in the event that a change of control occurs with respect to the Company. Political Donations No political donations which require disclosure in accordance with the Electoral Acts 1997 to 2012 were made by the Group during the year. Accounting Records The directors believe that they have complied with the requirements of Sections 281 to 285 of the Companies Act 2014 with regard to maintaining adequate accounting records by employing accounting personnel with appropriate expertise and by providing adequate resources to the finance function. The accounting records of the Company are maintained at the Company’s registered office, 20 Riverwalk, Citywest Business Campus, Citywest, Dublin 24, Ireland. Auditor The appointment of EY as the Company’s Auditor was approved by shareholders at the AGM held on 7 February 2017. The re-appointment of EY for the year ending 30 September 2018 will be subject to shareholder approval at the AGM to be held on 30 January 2018. Disclosure of Information to the Auditor Each of the directors individually confirms that: • • in so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware; and they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of such information. Annual General Meeting The AGM of the Company will be held on 30 January 2018. Your attention is drawn to the letter to shareholders and the Notice of AGM available on the Company’s website, www.udghealthcare.com, which set out details of the matters which will be considered. Memorandum and Articles of Association The Company’s Memorandum and Articles of Association set out the objects and powers of the Company and may be amended by a special resolution passed by the shareholders at a general meeting of the Company. Corporate Governance UDG Healthcare plc is an Irish registered company and is therefore not subject to the disclosure requirements contained in the UK Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. A summary of the Group’s business model and strategy is set out on pages 12 to 15 and the Group’s sustainability policies and activities are summarised on pages 40 to 51. UDG Healthcare plc Annual Report and Accounts 2017 93 Directors’ Report Report of the Directors (continued) Directors Compliance Statement (Made in accordance with section 225 of the Companies Act, 2014). The directors acknowledge that they are responsible for securing compliance by UDG Healthcare plc (the ‘Company’) with its relevant obligations as are defined in the Companies Act, 2014 (the ‘Relevant Obligations’). The directors confirm that they have drawn up and adopted a compliance policy statement setting out the Company’s policies that, in the directors’ opinion, are appropriate to the Company with respect to compliance by the Company with its relevant obligations. The directors further confirm the Company has put in place appropriate arrangements or structures that are, in the directors’ opinion, designed to secure material compliance with its relevant obligations including reliance on the advice of persons employed by the Company and external legal and tax advisers as considered appropriate from time to time and that they have reviewed the effectiveness of these arrangements or structures during the financial year to which this report relates. Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Report and the Group and Company Financial Statements, in accordance with applicable laws and regulations. Company law requires the directors to prepare Group and Company Financial Statements each year. Under that law, the directors are required to prepare the Group Financial Statements in accordance with IFRS as adopted by the European Union and have elected to prepare the Company Financial Statements in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2014. 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 assets, liabilities and financial position of the Group and Company and of their profit and loss for that period. In preparing each of the Group and Company Financial Statements, the directors are required to: • • make judgements and estimates that are reasonable and prudent; • state that the Financial Statements comply with IFRS as adopted by the European Union as applied in accordance with the Companies Act 2014; and select suitable accounting policies and then apply them consistently; • prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The directors are also required by the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group. The directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy, at any time, the assets, liabilities, financial position and profit and loss of the Company, and which enable them to ensure that the Financial Statements of the Group comply with the provisions of the Companies Act 2014. The directors are also responsible for taking all reasonable steps to ensure such records are kept by subsidiaries which enable them to ensure that the Financial Statements of the Group comply with the provisions of the Companies Act, 2014. They are also responsible for safeguarding the assets of the Company and the Group, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s and Company’s website (www.udghealthcare.com). Legislation in Ireland concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility Statement as Required by the Transparency Directive and UK Corporate Governance Code Each of the directors, whose names and functions are listed on pages 80 and 90 of this Annual Report, confirm that, to the best of each person’s knowledge and belief: • as required by the Transparency Regulations: • The Group Financial Statements, prepared in accordance with IFRS as adopted by the European Union and, in the case of the Company, as applied in accordance with the Companies Act 2014, give a true and fair view of the assets, liabilities, financial position of the Group and Company as at 30 September 2017 and of the profit of the Group for the year then ended; • The Directors’ Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face; and • as required by the UK Corporate Governance Code: • The Annual Report and Financial Statements, taken as a whole, provide the information necessary to assess the Group’s performance, business model and strategy and is fair, balanced and understandable. 94 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Other Information Other information relevant to the Director’s Report may be found in the following sections of the Annual Report: Information Location in the Annual Report Principal activities, business review and future developments Chairman’s Statement; Chief Executive’s Review; Operations Reviews and Finance Review – pages 4 to 55. Results Financial Statements – pages 98 to 176. Corporate Governance Corporate Governance Report – pages 59 to 65. Directors’ remuneration, including the interests of the directors and secretary in the share capital of the Company Directors’ Remuneration Report – pages 70 to 87. Principal Risks and Uncertainties Principal Risks and Uncertainties – pages 19 to 23. Principal Key Performance Indicators Key Performance Indicators – pages 16 to 18. Financial risk management objectives and policies of the Group and the Company Financial Statements – Note 30. Company’s capital structure including a summary of the rights and obligations attaching to shares Group Statement of Changes in Equity – page 105; and Financial Statements – Notes 17, 19 and 20. Long Term Incentive Plan, share options and equity settled incentive schemes Directors’ Remuneration Report – pages 70 to 87. Events after the balance sheet date Financial Statements – Note 34. Significant subsidiary undertakings Financial Statements – Note 47. The Directors’ Report for the year ended 30 September 2017 comprises these pages and the sections of the Annual Report referred to under ‘Other information’ above, which are incorporated into the Directors’ Report by reference. On behalf of the Board P. Gray Director 4 December 2017 B. McAtamney Director UDG Healthcare plc Annual Report and Accounts 2017 95 Financial Statements Independent Auditor’s Report to the Members of UDG Healthcare plc Opinion In our opinion: • UDG Healthcare plc’s group financial statements and parent company financial statements (the “financial statements”) give a true and fair view of the assets, liabilities and financial position of the group and of the parent company as at 30 September 2017 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“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 2014; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2014, and, as regards the group financial statements, Article 4 of the IAS Regulation. • • • We have audited the financial statements of UDG Healthcare plc which comprise: Group Parent company Group Balance Sheet as at 30 September 2017 Company Balance Sheet as at 30 September 2017 Group Income Statement for the year then ended Company Statement of Comprehensive Income for the year then ended Group Statement of Comprehensive Income for the year then ended Company Statement of Changes in Equity for the year then ended Group Statement of Changes in Equity for the year then ended Company Cash Flow Statement for the year then ended Group Cash Flow Statement for the year then ended Related notes 35 to 50 to the financial statements including a summary of significant accounting policies Related notes 1 to 34 to the financial statements, including a summary of significant accounting policies The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union, and in the case of the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2014. Basis for Opinion We conducted our audit in accordance with ISAs (Ireland) 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 Company in accordance with ethical requirements that are relevant to our audit of financial statements in Ireland, including the Ethical Standard as applied to public interest entities issued by the Irish Auditing and Accounting Supervisory Authority (IAASA), 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. Overview of Our Audit Approach Key audit matters • Assessment of the carrying value of goodwill • Accounting for acquisitions • Revenue recognition Audit scope • We performed an audit of the complete financial information of 8 components and audit Materiality procedures on specific balances for a further 50 components. • The components where we performed full or specific audit procedures accounted for 88% of Profit before Tax, 94% of Revenue and 97% of Total Assets. • Overall group materiality of $4.6 million which represents 5% of Profit before Tax. In their prior year audit, KPMG adopted a materiality of €3.75 million based on 5% of Profit before Tax from continuing operations. 96 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements 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, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key observations communicated to the Audit Committee Our observations included the headroom level by CGU, where within an acceptable range the discount rate for each CGU lay, the results of our sensitivity analysis, and an analysis of the 5 year forecast EBIT growth rate when viewed against the prior year impairment model and the current year actual growth. Our observations included a comparison of the net assets, goodwill and other intangible assets arising on each acquisition. We also analysed each of these categories as a percentage of total consideration for each acquired entity. We also commented on deferred tax aspects and the range of intangible asset useful lives determined. Risk Our response to the risk Assessment of the Carrying Value of Goodwill ($542.6 million) Refer to the Audit Committee Report (page 67); Accounting policies (page 112); and Note 12 of the Consolidated Financial Statements (page 129). Our team included valuations specialists who performed an independent assessment against external market data of key inputs used by management in calculating appropriate discount rates. The impairment review of goodwill, with a carrying value of $542.6 million, is considered to be a risk area due to the size of the balance as well as the fact that it involves significant judgement by management. Judgemental aspects include assumptions of future profitability, revenue growth, margins, and the selection of appropriate discount rates, all of which may be susceptible to management override. Accounting for Acquisitions ($270.5 million) Refer to the Audit Committee Report (page 67); Accounting policies (page 111); and Note 28 of the Consolidated Financial Statements (page 141). During the year, the Group completed 6 acquisitions at a total cost of $270.5 million, representing a significant increase over the prior year when only 1 acquisition was completed at a cost of $23.0 million. As a result of this significant increase in activity, the accounting for acquisitions was an area where we allocated significant resources in directing the efforts of the engagement team. Particular focus was applied to the IFRS 3 requirements around the identification and valuation of intangible assets other than goodwill, and the valuation of deferred contingent consideration balances, as these areas require significant judgement to be exercised by management. The nature of these judgements result in them being susceptible to management override. We challenged the determination of the Group’s 9 cash-generating units (CGUs), and flexed our audit approach relative to our risk assessment and the level of excess of value-in-use over the carrying amount in each CGU. For all CGUs selected for detailed testing, we corroborated key assumptions in the models, in particular growth rates, which we compared against historic rates achieved and external analyst forecasts. We performed a sensitivity analysis on the discount rate and the long term growth rate, to assess the level of excess of value-in-use over the carrying value in place for each CGU based on reasonably possible movements in such assumptions. We considered the adequacy of management’s disclosures in respect of impairment testing and whether the disclosures appropriately communicate the underlying sensitivities. We performed procedures on all current year acquisitions including review of the underlying legal documentation, audit of the fair values of assets and liabilities arising on acquisition, and the valuation of deferred contingent consideration balances. In respect of the identification and valuation of intangible assets other than goodwill, management utilised external specialists to assist them in determining these values. Our team included valuations specialists who independently considered the outcome for each acquisition, including performing corrobarative calculations in areas such as discount rates. We also performed appropriate audit procedures to assess the competence, capabilities and objectivity of management’s specialists and that the results of their work are reasonable in the circumstances and support the relevant assertions in the financial statements. We also considered the adequacy of the related disclosures, including where the initial business combination accounting was still provisional. UDG Healthcare plc Annual Report and Accounts 2017 97 Financial Statements Independent Auditor’s Report to the Members of UDG Healthcare plc (continued) Risk Our response to the risk Revenue Recognition ($1,219.8 million) Refer to the Audit Committee Report (page 67); Accounting policies (page 114); and Note 3 of the Consolidated Financial Statements (page 118). The Group generates revenue from a variety of geographies and across a large number of separate legal entities spread across the Group’s three segments. Revenue may be recorded in an incorrect period or on a basis that is inconsistent with the contractual terms agreed with clients. Certain of the Group’s revenue streams involve the exercise of judgement, in particular the determination of stage of completion of individual contracts where their duration spans accounting periods. In addition, the Group must assess whether it acts as agent or principal in transactions and accordingly whether revenue should be recorded on a gross or net basis, including the treatment of any rebates received. These judgements are important, given the significance of revenue as both a growth measure and a key determinant of profit in each period. We performed procedures on revenue at all in-scope locations, as outlined in further detail in the ‘Tailoring the scope’ section below. Detailed transactional testing of revenue recognised throughout the year was performed, commensurate with the higher audit risk assigned to revenue. Dependent on the nature of the revenue recognised at each location, we examined supporting documentation including client contracts, statements of works or purchase orders, sales invoices, and cash receipts. In addition, we performed cut-off procedures, revenue journal testing and client balance confirmations, and in some locations data analytics procedures were also performed. Particular focus was applied at those locations where revenue is determined over time under a stage of completion methodology or where agent versus principal considerations apply. In these circumstances we applied professional scepticism when assessing the judgments made by management. Key observations communicated to the Audit Committee Our observations included an outline of the range of audit procedures performed, the key judgments involved, the entities where management judgement was most prevalent and the results of our testing. We also provided our assessment of where we believe the Group’s revenue recognition practices lie within a range of acceptable outcomes, and the level of subjectivity involved in revenue related estimates. Our Application of Materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group to be $4.6 million, which is 5% of Profit before Tax. In their prior year audit, KPMG adopted a materiality of €3.75 million based on 5% of Profit before Tax from continuing operations. Profit before Tax is a key performance indicator for the Group and is also a key metric used by the Group in the assessment of the performance of management. We therefore considered Profit before Tax to be the most appropriate performance metric on which to base our materiality calculation as we consider it to be the most relevant performance measure to the stakeholders of the Group. During the course of our audit, we reassessed initial materiality and the only change in final materiality was to reflect the actual reported performance of the Group in the year. Performance Materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% of our materiality, namely $2.3 million. We have set performance materiality at this percentage based on our assessment of the risk of misstatements, both corrected and uncorrected, with the current year being our first year as auditor. Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was $1.7 million to $0.5 million. 98 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Reporting Threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of $230,000, which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. An Overview of the Scope of Our Audit Report Tailoring the Scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. In determining those components in the Group at which we perform audit procedures, we utilised size and risk criteria in accordance with International Standards on Auditing (Ireland). In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 154 reporting components of the Group, we selected 58 components covering entities within the US, UK, Ireland, Germany, Belgium, Netherlands, Spain, Portugal, Austria, Sweden, Turkey, Japan and Canada, which represent the principal business units within the Group. Of the 58 components selected, we performed an audit of the complete financial information of 8 components (“full scope components”) which were selected based on their size or risk characteristics. For the remaining 50 components (“specific scope components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. The reporting components where we performed audit procedures accounted for 88% of the Group’s Profit before Tax, 94% of the Group’s Revenue and 97% of the Group’s Total assets. For the current year, the full scope components contributed 84% of the Group’s Profit before Tax, 60% of the Group’s Revenue and 42% of the Group’s Total assets. The specific scope component contributed 4% of the Group’s Profit before Tax, 34% of the Group’s Revenue and 55% of the Group’s Total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group. Of the remaining 96 components that together represent 12% of the Group’s Profit before, none are individually greater than 3% of the Group’s Profit before Tax. For these components, we performed other procedures, including analytical review, testing of consolidation journals and intercompany eliminations, and foreign currency translation recalculations to respond to any potential risks of material misstatement to the financial statements. The charts below illustrate the coverage obtained from the work performed by our audit teams. Profit before tax (or adjusted PBT measure used) 12% 4% Revenue 6% 34% Total assets 3% 42% 84% 60% 55% Full scope components Full scope components Full scope components Specific scope components Specific scope components Specific scope components Other procedures Other procedures Other procedures UDG Healthcare plc Annual Report and Accounts 2017 99 Financial Statements Independent Auditor’s Report to the Members of UDG Healthcare plc (continued) Involvement with Component Teams In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Of the 8 full scope components, audit procedures were performed on 1 of these directly by the primary audit team and on 7 by component audit teams. For the 45 full scope and specific scope components, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. The Group audit team completed a programme of planned visits which has been designed to ensure that senior members of the Group audit team, including the Audit Engagement Partner, visit a number of overseas locations each year. During the current year’s audit cycle, visits were undertaken to the component teams in the US and Germany. These visits involved discussing the audit approach with the component team and any issues arising from their work, meeting with local management and attending planning and closing meetings. The Group audit team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers as deemed necessary and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the group financial statements. Conclusions Relating to Principal Risks, Going Concern and Viability Statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (Ireland) require us to report to you if we have anything material to add or draw attention to: • the disclosures in the annual report set out on pages 21 to 23 that describe the principal risks and explain how they are being managed or mitigated; the directors’ confirmation set out on page 20 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; the directors’ statement set out on page 20 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • • • whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) • is materially inconsistent with our knowledge obtained in the audit; and the directors’ explanation set out on page 20 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Other Information The directors are responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained during 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. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable (set out on page 94) – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit committee reporting (set out on pages 66 to 69) – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee or is materially inconsistent with our knowledge obtained in the audit; or • Directors’ statement of compliance with the UK Corporate Governance Code (set out on page 59) – the parts of the directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. 100 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Opinions on Other Matters Prescribed by The Companies Act 2014 Based solely on the work undertaken in the course of the audit, we report that: • in our opinion, the information given in the Directors’ Report is consistent with the financial statements; and in our opinion, the Directors’ Report has been prepared in accordance with the Companies Act 2014. • We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion the accounting records of the Company were sufficient to permit the financial statements to be readily and properly audited and the Company statement of financial position is in agreement with the accounting records. Matters on Which We Are Required to Report by Exception Based on the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Directors’ Report. The Companies Act 2014 requires us to report to you if, in our opinion, the disclosures of directors’ remuneration and transactions required by sections 305 to 312 of the Act are not made. We have nothing to report in this regard. Respective Responsibilities Responsibilities of directors for the financial statements As explained more fully in the directors’ responsibilities statement set on page 94, 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 they 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 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 management either intends to liquidate the Company or to cease operations, or has 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 (Ireland) 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. The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group across the various jurisdictions globally in which the Group operates. We determined that the most significant are those that relate to the form and content of external financial and corporate governance reporting including company law, tax legislation, employment law and regulatory compliance with agencies such as the US Food and Drug Administration. • We understood how UDG Healthcare plc is complying with those frameworks by making enquiries of management, internal audit, those responsible for legal and compliance procedures and the company secretary. We corroborated our enquiries through our review of the Group’s Compliance Policy, board minutes, papers provided to the audit committee and correspondence received from regulatory bodies. • We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur, by meeting with management, including within various parts of the business, to understand where they considered there was susceptibility to fraud. We also considered performance targets and the potential for management to influence earnings or the perceptions of analysts. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error. • Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures included a review of board minutes to identify any noncompliance with laws and regulations, a review of the reporting to the audit committee on compliance with regulations, enquiries of internal general counsel and management. A further description of our responsibilities for the audit of the financial statements is located on the IAASA’s website at: http://www.iaasa.ie/getmedia/b2389013-1cf6-458b-9b8f-a98202dc9c3a/Description_of_auditors_responsiblities_for_audit.pdf. This description forms part of our auditor’s report. UDG Healthcare plc Annual Report and Accounts 2017 101 Financial Statements Independent Auditor’s Report to the Members of UDG Healthcare plc (continued) Other matters which we are required to address We were appointed by the Audit Committee following the AGM held on 7 February 2017 to audit the financial statements for the year ending 30 September 2017 and subsequent financial periods. This is our first year of engagement. The non-audit services prohibited by IAASA’s Ethical Standard were not provided to the Group or Company and we remain independent of the Group and Company in conducting our audit. Our audit opinion is consistent with the additional report to the Audit Committee. The purpose of our audit work and to whom we owe our responsibilities Our report is made solely to the Company’s members, as a body, in accordance with section 391 of the Companies Act 2014. 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. Breffni Maguire for and on behalf of Ernst & Young Chartered Accountants and Statutory Audit Firm Dublin 4 December 2017 102 UDG Healthcare plc Annual Report and Accounts 2017 Group Income Statement for the year ended 30 September 2017 Continuing operations Revenue Cost of sales Gross profit Selling and distribution expenses Administrative expenses Other operating expenses Transaction costs Share of joint ventures’ profit after tax Operating profit Finance income Finance expense Profit before tax from continuing operations Income tax expense Profit for the financial year from continuing operations Profit after tax for the financial year from discontinued operations Profit for the financial year Profit attributable to: Continuing operations Discontinued operations Earnings per ordinary share Basic – continuing operations Basic – discontinued operations Basic Diluted – continuing operations Diluted – discontinued operations Diluted On behalf of the Board P. Gray Director B. McAtamney Director Strategic Report Directors’ Report Financial Statements 2017 $’000 1,219,755 (871,909) 347,846 (192,536) (23,313) (25,450) (4,028) 667 103,186 18,905 (29,257) 92,834 (20,976) 71,858 – 71,858 71,858 – 71,858 28.97c – 28.97c 28.83c – 28.83c As re-presented and restated 2016 $’000 1,083,439 (767,833) 315,606 (177,543) (20,854) (18,213) (2,214) 798 97,580 5,311 (19,349) 83,542 (15,428) 68,114 150,409 218,523 68,114 150,409 218,523 27.64c 61.04c 88.68c 27.53c 60.79c 88.32c Note 3 28 14 5 6 6 7 8 8 10 10 10 10 10 10 UDG Healthcare plc Annual Report and Accounts 2017 103 Financial Statements Group Statement of Comprehensive Income for the year ended 30 September 2017 Profit for the financial year Other comprehensive income/(expense): Items that will not be reclassified to profit or loss: Remeasurement gain/(loss) on Group defined benefit schemes – Continuing operations – Discontinued operations Deferred tax on Group defined benefit schemes – Continuing operations – Discontinued operations Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustment – Continuing operations – Discontinued operations Reclassification on loss of control Group cash flow hedges: – Effective portion of cash flow hedges – movement into reserve – Effective portion of cash flow hedges – movement out of reserve Effective portion of cash flow hedges – Movement in deferred tax – movement into reserve – Movement in deferred tax – movement out of reserve Net movement in deferred tax Other comprehensive income/(expense), net of tax Total comprehensive income, net of tax, attributable to equity holders of the parent Total comprehensive income/(expense) attributable to: Continuing operations Discontinued operations Note 29 27 20 20 20 20 (15,271) 14,865 1,909 (1,858) 2017 $’000 71,858 11,098 – (599) – 10,499 10,109 – – (406) 51 9,754 20,253 92,111 92,111 – 92,111 As re-presented and restated 2016 $’000 218,523 (9,409) 1,177 599 (232) (7,865) (60,031) (2,045) 5,283 (6,379) 798 (62,374) (70,239) 148,284 (6,308) 154,592 148,284 (5,483) (896) 685 113 104 UDG Healthcare plc Annual Report and Accounts 2017 Group Statement of Changes in Equity for the year ended 30 September 2017 Strategic Report Directors’ Report Financial Statements Equity share capital $’000 Share premium $’000 Retained earnings $’000 Other reserves (Note 20) $’000 Attributable to owners of the parent $’000 Non- controlling interest $’000 At 1 October 2016 14,535 187,355 784,432 (179,446) 806,876 Profit for the financial year Other comprehensive income/(expense): Effective portion of cash flow hedges Deferred tax on cash flow hedges Translation adjustment Remeasurement gain on defined benefit schemes Deferred tax on defined benefit schemes Total comprehensive income for the year Transactions with shareholders: New shares issued Issued in business combination Share-based payment expense Dividends paid to equity holders Release from share-based payment reserve Non-controlling interest arising on acquisition – – – – – – – 46 39 – – – – – – – – – – – 71,858 – 71,858 – – – 11,098 (599) (406) 51 10,109 – – (406) 51 10,109 11,098 (599) 82,357 9,754 92,111 3,129 6,012 – – – – – – – (31,279) 577 – – – 3,613 – (577) – 3,175 6,051 3,613 (31,279) – – At 30 September 2017 14,620 196,496 836,087 (166,656) 880,547 for the year ended 30 September 2016 Total equity $’000 806,876 71,858 (406) 51 10,109 11,098 (599) 92,111 – – – – – – – – – – – – – 109 109 3,175 6,051 3,613 (31,279) – 109 880,656 At 1 October 2015 14,430 183,000 600,793 (116,219) 682,004 Equity share capital $’000 Share premium $’000 Retained earnings $’000 Other reserves (Note 20) $’000 Total equity as re-presented and restated $’000 Profit for the financial year Other comprehensive income/(expense): Effective portion of cash flow hedges Deferred tax on cash flow hedges Translation adjustment – Continuing operations – Discontinued operations Reclassification on loss of control of subsidiary undertakings Remeasurement (loss)/gain on defined benefit schemes – Continuing operations – Discontinued operations Deferred tax on defined benefit schemes – Continuing operations – Discontinued operations Total comprehensive income/(expense) for the year Transactions with shareholders: New shares issued Share-based payment expense Dividends paid to equity holders Release from share-based payment reserve At 30 September 2016 – – – – – – – – – – – – – – – – – – – – – – 218,523 – 218,523 – – – – – (6,379) 798 (6,379) 798 (60,031) (2,045) 5,283 (60,031) (2,045) 5,283 (9,409) 1,177 599 (232) – – – – (9,409) 1,177 599 (232) 210,658 (62,374) 148,284 105 – – – 4,355 – – – – – (30,056) 3,037 – 2,184 – (3,037) 4,460 2,184 (30,056) – 14,535 187,355 784,432 (179,446) 806,876 UDG Healthcare plc Annual Report and Accounts 2017 105 Financial Statements Group Balance Sheet as at 30 September 2017 ASSETS Non-current Property, plant and equipment Goodwill Intangible assets Investment in joint ventures and associates Derivative financial instruments Deferred income tax assets Employee benefits Total non-current assets Current Inventories Trade and other receivables Cash and cash equivalents Current income tax assets Derivative financial instruments Assets held for sale Total current assets Total assets EQUITY Equity share capital Share premium Other reserves Retained earnings Equity attributable to owners of the parent Non-controlling interest Total equity LIABILITIES Non-current Interest-bearing loans and borrowings Provisions Employee benefits Deferred income tax liabilities Derivative financial instruments Total non-current liabilities Current Interest-bearing loans and borrowings Trade and other payables Current income tax liabilities Provisions Liabilities held for sale Total current liabilities Total liabilities Total equity and liabilities On behalf of the Board P. Gray Director B. McAtamney Director 106 UDG Healthcare plc Annual Report and Accounts 2017 Note 2017 $’000 As re-presented (Note 32) 2016 $’000 As re-presented (Note 32) 2015 $’000 11 12 13 14 30 27 29 15 16 30 8 17 19 20 21 22 23 25 29 27 30 23 24 25 8 168,403 542,554 227,617 8,838 1,302 4,025 12,379 965,118 55,060 307,388 187,469 2,464 2,450 – 554,831 136,877 384,520 108,322 9,067 13,185 4,296 13,939 670,206 54,941 233,791 428,729 4,532 8,239 – 132,087 401,306 113,927 25,855 24,700 4,463 14,639 716,977 61,636 229,939 239,832 1,806 5,321 530,821 730,232 1,069,355 1,519,949 1,400,438 1,786,332 14,620 196,496 (166,656) 836,087 880,547 109 880,656 14,535 187,355 (179,446) 784,432 806,876 – 806,876 14,430 183,000 (116,219) 600,793 682,004 – 682,004 244,077 58,470 3,162 54,279 352 360,340 58 248,145 16,845 13,905 – 278,953 639,293 242,108 6,084 20,442 31,008 – 299,642 64,882 204,468 14,587 9,983 – 293,920 593,562 465,866 8,411 20,505 31,424 – 526,206 23,315 214,831 4,988 20,931 314,057 578,122 1,104,328 1,519,949 1,400,438 1,786,332 Group Cash Flow Statement for the year ended 30 September 2017 Strategic Report Directors’ Report Financial Statements Cash flows from operating activities Profit before tax Finance income Finance expense Operating profit Share of joint ventures’ profit after tax Depreciation charge Loss/(profit) on disposal of property, plant and equipment Impairment of intangible assets Amortisation of intangible assets Share-based payment expense Decrease in inventories Increase in trade and other receivables Increase/(decrease) in trade payables, provisions and other payables Exceptional items paid Profit on disposal of discontinued operations Impairment of assets held for sale Interest paid Income taxes paid Net cash inflow/(outflow) from operating activities Cash flows from investing activities Interest received Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Investment in intangible assets – computer software Acquisition of subsidiaries (net of cash and cash equivalents acquired) Deferred contingent acquisition consideration paid Disposal of subsidiary undertakings (net of cash and cash equivalents disposed) Net cash (outflow)/inflow from investing activities Cash flows from financing activities Proceeds from issue of shares (including share premium thereon) Repayments of interest-bearing loans and borrowings Group transfers Decrease in finance leases Dividends paid to equity holders of the Company Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Translation adjustment Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents is comprised of: Cash at bank and short term deposits 92,834 (18,905) 29,257 103,186 (667) 21,221 55 – 25,450 3,613 1,893 (24,612) 2,934 (165) – – (10,608) (14,522) 107,778 1,044 (29,466) 146 (21,884) (198,439) (14,265) – (262,864) 3,175 (63,266) – (3) (31,279) (91,373) (246,459) 5,199 428,729 187,469 187,469 2016 (As re-presented) 2017 $’000 Continuing operations $’000 Discontinued operations $’000 83,542 (5,311) 19,349 97,580 (798) 20,032 71 798 18,213 2,184 3,452 (9,783) (8,663) (2,564) – – (12,201) (13,716) 151,220 (8) 64 151,276 (1,659) – (12) 1,133 – – 3,870 (10,074) (32,081) – (150,780) 18,842 – (777) Total $’000 234,762 (5,319) 19,413 248,856 (2,457) 20,032 59 1,931 18,213 2,184 7,322 (19,857) (40,744) (2,564) (150,780) 18,842 (12,201) (14,493) 94,605 (20,262) 74,343 663 (31,736) 435 (10,926) (14,446) (17,331) 447,112 8 (2,533) 12 (6,648) – – (21,389) 671 (34,269) 447 (17,574) (14,446) (17,331) 425,723 373,771 (30,550) 343,221 4,460 (178,696) 2,879 (80) (30,056) – – (2,879) – – 4,460 (178,696) – (80) (30,056) (201,493) (2,879) (204,372) 266,883 (53,691) 213,192 (24,295) 239,832 428,729 428,729 UDG Healthcare plc Annual Report and Accounts 2017 107 Financial Statements Notes forming part of the Group Financial Statements 1. Significant Accounting Policies UDG Healthcare plc (the ‘Company’) is a public limited company incorporated in Ireland. The Consolidated Financial Statements of the Company for the year ended 30 September 2017 comprise the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in joint venture undertakings and associates using the equity method of accounting. The accounting policies applied in the preparation of the Financial Statements for the year ended 30 September 2017 are set out below. Statement of Compliance The Group Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. The individual Financial Statements of the Company (Company Financial Statements) have been prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the Companies Act 2014. The Company has availed of the exemption contained in Section 304 (2) of the Companies Act 2014 which permits a company which publishes its Company and Group Financial Statements together to exclude the Company Income Statement and related notes that form part of the approved Company Financial Statements from the Financial Statements presented to its members and from the requirement to file it with the Registrar of Companies. The accounting policies adopted are consistent with those of the previous year except for the change in the Group’s presentation currency from euro to US dollar and the following new and amended IFRSs and International Financial Reporting Interpretations Committee (IFRIC) interpretations that were adopted by the Group as of 1 October 2016: • Amendments to IAS 27: Equity method in Separate Financial Statements; • Amendments to IAS 1: Disclosure initiative; • Amendments to IFRS 11: Accounting for acquisitions of interests in Joint Operations; • Annual Improvements to IFRSs 2012–2014 Cycle; and • Amendments to IAS 16 and IAS 38: Clarification of acceptable methods of depreciation and amortisation. These are effective for the Group’s financial year ended 30 September 2017 but did not have a material effect on the results or financial position of the Group. The IASB and the International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards, amendments to existing standards and interpretations that are not yet effective for the Group: • Annual Improvements to IFRSs 2014-2016 Cycle: As part of its annual improvement process, the IASB has published necessary amendments to IFRS. The topics covered in these revisions are listed below: • IFRS 1 (effective 1 January 2018): First-time Adoption of International Financial Reporting Standards: Deletion of short term exemptions for first time adopters IFRS 12 (effective 1 January 2017): Disclosure of Interests in Other Entities: Clarification of the scope of the disclosure requirements IAS 28 (effective 1 January 2018): Investments in Associates and Joint Ventures: Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice • • • • IFRIC Interpretation 22: Foreign Currency Transactions and Advance Consideration (*) (effective 1 January 2018): The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transaction for each payment or receipt of advance consideration. IFRIC Interpretation 23: Uncertainty over Income Tax Treatments (*) (effective 1 January 2019): The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The Interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. • Amendments to IAS 7: Disclosure Initiative (effective 1 January 2017): The Amendments to IAS 7 require entities to provide disclosures that enable users to evaluate changes in liabilities arising from financing activities. An entity applies its judgement when determining the exact form and content of the disclosures needed to satisfy this requirement. The Amendments also suggest a number of specific disclosures that may be necessary in order to satisfy the above requirement. • Amendments to IAS 12 (effective 1 January 2017): Recognition of deferred tax assets for unrealised losses: The Amendments clarify that deductible temporary differences arise from unrealised losses on debt instruments measured at fair value. This is regardless of whether the instrument is recovered through sale or by holding it to maturity or whether it is probable that the issuer will pay all contractual cash flows. Entities are therefore required to recognise deferred taxes for temporary differences from unrealised losses on debt instruments measured at fair value if all other recognition criteria for deferred taxes are met. 108 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements • Amendments to IAS 40 (effective 1 January 2018): Transfers of Investment Property (*): The Amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The Amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. • Amendments to IFRS 2 (*) (effective 1 January 2018): Classification and measurement of share-based payment transactions: The Amendments clarify how to account for certain types of share-based payment transactions. Once the amendments are applied, the timing and amount of expense recognised for new and outstanding awards could change. They specifically provide requirements on the accounting for: • the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payment transactions with a net settlement feature for withholding tax obligations; and • • a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. • Amendments to IFRS 10 and IAS 28 (this has been deferred by the IASB): Sale or contribution of assets between an investor and its associate or joint venture: The amendments address an inconsistency between the two standards in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are housed in a subsidiary. A number of the standards (*) set out above have not yet been EU endorsed. These standards, interpretations and amendments to existing standards will be applied for the purposes of the Group and Company Financial Statements with effect from their respective effective dates. The Group is currently considering the impact of the above interpretations and amendments, however, they are not expected to materially impact the Group. Discussion on the major standards are included below. IFRS 16 Leases IFRS 16, published in January 2016 and effective on 1 January 2019, replaces the existing guidance in IAS 17 ‘Leases’. IFRS 16 eliminates the classification of leases as either operating leases or finance leases. It introduces a single lessee accounting model, which requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months and depreciation of lease assets separately from interest on lease liabilities in the income statement. The Group is assessing the potential impact on its Consolidated Financial Statements resulting from the application of IFRS 16. Early indications from our initial review of IFRS 16 is that the adoption of this new standard will have a material impact on the Group’s Consolidated Income Statement and Consolidated Balance Sheet as follows: Income Statement Operating expenses will decrease, as the Group currently recognises operating lease expenses in either cost of sales or selling and distribution expenses (depending on the nature of the lease). The Group’s lease expense for 2017 was $29,058,000 (2016: $28,128,000) and is disclosed in Note 5 to the Consolidated Financial Statements. Depreciation and finance costs as currently reported in the Group’s Income Statement will increase, as under the new Standard the right-of-use asset will be capitalised and depreciated over the term of the lease with an associated finance cost applied annually to the lease liability. Balance Sheet At the transition date the Group will calculate the lease commitments outstanding at that date and apply the appropriate discount rate to calculate the present value of the lease commitment. The Group expects to adopt IFRS 16 by applying the fully retrospective application as permitted by the Standard. The Group’s commitment outstanding on all leases as at 30 September 2017 is $104,307,000 (2016: $102,582,000) (see Note 26). The Group has been assessing the impact of the new Standard, however, the approximate financial impact of the Standard is as yet unknown, as a number of factors impact the calculation of the liability, such as discount rate, the expected term of leases including renewal options and exemptions for short-term leases and low-value items. The Group’s commitment as at 30 September 2017 provides an indication of the scale of leases held and how significant leases currently are to the Group’s business. However, for the reasons highlighted above, this amount should not be used as a proxy for the impact of IFRS 16 on the Consolidated Balance Sheet. The Group will continue to assess its portfolio of leases to calculate the impending impact of transition to the new Standard. In addition to the impacts above, there will also be significant increased disclosures when the Group adopts IFRS 16. UDG Healthcare plc Annual Report and Accounts 2017 109 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 1. Significant Accounting Policies (continued) IFRS 9 Financial Instruments IFRS 9 Financial Instruments, effective on 1 January 2019, addresses the classification, measurement and derecognition of financial assets and liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships may be eligible for hedge accounting, as the Standard introduces a more principles-based approach. The Group has performed an initial assessment on the impact of IFRS 9, and it would appear that the Group’s current hedge relationships would qualify as continuing hedges upon the adoption of IFRS 9. Accordingly, the Group does not expect a significant impact on the accounting for its hedging relationships. The new Standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the first year of adoption of the new Standard. IFRS 15 Revenue from Contracts with Customers IFRS 15 Revenue from Contracts with Customers will replace IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. The new standard is effective from 1 January 2018. IFRS 15 introduces a number of new concepts and requirements and also provides guidance and clarification on existing practice. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the client. The Group is assessing the potential impact on its Consolidated Financial Statements resulting from the application of IFRS 15. Findings from our initial review of IFRS 15 are that the impact of this new standard on the Group’s results is unlikely to be material, however, there will be increased disclosures when the Group adopts IFRS 15. Change in Presentation Currency The Group is presenting its results in US Dollars for the first time having previously reported in Euro. This change should help to provide a clearer understanding of the Group’s financial performance as half of the Group’s profits are currently generated in US Dollars, the Group’s US based businesses are demonstrating the greatest growth opportunities and future corporate development activity is likely to be US focused. In order to satisfy the requirements of IAS 21 with respect to a change in presentation currency, the statutory financial information as previously reported in the Group’s Annual Reports have been restated from Euro into US Dollars using the procedures outlined below: • Assets and liabilities were translated to US Dollars at the closing rates of exchange at each respective balance sheet date. • Share capital, share premium and other reserves were translated at the historic rates prevailing at the dates of transactions. • Income and expenses were translated to US Dollars at an average rate at each of the respective reporting years. This has been deemed to be a reasonable approximation. • Differences resulting from the retranslation were taken to reserves. • All exchange rates used were extracted from the Group’s underlying financial records. Please see Note 32 for further information on the procedures used to restate comparative information and the impact on the prior year results, closing balance sheet and the numerator for earnings per share as originally reported. A change in presentation currency represents a change in accounting policy which is accounted for retrospectively. Basis of Preparation The Consolidated Financial Statements are presented in US dollars and rounded to the nearest thousand, are prepared on a going concern basis. The Company Financial Statements continue to be presented in euro and rounded to the nearest thousand, and are prepared on a going concern basis. The Consolidated Financial Statements have been prepared under the historical cost convention as modified by the measurement at fair value of share-based payments, retirement benefit obligations and certain financial assets and liabilities including derivative financial instruments. The preparation of Financial Statements in accordance with IFRS as adopted by the EU requires management to make certain judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these 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. The Parent Company’s Financial Statements included on pages 162 to 171 are prepared using accounting policies which are consistent with the accounting policies applied to the Consolidated Financial Statements by the Group. The accounting policies are set out below and they have also been applied consistently by all of the Group’s subsidiaries and joint ventures to all years presented in these Financial Statements. 110 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements Basis of Consolidation The Group’s Financial Statements include the Financial Statements of the Company and all of its subsidiaries, joint ventures and associates. Accounting for Subsidiaries, Joint Ventures and Associates Subsidiaries are entities controlled by the Group. Control exists when the Group is exposed, or has rights to variable returns from its involvement with the investee and has the ability to effect these returns through its power over the investee. In assessing control, potential voting rights that currently are exercisable or convertible are taken into account. The Financial Statements of subsidiaries are included in the Group Financial Statements from the date that control commences until the date that control ceases. Intragroup balances and any unrealised income and expenses arising from intragroup transactions are eliminated in preparing the Group Financial Statements. Unrealised gains arising from transactions with equity accounted joint ventures are eliminated against the investment to the extent of the Group’s interest. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent there is no evidence of impairment. Joint ventures are those entities where the rights are to share in the net assets and over whose activities the Group has joint control, established by contractual arrangement and requiring unanimous consent for strategic, financial and operational decisions. An associate is an enterprise over which the Group has significant influence, but not control, through participation in the financial and operating policy decisions of the investee. Joint ventures and associates are included in the Financial Statements using the equity method of accounting, from the date that joint control and significant influence commence, until the date that joint control and significant influence cease. The Income Statement reflects in operating profit, the Group’s share of profit after tax of its joint ventures in accordance with IFRS 11 Joint Arrangements. The Group’s interest in its net assets is included as investment in joint ventures in the Balance Sheet at an amount representing the Group’s share of the fair value of the identifiable net assets at acquisition plus the Group’s share of post-acquisition retained profits or losses and other comprehensive income less dividends received from the joint ventures and goodwill arising on the investment and intercompany transactions that are eliminated. Business Combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. • The Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. • • When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities that the Group incurs in connection with completed business combinations are expensed as incurred. Any deferred contingent consideration payable is measured at fair value at the acquisition date. If the deferred contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within Equity. Otherwise, subsequent changes in the fair value of the deferred contingent consideration are recognised in profit or loss. When share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. Intangible Assets – Acquired Intangible assets that are acquired by the Group in a business combination are stated at cost less accumulated amortisation and impairment losses, when separable or arising from contractual or other legal rights and when they can be measured reliably. Amortisation is charged to the Income Statement on a straight line basis over the estimated useful lives of the intangible assets. Intangible assets are amortised over the following range of periods: Customer relationships Trade names Technology Contract based 6–15 years 2–15 years 3–10 years 6 months UDG Healthcare plc Annual Report and Accounts 2017 111 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 1. Significant Accounting Policies (continued) Intangible Assets – Computer Software Computer software, including computer software which is not an integrated part of an item of computer hardware, is stated at cost less any accumulated amortisation and any accumulated impairment losses. Cost comprises purchase price and any other directly attributable costs. Computer software is recognised if it meets the following criteria: • an asset can be separately identified; • it is probable that the asset created will generate future economic benefits; the development cost of the asset can be measured reliably; it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. • • • Costs relating to the development of computer software for internal use are capitalised once the recognition criteria outlined above are met. Computer software is amortised over its expected useful life, which ranges from three to ten years, by charging equal instalments to the Income Statement from the date the assets are ready for use. Property, Plant and Equipment Property, plant and equipment is reported at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Depreciation is calculated, on a straight line basis on cost less estimated residual value, to write property, plant and equipment off over their anticipated useful lives using the following annual rates: Land and buildings – Freehold land – Freehold buildings Plant and equipment Computer equipment Motor vehicles Assets under construction not depreciated 2–7% 10–20% 20–33% 20% not depreciated The residual value of assets, if not insignificant, and the useful life of assets are reassessed annually. Gains and losses on disposals are determined by comparing the consideration received with the carrying amount at the date of disposal and are included in operating profit. Assets Held for Sale and Discontinued Operations Non-current assets and disposal groups that are expected to be recovered primarily through sale rather than continuing use are classified as held for sale. These assets are shown in the Balance Sheet at the lower of their carrying amount and fair value less any disposal costs. Impairment losses on initial classification as assets held for sale and subsequent gains or losses on remeasurement are recognised in the Income Statement. A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: • represents a separate major line of business or geographic area of operations; is part of a single co-ordinated plan to dispose of a separate major line of business or geographic area of operations; or is a subsidiary acquired exclusively with a view to resale. • • Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held for sale. When an operation is classified as a discontinued operation, the comparative statement of profit or loss and other comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. Impairment Reviews and Testing The carrying amounts of the Group’s non-financial assets, other than inventories (which are carried at the lower of cost and net realisable value) and deferred tax assets (which are recognised based on recoverability), are reviewed on an annual basis to determine whether there is any indication of impairment. If such an indication exists, then the asset is tested for impairment. 112 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements The recoverable amount of a non-financial asset or cash generating unit is the greater of its fair value less cost 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 the purpose of impairment testing, assets are grouped together into the group of assets that generates cash inflows that are largely independent of the cash inflows of other assets or groups of assets (the ’cash generating unit’). Goodwill acquired in a business combination is allocated to cash generating units that are expected to benefit from the combination’s synergies. An impairment loss is recognised if the carrying amount of an asset or its cash generating unit exceeds its estimated recoverable amount. Goodwill is subject to impairment testing on an annual basis. A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss arising on financial assets is recognised in the income statement. Individually significant financial assets are tested for impairment on an individual basis. An impairment loss, other than in the case of goodwill, is reversed if 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. All impairment losses are recognised in the Income Statement. Leases Leases of property, plant and equipment, where the Group assumes substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in interest-bearing loans and borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term. Leases where substantially all of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight line basis over the term of the lease. Inventories Inventories are measured at the lower of cost and net realisable value. Cost is based on the first in, first out principle and includes all expenditure which has been incurred in the normal course of business in bringing the products to their present location and condition. Net realisable value is the estimated selling price of inventory on hand in the ordinary course of business less all costs expected to be incurred in marketing, selling and distribution. Foreign Currency Transactions in foreign currencies are translated into the functional currency of the related entity at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities that are measured based on historical cost are not subsequently re-translated. Non-monetary assets carried at fair value are subsequently remeasured at the exchange rate at the date fair value was determined. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into functional currencies at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Income Statement, except for qualifying cash flow hedges and a financial liability designated as a hedge of the net investment in a foreign operation, which are recognised directly in Other Comprehensive Income. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to US dollars at the foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to US dollars at the average exchange rate for the financial period. Foreign exchange differences arising on translation of foreign operations are recognised in Other Comprehensive Income and accumulated in the foreign exchange reserve within Equity. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. UDG Healthcare plc Annual Report and Accounts 2017 113 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 1. Significant Accounting Policies (continued) Hedge of Net Investment in Foreign Operation Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in Other Comprehensive Income to the extent that the hedge is effective and are presented within Equity in the foreign exchange translation reserve. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of a net investment is disposed of, the associated cumulative amount in equity is transferred to profit or loss as an adjustment to the profit or loss on disposal. Financial Guarantee Contracts Where the Group enters into financial guarantee contracts to guarantee the indebtedness of other parties, the Group considers these to be insurance arrangements and accounts for them as such. The Group treats the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required to make a payment under the guarantee. Revenue Recognition Revenue represents the fair value of consideration received or receivable (net of returns, trade discounts and rebates) for products and services provided in the course of ordinary activity to third party clients in the financial reporting period. The fair value of sales is exclusive of value added tax and after allowances for discounts and is recognised in the Income Statement when the significant risks and rewards of ownership have been transferred to the buyer, the consideration can be measured reliably and it is probable that the economic benefits will flow to the Group. Discounts granted to clients are recognised as a reduction in sales revenue at the time of the sale based on management’s estimate of the likely discount to be awarded to clients. Revenue from services rendered is recognised in the Income Statement in proportion to the stage of completion of the related contract or fully when no further obligations exist on the related service contract. Where the outcome of the contract can be measured reliably, stage of completion is measured by reference to services completed to date as a percentage of total services to be performed. Where services are to be performed rateably over a period of time, revenue is recognised on a straight line basis over the period of the contract. When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognised is the net amount of commission earned by the Group. Exceptional Items With respect to exceptional items, the Group has applied an income statement format which seeks to highlight significant items within Group results for the year. Such items may include restructuring costs, profit or loss on disposal or termination of operations, litigation costs and settlements, profit or loss on disposal of investments and impairment of assets. The Group exercises judgement in assessing the particular items which, by virtue of their scale and nature, should be disclosed in the Income Statement and related notes as exceptional items. The Group believes that such a presentation provides a more helpful analysis as it highlights material items of a non-recurring nature. Finance Income and Expense Finance income comprises interest income on funds invested, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognised in profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance expense comprises interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets and losses on hedging instruments that are recognised in profit or loss. All borrowing costs are recognised in profit or loss using the effective interest rate method. Employee Benefits Pension obligations A defined contribution pension plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the Income Statement as incurred. A defined benefit plan is a post-employment plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior years, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. 114 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in Other Comprehensive Income. The Group determines the net interest expense/(income) on the net benefit liability/(asset) for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the year to the then net benefit liability/(asset), taking into account any changes in the net defined benefit liability/ (asset) during the year as a result of contributions and benefit payments. The discount rate applied is the yield at the balance sheet date on high quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in the profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. Performance related incentive plans The Group recognises the present value of a liability for short term employee benefits, including costs associated with performance related incentive plans, in the Income Statement when an employee has rendered service in exchange for these benefits and a constructive obligation to pay those benefits arises. Share-based payment transactions The Group operates a Long Term Incentive Plan and share option scheme which allow executive directors and employees acquire shares in the Company. All schemes are equity settled arrangements under IFRS 2 Share-based Payments. The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with market-based vesting conditions, the grant-date fair value of the share- based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Income Tax Expense Income tax expense for the year comprises current and deferred tax. Taxation is recognised in the Income Statement except to the extent that it relates to items recognised directly in Equity or Other Comprehensive Income, in which case the related tax is recognised directly in Equity or Other Comprehensive Income. Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws that have been enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. If the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction does not affect accounting nor taxable profit or loss, it is not recognised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the 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. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same tax entity or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis. Segmental Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM) who is responsible for allocating resources and assessing performance of the operating segments. The Group has determined that it has three reportable operating segments: Ashfield, Sharp and Aquilant. UDG Healthcare plc Annual Report and Accounts 2017 115 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 1. Significant Accounting Policies (continued) Cash and Cash Equivalents Cash and cash equivalents comprise cash balances and deposits, including bank deposits of less than six months’ maturity from the commencement date. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the Group and Company Cash Flow Statements. Trade and Other Receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The amount of the provision is recognised in the Group Income Statement. Financial Instruments Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Income Statement, except where derivatives qualify for hedge accounting, in which case recognition of any resultant gain or loss depends on the nature of the item being hedged, as set out below. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of changes in the fair value of the derivative financial instrument is recognised directly in Other Comprehensive Income in the cash flow hedge reserve. When the forecasted transaction results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from Equity and included in the initial cost or other carrying amount of the non-financial asset or liability. In other cases, the associated cumulative gain or loss is removed from equity and recognised in the Income Statement in the same period or periods during which the hedged item affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the Income Statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecasted, transaction is still expected to occur, then hedge accounting is ceased prospectively and the cumulative gain or loss at that point remains in Equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in Equity is reclassified immediately to the Income Statement. Fair value hedges Where a derivative financial instrument is designated as a hedge of a change in the fair value of an asset or liability, gains or losses arising from the remeasurement of the hedging instrument to fair value are reported in the Income Statement. In addition, any changes in the fair value of the hedged item which is attributable to the hedged risk is adjusted against the carrying amount of the hedged item and reflected in the Income Statement. Where the adjustment is to the carrying amount of a hedged interest-bearing financial instrument, the adjustment is amortised to the Income Statement with the objective of achieving full amortisation by maturity. Non-derivative Financial Instruments Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are initially recognised at fair value and subsequently measured at amortised cost. A financial instrument is recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control of substantially all risks and rewards of the asset. Purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Group commits itself to purchase or sell the asset. Financial liabilities are de-recognised if the Group’s obligations specified in the contract expire, are discharged or cancelled. 116 UDG Healthcare plc Annual Report and Accounts 2017 Interest-bearing Loans and Borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings, other than those accounted for under the fair value hedging model outlined above, are stated at amortised cost with any difference between cost and redemption value being recognised in the Income Statement over the period of the borrowings on an effective interest basis. Effective interest rate is calculated by taking into account any issue costs and any expected discount or premium on settlement. Provisions A provision is recognised in the Balance Sheet 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 which can be measured reliably. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Where share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. Critical Accounting Estimates and Judgements Income tax expense The Group is subject to income tax in a number of jurisdictions, and significant judgement and degree of estimation is required in determining the worldwide provision for taxes. There are many transactions and calculations during the ordinary course of business, for which the ultimate tax determination is uncertain and the complexity of the tax treatment may be such that the final tax charge may not be determined until formal resolution has been concluded with the relevant tax authority which may take extended time periods to conclude. Also, the Group can be subject to uncertainties, including tax audits in any of the jurisdictions in which it operates, which are frequently complex taking many years to conclude. Amounts accrued for anticipated tax authority reviews are based on estimates of whether any additional amounts of tax may be due. Such estimates are determined based on a number of factors including management judgement, interpretation of relevant tax laws, correspondence with the tax authorities, advice from external tax professionals and a probability weighted expected value. The ultimate tax charge may, therefore, be different from that which initially is reflected in the Group’s consolidated tax charge and provision and any such differences could have a material impact on the Group’s income tax charge and consequently financial performance. Where the final tax charge is different from the amounts that were initially recorded, such differences are recognised in the income tax provision in the period in which such determination is made. Discontinued operations and assets and liabilities classified as held for sale Management has applied judgement in presenting the Group’s joint venture arrangement with Magir Limited as a discontinued operation and asset held for sale. Due to the absence of a power sharing administration in Northern Ireland, a decision regarding historical and future drug reimbursement rates has not been made and agreeing a value on the business in the absence of this information has not been possible. It remains the intention of the Group to dispose of the asset once the valuation can be properly established. Goodwill and intangible assets Determining whether goodwill and intangible assets are impaired requires comparison of the value in use for the relevant CGUs (or group of CGUs) to the net assets attributable to these CGUs. The value in use calculation is based on an estimate of future cash flows expected to arise from the CGUs and these are discounted to net present value using an appropriate discount rate. In calculating value in use, management judgement is required in forecasting cash flows of cash generating units, in determining terminal growth values and in selecting an appropriate discount rate. Sensitivities to changes in assumptions are detailed in Note 12. Determining the useful life of intangible assets requires judgement when estimating the useful life of the intangible assets. Management regularly reviews these useful lives and changes them if necessary to reflect current conditions. Changes in useful lives can have a significant impact on the amortisation charge for the year. Inventories Inventory comprises raw materials, work in progress and finished goods. Provisions are made against slow moving, obsolete and damaged inventories for which the net realisable value is estimated to be less than cost. Determining the net realisable value of inventory requires judgement to be applied to determine the likely saleability of products and the potential prices that can be achieved. Estimates of net realisable value are based on the most reliable evidence, taking into consideration product obsolescence or perishability (which are generally low given the nature of the Group’s inventory) and the purpose for which the inventory is held. The actual realisable value of inventory may differ from the estimated value on which the provision is based. UDG Healthcare plc Annual Report and Accounts 2017 117 Directors’ Report Strategic Report Financial StatementsFinancial Statements Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 1. Significant Accounting Policies (continued) Critical Accounting Estimates and Judgements (continued) Trade and other receivables The Group trades with a large and varied number of clients on credit terms. Provision for impairment is made when there is objective evidence that the Group will not be in a position to collect the associated trade debts. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the trade receivable is impaired. The Group uses estimates based on historical experience and current information in determining the level of debts for which a provision for impairment is required. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The level of provision required is reviewed on an ongoing basis. Provisions The amounts recognised as a provision are management’s best estimate of the expenditure required to settle present obligations at the balance sheet date. The outcome depends on future events which are by their nature uncertain. In assessing the likely outcome, management bases its assessment on historical experience and other factors that are believed to be reasonable in the circumstances. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Deferred contingent consideration are recognised in the Group Balance Sheet as provisions. The expected payment is determined separately in respect of each individual earnout agreement taking into consideration the expected level of profitability of each acquisition. Any deferred contingent consideration is recognised at fair value at the acquisition date and included in the costs of the acquisition. The fair value of deferred contingent consideration at acquisition date is arrived at through discounting the expected payment to present value. Employee benefits Retirement benefit obligations The estimation of and accounting for retirement benefit obligation involves judgements made in conjunction with independent actuaries. These involve estimates about uncertain future events based on the environment in different countries, including life expectancy of scheme members, future salary and pension increases and inflation as well as discount rates. The assumptions used by the Group and a sensitivity analysis of a change in these assumptions are described in Note 29. Share-based payment The fair value of the Executive Share Option Scheme has been measured using the Black Scholes formula or the binomial formula. The fair value of the Long Term Incentive Plan has been measured using the Black Scholes formula or the Monte Carlo Simulation. The inputs used in the measurement of the fair values at grant date are disclosed in Note 29. Financial instruments and financial risk Details of the methods and assumptions used are included in Note 30. 2. Prior Year Reclassification Reclassification of Revenue Pass-through revenues relate to the recharging of travel and other costs to clients at zero margin. There has been a reclassification of pass-through revenue from cost of sales to revenue. As a result, $35,771,000 (€32,200,000) has been reclassified from cost of sales to revenue so that the results are presented on a consistent basis in both 2017 and 2016. There is no impact on gross profit. A summary of the impact on the previously reported figures is set out below: Revenue Cost of sales Gross profit 3. Revenue Goods for resale Services Commission income Total revenue As previously stated €’000 943,080 (658,981) 284,099 Reclassification €’000 As restated €’000 As re-presented $’000 32,200 (32,200) – 975,280 (691,181) 284,099 1,083,439 (767,833) 315,606 2017 $’000 As re-presented and restated 2016 $’000 87,659 1,127,169 4,927 92,370 986,219 4,850 1,219,755 1,083,439 Commission income relates to the sale of products where the Group acts as an agent in the transaction rather than as a principal. 118 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 4. Segmental Information Segmental information is presented in respect of the Group’s operating segments and geographical regions. The operating segments are based on the Group’s management and internal reporting structure. Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Due to the nature of certain liabilities and assets, which are not segment specific, they have not been allocated to a segment but rather have been disclosed in aggregate immediately after the relevant segment note. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year and is comprised of property, plant and equipment, goodwill and intangible assets. UDG Healthcare is a leading global healthcare services provider. IFRS 8 Operating Segments requires the reporting information for operating segments to reflect the Group’s management structure and the way financial information is regularly reviewed by the Group’s CODM, which the Group has defined as Brendan McAtamney (Chief Executive Officer). The segmental information of the business as presented corresponds with these requirements. Operating profit before transaction costs, amortisation of acquired intangible assets and exceptional items (adjusted operating profit) represents the key measure utilised in assessing the performance of operating segments. The Group’s operations are divided into the following operating segments: Ashfield – Ashfield is a global leader in commercialisation services for the pharmaceutical and healthcare industry, operating across three broad areas of activity: advisory, communications and commercial & clinical services. It focuses on supporting healthcare professionals and patients at all stages of the product life cycle. The division provides field and contact centre sales teams, healthcare communications, patient support, audit, advisory, medical information and event management services to over 300 healthcare companies. Sharp – Sharp is a global leader in contract packaging and clinical trial packaging services for the pharmaceutical and biotechnology industries, operating from state-of-the-art facilities in the US and Europe. Aquilant – Aquilant is a leading provider of outsourced sales, marketing, distribution and engineering services to the medical and scientific sectors in the UK, Ireland and the Netherlands. Discontinued Operations On 1 April 2016 the Group completed the disposal of United Drug Supply Chain Services, United Drug Sangers, TCP Group and MASTA. In accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, the operations of those businesses were classified as discontinued in the year ended 30 September 2016. The Group has included the joint venture arrangement with Magir Limited as a discontinued operation during the current and prior year. Details of the disposal are included in Note 8. Geographical Analysis The Group operates in four principal geographical regions being the Republic of Ireland, the United Kingdom, North America and the Rest of World. In presenting information on the basis of geographical segment, segment revenue is based on the geographical location of the Group’s subsidiaries. Segment assets are based on the geographical location of the assets. Inter-segment revenue is not material and thus not subject to disclosure. Continuing operations – 2017 Income statement items Segment revenue Adjusted operating profit* Amortisation of acquired intangibles Transaction costs Operating profit Finance income Finance expense Profit before tax Income tax expense Profit for the financial year * Excluding amortisation of acquired intangibles and transaction costs. Ashfield 2017 $’000 Sharp 2017 $’000 Aquilant 2017 $’000 Group total 2017 $’000 821,412 302,076 96,267 1,219,755 81,567 (20,040) (3,758) 57,769 41,304 (2,026) (270) 39,008 6,409 – – 6,409 129,280 (22,066) (4,028) 103,186 18,905 (29,257) 92,834 (20,976) 71,858 UDG Healthcare plc Annual Report and Accounts 2017 119 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 4. Segmental Information (continued) Geographical Analysis (continued) Continuing operations – 2016 Segment revenue – as restated (Note 2) Adjusted operating profit* Amortisation of acquired intangibles Transaction costs Operating profit Finance income Finance expense Profit before tax Income tax expense Profit for the financial year * Excluding amortisation of acquired intangibles and transaction costs. Balance sheet items Segment assets Unallocated assets Segment liabilities Unallocated liabilities Segment assets Unallocated assets Segment liabilities Unallocated liabilities Ashfield 2016 $’000 Sharp 2016 $’000 Aquilant 2016 $’000 Group total as re-presented 2016 $’000 685,041 295,992 102,406 1,083,439 70,653 (12,956) (2,214) 55,483 38,208 (3,021) – 35,187 6,910 – – 6,910 Ashfield 2017 $’000 Sharp 2017 $’000 Aquilant 2017 $’000 947,326 358,007 126,550 (261,143) (70,755) (34,669) Ashfield 2016 $’000 Sharp 2016 $’000 Aquilant 2016 $’000 605,063 332,709 123,043 (175,265) (52,892) (29,720) 115,771 (15,977) (2,214) 97,580 5,311 (19,349) 83,542 (15,428) 68,114 Group total 2017 $’000 1,431,883 88,066 1,519,949 (366,567) (273,726) (639,293) Group total as re-presented 2016 $’000 1,060,815 339,623 1,400,438 (257,877) (335,685) (593,562) Unallocated assets and liabilities comprises amounts relating to interest-bearing loans and borrowings, derivative financial instruments, current income tax, deferred income tax, employee benefits and cash held at Group. The decrease in unallocated assets during the year reflects a reduction in Group cash balances due to acquisition activity. Other segmental information Depreciation Capital expenditure* Amortisation of acquired intangibles Amortisation of computer software Share-based payment expense 120 UDG Healthcare plc Annual Report and Accounts 2017 Ashfield $’000 2017 6,298 289,257 20,040 2,180 2,585 Sharp $’000 2017 13,362 38,210 2,026 1,123 920 Aquilant $’000 2017 1,561 1,556 – 81 108 Group total $’000 2017 21,221 329,023 22,066 3,384 3,613 Strategic Report Directors’ Report Financial Statements Financial Statements Depreciation Capital expenditure* Amortisation of acquired intangibles Amortisation of computer software Impairment of goodwill and intangibles Share-based payment expense Ashfield $’000 2016 6,284 40,078 12,956 1,333 – 1,497 Sharp $’000 2016 11,802 22,965 3,021 817 – 584 Aquilant $’000 2016 1,946 2,295 – 86 798 103 Discontinued operations $’000 2016 Group total as re-presented 2016 $’000 – 9,181 – – 1,133 – 20,032 74,519 15,977 2,236 1,931 2,184 * Capital expenditure comprises acquisition of computer software, property, plant and equipment, goodwill and intangible assets. The results and assets of joint ventures and associates are included within the individual business segment in which they are included for internal reporting, which relate to the Ashfield division and discontinued operations. The following represents a geographical analysis of the segment information in accordance with IFRS 8, which requires disclosure of information about the country of domicile (Republic of Ireland) and countries with material revenue and non-current assets. The analysis of revenue represents continuing operations. The analysis of balance sheet items and other segment information for the year ended 30 September 2016 includes both continuing and discontinued operations. Geographical analysis Revenue Segment assets Capital expenditure* Republic of Ireland 2017 $’000 42,178 97,315 205 Republic of Ireland 2016 $’000 United Kingdom 2017 $’000 North America 2017 $’000 Rest of World 2017 $’000 Group total 2017 $’000 318,934 554,885 128,017 629,001 684,879 182,947 229,642 1,219,755 182,870 1,519,949 17,854 329,023 United Kingdom 2016 $’000 North America 2016 $’000 Rest of World 2016 $’000 Group total as re-presented 2016 $’000 Revenue – as restated (Note 2) 36,268 365,985 499,498 181,688 1,083,439 Segment assets Capital expenditure* 307,994 473,025 8,516 34,411 477,685 25,184 141,734 1,400,438 6,408 74,519 * Capital expenditure comprises acquisition of computer software, property, plant and equipment, goodwill and intangible assets. 5. Statutory and Other Information Operating profit is stated after charging/(crediting): Depreciation of property, plant and equipment Loss/(profit) on disposal of property, plant and equipment Amortisation of acquired intangibles Amortisation of computer software Operating lease rentals: – Land and buildings – Other assets Foreign exchange (gain)/loss Continuing operations as re-presented 2016 $’000 Discontinued operations as re-presented 2016 $’000 20,032 71 15,977 2,236 11,893 16,235 (3,367) – (12) – – 350 844 4 2017 $’000 21,221 55 22,066 3,384 13,646 15,412 (2,293) Details of directors’ remuneration, pension entitlements and interests in share options are set out in the Directors’ Remuneration Report. UDG Healthcare plc Annual Report and Accounts 2017 121 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 5. Statutory and Other Information (continued) As set out in the 2016 Annual Report, a formal tender process was carried out for the external audit of the Group’s Financial Statements for the year ended 30 September 2017. Following the conclusion of this process, on the recommendation of the Audit Committee, the Board appointed Ernst & Young as auditors. Consequently, the 2016 auditor’s remuneration information included below relates to KPMG and the 2017 auditor’s remuneration pertains to Ernst & Young. Auditor’s remuneration Fees payable to the Group auditors and to member firms of the Group auditors are as follows: Description of services Audit services – Group – Company Other assurance services – Group Tax advisory services – Group Other non-audit services – Group 2017 $’000 2016 as re-presented $’000 887 9 – – 2 814 11 61 – 4 898 891* * Fees payable to the Group auditors include fees in relation to the six acquisitions made in 2017. Group audit consists of fees payable for the consolidated and statutory audits of the Group and its subsidiaries. Included in Group audit are total fees of $9,000 (2016: $11,000) which were paid to the Group’s auditor in respect of the parent company. Included in the above fees are the following amounts payable to the Group auditors outside of Ireland: Audit services Other assurance services Tax advisory services Other non-audit services 2017 $’000 2016 as re-presented $’000 593 – – 593 369 7 – 376 122 UDG Healthcare plc Annual Report and Accounts 2017 6. Finance Income and Expense Finance income Income arising from cash deposits Fair value of deferred contingent consideration Fair value of cash flow hedges transferred from equity Fair value adjustment to guaranteed senior unsecured loan notes Foreign currency gain on retranslation of guaranteed senior unsecured loan notes Ineffective portion of cash flow hedges Net finance income on pension scheme obligations Finance income relating to continuing operations Finance income relating to discontinued operations Finance expense Interest on overdrafts Interest on bank loans and other loans: – Wholly repayable within 5 years – Wholly repayable after 5 years Interest on finance leases Unwinding of discount on provisions Fair value of deferred contingent consideration Fair value adjustments to fair value hedges Fair value of cash flow hedges transferred to equity Foreign currency loss on retranslation of guaranteed senior unsecured loan notes Net finance cost on pension scheme obligations Finance expense relating to continuing operations Finance expense on pension scheme obligations relating to discontinued operations Net finance expense Strategic Report Directors’ Report Financial Statements Financial Statements 2017 $’000 2016 as re-presented $’000 1,057 – – 2,840 14,865 76 67 18,905 – 18,905 710 294 896 3,157 – 254 – 5,311 8 5,319 (46) (31) (5,482) (5,641) (3) (380) – (2,840) (14,865) – – (7,761) (5,686) (1) (1,158) (647) (3,157) – (896) (12) (29,257) (19,349) – (29,257) (10,352) (64) (19,413) (14,094) UDG Healthcare plc Annual Report and Accounts 2017 123 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 7. Income Tax Expense Recognised in the income statement Current income tax Ireland Adjustment in respect of prior years Current year income tax on profit for the year Overseas Adjustment in respect of prior years Current year income tax on profit for the year Total current income tax (expense) Deferred income tax Origination and reversal of temporary differences: Property, plant and equipment Intangible assets Employee benefits Other items Total deferred income tax (expense)/credit Income tax (expense) The total income tax expense for the financial year is analysed as follows: Continuing operations Discontinued operations Income tax (expense) 2017 $’000 2016 as re-presented $’000 2,442 (589) 1,853 (108) (18,710) (18,818) (16,965) (2,508) 5,070 332 (4,905) (4,011) 279 (3,168) (2,889) 2,310 (16,406) (14,096) (16,985) (2,761) 7,565 113 (4,171) 746 (20,976) (16,239) (20,976) – (20,976) (15,428) (811) (16,239) Other items relate to a charge with respect to tax deductible goodwill amortisation of $5,099,000 (2016: $4,554,000) and a charge with respect to short term timing differences of $1,806,000 (2016: credit of $383,000). The pre-exceptional tax charge in 2016 was $16,239,000 and the tax related to the exceptional items was nil. The deferred income tax expense for the year to 30 September 2017 included a credit of $422,000 in respect of prior years (2016: charge of $1,056,000). Factors Affecting the Tax Charge in Future Years The total tax charge for future periods will be affected by changes to applicable tax rates in force in jurisdictions in which the Group operates and other changes in tax legislation applicable to the Group’s businesses. Reconciliation of effective tax rate Profit before tax Taxation based on Irish corporation tax rate Expenses not deductible for tax purposes Tax on income from joint ventures Non-taxable profit on disposal of subsidiaries and joint venture Differences in foreign tax rates Adjustments in respect of prior years 2017 % 12.5 2017 $’000 92,834 (11,604) (1,318) 83 – (10,893) 2,756 (20,976) 2016 % 12.5 2016 as re-presented $’000 234,762 (29,345) (5,796) 307 21,044 (3,982) 1,533 (16,239) The Group’s share of joint ventures’ profit after tax includes a tax charge of $366,000 (2016: $993,000). 124 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 8. Net Result from Discontinued Operations, Disposal and Assets and Liabilities Classified as Held for Sale On 1 April 2016, the Group completed the disposal of United Drug Supply Chain Services, United Drug Sangers, TCP Group and MASTA. In accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued operations, these business disposals were considered to be discontinued. The respective profit and losses on the disposal of these businesses were recognised in the Group Income Statement within discontinued operations. The profit from discontinued operations after tax included in the Group Income Statement in the prior year is summarised in the table below: Profit from discontinued operations after tax – United Drug Supply Chain Services businesses and MASTA – Magir Limited Profit on disposal of discontinued operations Impairment of assets held for sale Profit from discontinued operations after tax The profit in the prior year from discontinued operations was fully attributable to the equity holders of the Company. (A) Revenue Cost of sales Gross profit Selling and distribution expenses Administrative expenses Settlement gain on defined benefit pension Operating profit Net finance expense Profit from discontinued operations before tax Income tax expense Profit from discontinued operations after tax 2016 as re-presented $’000 (a) (c) (b) (c) 16,812 1,659 150,780 (18,842) 150,409 2016 as re-presented $’000 750,206 (695,370) 54,836 (37,281) (2,517) 2,641 17,679 (56) 17,623 (811) 16,812 In accordance with IFRS 5, depreciation of property, plant and equipment and amortisation of intangibles was not charged on the assets disposed of during the prior year. If the assets had continued to be depreciated and amortised during the prior year, the respective pre-tax charges for the year would have been $3,873,000 and $791,000. UDG Healthcare plc Annual Report and Accounts 2017 125 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 8. Net Result from Discontinued Operations, Disposal and Assets and Liabilities Classified as Held for Sale (continued) (B) Reconciliation of consideration received to cash received The following table summarises the consideration received, the profit on disposal of discontinued operations and the net cash flow arising on the disposal of these businesses: Total consideration Working capital and related adjustments Cash received on completion Cash and cash equivalents disposed of Disposal related costs paid Net consideration received on completion Assets and liabilities disposed of Assets Property, plant and equipment Goodwill Intangible assets Deferred income tax assets Inventories Trade and other receivables Total assets Liabilities Deferred income tax liabilities Trade and other payables Employee benefits Current income tax liability Total liabilities Net identifiable assets and liabilities disposed of Recycling of foreign exchange loss previously recognised in foreign currency translation reserve Provision for taxation Profit on disposal of discontinued operations after tax 2016 as re-presented $’000 463,939 (16,827) 447,112 (21,389) (9,422) 416,301 96,734 16,276 53,331 1,126 127,922 249,609 544,998 (391) (287,088) (2,239) (721) (290,439) (254,559) (5,283) (5,679) 150,780 (C) During the current and prior year the Group has treated the joint venture arrangement with Magir as a discontinued operation and asset held for sale in accordance with IFRS 5. Due to the absence of a power sharing administration in Northern Ireland, a decision regarding historical and future drug reimbursement rates has not been made and agreeing a value on the business in the absence of this information has not been possible. It remains the intention of the Group to dispose of the asset once the valuation can be properly established. The following table details the results of this discontinued operation included in the prior year Group Income Statement: Share of joint venture profit after tax Impairment charge on assets held for sale Profit from discontinued operations after tax 2016 as re-presented $’000 1,659 (18,842) (17,183) The assets and liabilities classified as held for sale in the Group Balance Sheet have a nil carrying value at 30 September 2017 (2016: nil). 126 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 2017 $’000 2016 as re-presented $’000 22,388 8,891 31,279 21,659 8,397 30,056 9. Dividends – Equity Shares Dividends paid Final dividend for 2016 of 9.04 $ cent (2015: 8.83 $ cent) per share Interim dividend for 2017 of 3.58 $ cent (2016: 3.41 $ cent) per share Total dividends The directors have proposed a final dividend for 2017 of 9.72 $ cent per share (2016: 9.04 $ cent per share) per share amounting to $24,137,000 (2016: $22,388,000), subject to shareholder approval at the upcoming Annual General Meeting. The total dividend for the year, subject to shareholder approval, is 13.30 $ cent (2016: 12.45 $ cent) per share. The final dividend for 2017 has not been provided for in the Balance Sheet at 30 September 2017, as there was no present obligation to pay the dividend at year end. 10. Earnings per Ordinary Share Profit attributable to owners of the parent Adjustment for amortisation of acquired intangible assets (net of tax) Adjustment for transaction costs (net of tax) Adjustment for profit on disposal (net of tax) Adjustment for impairment of asset held for sale (net of tax) Adjusted profit attributable to owners of the parent Weighted average number of shares Number of dilutive shares under options Weighted average number of shares, including share options Basic earnings per share – $ cent Diluted earnings per share – $ cent Adjusted basic earnings per share – $ cent Adjusted diluted earnings per share – $ cent Continuing operations as re-presented 2016 $’000 68,114 8,413 2,123 – – Discontinued operations as re-presented 2016 $’000 150,409 – – (150,780) 18,842 Total as re-presented 2016 $’000 218,523 8,413 2,123 (150,780) 18,842 78,650 18,471 97,121 Total 2017 $’000 71,858 16,996 3,658 – – 92,512 2017 Number of shares 2016 Number of shares 248,001,114 1,238,273 246,405,955 1,016,938 249,239,387 247,422,893 Continuing operations as re-presented 2016 Discontinued operations as re-presented 2016 Total as re-presented 2016 27.64 27.53 31.92 1 31.79 1 61.04 60.79 7.50 2 7.47 2 88.68 88.32 39.42 39.26 Total 2017 28.97 28.83 37.30 1 37.12 1 Non-IFRS Information The Group reports certain financial measurements that are not required under International Financial Reporting Standards (IFRS) which represent the generally accepted accounting principles (GAAP) under which the Group reports. The Group believes that the presentation of these non-IFRS measurements provide useful supplemental information which, when viewed in conjunction with our IFRS financial information, provide investors with a more meaningful understanding of the underlying financial and operating performance of the Group and its divisions. These measurements are also used internally to evaluate the historical and planned future performance of the Group’s operations and to measure executive management’s performance based remuneration. 1. Adjusted profit attributable to equity holders of the parent from continuing operations is stated before the amortisation of acquired intangible assets and transaction costs. 2. Adjusted profit attributable to equity holders of the parent from discontinued operations is stated after deducting the profit on disposal of the discontinued operations ($150.8m, net of tax), and adding back the impairment of the investment in Magir Limited, an asset held for sale ($18.8m, net of tax). Treasury shares have been excluded from the weighted average number of shares in issue used in the calculation of earnings per share. 2,567,081 (2016: 2,273,772) anti-dilutive share options have been excluded from the calculation of diluted earnings per share. The average market value of the Company’s shares for the purposes of calculating the dilutive effect of share options was based on quoted market prices for the year. UDG Healthcare plc Annual Report and Accounts 2017 127 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 11. Property, Plant and Equipment Land and buildings $’000 Plant and equipment $’000 Motor vehicles $’000 Computer equipment $’000 Assets under construction $’000 Year ended 30 September 2017 Opening net book amount Additions in year Arising on acquisition Depreciation charge Disposals in year Transfer to intangibles Reclassifications Translation adjustment At 30 September 2017 At 30 September 2017 Cost or deemed cost Accumulated depreciation Net book amount Year ended 30 September 2016 (as re-presented) Opening net book amount Additions in year Arising on acquisition Depreciation charge Disposals in year Transfer to assets held for sale Transfer to intangibles Reclassifications Translation adjustment At 30 September 2016 At 30 September 2016 Cost or deemed cost Accumulated depreciation Net book amount 61,093 4,151 15,692 (4,935) (97) – (561) 1,120 76,463 65,013 20,780 5,153 (11,620) (14) – 163 1,089 80,564 106,815 (30,352) 157,112 (76,548) 76,463 80,564 Land and buildings $’000 Plant and equipment $’000 58,130 8,043 228 (4,945) (132) – – 2,455 (2,686) 61,093 51,193 10,038 155 (10,491) (254) (1,028) – 16,066 (666) 65,013 290 30 – (62) – – – 13 271 738 (467) 271 Motor vehicles $’000 369 148 10 (62) (69) – – (43) (63) 290 10,481 3,414 593 (4,604) (90) (393) 398 215 10,014 27,558 (17,544) 10,014 – 1,091 – – – – – – 1,091 1,091 – 1,091 Computer equipment $’000 Assets under construction $’000 11,173 6,403 191 (4,534) (51) – (1,701) (153) (847) 10,481 11,222 7,104 – – – – – (18,325) (1) – – – – Total $’000 136,877 29,466 21,438 (21,221) (201) (393) – 2,437 168,403 293,314 (124,911) 168,403 Total $’000 132,087 31,736 584 (20,032) (506) (1,028) (1,701) – (4,263) 136,877 242,580 (105,703) 136,877 87,272 (26,179) 61,093 128,888 (63,875) 65,013 897 (607) 290 25,523 (15,042) 10,481 During the current and prior year, the cost and associated depreciation of computer software that was previously recognised within property, plant and equipment were transferred to intangible assets. No borrowings are secured on the above assets with the exception of the leased assets noted below. Leased Property, Plant and Equipment The Group leases items of property, plant and equipment under a number of finance lease agreements. At 30 September 2017, the carrying amount of leased assets included in property, plant and equipment was $164,000 (2016: $185,000) and related depreciation amounted to $86,000 (2016: $113,000). 128 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 2017 $’000 2016 as re-presented $’000 384,520 140,626 1,844 15,564 542,554 401,306 11,610 – (28,396) 384,520 12. Goodwill Cost At beginning of year Acquired during the year (Note 28) Measurement period adjustment Translation adjustment At end of year Goodwill arises on acquisitions. The goodwill acquired during the year relates to the acquisition of STEM Marketing Limited, Vynamic LLC, Sellxpert GmbH, Sellxpert AG, Cambridge BioMarketing LLC and MicroMass Communications Inc. A measurement period adjustment on finalisation of the IFRS 3 Business Combination accounting for the Pegasus Public Relations Limited acquisition, completed in 2016, resulted in an increase in goodwill of $1,844,000. Goodwill acquired through business combinations has been allocated to cash generating units (CGUs) for the purpose of impairment testing. The CGUs represent the lowest level within the Group at which associated goodwill is monitored for management purposes and is not bigger than the segments determined in accordance with IFRS 8 Operating Segments. Significant under-performance in any of the Group’s major CGUs may give rise to a material write-down of goodwill which would have a substantial impact on the Group’s income and equity. A total of nine (2016: eight) CGUs have been identified. The carrying value of goodwill and the number of CGUs are analysed between the operating segments in the Group below. Ashfield Sharp Aquilant 2017 $’000 Number of CGUs 2016 as re-presented $’000 Number of CGUs 389,029 90,541 62,984 542,554 6 2 1 9 235,184 89,077 60,259 384,520 5 2 1 8 In accordance with IAS 36 Impairment of Assets, the CGUs to which significant amounts of goodwill (greater than 10% of the total value) have been allocated are as follows: Ashfield Healthcare Communications Group 1 Ashfield Advisory Group 2 Aquilant Group Ashfield EUCAN Group 3 Sharp Commercial Packaging Group Sharp Clinical Services Group 1 2 3 Includes goodwill relating to Cambridge BioMarketing LLC and MicroMass Communications Inc which were acquired during the year. Includes goodwill relating to STEM Marketing Limited and Vynamic LLC which were acquired during the year. Includes goodwill relating to Sellxpert GmbH and Sellxpert AG which were acquired during the year. 2017 $’000 2016 as re-presented $’000 168,842 67,032 62,984 54,181 50,847 39,694 85,952 – 60,260 41,928 49,876 39,201 UDG Healthcare plc Annual Report and Accounts 2017 129 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 12. Goodwill (continued) The value in use and excess of value in use over the carrying amount of the above significant CGUs are as follows: Ashfield Healthcare Communications Group Ashfield Advisory Group Aquilant Group Ashfield EUCAN Group Sharp Commercial Packaging Group Sharp Clinical Services Group Value in use 2017 $’000 2016 as re-presented $’000 Excess 2017 $’000 2016 as re-presented $’000 939,198 232,753 142,112 246,270 611,045 103,755 621,180 – 201,039 265,330 613,622 81,838 659,220 79,339 56,306 171,004 436,659 49,235 474,034 – 119,541 205,307 421,828 30,221 Impairment Testing of Cash Generating Units (CGUs) Containing Goodwill The Group tests goodwill for impairment on an annual basis or more frequently if there is an indication that the goodwill may be impaired. This testing involves determining the CGU’s value in use and comparing this to the carrying amount of the CGU. Where the value in use exceeds the carrying value of the CGU, the asset is not impaired, but where the carrying amount exceeds the value in use, an impairment loss is recognised to reduce the carrying amount of the CGU to its value in use. Estimates of value in use are key judgemental estimates in the Financial Statements. A number of key assumptions have been made as a basis for the impairment tests. In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external sources of information. Value in Use Calculations Where a value in use approach is used to assess the recoverable amount of the CGU, calculations use pre-tax cash flow projections based on financial budgets and projections covering a five year period. The cash flow forecasts used for the value in use computations exclude incremental profits and other cash flows derived from planned acquisition activities. For individual CGUs, forecasts for up to four years have been approved by senior management. The remaining year’s forecasts have been extrapolated using growth rates of 1% to 10% (2016: 2% to 10%) based on the historical annual growth experience of individual CGUs. For the purposes of calculating terminal values, a terminal growth rate of 2.5% (2016: 2.5%) has been adopted. The value in use of each CGU is calculated using a discount rate representing the Group’s estimated weighted average cost of capital, adjusted to reflect risks associated with each CGU. The pre-tax discount rates range from 8.1% to 12.5% (2016: 8.0% to 13.6%). The pre-tax discount rates used for significant CGUs are detailed in the table below. Ashfield Healthcare Communications Group Ashfield Advisory Group Aquilant Group Ashfield EUCAN Group Sharp Commercial Packaging Group Sharp Clinical Services Group 2017 8.5% 8.5% 8.1% 9.8% 11.1% 10.9% 2016 8.9% – 8.0% 8.5% 10.7% 9.8% The key assumptions used for the value in use computations are that the markets will grow in accordance with publicly available data, the Group will maintain its current market share, gross margins will be maintained at current levels and overheads will increase in line with expected levels of inflation. The cash flow forecasts assume appropriate levels of capital expenditure and investment in working capital to support the growth in individual CGUs. Impairment The Group did not impair goodwill in the current year nor in the prior year. Additional Sensitivity Analysis The Group has conducted a sensitivity analysis on each of the CGUs. For the purposes of performing sensitivity analysis, each individual discount rate was increased by 2% and the terminal growth rate was reduced to 2%. Applying these assumptions did not indicate any impairment. 130 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 13. Intangible Assets Year ended 30 September 2017 Opening net book amount Additions in year Arising on acquisition Amortisation of acquired intangible assets Amortisation of computer software Transfer from property, plant and equipment Measurement period adjustment Translation adjustment At 30 September 2017 At 30 September 2017 Cost or deemed cost Accumulated amortisation Net book amount Year ended 30 September 2016 (as re-presented) Opening net book amount Additions in year Arising on acquisition Amortisation of acquired intangible assets Amortisation of computer software Transfer to assets held for sale Transfer from property, plant and equipment Impairment charge Translation adjustment At 30 September 2016 At 30 September 2016 Cost or deemed cost Accumulated amortisation Net book amount Computer software $’000 Customer relationships $’000 Trade names $’000 Contract based $’000 Technology $’000 Total $’000 18,962 21,884 77 – (3,384) 393 – 1,838 39,770 76,736 – 62,734 (16,275) – – (1,005) 4,784 126,974 11,333 – 37,924 (2,751) – – – 1,049 47,555 – – 1,400 (233) – – – – 1,167 1,291 – 12,635 (2,807) – – – 1,032 108,322 21,884 114,770 (22,066) (3,384) 393 (1,005) 8,703 12,151 227,617 51,445 (11,675) 39,770 218,720 (91,746) 126,974 79,653 (32,098) 47,555 22,039 (20,872) 1,167 19,144 (6,993) 12,151 391,001 (163,384) 227,617 Computer software $’000 Customer relationships $’000 Trade names $’000 Contract based $’000 Technology $’000 Total $’000 11,564 10,926 – – (2,236) (1,865) 1,701 (798) (330) 18,962 87,501 – 8,903 (13,351) – – – – (6,317) 76,736 12,957 – 1,579 (2,013) – – – – (1,190) 11,333 282 – – (281) – – – – (1) – 1,623 – – (332) – – – – – 1,291 113,927 10,926 10,482 (15,977) (2,236) (1,865) 1,701 (798) (7,838) 108,322 30,014 (11,052) 18,962 149,542 (72,806) 76,736 39,826 (28,493) 11,333 19,872 (19,872) 5,181 (3,890) 244,435 (136,113) – 1,291 108,322 The amortisation charge for the year has been charged to other operating expenses in the Income Statement. Intangible assets are amortised over their useful lives, ranging from six months to 15 years, depending on the nature of the asset. 14. Investment in Joint Ventures and Associates The Group’s interest in its joint ventures and associates, all of which are unlisted, is set out below. At 1 October 2015 (as re-presented) Share of profit after tax – continuing operations Share of profit after tax – discontinued operations Transferred to assets held for sale Translation adjustment At 30 September 2016 (as re-presented) Share of profit after tax Translation adjustment At 30 September 2017 $’000 25,855 798 1,659 (18,842) (403) 9,067 667 (896) 8,838 UDG Healthcare plc Annual Report and Accounts 2017 131 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 14. Investment in Joint Ventures and Associates (continued) The Group has classified the joint venture arrangement with Magir Limited as an asset held for sale. Set out below is the summarised financial information for the Group’s joint ventures, which are accounted for using the equity method. The information below reflects the amounts presented in the Financial Statements of the joint venture reconciled to the carrying value of the Group’s interest in joint ventures. 2017 $’000 2016 as re-presented $’000 Joint venture balance sheet (100%) Non-current assets Cash and cash equivalents Other current assets Non-current liabilities Current liabilities Net assets Reconciliation of the carrying value of the Group’s interest in joint ventures: Group’s equity interest Group’s share of net assets Goodwill Carrying value of Group’s interest in joint ventures Revenue Expenses, net of tax Profit after tax Group’s equity interest Group’s share of profit after tax 2,265 2,292 13,879 (4,199) (7,315) 6,922 49.99% 3,460 5,378 8,838 2016 (as re-presented) Continuing operations $’000 66,287 (64,690) 1,597 49.99% 798 Discontinued operations $’000 113,381 (108,487) 4,894 33.9% 1,659 2017 $’000 61,883 (60,549) 1,334 49.99% 667 1,226 3,212 16,856 (2,664) (12,435) 6,195 49.99% 3,097 5,970 9,067 Total $’000 179,668 (173,177) 6,491 – 2,457 Capital Commitments At 30 September 2017, the Group’s share of authorised but not contracted for capital expenditure was nil. The following joint venture of UDG Healthcare plc is classified as an asset held for sale. Name plc Nature of business Magir Limited (trading as Medicare) Healthcare and retail organisation Group share 31.62% Magir Limited has its registered office at 44 Montgomery Road, Belfast, BT6 9ML The following joint venture of UDG Healthcare plc is included within the Ashfield operating segment. Name CMIC Ashfield Co., Ltd Nature of business Contract sales outsourcing Group share 49.99% CMIC Ashfield Co., Ltd has its registered office at 7–10–4 Nishi-Gotanda, Shinagawa-ku, Tokyo, Japan All shares held are ordinary shares. 132 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements UDG Healthcare plc accounts for Magir Limited and CMIC Ashfield Co. Limited as joint ventures on the basis of contractual arrangements which establish joint control between the Group and the remaining shareholders. These contractual arrangements outline the requirement for all significant strategic, financial and operational decisions to be jointly approved by both parties to the respective agreements. The Group has considered the impact of IFRS 12, Disclosure of Interest in Other Entities in the Group Financial Statements. Given that neither joint venture is individually material to the results or financial position of the Group as at 30 September 2017 or 2016, no separate summary information for the respective joint ventures has been disclosed. 15. Inventories Raw materials Work in progress Finished goods 2017 $’000 2016 as re-presented $’000 13,921 6,159 34,980 55,060 16,204 4,617 34,120 54,941 In 2017, raw materials, work in progress and finished goods recognised as continuing cost of sales amounted to $207,803,000 (2016: $224,075,000). Estimates of net realisable value are based on the most reliable evidence, taking into consideration product obsolescence or perishability (which are generally low given the nature of the Group’s inventory) and the purpose for which the inventory is held. Current replacement cost does not differ materially from historical cost. At 30 September 2017, the level of consignment inventory within the continuing Group amounted to $2,943,000 (2016: $2,755,000). These represent goods held on behalf of clients at locations around the Group, but are not owned by the Group. 16. Trade and Other Receivables Current Trade receivables Other receivables Accrued income Prepayments The maximum exposure to credit risk for trade receivables at the reporting date by geographical region was: Geographical analysis of risk Republic of Ireland United Kingdom North America Rest of World 2017 $’000 2016 as re-presented $’000 215,140 24,121 50,050 18,077 307,388 163,492 16,913 32,944 20,442 233,791 2017 $’000 2016 as re-presented $’000 7,191 39,023 104,577 64,349 215,140 7,012 33,428 78,270 44,782 163,492 There is no material concentration of credit risk with regard to individual clients included in Group trade receivables. Details of how the Group manages credit risk are set out in Note 30. UDG Healthcare plc Annual Report and Accounts 2017 133 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 16. Trade and Other Receivables (continued) The ageing of trade receivables at 30 September 2017 and 2016 was: Not past due Past due 0–30 days 31–90 days 91–180 days +181 days Gross value $’000 186,146 19,213 8,923 2,099 1,315 2017 Impairment $’000 Net $’000 (200) 185,946 2016 (as re-presented) Gross value $’000 138,501 Impairment $’000 Net $’000 (361) 138,140 (58) (457) (526) (1,315) 19,155 8,466 1,573 – 15,166 6,976 3,118 2,647 (140) (156) (845) (1,414) 15,026 6,820 2,273 1,233 217,696 (2,556) 215,140 166,408 (2,916) 163,492 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: At beginning of the year Disposals in year Bad debts written off during the year Acquired during the year Impairment loss recognised during the year Translation adjustment At end of year 2017 $’000 2,916 – (562) – 104 98 2,556 2016 as re-presented $’000 7,996 (5,279) (258) 64 563 (170) 2,916 Trade receivables are assessed individually for impairment. The Group trades with a large and varied number of clients on credit terms. Provision for impairment is made when there is objective evidence that the Group will not be in a position to collect the associated trade debts. Impairments are recorded in the Group Income Statement on identification. The general economic climate being experienced by clients of the Group remains consistent with 2016 and is closely monitored by the Group. 17. Equity Share Capital Equity share capital Authorised Ordinary shares of €0.05 each Redeemable ordinary shares of €0.05 each Allotted, called up and fully paid Ordinary shares of €0.05 each Redeemable ordinary shares of €0.05 each In issue at 30 September Number of shares 2017 2017 $’000 Number of shares 2016 2016 as re-presented $’000 367,471,934 7,528,066 21,605 492 367,471,934 7,528,066 375,000,000 22,097 375,000,000 248,326,744 7,528,066 255,854,810 14,128 492 246,764,469 7,528,066 14,620 254,292,535 21,605 492 22,097 14,043 492 14,535 The redeemable ordinary shares do not rank for dividends and do not carry voting rights. The redeemable ordinary shares can be redeemed by the Company with the agreement of holders of such shares. All redeemable ordinary shares are held by the Group and are treated as treasury shares in accordance with the requirements of company law. 134 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to attend, speak, ask questions and have one vote per share at general meetings of the Company. All shares rank equally with regard to the Company’s residual assets. In issue at beginning of year Exercise of share options Issued in business combination (Note 28) In issue at end of year Number of ordinary shares Number of redeemable ordinary shares 2017 2016 2017 2016 246,764,469 837,278 724,997 244,879,716 1,884,753 – 7,528,066 – – 7,528,066 – – 248,326,744 246,764,469 7,528,066 7,528,066 18. Profit Attributable to UDG Healthcare plc The profit recorded in the Financial Statements of the holding Company for the year ended 30 September 2017 was €76,437,000 (2016: €93,559,000). As permitted by Section 304 (2) of the Companies Act 2014, the Income Statement of the Company has not been separately presented – the exemption is afforded by Section 304. 19. Share Premium At 1 October Premium arising on shares issued Issued in business combination At 30 September 20. Other Reserves Cash flow hedge $’000 Share-based payment $’000 At 1 October 2016 (as re-presented) Effective portion of cash flow hedges Deferred tax on cash flow hedges Share-based payment expense Release from share-based payment reserve Translation adjustment At 30 September 2017 (12,499) (406) 51 – – – (12,854) Foreign exchange $’000 Treasury shares $’000 (165,574) (7,676) – – – – 10,109 – – – – – 5,956 – – 3,613 (577) – 8,992 (155,465) (7,676) At 1 October 2015 (as re-presented) Effective portion of cash flow hedges Deferred tax on cash flow hedges Share-based payment expense Release from share-based payment reserve Translation adjustment – Continuing operations – Discontinued operations Reclassification on loss of control Release of treasury shares on vesting Cash flow hedge $’000 Share-based payment $’000 Foreign exchange $’000 Treasury shares $’000 (6,918) (6,379) 798 – – – – – – 6,832 – – 2,184 (3,037) – – – (23) (108,781) – – – – (60,031) (2,045) 5,283 – (7,699) – – – – – – – 23 2017 $’000 2016 as re-presented $’000 187,355 3,129 6,012 196,496 Capital redemption reserve $’000 347 – – – – – 347 Capital redemption reserve $’000 347 – – – – – – – – 183,000 4,355 – 187,355 Total $’000 (179,446) (406) 51 3,613 (577) 10,109 (166,656) Total $’000 (116,219) (6,379) 798 2,184 (3,037) (60,031) (2,045) 5,283 – At 30 September 2016 (12,499) 5,956 (165,574) (7,676) 347 (179,446) Cash Flow Hedge Reserve The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Share-based Payment Reserve This reserve comprises amounts expensed in the Income Statement in connection with share-based payments, net of transfers to retained earnings on the exercise, lapsing or forfeiting of share awards. UDG Healthcare plc Annual Report and Accounts 2017 135 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 20. Other Reserves (continued) Foreign Exchange Reserve The currency translation reserve comprises all foreign exchange differences from 1 October 2016, arising from the translation of the net assets of the Group’s non-US Dollar denominated operations, including the translation of the profits of such operations from the average exchange rate for the year to the exchange rate at the balance sheet date. The reserve also includes all foreign exchange differences arising from the translation of liabilities that hedge the Group’s net investment in foreign operations. Capital Redemption Reserve The capital redemption reserve is a legal reserve which has arisen from the Company buying back and cancelling its ordinary shares. Treasury Shares Dublin Drug Company Limited During the year ended 30 September 1998, the Group acquired Dublin Drug Company Limited for consideration of $13,118,000 which at the date of its acquisition held 2,225,438 ordinary shares in UDG Healthcare plc which had a nominal value of $790,000 and at the date of their acquisition represented 9.84% of the Company’s issued ordinary share capital. Subsequent to the acquisition, these ordinary shares were converted into redeemable ordinary shares. On 29 January 2002, 1,150,000 of these redeemable ordinary shares were redeemed at their market value both out of the proceeds of a placing in the market of 1,150,000 new ordinary shares and the distributable reserves of the Company, in accordance with Article 3A of the Articles of Association of the Company and Section 207 of the Companies Act 1990, and immediately thereafter were cancelled. During the year ended 30 September 2003, the Company’s shareholders approved a 7 for 1 split of the ordinary share capital and redeemable ordinary share capital of the Company. At 30 September 2017, Dublin Drug Company Limited continued to hold 7,528,066 redeemable ordinary shares and they have been treated as treasury shares in the Balance Sheet in accordance with the requirements of company law. Summary At 30 September 2017 7,528,066 (2016: 7,528,066) treasury shares were held by the Group, representing 2.94% (2016: 2.96%) of the issued ordinary and redeemable ordinary share capital of the Company. 21. Retained Earnings At beginning of year Net income recognised directly in the Income Statement Net income recognised directly in Other Comprehensive Income – Remeasurement gain/(loss) on Group defined benefit schemes – Deferred tax on Group defined benefit schemes Dividends paid to equity holders Release from share-based payment reserve At end of year 22. Non-controlling Interests At 1 October Acquired during the year Share of profit for the financial year Translation adjustment At 30 September 2017 $’000 2016 as re-presented $’000 784,432 71,858 11,098 (599) (31,279) 577 836,087 600,793 218,523 (8,232) 367 (30,056) 3,037 784,432 2017 $’000 – 110 – (1) 109 2016 as re-presented $’000 – – – – – The non-controlling interest relates to Sellxpert AG, a company registered in Switzerland. The Group acquired a 50% shareholding in Sellxpert AG on 10 July 2017. 136 UDG Healthcare plc Annual Report and Accounts 2017 23. Interest-bearing Loans and Borrowings Non-current Guaranteed senior unsecured notes Bank borrowings Finance leases Current Guaranteed senior unsecured notes Bank borrowings Finance leases Interest-bearing loans and borrowings are repayable as follows: Bank borrowings, overdrafts and guaranteed senior unsecured notes Within one year After one but within two years After two but within five years After five years Finance leases Within one year After one but within two years Non-current Current Strategic Report Directors’ Report Financial Statements Financial Statements 2017 $’000 2016 as re-presented $’000 244,043 – 34 244,077 (142) 70 130 58 242,289 (190) 9 242,108 65,011 (287) 158 64,882 2017 $’000 2016 as re-presented $’000 (72) (95) 65,362 178,776 130 34 244,135 244,077 58 244,135 64,724 (190) 66,021 176,268 158 9 306,990 242,108 64,882 306,990 In September 2010, the Group completed a $130 million debt financing in the US Private Placement Market. The following notes remain outstanding: 4.70% Series ‘A’ guaranteed senior unsecured notes, 2017 5.25% Series ‘B’ guaranteed senior unsecured notes, 2020 2017 $’000 – 65,000 65,000 2016 $’000 65,000 65,000 130,000 In September 2013, the Group completed a $140 million and €23 million debt financing in the US Private Placement Market. The following notes remain outstanding: 4.48% Series ‘A’ guaranteed senior unsecured notes, 2023 4.59% Series ‘B’ guaranteed senior unsecured notes, 2025 3.45% Series ‘C’ guaranteed senior unsecured notes, 2023 3.50% Series ‘D’ guaranteed senior unsecured notes, 2025 2017 $’000 105,000 35,000 140,000 2017 €’000 12,000 11,000 23,000 2016 $’000 105,000 35,000 140,000 2016 €’000 12,000 11,000 23,000 UDG Healthcare plc Annual Report and Accounts 2017 137 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 23. Interest-bearing Loans and Borrowings (continued) In September 2014, the Group completed a €10 million debt financing in the US Private Placement Market. The following note remains outstanding: 2.64% Series ‘A’ guaranteed senior unsecured note, 2023 2017 €’000 10,000 10,000 2016 €’000 10,000 10,000 All the loan notes were issued by UDG Healthcare Finance Limited, a wholly owned subsidiary, and have been guaranteed by UDG Healthcare plc and other Group undertakings. US dollar loan note issuance proceeds were swapped into euro and the US dollar fixed interest rates applicable to the debt were swapped into predominantly fixed Euro rate debt to generate the desired interest profile. These loans are repayable in full on maturity. Borrowing Facilities In September 2014, the Group renewed its senior bank debt facility extending the term to November 2019. At year end the Group has $247,926,000 (2016: $234,382,000) of committed, undrawn multi-currency senior debt loan facilities with a maturity date of November 2019. The Group also has $11,806,000 (2016: $11,161,000) of undrawn overdraft facilities. Covenants The unsecured loan notes and senior bank facilities are subject to compliance with certain covenants including a leverage covenant (net debt to EBITDA) not to exceed 3.5:1 and an interest cover covenant (EBITDA to net interest expense) to be at least 3.0:1. 2017 $’000 2016 as re-presented $’000 58,145 97,526 58,968 12,594 20,912 47,279 73,851 53,458 15,420 14,460 248,145 204,468 Total 2017 $’000 16,067 – 65,939 (14,430) 380 999 3,420 72,375 Total as re-presented 2016 $’000 29,342 (1,022) 8,581 (19,895) 1,158 – (2,097) 16,067 Deferred contingent consideration 2017 $’000 15,419 – 65,939 (14,265) 380 999 3,406 71,878 Onerous leases 2017 $’000 Restructuring and other costs 2017 $’000 359 – – (52) – – 17 324 289 – – (113) – – (3) 173 24. Trade and Other Payables Current Trade payables Accruals Deferred income Other payables PAYE, VAT and social welfare 25. Provisions At the beginning of the year Release to income statement Arising on acquisitions (Note 28) Utilised during the year Unwinding of discount Measurement period adjustment Translation adjustment At end of year 138 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements Non-current Current Total Deferred contingent consideration 2017 $’000 58,136 13,742 71,878 Onerous leases 2017 $’000 Restructuring and other costs 2017 $’000 269 55 324 65 108 173 Total 2017 $’000 58,470 13,905 72,375 Total as re-presented 2016 $’000 6,084 9,983 16,067 Deferred Contingent Consideration The deferred contingent consideration liability represents the fair value of amounts which may become payable over the period from October 2017 to October 2020 in connection with the acquisition of subsidiaries. Payment is dependent on achieving predetermined targets based on future performance and profitability. During the year, payments were made of $14,265,000 (2016: $17,331,000) with respect to prior and current year acquisitions. Deferred contingent consideration of nil (2016: $354,000) in respect of prior year acquisitions was charged following a review of earn out targets. The prior year charge was included in the Group Income Statement. Onerous Leases The onerous leases relate to properties that the Group remains committed to following the integration of the businesses acquired in prior years. The properties are being proactively managed. In calculating the provisions, the Group made certain estimates and assumptions in assessing the amount provided. The provisions were calculated by taking into consideration the committed rental charges associated with the premises and the period of time to the earliest date at which the Group can exit from the leases. The cash outflows will be incurred during the period from October 2017 to April 2021. Restructuring and Other Costs This provision primarily relates to redundancy costs associated with the implementation of the restructuring programme in Sharp Packaging Belgium in 2015. 26. Operating Leases Leases as Lessee Non-cancellable operating lease rentals are payable as set out below. These amounts represent the minimum future lease payments, in aggregate, the Group is required to make under existing lease agreements. Less than one year Between one and five years More than five years 2017 $’000 2016 as re-presented $’000 27,121 52,729 23,305 103,155 24,260 50,171 28,151 102,582 The Group leases certain property, plant and equipment under operating leases. The leases typically run for an initial lease period with the potential to renew the leases after the initial period. UDG Healthcare plc Annual Report and Accounts 2017 139 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 27. Deferred Income Tax Assets and Liabilities The following is an analysis of the movement in the major categories of deferred tax assets/(liabilities) recognised by the Group for the year ended 30 September 2017: At 1 October 2016 Recognised in Income Statement Recognised in Other Comprehensive Income Arising on acquisition Exchange differences and other At 30 September 2017 Analysed as: Deferred tax asset Deferred tax liability Property, plant and equipment $’000 Intangible assets $’000 Retirement benefit obligation $’000 (6,894) (2,508) – (22) 277 (9,147) 184 5,070 – (19,989) (1,186) (15,921) Short-term temporary differences and other differences $’000 (4,148) 332 (599) – (6) (15,854) (6,905) 51 1,932 11 Total $’000 (26,712) (4,011) (548) (18,079) (904) (4,421) (20,765) (50,254) 7 (9,154) (9,147) – (15,921) (15,921) 234 (4,655) (4,421) 3,784 (24,549) 4,025 (54,279) (20,765) (50,254) The following is an analysis of the movement in the major categories of deferred tax assets/(liabilities) recognised by the Group for the year ended 30 September 2016. At 1 October 2015 (as re-presented) Recognised in the Income Statement Recognised in Other Comprehensive Income Arising on acquisition Deferred tax on disposals Exchange differences and other At 30 September 2016 (as re-presented) Analysed as: Deferred tax asset Deferred tax liability Property, plant and equipment $’000 Intangible assets $’000 Retirement benefit obligation $’000 (3,905) (2,761) – – – (228) (6,894) – (6,894) (6,894) (7,571) 7,565 – (1,782) – 1,972 184 425 (241) 184 (2,941) 113 367 – (1,602) (85) (4,148) 1,093 (5,241) (4,148) Short-term temporary differences and other differences $’000 (12,544) (4,171) 798 – – 63 Total $’000 (26,961) 746 1,165 (1,782) (1,602) 1,722 (15,854) (26,712) 2,778 (18,632) 4,296 (31,008) (15,854) (26,712) No deferred income tax is recognised on the unremitted earnings of overseas subsidiaries and joint ventures as the Group does not anticipate additional tax on any ultimate remittance. As at 30 September 2017, the Group has unused tax losses and other timing differences of $34,714,000 (2016: $32,205,000) in respect of which no deferred tax asset has been recognised as it is not considered probable that there will be future taxable profits available. Included in the tax losses not recognised for deferred tax purposes are losses of $14,728,000 (2016: $13,247,000) which will expire within the next nine years. The remaining tax losses carry forward indefinitely. 140 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 28. Acquisition of Subsidiary Undertakings On 21 October 2016, the Group acquired STEM Marketing Limited (‘STEM’), a leading global provider of commercial, marketing and medical audits to pharmaceutical companies. The Group has agreed to pay the sellers an additional amount over the next three years if predefined financial thresholds are met. The Group has included contingent consideration related to the additional consideration, which represents its fair value at the date of acquisition. On 3 April 2017, the Group acquired 100% of the share capital of Steel Eagle LLC, a US based pharmaceutical packaging facility. On 1 July 2017, the Group acquired 100% of the share capital of Vynamic LLC, a US based healthcare industry management consulting firm. The Group has agreed to pay the sellers an additional amount over the next three years if predefined financial thresholds are met. The Group has included contingent consideration related to the additional consideration, which represents its fair value at the date of acquisition. On 10 July 2017, the Group acquired 100% of the share capital of Sellxpert GmbH, a German contract sales organisation. The Group has agreed to pay the sellers an additional amount over the next three years if predefined financial thresholds are met. The Group has included contingent consideration related to the additional consideration, which represents its fair value at the date of acquisition. On 10 July 2017, the Group also acquired 50% of the share capital in Sellxpert AG, a contract sales organisation based in Switzerland. On 12 July 2017, the Group acquired 100% of the share capital of Cambridge BioMarketing LLC, a US based healthcare communications business. The Group has agreed to pay the sellers an additional amount over the next twelve months, if predefined financial thresholds are met. The Group has included contingent consideration related to the additional consideration, which represents its fair value at the date of acquisition. On 13 September 2017, the Group acquired 100% of the share capital of MicroMass Communications Inc (‘MicroMass’), a US-based healthcare communications agency specialising in behavioural change. The Group has agreed to pay the sellers an additional amount over the next three years, if predefined financial thresholds are met. The Group has included contingent consideration related to the additional consideration, which represents its fair value at the date of acquisition. The initial assignment of fair values to identifiable net assets acquired has been performed on a provisional basis in respect of the above listed acquisitions. Any amendments to these acquisition fair values within the twelve-month timeframe from the date of acquisition will be disclosed in the relevant annual report as stipulated by IFRS 3 (revised 2008), Business Combinations. In the prior financial year, Pegasus Public Relations Limited, a healthcare communications company based in the UK, was acquired on 18 April 2016. The Group has revised its estimate of the acquisition date fair value of intangibles, deferred contingent consideration and trade and other receivables in respect of this acquisition. This has resulted in a corresponding increase in goodwill relative to the amount previously recorded. On the basis that this adjustment was not deemed to be material, it was accounted for in the current year as a measurement period adjustment. UDG Healthcare plc Annual Report and Accounts 2017 141 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 28. Acquisition of Subsidiary Undertakings (continued) The fair value of the assets and liabilities acquired in the year ended 30 September 2017 (excluding net cash acquired), determined on a provisional basis due to the timing of recent acquisitions, are set out below: STEM $’000 MicroMass $’000 Other $’000 Total $’000 Measurement period adjustments $’000 2017 Total $’000 2016 Total as re-presented $’000 Assets Non-current assets Property, plant and equipment Intangible assets – computer software Intangible assets – other intangible assets Total non-current assets Current assets Inventories Trade and other receivables Total current assets Non-current liabilities Deferred income tax liabilities Total non-current liabilities Current liabilities Trade and other payables Current income tax liabilities Total current liabilities Identifiable net assets acquired Intangible assets – goodwill Total consideration (enterprise value) Satisfied by: Cash Net cash acquired Net cash outflow Equity instruments (724,997 ordinary shares) Deferred contingent acquisition consideration Non-controlling interest Total consideration 122 – 55,332 55,454 – 9,459 9,459 540 – 28,300 28,840 – 6,320 6,320 20,776 21,438 77 31,061 51,914 800 18,814 19,614 77 114,693 136,208 800 34,593 35,393 (7,496) (7,496) (10,754) (10,754) – – (18,250) (18,250) – – (1,005) (1,005) – (11) (11) 171 171 – – – 21,438 77 113,688 135,203 800 34,582 35,382 (18,079) (18,079) (22,402) (1,036) (23,438) 584 – 10,482 11,066 – 6,215 6,215 (1,782) (1,782) (3,542) (540) (4,082) 11,417 11,610 (3,758) (743) (4,501) 52,916 50,779 (3,362) – (3,362) 21,044 53,170 (15,282) (293) (15,575) (22,402) (1,036) (23,438) 55,953 36,677 129,913 140,626 (845) 1,844 129,068 142,470 103,695 74,214 92,630 270,539 999 271,538 23,027 63,247 (3,358) 59,889 6,051 37,755 – 103,695 63,683 (1,120) 62,563 – 11,651 – 74,214 78,715 (2,728) 75,987 205,645 (7,206) 198,439 – 6,051 16,533 110 92,630 65,939 110 270,539 – – – – 999 – 999 205,645 (7,206) 198,439 6,051 66,938 110 271,538 16,843 (2,397) 14,446 – 8,581 – 23,027 Goodwill is attributable to the future economic benefits arising from assets which are not capable of being individually identified and separately recognised. The significant factors giving rise to the goodwill include the value of the workforce and management teams within the businesses acquired, the enhancement of the competitive position of the Group in the marketplace and the strategic premium paid by UDG Healthcare plc to create the combined Group. The goodwill arising from acquisitions that is expected to be tax deductible is nil (2016: nil). The intangible assets arising on the acquisitions are related to the trade names, client relationships, technology and client contracts. The contractual assets are not materially different from the disclosed trade and other receivables. 142 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements The total transaction related costs for completed and aborted acquisitions amount to $4,028,000 (2016: $2,214,000). These are presented separately in the Group Income Statement. The fair value of contingent consideration recognised at the date of acquisition is calculated by discounting the expected future payment to present value at the acquisition date. In general, for contingent consideration to become payable, pre-defined profit thresholds must be exceeded. On an undiscounted basis, the future payments for which the Group may be liable in respect of current year acquisitions range from nil to $64,420,000 at 30 September 2017 (2016: nil to $8,776,000). The Group’s results for the year ended 30 September 2017 included the following amounts in respect of the businesses acquired during the year: Revenue Gross profit Selling and distribution expenses Other operating expenses* Operating profit Net interest (expense)/income Profit before tax Income tax Profit after tax 2017 Total $’000 2016 Total as re-presented $’000 69,630 9,268 32,850 (21,263) (8,365) 3,222 (1,120) 2,102 (467) 1,635 3,191 (1,585) (629) 977 4 981 (197) 784 * Other operating expenses relate to amortisation of intangible assets. Had the acquisitions been effected on 1 October 2016, the combined continuing Group would have reported total revenues of $1,315,507,000 and profit after interest and tax for the financial year of $78,525,000. 29. Employee Benefits The aggregate employee costs recognised in the Income Statement are as follows: Wages and salaries Social security contributions Pension costs – defined contribution schemes Pension costs – defined benefit schemes Share-based payment expense 2017 $’000 447,088 51,233 9,515 (341) 3,613 511,108 2016 as re-presented $’000 453,907 49,903 8,998 (1,991) 2,184 513,001 During the year the Group capitalised employee costs amounting to $2,702,000 (2016: $1,881,000), relating to intangible assets – computer software. The Group also capitalised employee costs amounting to $1,022,000 (2016: nil) relating to tangible assets. The employee benefit expense is analysed as follows: Continuing operations Discontinued operations 2017 $’000 511,108 – 511,108 2016 as re-presented $’000 492,884 20,117 513,001 UDG Healthcare plc Annual Report and Accounts 2017 143 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 29. Employee Benefits (continued) The average number of employees, including executive directors, during the year was as follows: Marketing, distribution and selling Operational Administration The average number of employees during the year is analysed as follows: Continuing operations Discontinued operations 2017 Number 6,570 1,275 76 7,921 2017 Number 7,921 – 7,921 2016 Number 6,179 1,225 95 7,499 2016 Number 6,990 509 7,499 A further 1,191 (2016: 1,224) personnel are employed in the Group’s joint ventures. (i) Defined contribution schemes The Group makes contributions to a number of defined contribution schemes, the assets of which are vested in independent trustees for the benefit of members and their dependants. (ii) Defined benefit schemes The following amounts were recognised on the Balance Sheet of the Group in respect of employee benefit schemes as at 30 September: Employee benefit asset Employee benefit liability The Group operates a number of defined benefit schemes as at 30 September as follows: United States defined benefit scheme (US scheme) Republic of Ireland defined benefit schemes (ROI schemes) Net surplus/(liability) 2017 $’000 12,379 (3,162) 9,217 2016 as re-presented $’000 13,939 (20,442) (6,503) 2017 $’000 12,379 (3,162) 9,217 2016 as re-presented $’000 13,939 (20,442) (6,503) On 1 April 2016 the Group completed the disposal of United Drug Supply Chain Services, United Drug Sangers, TCP Group and MASTA. Under the terms of the disposal, the Group retained responsibility for the funding requirements in respect of the ROI schemes. During 2015, the Group announced that the pension accrual under the ROI schemes would cease on 31 December 2015. On completion of the disposal the future funding obligations of the Northern Ireland (NI) scheme ceased to be the responsibility of the Group. Each of the defined benefit schemes operated by the Group are funded by the payment of contributions to separately administered trust funds. The contributions to the schemes are determined with the advice of independent qualified actuaries obtained at regular intervals using the projected unit method of funding. Each defined benefit scheme is independently funded and the assets are vested in the independent trustees for the benefit of members and their dependants. The valuations are not available for public inspection but the results are advised to members of the schemes. The most recent full actuarial valuations for the principal schemes were conducted as at 31 December 2014 for the ROI schemes and 1 January 2016 for the US scheme. Assumed medical costs are not a component of the pension obligations of any of the Group’s pension obligations. 144 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements The principal long-term financial assumptions used by the Group’s actuaries in the computation of the defined benefit liabilities arising on pension schemes as at 30 September are as follows: Increase in salaries Increase in pensions Inflation rate Discount rate 2017 n/a 0–1.65% 1.65% 2.05% ROI schemes US scheme 2016 2015 2017 2016 2015 n/a 0–1.50% 1.50% 1.25% 2.75% 2.75–4.00% 2.75–4.00% 2.75–4.00% 0.00% 2.75% 4.00% 0.00% 2.75% 3.30% 0–1.75% 1.75% 2.70% 0.00% 2.75% 3.60% The ROI schemes have a remeasurement gain in the current year which primarily relates to an increase in the discount rate. The change in the discount rate within the schemes is reflective of changes in bond yields during the year. The US scheme has a remeasurement gain in the year arising from a higher than expected return on plan assets. In the ROI schemes, there is no longer a salary increase assumption due to the accrual of pension benefit ceasing from 1 December 2015. All schemes used certain mortality rate assumptions when calculating scheme obligations. These are based on advice from published statistics and experience in each geographic region. These assumptions will continue to be monitored in light of general trends in mortality experience. The average life expectancy of a pensioner at age 65, in years, is as follows: ROI schemes US scheme Current pensioners Male Female Future pensioners Male Female The market value of the assets in the pension schemes at 30 September 2017 were: Equities – Developed markets – Emerging markets Bonds – Government – Non-government Property Cash Fair value of scheme assets Present value of scheme obligations Employee benefits (liability)/asset Deferred income tax asset/(liability) Net (liability)/asset 2017 21.4 23.9 23.8 25.9 % 34 – 40 – 3 23 100 2016 21.2 23.7 23.7 25.8 ROI 2017 $’000 11,652 – 13,668 – 1,145 7,827 34,292 (37,454) (3,162) 234 (2,928) 2017 21.1 24.7 21.5 25.3 % 49 2 31 18 – – 100 2016 21.4 25.1 21.9 25.8 US 2017 $’000 15,889 657 10,153 5,761 – 28 32,488 (20,109) 12,379 (4,655) 7,724 UDG Healthcare plc Annual Report and Accounts 2017 145 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 29. Employee Benefits (continued) The market value of the assets in the pension schemes at 30 September 2016 were: Equities – Developed markets – Emerging markets Bonds – Government – Non-government Property Cash Fair value of scheme assets Present value of scheme obligations Employee benefits (liability)/asset Deferred income tax asset/(liability) Net (liability)/asset Movements in Fair Value of Plan Assets At beginning of year Interest income on plan assets Employer contributions Employee contributions Benefit payments Return on plan assets excluding interest income Settlements Disposed Translation adjustment At end of year ROI 2017 $’000 39,457 429 4,218 – (1,022) 2,068 (12,663) – 1,805 34,292 US 2017 $’000 30,404 798 – – (496) 1,782 – – – 32,488 * This scheme relates to United Drug Sangers which was disposed of on 1 April 2016. Movements in Present Value of Defined Benefit Obligations At beginning of year Current service costs Interest on scheme obligations Employee contributions Benefit payments Remeasurement (gain)/loss Effect of changes in actuarial assumptions Settlements Curtailment gain Disposed Translation adjustment At end of year ROI 2017 $’000 59,899 – 638 – (1,022) (3,105) (5,374) (15,391) – – 1,809 37,454 US 2017 $’000 16,465 2,387 522 – (496) 624 607 – – – – 20,109 Total 2017 $’000 69,861 1,227 4,218 – (1,518) 3,850 (12,663) – 1,805 66,780 Total 2017 $’000 76,364 2,387 1,160 – (1,518) (2,481) (4,767) (15,391) – – 1,809 57,563 % 49 – 20 3 3 25 100 ROI 2016 $’000 43,352 1,081 6,592 23 (980) 1,364 (11,796) – (179) 39,457 ROI 2016 $’000 63,857 134 1,487 23 (980) (2,037) 13,900 (15,865) (367) – (253) 59,899 ROI 2016 $’000 19,565 – 7,930 1,124 1,008 9,830 39,457 (59,899) (20,442) 1,093 (19,349) US 2016 $’000 28,425 921 – – (587) 1,645 – – – 30,404 US 2016 $’000 13,786 2,186 527 – (587) 354 199 – – – – 16,465 % 45 8 30 17 – – 100 NI* 2016 $’000 25,132 489 278 69 (556) 1,222 – (25,297) (1,337) – NI* 2016 $’000 28,788 125 553 69 (556) (668) 715 – – (27,537) (1,489) – US 2016 $’000 13,703 2,288 9,229 5,124 – 60 30,404 (16,465) 13,939 (5,241) 8,698 Total 2016 $’000 96,909 2,491 6,870 92 (2,123) 4,231 (11,796) (25,297) (1,516) 69,861 Total 2016 $’000 106,431 2,445 2,567 92 (2,123) (2,351) 14,814 (15,865) (367) (27,537) (1,742) 76,364 * All liabilities and information associated with the NI Scheme is attributable to United Drug Sangers which was disposed of on 1 April 2016. 146 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements 2017 $’000 3,850 2,481 29 4,738 11,098 2014* $’000 109,827 118,280 US 2017 $’000 (2,387) – (522) 798 (2,111) 2016 as re-presented $’000 4,231 2,351 – (14,814) (8,232) 2013* $’000 88,358 94,522 Total 2017 $’000 (2,387) 2,728 (1,160) 1,227 408 The remeasurement gain/(loss) on the plan assets and present value of the defined benefit obligation are as follows: Return on plan assets excluding interest income Remeasurement loss on experience variations Effect of changes in actuarial assumptions: – Changes in demographic assumptions – Changes in financial assumptions Total included in Group Statement of Comprehensive Income Historical Information Fair value of scheme assets Present value of scheme obligations 2017 $’000 66,780 57,563 2016 $’000 69,861 76,364 2015* $’000 96,909 106,431 * Includes the United Drug Sangers scheme which was disposed of on 1 April 2016. Defined Benefit Pension Credit/(Expense) Recognised in the Income Statement Current service costs Settlements Interest cost on scheme obligations Interest income on scheme assets ROI 2017 $’000 – 2,728 (638) 429 2,519 Accrual of pension benefits within the ROI schemes ceased with effect from 31 December 2015. During the current and prior year, a general offer was made to the members of the ROI schemes to transfer their accrued benefits from the schemes in exchange for a fixed monetary amount. Acceptance of the offer was at the discretion of individual members and resulted in a settlement gain of $2,728,000 (2016: $4,069,000, $2,641,000 of which related to discontinued operations). Related professional fees amount to $180,000 (2016: $261,000). The employee benefit credit/(expense) is analysed as: Continuing operations Discontinued operations Total Current service costs Settlements Curtailment gain Interest cost on scheme obligations Interest on scheme assets 2017 $’000 408 – 408 NI 2016 $’000 (125) – – (553) 489 (189) 2016 $’000 (833) 2,748 1,915 Total 2016 $’000 (2,445) 4,069 367 (2,567) 2,491 1,915 ROI 2016 $’000 (134) 4,069 367 (1,487) 1,081 3,896 US 2016 $’000 (2,186) – – (527) 921 (1,792) The tax effect relating to these items is disclosed in Note 27. The cumulative remeasurement loss recognised in Other Comprehensive Income is $27,091,000 (2016: $38,189,000). The expected employer’s contribution for the year ended 30 September 2018 is $1,522,000. UDG Healthcare plc Annual Report and Accounts 2017 147 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 29. Employee Benefits (continued) Expected Maturity Analysis of Undiscounted Pension Benefits ROI schemes US scheme At 30 September 2017 ROI schemes US scheme At 30 September 2016 Less than 1 year $’000 868 1,326 2,194 858 1,256 2,114 Between 1–2 years $’000 960 1,365 2,325 1,006 920 1,926 Between 2–5 years $’000 Over 5 years $’000 3,223 5,145 8,368 3,810 4,025 7,835 6,199 80,181 86,380 8,025 63,373 71,398 Total $’000 11,250 88,017 99,267 13,699 69,574 83,273 Sensitivity Analysis for Principal Assumptions Used to Measure Scheme Liabilities There are inherent uncertainties surrounding the financial assumptions adopted in calculating the actuarial valuation of the Group’s defined benefit pension schemes. The following table analyses, for the Group’s pension schemes, the estimated impact on plan obligations resulting from changes to key actuarial assumptions, whilst holding all other assumptions constant. The impact on the defined benefit obligation at 30 September 2017 is calculated on the basis that only one assumption is changed with all other assumptions remaining unchanged. The assessment of the sensitivity analysis below could therefore be limited as a change in one assumption may not occur in isolation as assumptions may be correlated. Change in assumption Impact on ROI plan liabilities Impact on US plan liabilities Increase/decrease by 0.25% Increase/decrease by 0.25% Increase by one year ↑↓ by 4.8% ↑↓ by 2.8% ↑ by 3.7% ↑↓ by 2.1% ↑↓ by 0.0% ↑ by 0.3% Assumption Discount rate Price inflation Mortality Share-Based Payment Executive Share Option Plan expense Long Term Incentive Plan expense Ashfield In2Focus share scheme expense 2017 $’000 163 3,450 – 3,613 2016 as re-presented $’000 394 1,780 10 2,184 $863,000 (2016: $767,000) of the total share-based payment expense recognised in the Income Statement relates to the directors. Executive Share Option Plan/Executive Share Option Scheme The Company’s Executive Share Option Plan (ESOP) was established during 2010. Under the ESOP share options may be granted to management which may entitle them to purchase shares in the Company so as to provide an incentive to perform strongly over an extended period and to encourage alignment of their interests with those of shareholders. Share options granted under the ESOP are exercisable for a period of four years from the third anniversary of the grant date, if adjusted diluted EPS growth is not less than the movement in the Irish Consumer Price Index, plus 3% compounded, over the performance period. There were no share options granted under the ESOP in the current year (2016: nil). In accordance with the terms of the ESOP, share options granted are exercisable at the market price of the underlying share on the last dealing day preceding the date of grant. The terms of the former Executive Share Option Scheme (ESOS) are set out in the Directors’ Remuneration Report on pages 70 to 87. The measurement requirements of IFRS 2 Share-based Payment have been implemented in respect of share options that were granted after 7 November 2002. There were no share options granted under the ESOS in the current year (2016: nil). 148 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements The number and weighted average exercise price of outstanding share options under the ESOP/ESOS are as follows: Outstanding at beginning of year Forfeited during the year Exercised during the year Lapsed during the year Outstanding at end of year Exercisable at end of year Weighted average exercise price 2017 $ Number of share options 2017 ‘000 Weighted average exercise price 2016 $ Number of share options 2016 ‘000 5.79 7.15 4.72 – 6.69 6.23 1,769 (123) (837) – 809 181 4.71 5.73 4.38 4.37 5.79 4.18 3,880 (555) (1,197) (359) 1,769 618 The weighted average share price at the date of exercise of share options during the year was $9.05 (2016: $8.12). The weighted average remaining contractual life for the share options outstanding at 30 September 2017 was 4.76 years (2016: 4.57 years). At 30 September 2017, the range of exercise prices of outstanding share options was from $4.30 to $7.78 (2016: $2.82 to $7.78). Analysis of ESOP/ESOS Share Options Outstanding at Year End Share option by exercise price: Total – Sterling denominated Total – Euro denominated Total options outstanding Exercise price £ 5.13 2.68 3.73 Exercise price € 2.09 4.06 Number of options 2017 ‘000 Number of options 2016 ‘000 238 1 570 809 311 31 840 1,182 Number of options 2017 ‘000 Number of options 2016 ‘000 – – – 809 284 303 587 1,769 Long Term Incentive Plan The Company’s Long Term Incentive Plan (LTIP) was established during 2010. The terms of share options granted under the LTIP during the year are set out in the Directors’ Remuneration Report on pages 70 to 87. During the year 914,344 (2016: 858,432) share options were granted under the LTIP. In accordance with the terms of the LTIP, share options awarded are exercisable at the nominal value of the underlying share as at the date of grant. UDG Healthcare plc Annual Report and Accounts 2017 149 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 29. Employee Benefits (continued) Long Term Incentive Plan (continued) A summary of the details in respect of share options granted under the LTIP in 2017 and 2016 is set out below. 2017 Market based awards 2017 Market based awards 2017 Non-market based awards 2017 Market based awards 2017 Market based awards 2017 Non-market based awards 2017 Market based awards 2017 Non-market based awards Grant date Fair value at grant date Share price at grant date Exercise price Expected volatility Expected life Risk-free interest rate Valuation model 25 July 2017 $6.35 $10.86 $0.06 21.59% 3 years 0.92% Monte Carlo Simulation 25 May 2017 $6.53 $10.18 $0.06 24.11% 5 years 0.59% Monte Carlo Simulation Performance period Vesting period 3 years 3 years 3 years 3 years 25 May 2017 $10.13 $10.18 $0.06 24.11% 5 years 0.59% Monte Carlo option pricing model 3 years 3 years 8 December 2016 $5.48 $8.79 $0.05 37.91% 5 years 0.36% Monte Carlo Simulation 8 December 2016 $5.84 $8.79 $0.05 37.91% 6 years 0.49% Monte Carlo Simulation 3 years 3 years 3 years 5 years 8 December 2016 $8.80 $8.79 $0.05 37.91% 6 years 0.49% Monte Carlo option pricing model 3 years 5 years 8 December 2016 $5.92 $8.79 $0.05 37.91% 5 years 0.36% Monte Carlo Simulation 3 years 3 years 8 December 2016 $8.80 $8.79 $0.05 37.91% 5 years 0.36% Monte Carlo option pricing model 3 years 3 years Grant date Fair value at grant date Share price at grant date Exercise price Expected volatility Expected life Risk-free interest rate Valuation model Performance period Vesting period 2016 Market based awards 2016 Non-market based awards 2016 Market based awards 2016 Non-market based awards 2016 Market based awards 2016 Non-market based awards 2016 Market based awards 31 May 2016 $5.98 $8.59 $0.06 25.54% 5 years 0.897% Monte Carlo Simulation 3 years 3 years 31 May 2016 $8.53 $8.59 $0.06 25.54% 5 years 0.897% Monte Carlo Simulation 3 years 5 years 31 May 2016 $6.55 $8.59 $0.06 25.54% 5 years 0.897% Monte Carlo Simulation 3 years 5 years 5 February 2016 $7.42 $7.46 $0.06 28.86% 6 years 0.980% Black Scholes 3 years 5 years 5 February 2016 $4.58 $7.46 $0.06 28.86% 6 years 0.980% Monte Carlo Simulation 3 years 5 years 3 December 2015 $8.13 $8.18 $0.05 27.88% 6 years 1.472% Black Scholes 3 years 5 years 3 December 2015 $5.11 $8.18 $0.05 27.88% 6 years 1.472% Monte Carlo Simulation 3 years 5 years The number and weighted average exercise price of outstanding share options under the LTIP are as follows: Outstanding at beginning of year Forfeited during the year Exercised during the year Granted during the year Outstanding at end of year Exercisable at end of year Weighted average exercise price 2017 $ Number of share options 2017 ‘000 Weighted average exercise price 2016 $ Number of share options 2016 ‘000 0.06 0.06 0.06 0.06 0.06 0.06 2,079 (71) – 914 2,922 116 0.06 0.06 0.06 0.06 0.06 0.06 1,958 (49) (688) 858 2,079 116 The weighted average share price at the date of exercise of share options in the prior year was $8.03. The weighted average remaining contractual life for the share options outstanding at 30 September 2017 was 4.86 years (2016: 5.39 years). Ashfield Healthcare UK Share Scheme The number of outstanding shares under the Ashfield Healthcare UK share scheme is as follows: At beginning of year Released during year At end of year 150 UDG Healthcare plc Annual Report and Accounts 2017 Number of shares 2017 ‘000 Number of shares 2016 ‘000 – – – 6 (6) – Strategic Report Directors’ Report Financial Statements Financial Statements 30. Financial Instruments and Financial Risk Fair values versus carrying amounts The fair value of financial assets and liabilities together with the carrying amounts shown in the Balance Sheet are as follows: 30 September 2017 Trade and other receivables (Note 16) Derivative financial assets Cash and cash equivalents Trade and other payables (Note 24) Derivative financial liabilities Interest-bearing loans and borrowings (Note 23) Finance lease liabilities (Note 23) Deferred contingent consideration (Note 25) 30 September 2016 (as re-presented) Trade and other receivables (Note 16) Derivative financial assets Cash and cash equivalents Trade and other payables (Note 24) Interest-bearing loans and borrowings (Note 23) Finance lease liabilities (Note 23) Deferred contingent consideration (Note 25) Cash flow hedges $’000 Fair value through profit or loss $’000 – 2,581 – 2,581 – 352 – – – 352 Cash flow hedges $’000 – 17,451 – 17,451 – – – – – – 1,171 – 1,171 – – – – 71,878 71,878 Fair value through profit or loss $’000 – 3,973 – 3,973 – – – 15,419 15,419 Receivables $’000 239,261 – 187,469 426,730 – – – – – – Receivables $’000 180,405 – 428,729 609,134 – – – – – Liabilities at amortised cost $’000 – – – – 70,739 – 243,971 164 – 314,874 Liabilities at amortised cost $’000 – – – – 62,699 306,823 167 – 369,689 Total carrying value $’000 239,261 3,752 187,469 Fair value $’000 239,261 3,752 187,469 430,482 430,482 70,739 352 243,971 164 71,878 387,104 Total carrying value $’000 180,405 21,424 428,729 630,558 62,699 306,823 167 15,419 385,108 70,739 352 248,987 164 71,878 392,120 Fair value $’000 180,405 21,424 428,729 630,558 62,699 310,258 167 15,419 388,543 The fair values of the financial assets and liabilities not measured at fair value disclosed in the above tables have been determined using the methods and assumptions set out below. Trade and Other Receivables/Payables For receivables and payables, the carrying value less impairment provision is deemed to reflect fair value, where appropriate. Cash and Cash Equivalents For cash and cash equivalents, the nominal amount is deemed to reflect fair value. Interest-bearing Loans and Borrowings (Excluding Finance Lease Liabilities) The fair value of interest-bearing loans and borrowings is based on the fair value of the expected future principal and interest cash flows discounted at interest rates effective at the balance sheet date and adjusted for movements in credit spreads. Finance Lease Liabilities For finance lease liabilities, fair value is the present value of future cash flows discounted at current market rates. Valuation Techniques and Significant Unobservable Inputs Fair value hierarchy of assets and liabilities measured at fair value The Group has adopted the following fair value hierarchy in relation to its financial instruments that are carried in the balance sheet at the fair values at the year end: • Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2 – inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices); and • Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). UDG Healthcare plc Annual Report and Accounts 2017 151 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 30. Financial Instruments and Financial Risk (continued) Valuation Techniques and Significant Unobservable Inputs (continued) Fair value hierarchy of assets and liabilities measured at fair value (continued) The following table sets out the fair value of all financial assets and liabilities that are measured at fair value: Fair value measurement as at 30 September 2017 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Assets measured at fair value Designated as hedging instruments Cross currency interest rate swaps Liabilities measured at fair value Designated hedging instruments Cross currency interest rate swaps At fair value through profit or loss Deferred contingent consideration – – – – – 3,752 3,752 352 – 352 – – – 71,878 71,878 3,752 3,752 352 71,878 72,230 Fair value measurement as at 30 September 2016 (as re-presented) Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – 21,424 21,424 – – 21,424 21,424 – – 15,419 15,419 2017 $’000 2,450 1,302 3,752 352 352 3,400 15,419 15,419 2016 as re-presented $’000 8,239 13,185 21,424 – – 21,424 Assets measured at fair value Designated as hedging instruments Cross currency interest rate swaps Liabilities measured at fair value At fair value through profit or loss Deferred contingent consideration Derivative Financial Instruments Derivative financial assets Current Non-current Derivative financial liabilities Non-current Net derivative financial asset 152 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements Summary of derivatives: Derivative financial assets Derivative financial liabilities Amount of financial assets/ liabilities as presented in the Balance Sheet $’000 3,752 352 Related amounts not offset in the Balance Sheet $’000 – – Amount of financial assets/ liabilities as presented in the Balance Sheet $’000 21,424 – 2017 Net $’000 3,752 352 Related amounts not offset in the Balance Sheet $’000 – – 2016 Net as represented $’000 21,424 – All derivatives entered into by the Group are included in Level 2 of the fair value hierarchy and consist of cross-currency interest rate swaps. The fair value of cross-currency interest rate swaps are calculated at the present value of the estimated future cash flows based on the terms and maturity of each contract using forward currency rates and market interest rates as applicable for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include, where appropriate, adjustments to take account of the credit risk of the Group entity and counterparty. The fair value of cross-currency interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates. The swaps are a mixture of fixed to fixed and fixed to floating rate swaps. The Group classifies the fixed to floating swap as a fair value hedge and has stated it at its fair value with a corresponding opposite adjustment to the underlying debt for the risk being hedged. Both of these adjustments are recorded within the income statement and to the extent they do not offset, this represents the ineffective portion of the fair value hedge. The fair value of this swap at 30 September 2017 was a net asset of $1,171,000 (2016: net asset of $3,973,000). The fixed to fixed rate cross currency interest rate swaps are classified as cash flow hedges and are stated at their fair value. The fair value of these swaps at 30 September 2017 was a net asset of $2,229,000 (2016: net asset of $17,451,000), and the effective portion of this adjustment was accounted for in the cash flow hedge reserve. The interest element of the cash flow hedges will be recognised in the Income Statement in the periods to 30 September 2025, as the associated interest on the hedged debt is recognised. Deferred Contingent Consideration Deferred contingent consideration is included in Level 3 of the fair value hierarchy. Details of the movement in the year are included in Note 25. The fair value is determined considering the expected payment, discounted to present value using a risk adjusted discount rate. The expected payment is determined separately in respect of each individual earnout agreement taking into consideration the expected level of profitability of each acquisition. The provision for deferred contingent consideration is in respect of acquisitions completed during 2012, 2016 and 2017. The significant unobservable inputs are: • forecasted average annual net revenue growth rate 13% (2016: 6%); forecast average EBIT growth rate 22% (2016: 10%); and risk adjusted discount rate 0.02% – 1.55% (2016: 6.2% – 8.5%). Inter-relationship Between Significant Unobservable Inputs and Fair Value Measurement The estimated fair value would increase/(decrease) if: • the annual net revenue growth rate was higher/(lower); the EBIT growth rate was higher/(lower); and the risk adjusted discount rate was lower/(higher). • • • • For the fair value of deferred contingent consideration, a reasonably possible change to one of the significant unobservable inputs at 30 September 2017, holding the other inputs constant, would have the following effects: Effect of change in assumption on income statement: Annual EBIT growth rate (1% movement) Annual net revenue growth rate (1% movement) Risk-adjusted discount rate (1% movement) Increase $’000 Decrease $’000 – – 293 – – (212) UDG Healthcare plc Annual Report and Accounts 2017 153 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 30. Financial Instruments and Financial Risk (continued) Capital Management The Board considers capital to consist of equity (share capital, share premium and retained earnings) and net debt. The Board’s policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain the ongoing development of the Group. The directors periodically review the capital structure of the Group, considering the cost of capital and the risks associated with each class of capital. The Board monitors the return on equity generated by the Group and the level of dividends paid to shareholders. There were no changes to the Board’s approach to capital management during the year. Capital and reserves attributable to the equity holders of the Company Net debt Capital and net debt 2017 $’000 2016 as re-presented $’000 878,547 53,266 931,813 806,876 – 806,876 Financial Ratios Financial covenants in our principal debt facilities are based on net debt to EBITDA being less than 3.5 times and EBITDA interest cover being greater than three times. 2017 Times 2016 Times Net (debt)/cash to EBITDA EBITDA interest cover (0.32) 16.3 1.05 10.6 Financial Risk Management The Group’s multinational operations expose it to different financial risks that include foreign exchange rate risks, credit risks, liquidity risks and interest rate risks. The Group has a risk management programme in place which seeks to limit the impact of these risks on the financial performance of the Group. The Board has determined the policies for managing these risks as set out below. Credit Risk The Group has detailed procedures for monitoring and managing the credit risk related to its trade receivables based on experience, client’s track record and historic default rates. Individual credit limits are generally set by client and credit is only extended above such limits in defined circumstances. The Group establishes an allowance for impairment that represents the best estimate of incurred losses in respect of trade and other receivables (Note 16). Where the Group is satisfied that no recovery of the amount owing is possible, the amount is considered irrecoverable and is written off directly against the receivable. 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. Interest Rate Risk The majority of the Group’s ongoing operations are financed from a mixture of cash generated from operations and borrowings. Other than the US dollar private placement borrowings which are secured at fixed interest rates, borrowings are initially secured at floating interest rates and interest rate risk is monitored on an ongoing basis. A reduction of one hundred basis points in interest rates at the reporting date would have increased profit before tax by the amounts shown below assuming all other variables including foreign currency rates remain constant. An increase of one hundred basis points on the same basis would reduce profit before tax by $261,000 (2016: $351,000). Effect of reduction of one hundred basis points: Profit before tax 2017 $’000 261 2016 as re-presented $’000 440 154 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements Currency Risk Structural currency risk A significant proportion of the Group’s operations are carried out in the UK and Europe and as a result the Group is exposed to structural currency fluctuations in respect of sterling and the euro. Where practical, the Group finances investments through borrowings denominated in the same currency in which the related cash flows will be generated. To the extent that the non-US dollar denominated assets and liabilities of the Group do not offset, the Group is exposed to structural currency risk. Such movements are reported through the Group Statement of Comprehensive Income. Euro and sterling denominated profits are translated into US dollars at the average rate of exchange for the financial year. The average rate at which euro profits were translated during the year was $1:€0.9047 (2016: $1:€0.9002) and sterling profits were translated at $1:£0.7891 (2016: $1:£0.7045). The Group is also subject to translational currency risk on the translation of profits earned outside of the US. Transactional currency risk The euro is the principal currency of the Group’s Irish and Continental European businesses, sterling is the principal currency for the Group’s UK businesses and the US dollar is the principal currency for the Group’s US businesses. The Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot and forward rates where necessary. Details of the Group’s transactional foreign currency risk at 30 September 2017 and 2016 arising from foreign currency transactions are set out in the table below. Cash and cash equivalents Trade receivables Trade and other payables (as re-presented) Cash and cash equivalents Trade receivables Trade and other payables Euro 2017 $’000 3,906 6,521 (3,755) 6,672 Euro 2016 $’000 1,680 7,242 (3,330) 5,592 Sterling 2017 $’000 2,349 397 (945) 1,801 Sterling 2016 $’000 155 228 (1,098) (715) US dollar 2017 $’000 3,385 4,137 (3,131) 4,391 US dollar 2016 $’000 2,513 7,632 (3,479) 6,666 Total 2017 $’000 9,640 11,055 (7,831) 12,846 Total 2016 $’000 4,348 15,102 (7,907) 11,543 Sensitivity analysis on transactional currency risk For the purposes of performing sensitivity analysis on transactional currency risk, financial assets and liabilities outstanding at the balance sheet date denominated in a currency other than the functional currency of individual entities, have been aggregated by currency and the impact of a 5% strengthening of the US dollar against the relevant currency calculated. This analysis assumes that all other variables, in particular interest rates, remain constant. Euro: Based on the value of euro denominated financial assets and liabilities held by individual entities with a functional currency other than the euro, a 5% strengthening of the US dollar against the euro at 30 September 2017 and 30 September 2016 would have increased/(reduced) equity and profit after tax by the amounts shown below: Profit after tax 2017 $’000 292 2016 $’000 235 Sterling: Based on the value of sterling denominated financial assets and liabilities held by individual entities with a functional currency other than sterling, a 5% strengthening of the US dollar against sterling at 30 September 2017 and 30 September 2016 would not have had a material effect on equity or profit after tax of the Group. UDG Healthcare plc Annual Report and Accounts 2017 155 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 30. Financial Instruments and Financial Risk (continued) Funding and Liquidity Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group uses a combination of long and short-term debt and cash and cash equivalents to meet its liabilities as they fall due. This is in addition to the Group’s strong cash flow generation. The Group believes it has sufficient cash resources and bank debt facilities at its disposal, which provides flexibility in financing existing operations, acquisitions and other developments. The following are the undiscounted contractual maturities of financial instruments, including interest payments and excluding the impact of netting arrangements: 30 September 2017 Non-derivative financial instruments Bank overdraft Finance leases Floating rate unsecured guaranteed senior notes Fixed rate unsecured guaranteed senior notes Trade and other payables Provisions Derivative financial instruments Cash flow hedges Fair value hedges 30 September 2016 (as re-presented) Non-derivative financial instruments Other loans and borrowings Bank overdraft Finance leases Floating rate unsecured guaranteed senior notes Fixed rate unsecured guaranteed senior notes Trade and other payables Provisions Derivative financial instruments Cash flow hedges Fair value hedges Carrying amount $’000 Contractual cash flow $’000 6 months or less $’000 6–12 months $’000 Between 1–2 years $’000 Between 2–5 years $’000 More than 5 years $’000 70 164 15,545 228,356 70,739 72,375 73 169 15,002 260,304 70,739 73,573 73 70 103 4,042 70,739 1,230 – 64 103 4,042 – 12,846 – 35 14,796 58,136 – 43,123 – – – 17,657 – 16,374 – – – 176,427 – – (2,229) (1,171) (2,559) (1,220) (40) (8) (40) (8) (572) (1,204) (174) – (1,733) – 383,849 416,081 76,209 17,007 114,314 33,857 174,694 Carrying amount $’000 Contractual cash flow $’000 6 months or less $’000 6–12 months $’000 Between 1–2 years $’000 Between 2–5 years $’000 More than 5 years $’000 (568) 91 167 31,157 276,143 62,699 16,067 (568) 95 171 27,990 299,475 62,699 16,873 (189) 95 158 191 4,727 62,699 1,199 (189) – 4 13,787 50,700 – 8,890 (190) – 9 205 7,642 – 4,956 – – – 13,807 64,053 – 1,828 – – – – 172,353 – – (17,451) (3,972) (20,149) (4,086) (318) (28) (3,411) (2,012) (515) (30) (4,309) (2,016) (11,596) – 364,373 382,500 68,534 67,769 12,077 73,363 160,757 156 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Financial Statements Maturity Profile of Net Debt In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature. 30 September 2017 Effective interest rate Total $’000 Less than 1 year $’000 Between 1–2 years $’000 Between 2–5 years $’000 More than 5 years $’000 Cash at bank and short-term deposits 0.33% 187,469 187,469 Other loans and borrowings Finance leases Floating rate unsecured guaranteed senior notes Fixed rate unsecured guaranteed senior notes 7% 1.51% 1.29% 3.73% Total loan notes Total before derivatives Derivatives Net (debt)/cash 30 September 2016 (as re-presented) (70) (164) (15,545) (228,356) (243,901) (56,666) 3,400 (70) (130) 17 125 142 187,411 2,450 (53,266) 189,861 Effective interest rate Total $’000 Less than 1 year $’000 Cash at bank and short term deposits 0.06% 428,729 428,729 Other loans and borrowings Finance leases Floating rate unsecured guaranteed senior notes Fixed rate unsecured guaranteed senior notes 7% 0.68% 1.40% 3.79% Total loan notes Total before derivatives Derivatives Net cash/(debt) 477 (167) 287 (158) (31,157) (276,143) (15,131) (49,880) (307,300) (65,011) 121,739 363,847 21,424 143,163 7,336 371,183 – – (34) 6 89 95 61 1,299 1,360 Between 1–2 years $’000 – 190 (9) – – – 181 3,768 3,949 – – – – – – (15,568) (49,794) – (178,776) (65,362) (178,776) (65,362) (178,776) 3,713 (4,062) (61,649) (182,838) Between 2–5 years $’000 More than 5 years $’000 – – – (16,026) (49,995) – – – – (176,268) (66,021) (176,268) (66,021) (176,268) 7,233 3,087 (58,788) (173,181) The effect of the derivatives included above has been to swap US dollar denominated debt to euro denominated debt and to partially swap fixed rate interest into floating rate interest. 31. Capital Commitments Capital expenditure authorised but not contracted for amounted to $18,900,000 (2016: $29,668,000) at the balance sheet date. This primarily relates to the Group’s UK clinical facility move and the Group’s investment in Future Fit IT initiatives. 32. Change in Presentation Currency Following the disposal of the United Drug Supply Chain and MASTA businesses in April 2016, the geographic profile of the Group’s businesses has changed considerably and the vast majority of the Group’s profits are now generated in currencies other than euro. Over half of the Group’s profits are currently generated in US dollars, the Group’s US based businesses are demonstrating the greatest growth opportunities and future corporate development activity is likely to be US focused. Consequently, on 4 August 2016 the Group announced that from 1 October 2016, the financial results would be presented in US dollars. The change in presentation currency has been applied retrospectively. In re-presenting the Group Financial Statements for the year ended 30 September 2016, the reported information was converted to US dollars from euro using the following procedures: • Assets and liabilities were translated to US dollars at the closing rates of exchange at each respective balance sheet date (30 September 2016: $1:€0.8960; 30 September 2015: $1:€0.8926). • Share capital, share premium and other reserves were translated at the historic rates prevailing at the dates of transactions. • Income and expenses were translated to US dollars at an average rate at each of the respective reporting periods. This has been deemed to be a reasonable approximation (30 September 2016: $1:€0.9002; 30 September 2015: $1:€0.8709). • Differences resulting from the retranslation were taken to reserves. UDG Healthcare plc Annual Report and Accounts 2017 157 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 32. Change in Presentation Currency (continued) To assist shareholders during this change, the impact on the prior period results, closing balance sheet and the numerator for earnings per share as originally reported is set out below: As restated (Note 2) year ended 30 September 2016 €’000 As re-presented and restated (Note 2) year ended 30 September 2016 $’000 975,280 (691,181) 284,099 (159,820) (18,771) (16,395) (1,993) 718 87,838 4,781 (17,417) 75,202 (13,888) 61,314 131,958 193,272 1,083,439 (767,833) 315,606 (177,543) (20,854) (18,213) (2,214) 798 97,580 5,311 (19,349) 83,542 (15,428) 68,114 150,409 218,523 61,314 131,958 193,272 68,114 150,409 218,523 24.88c 53.56c 78.44c 24.78c 53.33c 78.11c 27.64c 61.04c 88.68c 27.53c 60.79c 88.32c Group Income Statement for the year ended 30 September 2016 Continuing operations Revenue Cost of sales Gross profit Selling and distribution expenses Administration expenses Other operating expenses Transaction costs Share of joint ventures’ profit after tax Operating profit Finance income Finance expense Profit before tax from continuing operations Income tax expense Profit for the financial year from continuing operations Profit after tax for the financial year from discontinued operations Profit for the financial year Profit attributable to: Continuing operations Discontinued operations Earnings per ordinary share: Basic – continuing operations Basic – discontinued operations Basic Diluted – continuing operations Diluted – discontinued operations Diluted 158 UDG Healthcare plc Annual Report and Accounts 2017 Group Statement of Comprehensive Income for the year ended 30 September 2016 Profit for the financial year Other comprehensive income/(expense): Items that will not be reclassified to profit or loss: Remeasurement (loss)/gain on Group defined benefit schemes – Continuing operations – Discontinued operations Deferred tax on Group defined benefit schemes – Continuing operations – Discontinued operations Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustment – Continuing operations – Discontinued operations Reclassification on loss of control Gain on hedge of net investment in foreign operations Group cash flow hedges: – Effective portion of cash flow hedges – movement into reserve – Effective portion of cash flow hedges – movement out of reserve Effective portion of cash flow hedges – Movement in deferred tax – movement into reserve – Movement in deferred tax – movement out of reserve Net movement in deferred tax Other comprehensive expense, net of tax Total comprehensive income, net of tax, attributable to equity holders of the parent Total comprehensive income/(expense) attributable to: Continuing operations Discontinued operations Strategic Report Directors’ Report Financial Statements Financial Statements As originally reported year ended 30 September 2016 €’000 193,272 As re-presented year ended 30 September 2016 $’000 218,523 (4,936) (806) 617 101 (8,468) 1,057 539 (211) (7,083) – (45,373) (7,109) 4,640 2,262 (5,742) 718 (50,604) (57,687) 135,585 5,250 130,335 135,585 (5,483) (896) 685 113 (9,409) 1,177 599 (232) (7,865) (60,031) (2,045) 5,283 – (6,379) 798 (62,374) (70,239) 148,284 (6,308) 154,592 148,284 UDG Healthcare plc Annual Report and Accounts 2017 159 Financial Statements Financial Statements Notes forming part of the Group Financial Statements (continued) 32. Change in Presentation Currency (continued) Group Balance Sheet ASSETS Non-current Property, plant and equipment Goodwill Intangible assets Investment in joint ventures and associates Derivative financial instruments Deferred income tax assets Employee benefits Total non-current assets Current Inventories Trade and other receivables Cash and cash equivalents Current income tax assets Derivative financial instruments Assets held for sale Total current assets Total assets EQUITY Equity share capital Share premium Other reserves Retained earnings Total equity LIABILITIES Non-current Interest-bearing loans and borrowings Provisions Employee benefits Deferred income tax liabilities Total non-current liabilities Current Interest-bearing loans and borrowings Trade and other payables Current income tax liabilities Provisions Liabilities held for sale Total current liabilities Total liabilities Total equity and liabilities 160 UDG Healthcare plc Annual Report and Accounts 2017 As at 30 September 2016 As at 30 September 2015 As originally reported €’000 As re-presented $’000 As originally reported €’000 As re-presented $’000 122,638 344,521 97,054 8,124 11,814 3,849 12,489 600,489 49,226 209,472 384,131 4,061 7,382 – 654,272 136,877 384,520 108,322 9,067 13,185 4,296 13,939 670,206 54,941 233,791 428,729 4,532 8,239 – 730,232 117,903 358,213 101,693 23,079 22,048 3,984 13,067 639,987 55,017 205,248 214,078 1,612 4,750 473,820 132,087 401,306 113,927 25,855 24,700 4,463 14,639 716,977 61,636 229,939 239,832 1,806 5,321 530,821 954,525 1,069,355 1,254,761 1,400,438 1,594,512 1,786,332 12,715 156,084 (41,295) 595,449 14,535 187,355 (179,446) 784,432 12,621 152,164 10,077 433,912 14,430 183,000 (116,219) 600,793 722,953 806,876 608,774 682,004 216,923 5,451 18,315 27,782 268,471 58,133 183,190 13,070 8,944 – 263,337 531,808 242,108 6,084 20,442 31,008 299,642 64,882 204,468 14,587 9,983 – 293,920 593,562 415,840 7,508 18,303 28,050 469,701 20,811 191,758 4,452 18,683 280,333 516,037 465,866 8,411 20,505 31,424 526,206 23,315 214,831 4,988 20,931 314,057 578,122 985,738 1,104,328 1,254,761 1,400,438 1,594,512 1,786,332 Strategic Report Directors’ Report Financial Statements Financial Statements 33. Related Parties The Group trades in the normal course of business with its joint venture undertakings. The aggregate value of these transactions is not material in the context of the Group’s financial results. Magir Limited, the Group’s joint venture investment, has been classified as an asset held for sale at 30 September 2017. The Group has provided a guarantee to Magir’s bankers for an amount of £9,500,000 and a loan, gross of interest, of £10,997,000. IAS 24 Related Party Disclosures requires the disclosure of compensation paid to the Group’s key management personnel. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. UDG Healthcare plc classifies directors, the Company Secretary and members of its senior executive team as key management personnel. The senior executive team is the body of senior executives that formulates business strategy along with the directors, follows through on implementation of that strategy and directs and controls the activities of the Group on a day-to-day basis. In addition to the executive directors, the following individuals were members of the senior executive team at 30 September 2017: Name Sean Coyle Eleanor Garvey Eimear Kenny Liam Logue Mike O’Hara Damien Moynagh Jez Moulding Title Managing Director of Aquilant and Group Finance Director Group Head of Quality and Compliance Group Head of Human Resources Head of Corporate Development Managing Director of Sharp General Counsel and Company Secretary Executive Vice President of Ashfield and Group Chief Operating Officer Remuneration of Key Management Personnel Salaries and other short-term benefits Post employment benefits Share-based payment (calculated in accordance with the principles disclosed in Note 29) 2017 $’000 7,882 882 1,823 10,587 2016 as re-presented $’000 8,976 991 1,685 11,652 Details of the remuneration of the Group’s individual directors, together with the number of UDG Healthcare plc shares owned by them and their outstanding share options, are set out in the Directors’ Remuneration Report. 34. Events After the Balance Sheet Date There have been no significant events after the balance sheet date which require disclosure. UDG Healthcare plc Annual Report and Accounts 2017 161 Financial Statements Company Statement of Comprehensive Income for the year end 30 September 2017 Profit for the financial year Other comprehensive income/(expense): Company defined benefit pension schemes: – Remeasurement gain/(loss) on defined benefit pension schemes – Deferred tax on defined benefit pension schemes Other comprehensive income/(expense) for the financial year Total comprehensive income for the financial year Note 44 39 2017 €’000 76,437 9,542 (354) 9,188 85,625 2016 €’000 93,559 (8,235) 757 (7,478) 86,081 162 UDG Healthcare plc Annual Report and Accounts 2017 Company Statement of Changes in Equity for the year ended 30 September 2017 Strategic Report Directors’ Report Financial Statements Equity share capital €’000 Share premium €’000 Retained earnings €’000 Other reserves €’000 Total equity €’000 At 1 October 2016 12,715 156,084 308,038 54,123 530,960 Profit for the financial year Other comprehensive income/(expense): Remeasurement gain on defined benefit pension schemes Deferred tax on defined benefit pension schemes Total comprehensive income for the year Transactions with shareholders: New shares issued Issued in business combination Share-based payment expense Dividends paid to equity holders Release from share-based payment reserve – – – – 41 36 – – – – – – – 2,831 5,610 – – – 76,437 9,542 (354) 85,625 – – – (28,985) 497 – – – – – – 3,269 – (497) 76,437 9,542 (354) 85,625 2,872 5,646 3,269 (28,985) – At 30 September 2017 12,792 164,525 365,175 56,895 599,387 for the year ended 30 September 2016 Equity share capital €’000 Share premium €’000 Retained earnings €’000 Other reserves €’000 Total equity €’000 At 1 October 2015 12,621 152,164 246,609 54,900 466,294 Profit for the financial year Other comprehensive income/(expense): Remeasurement loss on defined benefit pension schemes Deferred tax on defined benefit pension schemes Total comprehensive income for the year Transactions with shareholders: New shares issued Share-based payment expense Dividends paid to equity holders Release from share-based payment reserve – – – – 94 – – – – – – – 3,920 – – – 93,559 (8,235) 757 86,081 – – (27,386) 2,734 At 30 September 2016 12,715 156,084 308,038 – – – – – 1,957 – (2,734) 54,123 93,559 (8,235) 757 86,081 4,014 1,957 (27,386) – 530,960 UDG Healthcare plc Annual Report and Accounts 2017 163 Note 2017 €’000 2016 €’000 36 37 38 39 40 41 41 44 43 – – 289,593 – 289,593 369,347 44,634 413,981 703,574 12,792 164,525 56,895 365,175 599,387 – – 103,249 938 104,187 104,187 703,574 1,084 5,647 152,193 1,336 160,260 364,638 118,066 482,704 642,964 12,715 156,084 54,123 308,038 530,960 18,315 18,315 93,087 602 93,689 112,004 642,964 Financial Statements Company Balance Sheet as at 30 September 2017 ASSETS Non-current Property, plant and equipment Intangible assets Investment in subsidiary undertakings Deferred income tax assets Total non-current assets Current Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY Equity share capital Share premium Other reserves Retained earnings Capital and reserves attributable to equity holders of the parent LIABILITIES Non-current Employee benefits Total non-current liabilities Current Trade and other payables Current income tax liabilities Total current liabilities Total liabilities Total equity and liabilities On behalf of the Board P. Gray Director B. McAtamney Director 164 UDG Healthcare plc Annual Report and Accounts 2017 Company Cash Flow Statement for the year ended 30 September 2017 Cash flows from operating activities Profit before tax Impairment of investment in subsidiary undertakings Finance income Finance expense Transfer of defined benefit pension obligations Operating profit Depreciation charge Amortisation charge Impairment of intangible assets (Increase)/decrease in trade and other receivables Decrease in trade payables, provisions and other payables Profit on disposal of investments Interest paid Income taxes received Net cash inflow from operating activities Cash flows from investing activities Interest received Purchase of property, plant and equipment Disposal of property, plant and equipment Investment in intangible assets – computer software Disposal of intangible assets – computer software Investment in subsidiary undertakings Disposal of investment in subsidiary undertakings Net cash (outflow)/inflow from investing activities Cash flows from financing activities Proceeds from issue of shares (including share premium thereon) Dividends paid to equity holders of the Company Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents is comprised of: Cash at bank and short-term deposits Strategic Report Directors’ Report Financial Statements 2017 €’000 2016 €’000 76,596 – (1) 191 7,678 84,464 – – – (6,190) (17,234) – (2) 962 62,000 1 – 1,084 – 5,647 (116,051) – (109,319) 2,872 (28,985) (26,113) (73,432) 118,066 44,634 93,062 1,270 (4) 1,791 (7,921) 88,198 373 1,277 718 291,153 (231,291) (21,654) (946) 214 128,042 4 (1,042) – (260) – (18,179) 32,873 13,396 4,014 (27,386) (23,372) 118,066 – 118,066 44,634 44,634 118,066 118,066 UDG Healthcare plc Annual Report and Accounts 2017 165 Financial Statements Notes forming part of the Company Financial Statements 35. Profit on Disposal On 1 April 2016 the Group disposed of United Drug Supply Chain Services, United Drug Sangers, TCP Group and MASTA. UDG Healthcare plc was the immediate parent of TCP Group and Pemberton Marketing International Limited (part of United Drug Supply Chain Services). The below table outlines the profit on disposal which was recognised in the Company’s income statement during the prior year. 2016 €’000 32,873 (7,239) (2,964) (1,016) 21,654 Total 2017 €’000 1,839 (1,839) – 755 (755) – – Total 2016 €’000 797 1,042 1,839 382 373 755 Computer equipment 2017 €’000 1,839 (1,839) – 755 (755) – – Computer equipment 2016 €’000 797 1,042 1,839 382 373 755 1,084 1,084 Cash consideration Disposal of investment Transaction and other related costs Provision for taxation Profit on disposal See Note 8 for further details. 36. Property Plant and Equipment Cost At 1 October 2016 Transfer to subsidiary undertaking At 30 September 2017 Depreciation At 1 October 2016 Transfer to subsidiary undertaking At 30 September 2017 Carrying amount At 30 September 2017 Cost At 1 October 2015 Additions in year At 30 September 2016 Depreciation At 1 October 2015 Depreciation charge for the year At 30 September 2016 Carrying amount At 30 September 2016 No borrowings were secured on the above assets. 166 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Computer software €’000 11,773 260 (1,293) (2,156) 8,584 (8,584) – 2,712 1,277 (1,293) 718 (477) 2,937 (2,937) – – 5,647 2017 €’000 2016 €’000 152,193 134,131 – – 3,269 289,593 101,122 77,286 (26,902) (1,270) 1,957 152,193 37. Intangible Assets Cost At 1 October 2015 Additions Eliminated on disposal Transfer to assets held for sale At 30 September 2016 Transfer to subsidiary undertaking At 30 September 2017 Amortisation At 1 October 2015 Amortisation charge for the year Eliminated on disposal Impairment charge Transfer to assets held for sale At 30 September 2016 Transfer to subsidiary undertaking At 30 September 2017 Carrying amount At 30 September 2017 At 30 September 2016 38. Investment in Subsidiary Undertakings Cost At beginning of year Additions in year Disposals in year Impairment Share options granted to employees of subsidiary undertakings At end of year The additions to investment in subsidiary undertakings during the year of €134,131,000, were comprised primarily of cash consideration. In the prior year, the additions to investments in subsidiary undertakings of €77,286,000 was comprised of cash consideration of €18,179,000, €39,444,000 relating to the reversal of a previous write-down of investments and €19,663,000 relating to a share-for-share exchange. The company recorded an impairment charge of €1,270,000 relating to a subsidiary that was no longer trading. The disposals in the prior year related to the disposal of subsidiary undertakings of €7,239,000 and a share-for-share exchange of €19,663,000. 39. Deferred Income Tax Assets At beginning of year Temporary differences – arising in income Employee benefits – arising in other comprehensive income At end of year 2017 €’000 1,336 (982) (354) – 2016 €’000 1,044 (465) 757 1,336 UDG Healthcare plc Annual Report and Accounts 2017 167 Financial Statements Notes forming part of the Company Financial Statements (continued) 40. Trade and Other Receivables Current Amounts due from subsidiary undertakings Other receivables Prepayments Amounts due from subsidiary undertakings are repayable on demand. 41. Capital and Reserves At 30 September 2015 Profit for the financial year Release from share-based payment reserve Dividends paid to equity holders Remeasurement loss on defined benefit pension scheme Deferred tax on defined benefit pension scheme Share-based payment expense At 30 September 2016 Profit for the financial year Release from share-based payment reserve Dividends paid to equity holders Remeasurement gain on defined benefit pension scheme Deferred tax on defined benefit pension scheme Share-based payment expense At 30 September 2017 2017 €’000 2016 €’000 368,712 635 – 369,347 362,081 1,425 1,132 364,638 Other reserves €’000 Retained earnings €’000 54,900 – (2,734) – – – 1,957 246,609 93,559 2,734 (27,386) (8,235) 757 – 54,123 308,038 – (497) – – – 3,269 76,437 497 (28,985) 9,542 (354) – 56,895 365,175 Other reserves represents a share-based payment reserve of €6,812,000 (2016: €4,040,000), a treasury shares reserve of (€5,742,000) (2016: (€5,742,000)), a goodwill reserve of (€93,000) (2016: (€93,000)), a non-distributable reserve of €55,668,000 (2016: €55,668,000) and a capital redemption reserve of €250,000 (2016: €250,000). The Company’s non-distributable reserve consists of €16,762,000 (2016: €16,762,000) transferred from the share premium account against which goodwill, arising from acquisitions in financial periods prior to 1 October 1999, is offset on consolidation and a transfer from the income statement of €38,906,000 (2016: €38,906,000), arising on the restructuring of Group activities. Details of equity share capital are set out in Note 17. 42. Interest-bearing Loans and Borrowings Details of how the Company manages risk exposures and accounts for financial instruments are set out in Note 30. Foreign Currency Risk Management The majority of trade conducted by the Company is in euro. Therefore, the level of transactional foreign exchange exposure is not material to the Company. 168 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Funding and Liquidity The following are the undiscounted contractual maturities of financial instruments, including interest payments and excluding the impact of netting arrangements: Carrying amount €’000 103,249 103,249 Carrying amount €’000 93,087 93,087 Contractual cash flow €’000 103,249 103,249 Contractual cash flow €’000 93,087 93,087 6 months or less €’000 103,249 103,249 6 months or less €’000 93,087 93,087 6–12 months €’000 – – 6–12 months €’000 – – Between 1–2 years €’000 Between 2–5 years €’000 – – – – Between 1–2 years €’000 Between 2–5 years €’000 – – – – 30 September 2017 Trade and other payables 30 September 2016 Trade and other payables 43. Trade and Other Payables Current Amounts due to subsidiary undertakings Accruals Amounts due to subsidiary undertakings are repayable on demand. 44. Employee Benefits The aggregate employee costs recognised in the income statement are as follows: Wages and salaries Social security contributions Pension costs – defined contribution schemes Pension costs – defined benefit schemes* * The defined benefit schemes’ pension cost excludes settlement and curtailment gains totalling €2,465,000 (2016: €1,350,000). The average number of employees, including executive directors, during the year was as follows: Administration 2017 €’000 2016 €’000 103,089 160 103,249 92,396 691 93,087 2017 €’000 270 14 9 – 293 2016 €’000 1,172 107 20 84 1,383 2017 Number 2016 Number 2 2 31 31 (i) Defined Contribution Schemes The Company makes contributions to a number of defined contribution schemes, the assets of which are vested in independent trustees for the benefit of members and their dependants. (ii) Defined Benefit Schemes The Company operated a number of defined benefit schemes during the year. During 2015, the Group announced that the pension accrual under the defined benefit schemes would cease on 31 December 2015. Each defined benefit scheme was independently funded and the assets were vested in the independent trustees for the benefit of members and their dependants. The valuations are not available for public inspection but the results are advised to members of the schemes. The most recent full actuarial valuations for the principal schemes were conducted as at 31 December 2014. UDG Healthcare plc Annual Report and Accounts 2017 169 Financial Statements Notes forming part of the Company Financial Statements (continued) 44. Employee Benefits (continued) (ii) Defined Benefit Schemes (continued) Assumed medical costs were not a component of the pension obligations of any of the Company’s pension obligations. The valuation method used for Company defined benefit schemes was the projected credit unit method. On 30 September 2017, the Company transferred the duties and obligations of the schemes to UDG Healthcare Ireland Limited by executing a deed of substitution. The principal long-term financial assumptions used by the Company’s actuaries in the computation of the defined benefit liabilities arising on pension schemes as at 30 September are as follows: Increase in salaries Increase in pensions Inflation rate Discount rate The reduction in discount rates is reflective of changes in bond yields during the year. The composition of actual Company scheme assets is detailed below. The mortality assumptions of the schemes have been discussed in detail in Note 29. The market value of the assets in the pension schemes at 30 September were: 2017 n/a 0–1.65% 1.65% 2.05% 2016 2015 n/a 0–1.75% 1.50% 1.25% 2.75% 0–1.75% 1.75% 2.70% Equities – Developed markets Bonds – Government – Non-government Property Other Fair value of scheme assets Present value of scheme obligations Employee benefits liability Deferred income tax asset Net liability Movements in Fair Value of Plan Assets At beginning of year Interest income on plan assets Employer contributions Employee contributions Benefit payments Return on plan assets excluding interest income Settlements Transfer of plan assets following disposal of subsidiary undertaking Transfer of plan assets to subsidiary undertaking At end of year 170 UDG Healthcare plc Annual Report and Accounts 2017 2017 €’000 2016 €’000 – – – – – – – – – – 2017 €’000 35,352 388 3,816 – (925) 1,871 (11,457) – (29,045) – 17,530 7,105 1,007 903 8,807 35,352 (53,667) (18,315) 980 (17,335) 2016 €’000 14,305 663 3,581 10 (695) 1,782 (4,454) 20,160 – 35,352 Strategic Report Directors’ Report Financial Statements Movements in Present Value of Defined Benefit Obligations At beginning of year Current service costs Interest cost on scheme obligations Revaluation (gain)/loss on experience variations Employee contributions Benefit payments Effect of changes in actuarial assumptions Curtailment gain Settlements Transfer of defined benefit obligations following disposal of subsidiary undertaking Transfer of defined benefit obligations to subsidiary undertaking At end of year 2017 €’000 53,667 – 577 (2,809) – (925) (4,862) – (13,925) – (31,723) – Reconciliation of the measurement gain to the plan assets and present value of the defined benefit obligation is as follows: Remeasurement gain on experience variations Return on plan assets excluding interest cost Effect of changes in actuarial assumptions – Changes in demographical assumptions – Changes in financial assumptions Total included in Company statement of comprehensive income Fair value of scheme assets Present value of scheme obligations 2017 €’000 – – 2016 €’000 35,352 53,667 2015 €’000 14,305 21,071 2017 €’000 2,809 1,871 – 4,862 9,542 2014 €’000 14,649 21,082 2016 €’000 21,071 84 903 1,262 10 (695) 8,755 (328) (5,476) 28,081 – 53,667 2016 €’000 (1,262) 1,782 – (8,755) (8,235) 2013 €’000 11,577 17,878 45. Related Party Transactions The Company has related party relationships with its subsidiaries and with the directors of the Company. Details of the remuneration of the Company’s individual directors, together with the number of shares in the Company owned by them and their outstanding share options, are set out in the Directors’ Remuneration Report. Transactions with Subsidiary Undertakings Charges to subsidiary undertakings with respect to information technology support and management services Details of balances outstanding with subsidiary undertakings are provided in Note 40 and Note 43. 2017 €’000 – 2016 €’000 587 IAS 24 Related Party Disclosures requires the disclosure of compensation paid to the Company’s key management personnel. The details on key management personnel are outlined in Note 33. In 2015 the Company transferred a significant element of its business activities to a subsidiary, UDG Healthcare Ireland Limited. The key management personnel engaged in the business throughout the year were employed by UDG Healthcare Ireland Limited. 46. Contingent Liabilities Guarantees have been given by the Company in respect of the borrowing facilities of certain subsidiary undertakings and clients. UDG Healthcare plc Annual Report and Accounts 2017 171 Financial Statements Notes forming part of the Company Financial Statements (continued) 47. Principal Subsidiary Undertakings The information in this note relates only to the Group’s principal subsidiary undertakings at 30 September 2017. A full list of subsidiaries, joint ventures and associates will be annexed to the Annual Return of the Company to be filed with the Irish Registrar of Companies. Incorporated In The Republic of Ireland Name Aquilant Analytical Sciences Limited* Aquilant Medical (ROI) Limited Aquilant Pharmaceuticals Limited Aquilant Scientific (ROI) Limited* Ashfield Healthcare (Ireland) Limited UDG Healthcare Ayrtons (Dublin) Limited* UDG Healthcare Finance Limited* UDG Healthcare (US) Holdings Limited* UDG Healthcare Distributors Limited* UDG Healthcare Ireland Limited Nature of business Group share Distribution of specialist analytical chemistry equipment Distribution of medical and pharmaceutical equipment and consumables Distribution of medical and pharmaceutical equipment and consumables Distribution of medical and scientific equipment and consumables Contract sales outsourcing Investment holding company Financial services Investment holding company Investment holding company Investment holding company 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% All of the above companies have their registered office at 20 Riverwalk, Citywest Business Campus, Dublin 24, NR23 D24. All shares held are ordinary shares. * Subsidiary undertakings owned directly by UDG Healthcare plc. Incorporated In The United Kingdom Name Nature of business Group share Aquilant Endoscopy Limited (1) Aquilant Limited (1) Aquilant Northern Ireland Limited (2) Ashfield Healthcare Limited (1) Ashfield Insight & Performance Limited (1) Ashfield Meetings & Events Limited (1) Galliard Healthcare Communications Limited (1) Ashfield Healthcare Communications Group Limited (1) Pegasus Public Relations Limited (1) Pharmexx (UK) Limited (1) Sharp Clinical Services (UK) Limited (1) UDG Healthcare (UK) Holdings Limited (1)* STEM Healthcare Limited (1) Distribution of medical equipment and consumables 100% Supply and distribution of medical devices and surgical products 100% 100% Distribution of medical equipment and consumables 100% Contract sales outsourcing 100% Sales force effectiveness training services provider 100% Event management services provider 100% Specialist healthcare and scientific public relations provider Healthcare communications and consultancy services provider 100% 100% Healthcare communications provider 100% Contract sales outsourcing 100% Clinical trials services provider 100% Investment holding company 100% Commercial, marketing and medical audit services provider (1) This company has its registered office at Ashfield House, Resolution Road, Ashby de la Zouch, Leicestershire, LE65 1HW. (2) This company has its registered office at Maryland Industrial Estate, Ballygowan Road, Castlereagh, Belfast, BT23 6BL. * Subsidiary undertakings owned directly by UDG Healthcare plc. 172 UDG Healthcare plc Annual Report and Accounts 2017 Strategic Report Directors’ Report Financial Statements Incorporated In Continental Europe Name Nature of business Group share Aquilant Nederland B.V. (3) Ashfield Healthcare GmbH (4) Ashfield Healthcare GmbH (5) Ashfield Iberia SLU (6) Ashfield Nordic AB (7) Ashfield S.A (8) Ashfield Saglik Hizmetleei Ticaret Limited Sirketi (9) Enestia Belgium N.V. (10)* European Packaging Centre B.V. (3) Ashfield Iberia Lda (11) UDG Healthcare Holdings B.V. (3) Sellxpert GmbH & Co KG (12) Selldirekt GmbH (12) Distribution of medical equipment and consumables Contract sales outsourcing Contract sales outsourcing Contract sales outsourcing Pharmaceutical sales and marketing company Contract sales outsourcing Pharmaceutical sales and marketing company Packaging solutions provider Contract packaging company Contract sales outsourcing Investment holding company Contract sales outsourcing Contract sales outsourcing 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (3) This company has its registered office at Neptunus, 8448 CN Heerenveen, the Netherlands. (4) This company has its registered office at Euro Plaza, Gebaude F, Technologiestrabe 5, 4. OG, 1120 Vienna, Austria. (5) This company has its registered office at Goldbeckstrasse 5, 69493 Hirschberg, Germany. (6) This company has its registered office at Calle Collado Mediano, s/n Edificio Prisma, Portal 2, 3a planta 28230 Las Rozas (Madrid) Spain. (7) This company has its registered office at Luntmakargatan 66, 5van, 11351 Stockholm, Sweden. (8) This company has its registered office at Avenue Pastuer 2, 1300 Wavre, Belgium. (9) This company has its registered office at Büyükdere Caddesi Yapı Kredi Plaza B Blok K:12/D:29 34330 Levent/İstanbul. (10) This company has its registered office at Klocknerslyaat 1, 3930 Hamont-Achel, Belgium. (11) This company has its registered office at Avenida Dom João Ii, Nº 44c – 2.3 Edificio Atlantis, Parque Das Naçoes, 1990–095 Lisboa, Portugal. (12) This company has its registered office at Gutenbergstr. 4, Speyer, 67346 Germany. * Subsidiary undertakings owned directly by UDG Healthcare plc. Incorporated In North America Name Ashfield Healthcare LLC (13) Ashfield Healthcare Canada Inc (14) Ashfield Healthcare Communications LLC (17) Ashfield Meetings & Events Inc. (13) Ashfield Pharmacovigilance, Inc. (15) Informed Direct, Inc. (16) Sharp Clinical Services, Inc. (18) Sharp Corporation (19) Ashfield Market Access, LLC (15) Sharp (Bethlehem), LLC (21) Vynamic LLC (22) Cambridge BioMarketing Group, LLC (23) MicroMass Communications, Inc. (20) UDG US Healthcare Holdings, Inc. (18) STEM Healthcare US, Inc. (24) Nature of business Group share 100% 100% Pharmaceutical sales and marketing company Marketing, communications and sample and promotional material management services provider Healthcare communications and consultancy services provider 100% 100% Event management services provider 100% Safety and risk management services provider Healthcare communications and consultancy services provider 100% 100% Clinical trials services provider 100% Contract packaging company 100% Market access services provider 100% Contract packaging company 100% Management consulting 100% Healthcare communications business 100% Healthcare communications business 100% Investment holding company 100% Internal audit services provider (13) This company has its registered office at 1100 Virginia Drive, Suite 200, Ft. Washington, Pennsylvania 19034. (14) This company has its registered office at 263 Labrosse Avenue, Pointe-Claire, Quebec H9R 1A3. (15) This company has its registered office at 5003 South Miami Blvd, Suite 500, Durham, North Carolina 27703. (16) This company has its registered office at 7 Island Dock Road, Suite A, Haddam, Connecticut 06438. (17) This company has its registered office at 125 Chubb Avenue, Lyndhurst, New Jersey 07071. (18) This company has its registered office at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. (19) This company has its registered office at 7451 Keebler Way, Allentown, Pennsylvania 18106. (20) This company has its registered office at 270 Cornerstone Drive, Suite 103, Cary, North Carolina 27519. (21) This company has its registered office at 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808. (22) This company has its registered office at 1600 Arch St, Philadelphia, PA 19103. (23) This company has its registered office at 245 First Street, 12th Floor, Cambridge, MA 02142. (24) This company has its registered office at 2555 Kingston Road, Suite 235, York, Pennsylvania 17402. UDG Healthcare plc Annual Report and Accounts 2017 173 Financial Statements Notes forming part of the Company Financial Statements (continued) 48. Auditor Remuneration The auditor’s remuneration for the audit of the Company is detailed in Note 5. 49. Section 357 Guarantees Pursuant to the provisions of Section 357, Companies Act 2014, the Company has guaranteed the liabilities of the following subsidiaries for the financial year ended 30 September 2017: Aquilant Analytical Sciences Limited, Aquilant Limited, Aquilant Medical (ROI) Limited, Aquilant Pharmaceuticals Limited, Aquilant Scientific (ROI) Limited, Ashfield Alliance Limited, Ashfield Healthcare (Ireland) Limited, Dublin Drug (Investments) Limited, Dublin Drug Company Limited, Dublin Drug Public Limited Company, Dugdale Trading Limited, Marker (U.D.) Ireland Limited, Pharmexx Ireland (Sales Solutions) Limited, UDG Healthcare Ireland Limited, United Care Limited, UDG Healthcare (US) Holdings Limited, UDG Healthcare Ayrtons (Dublin) Limited, UDG Healthcare Distributors Limited, UDG Healthcare Finance Limited, UDG Healthcare Nordic Limited, UDG Healthcare Packaging Group Limited and UDG Healthcare Property Holdings Limited. 50. Approval of Financial Statements The Group and Company Financial Statements were approved by the directors on 4 December 2017. 174 UDG Healthcare plc Annual Report and Accounts 2017 Financial Calendar Strategic Report Directors’ Report Financial Statements UDG Healthcare plc is an Irish registered company. The Company’s ordinary shares are quoted on the London Stock Exchange. Ex-dividend date for 2017 final dividend Record date for 2017 final dividend Annual General Meeting Payment date for 2017 final dividend Interim Announcement of Results for 2018 Financial year end Preliminary Announcement of Results for 2018 11 January 2018 12 January 2018 30 January 2018 5 February 2018 22 May 2018 30 September 2018 27 November 2018 UDG Healthcare plc Annual Report and Accounts 2017 175 Financial Statements Additional Information Key Performance Indicators and Non-IFRS Performance Measures The Group reports certain financial measurements that are not required under International Financial Reporting Standards (IFRS) which represent the generally accepted accounting principles (GAAP) under which the Group reports. The Group believes that the presentation of these non-IFRS measurements provides useful supplemental information which, when viewed in conjunction with IFRS financial information, provides stakeholders with a more meaningful understanding of the underlying financial and operating performance of the Group and its divisions. These measurements are also used internally to evaluate the historical and planned future performance of the Group’s operations and to measure executive management’s performance based remuneration. None of the non-IFRS measurements should be considered as an alternative to financial measurements derived in accordance with IFRS. The non-IFRS measurements can have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of results as reported under IFRS. The principal non-IFRS measurements used by the Group, together with reconciliations where the non-IFRS measurements are not readily identifiable from the Financial Statements, are as follows: Net Revenue (Continuing) Definition This comprises of gross revenue as reported in the Group Income Statement, adjusted for revenue associated with pass-through costs for which the Group does not earn a margin. Calculation Revenue (continuing) Pass-through revenue Net revenue (continuing) Income Statement 2017 $’000 2016 $’000 1,219,755 (191,269) 1,083,439 (163,490) 1,028,486 919,949 Adjusted Operating Profit (Continuing) Definition This comprises of operating profit as reported in the Group Income Statement before amortisation of acquired intangible assets, transaction costs and exceptional items (if any). Calculation Operating profit (continuing) Transaction costs (continuing) Amortisation of acquired intangible assets (continuing) Income Statement Income Statement Note 4 Adjusted operating profit (continuing) 2017 $’000 103,186 4,028 22,066 129,280 2016 $’000 97,580 2,214 15,977 115,771 Adjusted Profit Before Tax (Continuing) Definition This comprises profit before tax as reported in the Group Income Statement before amortisation of acquired intangible assets, transaction costs and exceptional items (if any). Calculation Profit before tax (continuing) Transaction costs (continuing) Amortisation of acquired intangible assets (continuing) Income Statement Income Statement Note 4 Adjusted profit before tax (continuing) Adjusted Operating Margin (Continuing) Definition Measures the adjusted operating profit as a percentage of revenue. Calculation Adjusted operating profit (continuing) Revenue (continuing) Adjusted operating margin (continuing) Per above Income Statement 176 UDG Healthcare plc Annual Report and Accounts 2017 2017 $’000 92,834 4,028 22,066 118,928 2016 $’000 83,542 2,214 15,977 101,733 2017 $’000 129,280 1,219,755 10.6% 2016 $’000 115,771 1,083,439 10.7% Strategic Report Directors’ Report Financial Statements 2017 $’000 129,280 1,028,486 12.6% 2016 $’000 115,771 919,949 12.6% Adjusted Net Operating Margin (Continuing) Definition Measures the adjusted operating profit as a percentage of net revenue. Calculation Adjusted operating profit (continuing) Net revenue (continuing) Net operating margin (continuing) Per above Per above Adjusted Diluted Earnings per Share Definition The Group defines adjusted earnings per share as basic earnings per share adjusted for the impact of amortisation of acquired intangible assets, transaction costs and exceptional items (if any). Calculation Adjusted earnings per share (continuing) – $ cent Adjusted earnings per share (discontinued) – $ cent Note 10 Note 10 Adjusted earnings per share 2017 37.12 – 37.12 2016 31.79 7.47 39.26 Annualised EBITDA Definition Annualised EBITDA is continuing and discontinued earnings before net interest, tax, depreciation, amortisation of intangible assets, exceptional items for the previous twelve months adjusted for the share of joint venture profits, dividends received from joint ventures, profit/(loss) on disposal of property, plant and equipment, impairment of intangible assets, the annualisation of the EBITDA of companies acquired during the year and the EBITDA of completed disposals. Calculation Operating profit (continuing) Operating profit (discontinued) Depreciation (continuing) Amortisation of computer software (continuing) Amortisation of acquired intangible assets (continuing) Joint ventures profit share (continuing) Joint ventures profit share (discontinued) Loss on disposal of property, plant and equipment EBITDA of completed disposals Annualised EBITDA of acquisitions* Annualised EBITDA Income Statement Note 8 Note 4 Note 4 Note 4 Income Statement Note 8 Cash Flow Statement Note 8 * This includes EBITDA for acquisitions which were not part of the Group for the full financial year. 2017 $’000 103,186 – 21,221 3,384 22,066 (667) – 55 – 14,827 164,072 2016 $’000 97,580 19,338 20,032 2,236 15,977 (798) (1,659) 59 (17,679) 1,735 136,821 Financial Ratios Definition The net (debt)/cash to EBITDA and EBITDA interest cover ratios disclosed are calculated using annualised EBITDA and adjusted net finance expense (net finance expense excluding interest on pension scheme obligations and the unwinding of discount on provisions, see Note 6). Net (debt)/cash represents the net total of current and non-current borrowings, current and non-current derivative financial instruments and cash and cash equivalents as presented in the Group Balance Sheet and as calculated in Note 30. UDG Healthcare plc Annual Report and Accounts 2017 177 Financial Statements Additional Information (continued) Return on Capital Employed (ROCE) Definition ROCE is the continuing adjusted operating profit expressed as a percentage of the Group’s net assets employed. Net assets employed is the average of the opening and closing net assets in the year excluding net debt/(cash) adjusted for cumulative historical amortisation of acquired intangible assets and restructuring charges. Calculation Net assets Net debt/(cash) Assets before net debt/(cash) Historical intangible amortisation Historical restructuring costs Total capital employed Average total capital employed Adjusted operating profit (continuing) Return on capital employed Balance Sheet Per above Per above 2017 $’000 880,656 53,266 933,922 176,997 47,494 1,158,413 1,006,869 129,280 12.8% 2016 $’000 806,876 (143,163) 663,713 146,467 45,144 855,324 849,580 115,771 13.6% Effective Tax Rate (Continuing) Definition The Group continuing effective tax rate expresses the income tax expense adjusted for the impact of exceptional items, transaction costs and the amortisation of acquired intangible assets as a percentage of adjusted profit before tax for continuing operations. Calculation Tax charge (continuing) Tax relief with respect to transaction costs (continuing) Deferred tax credit with respect to intangible amortisation (continuing) Income tax expense before exceptional, transaction costs and deferred tax attaching to amortisation of intangible assets Income Statement Adjusted profit before tax (continuing) Per above Effective tax rate (continuing) 2017 $’000 20,976 370 5,070 26,416 118,928 22.2% 2016 $’000 15,428 91 7,564 23,083 101,733 22.7% Measurements Removed from the Additional Information Measurements removed from the additional information section shown elsewhere in the financial statements are as follows: • Adjusted operating profit (discontinued) – this measurement is shown in Note 8 • Net interest – this measurement is shown in Note 6 • EBITDA Interest cover – this measurement is shown in Note 30 • Net (debt)/cash – this measurement is shown in Note 30 • Net (debt)/cash to EBITDA – this measurement is shown in Note 30 A number of measurements have been removed from the additional information section. The Group believes these are not necessary to provide stakeholders with a more meaningful understanding of the underlying financial operating performance of the Group and its divisions as other performance measures are deemed more appropriate. Measurements removed are as follows: • Adjusted profit before tax (discontinued) • EBITDA (continuing) • EBITDA (discontinued) • Working capital (continuing) 178 UDG Healthcare plc Annual Report and Accounts 2017 Glossary Strategic Report Directors’ Report Financial Statements AGM BCG CDP CEO CFO CGU CIPD CMIC COO CO2 CODM CRM CMO Annual General Meeting Boston Consulting Group Carbon Disclosure Project Chief Executive Officer Chief Financial Officer Cash Generating Unit Chartered Institute of Personnel and Development Current Medical Information Centre Chief Operating Officer Carbon Dioxide Chief Operating Decision Maker Customer Relationship Management Chief Marketing Officer The Code UK Corporate Governance Code 2014 issued by the UK Financial Reporting Council CSR DEA EBIT EBITA EBITDA EDI EfW EHS ERM EPS ESOP ESOS EU EVP EY FDA Corporate Social Responsibility Drug Enforcement Administration Earnings Before Interest and Tax Earnings Before Interest, Taxes and Amortisation Earnings Before Interest, Tax, Depreciation and Amortisation Electronic Data Interchange Energy-from-Waste Environmental Health and Safety Enterprise Risk Management Earnings per Share Executive Share Option Plan Executive Share Option Scheme European Union Executive Vice President Ernst & Young Chartered Accountants and Statutory Audit Firm Food and Drug Administration FTSE 100 Index Capitalisation – weighted index consisting of the 100 largest companies listed on the London Stock Exchange with the highest market capitalisation FTSE 250 Index Capitalisation – weighted index consisting of the 101st to the 350th largest companies on the London Stock Exchange FY2016 FY2017 GAAP GDPR GS1 HR Financial Year 2016 Financial Year 2017 Generally Accepted Accounting Principles General Data Protection Regulation Global Standards 1 Human Resources HIPAA IAASA IAS IASB IFRIC IFRS Inc. IRT IT ISAs ISEQ KPI LTA LTIP MAH M&A NETS NHS Health Insurance Portability and Accountability Act Irish Auditing and Accounting Supervisory Authority International Accounting Standard International Accounting Standards Board International Financial Reporting Interpretations Committee International Financial Reporting Standards Incorporated Interactive Response Technology Information Technology International Standards on Auditing Irish Stock Exchange Quotient Key Performance Indicator Lost Time Accidents Long Term Incentive Plan Marketing Authorisation Holder Mergers and Acquisitions Network of Employers for Traffic Safety National Health Service NHTSA National Highway Traffic Safety Administration N/A NI PA PAYE PBCIT PBIT PBT Not Applicable Northern Ireland Pennsylvania Pay As You Earn Profit Before Central costs, Interest and Tax Profit Before Interest and Tax Profit Before Tax PEPPOL Pan European Public Procurement On-Line PLC RF RIF ROCE ROI RoSPA QMS SID SOP SVP TCP TSR UK US VAT Public Limited Company Radio Frequency Risk, Investment and Financing Committee Return on Capital Employed Republic of Ireland Royal Society for the Prevention of Accidents Quality Management System Senior Independent non-executive Director Standard Operating Procedure Senior Vice President Temperature Controlled Pharmaceuticals Total Shareholder Return United Kingdom United States Value Added Tax UDG Healthcare plc Annual Report and Accounts 2017 179 Contacts for Shareholders Principal Bankers Ulster Bank Ulster Bank Group Centre, George’s Quay, Dublin 2, Ireland Solicitors A&L Goodbody International Financial Services Centre, North Wall Quay, Dublin 1, Ireland Pinsent Masons LLP 3 Hardman Street, Manchester, M3 3AU Auditor Ernst & Young Harcourt Centre, Harcourt Street, Dublin 2, Ireland Website Further information on UDG Healthcare is available on the Group’s website: www.udghealthcare.com Company Secretary and Registered Office Damien Moynagh UDG Healthcare plc, 20 Riverwalk, Citywest Business Campus, Citywest, Dublin 24, Ireland Tel: +353 1 468 9000 Website: www.udghealthcare.com Registered Number 12244 Registrar Enquiries concerning shareholdings should be addressed to: Computershare Investor Services (Ireland) Limited Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, Ireland Tel: +353 1 447 5100 Fax: +353 1 447 5571 Email: webqueries@computershare.co.uk Stockbrokers Jefferies Hoare Govett, a division of Jefferies International Limited Vintners Place, 68 Upper Thames Street, London, EC4V 3BJ, UK Davy Davy House, 49 Dawson Street, Dublin 2, Ireland Goodbody Stockbrokers Ballsbridge Park, Ballsbridge, Dublin 4, Ireland 180 UDG Healthcare plc Annual Report and Accounts 2017 UDG Healthcare plc UDG Healthcare plc 20 Riverwalk Citywest Business Campus Citywest Dublin 24 Ireland T: +353 1 468 9000 www.udghealthcare.com