Integral Diagnostics
Annual Report 2017

Plain-text annual report

Annual Report 2017 About Us Contents Our Locations The focus and ethos of providing the highest quality diagnostic imaging services, trusted by referers, and preferred by patients, is unwavering. Chairman’s Report Managing Director and Chief Executive Officer’s Report Directors’ Report Remuneration Report Auditor’s Independence Declaration Operating and Financial Review Consolidated Statement of Profit or Loss and Other Comprehensive Income 2 4 6 14 22 23 31 Consolidated Statement of Financial Position 32 Consolidated Statement of Changes in Equity 33 Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Shareholder Information Corporate Directory 34 35 67 68 74 75 Victoria • Ballarat (4 sites) • Geelong (7 sites) Queensland • Gold Coast (10 sites) • Mackay (1 site) • Melbourne metropolitan (1 site) • Toowoomba (1 site) • Outer western areas of Melbourne (10 sites) • Warrnambool (1 site) Western Australia • South west Western Australia (9 sites) Integral Diagnostics Limited ABN 55 130 832 816 1 Annual Report 2017Integral DiagnosticsChairman’s Report Dear shareholders, On behalf of the Board, I present the 2017 Annual Report for Integral Diagnostics Limited. The performance of the Company over the 12 months ended 30 June 2017 (FY17) was within market guidance provided at the half year, but was below the Board and management’s expectations. Whilst revenue grew 7.1%, cost growth was higher, leading to a $1.5 million decline (9.3%) in underlying NPAT performance compared to FY16. Dr Ian Kadish, an experienced CEO, has been recruited to lead the Company in its strategy execution and improve financial returns given the strength and opportunities of the Integral Diagnostics business. Throughout the Company, the focus and ethos of providing the highest quality diagnostic imaging services, trusted by referrers and preferred by patients, is unwavering. This was evident during the many site visits undertaken by Board members across all three States we operate in. FY17 results Revenue was up 7.1% to $179.7 million, reflecting a full year of South West MRI Pty Ltd/Western District Radiology, which was successfully acquired on 1 July 2016 and integrated into the Group, and organic growth across all business units. Underlying examination volume growth was 4.6%. This was below our expectations and slightly below Medicare data of 5.1% in the States in which we operated, with volatility across the year reflecting wider industry and competitive dynamics in our key regions. Ensuring Integral Diagnostics maintains and grows its historical share of industry growth is a key focus for FY18. The Company incurred expenditure growth of $13.5 million, resulting in an overall underlying NPAT performance of $15.1 million, which was $1.5 million below FY16. The Company has the capacity and infrastructure in place to support an increased volume of diagnostic imaging services and will focus on disciplined cost management with its new leadership to improve earnings. Integral Diagnostics has net debt of $48.7 million and comfortable gearing at 1.4x net debt to EBITDA. The Company has the capital structure in place to support its growth strategy and pursue attractive value accretive acquisitions. Reflecting the Company’s strong balance sheet, financial performance and outlook, your Board was pleased to announce a fully franked final FY17 dividend of 4.0 cents per share, taking the full year FY17 dividend to 7.0 cents per share fully franked, in line with a payout ratio of 65-75% of net profit after tax and amortisation. Smooth transition to fresh leadership After completing a thorough search process, the Board appointed Dr Ian Kadish as CEO and Managing Director, effective 22 May 2017. With substantial healthcare and listed company experience in Australia and overseas, Ian brings an important mix of medical training, broad international exposure, and strong finance, IT and M&A experience in high-growth organisations. The CEO transition was smooth, with John Livingston resigning as CEO for personal health reasons. John was the co-founder of Lake Imaging in 2002, and the entire Board, management and team at Integral Diagnostics wish John all the best in his recovery and future endeavours. Revenue was up 7.1% to $179.7 million, reflecting a full year of South West MRI Pty Ltd/Western District Radiology, which was successfully acquired on 1 July 2016 and integrated into the Group, and organic growth across all business units. Craig Bremner resigned as Chief Financial Officer effective 31 August 2017 after 12 years with the Company. The transition to Anne Lockwood, the Company’s Financial Controller and former partner of a major accounting firm, appointed as Interim CFO is well underway. Garry Hounsell resigned as a Non-Executive Director on 31 March 2017 given the time commitments required for another significant listed Chair role. As a result, Rupert Harrington, who was a member of the Audit and Risk Committee, was appointed Chair of that Committee. Positioned to capitalise on attractive long-term industry fundamentals The regulatory environment is now clearer following the Federal Government’s decision in May 2017 not to remove bulk billing incentives for diagnostic imaging. In addition, the Federal Government has committed to reintroducing MBS rebate indexation for a small number of diagnostic imaging services from July 2020. The diagnostic imaging sector has operated with an MBS rebate freeze for nearly two decades. We support the campaign to improve affordability of all diagnostic services by reintroducing indexation for all items in line with the reintroduction of GP indexation from 2018. The long-term industry fundamentals remain, and underpin attractive future growth opportunities for Integral Diagnostics, which we are well positioned to capitalise on. Australia has a growing and ageing population requiring greater healthcare support. At the same time, community expectations for higher quality healthcare and diagnosis continue to rise, while new imaging technologies improve efficiency and aid diagnosis and early recognition of disease. The support of our shareholders and their involvement in our Company is greatly valued by the Board and we thank you and encourage your continued participation. Special thanks to the exceptional radiologists, imaging and support staff of Integral Diagnostics who contribute to patient diagnosis and treatment, critical in patient healthcare. Helen Kurincic Chairman 2 3 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Managing Director and Chief Executive Officer’s Report Dear shareholders, I am honoured to be writing to you as the Company’s recently appointed CEO and Managing Director. I am excited to lead Integral Diagnostics as we execute on our development and growth strategy. Integral Diagnostics is uniquely positioned as a focused diagnostic imaging company that is 30% owned by its radiologists, is passionate about quality care and clinical leadership, and is a market leader in the regions in which it operates. While I have been a part of Integral Diagnostics for only a few months, it quickly became clear to me that our radiologist team is among the finest in the country. Our radiologists have the reputation, the skills and the expertise that have enabled us to build a loyal referral network in three States, and a quality reputation in all States. We have also invested in high-quality clinical staff and world-class imaging assets. Going forward, this positions the Company well to deliver on our promise of quality patient care and service to our referrers, and thereby increase value to our shareholders. Ultimately good medicine is good business. Operational highlights Integral Diagnostics has historically invested in leading- edge technology and staff to position the business to meet expected long-term growth in demand for diagnostic health services. This has adversely impacted margins and earnings. The Company has the capacity and infrastructure in place to support an increased volume of diagnostic imaging services. Going forward, our investments will be tailored to current growth patterns, with disciplined execution focused on generating the returns necessary. Over the course of the last year, Integral Diagnostics delivered the following operational achievements: • successfully acquired and integrated Western District Radiology and South West MRI; • executed five, five-year contracts with the West Australian Country Health Service relating to the provision of reporting contracts in remote regions; • expanded capacity in Toowoomba, Sunbury and Geelong; • refurbished diagnostic imaging facilities at Pindara Private Hospital; • installed new MRI machines and facilities at Robina and John Flynn Private Hospital; • purchased a Mobile MRI; and • upgraded IT platforms to support improved medical imaging and digital reporting. Outlook We will continue to invest in the business but will be focused on improving margins through disciplined cost management,driving growth organically and through value accretive acquisitions. Coupled with a more stable regulatory environment, we are looking forward to a better FY18. Growth will be achieved organically by leveraging the infrastructure and resources already in place, through investment in key strategic relationships with private hospital groups, and through developing specialised diagnostic centres of excellence. We will execute on Our radiologists have the reputation, the skills and the expertise that have enabled us to build a loyal referral network in three States, and a quality reputation in all States. strategically aligned acquisitions, and will ensure that we continue to provide quality care and service to our patients and referrers. An ageing population and better- informed patients will continue to drive demand for better health insights, and Integral Diagnostics is well placed to benefit from this growth. I would like to take this opportunity to thank our referrers, doctors and staff for their ongoing support and commitment. On behalf of IDX, we look forward to delivering quality healthcare to our patients, outstanding service and valuable insights to our referrers, a preferred place to work for our doctors and staff, and improving returns for our investors. Dr Ian Kadish (Appointed 22 May 2017) Managing Director and Chief Executive Officer MBBCh, MBA 4 5 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsDirectors’ Report For year ended 30 June 2017 The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Integral Diagnostics Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled for the year ended 30 June 2017. The information referred to below forms part of, and is to be read in conjunction with, this Directors’ Report: • the Operating and Financial Review (OFR) on pages 23 to 30; and • the Remuneration Report on pages 14 to 21. Directors The following persons were Directors of Integral Diagnostics Limited during the whole of the financial year and up to the date of this Report, unless otherwise stated: Helen Kurincic (Independent Non-Executive Chairman) Dr Ian Kadish (Managing Director and Chief Executive Officer) John Livingston (Managing Director and Chief Executive Officer) Dr Chien Ping Ho (Executive Director) Dr Sally Sojan (Executive Director) John Atkin (Independent Non-Executive Director) Rupert Harrington (Independent Non-Executive Director) Garry Hounsell (Independent Non-Executive Director) Appointed 22 May 2017 Resigned 21 May 2017 Resigned 31 March 2017 Principal activities During the financial year, the principal activity of the Group was the provision of diagnostic imaging services. Business strategies, prospects and likely developments The OFR on pages 23 to 30 of the Annual Report sets out information on the business strategies, prospects and likely development for the future financial years. Review and results of operations A review of the operations of the Group during the financial year, the results of those operations and the financial position of the Group is contained in the OFR on pages 23 to 30. Dividends paid in the year ended 30 June 2017 Dividends paid/payable during the financial year were as follows: Dividend paid to shareholders of the Company at $0.04 cents per share paid 4 October 2016 Dividend paid to shareholders of the Company at $0.03 cents per share paid on 30 March 2017 Consolidated 30 June 2017 $’000 5,803 4,351 30 June 2016 $’000 - - Significant changes in the state of affairs On 1 July 2016, the Group acquired the Western District Radiology business and the remaining 50% interest in South West MRI Pty Ltd for the total consideration of $4,954,000, being $3,679,000 cash payment and $1,275,000 of issued shares (908,056 shares issued at $1.4041 per share). This acquisition fits the Company’s strategic criteria and further strengthens the Group’s position in the south-west region of Victoria. See Note 32 to the financial statements for full details of this transaction. On 21 May 2017 John Livingston resigned as the Managing Director and Chief Executive Officer. On 22 May 2017 the new Managing Director and Chief Executive Officer, Ian Kadish joined Integral Diagnostics Limited. There were no other significant changes to the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year Subsequent to year-end, a fully franked dividend of 4 cents per share was declared on 23 August 2017 and will be paid on 4 October 2017. The Directors are not aware of any other matters or circumstances that have arisen since the end of the financial year which have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Environmental regulations The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. During the financial year the Group was not convicted of any breach of environmental regulations. 6 7 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Directors’ Report continued For year ended 30 June 2017 Information on Directors Helen Kurincic Independent Non-Executive Chairman MBA, FAICD, Grad Dip Wom Stud, PBC Crit Care, Cert Nsg Other current directorships Former directorships (in the last three years) Special responsibilities Interests in shares Helen Kurincic is the Chairman of Integral Diagnostics and has deep Executive and Board-level experience in the healthcare industry. Helen is currently a Non-Executive Director of HBF Health Limited, Estia Health Limited and a senior advisor in the healthcare sector. She was the Chief Operating Officer and Director of Genesis Care from its earliest inception creating and developing the first and largest radiation oncology and cardiology network across Australia. Prior to that Helen held various executive and Non-Executive healthcare sector roles including Non-Executive Director of DCA Group Limited (diagnostic imaging services in Australia and the United Kingdom), Non-Executive Director of AMP Capital Investors Domain Principal Group, CEO of Benetas, Non-Executive Director of Melbourne Health and Orygen Research Centre. Ms Kurincic has also been actively involved in healthcare government policy reform including appointments by health ministers as Chair of the Professional Programs and Services Committee for the Fourth Community Pharmacy Agreement and Member of the Minister’s Implementation Taskforce and Minister’s Reference Group for the Long Term Reform of Aged Care. Estia Health Ltd None Chair of the Nominations Committee and Member of the Audit, Risk and Compliance Committee and People and Remuneration Committee 420,870 ordinary shares (indirectly) Dr Ian Kadish (Appointed 22 May 2017) Managing Director and Chief Executive Officer MBBCh, MBA Dr Ian Kadish was appointed Managing Director and Chief Executive Officer of IDX on 22 May 2017. Ian began his career as a medical doctor in Johannesburg, South Africa. He subsequently completed an MBA at the Wharton Business School at the University of Pennsylvania and followed this with several roles overseas including CSC Healthcare, McKinsey and Company, and Netcare, a major hospital group in South Africa and the United Kingdom where Ian was Executive Director from 1997 to 2006. Ian was instrumental in growing the group from 5 hospitals with a revenue of $60 million, to 119 hospitals and revenue of $3 billion. Since migrating to Australia in 2006, Ian’s roles have included CEO and MD of Healthcare Australia, CEO and MD of Pulse Health Group (ASX-listed hospital group) and CEO of Laverty Pathology. Other current directorships Former directorships (in the last three years) Special responsibilities Interests in shares None None None None John Livingston (Resigned 21 May 2017) Managing Director and Chief Executive Officer BAppSci (Med Rad), GradDipHSc (Edu), GradCertBus (Mgt), GAICD Other current directorships Former directorships (in the last three years) Special responsibilities Interests in shares Dr Chien Ping Ho Executive Director MBBS, FRANZCR, GAICD John Livingston is a founding partner of Integral Diagnostics. John has more than 20 years’ experience in healthcare, working in both public and private radiology settings. As one of the founding partners of Lake Imaging, John has grown the business through the introduction of new services, greenfield facilities and various mergers and acquisitions which have resulted in Integral Diagnostics moving towards a national platform; namely the arrangements with St John of God and South Western MRI in Victoria; Global Diagnostics in Western Australia and South Coast Radiology in Queensland. John was awarded the AGFA International award for Development of Digital Imaging Solutions in 2005. He has presented in Australia and abroad on the digital radiology environment, as well as business strategies and systems within the commercial sector. With a special interest in the enhancement of radiology efficiency, John is considered an industry leader in the use of innovation to enhance referrer and patient outcomes. Before moving into the private radiology sector, John held senior radiology positions in the public sector. None None None 2,467,230 ordinary shares (indirectly) Dr Chien Ping Ho is a fellow of the Royal Australian and New Zealand College of Radiologists and an accredited MRI supervising radiologist. Upon completion of his radiology training at The Royal Melbourne Hospital, Dr Ho undertook advanced training at three London hospitals – Chelsea and Westminster Hospital, The Royal National Orthopaedic Hospital and University College Hospital. During this time he completed an MRI/musculoskeletal fellowship and also spent time as a staff specialist. Dr Ho commenced with Lake Imaging in 2004 and is currently a consultant radiologist for Integral Diagnostics in Victoria. Dr Ho has considerable experience across all radiology modalities with a special interest in musculoskeletal and body imaging. Other current directorships Former directorships (in the last three years) None None Special responsibilities Interests in shares Chair of the National Clinical Leadership Committee 2,445,481 ordinary shares (indirectly) 8 9 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsDirectors’ Report continued For year ended 30 June 2017 Information on Directors continued Dr Sally Sojan Executive Director MBBS, FRANZCR, FAANMS, GAICD Dr Sally Sojan graduated from the University of Queensland with a medical degree. Dr Sojan completed her radiology fellowship at the Princess Alexandra Hospital in Brisbane. Dr Sojan then completed her nuclear medicine and PET qualifications at The Royal Brisbane Hospital and The Royal Adelaide Hospital followed by an MRI fellowship at The Mater Private Hospital in Brisbane. Dr Sojan commenced working at South Coast Radiology where she established the first PET service on the Gold Coast. Her specialty interests include nuclear medicine and PET and musculoskeletal MRI. Dr Sojan was previously the Chair of the South Coast Radiology Board Meetings and has been a Board member of Integral Diagnostics for three years. Rupert Harrington Independent Non-Executive Director BTech, MSc, CDipAF Rupert Harrington is a major shareholder and Executive Chairman of Advent,a leading Australian private equity manager. Rupert has been involved in private equity since 1987 and is considered to be one of the founders of the Australian industry. Prior to Advent, Rupert had eight years’ general management experience at both corporate and operational management levels. During Rupert’s time at Advent, he has been either a Director or Chairman of 26 investee companies, including businesses operating in the manufacturing, services and high-technology sectors spanning many facets of the investment process at all stages of the growth cycle. He was actively involved in all aspects of Advent’s recent healthcare investment in Primary Health Care and Genesis Care. Other current directorships Former directorships (in the last three years) None None Special responsibilities Interests in shares Member of the National Clinical Leadership Committee 1,026,491 ordinary shares (indirectly) John Atkin Independent Non-Executive Director BA, LLB, FAICD John Atkin is a Non-Executive Director of IPH Limited. John is currently the Nomination and Remuneration Committee Chair of IPH Limited and is a member of the Audit and Risk Committee. John was Chief Executive Officer and Managing Director of The Trust Company Limited from 2009 to 2013 prior to its successful merger with Perpetual Limited. Prior to joining the Trust Company, John was the managing partner and Chief Executive Officer of leading Australasian law firm Blake Dawson (now Ashurst). Before this, John was a senior mergers and acquisitions partner of Mallesons Stephen Jacques (Now King & Wood Mallesons). John is Chairman of the Australian Outward Bound Foundation and a member of the Board of the State Library of New South Wales Foundation. Other current directorships IPH Limited Former directorships (in the last three years) Special responsibilities Interests in shares Aurizon Holdings Limited, GPT Metro Office Chair of the People and Remuneration Committee and a member of the Audit, Risk and Compliance Committee and Nominations Committee 132,945 ordinary shares (indirectly) Other current directorships Clover Corporation Limited, Bradken Limited Former directorships (in the last three years) Special responsibilities Interests in shares Garry Hounsell (Resigned 31 March 2017) Independent Non-Executive Director BBus (Accounting), FCA, FAICD None Chair of the Audit, Risk and Compliance Committee, and a member of the People and Remuneration Committee and Nominations Committee 177,176 ordinary shares (directly) and 78,534 ordinary shares (indirectly) Garry was a senior partner of Ernst & Young and Chief Executive Officer and Country Managing Partner of Arthur Andersen. Garry is currently the Chair of Spotless Group Holdings Limited (since March 2017) and the Chair of Helloworld Travel Limited (since 2016). He is a Director of Treasury Wine Estates Limited (since 2012) Dulux Group Limited (since 2010). Garry is currently the Audit Committee Chair for Spotless Group Holdings Limited, Treasury Wine Estates Limited and Dulux Group Limited. Garry was Chairman of PanAust Limited (2008 to 2015) and eMitch (2006 to 2008) and a Director of Qantas Airways Limited (2005 to 2015), Orica Limited (2004 to 2012), Nufarm Limited (2004 to 2012) and Mitchell Communications Group Limited (2008 to 2010). Other current directorships Former directorships (in the last three years) Special responsibilities Interests in shares Treasury Wine Estates Limited Helloworld Travel Limited, Dulux Group Limited, Spotless Group Holdings Limited PanAust Limited, Qantas Airways Limited Chair of the Audit, Risk and Compliance Committee and a member of the People and Remuneration Committee and Nominations Committee 20,000 ordinary shares (directly) Other current directorships quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Former directorships (last three years) quoted above are directorships held in the last three years for listed entities only and excludes directorship of all other types of entities, unless otherwise stated. 10 11 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Directors’ Report continued For year ended 30 June 2017 Company Secretary Sonia Joksimovic (BBus, AFIN, FGIA, GAICD) was the Company Secretary until her resignation which was effective on the 7 August 2017. Sonia is an experienced chartered secretary with over nine years’ experience across listed small market capitalisation, unlisted and private companies, specialising in governance, compliance and other corporate matters. Proceedings on behalf of the Company No person has applied to the court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Kathryn Davies (BBus, GAICD, CPA) was appointed Company Secretary effective 8 August 2017. Kathryn, holding a Bachelor of Business with a double major in Accounting and Business Law, is a Certified Practising Accountant and a Graduate of the Australian Institute of Company Directors, acts for companies as both advisor or Executive. Ms Davies has significant experience in capital markets, negotiating and delivering on large scale business transactions and international stakeholder management. She also has extensive corporate and commercial experience and has worked across technology, healthcare and natural resources sectors. Most recently, she has been the Company Secretary of Japara Healthcare Ltd, interim Chief Financial Officer of Planet Innovation Pty Ltd and is a current Non-Executive Director of Golden Rim Resources Ltd. Meetings of Directors Board Audit, Risk and Compliance Committee People and Remuneration Committee Nomination Committee Held 15 12 2 15 15 11 15 15 Attended 15 12 2 15 14 9 15 14 Held 8 - - - - 6 8 8 Attended 8 - - - - 6 7 8 Held 7 - - - - 5 7 7 Attended 7 - - - - 4 7 6 Held 4 - - - - 2 4 2 Attended 4 - - - - 2 4 1 Director Helen Kurincic John Livingston Dr Ian Kadish Dr Chien Ping Ho Dr Sally Sojan Garry Hounsell John Atkin Rupert Harrington Held: represents the number of meetings held during the time the Director held office and was eligible to attend as a member. Indemnity and insurance of officers The Company’s Constitution requires the Company to indemnify any person who is, or has been, an officer of the Company, including the Directors, Executives and the Company Secretary of the Company, on a full indemnity basis and to the full extent permitted by law, against all losses or liabilities (including all reasonable legal costs) incurred by the officer as an officer of the Company or of a related body corporate. In accordance with the Company’s Constitution, the Company has entered into a deed of indemnity, insurance and access with each of the Company’s Directors. Under the deeds of indemnity, insurance and access, the Company must maintain a Directors’ and officers’ insurance policy insuring a Director (among others) against liability as a Director and officer of the Company and its related bodies corporate until seven years after a Director ceases to hold office as a Director or a related body corporate (or the date any relevant proceedings commenced during the seven-year period have been finally resolved). No Director or officer of the Company has received benefits under an indemnity from the Company during or since the end of the financial year. During the financial year, the Company has paid a premium in respect of a contract insuring officers of the Company and its subsidiaries against all liabilities that they may incur as an officer of the Company, including liability for costs and expenses incurred by them in defending civil or criminal proceedings involving them as such officers, with some exceptions. Due to confidentiality obligations and undertakings of the policy, no further details in respect of the premium or the policy can be disclosed. Indemnity and insurance of the auditor The Company has not, during or since the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Non-audit services Details of the amounts paid or payable to the auditor for the non-audit services provided during the financial year by the auditor are outlined in Note 27 to the financial statements. The non-audit services provided were largely for work performed pertaining to compliance tax services. The Directors are satisfied that the provision of non-audit services provided during the financial year by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in Note 27 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Officers of the Company who are former partners of PricewaterhouseCoopers There are no officers of the Company who are former audit partners of PricewaterhouseCoopers. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 22. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. Rounding of amounts The Company is a kind referred to in Legislative Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding off’. Amounts in this Report and in the financial statements have been rounded off, except where otherwise stated, in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. This Report is made in accordance with a resolution of Directors. On behalf of the Directors Helen Kurincic Chairman 23 August 2017 Melbourne Ian Kadish Managing Director and Chief Executive Officer 12 13 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Remuneration Report For year ended 30 June 2017 The Remuneration Report, which has been audited, outlines the Director and Executive remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. The following Non-Executive Directors, all of whom are currently regarded as independent, were members of the PRC for the entire financial year (unless otherwise noted): Key management personnel (KMP) are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all Directors. The Remuneration Report is set out under the following main headings: A. Principles used to determine the nature and amount of remuneration B. Details of remuneration C. Other transactions with KMP and their related parties D. Service agreements E. Additional disclosures relating to KMP A. Principles used to determine the nature and amount of remuneration The objective of the Group’s Executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns Executive reward with the achievement of strategic objectives and the creation of value for shareholders. The Board of Directors (‘the Board’) works to ensure that Executive reward satisfies the following key criteria for good governance practices: • competitiveness and reasonableness; • acceptability to shareholders; • performance linkage/alignment of Executive compensation; and • transparency. People and Remuneration Committee The People and Remuneration Committee (PRC) is governed by the PRC Charter and is responsible for determining and reviewing compensation arrangements for the Directors, Executive Directors, Executives and Senior Management including: (a) Review and recommend to the Board arrangements for remuneration including contract terms, annual remuneration and participation in any short and long-term incentive plans. (b) Review and recommend to the Board major changes and developments in the Company’s remuneration, superannuation, recruitment, retention and termination policies and procedures. (c) Review and recommend to the Board short-term incentive strategy, performance targets and bonus payments for the CEO and the Executives that report to the Board. (d) Review and recommend to the Board the remuneration arrangements for the Chairman and the Non-Executive Directors of the Board, including fees, travel and other benefits. (e) Be satisfied that the Committee, the Board and management have available to them sufficient information and external advice to ensure informed decision-making regarding remuneration. The PRC also reviews and makes recommendations to the Board in regards to ‘people’ by monitoring and reviewing the Senior Management performance assessment process, reviewing major changes and developments in the personnel practices and industrial relations strategies of the Group, senior leadership succession planning, and overseeing the effectiveness of the Diversity Policy. John Atkin – Chairman Independent, Non-Executive Director Helen Kurincic Independent, Non-Executive Director Rupert Harrington Independent, Non-Executive Director Garry Hounsell Independent, Non-Executive Director (resigned 31 March 2017) Executives do not participate in any remuneration matters under the PRC Charter. The PRC meets quarterly or as often as necessary in order to fulfil its role. Non-Executive Directors’ remuneration arrangements Under the Constitution, the Board decides the remuneration to which each Director is entitled for his or her service as a Director. However, the total aggregate amount provided to all Non-Executive Directors for their services as Directors must not exceed in any financial year the amount fixed by the Company in general meeting. This amount has been fixed at $1,000,000. The annual base Non-Executive Director fees currently agreed to be paid by the Company are $200,000 to the Chairman and $100,000 to each of the other Non-Executive Directors. Effective 1 October 2017 Rupert Harrington was entitled to receive Directors’ fees. The following additional annual fees are payable to Committee members, except the Chairman: • $20,000 will be paid to the Chair of the Audit, Risk and Compliance Committee and $10,000 will be paid to each member of that Committee; and • $12,000 will be paid to the Chair of the People and Remuneration Committee and $6,000 will be paid to each member of that Committee. No additional fees were paid to Nomination Committee Chair or members. All Directors’ fees include superannuation. The PRC reviewed Directors’ fees and had determined no increase for the 2017 financial year. There will also be no Director fee increase for the 2018 financial year. Executive Directors’ remuneration arrangements – Dr Chien Ping Ho and Dr Sally Sojan Dr Chien Ping Ho and Dr Sally Sojan are deemed to be Executive Directors as they are employed as radiologists by the Company. The key terms of their employment contracts as radiologist shareholders are consistent with all radiologist shareholders and include a fixed salary at market rate plus allowances where appropriate and in line with market. Dr Chien Ping Ho and Dr Sally Sojan are entitled to receive Medical Director Fees for representative Clinical Leadership roles up to $100,000 in aggregate. They do not receive remuneration in their capacity as Directors. Executive remuneration arrangements The Executive remuneration and reward framework for the 2017 financial year has three components: • base pay and non-monetary benefits; • short-term performance incentives; and • other remuneration such as superannuation and leave entitlements. The combination of these comprises the Executives’ total remuneration. The Executive remuneration is reviewed annually by the PRC, based on individual and business performance, the overall performance of the Group and comparable market data. The short-term incentives (STI) program is designed to align the targets of the business with the Executives responsible for meeting those targets. Financial and non-financial targets and KPIs are reviewed annually by the PRC and approved by the Board to ensure STI payments are aligned with the short-term objectives of the business while consistent with the long-term strategy of the Company. 14 15 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Remuneration Report continued For year ended 30 June 2017 A. Principles used to determine the nature and amount of remuneration continued STI payments for the year ended 30 June 2017 were based on the performance of the business against the following Executive KPIs: • 50% financial target based on achievement of year-on-year EBIT growth measures; and • 50% strategic priority targets such as safety and quality, business development, technology and organisational capability transformation. The achievement of the 50% financial target of EBIT growth was a gateway hurdle to being assessed against the other KPIs for STI payment. Given that EBIT growth targets were not met the achievement of the additional KPIs was not assessed for the purpose of determining the payment of a STI. The maximum STI opportunity for 30 June 2017 was $352,000 of which nil was deemed to be payable to the Executive by the Board. There were no equity-based long-term incentives (LTIs) in place for the 2017 financial year. The new CEO, Dr Ian Kadish who commenced 22 May 2017 has an LTI contained within his employment agreement effective from FY18 with plan rules and terms subject to approval by shareholders at the Company’s 2017 AGM. See the section on ‘Service Agreements’ on page 19 for more detail. Performance against key measures The Company aims to align its Executive remuneration to its strategic and business objectives and the creation of shareholder wealth. The table below shows measures of IDX’s financial performance over the last two years as required by the Corporations Act 2001. These are not necessarily consistent with the measures used in determining variable amounts of remuneration awarded to key management personal. However, for FY17 no STI’s were paid reflecting dissapointing financial performance as indicated in the measures below: Key measures of the Group Underlying EBITDA as a % of revenue Underlying NPAT as a % of revenue EPS (cents per share) Return on operating assets (based on normalised NPAT) Declared dividend payout ratio on NPAT Use of remuneration consultants 2017 18.6% 8.4% 10.7 11.6% 65.6% 2016 21% 9.9% 8.2 13.4% - The Board ensures that any recommendations made by consultants in relation to remuneration arrangements of KMP at Integral Diagnostics must be made directly to the Board without any influence from management. The arrangements in place ensure any advice is independent of management and includes management not being able to attend Board or Committee meetings where recommendations relating to their remuneration are discussed. The remuneration consultants engaged by the Board, Godfrey Remuneration Group Pty Ltd (GRG), completed a report for the Board on market benchmarking of Senior Executive remuneration during the 2017 financial year. The total consideration paid to GRG for the advice provided was $18,000 excluding GST. The scope of the report and all discussions with GRG were undertaken by the Chair of the PRC and the Chair of the Board together with Non-Executive Directors of the PRC. No discussions were held between GRG and the Executive KMP. Accordingly, the Board is satisfied that the recommendations made by GRG are free from undue influence by any member of the KMP to whom the recommendations relate. B. Details of remuneration Amounts of remuneration The KMP of the Group consisted of the Directors of Integral Diagnostics Limited and the following Executives: • Craig Bremner – Chief Financial Officer; and • Gregory Hughes – Chief Operating Officer. Details of the remuneration received by the Group’s KMP for the current and prior financial years are set out in the following tables. 2017 Non-Executive Directors Helen Kurincic Garry Hounsell 1 John Atkin Rupert Harrington 2 Executive Directors John Livingston 3 Dr Ian Kadish 4 Dr Chien Ping Ho 5 Dr Sally Sojan 5 Other key management personnel Craig Bremner 6 Gregory Hughes Short-term benefits Post-employment benefits Long-term benefits Cash salary and fees $ Cash incentive $ Superannuation $ Long service leave $ 182,648 86,301 111,416 82,160 444,801 44,268 617,607 702,572 2,271,473 301,717 301,717 603,434 - - - - - - - - - - - 17,352 8,199 10,584 7,340 20,193 4,205 20,823 25,000 113,696 19,616 19,616 39,232 - - - - - 1,205 9,198 8,644 19,047 5,029 5,029 10,058 Total $ 200,000 94,500 122,000 89,500 464,994 49,678 647,328 736,216 2,404,216 326,362 326,362 652,724 1. Resigned effective 31 March 2017. 2. Eligible for Directors’ fees from 1 October 2016 and Chair of ARCC from April 2017. 3. Resigned as Executive Director effective 21 May 2017, employment cessation effective 31 July 2017. 4. Appointed effective 22 May 2017. 5. Remuneration includes Medical Director fees for the entire financial year. 6. Resigned to be effective 31 August 2017. Given that no STIs were paid, the proportion of remuneration paid in the 2017 financial year and linked to performance for all executives was nil. 16 17 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Remuneration Report continued For year ended 30 June 2017 2016 Non-Executive Directors Helen Kurincic Garry Hounsell John Atkin Rupert Harrington Mark Jago 2 Robert-Radcliff Smith 2 Executive Directors John Livingston Dr Chien Ping Ho 3 Dr Sally Sojan 3 Dr Alexius Meakin 4 Dr Donald Barrie 5 Other key management personnel Craig Bremner Gregory Hughes Short-term benefits Post-employment benefits Long-term benefits Cash salary and fees $ Cash incentive1 $ Superannuation $ Long service leave $ 166,667 86,301 83,643 - - - 486,018 563,355 591,020 162,885 61,406 2,201,295 294,218 294,218 588,436 - - - - - - 120,000 - - - - 120,000 80,000 - 80,000 15,833 8,199 7,857 - - - 19,308 19,308 25,000 7,705 4,826 108,036 19,308 19,308 38,616 - - - - - - 14,709 16,988 8,336 2,256 724 43,013 9,250 9,250 18,500 Total $ 182,500 94,500 91,500 - - - 640,035 599,651 624,356 172,846 66,956 2,472,344 402,776 322,776 725,552 1. Cash incentives made to Executives in the 2016 financial year relate solely to performance during the Company’s IPO preparation and process. No STI payments were deemed by the Board to be payable to the Executive for performance for the year ended 30 June 2016. The above table does not include payments made to John Livingston, Craig Bremner and Gregory Hughes of $117,189, $47,372 and $47,372 respectively, which relate to the 2015 financial year and were prior to the IPO. 2. Resigned as a Director 30 September 2015 – received no remuneration for 2016. 3. Remuneration includes Medical Director fees from October 2015. 4. Resigned as a Director 30 September 2015 – remuneration disclosed is from 1 July 30 September 2015 only. 5. Resigned as a Director 31 July 2015 – remuneration disclosed from 1 July 31 July 2015 only. C. Other transactions with KMP and their related parties Payment for goods and services Cleaning fees paid to GJJ Hughes Pty Ltd of which Gregory Hughes is related to1 Payment for rental of buildings to Perhaps Holdings Pty Ltd of which Chien Ping Ho and John Livingston are related 2 Payment for rental of buildings to Eleven Eleven How Pty Ltd of which Chien Ping Ho, John Livingston, Gregory Hughes and Craig Bremner are related to Payment for rental of buildings to Kiwi Blue Pty Ltd of which Chien Ping Ho and John Livingston are related to Consolidated 30 June 2017 $ 12,500 44,120 391,934 225,307 1. The cleaning arrangement with GJJ Hughes Pty Ltd was terminated in February 2017. 2. The property rented through Perhaps Holdings Pty Ltd was sold in February 2017 by Perhaps Holdings Pty Ltd to an independent third party. All transactions with KMP are made on commercial arm’s-length terms and conditions and in the ordinary course of business. The Board has an established Related Party Transaction Policy, that is overseen by the Audit, Risk and Compliance Committee, to ensure that related party transactions are managed and disclosed in accordance with the Corporations Act, ASX Listing Rule 10.1 and accounting requirements and in accordance with good governance obligations, to ensure that financial benefit is not given to related parties without approval by the Board, and where required, shareholders. The related party transactions set out above were historical arrangements in place when the business was privately held. It is the Board’s policy that independent reviews will be undertaken on any renewals and these reviews will be overseen by the Audit, Risk and Compliance Committee. D. Service agreements Remuneration and other terms of employment for Executive KMP are formalised in service agreements. Details of these agreements are as follows: Chief Executive Officer (CEO) Dr Ian Kadish (Appointed CEO 22nd May 2017) The CEO is employed under an ongoing contract until terminated as set out in the termination provisions below. There is no minimum term. Under the terms of the contract: • the CEO receives fixed remuneration of $480,000 per annum, which represents the CEO’s total employment cost inclusive of the Employee’s Salary, superannuation, fringe benefits tax, motor vehicle allowance and any other benefits as may be agreed between the Employer and the Employee from time to time; • relocation allowance of up to $20,000 in the first year of employment; • an annual bonus for FY18 of up to $100,000 where the Board may at its discretion, decide that the Employee should receive a bonus having regard to the overall performance of the Group and the progress made by the Employee in achieving the performance goals set by the Board at the outset of the period; • the CEO is entitled to a long-term incentive for FY18 having a maximum face value equal to $500,000 to be provided through the grant of performance rights (zero priced options) issued at the volume weighted average trading price of ordinary shares in Integral Diagnostics on the Australian Stock Exchange for the 30 trading days prior to the commencement of the Employee’s appointment. Vesting is to be tested at the four-year point (that is, based on the Integral Diagnostics accounts for the year ended June 2021 and will be determined by reference to the improvement in EPS in FY21 over FY17). Vesting of 100% will occur if compound annual growth rate (CAGR) of earnings per share (EPS) equals or exceeds 15%. There will be no vesting if EPS CAGR is less than 5%. There will be 20% vesting at EPS CAGR of 5% and pro-rata vesting between 5% and 15%. EPS growth rate is to be calculated by reference to an assumed conservative gearing in line with Board’s current policy. The Board, at its discretion, may allow a re-test at five years if the EPS result for the fourth year is ‘knocked off track’ due to some extreme event or circumstance. If there is a merger, takeover or change of control or other significant transaction (including buy-back or reduction of capital) the Board has a discretion as to whether or not the formula and benchmarks for calculating for EPS growth are adjusted to exclude some or all of the impact of that transaction so the Employee is not unfairly benefited or impacted by the transaction (i.e. avoid any windfall gains or unfair penalties). If Integral Diagnostics is subject to a takeover (or merger by way of scheme of arrangement) resulting in a change of control, the LTI will immediately vest pro-rata relative to the time period that has elapsed between 22 May 2017 and the change of control event and having regard to the CAGR of EPS achieved or reasonably estimated by the Board to have been achieved in the period prior to the change in control. The performance rights and any shares in Integral Diagnostics arising from the vesting and exercise of the performance rights are subject to a holding lock and cannot be traded or dealt with by the Employee in any way for the maximum period taxing on receipt of the performance rights can be deferred under the applicable tax legislation. The shares will be entitled to dividends during this period. Once receipt of the shares is included in the Employee’s taxable income, they may sell so much of the shares as is reasonably required to meet the tax payable in connection with their receipt, with the balance held subject to escrow conditions that match those applicable to radiologist shareholders in Integral Diagnostics; and • the CEO’s remuneration will be reviewed on an annual basis. Any increase in the Employee’s remuneration is at the sole discretion of Integral Diagnostics Limited. 18 19 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Remuneration Report continued For year ended 30 June 2017 John Livingston (Resigned as CEO 21 May 2017) The CEO was employed under an ongoing contract with a minimum employment term of three years, expiring 31 July 2017. Under the terms of the contract: • the CEO received fixed remuneration of $505,680 per annum, which includes superannuation; • the CEO’s STI opportunity was $192,000; and • fixed remuneration had an annual indexation of 2% or CPI, whichever is higher subject to satisfactory individual and business performance as determined by the Company acting reasonably. Termination provisions for Executives Termination provisions of KMP are formalised in their individual employment agreements. Details of these agreements are as follows: Name: Title: Dr Ian Kadish Chief Executive Officer Agreement commenced: 22 May 2017 Term of agreement: No fixed end date Details: Name: Title: Either the Company or the Executive may terminate the agreement by giving six months’ notice in writing. Upon termination the Company at its absolute discretion may elect to pay out the notice period, or any remaining part of the notice period, based on the Executive’s salary component only of the TEC including superannuation or place the Executive on garden leave. Notwithstanding the above, the Company may terminate the Executive’s employment without notice for serious misconduct. Upon termination of the Executive agreement, the Executive will be subject to a restraint of trade period of 15 months. The Company may elect to reduce this restraint period and the enforceability of the restraint deed is subject to all usual legal requirements. John Livingston Chief Executive Officer (resigned as CEO 21 May 2017 employment, cessation effective 31 July 2017) Agreement commenced: 1 August 2014 Term of agreement: Minimum period of employment of three years expiring on 31 July 2017 with no fixed end date Details: During the Executive’s minimum period of employment the Company may terminate their employment if there are changes outside its control that will materially harm the business and its shareholders, or there is continued and unremedied poor performance, provided in each case it has provided 12 months’ notice in writing. The Executives may not terminate their employment during the minimum term. After expiry of the minimum term, the Executive’s employment will continue until terminated by either party providing six months’ notice in writing unless otherwise agreed and approved by the Board. The Executive may give the period of notice of termination of six months during the minimm period of employment so that the date of resignation is effective on or after the expiry of the minimum period. The Executive may be paid in lieu of all or part of the notice period. Notwithstanding the above, the Company may terminate the Executive’s employment without notice for serious misconduct. Upon termination of the Executive agreement, the Executive will be subject to a restraint of trade period of six months. The Company may elect to reduce this restraint period and the enforceability of the restraint deed is subject to all usual legal requirements. Name: Title: Craig Bremner Chief Financial Officer (resigned to be effective 31 August 2017) Agreement commenced: 1 August 2014 Term of agreement: Minimum period of employment of three years expiring on 31 July 2017 with no fixed end date. Details: During the Executive’s minimum period of employment the Company may terminate their employment if there are changes outside its control that will materially harm the business and its shareholders, or there is continued and unremedied poor performance, provided in each case it has provided 12 months’ notice in writing. The Executives may not terminate their employment during the minimum term. After expiry of the minimum term, the Executive’s employment will continue until terminated by either party providing six months’ notice in writing unless otherwise agreed and approved by the Board. The Executive may give the period of notice of termination of six months during the minimm period of employment so that the date of resignation is effective on or after the expiry of the minimum period. The Executive may be paid in lieu of all or part of the notice period. Notwithstanding the above, the Company may terminate the Executive’s employment without notice for serious misconduct. Upon termination of the Executive agreement, the Executive will be subject to a restraint of trade period of six months. The Company may elect to reduce this restraint period and the enforceability of the restraint deed is subject to all usual legal requirements. Name: Title: Greg Hughes Chief Operating Officer Agreement commenced: 1 August 2014 Term of agreement: Minimum period of employment of three years expiring on 31 July 2017 with no fixed end date. Details: During the Executive’s minimum period of employment the Company may terminate their employment if there are changes outside its control that will materially harm the business and its shareholders, or there is continued and unremedied poor performance, provided in each case it has provided 12 months’ notice in writing. The Executives may not terminate their employment during the minimum term. After expiry of the minimum term, the Executive’s employment will continue until terminated by either party providing six months’ notice in writing unless otherwise agreed and approved by the Board. The Executive may give the period of notice of termination of six months during the minimm period of employment so that the date of resignation is effective on or after the expiry of the minimum period. The Executive may be paid in lieu of all or part of the notice period. Notwithstanding the above, the Company may terminate the Executive’s employment without notice for serious misconduct. Upon termination of the Executive agreement, the Executive will be subject to a restraint of trade period of six months. The Company may elect to reduce this restraint period and the enforceability of the restraint deed is subject to all usual legal requirements. E. Additional disclosures relating to KMP Shareholding The number of shares in the Company held during the financial year by each Director and other members of the KMP of the Group, including their personal related parties, is set out below: Ordinary shares Helen Kurincic John Livingston Dr Chien Ping Ho Dr Sally Sojan John Atkin Garry Hounsell Rupert Harrington Craig Bremner Gregory Hughes Balance at 1 July 2016 420,870 2,467,230 2,467,230 1,095,000 91,623 50,000 130,710 2,467,230 2,467,230 11,657,123 Received as part of remuneration - - - - - - - - - - Additions - - - - 41,322 - 125,000 - - 166,322 Disposals/other - - 21,749 68,509 - 30,000 - - - 120,258 Balance at the end of the year 420,870 2,467,230 2,445,481 1,026,491 132,945 20,000 255,710 2,467,230 2,467,230 11,703,187 20 The Remuneration Report has been audited. 21 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnosticsfinancial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Auditor’s Independence Declaration For year ended 30 June 2017 Our objectives are to obtain reasonable assurance about whether the financial report as a whole is 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 the Australian Auditing Standards will always detect a material if, misstatement when it exists. Misstatements can arise from fraud or error and are considered material individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 14 to 21 of the directors’ report for the year ended 30 June 2017. Auditor’s Independence Declaration As lead auditor for the audit of Integral Diagnostics Limited for the year ended 30 June 2017, I declare that In our opinion, the remuneration report of Integral Diagnostics Limited, for the year ended 30 June to the best of my knowledge and belief, there have been: 2017 complies with section 300A of the Corporations Act 2001. (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and Responsibilities no contraventions of any applicable code of professional conduct in relation to the audit. (b) The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is This declaration is in respect of Integral Diagnostics Limited and the entities it controlled during the period. to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Nadia Carlin Nadia Carlin Partner Partner PricewaterhouseCoopers Melbourne 23 August 2017 Melbourne 23 August 2017 Operating and Financial Review For the year ended 30 June 2017 The purpose of this Operating and Financial Review is to provide shareholders with additional information regarding the Company’s operations, financial position, business strategies and prospects. The review complements the Financial Report on pages 31 to 66 and the ASX announcement and full year results presentation dated 24 August 2017. Integral Diagnostics Limited (ASX: IDX) is an Australian healthcare services company whose main activity is providing diagnostic imaging services to general practitioners, medical specialists and allied health professionals (referrers) and their patients. These services are provided through a network of 45 sites, including 12 hospital sites, in three regional geographic markets under four brands – Lake Imaging (Victoria), South Coast Radiology (Queensland), Global Diagnostics (Western Australia) and Western District Radiology (Victoria). Diagnostic imaging involves a set of techniques that non-invasively produces images of the human body for clinical analysis and medical intervention. Images can be produced using a variety of modalities, including: • radiography (X-ray); • ultrasound; • computed tomography (CT); • magnetic resonance imaging (MRI); and • nuclear medicine (which includes positron emission tomography (PET)). The images produced by diagnostic imaging are a critical tool for referrers in diagnosing and deciding on a form of treatment for patients. Year in review Financial performance A summary income statement providing details of one-off transactions and reconciling to the statutory income statement is outlined in the following table: Summary income statement ($million) Total revenue EBITDA prior to one-off transactions EBIT prior to one-off transactions NPAT prior to one-off transactions One-off transactions net of tax Transaction costs/IPO costs Impairment of asset and restructuring provision Fair value gain on acquisition of SWMRI joint venture Statutory NPAT Amortisation NPATA Underlying EBITDA as a % of revenue Underlying NPAT as a % of revenue EPS (cents per share) Return on operating assets (underlying NPAT) Declared dividend payout ratio on NPAT Actual 2017 179.7 33.5 23.7 15.1 Actual 2016 167.8 34.9 26.2 16.6 - (0.8) 1.2 15.5 0.4 15.9 18.6% 8.4% 10.7 11.6% 65.6% (5.2) - - 11.4 0.4 11.8 21.0% 9.9% 8.2 13.4% n/a PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331 MELBOURNE VIC 3001 T: +61 3 8603 1000, F: +61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. The underlying performance of IDX during the year was within market guidance provided at the half year, but was below the Board and management’s expectations. Whilst revenue grew 7.1%, cost growth was higher, leading to a $1.5 million decline (9.3%) in underlying NPAT performance compared to the 2016 financial year. The underlying performance decline of $1.5 million was primarily due to the growth in revenue being consumed by larger growth in costs. This performance together with the unexpected impairment and restructuring cost of $0.8 million (net of tax) were the key drivers of the FY17 result. 22 23 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Operating and Financial Review continued For the year ended 30 June 2017 Year in review continued Financial overview • Achieved an overall examination volume increase of 4.6% (normalised for acquisitions), and revenue growth of $12.0 million (7.1 %) to $179.7 million. The South West MRI Pty Ltd/Western District Radiology (SWMRI/WDR) acquisition contributed $4.7 million in revenue, with the remainder representing organic growth across all business units. • Patient examination volume growth for the Company across Medicare funded, patient funded and reporting contract examinations was up 4.6% in FY17 (adjusted for working days and acquisitions). This level of volume growth was below the Company’s expectations and slightly under the Medicare data growth rate of 5.1% in the States in which Integral Diagnostics operates. • Revenue growth was impacted by increased competition at selected sites in Victoria and Queensland. • Incurred expenditure growth of $13.5 million, resulting in an overall underlying performance which was $1.5 million below FY16. Expenditure growth was driven by: − additional $10.1 million in employee benefits expense. With $2.2 million relating to the SWMRI/WDR acquisition and $7.9 million relating to the full year impact of historical investment in radiologists, imaging and administrative staff to service expanded, yet underutilised capacity; − additional $3.4 million in depreciation, occupancy, consumables and equipment costs driven by the investment in leasehold properties and new equipment to deliver an expanded range of services at key sites including Toowoomba, Sunbury, Ocean Grove and the SWMRI/WDR acquisition; − additional other costs of $1.2 million due to ongoing investment in development of staff and systems; − reduction in finance costs of $0.6 million driven by a lower cost of finance; and − reduction in taxation costs of $0.6 million. • Incurred an impairment charge of $0.8 million and a restructuring charge of $0.3 million before tax (total of $0.8 million net of tax) as a result of the write-off of infrastructure installed to support the Mobile MRI at Port Hedland. The actual volume achieved was well below the business plan. As a result of a full review it has been determined that it is not economic to continue with the Mobile MRI in that region. Operating performance overview • Successfully completed the acquisition and integration of SWMRI/WDR. • Benefited from the prior year investment in expanded capacity in Toowoomba, Sunbury and Geelong, which whilst performing well are not yet at required capacity, with further growth expected to be derived from these sites in FY18. • Signed five, five-year contracts with the West Australian Country Health Service relating to the provision of reporting contracts in remote regions. Two of these contracts were new to the Group and increased services began in November and December 2016. • Contributed to the refurbishment of the Company’s facilities at Pindara Private Hospital and installed new state- of-the-art MRI machines and facilities at Robina and John Flynn Private Hospital. • Committed to a refurbishment project at the St John of God Hospital in Geelong, securing 10-year leases across all three of the St John of God Hospital sites in Victoria. This further strengthens Integral Diagnostics’ strategic relationship with St John of God Health Care. • Purchased a Mobile MRI, which although has not been successful in its initial location of Port Hedland, will be relocated to alternative locations where volumes are expected to deliver the utilisation levels and returns required. • Invested in IT platforms to support the delivery of improved medical imaging and digital reporting to referrers. • The Board has recruited an experienced CEO to lead the Company to capitalise on its geographic footprint and scale, bring a disciplined approach to cost management and capital expenditure, and actively pursue value accretive acquisition opportunities. Capital expenditure Total expenditure on tangible assets was $15.3 million (FY16: $17.5 million) of which $1.9 million related to the acquisition of SWMRI/WDR, $11.1 million related to maintenance, and $2.3 million related to growth opportunities. The growth capital expenditure included $0.75 million on the Mobile MRI machine, $0.81 million of infrastructure associated with the Mobile MRI that has been subsequently impaired, $0.14 million invested in IT for improved medical imaging and reporting platforms, and $0.58 million on new equipment across various sites. Several growth opportunities, including the refurbishment of the St John of God Hospital in Geelong and the opening of key strategic specialist sites planned for FY17 have been delayed and will occur in FY18. Acquisitions On 1 July 2016, the Group completed the acquisition of the Western District Radiology business and the remaining 50% interest in South West MRI Pty Ltd (collectively known as the SWMRI/WDR acquisition) for $4.954 million. This acquisition complemented the Group’s strengths and further strengthened its position in the south-west region of Victoria. The operations of SWMRI/WDR have been successfully integrated into the Group. Taxation The effective tax rate on operating earnings is 27.35% (FY16: 30.77%) as a result of being able to claim transaction costs relating to the IPO and acquisitions as deductible items. Cash flows Increase in free cash flows by 12.7% to $20.4 million (FY16: $18.1 million). Debt facilities The increase in net debt by 8.5% to $48.7 million (30 June 2016: $44.9 million) was largely due to a drawdown to fund the acquisition of SWMRI/WDR. The Company’s relationship with its current lenders is strong and the average cost of debt has declined over FY17. The facilities under the current lending arrangement expire in September 2018. The Company is currently in the process of reviewing the facilities arrangements and expects to have renewed terms and conditions prior to 31 December 2017. Earnings per share Basic earnings per share increased by 30.1% to 10.67 cents per share (FY16: 8.2 cents per share). On an underlying NPAT performance, earnings per share declined 9% to 10.41 cents per share (FY16: 11.44 cents per share). Dividend Dividend payments of 7.00 cents per share ($10.2 million) fully franked have been paid during FY17. This represents 65.6% of a NPAT payout ratio in line with expectations. A dividend of 4.00 cents per share fully franked will be paid on 4 October 2017 to shareholders on the register at 1 September 2017. 24 25 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsOperating and Financial Review continued For the year ended 30 June 2017 Company outlook A key focus in FY18 is ensuring the Group retains its historical share of industry growth and contains costs. Balance sheet A summary of the balance sheet as at 30 June 2017 and in comparison to the prior year is outlined in the following table. The long-term industry fundamentals remain strong and underpin attractive future growth opportunities. Australia has a growing and ageing population requiring greater healthcare support. At the same time, community expectations for higher quality healthcare and diagnosis continue to rise, while new imaging technologies improve efficiency and aid diagnosis and early recognition of diseases. The Company’s focus in FY18 will be to optimise the performance of existing capacity and infrastructure and driving growth organically and through strategically aligned acquisitions. This includes: • leveraging of the investments made by recognising the potential of the Company’s existing professional team and network of sites to return volume growth to its historical growth trajectory; • contain costs so revenue growth delivers improved returns; • focused execution of future growth opportunities including the redevelopment at the St John of God Hospital in Geelong and other key centres of excellence including the recently opened Spine Clinic on the Gold Coast; and • building and capitalising on value accretive M&A opportunities in a consolidating market. The ethos of providing the highest quality diagnostic imaging services, trusted by referrers and preferred by patients, is unwavering. Regulatory outlook The regulatory environment is now clearer following the Federal Government’s decision in May 2017 not to remove bulk billing incentives for diagnostic imaging. In addition, the Federal Government has committed to reintroducing MBS rebate indexation for a limited number of diagnostic imaging services from July 2020. Balance sheet Cash and cash equivalents Trade and other receivables Other current assets Total current assets Property, plant and equipment Intangible assets Deferred tax asset Total non-current assets TOTAL ASSETS Trade and other payables Current tax liabilities Borrowings Provisions Other current liabilities Total current liabilities Borrowings Provisions Other non-current liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS 30 June 2017 Actual $’M 24.2 5.1 3.9 33.2 30 June 2016 Actual $’M 23.6 5.5 2.9 32.0 50.5 104.0 2.7 157.2 190.4 8.3 (0.03) 11.5 10.6 0.06 30.5 61.4 8.1 - 69.5 100.0 90.4 46.6 99.8 2.7 149.1 181.1 10.4 1.1 6.7 9.5 – 27.7 61.8 7.2 0.4 69.4 97.1 84.0 • Working capital of $2.7 million is driven by strong cash holdings offset by an increase in current debt due to a number of balloon payments due on finance leases. • Property, plant and equipment increased by $3.9 million due to the acquisition of SWMRI/WDR ($1.9 million) and ongoing investment in state-of-the-art equipment, offset by depreciation charges. • Intangibles have increased by $4.2 million largely due to the goodwill recognised on the SWMRI/WDR acquisition and the DTL recognised on brand names as required by Australian Accounting Standards. • Provisions (excluding tax) have increased $2.0 million. This increase is primarily due to the provisions associated with employee benefits and a $0.3 million provision for restructuring the operations in Port Hedland. • Net debt increased by $3.8 million to $48.7 million, resulting in a gearing level of net debt/EBITDA of 1.4x. • The Company continues to comply with the financial covenants of its facility agreement. 26 27 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsOperating and Financial Review continued For the year ended 30 June 2017 Cash flow A summary of the cash flows as at 30 June 2017 are presented below. Summary of cash flow ($ million) Free cash flow Growth capital expenditure Net cash flow before financing and taxation Tax paid Interest and other costs paid on borrowings Proceeds from issue of shares Net change in borrowings Net payment of bank facilities Deferred consideration Dividends paid Offer transaction costs in equity Net cash flows 2017 Actual 20.4 (2.3) 18.1 2016 Actual 18.1 (7.8) 10.3 (7.4) (2.6) - 2.7 - (0.03) (10.2) - 0.6 (7.8) (2.7) 33.2 6.0 (20.0) (3.2) - (1.8) 14.0 • Free cash flows of $20.4 million are $2.3 million or 12.7% higher than FY16. • Growth capital expenditure was $2.3 million for the year largely due to $0.75 million on Mobile MRI, $0.81million of infrastructure associated with the Mobile MRI that has been subsequently impaired, $0.14 million investment on IT for improved reporting platforms, and $0.58 million on new equipment across various sites. Growth Capex was lower than expected as two significant projects were deferred until FY18 as outlined above. • Dividends of $10.2 million (7 cents per share fully franked) were paid in FY17. Business opportunities and risks The following are key opportunities that may impact the Company’s financial and operating result in future periods: • Ability to leverage off the growing demand for diagnostic imaging services through the Company’s current network. • Utilisation of high-quality systems to deliver best-in-class patient and referrer outcomes. • Ability to leverage off the Company’s strong market position, diversified service model and sources of funding to develop growth opportunities. • Identification of new business opportunities through development of the existing business, capacity expansion or further acquisitions. • Ability to leverage off and be first to market with new technology and innovation. • Ability to leverage of the Company’s attractive specialist healthcare model to attract, retain and grow the radiologist group. • Ability to attract and retain an experienced management team and Board to drive growth and sustainability through the business. The following are key risks that may impact the Company’s financial and operating result in future periods: • Changes to or breaches of laws, accreditation, licensing, Government policies and regulations may impact the ability of the Company to continue to operate at the same capacity. • Inadequate Commonwealth Government rebates for diagnostic imaging services may reduce demand for services. • Failure to realise anticipated benefits or appropriately integrate acquisitions. • Failure to deliver upon key business cases or projects. • Failure to adopt safe work practices for staff, patients and their carers. • Inadequate processes or resources to manage a crisis or unexpected events that threaten to harm the organisation, operations and staff. • The Company may be unable to recruit and retain appropriately skilled radiologists, management and technical professionals. • The Company’s relationship with radiologists and technical professionals may deteriorate. • Management and staff lack the competence and skills to undertake their duties appropriately • Relationships with referrers may deteriorate resulting in a decrease in volume levels. • The Company may suffer reputational damage resulting in a deterioration of its competitive position. • Overall decline in competitive advantage. • Labour costs may increase. • Failure of technical infrastructure or medical equipment. • Failure to adapt or respond to disruptive innovations and technologies. 28 29 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsOperating and Financial Review continued For the year ended 30 June 2017 Consolidated Statement of Profit or Loss and Other Comprehensive Income For year ended 30 June 2017 Risk management The Company’s risk management framework is overseen by the Audit, Risk and Compliance Committee and is actively managed by the Executive Committee. It is consistent with AS/NZ31000:2009 and is subject to regular review. This risk management framework has helped to enable a consistent and rigorous approach to identifying, analysing and evaluating risks. During the year, the Audit, Risk and Compliance Committee and the Board have reviewed and updated the Company’s Enterprise Risk Management Framework. This review occurs annually or more regularly as required. The Audit, Risk and Compliance Committee and the Board also reviewed risk appetite statements and measures for each of its risk categories and reviewed the Company’s material business risk assessments during the period. A key component of clinical risk management is managed through the National Clinical Leadership Committee (National CLC) and State Clinical Leadership Committees (State CLCs), under the National and State Clinical Leadership Committees Charter. The Charter provides a framework for the National CLC and State CLCs to work together to develop and implement policies and work practices to enable clinical best practice. The responsibilities of the National CLC include reviewing any recommendations arising from any adverse incidents from the State CLCs and to share learnings to prevent recurrence. The Company’s Audit, Risk and Compliance Committee Charter is also available in the Corporate Governance section of its website. Revenue Revenue Fair value gain on acquisition of SWMRI joint venture Interest income Total revenue and other income Expenses Consumables Employee benefits expense Depreciation and amortisation expense Transaction costs Equipment-related expenses Occupancy expenses Other expenses Impairment of asset and restructuring provision Finance costs Total expenses Operating profit Share of profits of associates accounted for using the equity method Profit before income tax expense Note 30 June 2017 $’000 30 June 2016 $’000 5 6 6 6 6 6 6 179,732 1,200 370 181,302 (8,850) (105,577) (9,831) – (6,993) (12,615) (12,178) (1,108) (2,841) (159,993) 167,770 – 263 168,033 (8,365) (95,406) (8,720) (6,990) (6,056) (11,724) (10,991) – (3,333) (151,585) 21,309 – 16,448 2 21,309 16,450 Income tax expense 7 (5,829) (5,062) Profit for the year from continuing operations 15,480 11,388 Other comprehensive income, net of tax Total comprehensive income Profit is attributable to: Owners of Integral Diagnostics Limited Total comprehensive income is attributable to: Owners of Integral Diagnostics Limited Earnings per share attributable to the owners of Integral Diagnostics Limited Basic earnings per share Diluted earnings per share 37 37 – 15,480 15,480 15,480 15,480 15,480 Cents 10.67 10.67 – 11,388 11,388 11,388 11,388 11,388 Cents 8.2 8.2 The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. 30 31 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsConsolidated Statement of Financial Position For year ended 30 June 2017 Consolidated Statement of Changes in Equity For year ended 30 June 2017 Assets Current assets Cash and cash equivalents Trade and other receivables Other assets Inventory Total current assets Non-current assets Property, plant and equipment Intangibles Deferred tax asset Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Income tax payable Provisions Derivative financial instrument Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed capital Reserves Retained profits Total equity Note 30 June 2017 $’000 30 June 2016 $’000 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24,210 5,149 3,514 393 33,266 50,523 103,921 2,675 157,119 23,620 5,544 2,450 333 31,947 46,629 99,872 2,657 149,158 190,385 181,105 8,340 11,495 (34) 10,650 59 30,510 61,397 – 8,126 69,523 10,397 6,762 1,107 9,519 – 27,785 61,781 365 7,254 69,400 100,033 97,185 90,352 83,920 83,866 (11,862) 18,348 82,760 (11,862) 13,022 90,352 83,920 Balance at 1 July 2015 Profit/(loss) after income tax expense Other comprehensive income, net of tax Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (Note 21) Transaction with non-controlling interest reserve Share-based payments Balance at 30 June 2016 Balance at 1 July 2016 Profit/(loss) after income tax expense Other comprehensive income, net of tax Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (Notes 21, 32) Unwinding of DTA in equity Dividends paid Balance at 30 June 2017 Contributed capital $’000 50,743 – – – 32,017 – – 82,760 Contributed capital $’000 82,760 – – 82,760 Reserves $’000 (10,537) – – – (194) (1,197) 66 (11,862) Reserves $’000 (11,862) – – (11,862) Retained profits $’000 1,634 11,388 - 13,022 Total equity $’000 41,840 11,388 - 53,228 – 31,823 – – 13,022 Retained profits $’000 13,022 15,480 – 28,502 (1,197) 66 83,920 Total equity $’000 83,920 15,480 – 99,400 1,275 (169) – 83,866 – – – (11,862) – – (10,154) 18,348 1,275 (169) (10,154) 90,352 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 32 33 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsConsolidated Statement of Cash Flows For year ended 30 June 2017 Notes to the Financial Statements Cash flows from operating activities Receipts from customers Payments to suppliers and employees Transaction costs relating to acquisition of subsidiaries Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payments for purchase of subsidiary, net of cash acquired Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Interest received Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares IPO transaction costs Proceeds from borrowings Repayment of borrowings Dividends paid to Company shareholders Settlement of deferred consideration Transactions with non-controlling interests Net cash (used in)/from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year Note 30 June 2017 $’000 30 June 2016 $’000 179,604 (146,314) (180) (2,960) (7,420) 22,730 (3,529) (11,650) 100 370 (14,709) – – 10,887 (8,134) (10,154) (30) – (7,431) 590 23,620 24,210 166,804 (131,706) (189) (3,067) (7,787) 24,055 – (17,222) 300 263 (16,659) 33,170 (8,104) 17,043 (31,134) - (3,150) (1,197) 6,628 14,024 9,596 23,620 36 32 21 22 8 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. Note 1. General information The Financial Report covers Integral Diagnostics Limited as a Group consisting of Integral Diagnostics Limited (‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year (collectively referred to as the ‘Group’). The financial statements are presented in Australian dollars, which is Integral Diagnostics Limited’s functional and presentation currency and are rounded to the nearest thousand dollars ($‘000) unless otherwise stated. Integral Diagnostics Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: 1111 Howitt Street Wendouree VIC 3355 A description of the nature of the consolidated entity’s operations and its principal activities are included in the Directors’ Report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 23 August 2017. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out either in the respective notes or below. These policies have been consistently applied to all the years presented, except as follows: Recognition of deferred tax liabilities on indefinite life intangible assets The IFRS Interpretations Committee (IFRIC) has recently clarified that an intangible asset with an indefinite useful life is not a non-depreciable asset and that non-amortisation of an intangible asset does not necessarily mean that recovery of the carrying amount of the intangible asset will be only through sale and not through use. The Group has recognised brand names on acquisition which are indefinite life intangibles, previously it has been assumed that recovery of the carrying value of the brand names would be through sale. Given the clarification provided by IFRIC the Group has elected to change the method of accounting and has determined that the value of the brand names will be recovered through use on the basis that management expects to hold and consume the brand names until the end of their lives (even though this point of time is not known). Given that the brand names were acquired in a business combination, a deferred tax liability is required to be recognised on these brand names. A deferred tax liability to the value of $2,146,500 has been recognised on brand names; this change has been adopted retrospectively and adjusted through goodwill recognised on acquisition. There has been no impact on the profit and loss or the net assets of the Group as a result of this change in accounting policy. New, revised or amending accounting standards and interpretations adopted The Group has adopted all of the new, revised or amending accounting standards and interpretations issued by the Australian Accounting Standards Board (AASB) that are mandatory for the current reporting period. Any new, revised or amending accounting standards or interpretations that are not yet mandatory have not been early adopted. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Historical cost convention The financial statements have been prepared under the historical cost convention, except for derivative financial instruments which have been measured at fair value. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in Note 31. 34 35 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsNotes to the Financial Statements continued Note 2. Significant accounting policies continued Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Integral Diagnostics Limited as at 30 June 2017 and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Where the Group loses control over a subsidiary, it derecognises the assets (including goodwill), liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Current and non-current classification Assets and liabilities are presented in the Consolidated Statement of Financial Position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in a normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is expected to be settled in a normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful lives are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use (VIU). The VIU is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash- generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Rounding of amounts The Company is of a kind referred to in Legislative Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’. Amounts in this Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. New accounting standards and interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2017. The Group’s assessment of the impact of these new or amended accounting standards and interpretations, most relevant to the Group is set out below. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. For lessee accounting, the standard eliminates the ‘operating lease’ and ‘finance lease’ classification required by AASB 117 ‘Leases’. Subject to exceptions, a ‘right-of-use’ asset will be capitalised in the Consolidated Statement of Financial Position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and office furniture) where an accounting policy choice exists whereby either a ‘right-of-use’ asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in the finance costs). For classification within the Consolidated Statement of Cash Flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) components. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The Group will adopt this standard from 1 July 2019. On adoption the asset and liabilities will be grossed up by the value of leased assets, which the Group is unable to quantify until adoption as it is dependent on the number of leased properties held at that date, from adoption operating lease costs will be allocated to amortisation and interest charges which will be below the EBITDA line. AASB 15 Revenue from contracts with customers This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will require: contracts (either written, verbal or implied) to be identified, together with the separate performance obligations within the contract; determine the transaction price, adjusted for the time value of money excluding credit risk; allocation of the transaction price to the separate performance obligations on a basis of relative stand-alone selling price of each distinct good or service, or estimation approach if no distinct observable prices exist; and recognition of revenue when each performance obligation is satisfied. Credit risk will be presented separately as an expense rather than adjusted to revenue. For goods,the performance obligation would be satisfied when the customer obtains control of the goods. For services, the performance obligation is satisfied when the service has been provided, typically for promises to transfer services to customers. For performance obligations satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment. Sufficient quantitative and qualitative disclosure is required to enable users to understand the contracts with customers; the significant judgements made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfil a contract with a customer. The Group will adopt this standard from 1 July 2018. The changes in revenue recognition requirements in AASB 15 are not expected to have a significant impact on the timing and amount of revenue recorded in the financial statements, or result in significant additional disclosures. 36 37 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsNotes to the Financial Statements continued Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Estimation of useful lives of assets The Group determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Goodwill and other indefinite life intangible assets The Group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in Note 13. The recoverable amounts of cash-generating units have been determined based on VIU calculations. These calculations require the use of assumptions, including anticipated sales growth, long-term growth rate and the post-tax discount rate. Sales revenue Services revenue Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The Group assessed impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves VIU calculations, in conjunction with the goodwill impairment testing which incorporates a number of key estimates and assumptions. Other revenue Other revenue Fair value gain on aquiition of SWMRI joint venture Total revenue Note 4. Operating segments Identification of reportable operating segments The Group comprised the single business segment of the operation of diagnostics imaging facilities. Major customers During the year ended 30 June 2017, there was no external revenue greater than 10% to any one customer (2016: nil). Operating segment information As the Group operates in a single business and geographic segment, these financial statements represent the required financial information of that segment. Accounting policy for operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (CODM) which includes the KMP of the Company. The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Note 5. Revenue Consolidated 30 June 2017 $’000 30 June 2016 $’000 177,710 165,435 2,022 1,200 180,932 2,335 – 167,770 Accounting policy for revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Rendering of services Rendering of services revenue is recognised when the service is rendered for the provision of medical imaging services. The point of sale is deemed to be at the time the image is taken. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Other revenue largely includes compensation payments received under equipment and leasehold contracts as well as labour cost charges to hospitals and Government (trainees and paid parental leave). 38 39 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsNotes to the Financial Statements continued Note 6. Expenses Profit before income tax includes the following specific expenses: Consolidated 30 June 2017 $’000 30 June 2016 $’000 Depreciation Leasehold improvements Plant and equipment Motor vehicles Office furniture and equipment Total depreciation Amortisation Customer contracts Total depreciation and amortisation Transaction costs Professional fees and other costs on acquisition of South Coast Radiology business and investment in Lake Imaging Holdings IPO transaction costs Fees relating to other transactions Total transaction costs Finance costs Interest and finance charges paid/payable Funding/establishment costs Finance costs expensed 1,087 6,242 107 1,751 9,187 644 9,831 – – – – 2,653 188 2,841 751 6,633 104 587 8,075 645 8,720 115 6,321 554 6,990 3,151 182 3,333 Net loss/(gain) on disposal Net loss/(gain) on disposal of property, plant and equipment 477 177 Employee benefits expense Employee benefits Superannuation contributions Labour supply Total employee benefits expense Impairment of asset and restructuring provision Impairment of asset Restructuring provision (see Note 17) Total impairment of asset and restructuring provision expense 88,211 6,032 11,334 105,577 810 298 1,108 79,448 5,477 10,481 95,406 – – – The impaired asset relates to building works conducted on leased land at Port Hedland. As at 30 June 2017 there were indicators of impairment in regards to the building works based on the level of volumes and revenue the MRI operations were able to achieve. Impairment testing was undertaken in accordance with the requirements of AASB 136 ‘Impairment of assets’ and it was determined that the carrying value of the asset could not be supported through a VIU or fair value less costs to sell methodology in accordance with Australian Accounting Standards and as such the Group has determined that the infrastructure asset supporting the Mobile MRI is impaired as at 30 June 2017. The Mobile MRI is not considered impaired as it can be easily re-located to another site and its carrying value can be supported through both a VIU and fair value less costs to sell valuation methodology. Minimum lease payments recognised as operating lease expense were $8,683,000 (2016: $8,316,000). Costs of inventories recognised as expense were $8,850,000 (2016: $8,365,000). Accounting policy for finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Note 7. Income tax expense Income tax expense Current tax Deferred tax – origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Deferred tax included in income tax expense comprises: Decrease/(increase) in deferred tax assets (Note 14) Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Entertainment costs Fair value gain Fixed asset variance Transactions costs deducted in equity Adjustment recognised for prior periods Income tax expense Consolidated 30 June 2017 $’000 30 June 2016 $’000 6,170 (208) (133) 5,829 6,517 (1,545) 90 5,062 (208) (1,545) 21,309 16,450 6,393 4,935 21 (360) 76 (168) 5,962 (133) 5,829 19 – – 18 4,972 90 5,062 Accounting policy for income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Note 8. Current assets – cash and cash equivalents Cash on hand Cash at bank Consolidated 30 June 2017 $’000 14 24,196 24,210 30 June 2016 $’000 15 23,605 23,620 Accounting policy for cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 40 41 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 9. Current assets – trade and other receivables Note 10. Current assets – other Trade receivables Less: Provision for impairment of receivables Other receivables Impairment of receivables Movements in the provision for impairment of receivables are as follows: Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Closing balance Consolidated 30 June 2017 $’000 4,975 (137) 4,838 30 June 2016 $’000 5,199 (63) 5,136 311 5 ,149 408 5,544 Consolidated 30 June 2017 $’000 63 127 (53) 137 30 June 2016 $’000 88 66 (91) 63 Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $986,000 as at 30 June 2017 ($1,812,000 as at 30 June 2016). The Group did not consider there was a credit risk on the aggregate balances after reviewing the credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: Past due 31 to 60 days Past due 61 to 90 days Past due more than 91 days Consolidated 30 June 2017 $’000 367 210 409 986 30 June 2016 $’000 1,278 164 370 1,812 Accounting policy for trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 to 60 days. Due to the short-term nature of these receivables, their carrying amount is assumed to approximate fair value. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Accrued revenue Prepayments Security deposits Other current assets Note 11. Inventory Film, contrast, drugs and needles Consolidated 30 June 2017 $’000 1,248 2,200 56 10 3,514 30 June 2016 $’000 745 1,584 43 78 2,450 Consolidated 30 June 2017 $’000 393 393 30 June 2016 $’000 333 333 Accounting policy for inventory Inventory is valued at the lower of cost and net realisable value. Inventory has been recognised based on categories of high-value items used in the production of medical images that the Company holds in large volumes including film, contrast, drugs and needles. Costs of inventories recognised as an expense was $8,850,000 (2016: $8,365,000). Note 12. Non-current assets – property, plant and equipment Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment – at cost Less: Accumulated depreciation Motor vehicles – at cost Less: Accumulated depreciation Office furniture and equipment – at cost Less: Accumulated depreciation Consolidated 30 June 2017 $’000 15,752 (4,793) 10,959 30 June 2016 $’000 14,055 (3,811) 10,244 57,612 (22,945) 34,667 466 (372) 94 9,310 (4,507) 4,803 52,660 (20,439) 32,221 418 (280) 138 7,854 (3,828) 4,026 50,523 46,629 42 43 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 12. Non-current assets – property, plant and equipment continued Note 13. Non-current assets – intangibles Reconciliations (a) Reconciliations of the written down values of property, plant and equipment at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2015 Additions Disposals Depreciation expense Balance at 30 June 2016 Additions Disposals/write-offs Depreciation expense Balance at 30 June 2017 Leasehold improvements $’000 6,616 4,419 (40) (751) 10,244 2,612 (810) (1,087) 10,959 Plant and equipment $’000 27,542 11,858 (546) (6,633) 32,221 9,188 (500) (6,242) 34,667 Motor vehicles $’000 242 – – (104) 138 Office furniture and equipment $’000 3,559 1,245 (191) (587) 4,026 63 – (107) 94 2,618 (90) (1,751) 4,803 Total $’000 37,959 17,522 (777) (8,075) 46,629 14,481 (1,400) (9,187) 50,523 (b) Property, plant and equipment includes the following amounts where the Group is a lessee under a finance lease at the beginning and end of the current and previous financial year are set out below: Consolidated Net book value at 30 June 2016 Leasehold improvements $’000 4,065 Plant and equipment $’000 26,318 Motor vehicles $’000 116 Office furniture and equipment $’000 355 Total $’000 30,854 Net book value at 30 June 2017 4,562 29,941 102 568 35,173 Property, plant and equipment secured under finance leases Refer to Note 19 for further information on property, plant and equipment secured under finance leases. Accounting policy for property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Leasehold improvements Plant and equipment Motor vehicles 5 – 20 years 4 – 15 years 5 – 8 years Office furniture and equipment 3 – 15 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Goodwill – at cost Brand names – at cost Customer contracts – at cost Less: Accumulated amortisation Consolidated 30 June 2017 $’000 96,387 30 June 2016 $’000 91,851 7,155 7,000 2,456 (2,077) 379 2,456 (1,435) 1,021 103,921 99,872 Reconciliations Reconciliations of the written-down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balances at 1 July 2015 Adjustment for change in accounting policy * Amortisation expense Balance at 30 June 2016 Additions through business combinations (Note 32) Amortisation expense Goodwill $’000 89,704 2,147 – 91,851 4,536 – Brand names $’000 7,000 – – 7,000 155 – Customer contracts $’000 1,668 – (647) 1,021 - (642) Total $’000 98,372 2,147 (647) 99,872 4,691 (642) Balance at 30 June 2017 96,387 7,155 379 103,921 * Restated for change in accounting policy $2,147,000 DTL recognised on brand names retrospectively. Impairment test for goodwill and intangibles Goodwill and brand names are tested for impairment annually (as at 30 June) and when circumstances indicate the carrying value may be impaired. The Group’s impairment test for goodwill and intangible assets with indefinite lives is based on VIU calculations. For the year ended 30 June 2016 the Group identified three cash-generating units to which goodwill was applied. Management have undertaken a review of the judgements used to determine the allocation of goodwill to individual cash-generating units and have concluded that given the change in the structure and operations of the Group since initial acquisition of the individual businesses and, given the synergies now being delivered and the opportunities available to the Group from the amalgamation of the businesses as a whole, from 1 July 2016 goodwill forms one cash-generating unit for impairment testing purposes, which is in line with the operating segment identified in Note 3. 44 45 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 13. Non-current assets – intangibles continued Goodwill allocation CGU: South Coast Radiology Lake Imaging Global Diagnostics (Australia) Consolidated CGU Consolidated 30 June 2017 $’000 30 June 2016 $’000 – – – 96,387 78,420 6,330 4,954 89,704 Brand names of $7,000,000 are included within the SCR CGU and $155,000 included within the Lake Imaging CGU. Key assumptions for VIU calculations The recoverable amount of each CGU is determined based on VIU calculations which require the use of assumptions. The calculations use cash flow projections based on financial budgets approved by management. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. These growth rates do not exceed the average growth rates for the industry in which the Group operates. The following table sets out the key assumptions for impairment testing: 2017 – Long-term growth rate 2017 – Pre-tax discount rate 2016 – Long-term growth rate 2016 – Pre-tax discount rate % 3.0 15.4 3.0 14.8 Within the VIU calculation for the five-year forecast period revenues have been forecast to grow between 3.0%–6.5% (2016: 4.2%–4.7%) and 3% (2016: 3%) into perpetuity. The forecast cash flows also include ongoing investment in property, plant and equipment to maintain the existing base and in 2018 to invest in further technology and expansion. The pre-tax discount rate would need to increase by more than 8.1% or the growth rate decline by more than 1.0% in the five-year forecast period and into perpetuity for there to be any impairment of the goodwill balances. Should managements judgement in regards in the allocation of goodwill to cash-generating units for the purpose of impairment testing not have changed and goodwill and intangible assets with indefinite lives were tested for impairment as allocated to the separate cash-generating units as outlined in the 2016 Annual Report and in accordance with the updated assumptions as outlined above, no impairment for goodwill and intangibles with indefinite lives would have been identified. Accounting policy for intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less an impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Brand names Significant costs associated with brand names are not amortised but are tested for impairment annually on the same basis and within the same VIU calculation as outlined above and are carried at cost. Customer contracts Customer contracts acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their finite useful lives of between one and four years. The contracts consist of Global Diagnostics (Australia), a 100% owned subsidiary of the Company, providing radiology reporting services to the Western Australia Country Health Service in the Pilbara, Wheatbelt and Goldfield regions. Note 14. Non-current assets – deferred tax Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Employee benefits and other provisions Provisions for lease make good Provision for restructuring Operating lease borrowings Transaction costs Impaired asset Property, plant and equipment Brand names (change in accounting policy) Tax losses available Intangible assets Operating lease Consolidated 30 June 2017 $’000 30 June 2016* $’000 4,325 621 89 36 1,813 243 (2,355) (2,147) 54 (114) 110 3,557 519 – 119 2,486 – (1,784) (2,147) - (306) 213 Net deferred tax asset 2,675 2,657 Amount expected to be recovered within 12 months Amount expected to be recovered after more than 12 months Amount expected to be settled within 12 months Amount expected to be settled after more than 12 months Movements: Opening balance Credited to profit or loss (Note 7) Credited to equity Fixed asset variance Additions through business combinations (Note 32) Closing balance *Restated for change in accounting policy $2,147 DTL recognised on brand names retrospectively. 2,457 4,834 (355) (4,261) 2,675 2,657 208 (168) (76) 54 2,675 3,416 3,479 (280) (3,958) 2,657 3,259 1,545 – – (2,147) 2,657 46 47 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 14. Non-current assets – deferred tax continued Note 16. Current liabilities – borrowings Accounting policy for deferred tax Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • when the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • when the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Integral Diagnostics Limited (the ‘head entity’) and its wholly owned Australian subsidiaries have formed an income tax- consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax-consolidated group continue to account for their own current and deferred tax amounts. The tax-consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax-consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax-consolidated group. Assets or liabilities arising under tax funding agreements with the tax-consolidated entities are recognised as amounts receivable from or payable to other entities in the tax-consolidated group. The tax-consolidated group has a tax sharing agreement in place to limit the liability of subsidiaries in the tax-consolidated group, arising under the joint and several liability provisions of the tax consolidation system, in the event of default by the head entity to meet its payment obligations. Note 15. Current liabilities – trade and other payables Trade payables Other payables and accruals Consolidated 30 June 2017 $’000 3,316 5,024 8,340 30 June 2016 $’000 4,132 6,265 10,397 Refer to Note 25 for further information on financial instruments. Accounting policy for trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. They are recognised at their fair value. The amounts are unsecured and are usually paid within 30 days of recognition. Due to the short-term nature of these payables, their carrying amount is assumed to approximate fair value. Borrowings Lease liability Consolidated 30 June 2017 $’000 18 11,477 11,495 30 June 2016 $’000 17 6,745 6,762 Refer to Note 19 for further information on assets pledged as security and financing arrangements. Refer to Note 25 for further information on financial instruments. Note 17. Current liabilities – provisions Annual leave Long service leave Employee benefits Restructuring provision Consolidated 30 June 2017 $’000 5,494 4,645 213 298 10,650 30 June 2016 $’000 5,051 4,225 243 – 9,519 Accounting policy for employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. The leave obligations cover the Group’s liability for long service leave, annual leave and rostered days off. The current portion of this liability includes all accrued annual leave, the unconditional entitlements to long service leave where employees have completed the required period of service and also those where employes are entitled to pro-rata payments in certain circumstances. Accounting policy for restructuring provisions Restructuring provisions are recognised only when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees effected, a detailed estimate of associated costs, and an appropriate timeline, and the business has been notified of the plan’s main features. The restructuring provision of $298,000 relates to the recommission costs of the Port Hedland site where the Mobile MRI was located. Given the poor performance of the Mobile MRI in Port Hedland it has been determined that the Mobile MRI will be re-located to an alternative location where volumes are expected to deliver the utilisation levels and returns required. Costs included within the restructuring provision include lease and electricity contract break costs and repatriation of the site on which the impaired infrastructure asset is located. 48 49 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 18. Current liabilities – Derivative financial instrument Derivative financial instrument Note 19. Non-current liabilities – borrowings Borrowings Lease liability Refer to Note 25 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Borrowings Lease liability Consolidated 30 June 2017 $’000 59 30 June 2016 $’000 – Consolidated 30 June 2017 $’000 43,750 17,647 61,397 30 June 2016 $’000 40,373 21,408 61,781 Consolidated 30 June 2017 $’000 43,768 29,124 72,892 30 June 2016 $’000 40,390 28,153 68,543 Assets pledged as security The lease liabilities are effectively secured as the rights to the leased assets, recognised in the Consolidated Statement of Financial Position, revert to the lessor in the event of default. Financial arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Equipment finance facility Cash advance facility Cash advance facility Multi-option facility Standby letter of credit or guarantee facility Commercial cards facility Electronic payaway facility Used at the reporting date Equipment finance facility Cash advance facility Cash advance facility Multi-option facility Standby letter of credit or guarantee facility Commercial cards facility Electronic payaway facility Unused at the reporting date Equipment finance facility Cash advance facility Cash advance facility Multi-option facility Standby letter of credit or guarantee facility Commercial cards facility Electronic payaway facility Consolidated 30 June 2017 $’000 30 June 2016 $’000 15,900 10,500 50,250 15,000 2,000 600 3,075 97,325 15,900 10,500 33,250 10,167 1,406 30 3,075 74,328 – – 17,000 4,833 594 570 – 22,997 15,900 10,500 50,250 15,000 2,000 300 3,075 97,025 14,407 10,500 30,250 10,310 1,567 30 3,075 70,139 1,493 – 20,000 4,690 433 270 – 26,886 Accounting policy for borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Under the current lending arrangement the facilities expire in September 2018, and the Company are currently in the process of reviewing the facilities arrangements with the Company current lender and expect to have renewed terms and conditions prior to 31 December 2017 to ensure the Company meet the requirements of Australian Accounting Standards and can continue to classify the debt as non- current for the Company half-year accounts. 50 51 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 20. Non-current liabilities – provisions Note 21. Equity – contributed capital Long service leave Deferred rent liability Lease make good Consolidated 30 June 2017 $’000 1,704 2,172 4,250 8,126 30 June 2016 $’000 1,592 1,717 3,945 7,254 Ordinary shares – fully paid Movements in ordinary share capital Consolidated Consolidated 30 June 2017 shares 145,044,157 30 June 2016 shares 144,136,101 30 June 2017 $’000 83,866 30 June 2016 $’000 82,760 Deferred rent liability Deferred rent liabilities relate to property leases where rent increases prescribed in leases are based on fixed percentage increases, and/or where leases include a rent-free period or other lease incentives. The liability represents the difference between actual rental costs incurred per terms of leases, and calculated expense if the total estimated rental expense over the period of the lease was expensed evenly over the expected term of the lease. The liability reflects that as of the date of this Report, the calculated expense (if the total estimated rental expense was expensed evenly over the expected term of the lease) is greater than actual costs incurred to date. The total liability is expected to fluctuate over time reflecting the cumulative calculations of individual leases. For individual leases, any liability will unwind over the period of the lease. Lease make good The provision represents the present value of the estimated costs to make good the premises leased by the Group at the end of the respective lease terms. Property lease agreements include various obligations at the end of the respective lease terms, such as removal of tenant installations and making good any damage caused by installation or removal, removing signage, and other general maintenance obligations (e.g. painting, cleaning). These costs have been estimated for each location, based on specific terms of individual leases, size of the individual sites, and historical experience of costs incurred when vacating a site. Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Consolidated – 2017 Carrying amount at the start of the year Additional provisions Amounts used Carrying amount at the end of the year Deferred rent liability $’000 Lease make good $’000 1,717 631 (176) 2,172 3,945 310 (5) 4,250 Accounting policy for provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Accounting policy for other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Details Balance Issue of shares on exercise of options Share split prior to Initial Public Offering Issue of shares in Initial Public Offering Issue of shares to employees in Initial Public Offering Discount on employee share offer Less: Share issue transaction costs net of tax Balance Shares issued as part of acquisition (Note 32) Reversal of DTA on transaction costs in equity Date 30 June 2015 30 September 2015 30 September 2015 21 October 2015 21 October 2015 21 October 2015 30 June 2016 1 July 2016 Number of shares 4,219,468 5,380 122,520,592 17,143,244 247,417 – – 144,136,101 908,056 – Issue price $36.06 $0.00 $1.91 $1.72 $0.00 Balance 30 June 2017 145,044,157 $’000 50,743 194 – 32,744 426 47 (1,394) 82,760 1,275 (169) 83,866 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the Consolidated Statement of Financial Position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, adjustments may be made to the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 52 53 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsNotes to the Financial Statements continued Note 21. Equity – contributed capital continued The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company’s share price at the time of the investment. The Group is not actively pursuing additional investments in the short term, as it continues to integrate and grow its existing businesses in order to maximise synergies. The Group is subject to certain financing arrangement covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. Accounting policy for contributed capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Note 22. Equity – reserves Share-based payments reserve Capital reorganisation reserve Transactions with non-controlling interest Share-based payments reserve Consolidated 30 June 2017 $’000 – (3,849) (8,013) (11,862) 30 June 2016 $’000 – (3,849) (8,013) (11,862) The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and as part of their compensation for services. Capital reorganisation reserve The reserve is used to account for historical capital reorganisation of the Lake Group whereby the assets and liabilities of the acquired party are recorded at their previous book values and no goodwill is recognised. Any difference between the cost of the transaction and the carrying amount of the assets and liabilities are recorded directly in this reserve. Transactions with non-controlling interest Transactions with non-controlling interest reserve is used to record the differences arising as a result of transactions with non-controlling interests that do not result in a loss of control. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 30 June 2015 Recognition of share-based payments Issue of shares to employees Net movement on transactions with non-controlling interest (Note 32) Balance at 30 June 2016 Balance at 30 June 2017 Share-based payments reserve $’000 128 66 (194) Capital reorganisation reserve $’000 (3,849) – – Transactions with non- controlling interest $’000 (6,816) – – – – – – (3,849) (3,849) (1,197) (8,013) (8,013) Total $’000 (10,537) 66 (194) (1,197) (11,862) (11,862) Note 23. Equity – retained profits Retained profits at the beginning of the financial year Profit after income tax expense for the year Dividend paid (Note 24) Retained profits at the end of the financial year Note 24. Equity – dividends Dividends Dividends paid during the financial year were as follows: Dividend paid 4 cents per share on 4 October 2016 Dividend paid 3 cents per share on 30 March 2017 Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 30 June 2017 $’000 13,022 15,480 (10,154) 18,348 30 June 2016 $’000 1,634 11,388 – 13,022 Consolidated 30 June 2017 $’000 5,803 4,351 10,154 30 June 2016 $’000 – – – Consolidated 30 June 2017 $’000 17,838 30 June 2016 $’000 14,714 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: • franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date; • franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and • franking credits that will arise from the receipt of dividends recognised as receivables at the reporting. Accounting policy for dividends Dividends are recognised when declared during the financial year and payment is no longer at the discretion of the Company. 54 55 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsNotes to the Financial Statements continued Note 25. Financial instruments Financial risk management objectives The Group’s activities expose it to a variety of financial risks: market risk (including interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, ageing analysis for credit risk and beta analysis in respect of investment portfolios to determine market risk. Risk management is carried out by senior financial Executives (‘finance’) under policies approved by the Board of Directors (‘the Board’). These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. Finance reports to the Board on a monthly basis. Market risk Interest rate risk The Group’s interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Group to interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The policy has been to maintain approximately 25% of borrowings at fixed rates using interest rate swaps to achieve this when necessary. As at the reporting date, the Group had the following interest-bearing financial assets and liabilities: Consolidated Cash at bank and on deposit Borrowings Finance leases Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 2017 2016 Weighted average interest rate % 1.5 3.8 4.0 3.1 Weighted average interest rate % 1.6 4.5 4.9 3.1 Balance $’000 24,210 (43,750) (29,124) (59) (48,723) Balance $’000 23,620 (40,250) (28,153) (365) (45,148) An analysis by remaining contractual maturities is shown in ‘liquidity and interest rate risk management’ below. If interest rates were to increase/decrease by 100 (2016: 100) basis points from rates used to determine fair values as at the reporting date, assuming all other variables that might impact on fair value remain constant, then the impact on profit for the year and equity would be as follows: Basis points increase effect on Profit before tax Effect on equity post tax Basis points change Basis points decrease effect on Profit before tax Effect on equity post tax Basis points change Consolidated –2017 Impact Consolidated – 2016 Impact 100 100 485 536 339 375 100 100 (485) (536) (339) (375) 56 Credit risk Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group. Credit risk for cash deposits is managed by holding all cash deposits with major Australian banks. Credit risk for trade receivables is managed by completing credit checks for new customers. Outstanding receivables are regularly monitored for payments in accordance with credit terms. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the Consolidated Statement of Financial Position and notes to the financial statements. The Group does not hold any collateral. The Group does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the Group. The credit risk for derivative financial instruments arises from the potential failure of the counter-party to meet its obligations. The credit risk exposure of forward contracts is the net fair value of these contracts. Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Fair value risk The only item held at fair value in the financial statements is an interest rate derivative which is considered immaterial and as such no further disclosure in relation to fair value has been made. Subject to the continuance of satisfactory credit ratings and compliance with banking covenants, the bank loan facilities may be drawn at any time and have a maturity of one year and three months (2016: two years and three months). The bank loan facilities are interest-only repayments. Remaining contractual maturities The following tables detail the Group’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the Statement of Financial Position. Consolidated – 2017 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing – variable Borrowings Lease liability Total non-derivatives Derivatives Interest rate swaps net settled Total derivatives Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – 44,185 12,099 56,284 – – – – - 6,479 6,479 – – – – – – – – – 3,316 5,024 45,852 30,595 84,787 59 59 – – 3.8 4.0 3.1 3,316 5,024 1,667 12,017 22,024 59 59 57 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 25. Financial instruments continued Consolidated – 2016 Non-derivatives Non-interest Bearing trade Other payables Contingent consideration Interest-bearing – variable Borrowings Lease liability Total non-derivatives Derivatives Interest rate swaps net settled Total derivatives Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – – 4.5 4.9 3.1 4,132 6,265 – 1,997 7,930 20,324 324 324 – – – 1,997 10,550 12,547 41 41 – – – 41,433 11,717 53,150 – – – – – – – – – – 4,132 6,265 – 45,427 30,197 86,021 365 365 Note 28. Contingent liabilities The Group has given bank guarantees as at 30 June 2017 of $1,400,000 (2016: $1,300,000) to various landlords. Note 29. Commitments Lease commitments – operating Within one year One to five years More than five years Lease commitments – finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years Total commitment Less: Future finance charges Consolidated 30 June 2017 $’000 30 June 2016 $’000 7,874 14,896 2,811 25,581 12,017 18,578 30,595 (1,471) 7,574 20,956 3,465 31,995 7,930 22,267 30,197 (2,044) The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Net commitment recognised as liabilities 29,124 28,153 Note 26. Key management personnel disclosures Compensation The aggregate compensation paid to Directors and other members of the key management personnel of the Group is set out below: Representing: Lease liability – current (Note 16) Lease liability – non-current (Note 19) 11,477 17,647 6,745 21,408 29,124 28,153 Short-term employee benefits Consolidated 30 June 2017 $ 3,056,941 3,056,941 30 June 2016 $ 3,197,896 3,197,896 Note 27. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by PricewaterhouseCoopers, the auditor of the Company: Audit services – PricewaterhouseCoopers Audit and review of the financial statements Other services – PricewaterhouseCoopers Due diligence Tax compliance services Tax advice relating to corporate structuring Consolidated 30 June 2017 $ 30 June 2016 $ 214,925 204,545 – 31,562 – 246,487 427,273 42,727 126,364 800,909 Under the terms of the leases, the Group has the option to acquire the leased assets for predetermined residual values on the expiry of the leases. As at 30 June 2017, there were outstanding capital commitments for plant and equipment of $3,600,000 (2016: $300,000). Note 30. Related party transactions Parent entity Integral Diagnostics Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in Note 33. Key management personnel Disclosures relating to key management personnel are set out in Note 26 and the Remuneration Report on pages 14 to 21. 58 59 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 30. Related party transactions continued The following transactions occurred with related parties: Other income: Management fee received from South West MRI Pty Ltd, a joint venture entity Payment for goods and services: Consulting fees paid to Helen Kurincic, a Director of the Group Consulting fees paid to Garry Hounsell, a Director of the Group Consulting fees paid to John Atkin, a Director of the Group Radiology services provided to South West MRI Pty Ltd a joint venture entity Cleaning fees paid to GJJ Hughes of which Gregory Hughes is related to Other transactions: Payment for rental of buildings to Eleven Eleven How Pty Ltd of which Chien Ping Ho, John Livingston, Gregory Hughes and Craig Bremner are related to Payment for rental of buildings to Perhaps Holdings Pty Ltd of which Chien Ping Ho and John Livingston are related to Payment for rental of buildings to Kiwi Blue Pty Ltd of which Chien Ping Ho and John Livingston are related to Subscription for new ordinary shares by John Atkin, a Director of the Group Subscription for new ordinary shares by Rupert Harrington, a Director of the Group Consolidated 30 June 2017 $ 30 June 2016 $ – 142,383 – – – – 12,500 60,000 25,000 25,000 291,887 17,800 391,934 592,166 44,120 65,391 225,307 – – 193,182 175,000 249,656 Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current receivables: Trade receivables from related parties Consolidated 30 June 2017 $’000 30 June 2016 $’000 54 155 Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 31. Parent entity information Set out below is the supplementary information about the parent entity. Statement of Profit or Loss and Other Comprehensive Income Profit after income tax Total comprehensive income The parent has paid $10,154,000 in dividends during the year. Statement of Financial Position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed capital Share-based payments reserve Retained profits Total equity Parent 30 June 2017 $’000 16,700 30 June 2016 $’000 8,446 16,700 8,446 Parent 30 June 2017 $’000 23,759 30 June 2016 $’000 11,114 142,779 132,839 222 807 43,844 41,557 83,866 – 15,069 82,760 – 8,522 98,935 91,282 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity is party to the deed of cross guarantee, as disclosed in Note 34. Contingent liabilities Except as disclosed in Note 28, there are no other contingent liabilities of the parent entity as at 30 June 2017 and 30 June 2016. Capital commitments – property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2017 and 30 June 2016. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in Note 2, except for the following: • investments in subsidiaries are accounted for at cost, less an impairment, in the parent entity; • investments in associates are accounted for at cost, less any impairment, in the parent entity; and • dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. 60 61 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Note 32. Business combinations On 1 July 2016, the Group acquired the assets and liabilities of the Western District Radiology business and the remaining 50% interest in South West MRI Pty Ltd (collectively known as the WDR/SWMRI acquisition) for the total consideration transferred of $4,954,000 inclusive of GST. This acquisition complements the Group’s strengths and further strengthens the Group’s position in the south-west region of Victoria and will be integrated into the Group so as the maximum synergies can be obtained. The business of South West MRI Pty Ltd was valued at $2,400,000 immediately prior to acquisition, the value of the 50% interest held previously immediately prior to acquisition was $2,000 resulting in the recognition of a $1,200,000 gain as a result of re-measuring to fair value the equity interest held in South West MRI Pty Ltd. This amount was recognised in other income in the Statement of Profit and Loss as at 1 July 2016 and in goodwill. The share of plant and equipment $453,000 and debt assumed $389,000 will result in net assets of $65,000 being booked, which will reduce goodwill by $65,000. Details of the acquisition are as follows: 1 July 2016 Plant and equipment Brand name Other assets Employee benefits Lease make good provision Debt assumed GST on acquisition Net assets acquired Fair value gain on acquisition of SWMRI Pty Ltd joint venture Goodwill Acquisition date fair value of the total consideration transferred Representing: Cash paid or payable to vendor (including GST) Contingent consideration Integral Diagnostics Limited shares issued to vendor Cash used to acquire business, net of cash acquired: Acquisition date fair value of the total consideration transferred Less: 908,056 shares issued by Company (at fair value of $1.4041 per share) as part of consideration Less: Contingent consideration Net cash used Recognised on acquisition fair value $’000 1,968 155 106 (229) (100) (767) 485 1,618 (1,200) 4,536 4,954 3,529 150 1,275 4,954 4,954 (1,275) (150) 3,529 Total goodwill to be booked on the transaction $3,401,000 relating to the acquisition, $1,200,000 relating to the fair value uplift on existing interest less $65,000 on recognition of 50% of net assets in SWMRI, totalling goodwill of $4,536,000. The goodwill recognised is primarily attributed to the expected synergies and other benefits from combining the assets and activities of SWMRI/WDR with those of the Group. The goodwill is not deductible for income tax purposes. Contingent consideration payable is a maximum amount of $150,000 and is dependent on a range of performance hurdles over a two-year period, with payments required six-monthly. On acquisition it was considered that all performance hurdles would be met and the contingent consideration would be payable. As at 30 June 2017, $50,000 of the deferred consideration has been paid, $30,000 in cash and $20,000 offset against the amount owing by the vendor on settlement of the completion statement. On 3 August 2017 a further $25,000 was paid. From the date of acquisition, which was the beginning of the period, SWMRI/WDR has contributed $4,755,000 of revenue and $2,405,000 (prior to any corporate overhead allocations) to the net profit before tax from the continuing operations of the Group. Transaction costs of $180,000 were expensed in the Statement of Profit and Loss for the year ended 30 June 2016 and were part of the operating cash flows in the statement of cash flows. Accounting policy for business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions in existence at the acquisition date. Where the business combination is achieved in stages, the Group measures its previously held equity interest in the acquiree at the acquisition date fair value and the difference between and fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition date but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets and liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer received all the information possible to determine fair value. Business combinations under common control use the principals of corporate reorganisation. The difference between the acquisition-date historical book value of assets acquired, liabilities assumed and any non-controlling interest in the acquired and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as a capital reorganisation in reserves, and not as goodwill. 62 63 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral DiagnosticsNotes to the Financial Statements continued Note 33. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 2: Note 35. Interests in joint ventures Interest in joint ventures are accounted for using the equity method of accounting. Information relating to joint ventures are set out below: Lake Imaging Pty Ltd Radploy Pty Ltd Radploy 2 Pty Ltd Radploy 3 Pty Ltd Radploy 4 Pty Ltd Global Diagnostics (Australia) Pty Ltd SCR Corporate Pty Ltd RAD Corporate Pty Ltd Principal place of business/ country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Ownership interest 2017 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 2016 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Note 34. Deed of cross guarantee The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: • Integral Diagnostics Limited (formerly known as Lake Imaging Holdings Pty Ltd) • Lake Imaging Pty Ltd • Radploy Pty Ltd • Radploy 2 Pty ltd • Radploy 3 Pty Ltd • Radploy 4 Pty Ltd • Global Diagnostics (Australia) Pty Ltd • SCR Corporate Pty Ltd • RAD Corporate Pty Ltd By entering into the deed, the wholly owned entities have been relieved from the requirement to prepare financial statements and a Directors’ Report under the ASIC Corporations Instrument issued by the Australian Securities and Investments Commission (ASIC). The above companies represent a ‘closed group’ for the purposes of the Class Order, and as there are no other parties to the deed of cross guarantee that are controlled by Integral Diagnostics Limited, they also represent the ‘extended closed group’. The Statement of Profit or Loss and Other Comprehensive Income and Statement of Financial Position are the same as the Group’s and therefore have not been separately disclosed. South West MRI Pty Ltd Principal place of business/ country of incorporation Australia Ownership interest 2017 % – 2016 % 50.00 As a result of the acquisition, South West MRI Pty Ltd has been dissolved effective 12 July 2017 and no longer exists. Lake Imaging Holdings Pty Ltd owned 50% (100 ordinary shares) of South West MRI Pty Ltd, a company set up to provide magnetic resonance imaging (MRI) and associated services. Rafferty Rogan and Houghton Pty Ltd, in its capacity as Trustee for the Ultrasound Service Unit Trust (‘Western District Radiology’) owns the other 50% (100 ordinary shares). Accounting policy for joint ventures A joint venture is a form of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted using the equity method. Under the equity method, the share of the profits or losses of the joint venture is recognised in profit or loss and the movements in equity is recognised in other comprehensive income. Investments in joint ventures are carried in the Statement of Financial Position at cost plus post-acquisition changes in the Group’s share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Income earned from joint venture entities reduce the carrying amount of the investment. Note 36. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax Adjustments for: Depreciation and amortisation Loan establishment costs amortisation Net loss on disposal of property, plant and equipment Impairment of asset Share of profit – associates Share-based payments Tax included in equity Fair value gain on acquisition of SWMRI Pty Ltd Financial liability fair value movement through profit and loss Interest income IPO transaction costs included in financing activities Change in operating assets and liabilities: Increase in trade and other receivables Increase in deferred tax assets Increase in other operating assets and inventory Increase/(decrease) in trade and other payables Increase/(decrease) in provision for income tax Increase /(decrease) in other provisions Consolidated 30 June 2017 $’000 15,480 30 June 2016 $’000 11,388 9,830 188 477 810 - - - (1,200) (306) (370) - (108) (208) (622) (1,302) 1,448 (1,387) 8,720 180 176 - (2) 113 440 - (86) (263) 6,272 (754) (1,545) (718) 1,575 (1,619) 178 Net cash from operating activities 22,730 24,055 64 65 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Notes to the Financial Statements continued Directors’ Declaration Note 37. Earnings per share In the Directors’ opinion: Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of Integral Diagnostics Limited Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Weighted average number of options over ordinary shares Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share Consolidated 30 June 2017 $’000 15,480 – 15,480 30 June 2016 $’000 11,388 – 11,388 Number 145,044,157 Number 138,726,283 - 145,044,157 – 138,726,283 Cents 10.67 10.67 Cents 8.2 8.2 The weighted average number of ordinary shares for the comparative period has been adjusted for the 29 for one share split that occurred on 30 September 2015. Accounting policy for earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Integral Diagnostics Limited, excluding any costs of servicing equity other than ordinary shares, by weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Note 38. Events after the reporting period Subsequent to year-end, a fully franked dividend of 4 cents per share was declared on 23 August 2017 and will be paid on 4 October 2017. There are no other matters or circumstances that have arisen since the end of the financial year which have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. • the attached financial statements and notes comply with the Corporations Act 2001, the accounting standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 2 to the financial statements; • the attached financial statements and notes give a true and fair view of the Group’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; • there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and • at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group will be able to meet any obligations or liabilities to which they are, or may become, subject to virtue of the deed of cross guarantee described in Note 34 to the financial statements. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors. Helen Kurincic Chairman Ian Kadish Managing Director and Chief Executive Officer 23 August 2017 Melbourne 66 67 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Independent Audit Report Independent auditor’s report To the shareholders of Integral Diagnostics Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Integral Diagnostics Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001 , including: a) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year then ended b) complying with Australian Accounting Standards and the Corporations Regulations 2001 . What we have audited The Group financial report comprises: • • • • • • the consolidated statement of financial position as at 30 June 2017 the consolidated statement of profit or loss and other comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the financial statements, which include a summary of significant accounting policies the director’s declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331 MELBOURNE VIC 3001 T: +61 3 8603 1000, F: +61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. • • Key audit matters Amongst other relevant topics, we communicated the following key audit matters to the Audit – and Risk Committee: – Valuation of Goodwill Asset valuation- Property, plant and equipment They are further described in the Key audit matters section of our report. • • • Audit scope Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. The group operates in 3 geographical locations within Australia- Victoria, Queensland and Western Australia. We, as the Group engagement team, performed our audit procedures at the Group’s corporate head office in Geelong, Victoria. Materiality For the purpose of our audit we used overall Group materiality of $1,065,000 which represents approximately 5% of Group profit before tax. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because, in our view, it is the metric against which the performance of the Group is most commonly measured. We selected 5% based on our professional judgement noting that it is also within the range of commonly acceptable profit related thresholds. • • • • . 68 69 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Independent Audit Report continued Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter Valuation of Goodwill Refer to note 13 $96.4m The Group’s goodwill is recognised in one Cash Generating Unit (CGU). A Cash-generating unit is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the year ended 30 June 2017, the Group performed an impairment assessment over the goodwill balance of the IDX Group. The impairment assessment relied on the calculation of value-in-use for the Group. This calculation was based on estimated future cash flows discounted to net present value using the Company’s weighted average cost of capital (WACC). We considered the • valuation of goodwill to be a key audit matter due to: • The size of the goodwill balance ($96.4 million at 30 June 2017) The significant judgement involved in estimating future cash flows and the level to which they are discounted, in particular: ­ ­ discount rate growth rates • In FY17 the performance of the Group was below expectation. How our audit addressed the key audit matter We assessed whether the division of the Group into CGUs was consistent with our knowledge of the Group’s operations and internal Group reporting. To evaluate the Groups cash flow forecasts and the process by which they were developed, we performed the • following procedures, amongst others: • • • • Considered the historical accuracy of the Group’s cash flow forecasts by comparing the forecasts used in the prior year cash flow forecast valuation model (“the model”) to the actual performance of the Group in the current year. Compared the 12 month cash flow forecast used in the model with the Board approved budget, and considered whether the key assumptions used in the model (in particular the discount rate and growth rates) were subject to oversite from the directors. Together with PwC valuation experts, we assessed the discount rate and long term growth rates applied in the model by comparing these rates to historical results, market expectations of investment return and projected economic growth and interest rates. Reperformed the underlying calculations used in the model noting no exceptions. Performed a sensitivity analysis by varying the growth rates, discount rate and sales growth rates within a reasonably possible range. We found that changes to these key assumptions did not cause the carrying value of the CGU to exceed its recoverable amount. Asset valuation – property, plant and equipment Refer to note 12 $50.5m To assess the valuation of property, plant and equipment, we performed the following procedures, amongst others: • For the year ended 30 June 2017, the Group performed an impairment assessment over the property, plant and equipment cash generating units (CGUs) by reviewing the performance of each CGU for the period. The Group identified one CGU which was no longer expected to generate future profits, resulting in an impairment charge of $810,000 to an investment in infrastructure supporting the Group’s mobile MRI facility in regional Western Australia. The Group’s assessment did not identify any indicators of impairment for other CGU’s. We considered the valuation of property, plant and • equipment to be a key audit matter due to: • The size of the property, plant & equipment balance ($50.5 million at 30 June 2017) The judgements and assumptions required by the Group in determining whether there were any impairment indicators or impairment charges. • • • Assessed whether the division of the Group into CGUs was consistent with our knowledge of the Group’s operations and internal Group reporting Considered the Group’s assessment of whether there were any indicators of asset impairment at 30 June 2017 for its CGUs. Considered whether the discount rate and growth rates applied in the Group’s value in use model (“the model”) for the impaired CGU were consistent with our knowledge of current business conditions, externally derived data (where possible) and our understanding of the business. Tested the mathematical accuracy of underlying calculations used in the model. Other information The directors are responsible for the other information. The other information comprises the Chairman’s report, Managing Director and Chief Executive Officer’s report, Operating and Financial Review report, the Directors Report, Shareholder Information and the Corporate Directory included in the Group’s annual report for the year ended 30 June 2017 but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. 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. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. 70 71 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the In preparing the financial report, the directors are responsible for assessing the ability of the Group to going concern basis of accounting unless the directors either intend to liquidate the Group or to cease continue as a going concern, disclosing, as applicable, matters related to going concern and using the operations, or has no realistic alternative but to do so. going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an from material misstatement, whether due to fraud or error, and to issue an auditor’s report that audit conducted in accordance with the Australian Auditing Standards will always detect a material includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an misstatement when it exists. Misstatements can arise from fraud or error and are considered material audit conducted in accordance with the Australian Auditing Standards will always detect a material if, individually or in the aggregate, they could reasonably be expected to influence the economic misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, decisions of users taken on the basis of the financial report. individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: A further description of our responsibilities for the audit of the financial report is located at the http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditing and Assurance Standards Board website at: auditor’s report. http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Report on the remuneration report Our opinion on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 14 to 21 of the directors’ report for the year ended 30 June 2017. We have audited the remuneration report included in pages 14 to 21 of the directors’ report for the year ended 30 June 2017. In our opinion, the remuneration report of Integral Diagnostics Limited, for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. In our opinion, the remuneration report of Integral Diagnostics Limited, for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. Responsibilities Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is The directors of the Company are responsible for the preparation and presentation of the to express an opinion on the Remuneration Report, based on our audit conducted in accordance with remuneration report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is Australian Auditing Standards. to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers PricewaterhouseCoopers PricewaterhouseCoopers Nadia Carlin Nadia Carlin Partner Partner Nadia Carlin Partner Melbourne 23 August 2017 Melbourne 23 August 2017 Melbourne 23 August 2017 Independent Audit Report continued In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is 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 the Australian Auditing Standards 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 the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 14 to 21 of the directors’ report for the year ended 30 June 2017. In our opinion, the remuneration report of Integral Diagnostics Limited, for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. 72 73 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics Shareholder Information Corporate Directory Integral Diagnostics Limited Ordinary fully paid shares (total) as of 22 August 2017. Top 20 shareholders Name HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited RBC Investor Services Australia Nominees Pty Ltd Citicorp Nominees Pty Limited UBS Nominees Pty Ltd National Nominees Limited Visionary Imaging Pty Ltd Mittal Holdings Pty Ltd New Imaging Pty Ltd G J Hughes Pty Ltd Lethean Holdings Pty Ltd Lockwood Ridge Pty Ltd Muzray Pty Ltd Willowbay Rise Pty Ltd Wyndham Salter Pty Ltd NW3 Pty Ltd Mr Vincent Michael O'sullivan Clight Pty Ltd Jasmat Pty Ltd John Livingston Pty Ltd Meakin Professional Investments Pty Ltd Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Totals: Top 21 holders of ordinary fully paid shares (total) Total remaining holders balance Register of substantial shareholdings Investors Mutual SG Hiscock Adam Smith Asset Management Regal Funds Management IOOF Holdings Limited Range of units snapshot Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 over Rounding Total Directors Helen Kurincic – Independent Non-Executive Chairman Ian Kadish – Managing Director and Chief Executive Officer Dr Chien Ping Ho – Executive Director Dr Sally Sojan – Executive Director John Atkin – Independent Non-Executive Director Rupert Harrington – Independent Non-Executive Director Auditor PricewaterhouseCoopers 2 Riverside Quay Southbank VIC 3006 Solicitors Herbert Smith Freehills Level 42, 101 Collins Street Melbourne Victoria 3000 Company secretary Ms Kathryn Davies Registered office 1111 Howitt Street Wendouree Victoria 3355 T + 61 3 5339 0704 Share register Computershare Investor Services Pty Ltd Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 T 1300 787 272 Bankers Australia and New Zealand Banking Group Limited 927 Sturt Street Ballarat Victoria 3350 Stock exchange listing Integral Diagnostics Limited shares are listed on the Australian Securities Exchange (ASX code: IDX) Website integraldiagnostics.com.au Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 23 August 2017 and can be found at: integraldiagnostics.com.au/page/for-investors/ Units 29,626,840 20,457,732 6,321,095 5,932,694 4,074,932 3,449,893 2,889,180 2,878,410 2,604,280 2,467,230 2,467,230 2,467,230 2,467,230 2,467,230 2,467,230 2,445,481 2,334,000 2,330,160 2,330,160 2,330,160 2,330,160 107,138,557 37,905,600 Shares 13,520,000 8,999,909 8,460,682 8,020,747 7,329,787 % of units 20.43 14.10 4.36 4.09 2.81 2.38 1.99 1.98 1.80 1.70 1.70 1.70 1.70 1.70 1.70 1.69 1.61 1.61 1.61 1.61 1.61 73.87 26.13 % 8.12 6.2 5.83 5.53 5.05 Total holders 159 366 200 267 70 Units 88,453 980,337 1,547,809 6,743,619 135,683,939 1,062 145,044,157 % issued capital .06 .68 1.07 4.65 93.55 -0.01 100.00 74 75 Annual Report 2017Integral DiagnosticsAnnual Report 2017Integral Diagnostics 

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