Integral Diagnostics
Annual Report 2018

Plain-text annual report

Annual Report 2018 Contents About us We pride ourselves in the quality care and service that we deliver, in the trust that our referrers have in us, and in being the preferred provider to our patients. We always put our patients first, and in so doing we also put our shareholders first. 02 Chairman’s Report 04 Managing Director and Chief Executive Officer’s Report 06 Directors’ Report 14 Remuneration Report 24 Auditor’s Independence Declaration 25 Operating and Financial Review 33 Consolidated Statement of Profit or Loss and Other Comprehensive Income 34 Consolidated Statement of Financial Position 35 Consolidated Statement of Changes in Equity 36 Consolidated Statement of Cash Flows 37 Notes to the Financial Statements 71 Directors’ Declaration 72 Independent Audit Report 78 Shareholder Information 81 Corporate Directory Integral Diagnostics Limited ABN 55 130 832 816 Our locations Victoria // Ballarat (5 sites) // Geelong (10 sites) // Melbourne metropolitan (1 site) // Outer western areas of Melbourne (9 sites) // Warrnambool (2 sites) Queensland // Gold Coast (11 sites) // Mackay (1 site) // Toowoomba (1 site) Western Australia // South west Western Australia (9 sites) New Zealand // Auckland (4 sites) Integral Diagnostics Limited ABN 55 130 832 816 01 01 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 Chairman’s report The strong financial performance of 20.5% organic operating NPAT growth, was driven by solid underlying services growth and the realisation of significant cost efficiencies delivering a 1.5% uplift to an industry leading margin of 20.1%. Dear Shareholders, On behalf of the Board, I present the 2018 Annual Report for Integral Diagnostics Limited. Integral Diagnostics (IDX) delivered 20.5% organic operating NPAT growth in line with guidance, and basic operational EPS growth of 20.7%. The performance of the Company over the 12 months ended 30 June 2018 (FY18) was a material improvement in operating margin and key financial metrics. This result was achieved despite the significant distraction of an unsolicited and hostile takeover bid in FY18, clearly proven not to be in the best interests of IDX shareholders. I commend the Board and management’s diligence and unwavering focus on value for our shareholders throughout this time. FY18 results delivered through strategy execution FY18 has seen IDX’s new management team in place, working collaboratively with our market leading radiologists, executing on our attractive prospects and clearly defined growth strategy, underpinned by a diversified, medically led business model. The strong financial performance of 20.5% organic operating NPAT growth, was driven by solid underlying services growth and the realisation of significant cost efficiencies delivering a 1.5% uplift to an industry leading margin of 20.1%. Operating revenue was up 5.9% to $188.1 million, with organic growth being delivered across all business units by leveraging off our highly developed hub and spoke model. Whilst a strong result, revenue growth was impacted by impaired access in Q1 and the Commonwealth Games on the Gold Coast in April 2018. Underlying examination volume growth was 6.7%. This was above Medicare data of 5.7% in the States in which we operate, with significant volume growth coming from reporting contracts and non-Medicare related imaging showing the strength of our materially more diversified model than typical industry participants. IDX also provides a greater level of higher value modalities than the industry in general. Importantly through disciplined cost management executed and continuing to be underway, IDX only incurred expenditure growth of $6.6 million, resulting in an underlying NPAT performance of $18.2 million, which was $3.1 million above FY17. Free cash flow was up 27.9% to $30.7m. At 30 June 2018 IDX had net debt of $44.9 million and comfortable gearing at 1.2X Net Debt to EBITDA. On the 2nd of July 2018, IDX completed the acquisition of specialist radiology businesses Specialist Radiology Group, Trinity MRI and Cavendish Radiology in Auckland, New Zealand as well as the acquisition of Geelong Medical Imaging (GMI) in Australia. These acquisitions represent a strong strategic, clinical and cultural fit with our doctor led model and we look forward to their successful integration. 02 Integral Diagnostics Annual Report 2018 Reflecting the company’s strong financial performance and outlook, and despite the costs incurred in the takeover response, your Board was pleased to announce a fully franked final FY18 dividend of 4.0 cents per share, taking the full year FY18 dividend to 8.0 cents per share fully franked, in line with a payout ratio of 65-75% of net profit after tax and amortisation. Transformational change under fresh leadership The successful execution of IDX’s strategy has been led by our new leadership team in place. Dr Ian Kadish commenced as CEO and Managing Director from 22 May 2017 and Anne Lockwood was appointed as Chief Financial Officer (CFO) on 1 December 2017, after previously being IDX’s Financial Controller and Interim CFO from 1 September 2017. In February 2018, our CEO restructured the management team, strengthened the role of our General Managers and the position of Chief Operating Officer was made redundant. Raelene Murphy joined the Board as a non-executive Director on the 1st October 2017 and is also the Chair of the Audit and Risk Committee. Raelene has extensive experience as Chair of Audit and Risk Committees for ASX listed companies and has already been a valuable addition to our skilled and diverse board. Future prospects for further growth are positive The regulatory environment is generally positive across Australia and New Zealand whilst technological advances continue to expand the range of clinical indications for diagnostic imaging solutions. This has improved diagnosis and treatment, and assisted in avoiding unnecessary invasive procedures and reduced unnecessary hospital admissions. The introduction of a MBS rebate for MRI Prostate is an example of the critical benefits of diagnostic imaging to patients, referrers and total health care costs in modern medicine. Prostate cancer is the most common cancer in males with 17,729 new cases of prostate cancer diagnosed in 2018 in Australia. Prostate MRI has been proven to improve the accuracy of prostate cancer diagnosis by enhancing detection of significant cancer requiring treatment whilst also reducing treatment of insignificant cancer. The use of MRI following an elevated PSA can help clinicians decide if a biopsy is necessary. A British study published in the Lancet Medical Journal found that using MRI could prevent one in four men from having an unnecessary biopsy. Biopsies are more costly than a MRI and come with discomfort and risk of complications. our culture and high end clinical focus, and are earnings accretive to deliver sustainable value to shareholders. Given our MRI licences and high end clinical expertise, this change will be highly beneficial to Integral Diagnostics. The MBS benefits will be partially offset by the new restriction on GP referred knee MRIs. A select number of MBS diagnostic imaging items are proposed to have indexation re-instated from 2020. We continue to support the campaign to improve patient affordability of all diagnostic imaging services by re- instating indexation from 2020 across all MBS diagnostic imaging items. Diagnostic imaging has now operated for 20 years without MBS indexation. Looking forward, Integral Diagnostics has a solid growth platform to capitalise on the favourable healthcare industry dynamics particularly evident in diagnostic imaging – improving technology, a continuation in the trend towards prevention and early diagnosis and a shift to more complex modalities. Integral Diagnostics will continue to pursue appropriate acquisition opportunities that are in strategic alignment with our doctor led model, fit IDX is shaping as a true leader in comprehensive, specialised and regional diagnostic imaging. The support of our shareholders has been greatly valued by the Board and we thank you. Special thanks to the exceptional radiologists, imaging and support staff of Integral Diagnostics who work together to contribute daily to patient diagnosis critical to accurate health care evaluation and treatment. We are essentially a people and technology company. It is our exceptionally talented people partnered with high end clinical technology that ensures patients are at the heart of everything we do and get the very best of health care. This is what differentiates us. Yours sincerely, Helen Kurincic Chairman Integral Diagnostics Annual Report 2018 02 03 Integral Diagnostics Annual Report 2018 Managing Director and Chief Executive Officer’s Report Building on our history of successfully acquiring and integrating strategically compelling, fast-growing diagnostic imaging businesses, we will continue to pursue attractive acquisitions that fit our criteria, add scale and scope, build our quality, service and reputation, and are earnings accretive. Dear Fellow Shareholders, I am proud to have led Integral Diagnostics during this exciting phase of the Company’s development, as we expand our service offering to growing patient populations in Australia and New Zealand. Over the past year, we have performed over a million diagnostic imaging tests, have served more than 500,000 patients, and have consulted and reported for more than 20,000 doctors and other health professionals. In the process we have grown our volumes by almost 7%, and have organically grown our operating earnings by more than 20%. Over the period we have seen our share price increase by around 90% as investors have come to recognise the value that we offer in the fast growing healthcare imaging market. We have executed material acquisitions that increased our earnings base by a third, and have expanded the scale and scope of our service offering with the completion of important greenfields and brownfields in Victoria and Queensland. On July 2nd, we acquired a comprehensive diagnostic imaging business in Victoria, and we expanded into New Zealand with the acquisition of leading clinics in fast growing patient populations in Auckland and its surrounding suburbs. At Integral Diagnostics, we pride ourselves in the quality care and service that we deliver, in the trust that our referrers have in us, and in being the preferred provider to our patients. We always put our patients first, and in so doing we also put our shareholders first. We passionately believe that good medicine is good business. Operational Focus delivering results Integral Diagnostics is ideally positioned as a focussed, comprehensive diagnostic imaging company that is substantially owned by its radiologists, is passionate about quality care and clinical leadership, and is a market leader in each geography that we service. Our concentrated presence and comprehensive service offering in growing markets position us well for profitable expansion and development. FY18 was a busy year operationally. We successfully executed several important initiatives that underpin the continued growth of our business and earnings, while delivering “best-in-class” clinical services and the industry’s highest reported margins. The executed initiatives ensure that we continue to provide the highest quality care, while also improving our market- leading margins. The improvements in productivity and resource utilisation over the period position the group well to support the increased volume of diagnostic imaging services expected as referrers, and increasingly patients themselves, become more aware of the quality, cost and life-saving benefits that diagnostic imaging provides. In FY18, we delivered the following major milestones: • Installed new call centres in Queensland and Western Australia, considerably improving patient triage, service and access for patients and referrers 04 Integral Diagnostics Annual Report 2018 • Upgraded clinical systems improving medical imaging, efficiency and referrer engagement • Opened the Spine Centre of Excellence on the Gold Coast • Installed a new wide bore MRI in Mackay • Undertook a major refurbishment and expanded services at the 300 bed St John of God Private Hospital in Geelong • Installed and commissioned a new PET facility in Geelong, the first private PET service in the city, our second PET service in Victoria, and the fourth PET service in the Integral group. • Acquired Geelong Medical Imaging in Victoria, including two radiology clinics specialising in musculoskeletal services (completed on July 2nd, 2018) • Expanded into New Zealand with the acquisition of Specialist Radiology Group, Trinity MRI and Cavendish Radiology, that comprise leading specialist radiology clinics in Auckland (completed on July 2nd, 2018) Well positioned to continue our growth trajectory Our priorities for the year ahead build on our achievements in FY18 and enhance our growth platform into FY19 and beyond. We remain focused on further margin improvement through disciplined cost management and technology improvements, and driving further growth organically and through value accretive acquisitions. 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 referrers, and through developing our specialised diagnostic centres of excellence. Our disciplined capital expenditure programme will see us continue to invest in, and implement, leading edge technology solutions that will improve the efficiency of our operations and further enhance the quality care and service provided to Integral Diagnostic’s patients and referrers. Building on our history of successfully acquiring and integrating strategically compelling, fast-growing diagnostic imaging businesses, we will continue to pursue attractive acquisitions that fit our criteria, add scale and scope, build our quality, service and reputation, and are earnings accretive at appropriate multiples. Industry conditions in Australia and New Zealand are more favourable for medical imaging as major payers increasingly recognize the benefits that these critical diagnostic services offer to patients, referrers, insurers, employers and to society as a whole. Quality medical imaging help referrers to reach a diagnosis faster, allow patients to avoid more invasive and more expensive surgical procedures, and enable patients to return to work sooner. Medicare Australia recently recognized some of these benefits in adding Prostate MRI to the Medicare Benefits Schedule. Integral Diagnostics is privileged to work with some of the world’s finest radiologists, specialists, clinical and support teams. Integral is committed to working with our radiologists, and with the Royal Australia and New Zealand College of Radiology (RANZCR), to ensure that ANZ continues to educate, train, attract and retain some of the finest radiologists in the world. To that end, Integral Diagnostics is proud to have sponsored the College’s 2017 Graduation Ceremony for new RANZCR-trained radiologists, and has committed to sponsor it again this year. I would like to take this opportunity to thank our referrers, doctors and staff for their ongoing support and commitment. Without them, we wouldn’t be a leading diagnostic imaging provider in Australia and now also in New Zealand. We look forward to continuing our growth trajectory – to delivering quality care to our patients, outstanding service and valuable insights to our referrers, a preferred place to work for our doctors and staff, and growing returns for our shareholders. Sincerely, Ian Dr Ian Kadish Managing Director and Chief Executive Officer Integral Diagnostics Annual Report 2018 04 05 Integral Diagnostics Annual Report 2018 Directors’ Report Directors’ Report continued For year ended 30 June 2018 For year ended 30 June 2018 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 2018. 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 25 to 32; and • the Remuneration Report on pages 14 to 23. 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) Dr Chien Ping Ho (Executive Director) Dr Sally Sojan (Executive Director) John Atkin (Independent Non-Executive Director) Rupert Harrington (Independent Non-Executive Director) Raelene Murphy (Independent Non-Executive Director) Appointed 1st October 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 25 to 32 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 25 to 32. Dividends paid in the year ended 30 June 2018 Dividends paid/payable during the financial year were as follows: Final Dividend paid to shareholders of the company. Interim Dividend paid to shareholders of the company. Consolidated 30 June 2018 $’000 5,802 5,802 30 June 2017 $’000 5,802 4,351 Significant changes in the state of affairs There were no significant changes to the state of affairs of the Group during the financial year. 06 Integral Diagnostics Annual Report 2018 Matters subsequent to the end of the financial year On 2nd July 2018, the Group acquired the assets and liabilities of the Specialist Radiology Group, Trinity MRI and Cavendish Radiology in Auckland New Zealand (referred to as the New Zealand transaction). The three businesses combined: • Comprise the leading specialist radiology clinics in Auckland. • Employ and contract several of the nation’s leading specialists in musculoskeletal radiology and neuroradiology. • Have a projected EBITDA contribution of NZ$13 million to NZ$14 million (A$12 million to A$13 million1) for FY19. • A high growth business with strong margins. • Provides a premier platform for Integral Diagnostics to enter and grow in New Zealand. The key terms of the acquisition included: • A purchase consideration of NZ$105 million (A$99.03 million) on a cash and debt free basis, comprising NZ$80 million (A$75.3 million) in cash and NZ$25 million (A$23.25 million) in IDX equity. • 80% of the equity will be held in escrow for up to five years. • A five year staged earn-out for vendor radiologists based on earnings outperformance. This strategic acquisition includes four clinics, employing 14 radiologists working in both the public and private sectors. The clinics are market leaders in providing complex modalities including MRI, CT and SPECT CT (nuclear medicine), which are high margin services positioned to experience significant future growth. The clinics are fitted with state of the art equipment. Also on 2nd July 2018, the Group acquired the assets and liabilities of Geelong Medical Imaging (GMI), which comprises two radiology clinics in Geelong, Victoria. These clinics comprise a number of modalities, including X-Ray, ultrasound, CT, MRI and nuclear medicine. The key terms of the acquisition include: • A purchase consideration of $3.15 million on a cash and debt free basis. • $1.05 million in IDX equity (subject to voluntary escrow). • $1.40 million of deferred cash. See Note 38 to the financial statements for full detail of these transactions. Subsequent to year-end, a fully franked dividend of 4 cents per share was declared and will be paid on 2 October 2018. Other than as disclosed in the financial statements, 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. Integral Diagnostics Annual Report 2018 06 07 Integral Diagnostics Annual Report 2018 1. Based on forecast average weighted exchange rate of $NZ1 to $AUD0.93. Directors’ Report continued For year ended 30 June 2018 Information Directors Ms Helen Kurincic was appointed as an independent Non-Executive Director and Chairman of the Company in December 2014, preceding listing on the ASX on 21 October 2015 and is the Chairman of the Nomination Committee and a member of the People and Remuneration Committee and the Audit, Risk and Compliance Committee. Helen has deep Executive and Board-level experience across the healthcare industry. She is currently a Non-Executive Director of HBF Health Limited, Estia Health Limited (ASX: EHE) and Sirtex Medical Limited (ASX: SRX), and is a senior advisor in the healthcare sector. Previously, Helen 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 business across Australia. Prior to that Helen held various executive and non-executive healthcare sector roles including Non-Executive Director of DCA Group Ltd (diagnostic imaging services in Australia and the United Kingdom), Non-Executive Director of AMP Capital Investors Domain Principal Group, CEO of Benetas and Non-Executive Director of Melbourne Health and Orygen Research Centre. Helen 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. Helen Kurincic Independent Non-Executive Chairman MBA, FAICD, Grad Dip Wom Stud, PBC Crit Care, Cert Nsg Former directorships (in the last three years) None Special responsibilities Member of the Audit, Risk and Compliance Committee and People and Remuneration Committee, Chair of the Nomination Committee Interests in shares 420,870 ordinary shares (indirectly) Dr Ian Kadish was appointed Managing Director and Chief Executive Officer of Integral Diagnostics 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 (Dean’s List, May 1990) and followed this with several roles overseas including CSC Healthcare, McKinsey and Company, and Netcare, a major hospital group in South Aftrica and the United Kingdom where Ian was an Executive Director from 1997 to 2006. Ian was instrumental in growing the group from five 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. Dr Ian Kadish Managing Director and Chief Executive Officer MBBCh, MBA Former directorships (in the last three years) None Special responsibilities None Interests in shares 66,202 ordinary shares, 362,585 rights 08 Integral Diagnostics Annual Report 2018 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 imaging, body MRI (including prostate) and Cardiac CT. Dr Chien Ping Ho Executive Director MBBS, FRANZCR, GAICD Former directorships (in the last three years) None Special responsibilities Chair of the National Clinical Leadership Committee Interests in shares 2,343,630 ordinary shares (indirectly) 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 four years. Dr Sally Sojan Executive Director MBBS, FRANZCR, FAANMS,GAICD Former directorships (in the last three years) None Special responsibilities Member of the National Clinical Leadership Committee Interests in shares 1,046,491 ordinary shares (indirectly) Integral Diagnostics Annual Report 2018 08 09 Integral Diagnostics Annual Report 2018 Directors’ Report continued For year ended 30 June 2018 John Atkin is a Non-Executive Director of IPH Limited (ASX: IPH). John is currently the Nomination and Remuneration Committee Chair of IPH Limited and is a member of its Audit and Risk Committees. John is also an independent director of the Commonwealth Bank Group Superfund. John was a non executive director of Aurizon Limited (ASX: AZJ) from 2010 to 2016 and Chair of GPT Metro (ASX:GMF) for 2014 to 2016. 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, a Director of Outward Bound International Inc, Chair of Hunters Hill Environment Action Group Inc and a member of the board of the State Library of New South Wales Foundation. John Atkin Independent Non-Executive Director BA, LLB, FAICD Former directorships (in the last three years) Aurizon Holdings Limited, GPT Metro Office Special responsibilities Chair of the People and Remuneration Committee and a member of the Audit, Risk and Compliance Committee and the Nomination Committee Interests in shares 132,945 ordinary shares (indirectly) Rupert Harrington joined the Integral Board on 1 October 2015 as an experienced director with a wealth of experience in business strategy and M&A. Mr Harrington’s early career was in operational management in United Kingdom and Australia. His career from 1987 was in private equity where he has an excellent track record of delivering results for investors in sectors including health, technology, services, and manufacturing. This included Advent’s healthcare investments in Primary Health Care and Genesis Care. Mr Harrington is currently Chairman of Clover Corporation (ASX: CLV) and Non-Executive Director of Pro-Packaging (ASX: PPG). At the end of 2017 he resigned as Non-Executive Director of Bradken Limited following its successful acquisition by Hitachi. Rupert Harrington Independent Non-Executive Director BTech, MSc, CDipAF Former directorships (in the last three years) Bradken Limited Special responsibilities Member of the Audit, Risk and Compliance Committee, the People and Remuneration Committee and the Nomination Committee Interests in shares 177,356 ordinary shares (directly) and 128,534 ordinary shares (indirectly) 10 Integral Diagnostics Annual Report 2018 Ms Raelene Murphy was appointed as an independent Non-Executive Director of the Company on 1 October 2017, and is the Chairman of the Audit, Risk & Compliance Committee. Raelene has over 30 years’ experience in strategic, financial and operational leadership in both industry and professional advisory after beginning her career in audit. She was formerly a Partner in a national accounting firm, Managing Director of Korda Mentha and CEO of Delta Group. In her professional advisory career she specialised in operational and financial restructuring with a particular emphasis on merger and acquisition integration across a range of significant public and private companies. Raelene is a Fellow of Chartered Accountants Australia and New Zealand and has extensive experience as Chair of Audit and Risk Committees for ASX Listed companies. She is currently a Non-Executive Director of ASX listed Altium Limited (ASX: ALU), Service Stream Limited (ASX: SSM), Bega Limited (ASX: BGA) and Clean Seas Seafood Limited (ASX: CSS). Raelene Murphy (Appointed 1 October 2017) Independent Non-Executive Director BBus, FCA, GAICD Former directorships (in the last three years) Tassal Group Limited and EVZ Limited Special responsibilities Chair of the Audit, Risk and Compliance Committee. Interests in shares 12,835 ordinary shares (indirectly) 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. Integral Diagnostics Annual Report 2018 10 11 Integral Diagnostics Annual Report 2018 Directors’ Report continued For year ended 30 June 2018 Company Secretary Kathryn Davies (BBus, CPA, GAICD) was appointed Company Secretary on 8 August 2017. Kathryn is an experienced executive and company secretary with extensive commercial and corporate governance experience across international capital markets. Her experience includes healthcare, mining, oil and gas, industrial and technology groups. She has significant experience in negotiating and delivering on multi jurisdiction transactions and large scale, long term contracts as well as international stakeholder management. Sonia Joksimovic (BBus, AFIN, FGIA, GAICD) was Company Secretary until her resignation on 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. Meetings of Directors Director Helen Kurincic Dr Ian Kadish Dr Chien Ping Ho1 Dr Sally Sojan John Atkin Rupert Harrington Raelene Murphy Board Held 26 26 25 25 26 26 22 Attended 26 26 23 25 26 26 21 Audit, Risk and Compliance Committee People and Remuneration Committee Nomination Committee Held 4 – – – 4 4 3 Attended 4 – – – 4 4 3 Held 6 – – – 6 6 – Attended 6 – – – 6 6 – Held 3 – – – 3 3 – Attended 3 – – – 3 3 – Held: represents the number of meetings held during the time the Director held office and was eligible to attend. A number of additional Board meetings were convened during the period of the takeover bid resulting in a higher than usual number of Board meetings held annually. 1. Dr Chien Ping Ho was on sabbatical and undertaking professional development overseas, he was unable to attend two meetings during this time. 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. 12 Integral Diagnostics Annual Report 2018 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. 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 28 to the financial statements. The non-audit services provided were largely for work performed pertaining to compliance tax services, takeover response and due diligence on transactions. 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 28 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 24. 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. Integral Diagnostics Annual Report 2018 12 13 Integral Diagnostics Annual Report 2018 Helen Kurincic Chairman 22 August 2018 Melbourne Dr Ian Kadish Managing Director and Chief Executive Officer Remuneration Report For year ended 30 June 2018 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. Key Management Personnel (KMP) of the Group are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all Directors. The table below lists the KMP for the year ended 30 June 2018 (FY18). All KMP held their position for the duration of FY18, unless otherwise noted. Name Non-Executive Directors Helen Kurincic John Atkin Rupert Harrington Raelene Murphy Executive Directors Dr Ian Kadish Dr Chien Ping Ho Dr Sally Sojan Executives Anne Lockwood Gregory Hughes Craig Bremner Position Independent, Non-Executive Chairman Independent, Non-Executive Director Independent, Non-Executive Director Independent, Non-Executive Director Managing Director and Chief Executive Officer Executive Director Executive Director Chief Financial Officer (commenced as interim CFO on 1 September 2017 and appointed permanent CFO from 1 December 2017) Chief Operating Officer (position made redundant and ceased to be KMP on 9 February 2018) Chief Financial Officer (ceased on 31 August 2017) For the remainder of the Report, the term ‘Executive’ refers to all Executive KMP except for Dr Chien Ping Ho and Dr Sally Sojan who are both full time radiologists with the group. 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. Minimum Shareholding Policy F. Additional disclosures relating to KMP A. Principles used to determine the nature and amount of remuneration The objectives of the Group’s Executive reward framework is to align Executive reward with the achievement of strategic objectives, the creation of value for shareholders and ensures the reward for performance is competitive and appropriate for the results delivered. The Board of Directors (‘the Board’) works to ensure that Executive reward satisfies the following key criteria: • competitiveness and reasonableness; • acceptability and alignment to shareholders; • performance linkage/alignment of Executive compensation; and • transparency. The Company’s remuneration policy for Non-Executive Directors aims to ensure that the Company can attract and retain suitably qualified and experienced Non-Executive Directors. 14 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 15 People and Remuneration Committee The People and Remuneration Committee (PRC) is governed by the PRC Charter and is responsible for reviewing and recommending to the Board compensation arrangements for the Non-Executive Directors, Executive Directors, other KMP and Senior Management including: (a) contract terms, annual remuneration and participation in any short and long-term incentive plans. (b) major changes and developments in the Company’s remuneration, superannuation, recruitment, retention and termination policies and procedures. (c) remuneration strategy, performance targets and bonus payments for the CEO and the Executives that report to the CEO. (d) remuneration arrangements for the Chairman and the Non-Executive Directors of the Board, including fees, travel and other benefits. 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. The following Non-Executive Directors, all of whom are regarded as independent, were members of the PRC for the entire financial year: John Atkin – Chairman Independent, Non-Executive Director Helen Kurincic Independent, Non-Executive Director Rupert Harrington Independent, Non-Executive Director 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. Use of remuneration consultants The Board ensures that any recommendations made by consultants in relation to remuneration arrangements of KMP 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. During FY18, the Company did not receive any ‘remuneration recommendations’ as defined under the Corporations Act 2001 (Cth). Comparative market benchmarking of Senior Executive remuneration was undertaken by the Chair of the PRC and discussed with the Chair of the Board together with the Non-Executive Directors of the PRC. 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. The following additional annual fees are payable to Committee members for their service to their respective Committees, except the Chairman of the Board: • $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. Integral Diagnostics Annual Report 2018 14 15 Integral Diagnostics Annual Report 2018 Remuneration Report continued For year ended 30 June 2018 All Non-Executive Directors’ fees include superannuation. No additional fees are paid to the Nomination Committee Chair or members. The PRC reviewed Directors’ fees during the year and determined that there would be no increase for the 2018 financial year. There will also be no Director fee increase for the 2019 financial year. Executive Directors’ remuneration arrangements Dr Chien Ping Ho and Dr Sally Sojan are deemed to be Executive Directors as they are employed as radiologists by the Group. The key terms of their employment contracts are consistent with all radiologist shareholders and include a fixed salary at market rate plus allowances where appropriate and in line with market. An Executive Director Board fee of up to $50,000 is paid to each of Dr Chien Ping Ho and Dr Sally Sojan. Further details are provided on pages 21 and 22. Executive remuneration arrangements The Executive remuneration and reward framework for the 2018 financial year has three components: • fixed remuneration (including base salary and superannuation) and non-monetary benefits; • short-term performance incentives; and • long-term performance incentives. The combination of these comprises the Executives’ total remuneration. An Executive’s remuneration arrangement is reviewed annually by the PRC, based on individual and business performance, the overall performance of the Group and comparable market data. At risk remuneration consists of the short-term (STI) and long-term (LTI) incentive programs which have been designed to align Executive remuneration with the creation of shareholder value through achievement of strategic and financial objectives. Remuneration mix During the reporting period, the remuneration mix for each Executive is shown below: Executives Dr Ian Kadish Anne Lockwood2 Gregory Hughes3 Craig Bremner4 Fixed Remuneration (%) 72% 80% 80% 80% STI (%) 14% 17% 20% 20% LTI (%)1 14% 3% – – 1. LTI calculated with reference to proportional allocation of annual expense of the maximum LTI opportunity from grant date. 2. Appointed KMP on 1 September 2017 as Interim CFO, formal CFO appointment approved 1 December 2017. 3. Position made redundant and ceased to be KMP on 9 February 2018. 4. Ceased to be KMP on 31 August 2017, ineligible to participate in the FY18 STI plan. The percentage of remuneration that is ‘at risk’ LTI assumes all applicable performance conditions are achieved in full. Details of Executive remuneration is set out below. 16 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 17 Fixed Remuneration Delivery mechanism Considerations Strategic objective Governance • 100% cash payment including base salary and employer superannuation contributions • Role scope and complexity • The Executive’s skills and experience • Industry benchmarking • To attract and retain high quality Executives to deliver Company objectives • Reward capability and experience • Fixed remuneration is reviewed annually by the PRC with regard to market rates and individual performance • There are no guaranteed increases to fixed remuneration in employment contracts Short Term Incentive (STI) Delivery mechanism • 100% cash payment Performance period • The FY18 STI targets were set at the commencement of FY18 and assessed by the PRC after the end of the financial year, based on the Company’s audited annual results and individual performance against non-financial targets. Performance hurdles and measures NPAT Growth Hurdle • A gateway is in place for all Executives which means a minimum NPAT target must be achieved before any STI will be paid. Financial Performance Target • 50% of STI will be available based on achievement of year-on-year NPAT growth. • NPAT growth was selected because it is better aligned to the creation of shareholder returns. Strategic Priority Targets • 50% of STI will be available on achievement of non-financial strategic objectives and priorities being safety and quality, business development, technology and organizational capability transformation, which are all essential areas to positive outcomes for the Company and its stakeholders. The PRC reviews each Executive’s performance against these metrics to ensure Executives consider non-financial objectives when making strategic decisions. STI opportunity Maximum STI opportunities are outlined below: Executive Dr Ian Kadish Anne Lockwood Craig Bremner Gregory Hughes Maximum opportunity $100,000 $70,000 $83,000 $83,000 Strategic objective • The Financial Performance Target and Strategic Priority Targets were chosen because they are align with the short-term objectives of the business whilst consistent with the long term strategy of the Company. Governance • Performance measures and objectives are clearly defined and measurable • Targets are recommended by the PRC and approved by the Board • Any incentive payment is not an entitlement and provided at the complete discretion of the Board FY18 outcome • The operating NPAT result of $18.2m achieved the gateway hurdle requirement, therefore triggering the STI payment. Refer to pages 21 and 22 for further details on the STI payments. Integral Diagnostics Annual Report 2018 16 17 Integral Diagnostics Annual Report 2018 Remuneration Report continued For year ended 30 June 2018 Long Term Incentive (LTI) Strategic objective • The LTI Plan is designed to encourage Executives to focus on the key performance drivers which underpin sustainable growth in shareholder value. It is also designed to align the interests of Executives with the interests of shareholders by providing an opportunity for Executives to receive an equity interest in the Company. Participation by Executives FY18 LTI award • The CEO and CFO participated in the FY18 LTI Plan. • The FY18 LTI award was delivered in the form of zero exercise priced options (Performance Rights). • The number of Performance Rights granted to participants was determined by use of a face value methodology. A participant’s FY18 LTI award was divided by the volume weighted average price of the Company’s shares traded on the ASX over the 30 trading days up to 30 June 2017. • Each Performance Right entitles the holder to one ordinary share in the Company (or an equivalent cash payment in lieu of an allocation of shares) subject to the satisfaction of an earnings per share performance condition. • Performance Rights are granted by the Company at no cost to the participant and no payment is required to be made on vesting and exercise of the Performance Rights. • Performance Rights will automatically be exercised on vesting. • Performance Rights do not carry any voting or dividend entitlements prior to vesting and exercise. Performance Period Performance condition and measures The FY18 LTI Performance Rights will be tested based on performance over a 4 year period commencing on 1 July 2017 and ending on 30 June 2021. • The FY18 Performance Rights will vest subject to the satisfaction of an earnings per share (EPS) performance condition. • The EPS performance condition will be measured by reference to the compound annual growth rate (CAGR) of the Company’s EPS over the Performance Period. • EPS measures the earnings generated by the Company attributable to each share on issue on a fully diluted basis. • The EPS performance condition was selected because of its correlation with long-term shareholder return and its lower susceptibility to short-term share price volatility. • Calculation of EPS, the CAGR of the EPS and achievement against the performance condition will be determined by the Board in its absolute discretion, having regard to any matters that it considers relevant (including any adjustments for unusual or non-recurring items that the Board consider appropriate). The percentage of Performance Rights that will be eligible for vesting (if any) will be determined as follows: Company’s EPS CAGR over the Performance Period Less than 5% p.a. Equal to 5% p.a. Between 5% and 15% p.a. Equal to, or above, 15% p.a. % of FY18 Performance Rights that Vest Nil 20% Straight line pro rata Vesting between 20% and 100% 100% Assessment of performance condition • EPS growth rate is to be calculated with reference to underlying earnings (operating1). • The method of assessing the EPS performance condition has been chosen as the Board believes it is the most appropriate way to assess the true financial performance of the Company and determine remuneration outcomes. 18 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 19 Testing of performance condition • Testing of the Performance Rights is expected to occur in FY22, shortly after the end of the Performance Period. • Any Performance Rights that vest will be automatically exercised, and participants are not required to pay an exercise price. Any remaining Performance Rights that do not vest will lapse. • If none of the FY18 Performance Rights vest following testing after the end of the Performance Period due to some extreme event or circumstance, the Board may decide to re-test the performance condition at the end of a further one year period ending on 1 July 30 June 2022. Any FY18 Performance Rights that do not vest after the re-test will lapse immediately. Additional restrictions • Participants in the LTI Plan must elect to place an additional dealing restriction, by way Treatment of cessation2 of a holding lock, on any shares they may receive on vesting and exercise of the Performance Rights. • The minimum additional restriction period applies until 1 July 2022 and the maximum additional restrictions period applies until 1 July 2029 (or 1 July 2030 where the Performance Rights vest following re-testing). • Where a participant ceases employment for cause or due to resignation (other than due to death, permanent disability or serious illness) all unvested Performance Rights will lapse, unless the Board determines otherwise. • In all other circumstances, a pro rata portion of Performance Rights (based on the portion of the Performance Period that has elapsed) will remain on foot and be subject to the original performance condition (including that the Performance Rights will be eligible for re-testing), as though the participant had not ceased employment, unless the Board determines otherwise. Change of control • Where there is takeover bid or other transaction, event or state of affairs that in the Board’s opinion is likely to result in a change in control of the Company, the Board has the discretion to accelerate vesting of some or all of the Performance Rights (but not less than a pro rata portion (calculated based on the portion of the Performance Period that has elapsed and tested based on performance against the performance condition to that date)). Where only some of the Performance Rights are vested on a change of control, the remainder of the Performance Rights will immediately lapse. • If an actual change of control occurs before the Board exercises its discretion, a pro rata portion of the Performance Rights (equal to the portion of the relevant Performance Period that has elapsed up to the change of control) will be tested based on performance against the performance condition to that date. The Board retains a discretion to determine whether the remaining unvested Performance Rights will vest or lapse. • The Board has broad “clawback” powers to determine that any Performance Rights granted under the LTI Plan may lapse, shares allocated on vesting and exercise be forfeited, or cash payments or dividends be repaid in certain circumstances (e.g. in the case of fraud or gross misconduct). This protects the Company against the payment of benefits where participants have acted inappropriately. Forfeiture and clawback Governance • The performance condition and objectives are clearly defined and measurable • Any grant is not an entitlement and provided at the complete discretion of the Board 1. Operating defined as NPAT before one-off costs. 2. For FY18, the Board has determined that in the event of the CEO or CFO ceasing employment as a good leaver their full FY18 Performance Rights would stay on foot. Company performance The Company aims to align its Executive remuneration to its strategic and business objectives and the creation of shareholder value. The table below shows measures of the Group’s financial performance over the last three years. The Company listed on the ASX in October 2015. As a result, it is not possible to address the statutory requirement that the Company provides a five- year discussion of the link between performance and reward in this Remuneration Report as the Company has not been listed for a sufficient time. Integral Diagnostics Annual Report 2018 18 19 Integral Diagnostics Annual Report 2018 Remuneration Report continued For year ended 30 June 2018 The link between the Company’s performance and STI and LTI outcomes is considered in the sections below. Key Measures of the Group Operating EBITDA1 as a % of revenue Operating NPAT2 as a % of Revenue EPS (cents per share) Return on Operating Assets (based on operating NPAT) Closing share price3 Dividends paid per share Declared dividend payout ratio on operating NPATA 1. Operating EBITDA defined as EBITDA before one-off costs. 2. Operating NPAT defined as NPAT before one off costs. 3. The opening share price on 21 October 2015 was $1.91. FY2018 20.1% 9.6% 10.40cps 14.29% 3.02 8.0cps 65.0% FY2017 18.8% 8.3% 10.67cps 11.6% 1.66 7.0cps 65.6% FY2016 21% 9.9% 8.2cps 13.4% 1.45 4.0cps – Company performance and FY18 STI outcome The operating NPAT result of $18.2m achieved the hurdle requirement, therefore satisfying the gateway condition for the STI payments. In respect of FY18, 100% of current Executive STIs will be paid reflecting their contribution to the performance of the Group and their contribution to the takeover response. STI payments will be made on 15 September 2018. The table below shows the STI payment to each Executive for the current financial year: Executives Dr Ian Kadish1 Anne Lockwood2 Gregory Hughes3 Craig Bremner4 STI Foregone % – – 58% NA FY2018 STI Paid % 100% 100% 42% NA STI Payment $5 100,000 70,000 35,285 NA 1. Appointed effective 22 May 2017. 2. Appointed KMP on 1 September 2017 as Interim CFO, formal CFO appointment approved 1 December 2017. 3. Position made redundant and ceased to be KMP on 9 February 2018. 4. Ceased to be a KMP on 31 August 2017, ineligible to participate in the FY18 STI plan. 5. The minimum STI value possible is zero. B. Details of remuneration LTI Performance Rights granted in FY18 The table below shows the LTI details for each Executive for the financial year ended 30 June 2018: Executives Dr Ian Kadish Anne Lockwood Grant date 22/11/2017 27/04/2018 # of Performance Rights granted1 362,585 100,154 Fair value on grant date $1.54 $1.94 Aggregate fair vale1 $558,381 $194,299 Vesting and exercise date2 30/06/2021 30/06/2021 Performance Rights expiry date 30/6/22 30/6/22 1. The FY18 performance rights granted were made with reference to the 30 day VWAP of the Company’s shares traded up to, and including 30 June 2017, calculated fair value was made on grant date. 2. The FY18 LTI Performance Rights are zero exercise price options and the Performance Rights are automatically exercised on vesting. Movements in Performance Rights held by Executives The following table sets out the movement during FY18 of Performance Rights held by each Executive and their related parties. None of the Performance Rights vested or lapsed during the reporting period and none of the Performance Rights are presently capable of being exercised. 20 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 21 Granted Balance Executives Dr Ian Kadish Anne Lockwood 1 July 2017 Number 362,585 nil 100,154 nil Value ($)1 558,381 194,299 Vested Number & Value – – Lapsed Number & Value – – Balance 30 June 2018 362,585 100,154 Maximum value to be recognised in future years2 464,610 183,411 1. The value of FY18 LTI Performance Rights granted in the year is the fair value of the Performance Rights calculated at the grant date using the Black Scholes Pricing Model. 2. No grants will vest if the performance conditions are not satisfied, hence, the minimum value of grants yet to vest is nil. The maximum value of grants yet to vest has been estimated based on the fair value per grant at the maximum achievement of the vesting scale less amounts already recognised as an expense. Amounts of remuneration Details of the remuneration received by the Group’s KMP for FY18 and the prior financial year are set out in the following tables. Short Term Benefits Post- employment Benefits Long term benefits Value in Share based plans Cash salary and fees $ 182,648 111,416 108,220 90,000 Cash incentive $ Superann- uation $ Long service leave $ Performance rights granted $ Total remuneration $ n/a n/a n/a n/a 17,352 10,584 10,280 – – – – – n/a n/a n/a n/a 200,000 122,000 118,500 90,000 488,805 511,218 788,697 2,281,004 100,000 n/a n/a 100,000 20,890 19,153 25,000 103,259 7,397 5,487 10,253 23,137 93,771 n/a n/a 93,771 710,863 535,858 823,950 2,601,171 254,291 107,841 304,334 666,466 70,000 – 35,285 105,285 14,458 5,964 25,000 45,422 10,574 – – 10,574 10,887 n/a n/a 10,887 360,210 113,805 364,619 838,634 Proportion of total remuneration related to performance % 0 0 0 0 27.26% 0 0 7.45% 22.46% 0 9.68% 13.85% FY2018 Non-Executive Directors Helen Kurincic John Atkin Rupert Harrington1 Raelene Murphy2 Executive Directors Dr Ian Kadish3 Dr Chien Ping Ho4 Dr Sally Sojan4 Other Key Management Personnel Anne Lockwood5 Craig Bremner6 Gregory Hughes7 1. Chair of ARCC from April to September 2017. 2. Appointed 1 October 2017 and Chair of ARCC from October 2017. 3. Remuneration includes non-recurring relocation allowance of $20k. 4. Remuneration is as a radiologist of IDX and includes Executive Director fees. 5. Appointed 1 September 2017 as Interim CFO, permanent appointment from 1 December 2017. 6. Ceased on 31 August 2017. 7. Position made redundant and ceased to be KMP on 9 February 2018. Integral Diagnostics Annual Report 2018 20 21 Integral Diagnostics Annual Report 2018 Remuneration Report continued For year ended 30 June 2018 With reference to FY17 company performance, no STIs were paid. Short Term Benefits Post- employment Benefits Long term benefits Cash salary and fees $ Cash incentive $ Superann- uation $ Long service leave $ Total remuneration $ Proportion of total remuneration related to performance % 182,648 111,416 82,160 86,301 44,268 617,607 702,572 444,801 2,271,473 301,717 301,717 603,434 – – – – – – – – – – – – 17,352 10,584 7,340 8,199 4,205 20,823 25,000 20,193 113,696 19,616 19,616 39,232 – – – – 1,205 9,198 8,644 – 19,047 5,029 5,029 10,058 200,000 122,000 89,500 94,500 49,678 647,328 736,216 464,994 2,404,216 326,362 326,362 652,724 0 0 0 0 0 0 0 0 0 0 0 FY2017 Non-Executive Directors Helen Kurincic John Atkin Rupert Harrington1 Garry Hounsell2 Executive Directors Dr Ian Kadish3 Dr Chien Ping Ho4 Dr Sally Sojan4 John Livingston5 Other Key Management Personnel Craig Bremner6 Gregory Hughes 1. Eligible for Directors’ fees from 1 October 2016 and Chair of ARCC from April 2017. 2. Ceased on 31 March 2017. 3. Appointed effective 22 May 2017. 4. Remuneration is as a radiologist of IDX and includes Executive Director fees. 5. Ceased as an Executive Director on 21 May 2017, and ceased employment on 31 July 2017. 6. Ceased on 31 August 2017. C. Other transactions with KMP and their related parties Related party transactions Payment for goods and services Payment for rental of buildings to Eleven Eleven How Pty Ltd of which Dr Chien Ping Ho, Gregory Hughes and Craig Bremner are related Payment for rental of buildings to Kiwi Blue Pty Ltd of which Dr Chien Ping Ho is related Consolidated 30 June 2018 $ 368,506 210,820 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 practices, to ensure that a 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. 22 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 23 Loans No KMP has entered into a loan made, guaranteed or secured, directly or indirectly, with or by the Company or any of its subsidiaries during the reporting period. D. Service agreements Remuneration arrangements for Executive KMP are formalised in employment agreements. Key conditions for Executive KMP are outlined below: Name Dr Ian Kadish Agreement commenced Agreement expire Notice of termination by group Employee notice 22 May 2017 No fixed end date Six months Dr Chien Ping Ho Dr Sally Sojan 1 August 2014 1 August 2014 No fixed end date No fixed end date Six months, or 12 months if change of control event. Six months Six months Six months Six months post minimum employment period of five years Six months Anne Lockwood 1 December 2017 No fixed end date Six months E. Minimum Shareholding Policy From 1 July 2018, the Board has introduced a Minimum Shareholding Policy that requires Non-Executive Directors, Executive Directors and other KMP to build and maintain a minimum shareholding by the later of the fifth anniversary of the policy or the fifth anniversary of their appointment in that role. KMP are required to meet a minimum shareholding equivalent as per the prescribed percentage of their total base remuneration as outlined below: Managing Director and CEO: CFO: 100% 50% Non-Executive Directors and Executive Directors are required to establish and maintain a minimum shareholding of shares equal to 100% of their annual director fees. F. 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 Dr Chien Ping Ho Dr Sally Sojan Dr Ian Kadish John Atkin Rupert Harrington Raelene Murphy Anne Lockwood1 Craig Bremner2 Gregory Hughes3 Balance at 1 July 2017 420,870 2,445,481 1,026,491 – 132,945 255,890 – – – – 4,281,677 Additions – – 20,000 66,202 – 50,000 23,946 – – – 166,322 Disposals/other – 101,851 – – – – 11,111 – – – 112,962 Number of shares held upon ceasing to be KMP – – – – – – – – 2,467,230 2,467,230 4,934,460 Balance at the end of the year 420,870 2,343,630 1,046,491 66,202 132,945 305,890 12,835 – 2,467,230 2,467,230 9,263,323 1. Commenced as interim CFO on 1 September 2017 and appointed permanent CFO from 1 December 2017. 2. Ceased on 31 August 2017. 3. Position made redundant and ceased to be KMP on 9 February 2018. The Remuneration Report has been audited. 23 Integral Diagnostics Annual Report 2018 Integral Diagnostics Annual Report 2018 22 Auditor’s Independence Declaration For year ended 30 June 2018 Auditor’s Independence Declaration As lead auditor for the audit of Integral Diagnostics Limited for the year ended 30 June 2018, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Integral Diagnostics Limited and the entities it controlled during the period. Jason Perry Partner PricewaterhouseCoopers Melbourne 22 August 2018 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. 24 Integral Diagnostics Annual Report 2018 Operating and Financial Review For year ended 30 June 2018 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 33 to 70 and the ASX announcement and full year results presentation dated 23 August 2018. 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. IDX has a diversified revenue mix and focuses on providing a full range of diagnostic imaging modalities. Our footprint in full service hospitals leads to higher complexity and greater use of MRI and PET machines and interventional procedures throughout our business which leads to less reliance on bulk billed services. Post the acquisitions on the 2nd July 2018 in New Zealand and Victoria, IDX operates in four key markets. Geographic Market Operating Brands Core markets Sites (including hospital sites) Hospital sites MRI machines MRI licences Employed Radiologists1 Employees Victoria Lake Imaging Geelong Medical Imaging South West MRI Western District Radiology Ballarat, Geelong, Warrnambool and outer western areas of Melbourne 27 7 7 4 full 0 partial 27 351 Total IDX Queensland South Coast Radiology Darling Downs Radiology Mackay Radiology Western Australia Global Diagnostics New Zealand Specialist Radiology Group Trinity MRI Gold Coast, Toowoomba and Mackay South West Western Australia Auckland 13 2 7 3 full 3 partial 31 348 9 4 2 2 full 0 partial 8 155 4 – 3 na 14 74 53 13 19 9 full 3 partial 80 928 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 the most effective and efficient form of treatment for patients. In this way, appropriate use of diagnostics imaging can significantly enhance medical outcomes for patients while at the same time reduce the overall cost of health care. 1. Relates to employed radiologists only. In addition IDX has a number of contractor radiologists (~39 currently). 25 Integral Diagnostics Annual Report 2018 Operating and Financial Review continued For year ended 30 June 2018 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) Operating revenue Other revenue 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 Impairment of asset and restructuring provision Fair Value gain on acquisition of SWMRI Joint venture Statutory NPAT prior to takeover response costs Takeover response costs Statutory NPAT Amortisation NPATA Operating EBITDA as a % of Revenue Operating NPAT as a % of Revenue Operating Basic EPS (earnings per share) Statutory Basic EPS (earnings per share) Return on operating assets (Operating NPAT) Declared dividend payout ratio on operating NPATA Actual 2018 188.1 1.3 189.4 38.1 28.5 18.2 (1.4) – – 16.8 (1.7) 15.1 15.4 20.1% 9.7% 12.55 10.40 14.29% 65.0% Actual 2017 177.7 2.0 179.7 33.5 23.7 15.1 – (0.8) 1.2 15.5 – 15.5 15.9 18.6% 8.4% 10.41 10.67 11.6% 65.6% The Operating performance of IDX was a material improvement on FY17. The strong financial performance was driven by solid organic revenue growth and the realisation of significant cost efficiencies resulting in IDX delivering an industry leading operating margin of 20.1%. The lower statutory performance was due to the $3.1million in takeover response ($1.7m) and transaction costs ($1.4m). Before takeover response costs Statutory NPAT improved by 8.4%. IDX has only allocated costs directly related to external advisors and transaction related travel costs. The one off costs do not include any internal costs that would have otherwise been incurred in operations or business improvement. Financial overview • Achieved an overall examination volume increase of 6.7%, and operating revenue growth of $10.4 million (5.9 %) to $188.1million. The solid Operating growth was driven by new management executing on initiatives improving patient access from Q2 and leveraging off IDX’s strong hub and spoke model to drive organic growth. • Patient examination volume growth for the Company across Medicare funded, patient funded, and reporting contract examinations was up 6.7% in FY18 (with one less working day). This level of volume growth is above the Medicare data growth rate of 5.7% in the States in which IDX operates. IDX had particularly strong growth in volumes from reporting contracts and non-Medicare related imaging. • Despite the strong revenue growth the Company was impacted by the impaired access in Q1 and the Commonwealth Games on the Gold Coast in April 2018. • Significant cost efficiencies were realised during FY18 delivering an industry leading operating margin of 20.1% – Labour costs declined as a percentage of revenue reflecting management’s approach to flexing labour to demand. Labour costs in FY18 also includes approximately $1.3million of incentives not included in FY17. – Consumable costs declined 2% or $0.2m from prior year despite volumes being up by 6.7%. 26 Integral Diagnostics Annual Report 2018  – Except for equipment, all other operating cost centres declined as a percentage of revenue – reduced costs were driven by the vendor audit and cost efficiency reviews and did not impact service levels in any way. Equipment costs are a focus in FY19 and management is currently undertaking a review of all service costs and adopting a national procurement approach for equipment. – Depreciation costs were minimised due to managements and radiologists focus on ‘smart spending’ which reduced capital outlay and resulting depreciation. – Finance costs were reduced by a successful refinancing of debt facilities and disciplined use of surplus cash to fund asset purchases instead of higher cost asset financing. – Effective tax rate increased due to impact of non-deductible transaction costs. Operating performance overview • Successful defence of unsolicited, hostile takeover bid, clearly proven not to be in the best interests of IDX shareholders; • Completion of high margin/high growth New Zealand acquisitions with high end clinical specialties and completion of a bolt on acquisition in Victoria (July 2nd, 2018); • Installation of new call centres in QLD and WA, considerably improving access for patients and referrers from Q2; • Upgraded clinical systems for improved medical imaging, efficiency and referrer engagement; • Replaced MRI in Mackay with higher end wide bore MRI to better service the community; • Opened the Spine Centre of Excellence on the Gold Coast; • Commenced review of radiologist recruitment, retention, incentives and escrow arrangements; and • Major refurbishment and addition of the first and only private PET facility in Geelong at St John of God Private Hospital. Capital expenditure Total expenditure on tangible assets was $14.0 million (FY17: $13.4 million) of which $8.8 million related to replacement, and $5.2 million related to growth opportunities. The growth capital expenditure included the Spine Centre of Excellence on the Gold Coast, the major refurbishment and new PET facility at the St John of God Hospital in Geelong, new site development at Miami Beach (opening in FY19) and investment in IT infrastructure and software to align the group’s network, deliver synergies and improve the patient and referrer experience. The development of the specialist Prostate site in partnership with the Australian Prostate Cancer Research Centre has been delayed and will occur in FY19. Acquisitions On 2 July 2018, the Group completed the acquisition of Specialist Radiology Group, Trinity MRI and Cavendish Radiology in Auckland, New Zealand. The three businesses combined: • Comprise the leading specialist radiology clinics in Auckland; • Employ and contract several of the nation’s leading specialists in musculoskeletal radiology and neuroradiology; • Have a projected EBITDA contribution of NZ$13m to NZ$14m (A$12m to A$13m1) for FY19; • A high growth business with strong margins; and • Provides a premier platform for Integral Diagnostics to enter and grow in New Zealand. This strategic acquisition includes four clinics, employing 14 radiologists who work in both the public and private sector. The clinics are market leaders in providing complex modalities including MRI, CT and SPECT (nuclear medicine), which are high margin services positioned to experience significant future growth. The clinics are fitted with a state of the art and modern modality fleet. 1. Based on average exchange rate of NZD$1 AUD$0.93. 27 Integral Diagnostics Annual Report 2018 Operating and Financial Review continued For year ended 30 June 2018 IDX also completed the acquisition of Geelong Medical Imaging (GMI) on 2 July 2018, which comprises two radiology clinics in Geelong, Victoria. The clinics provide a number of modalities, including X-Ray, ultrasound, CT, MRI and nuclear medicine. The vendor radiologist is dual-trained in radiology and nuclear medicine. The FY19 EBITDA contribution of the GMI business is projected to be $1m. Taxation The effective tax rate on operating earnings is 31.79% (FY17: 27.35%) as a result of non-deductible transaction costs. Cash flows Increase in free cash flows by 27.9% to $30.7 million (FY17: $24.0 million). Capital Management The decline in net debt by 7.8% to $44.9 million (30 June 2017: $48.7 million) was largely due to strong cash flows. Net Debt/EBITDA ratio of 1.2X at 30 June allowing IDX to comfortably execute acquisitions on 2nd July 2018. Post acquisition the Net Debt/EBITDA ratio is approximately 2.2X. The Company renewed and extended debt facilities for a further three years in December 2017 and has maintained the average cost of debt at less than 3.8%. The Company is currently undertaking a review of required financing and the optimal capital structure to fund an ongoing acquisition strategy. Earnings per share On a statutory basis, Basic Earnings per Share declined by 2.5% to 10.40 cents per share (FY17: 10.67 cents per share). Pre takeover defence costs Statutory Basic Earnings per Share for FY18 was up at 11.57 cents per share. Diluted Earnings per Share in FY18 taking into account the FY18 performance rights issue was 10.38 cents per share (FY17: 10.67 cents per share). On an Operating NPAT performance, Basic Earnings per Share increased 20.7% to 12.55 cents per share (FY17 10.41 cents per share). Dividend Dividend payments of 8.00 cents per share ($11.6 million) fully franked will be paid for FY18. This represents 65.0% of Operating NPATA. The dividend is in line with the IDX dividend policy. A dividend of 4.00 cents per share fully franked will be paid on 4 October 2018 to shareholders on the register at 3 September 2018. 28 Integral Diagnostics Annual Report 2018 Company outlook The long-term industry fundamentals in Australia and New Zealand are strong and continue to underpin attractive on-going growth opportunities. Australia and New Zealand have growing and ageing populations 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. Increasing the use of diagnostic imaging as an early detector of disease leads to better preventative care via less invasive treatments which will ultimately lower overall healthcare costs. The Company’s focus in FY19 will be to: • Leverage off our diversified revenue streams and developed hub and spoke model to drive organic growth and further efficiency gains; • Focus on selection and implementation of leading edge technology solutions to improve the patient and referrer experience whilst protecting privacy that are best in class in the industry; • Develop a prostate imaging centre of excellence in partnership with the Australian Prostate Cancer Research Centre in North Melbourne. The centre will also include state of the art cardiac imaging; • Conclude review of radiologist recruitment, retention, incentives and escrow arrangements; • Successfully integrate the New Zealand and Geelong Medical Imaging acquisitions which will be EPS accretive; and • Execute on further value accretive, strategic acquisitions that are a good cultural and clinical fit and are strategically aligned. IDX remains committed to getting on with the business of executing on our attractive prospects and growth strategy supported by a medically led and diversified business model. Regulatory outlook The regulatory environment is generally positive across Australia and New Zealand. In Australia IDX expects to benefit from the introduction of an MBS rebate on MRI of the prostate from the 1st of July 2018. This will be partially offset by the restriction of GP’s referring knee MRI’s for patients > 50 years old from the 1st November 2018. New Breast Tomosynthesis items will also be made available from 1 November 2018 for a temporary period while a permanent listing is considered. IDX’s high end clinical focus on specialising in prostate and breast imaging in Australia will benefit from these new item codes. Importantly the Federal Government has committed to reintroducing MBS rebate indexation for a limited number of diagnostic imaging services from July 2020. The regulatory outlook in New Zealand is stable with new pricing on contracts with the Accident Compensation Corporation (ACC) and Southern Cross Health Care (SCH) being recently finalised and confirmed. 29 Integral Diagnostics Annual Report 2018 Operating and Financial Review continued For year ended 30 June 2018 Balance Sheet A summary of the balance sheet as at 30 June 2018 and in comparison to the prior year is outlined in the following table. 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 2018 Actual $’M 20.8 5.6 3.9 30.3 30 June 2017 Actual $’M 24.2 5.1 3.9 33.2 54.1 103.6 2.8 160.5 190.8 12.1 0.3 12.8 10.6 – 35.9 52.5 8.9 0.1 61.5 97.4 93.4 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 • Working capital of ($5.6) million is driven by an increase in current debt due to a number of balloon payments due on finance leases, increase in trade payables due to timing and decline in cash holdings from settlement of takeover response and transaction costs. • Property, plant and equipment increased by $3.6 million due to $14m of purchases offset by depreciation charges. • Provisions (excluding tax) have increased $0.8 million. This increase is due to increased employees (employee provisions) and sites (straight line lease accounting and make good provisions) • Net debt declined by $3.8 million to $44.9 million, resulting in a leverage level of net debt / EBITDA of 1.2x. • The Company renewed its debt facilities in December 2017 for three years and continues to comply with the financial covenants of its facility agreement. • An additional $75million of debt was utilised to fund settlement of the acquisitions on the 2nd of July – leverage is approx. 2.2x post acquisitions. 30 Integral Diagnostics Annual Report 2018 Cash flow A summary of the cash flows as at 30 June 2018 are presented below. Summary of cash flow ($ million) Free cash flow Growth capital expenditure Net cash flow before financing and taxation Tax paid Interest and other costs paid on borrowings Net change in borrowings Deferred consideration Dividends paid Offer transaction costs in equity NET CASH FLOWS Actual 2018 30.7 (5.2) 25.5 (7.0) (2.5) (7.5) (0.01) (11.6) (0.3) (3.4) Actual 2017 20.4 (2.3) 18.1 (7.4) (2.6) 2.7 0.03 (10.2) – 0.6 • Free cash flows of $30.7million are $6.7 million or 27.9% higher than FY17. • Growth capital expenditure was $5.2 million for the year largely for the Spine Centre of Excellence in Southport and the major redevelopment and new PET facility at the St John of God Hospital in Geelong. Growth Capex was lower than expected due to the development of the Prostate Centre of Excellence being delayed until FY19. • Dividends of $11.6 million (8 cents per share fully franked) were paid in FY18. Business risks The risk management framework in place at IDX identifies the risk profile and sets out for each key risk how management assess, manage, monitor, measure and report the risk. IDX’s core risks are described below and these risks are continuously assessed and reported on monthly. This is not a comprehensive list of all of the risks involved that may impact IDX’s financial and operating result in future periods: Strategic • Mergers and acquisitions. It is the Company’s strategy to drive growth organically and through mergers and acquisitions. This strategy may place significant demands on management, resources, internal controls and systems resulting in the failure to realise anticipated benefits or effectively integrate acquisitions. • Contemporary technology and innovation. The failure to adapt or respond to contemporary disruptive innovations and technologies will see an increase in competition and a decline in referrals. Financial • Regulatory change to revenue stream. Changes to government policies and regulations may have a material adverse impact on the financial and operational performance of the Company. • Financial – Contracts and service agreements. Contracts and service agreements may be breached, terminated or not renewed resulting in loss of capacity and revenue. Compliance • Regulatory compliance. Not meeting industry or regulatory compliance requirements will lead to the loss of licenses and accreditation and the inability to provide services or offer rebates which will reduce the demand for services. • Privacy and confidentiality. The Company relies on secure processing, transmission and storage of confidential, proprietary and other information in its IT infrastructure. The loss or misuse of personal information, or inadequate and insecure data protection and privacy protocols may result in a breach of a patient or referrer privacy and confidentiality. Operations and ICT • Cyber security and data loss. Data integrity and IT infrastructure security and monitoring is paramount to mitigate data loss, cyber-attacks, exposure and breaches. • Disaster recovery and crisis management. Inadequate processes and resources to manage crisis or unexpected events that threaten to harm the Company and its stakeholders. 31 Integral Diagnostics Annual Report 2018 Operating and Financial Review continued For year ended 30 June 2018 Quality and Safety • Clinical risk management. Inadequate and substandard professional clinical service provision places patients at risk of harm. • Unsafe work practices. The inability to maintain safe work practices and systems for staff, patients and their carers. Professional Staff • Recruitment and retention of professional staff. The inability to attract, recruit, and retain quality skilled; Radiologists, technical professionals, management and staff will impact the ability to provide quality services to patients and referrers. Risk management The Company’s risk management framework is overseen by the Audit Risk and Compliance Committee and is actively managed by the Senior Management Group. The framework is consistent with ISO 31000:2018 Risk Management – Guidelines and is subject to regular review. The framework is used to enable a consistent and rigorous approach to identifying, analysing and evaluating risks. Fundamental to the Company’s robust risk management framework has been the development and understanding of risk appetite across the business. Risk appetite is defined as the amount of risk on a broad level that the Board has been prepared to take to meet its Company goals. The Board’s risk appetite is aligned to the risk culture of the company; vision and values; strategic plan and goals; service commitment and patient and referrer demographic; and the financial and budget environment in which the Company is operating. A key component of the Company’s risk management is clinical governance which is managed through Integral Diagnostic’s National Clinical Leadership Committee (NCLC) 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 NCLC include reviewing any recommendations arising from any adverse incidents from the State CLCs and to share learnings to prevent recurrence. The NCLC and Board have also endorsed the Company’s new Clinical Governance and Quality Framework which is the overarching framework directing the delivery of safe and high quality diagnostic imaging services across the Group whilst maximising outcomes for patients and referrers through quality of care, continuous improvement, risk mitigation and fostering an environment of excellence in care. The Clinical Governance and Quality Framework is supported through the elements of: governance and leadership; systems and structures; roles and responsibilities; culture and transparency; and performance review and reporting. The principles of the framework meet the requirements of ISO 9001:2015 Quality Management Systems – Requirements and ISO 31000:2018 Risk Management – Guidelines. Post the acquisition of the New Zealand entities the NCLC was re-named Integral Clinical Leadership Committee (ICLC) and will incorporate a New Zealand based Clinical Leadership Committee. The Company’s Audit Risk and Compliance Committee Charter is also available in the Corporate Governance section of its website. 32 Integral Diagnostics Annual Report 2018 Consolidated Statement of Profit or Loss and Other Comprehensive Income For year ended 30 June 2018 Note 30 June 2018 $’000 30 June 2017 $’000 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 and takeover defence costs Equipment related expenses Occupancy expenses Other expenses Impairment of asset and restructuring provision Finance costs Total expenses Operating profit Profit before income tax expense Income tax expense Profit for the year from continuing operations Profit is attributable to: Owners of Integral Diagnostics Limited 5 5 6 6 6 6 6 7 Earnings per share attributable to the owners of Integral Diagnostics Limited Basic earnings per share Diluted earnings per share 37 37 Consolidated Statement of other comprehensive income Items that may be reclassified to profit & loss: Net (loss)/gain on cash flow hedges Total comprehensive income Total comprehensive income is attributable to: Owners of Integral Diagnostics Limited 189,399 – 330 189,729 (8,649) (109,513) (9,610) (3,902) (7,691) (13,120) (12,354) – (2,783) (167,622) 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) 22,107 21,309 22,107 21,309 (7,028) 15,079 (5,829) 15,480 15,079 15,079 Cents 10.40 10.38 15,480 15,480 Cents 10.67 10.67 (85) 14,994 – 15,480 14,994 15,480 The above Consolidated Statement of Profit or Loss and Consolidated Statement of Other Comprehensive Income should be read in conjunction with the accompanying notes. 33 Integral Diagnostics Annual Report 2018 Consolidated Statement of Financial Position As at 30 June 2018 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 instruments 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 2018 $’000 30 June 2017 $’000 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 20,844 5,622 3,516 346 30,328 54,084 103,542 2,838 160,464 24,210 5,149 3,514 393 33,266 50,523 103,921 2,675 157,119 190,792 190,385 12,112 12,820 318 10,644 – 35,894 52,503 122 8,851 61,476 8,340 11,495 (34) 10,650 59 30,510 61,397 – 8,126 69,523 97,370 100,033 93,422 90,352 83,425 (11,827) 21,824 83,866 (11,862) 18,348 93,422 90,352 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 34 Integral Diagnostics Annual Report 2018 Consolidated Statement of Changes in Equity For the year ended 30 June 2018 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 (Note 22, 33) Unwinding of DTA in equity Dividend paid (Note 25) Balance at 30 June 2017 Balance at 1 July 2017 Profit after income tax expense Movement in FV of derivative financial instrument Total comprehensive income Transactions with owners in their capacity as owners: Unwinding of DTA in equity Transaction costs recognised in equity (Note 22) Performance rights issue Dividends paid (Note 25) Balance at 30 June 2018 Contributed capital $’000 82,760 – – 82,760 Reserves $’000 (11,862) – – (11,862) 1,275 (169) – 83,866 – – – (11,862) Contributed capital $’000 83,866 – – 83,866 (162) (279) – – 83,425 Reserves $’000 (11,862) – (85) (11,947) – – 120 – (11,827) Retained profits $’000 13,022 15,480 – 28,502 – – (10,154) 18,348 Retained profits $’000 18,348 15,079 – 33,427 – – – (11,603) 21,824 Total equity $’000 83,920 15,480 – 99,400 1,275 (169) (10,154) 90,352 Total equity $’000 90,352 15,079 (85) 105,346 (162) (279) 120 (11,603) 93,422 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 35 Integral Diagnostics Annual Report 2018 Consolidated Statement of Cash Flows For the year ended 30 June 2018 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Transaction and takeover response costs Interest and other finance costs paid Interest received 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 borrowings Repayment of borrowings Dividends paid to Company shareholders Transaction and takeover response costs Settlement of deferred consideration Net cash (used in)/from financing activities Net increase/(decrease) 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 2018 $’000 30 June 2017 $’000 189,703 (149,807) (3,902) (2,842) 330 (6,965) 26,517 – (11,578) 1,144 – (10,434) 4,641 (12,209) (11,603) (278) – (19,449) (3,366) 24,210 20,844 179,604 (146,314) (180) (2,960) – (7,420) 22,730 (3,529) (11,650) 100 370 (14,709) 10,887 (8,134) (10,154) – (30) (7,431) 590 23,620 24,210 36 33 36 36 22 8 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 36 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements Note 1. General information The Financial Report covers Integral Diagnostics Limited as a Group consisting of Integral Diagnostics Limited (‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year (collectively referred to as the ‘Group’). The financial statements are presented in Australian dollars, which is Integral Diagnostics Limited’s functional and presentation currency and are rounded to the nearest thousand dollars ($‘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: Level 8/14-20 Blackwood Street North Melbourne VIC 3051 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 22nd August 2018. 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. 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 32. 37 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Integral Diagnostics Limited as at 30 June 2018 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. 38 Integral Diagnostics Annual Report 2018 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. The value-in-use 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 2018. 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 we are 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. The group continues to analyse the impact of the new standard by assessing the terms of leases in light of the requirements of AASB16. Further lease reviews as required and the computation of the likely lease liability and right of use asset to be recognised on transition will be completed throughout FY2019. This will be followed by consideration of the broader business impacts. The group is still in the process of assessing the appropriate adoption date of AASB16. At this time, the cumulative catch up transition method will be adopted. 39 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued 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. Management have undertaken a review of all revenue streams across the business and applied the requirements of the five step model across each revenue stream to identify the impact of the new revenue standard from application date. Management has assessed the effects of applying the new standard on the Group’s financial statements and has identified that it will not have a material impact on the Group. AASB 9 Financial Instruments AASB9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The standard does not need to be applied until 1 July 2018 but is available for early adoption. The Group does not expect the new guidance to have a significant impact on the classification and measurement of its financial assets. There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from AASB 193 Financial Instruments: Recognition and Measurement and have not been changed. The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting. Based on the Group’s assessment the current hedge relationships would qualify as continuing hedges upon the adoption of AASB 9. Accordingly, the Group does not expect a significant impact on the accounting for its hedging relationships. The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at fair value through other comprehensive income, contract assets under AASB 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. Management has assessed the effects of applying the new standard on the Group’s financial statements and has identified that it is unlikely to have a material impact on the Group. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. 40 Integral Diagnostics Annual Report 2018 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 value-in-use (VIU) calculations. These calculations require the use of assumptions, including anticipated sales growth, long-term growth rate and the post-tax discount rate. 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 value-in-use (VIU) calculations, in conjunction with the goodwill impairment testing which incorporates a number of key estimates and assumptions. 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 2018, there was no external revenue greater than 10% to any one customer (2017: 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 are responsible for the allocation of resources to operating segments and assessing their performance. 41 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 5. Revenue Sales revenue Services revenue Other revenue Other revenue Fair value gain on acquisition of SWMRI joint venture Revenue Consolidated 30 June 2018 $’000 30 June 2017 $’000 188,002 177,710 1,397 – 189,399 2,022 1,200 180,932 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). 42 Integral Diagnostics Annual Report 2018 Note 6. Expenses Profit before income tax includes the following specific expenses: Consolidated 30 June 2018 $’000 30 June 2017 $’000 Depreciation Leasehold improvements Plant and equipment Motor vehicles Office furniture and equipment Total depreciation Amortisation Customer contracts Total depreciation and amortisation Transaction costs and takeover response costs Professional fees and other costs Takeover defence costs Total transaction costs Finance costs Interest and finance charges paid/payable Funding/establishment costs Finance costs expensed Net loss/(gain) on disposal Net loss/(gain) on disposal of property, plant and equipment 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 1,096 6,292 28 1,815 9,231 379 9,610 1,468 2,434 3,902 2,627 156 2,783 1,087 6,242 107 1,751 9,187 644 9,831 – – – 2,653 188 2,841 (424) 477 89,552 6,160 13,801 109,513 – – – 88,211 6,032 11,334 105,577 810 298 1,108 The impaired asset relates to building works conducted on leased land at Pt Headland in relation to the Mobile MRI. 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 value-in-use 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 was impaired as at 30 June 2017. Minimum lease payments recognised as operating lease expense were $9.671 million (2017: $8.683 million). Costs of inventories recognised as expense were $8.649 million (2017: $8.850 million). 43 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued 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 Transaction and takeover defence costs Fair Value gain/loss Fixed Asset Variance Transactions costs deducted in equity Adjustment recognised for prior periods Income tax expense Consolidated 30 June 2018 $’000 30 June 2017 $’000 7,078 (164) 114 7,028 6,170 (208) (133) 5,829 (164) (208) 22,107 21,309 6,632 6,393 23 241 37 114 (133) 6,914 114 7,028 21 – (360) 76 (168) 5,962 (133) 5,829 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 2018 $’000 15 20,829 20,844 30 June 2017 $’000 14 24,196 24,210 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. 44 Integral Diagnostics Annual Report 2018 Note 9. Current assets – trade and other receivables 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 2018 $’000 5,570 (90) 5,480 30 June 2017 $’000 4,975 (137) 4,838 142 5,622 311 5,149 Consolidated 30 June 2018 $’000 137 7 (54) 90 30 June 2017 $’000 63 127 (53) 137 Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $913,000 as at 30 June 2018 ($986,000 as at 30 June 2017). 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 2018 $’000 328 135 450 913 30 June 2017 $’000 367 210 409 986 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. 45 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 10. Current assets – other Accrued revenue Prepayments Security deposits Other current assets Note 11. Inventory Film, contrast, drugs and needles Consolidated 30 June 2018 $’000 1,296 2,154 55 11 3,516 30 June 2017 $’000 1,248 2,200 56 10 3,514 Consolidated 30 June 2018 $’000 346 346 30 June 2017 $’000 393 393 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 $8,649,000 (2017: $8,850,000). Note 12. Non-current assets – property, plant and equipment Work in progress – at cost 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 2018 $’000 5,266 5,266 30 June 2017 $’000 449 449 16,190 (5,877) 10,313 62,014 (28,281) 33,733 466 (400) 66 11,028 (6,322) 4,706 15,303 (4,793) 10,510 57,612 (22,945) 34,667 466 (372) 94 9,310 (4,507) 4,803 54,084 50,523 46 Integral Diagnostics Annual Report 2018 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 2016 Additions Disposals Depreciation expense Balance at 30 June 2017 Additions Transfers Disposals/write offs Depreciation expense Balance at 30 June 2018 Work in progress $’000 – 449 – – 449 Leasehold improvements $’000 10,244 2,163 (810) (1,087) 10,510 13,512 (8,695) – – 5,266 – 899 – (1,096) 10,313 Plant and equipment $’000 32,221 9,188 (500) (6,242) 34,667 – 6,078 (720) (6,292) 33,733 Motor Vehicles $’000 138 63 – (107) 94 Office furniture and equipment $’000 4,026 2,618 (90) (1,751) 4,803 – – – (28) 66 – 1,718 – (1,815) 4,706 Total $’000 46,629 14,481 (1,400) (9,187) 50,523 13,512 – (720) (9,231) 54,084 (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: Net book value at 30 June 2017 Net book value at 30 June 2018 Leasehold improvements $’000 4,562 3,823 Plant and equipment $’000 29,941 20,814 Motor vehicles $’000 102 5 Office furniture and equipment $’000 568 721 Total $’000 35,173 25,363 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 5 – 20 years Plant and equipment Motor vehicles 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. Costs which are necessarily incurred whilst commissioning new asset, in the period before they are capable of operating in the manner intended by management, are capitalised as Work in Progress. Upon completion of the asset and all associated costs being recognised, the Work in Progress is transferred to the correct property, plant and equipment classification at which point it is accounted for in accordance with AASB 116. 47 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 13. Non-current assets – intangibles Goodwill – at cost Brand names – at cost Customer contracts – at cost Less: Accumulated amortisation Consolidated 30 June 2018 $’000 96,387 30 June 2017 $’000 96,387 7,155 7,155 2,456 (2,456) – 2,456 (2,077) 379 103,542 103,921 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 2016 Additions through business combinations (Note 33) Amortisation expense Balance at 30 June 2017 Amortisation expense Balance at 30 June 2018 Goodwill $’000 91,851 4,536 – 96,387 – 96,387 Brand names1 $’000 7,000 155 – 7,155 – 7,155 Customer contracts $’000 1,021 – (642) 379 (379) – Total $’000 99,872 4,691 (642) 103,921 (379) 103,542 1. Brand names of $7.0 million are included within the SCR CGU and $0.155 million included within the Lake Imaging CGU. 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 value in use calculations. An assessment of identifiable cash-generating units and a review of allocations of goodwill to identified cash-generating units is conducted annually. Management have concluded that given the current structure and operations of the Group and given the synergies being delivered and the opportunities available to the Group since initial acquisition, goodwill continues to form one cash-generating unit for impairment testing purposes, which is in line with the operating segment identified in Note 4. 48 Integral Diagnostics Annual Report 2018 Key assumptions for value-in-use calculations The recoverable amount is determined based on value-in-use 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: 2018 – Long-term growth rate 2018 – Pre-tax discount rate 2017 – Long-term growth rate 2017 – Pre-tax discount rate % 3.0 15.4 3.0 15.4 Within the value-in-use calculation for the five-year forecast period revenues have been forecast to grow between 4.2% – 8.3% (2017: 3.0% – 6.5%) and 3% (2017: 3%) into perpetuity. The forecast cash flows also includes ongoing investment in property, plant and equipment to maintain the existing base and in 2019 to invest in further technology and expansion. The pre-tax discount rate would need to increase by more than 15.6% or the growth rate decline by more than 1.8% in the five year forecast period and into perpetuity for there to be any impairment of the goodwill balances. 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. 49 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued 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 Transaction costs in equity 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 2018 $’000 30 June 2017 $’000 5,108 721 284 – – 1,406 – (2,594) (2,147) 54 – 6 4,325 621 – 89 36 1,813 243 (2,355) (2,147) 54 (114) 110 Net deferred tax asset 2,838 2,675 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 Adjustments recognised for prior periods Additions through business combinations (Note 33) Closing balance 2,446 5,265 (393) (4,480) 2,838 2,675 164 (133) 114 18 – 2,838 2,457 4,834 (355) (4,261) 2,675 2,657 208 (168) (76) – 54 2,675 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. 50 Integral Diagnostics Annual Report 2018 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 Refer to Note 26 for further information on financial instruments. Consolidated 30 June 2018 $’000 4,417 7,695 12,112 30 June 2017 $’000 3,316 5,024 8,340 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. Note 16. Current liabilities – borrowings Borrowings Lease liability Consolidated 30 June 2018 $’000 – 12,820 12,820 30 June 2017 $’000 18 11,477 11,495 Refer to Note 19 for further information on assets pledged as security and financing arrangements. Refer to Note 26 for further information on financial instruments. Note 17. Current liabilities – provisions Annual leave Long service leave Employee benefits Restructuring Provision Consolidated 30 June 2018 $’000 5,757 4,702 185 – 10,644 30 June 2017 $’000 5,494 4,645 213 298 10,650 51 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued 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 provision 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 employees 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 plans main features. The restructuring provision of $0.298 million relates to the recommission costs of the Pt Headland site where the Mobile MRI was located. Given the poor performance of the Mobile MRI in Pt Headland it has been determined that the Mobile MRI will be re-located to a site where it will be fully utilised. 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. Note 18. Current liabilities – Derivative financial instrument Derivative financial instrument Refer to Note 2 for further information on derivative financial instruments. Note 19. Non-current liabilities – borrowings Borrowings Lease liability Refer to Note 26 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 2018 $’000 – 30 June 2017 $’000 59 Consolidated 30 June 2018 $’000 43,750 8,753 52,503 30 June 2017 $’000 43,750 17,647 61,397 Consolidated 30 June 2018 $’000 43,750 21,573 65,323 30 June 2017 $’000 43,768 29,124 72,892 52 Integral Diagnostics Annual Report 2018 Refinancing of existing bank debt facilities On 7 December 2017 the Group agreed terms to refinance its existing bank debt facility with a new three year $100 million cash advance facility, plus a $31 million asset finance facility. Current cash reserves, ongoing operating cash flows and the extended facility provides the Group with certainty in relation to its funding for the next three years to allow the Group to • maintain cash reserves for working capital and debt servicing; • fund forecast maintenance and growth capital expenditure; • fund bolt on acquisitions as well as 1-2 mid-size acquisitions; and • meet the obligations under the dividend policy of 65%-75% of net profit after tax. Key terms of the new debt facility are as follows: • cash advance facility limit of up to $80 million, plus an accordion of $20 million. This increases the facility from the previous $65 million; • asset finance facility of $31 million was reduced by $8 million in June 2018 as asset finance facilities by alternative lenders were entered into; • margin pricing on the cash advance facility has increased by only 10 basis points reflecting the risk of the larger facility, average cost of debt will remain at less than 3.8% (based on one month BBSW of 1.98% 6 July 2018); • financial indebtedness under lease finance facilities extended to $30 million (prior year $15 million) allowing substantial asset finance facilities to be taken out with alternative lenders; • the facility will be subject to the following financial covenants: – Net Debt to EBITDA Ratio not greater than 3.50:1; – Fixed Charge Cover Ratio not less than 2.00:1; and – interest rate risk hedging on a minimum 25% of the amount drawn under the cash advance facility. In accordance with Australian Accounting Standards, Loan Establishment fees have been capitalised and will be amortised over the life of the debt facilities. 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. 53 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Financial arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Equipment finance facility Cash advance facility (1) Cash advance facility (2) 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 (1) Cash advance facility (2) 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 (1) Cash advance facility (2) Multi-option facility Standby letter of credit or guarantee facility Commercial cards facility Electronic payaway facility Consolidated 30 June 2018 $’000 30 June 2017 $’000 38,096 10,500 69,500 – 2,000 300 3,075 123,471 21,574 10,500 33,250 – 1,469 79 – 66,872 16,522 – 36,250 – 531 221 3,075 56,599 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 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 cash advance facilities expire in December 2020. Note 20. Non-current liabilities – Derivative financial instrument Derivative financial instrument Refer to Note 2 for further information on derivative financial instruments. Consolidated 30 June 2018 $’000 122 30 June 2017 $’000 – 54 Integral Diagnostics Annual Report 2018 Note 21. Non-current liabilities – provisions Long service leave Deferred rent liability Lease make good Consolidated 30 June 2018 $’000 2,114 2,387 4,350 8,851 30 June 2017 $’000 1,704 2,172 4,250 8,126 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 – 2018 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 2,172 430 (215) 2,387 4,250 130 (30) 4,350 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. 55 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 22. Equity – contributed capital Ordinary shares – fully paid Movement in ordinary share capital Details Balance Shares issued as part of Acquisition (Note 33) Reversal of DTA on transaction costs of equity Balance Reversal of DTA on transaction costs of equity Transaction costs on acquisitions in equity Balance Consolidated Consolidated 30 June 2018 Shares 145,044,157 30 June 2017 Shares 145,044,157 30 June 2018 $’000 83,425 30 June 2017 $’000 83,866 Date 1 July 2016 1 July 2016 Number of shares 144,136,101 908,056 Issue Price $1.40 30 June 2017 145,044,157 30 June 2018 145,044,157 $’000 82,760 1,275 (169) 83,866 (162) (279) 83,425 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. 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 currently undergoing a review of its capital structure and future requirements to continue to grow the business and execute on acquisition opportunities whilst maintaining an optimal mix of debt and equity against forecast EBITDA. 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. 56 Integral Diagnostics Annual Report 2018 Note 23. Equity – reserves Share-based payments reserve Capital reorganisation reserve Transactions with non-controlling interest Cash flow hedge reserve Consolidated 30 June 2018 $’000 120 (3,849) (8,013) (85) (11,827) 30 June 2017 $’000 – (3,849) (8,013) – (11,862) Share-based payments reserve 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. Cash flow hedge reserve The reserve is used to recognise the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within other income (expenses). 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 2017 Recognition of share-based payments Net movement in FV of derivative financial instrument Balance at 30 June 2018 Cash flow hedge reserve $’000 – – Share-based payment reserve $’000 – 120 Capital reorganisation reserve $’000 (3,849) – Transaction with non- controlling interest $’000 (8,013) – (85) (85) – 120 – (3,849) – (8,013) Total $’000 (11,862) 120 (85) (11,827) 57 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 24. Equity – retained profits Retained profits at the beginning of the financial year Profit after income tax expense for the year Dividend paid (Note 25) Retained profits at the end of the financial year Note 25. Equity – dividends Dividends Full franked 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 Dividend paid 4 cents per share on 4 October 2017 Dividend paid 4 cents per share on 5 March 2018 Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 30 June 2018 $’000 18,348 15,079 (11,603) 21,824 30 June 2017 $’000 13,022 15,480 (10,154) 18,348 Consolidated 30 June 2018 $’000 – – 5,801 5,802 11,603 30 June 2017 $’000 5,803 4,351 – – 10,154 Consolidated 30 June 2018 $’000 19,972 30 June 2017 $’000 17,838 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 date. Accounting policy for dividends Dividends are recognised when declared during the financial year and payment is no longer at the discretion of the Company. Note 26. 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 and ageing analysis for credit 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. 58 Integral Diagnostics Annual Report 2018 Market risk Interest rate risk The Group’s interest rate risk arises from long-term 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 is 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 2018 2017 Weighted average interest rate % 1.5 3.4 5 2.46 Weighted average interest rate % 1.5 3.8 4.0 3.1 Balance $’000 20,844 (43,750) (21,573) (122) (44,601) Balance $’000 24,210 (43,750) (29,124) (59) (48,723) 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 (2017: 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 is as follows: Basis points increase effect on Basis points change Profit before tax Effect on equity post tax Basis points decrease effect on Basis points change Profit before tax Effect on equity post tax Consolidated – 2018 Impact Consolidated – 2017 Impact 100 100 449 485 314 339 100 100 (449) (485) (314) (339) 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. 59 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued 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 two years and five months (2017: 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. Weighted average interest rate % – – 3.4 5 2.46 Weighted average interest rate % – – 3.8 4.0 3.1 Consolidated – 2018 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 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 1 year or less $’000 4,417 7,695 1,492 13,235 26,839 (122) (122) 1 year or less $’000 3,316 5,024 1,667 12,017 22,024 59 59 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – 1,492 6,871 8,363 – – – – 44,400 2,379 46,779 – – – – – – – – – 4,417 7,695 47,384 22,485 81,981 (122) (122) 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 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. 60 Integral Diagnostics Annual Report 2018 Note 27. 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: Short-term employee benefits Long-term employee benefits Consolidated 30 June 2018 $ 3,335,147 104,658 3,439,805 30 June 2017 $ 3,056,941 – 3,056,941 Note 28. 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 Tax services – acquisitions and takeover defence Agreed procedures in relation to takeover defence Advice re employee shares Tax compliance services Other services – Network firms of PwC Australia Due diligence and transaction costs Consolidated 30 June 2018 $ 30 June 2017 $ 206,925 214,925 52,000 27,800 5,000 26,000 317,725 – – – 31,562 246,487 185,804 – Note 29. Contingent liabilities The Group has given bank guarantees as at 30 June 2018 of $1.5 million (2017: $1.4 million) to various landlords. 61 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 30. 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 2018 $’000 30 June 2017 $’000 7,856 11,247 2,443 21,546 13,235 9,249 22,484 (911) 7,874 14,896 2,811 25,581 12,017 18,578 30,595 (1,471) Net commitment recognised as liabilities 21,573 29,124 Representing: Lease liability – current (Note 16) Lease liability – non-current (Note 19) 12,820 8,753 11,477 17,647 21,573 29,124 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 2018, there were outstanding capital commitments for plant and equipment of $1.2 million (2017: $3.6 million). Note 31. Related party transactions Parent entity Integral Diagnostics Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in Note 34. Key management personnel Disclosures relating to key management personnel are set out in Note 27 and the Remuneration Report on pages 14 to 23. 62 Integral Diagnostics Annual Report 2018 Transactions with related parties The following transactions occurred with related parties: Payment for goods and services: Cleaning fees paid to GJJ Hughes of which Gregory Hughes is related to (this arrangement was terminated effective January 2017). Other Transactions: Payment for rental of buildings to Eleven Eleven How Pty Ltd of which Chien Ping Ho and Gregory Hughes and Craig Bremner are related to. Payment for rental of buildings to Perhaps Holdings Pty Ltd of which Chien Ping Ho is related to (this arrangement was terminated effective January 2017). Payment for rental of buildings to Kiwi Blue Pty Ltd of which Chien Ping Ho and Gregory Hughes are related to. Consolidated 30 June 2018 $ 30 June 2017 $ – 12,500 368,506 391,934 – 44,120 210,820 225,307 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 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 32. 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 Consolidated 30 June 2018 $’000 30 June 2017 $’000 – 54 Parent 30 June 2018 $’000 6,575 30 June 2017 $’000 6,700 6,575 6,700 63 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Statement of Financial Position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed capital Cash flow hedging reserve Share-based payments reserve Retained profits Total equity Parent 30 June 2018 $’000 30,256 30 June 2017 $’000 23,759 143,893 142,779 1,567 222 45,043 43,844 83,462 (122) 120 15,390 83,866 – – 15,069 98,850 98,935 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 35. Contingent liabilities Except as disclosed in Note 30, there are no other contingent liabilities of the parent entity as at 30 June 2018 and 30 June 2017. Capital commitments – property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2018 and 30 June 2017. 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. Note 33. Business combinations Disclosure required under Australian Accounting Standards, in relation to the post balance date business combination, has been detailed in Note 38 on page 69. On 1st 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 million 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 million immediately prior to acquisition, the value of the 50% interest held previously immediately prior to acquisition was $0.002 million resulting in the recognition of a $1.200 million 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 $0.453 million and debt assumed $0.389 million will result in net assets of $0.065m being booked which will reduce goodwill by $0.065 million. 64 Integral Diagnostics Annual Report 2018 Details of the acquisition are as follows: 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 million relating to the acquisition, $1.200 million relating to the fair value uplift on existing interest less $0.065m on recognition of 50% of net assets in SWMRI, totaling goodwill of $4.536 million. The goodwill recognized 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 $0.150 million 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 $0.050 million of the deferred consideration has been paid, $0.030 million in cash and $0.020 million offset against the amount owing by the vendor on settlement of the completion statement. On the 3rd August 2017 a further $0.025 million was paid. From the date of acquisition, which was the beginning of the period, SWMRI/WDR has contributed $4.755 million of revenue and $2.405 million (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 for the half year ended 31 December 2016. 65 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued 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) twelve 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. 66 Integral Diagnostics Annual Report 2018 Note 34. 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: Name of entity 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 2018 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 2017 % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Note 35. 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 Class Order 98/1418 (as amended) 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 and therefore have not been separately disclose. 67 Integral Diagnostics Annual Report 2018 Notes to the Financial Statements continued Note 36. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Loan establishment costs amortisation Net (gain)/loss on disposal of property, plant and equipment Impairment of asset Share-based payments Tax included in equity FV gain on acquisition of SWMRI Pty Ltd Financial liability fair value movement through profit and loss Interest income Bad debts Property, plant, and equipment in payables 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 2018 $’000 15,079 30 June 2017 $’000 15,480 9,610 149 (423) – 120 (126) – (59) (330) 65 (1,821) (473) (163) 47 3,771 352 719 9,830 188 477 810 – – (1,200) (306) (370) – – (108) (208) (622) (1,302) 1,448 (1,387) Net cash from operating activities 26,517 22,730 Reconciliation of Liabilities arising from Financing Activities Finance Leases due within 1 year $’000 11,477 1,343 12,820 Finance Leases due after 1 year $’000 17,647 (8,894) 8,753 Borrowings due within 1 year $’000 18 (18) – Borrowings due after 1 year $’000 43,750 – 43,750 Total $’000 72,892 (7,568) 65,324 Consolidated – 2018 Balance as at 30/06/2017 Net cash flows Balance as at 30/06/2018 Note 37. Earnings per share 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 performance rights over ordinary shares Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share 30 June 2018 $’000 15,079 – 15,079 30 June 2017 $’000 15,480 – 15,480 Number 145,044,157 Number 145,044,157 262,139 145,306,296 – 145,044,157 Cents 10.40 10.38 Cents 10.67 10.67 68 Integral Diagnostics Annual Report 2018 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 (a) On 2nd July 2018, the Group acquired the assets and liabilities of the Specialist Radiology Group, Trinity MRI and Cavendish Radiology in Auckland New Zealand (referred to as the New Zealand transaction). The three businesses combined: • comprise the leading specialist radiology clinics in Auckland; • employ and contract several of the nation’s leading specialists in musculoskeletal radiology and neuroradiology; • have a projected EBITDA contribution of NZ$13 million to NZ$14 million (A$12 million to A$13 million1) for FY19; • a high growth business with strong margins; and • provides a premier platform for Integral Diagnostics to enter and grow in New Zealand. The key terms of the acquisition include: • a purchase consideration of NZ$105 million (A$99.03 million) on a cash and debt free basis, comprising NZ$80 million (A$75.3 million) in cash and Z$25 million (A$23.73 million) in IDX equity; • 80% of the equity will be held in escrow for up to five years; and • a five year staged earn-out for vendor radiologists based on earnings outperformance. This strategic acquisition includes four clinics, employing 14 radiologists working in both the public and private sectors. The clinics are market leaders in providing complex modalities including MRI, CT and SPECT CT (nuclear medicine), which are high margin services positioned to experience significant future growth. The clinics are fitted with state of the art equipment. The purchase price accounting has not yet been finalised as at the date of this report, the initial values identified in relation to the acquisition are as follows. Plant and equipment Intellectual Property (brand names) Customer contracts Deferred tax assets Working capital assets Working capital liabilities Net assets acquired Goodwill Acquisition-date fair value of total consideration transferred 1. Based on forecast average weighted exchange rate of $NZ1 to $AUD0.93. 69 Integral Diagnostics Annual Report 2018 Recognise on Acquisition $’000 6,623 10,788 3,906 56 1,255 (909) 21,719 77,317 99,036 Notes to the Financial Statements continued Representing: Cash paid or payable to vendor Integral Diagnostics Limited shares issued to vendor Net cash acquired with subsidiary Cash paid Net cash flow on acquisition Recognise on Acquisition $’000 75,303 23,733 1,000 (75,303) (74,303) (b) Also on 2nd July 2018, the Group acquired the assets and liabilities of Geelong Medical Imaging (GMI), which comprises two radiology clinics in Geelong, Victoria. These clinics comprise a number of modalities, including X-Ray, ultrasound, CT, MRI and nuclear medicine. The key terms of the acquisition include: • a purchase consideration of $3.15 million on a cash and debt free basis; • $1.05 million in IDX equity (subject to voluntary escrow); and • $1.40 million of deferred cash. The acquisition complements the Group’s strengths and further strengthens the Group’s position in South West Victoria and will be integrated into Lake Imaging. The purchase price accounting has not yet been finalised as at the date of this report, the initial values identified in relation to the acquisition are as follows. Plant and equipment Brand name Employee benefits Inventory Deferred tax asset Prepayments Net assets acquired Goodwill Acquisition-date fair value of total consideration transferred Representing: Cash paid or payable to vendor Deferred consideration Contingent consideration Integral Diagnostics Limited shares issued to vendor Net cash acquired with subsidiary Cash paid Net cash flow on acquisition Recognise on Acquisition $’000 626 170 (77) 16 23 39 797 4,803 5,600 3,150 500 900 1,050 – (3,150) (3,150) Subsequent to year end a dividend of 4.0 cents per share was declared and will be paid on 2 October 2018. No other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. 70 Integral Diagnostics Annual Report 2018 Directors’ Declaration In the Directors’ opinion: • 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 2018 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 35 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 Dr Ian Kadish Managing Director and Chief Executive Officer 22 August 2018 Melbourne 71 Integral Diagnostics Annual Report 2018 Independent Audit Report Independent auditor’s report To the members 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 2018 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 2018 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 consolidated financial statements, which include a summary of significant accounting policies the directors’ 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. 72 Integral Diagnostics Annual Report 2018 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. Materiality 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 shared service office in Geelong, Victoria.  For the purpose of our audit we used overall Group materiality of $1,288,000, which represents approximately 5% of the Group’s adjusted 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 adjusted profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. We adjusted group profit before tax for transaction costs as they are an unusual or infrequently occurring item impacting profit and loss.  We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. 73 Integral Diagnostics Annual Report 2018 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. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the 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 CGU 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. The Group has a goodwill balance of $96.4 million at 30 June 2018 which represents approximately 50% of the total assets of the Group. For the year ended 30 June 2018, the Group performed an impairment assessment over the Group’s goodwill. 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 carrying value of goodwill to be a key audit matter as the balance is significant to the statement of financial position and there is significant judgement involved in estimating future cash flows, particularly with respect to determining appropriate:    Discount rates Five-year cash flow projections (Cash flow forecasts) Earnings growth rates applied beyond the initial five-year period (Terminal growth rates) We assessed whether the division of the Group into CGU's 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:      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. 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 oversight from the directors. Reperformed the underlying calculations used in the model. 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. 74 Integral Diagnostics Annual Report 2018 Key audit matter How our audit addressed the key audit matter Borrowings Refer to note 16 & 19 $65.3m At 30 June 2018, The Group had a borrowing liability (current and non-current) of $65.3 million representing 67% of total liabilities. The Group refinanced the banking facilities during the year, replacing the old facility with a new facility with the same lender. The terms and conditions of the borrowings are detailed in note 19 of the financial report. The borrowing agreements contain financial covenants that the Group must comply with. We considered this a key audit matter given the significance of the refinancing arrangement, the financial size of the borrowings balance and the importance of the funding mechanism/capital structure for the continued growth of the Group. Transaction costs relating to the Unsolicited takeover bid Refer to note 6 $2.4m During the year the Group was subject to an unsolicited takeover bid by Capitol Health Limited. The Group incurred significant costs relating to this takeover bid. We considered the accounting treatment of the transaction costs related to this bid to be a key audit matter because these costs are significant and are a key contributor to the Group’s financial performance.  We obtained confirmations directly from the Group’s banks for all borrowings to test the amounts recorded in the financial statements.  We read the most up-to-date agreements between the Group and its financiers to develop an understanding of the terms associated with the facilities and the amount of facility available for drawdown.  Where debt is regarded as non-current, we tested the Group’s assessment that they had the unconditional right to defer payment such that there were no repayments required within 12 months from the balance date.  We assessed the accounting treatment of the capitalised borrowing costs arising from new arrangements and borrowing costs related to terminated facilities. As part of our procedures relating to the takeover bid transaction costs, we:     Agreed a sample of transaction costs recorded by the Group to the relevant underlying invoices. Traced a sample of payments made by the Group in respect of transaction costs to the relevant invoice to assess whether they were recorded as liabilities in the correct financial period. Inspected a sample of underlying contracts related to transaction costs to consider weather expenses recognised were consistent with costs agreed. Considered the adequacy of the Group’s accounting policies and disclosures in respect of the transaction costs in light of the requirements of Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2018, including the Chairman’s report, Managing Director and Chief Executive Officer’s report, Operating and Financial Review, the Directors Report, Shareholder Information, our locations, About us and the Corporate Directory, but does not include the financial report and our auditor’s report thereon. 75 Integral Diagnostics Annual Report 2018 Independent Audit Report continued 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. 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 have 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 23 of the directors’ report for the year ended 30 June 2018. 76 Integral Diagnostics Annual Report 2018 In our opinion, the remuneration report of Integral Diagnostics Limited for the year ended 30 June 2018 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. PricewaterhouseCoopers Jason Perry Partner Melbourne 22 August 2018 77 Integral Diagnostics Annual Report 2018 Shareholder Information Integral Diagnostics Limited Additional information required under ASX Listing Rule 4.10 and not shown elsewhere in this Annual Report follows. This information is current as at 10 August 2018. (a) Top 20 shareholders – ordinary shares Rank Name 1 2 3 4 5 6 7 8 9 10 10 10 10 14 15 16 17 18 19 20 20 Totals: Top 20 holders of ordinary fully paid shares (total) J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty Ltd Peter J Ansley + St Leger M Reeves + Stephen Eichsteadt + Thomas Q St Leger Reeves Visionary Imaging Pty Ltd Mittal Holdings Pty Ltd Anacacia Pty Ltd + Wattle Fund A/C G J Hughes Pty Ltd Lethean Holdings Pty Ltd Lockwood Ridge Pty Ltd Wyndham Salter Pty Ltd Mr Vincent Michael O’Sullivan CS Fourth Nominees Pty Limited NW3 Pty Ltd New Imaging Pty Ltd Jasmat Pty Ltd UBS Nominees Pty Ltd Meakin Professional Investments Pty Ltd Willowbay Rise Pty Ltd (b) Register of substantial shareholdings Number of fully paid ordinary shares 26,070,397 25,077,560 11,376,941 9,011,805 6,588,014 4,638,357 2,889,180 2,778,410 2,553,379 2,467,230 2,467,230 2,467,230 2,467,230 2,448,000 2,407,730 2,343,630 2,330,150 2,193,090 1,799,766 1,754,472 1,754,472 117,884,273 Shareholder Integral Diagnostics Limited1 Investors Mutual Ltd IOOF Holdings Limited Adam Smith Asset Management Viburnum Funds Pty Ltd Number of fully paid ordinary shares 39,628,923 13,620,000 12,049,838 9,949,431 7,266,066 % of issued capital 16.78 16.14 7.32 5.80 4.24 2.98 1.86 1.79 1.64 1.59 1.59 1.59 1.59 1.58 1.55 1.51 1.50 1.41 1.16 1.13 1.13 75.86 % of issued capital 25.5% 9.32% 8.308% 6.86% 5.01% 1. Restriction on disposal of shares under voluntary escrow arrangements disclosed in Integral Diagnostics Limited’s replacement Prospectus dated 9 October 2015, the announcements to ASX on 27 October 2015, 1 July 2016, 16 February 2018 and 2 July 2018 (and as set out in the IPO Restriction Deed, WDR Restriction Deed, NZ1 Restriction Deed, NZ Boyer Restriction Deed, NZ Gee Restriction Deed and GMI Restriction Deed) gives Integral Diagnostics a relevant interest in its own shares under section 608(1)(c) of the Corporations Act. Integral Diagnostics has no right to acquire these shares or to control the voting rights attached to these shares. 78 Integral Diagnostics Annual Report 2018 (c) Distribution of shareholders – ordinary shares Range 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 to 500,000 Rounding Total Total holders 221 345 133 168 82 Shares 88,171 954,102 1,007,261 4,686,359 148,656,874 949 155,392,767 % Issued capital .06 .61 .65 3.02 95.67 -0.01 100.00 (d) Less than marketable parcels of ordinary shares There are 80 shareholders holding less than a marketable parcel of ordinary shares (i.e. less than $500 per parcel of shares). (e) Distribution of unquoted securities – performance rights Range 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over1 Total Performance rights of ordinary shares – – – 139,068 462,739 601,807 % – – – 23.11 76.89 100.00 Number of holders of performance rights – – – 3 2 5 % – – – 60.00 40.00 100.00 1. Dr Ian Kadish holds greater than 20% of the performance rights; 362,585. (f) Voting rights In accordance with the Company’s Constitution, each member present at a meeting, whether in person, by proxy, by power of attorney or by a duly authorised representative in the case of a corporate member, shall have one vote on a show of hands and one vote for each fully paid ordinary share on a poll. Holders of performance rights do not have voting rights. (g) On-market buy-backs There is no current on-market buy-back in relation to the Company’s securities. 79 Integral Diagnostics Annual Report 2018 Shareholder Information continued For the year ended 30 June 2018 (h) Securities subject to voluntary escrow Number of securities Date of expected release from escrow1 23-Aug-18 30-Aug-18 04-Dec-18 22-Dec-18 01-Jan-19 11-Jan-19 28-Jan-19 23-Feb-19 30-Apr-19 02-Jul-19 08-Jul-19 31-Jul-19 Aug-194 31-Aug-19 22-Dec-19 06-Jan-20 23-Feb-20 29-Mar-20 22-Jun-20 02-Jul-20 31-Jul-20 30-Aug-20 07-Apr-21 18-Apr-21 02-Jul-21 03-Jul-21 08-Jul-21 25-Aug-21 10-Sep-21 02-Mar-22 12-Mar-22 02-Jul-22 03-Jul-22 18-Feb-23 30-Mar-23 02-Jul-23 03-Jul-23 03-Nov-23 18-Nov-23 05-Jan-24 05-Feb-24 02-Jul-24 21-Sep-24 01-Oct-24 Aug-254 Undated Subject to service conditions being met2 – – 244,470 – 122,232 244,470 – – 244,470 18,834 822,408 – – – – 822,408 – – 244,470 – – – 822,408 288,918 – – 244,470 822,408 288,912 288,918 144,456 – – 288,918 822,408 – – 288,918 288,918 84,174 213,588 – 577,836 822,408 873,918 – 9,925,338 Subject to non- compete – 731,030 – 776,720 – – 53,810 776,720 – – – 776,720 – 731,030 776,720 – 776,720 – – – 776,720 731,030 – – – – – – – – – – – – – – – – – – – – – – – – 6,907,220 Total shares on issue subject to voluntary escrow Unconditional 3,477,545 50,448 – – – – – – 18,834 – – – – 207,176 2,659,182 – – – – – 43,946 2,659,178 – – 43,946 2,659,183 – – – – 43,946 – – – – 11,863,384 Subject to a long term non-compete minimum value3 – – 236,321 – 118,156 236,321 – – 236,321 – 794,994 – – – – 794,994 – – 236,321 – – – 794,994 279,287 – – 236,321 794,994 279,280 269,657 139,640 – – 275,759 794,994 – – 277,071 279,287 70,145 206,468 – 481,530 767,582 1,282,947 – 9,883,384 Subject to permanent retirement – – – – – – – – – – – – – – – – – 106,830 – – – – – – – – – – – – – – – – – – – – – – – – – – – 942,767 1,049,597 39,628,923 1. Shares are released from escrow on or around this date. 2. Conditions include a minimum of seven years service. If this condition is not met, shares are to be released in conjunction with the release of FY25 annual results. 3. Minimum values are $1,000,000 or $500,000 and are calculated in accordance with the relevant Restriction Deed. 4. Actual date dependent on ASX annual results release. 80 Integral Diagnostics Annual Report 2018 Corporate Directory Directors Helen Kurincic – Independent Non-Executive Chairman Dr 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 Raelene Murphy – Independent Non-Executive Director Company secretary Ms Kathryn Davies Registered office Level 8/14 -20 Blackwood Street North Melbourne VIC 3051 T + 61 3 5339 0704 Share register Computershare Investor Services Pty Ltd Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 T 1300 787 272 Auditor PricewaterhouseCoopers Level 19, 2 Riverside Quay Melbourne Victoria 3006 Solicitors Herbert Smith Freehills Level 42, 101 Collins Street Melbourne Victoria 3000 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 22 August 2018 and can be found at: www.integraldiagnostics.com.au/page/for-investors/ corporate-governance 81 Integral Diagnostics Annual Report 2018 

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