IQE PLC | FINANCIAL REPORT AND ANNUAL ACCOUNTS 2013
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Five year financial summary
* The adjusted performance measures are reconciled in notes 4 and 10.
** Free cash flow is defined as net cash flow before acquisitions, financing and net interest paid.
!
EBITDA has been calculated as follows:
1
!2013 £’000 2012 £’000 2011 £’000 2010 £’000 2009 £’000Revenue 126,77487,96175,31872,65052,652EBITDA (see below) 24,92016,43713,95513,1158,051Operating profit-Adjusted*14,5569,2028,6578,5103,942-Reported7,3467,0147,3737,2083,044Profit after tax-Adjusted*14,2028,4019,7278,8082,956-Reported6,1266,6318,4437,5062,058Net cash flow from operations-Before exceptional cash flows 16,1734,67910,82310,2508,139-Reported12,7624,10910,82310,2507,712Free cash flow**-Before exceptional cash flows 5,389(1,569)(8,585)3,3153,906-Reported1,978(2,139)(8,585)3,3153,479Net (debt) / funds(34,351)(15,483)(3,921)7,021(14,931)Equity shareholders’ funds 110,49890,18972,75062,27429,837Basic EPS – adjusted*2.09p1.47p1.86p1.91p0.68pBasic EPS – unadjusted0.93p1.16p1.62p1.63p0.47pDiluted EPS – adjusted*2.00p1.40p1.74p1.76p0.64pDiluted EPS – unadjusted 0.89p1.10p1.51p1.50p0.44p2013 £‘0002012 £’0002011 £’0002010 £’0002009 £’000Profit after tax6,1266,6318,4437,5062,058Tax(934)(503)(1,551)(1,172)-Interest2,154886481874986Share based payments1,4151,3601,2841,302898Exceptional items5,065570---Depreciation8,5035,9984,1753,6193,372Amortisation of intangible assets2,5911,4951,123986737EBITDA24,92016,43713,95513,1158,051 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
What’s inside?
Five-year financial summary
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Chairman’s statement
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5
The evolution of semiconductors
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What we do
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Strategic review
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Our vision
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10
Our competitive advantage
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Our business model
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Our markets
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Our strategy
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Current trading and outlook
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Operational highlights
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Financial highlights
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Financial review
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Innovation, research & development
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Our commitment
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29
Risks and risk management
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Directors’ biographies
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Corporate governance report
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Directors’ report
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38
Remuneration report
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Independent auditors’ report
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Financial statements
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49
Consolidated income statement
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Consolidated balance sheet
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Consolidated statement of changes in equity
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51
Consolidated cash flow statement
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Parent company balance sheet
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Parent company statement of changes in equity
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54
Parent company cash flow statement
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Notes to the financial statements
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Officers and professional advisers
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85
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Enabling advanced
technologies
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Chairman’s statement
“Compound semiconductor
technology will be at the
heart of the next wave
of the electronics
revolution.”
It is my pleasure to introduce IQE’s
Annual Report for 2013.
The year started on an exciting note
with the acquisition in January of the
epitaxial business of Kopin Inc, a
NASDAQ listed competitor in the
wireless market. This followed the
acquisition of RFMD’s epitaxial
division in mid 2012.
These transactions consolidated our
market leadership, strengthened our
technology capabilities, broadened
our customer base, and are enabling
us to access significant synergies,
including enhanced economies of
scale and cost reductions.
The Group has already seen the
benefit of these synergies during
2013, and further efficiencies and cost
reductions are evident in 2014. IQE’s
goal is to realise at least £7m of cost
savings per annum, and this remains
on track with savings forecast in H2
2014 of £3.5m.
The performance of the acquired
businesses during 2013 stands
testament that their integration into
the IQE group has been seamless. By
way of example, the former Kopin
sites delivered consistent near perfect
scorecards to a major customer
during 2013, and received a highly
prestigious Supplier of the Year
award.
!
Both through acquisition and
organically, we have built the
foundations for a very exciting future.
We have created a world class
platform for the development and
supply of advanced semiconductor
materials evidenced by:
• a global footprint spanning US,
Europe and Asia;
• an unparalleled portfolio of
advance semiconductor materials
technology;
• a highly talented, committed and
experienced team;
• proven credibility and reputation;
• a secure multi-site, dual-platform
supply;
• scale and cost leadership; and
• the largest capacity in the industry.
The wireless market, which accounts
for approximately 85% of our sales,
will remain a key market for us.
Despite the recent softening in
smartphone growth, this market still
enjoys strong long term prospects
driven by the proliferation of wireless
communication, and the need for
continual improvement in chip
performance. Wireless chips will
need to evolve continually to meet
the challenge of the exponential
growth in data traffic, whilst
bandwidth becomes increasingly
more fragmented and trends to
higher frequency. Our materials will
be the key enablers underpinning
this evolution.
!
But our ambition far exceeds our
global leadership in wireless
communication. We have shared with
you previously our vision that
compound semiconductor
technology will be at the heart of the
next wave of the electronics
revolution.
We are beginning to see this happen,
and are continuing to strengthen our
position in these emerging markets.
We will leverage the platform that we
have built to realise these
opportunities. This will enable us to
deliver continued strong growth, and
to diversify our revenues further over
the coming years.
In anticipation of this, we have
already begun shaping our
organisation to meet the challenges
and opportunities of this exciting
future. For example, we have formed
industry specific business units
dedicated to each of our primary
markets: wireless, photonics, InfraRed,
CPV (advanced solar), power
switching, LEDs and advanced
electronics. This has involved a
number of new appointments, which
has added additional experience to
an already strong team.
On that note, I would like to take this
opportunity to thank all the
management and staff of IQE for their
commitment and dedication without
which our current success and future
plans would be impossible. We have
a great team doing outstanding work.
Finally, of course, I would also like to
thank you, my fellow shareholders, for
your continued belief in and support
of IQE.
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Expectations of technology
continues to drive demand
for faster, smaller and more
power efficient devices and
circuits. Due to the
fundamental laws of physics,
these devices and circuits will
inevitably transition from
silicon to compound
semiconductors
Silicon'IC'revolution
Compound'
semiconductors'in'
production
Dawn'of'silicon'IC'revolution
Silicon'comes'of'age
1960%%%%%%%%%%%%%1970%%%%%%%%%%%%%%1980%%%%%%%%%%%%%%1990%%%%%%%%%%%%%%2000%%%%%%%%%%%%%%2010%%%%%%%%%%%%%%2020%%%%%%%%%%%%%%2030
"Compound III-V transistors could begin to replace traditional
silicon technology around 2015"
Senior Intel Executive
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The evolution of semiconductors
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The early years of
compound
semiconductors
Whether you realise it or not,
compound semiconductors have
already revolutionised your life.
The early markets for compound
semiconductors have been in laser,
LED, and wireless applications. In
other words, the advent of the
internet, fibre optic communication
and the smartphone revolution have
been fundamentally dependent on
compound semiconductor
technologies.
The years ahead
The trends are clear, applications
begin their lives based on silicon
technology, but inevitably transition
to compound semiconductors as
human innovation demands more
from materials.
But this is only the tip of the iceberg.
Compound semiconductor
technology will lie at the heart of
human innovation for generations to
come. We are at an exciting inflection
point, and at a time when the rate of
change has never been quicker and
continues to gather pace.
!
The importance of
materials throughout
history
From the stone age, iron age, and
bronze age, through to the industrial
revolution, the space race, the
electronics revolution and the digital
revolution, the evolution of mankind
has been enabled by innovations in
material science.
The elements
Every material in the universe is made
from one or more of the fundamental
elements. It is the properties of these
elements which has enabled the
evolution of mankind. There are 118
elements of which around 100 are
naturally occurring. These are
recorded in the periodic table where
they are arranged in groups
according to their properties.
The evolution of
semiconductors
Semiconductors are a remarkable
combination of elements that have
the ability to both conduct and
insulate electric current. It is these
phenomena that have enabled the
electronics revolution that has
transformed our lives from the early
1960s through to the present day.
Silicon has been the backbone of the
electronics revolution from the 1960s
by virtue of the continuous
miniaturization of the electronic
circuits. This concept, which was
expressed by one of the founders of
Intel, Gordon Moore, has become
known as “Moore’s Law”.
Impressive as the impact of silicon
has been on our lives, it has very
basic properties in the context of the
broader family of semiconducting
materials. This is why human
innovation has turned to the
advanced properties of other
semiconducting compounds to
enable the dawn of the digital
revolution. It’s mankind’s ability to
harness the advanced properties of
the full range of semiconducting
materials that will drive the digital
revolution for generations to come.
This is the world of advanced or
“compound” semiconductors.
“IQE is uniquely
positioned to enable
and exploit this
opportunity by virtue
of its unparalleled
breadth of compound
semiconductor
technologies and its
advanced silicon
technologies.”
The next quantum leap
Of course, the mass adoption of new
technologies is more than just a
function of what is possible.
Rather, it is a function of cost versus
performance.
Compound semiconductors will
continue to gather momentum in
their own right as the industry
continues to increase scale which is
enabling technology to advance and
costs to reduce.
But, the next quantum leap in
technology will be achieved by
combining the advanced properties
of compound semi-conductors with
the scale and cost advantages of the
mature silicon industry.
IQE is uniquely positioned to both
enable and exploit this opportunity
by virtue of its unparalleled breadth
of compound semi-conductor
technologies and its advanced silicon
technologies.
This is why we are the technology
partner for governments and “Blue
Chips” alike in developing “compound
semiconductors on silicon.”
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
What we do
Atomically engineered epitaxial layers
of compound semiconductor materials
Epitaxy is the key
enabling technology
necessary for the
efficient manufacture
of compound
semiconductors
The supply chain
IQE designs and manufactures
advanced semiconductor materials.
Our finished products are compound
semiconductor wafers (also called
“epiwafers”).
Our products are bespoke. We
manufacture to the exact technical
specifications required by our
customers.
Our customers fabricate our wafers
into the “chips” that form the critical
components for a wide range of
wireless communication and photonic
devices.
!
Our core IP is “Epitaxy”
IQE manufactures epiwafers using a
nano technology called “Epitaxy”.
Epitaxy is a form of atomic
engineering that requires high
specification cleanrooms,
sophisticated production tools and
high levels of intellectual property.
Essentially, we grow atomically thin
films of crystals on a substrate. The
substrate is simply a physical and
electric template required in order to
handle our finished product. It’s the
combination of layers produced by
IQE that gives the epiwafer its
properties. The films are grown
atomic layer by atomic layer.
Our customers: !
Chip specialists!
OEMs: !
System specialists!
Our customers fabricate our
wafers into chips
OEMs utilise these chips to
make devices and systems
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IQE: !Materials specialists!We make advanced semiconductor wafers in high spec cleanrooms using sophisticated tools and extensive IP IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
!
!
Our vision !
To be the global number one provider of
advanced semiconductor materials.
!
Our strategy !
To use technology leadership and scale to
deliver the performance, cost points and
security of supply required for mass market
adoption of compound semiconductor
materials.
!
Our delivery !
Number one provider to the wireless market
by market share and scale and clear
technology leader with an unparalleled
breadth of technology. Leading the
advancement of new materials technologies.
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
IQE’s unique sales
proposition provides
differentiation and
competitive advantage
Our competitive advantage
Security of supply
Confidence in a secure supply is critical
to the supply chains in which IQE
operates. IQE offers its customers
identical supply from multiple locations
for all its core technologies, allowing it
to be a primary and trusted supplier to
its customers.
Our risk mitigation
strategy
IQE’s strategy is to be the most
significant supplier to all of the major
wireless chip companies in order to
mitigate against the impact of swings
in market share between the chip
companies.
The completion of the acquisitions of
the former RFMD and Kopin epi
businesses in June 2012 and January
2013 mark the delivery of this strategy.
Global footprint
IQE’s operations span the US, Asia and
Europe. This allows IQE to be
positioned close to its customers and
build strong relationships.
Breadth of technology
As one of the pioneers of compound
semiconductor technology, IQE has
developed an unparalleled and
comprehensive breadth of technology
and advanced production platforms.
Technology leadership
Through organic development and
through acquisition, IQE has established
clear technology leadership and created
a virtuous circle which continues to
attract the brightest and best talent.
Cost leadership
In the electronics industry, cost
leadership is achieved through
advanced technology and scale. IQE
has developed leadership in both.
!
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Global leader
global presence
Europe%
!
Bath,'UK''
Cardiff,'UK'
Cardiff,'UK'
Milton'Keynes,'UK''
Asia%
!
Singapore'
Taiwan'
North%America%
!
Bethlehem,'PA''
Greensboro,'NC'
Somerset,'NJ'
Spokane,'WA'
Taunton,'MA'
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Our business model
Outsourcing pioneer
In the early days of the industrial
revolution it became absolutely
necessary for manufacturers to be
vertically integrated since there were
no alternative sources of specialised
goods and services.
Only towards the middle of the
twentieth century did specialisation
become a competitive advantage.
However, in new and emerging
technologies, the early adopters
were in a similar position to their
industrial revolution forefathers in
that the development of new
processes and technologies required
the early pioneers to establish all key
parts of their supply chain.
Specialisation within the
silicon industry
Early silicon chip manufacturers
found it necessary to set up complete
vertically integrated supply chains to
source each part of the production
process from raw materials through
to final packaged product.
As silicon technology matured, the
industry saw the emergence of
businesses specialising in different
parts of the process to the extent that
there now exist a large number of
fabless companies who outsource the
entire production process to large
specialists such as TSMC Ltd and
Global Foundries.
Pioneering
specialisation within the
compound
semiconductor industry
The compound semiconductor
industry shares similar attributes with
the silicon chip industry. Some of the
processes such as epitaxy require
large scale investment, complex
infrastructure support in the form of
cleanrooms, environmental controls
and most importantly, highly
specialised skills and expertise.
In 1988, IQE became the first
compound semiconductor materials
company to recognise the potential
value in offering specialised
outsourcing of compound
semiconductor wafers and has
witnessed an increasing trend
towards this model over its twenty-
five year history.
By specialising in the complex epitaxy
process, IQE offers its customers
economies of scale, access to leading
technology and the ability to do what
they do best: design and refine their
products.
The high level of investment means
that IQE’s business is highly
operationally geared which facilitates
significant scope for profitability once
sales contribution exceed fixed costs.
The last decade has demonstrated an
unprecedented number of key
industry suppliers selecting
outsourcing as a key business
advantage.
!
Track record of 26%
sales CAGR over 10
years
!
High operational
gearing to transform
revenues into
profitability
!
Operational and
financial resilience
!
Strong position in
high-growth markets
provide strong
outlook
!
Revenues 2004 - 2013
EBITDA 2004 - 2013
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
One Focus
Multiple Markets
High performance wireless
applications including smartphones,
tablets, PCs, base stations and WiFi
Lasers and optical sensors for data
communications, data storage, imaging
and gesture recognition
Infrared materials for advanced
sensing applications including night
vision, thermal imaging and security
High efficiency concentrated
photovoltaic (CPV) solar cells for utility-
scale energy generation
Power control applications including
energy efficient power supplies,
electric vehicles and LED lighting
Advanced compound semiconductor
on silicon technologies for integration
of CS and CMOS applications
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Our markets
Overview
The key advantages of compound
semiconductors over silicon are :
Wireless
Accounted for 85% of the group’s
sales in 2013.
Photonics
Accounted for 14% of the group’s
sales in 2013.
The wireless market covers electronic
devices that communicate wirelessly.
This includes but is not limited to
mobile phones, smartphones, mobile
networks, WiFi, smart metering,
satellite navigation, and a plethora of
connected devices.
!
Compound semiconductors are much
more efficient at emitting and
receiving radio waves
Compound semiconductors are much
more efficient at emitting and
detecting light
Compound semiconductors operate
at much higher speeds and lower
power consumption
It is these advanced properties which
determine the top-level markets for
our materials:
✦ Wireless
✦ Photonics
✦ Electronics
!
Photonics!
14%
The photonics market covers
applications that either emit or detect
light.
We segment the photonics market
into:
✦ Emitters and detectors
✦ Infrared
✦ Solar (CPV)
✦ Lighting
Electronics
The electronics market combines the
advanced properties of compound
semiconductors with the low cost of
silicon.
We segment the electronics market
into:
✦ Power control
✦ Advanced materials
Wireless!
85%
IQE’s 2013 revenues
by market sector
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Wireless
The wireless communications market
has grown rapidly in recent years
reflecting the increasing adoption of
wireless technology, coupled with the
need for an increased compound
semiconductor content to support
greater sophistication of mobile
devices.
Nevertheless, the well publicised
softening in smartphone market in
2013 dampened our second half.
New smartphone launches no longer
attract the same ‘feeding frenzy’ that
has been the hallmark of recent years.
This reflects that, in the absence of
major advances in smartphone
features or functionality, replacement
cycles have slowed. Whilst no-one
can reliably predict when new
handset innovations will reignite the
smartphone frenzy, the overall
wireless market is expected to
continue to grow due to the global
roll out of 4G and LTE, the evolution
of wifi, and the proliferation of new
wireless devices including wearable
technology and the ‘internet of
things’.
Our short term demand profiles are
further affected by inventory build
and depletion cycles at the wireless
chip companies, and further
downstream. These appear to have
become more pronounced as the
OEMs require greater inventories to
ensure that customer demand is
satisfied and potential sales are not
missed in this tighter market. This
was a significant factor during 2013,
as evidenced at the top 3 wireless
chip companies, who reduced their
inventory levels by 9% in aggregate
between June 2013 and December
2013 (Source : Edison Research).
Nevertheless, smartphone shipments
are expected to continue to grow in
the coming years, and reach 1.7
billion units by 2017 (Source: IDC). This
will be driven by new features, apps,
social networking, entertainment and
location based services. To put this in
perspective, more than 1.8 billion
mobile handsets sold in 2013, of
which smartphone shipments, that
contain significantly more compound
semiconductor materials, exceeded
the one billion were smartphones
level for the first time in 2013.
High-speed connectivity and added
functionality drive the requirement
for the advanced properties offered
by compound semiconductor
epiwafers. The global roll-out of
wireless broadband networks such as
4G/LTE devices increasingly rely on
higher levels of compound
semiconductor content with 5G
expected to demand a quantum leap
in speed, power and efficiency.
The migration to new WiFi standards
is another major driver for RF
components.
The new 802.11ac WiFi standard
operates at 5GHz rather than the
2.6GHz currently used. The higher
frequency which will greatly increase
the range and reliability of WiFi
networks, will further raise the
demand for compound
semiconductor based RF devices.
Growth in the compound
semiconductor content in
smartphones will be driven by the
need for more radio frequency
functionality and greater complexity
in wireless circuitry but will be partly
mitigated by improved efficiencies
and a drive towards reduced
component footprints.
!
!
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
IQE
IQE
IQE
Photonics
Photonics represents applications
which emit and detect light. We
segment this market into emitters
and detectors, infra-red, solar and
lighting.
Emitters and detectors
This encompasses a wide range of
applications including optical
interconnects, laser projectors, optical
storage, cosmetic applications,
gesture recognition, finger navigation
and a wide range of other sensing
applications.
Optical interconnects
Currently, wired data transmission in
the home, the office and in data
centres is largely undertaken using
copper cables. However, data traffic is
growing at an explosive rate due to
technologies such as high definition
imaging, video streaming, “Big Data”
and cloud computing. This
phenomenon is necessitating a
switch from copper wires to optical
communication. This is a natural
evolution which mirrors the
transformation that has already taken
place in the in telecoms
infrastructure.
Optical interconnects offer
significantly higher-speed data
transfers over much longer distances
than their copper counterparts, and
are much more efficient. Data
centres are becoming one of the first
adopters, where optical technology
now offers both higher performance
and lower overall operating cost
compared with copper. This is an
example of one of the key markets
targeted by Philips Electronics, who
entered into a high volume supply
agreement with IQE during the fourth
quarter of 2013.
In addition, this technology is also set
to replace existing cable standards
such as USB and HDMI, as these
traditional copper cables struggle to
meet the increasing demands for
data transfer.
Compound semiconductor
technology that enables optical
interconnects include Vertical Cavity
Surface Emitting Lasers (VCSELs).
VCSELs are an advanced laser
technology geared to mass
production and low cost. IQE is the
market and technology leader for
VCSEL products, with world record
data speeds in excess of 64 GBs
recently demonstrated.
!
Laser projectors
Conventional projection technologies
utilise incandescent or halogen lamps
as their light sources. Such devices
are power hungry, physically bulky,
have relatively short lifetimes and
require focusing optics which can
limit the image quality and flexibility.
The emergence of lasers in each of
the primary colours (red, green and
blue) enables a low cost, high quality
laser projection solution which can
be miniaturized and does not require
focusing optics. This technology is
called pico projection.
Early pico projector technologies
utilise LEDs for the light source but
the next generation of devices is
incorporating miniature laser
projection units.
!
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Gesture recognition
Infrared
Gesture recognition represents the
ability of electronic devices to
recognise hand and body gestures
and movements in order to control
any device. The advanced properties
of compound semiconductor
epiwafers are a key component in
gesture recognition devices which
made their debut with the launch of
Microsoft’s Kinect gaming console.
The potential applications for this
technology extend far beyond
gaming, from medical applications,
disability aids, remote controls, to
sign language recognition, and more.
In fact, the use of this technology is
only limited by human imagination,
and has far reaching implications for
how we will interface with
technology in the near future.
Industry is at an early stage of
identifying and harnessing the full
power that this technology offers,
which extends far beyond just
gesture recognition. For example,
this is also the underlying hardware
technology in Googles “Project Tango”.
!
IQE is the clear market leader in
advanced gallium antimonide and
indium antimonide substrates for use
in a range of infrared and heat
sensing applications.
The sensitivity of current heat sensors
enable a monochrome image so that
applications such as night vision
devices can only see in tones of
green and black, whereas the new
antimonide materials allow greater
sensitivity so that different shades
and colours can be distinguished,
effectively producing full colour night
vision images.
The improved sensitivity is useful for
search and rescue operations and the
full colour night vision capability has
major military potential in terms of
enabling effective identification of
personnel and equipment in low or
zero visibility conditions.
IQE is actively engaged in a number
of collaborative programmes with
leading industry players and
government agencies in the
development and supply of infrared
materials based on antimonide (Sb)
materials.
!
!
!
!
!
!
High speed, heat assisted magnetic
recording (HAMR)
VCSEL devices have been successfully
deployed in dramatically increasing
data storage densities in magnet
storage devices by enabling targeted
heating of the storage medium
ahead of writing data.
HAMR technology is expected to
enable magnetic storage of hundreds
of Terabytes per square inch.
Cosmetic applications
There are exciting new applications
of compound semiconductor
technology in the billion dollar
cosmetics market. We are working
with a number of customers to
develop advanced laser technology
for cosmetic applications such as
laser hair removal, wrinkle treatment,
skin rejuvenation, acne and psoriasis
treatments to name just a few.
!
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Solid state lighting (LEDs)
Light emitting diodes (LEDs) are a
high performance, low cost, green
alternative to incandescent light
bulbs.
Global concerns about climate
change and the Earth’s dwindling
natural resources continues to be a
priority for governments worldwide.
Significant new policies and
legislation continue to be introduced
in the direction of renewable and
highly efficient energy devices.
Already, many continents have
introduced wide-ranging legislation
to progressively ban incandescent
lighting. Alternative low energy,
compact fluorescent lighting is
unpopular because of perceptions of
low quality lighting and on-going
issues with heavy metal content
including mercury.
Solid state lighting is widely viewed
as the only credible solution to
replace the incandescent light bulb.
Efficient energy consumption will
remain a key driver in the
development and adoption of this
technology, but the critical success
factor is reducing cost and improving
the ambience of these units.
High quality gallium nitride on silicon
(GaN on Si) provides the route map
to achieving this, which will
revolutionise residential and
commercial lighting around the
planet over the coming years.
!
Solid state lighting
will become the
standard source of
light.
High quality gallium
nitride provides the
route map to
achieving this.
Solar (CPV)
Solar cells utilising compound
semiconductors (called CPV or
Concentrated PhotoVoltaics) provide
the most efficient solution by using
multiple layers of finely tuned
materials to absorb sunlight across a
wider range of wavelengths.
As a result the efficiency of this
material is already in excess of 44%,
with a roadmap to increase this to
beyond 50%.
This compares with 12 to 18%
efficiency from silicon solar panels,
while thin film technology is typically
around 10 to 15% efficient. There is
very little scope to improve the
efficiency of these technologies due
to the fundamental properties of the
materials used.
!
A further advantage of compound
semiconductors is their tolerance of
higher temperatures. This means the
cost of CPV systems is also reduced
by using lenses which intensify
sunlight and thereby reduce the
amount of semiconductor required.
CPV has now reached price parity
with fossil fuels and other alternative
energy sources in high sunlight
regions (“high DNI regions”) and is
considered to be at an inflection
point, with industry analysts
forecasting significant adoption of
this technology. Specifically, in a
forecast published in late 2013,
industry analyst IHS has estimated
that the addressable market for this
technology will reach approximately
5GW in the next 2-3 years. To put this
in context, 1 GW represents
approximately $150m of revenue for
IQE, at a margin consistent with our
existing business.
The key milestone for adoption of
volume production is the
demonstration of a robust supply
chain. IQE has now qualified and
demonstrated high volume capability,
and is supporting its main customer,
Solar Junction, on finalizing a
complementary high volume chip
fabrication capability. We expect this
to be completed over the coming
months.
!
!
!
!
!
!
19
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The transformers that we use for our
electronic devices, such as laptop
power supplies, provide a vivid
example of this phenomenon by the
virtue of the heat energy they
generate as electricity is lost.
GaN offers performance and
efficiency which are orders of
magnitude better than the silicon
technology which dominates power
switching technology today. Indeed,
this technology has the potential to
eliminate up to 90% the energy lost
through switching.
!
Electronics
Power
Gallium nitride (GaN) is a compound
semiconductor that offers a diverse
range of RF, photonic and electronic
properties.
Of particular interest is the material’s
ability to cope with high voltages,
high temperature, and high power
which makes it an ideal candidate for
power control systems which are
growing in demand driven by
alternative energy sources such as
solar, wind and wave power, and also
the adoption of electric vehicles.
It is estimated that more than 10% of
all electricity is ultimately lost due to
conversion inefficiencies, as energy is
switched from generation, to grid,
and through to consumption. The
scale of this loss exceeds the world’s
entire supply of renewable energy
generation.
Advanced technologies
IQE has developed a powerful range
of advanced, engineered wafers such
as germanium-on-insulator (GeOI),
germanium-on-silicon (GeOSi) and
silicon-on-sapphire (SOS), which offer
a high performance and low cost
solution for next generation
microprocessors, ultra-high speed/
high density flash memory and MEMS
devices such as motion sensors.
IQE has established a powerful
position in these advanced
technologies, working with some of
the biggest names in the industry,
which is reflected in a number of
joint patents awarded in conjunction
with Intel for the production of
compound semiconductor materials
on silicon substrates.
We believe that the intellectual
property that we are developing in
this field has the potential to
revolutionise the semi-conductor
world, and in doing so create
significant long term value to IQE
stakeholders.
20
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The relationship between GaAs and Si
The relationship
between gallium
arsenide (GaAs) and
Silicon in wireless
communication
The first mobile phones in the 1980’s
used communication chips made
from silicon. As mobile
communication evolved, higher levels
of performance was demanded of
these communication chips, which
necessitated the use of gallium
arsenide (GaAs). In the many years
since, there has been speculation
periodically, that Silicon would
recapture this market. Driven by
unsubstantiated claims, rather than
technology innovation, this
speculation intensified in early 2013.
In reality, the wireless
communications revolution would
not have been possible without GaAs
technology. Indeed, even the current
silicon technology is unable to meet
the higher levels of todays
performance requirements.
But that does not mean that there is
no place for silicon in the wireless
market.
So what does this mean
for the future?
We believe that for the near future,
both technologies will continue to
address these different markets
segments with some areas of overlap.
In the longer term, the disruptive
technology will be a hybrid between
compound semiconductors and
silicon. This hybrid offers the
performance advantages of
compound semiconductors with the
large scale production infrastructure
of silicon. We are already beginning
to see this hybrid technology making
inroads in adjacent electronics
markets. Through its investment and
innovation, IQE is continuing to
position itself at the heart of this
emerging technology revolution.
Material Properties
Silicon has limited properties as a
semiconductor material. The
shortcomings in the wireless
communication properties of
silicon can be stretched (to a
point) by using very complex
circuit design. But the level of
complexity necessary is
significantly more expensive to
develop, and has much longer
design cycles. In contrast,
because of the the advanced
wireless communication
properties of GaAs the circuits
considerably less complex, and
hence are considerably cheaper
and quicker to design. GaAs can
inherently operate at much
higher frequencies than silicon.
Characteristics
The volume of global data
traffic will continue to grow at
an exponential rate for the
foreseeable future.
At the same time, the radio
frequencies (bandwidth)
available for radio
communication are becoming
significantly more complex
(fragmented) eg 2G – single
band; 3G – 5 bands; 4G/LTE –
over 40 bands. In addition,
wireless communication is
trending to higher frequencies
in order to pack more
information into radio signals.
These characteristics necessitate
wireless chips becoming
increasingly more complex.
The relationship between GaAs and Silicon in wireless communication is
best explained by comparing the properties of these materials, the
characteristics of wireless communication, the markets requirements
and the economics models of these materials
Market requirements
The increasing complexity of
wireless communication
necessitate bespoke radio solutions
at the leading edge.
For example, the communication
chips in an iphone not only vary
between territories, but between
different carriers within the same
territory. A ‘one size fits all’
approach simply does not work. In
addition, the continuing shift to
higher frequencies goes beyond
the capabilities of silicon, and
necessitates the use of GaAs.
Furthermore, time-to-market is
critical and can make the difference
between success and failure, so the
handset OEMs are demanding
rapid design iterations.
Economic models
Chip designers use the
technology which can deliver
the threshold performance at
the lowest cost. Threshold
performance continues to
increase.
Silicon technology is cost
competitive where the high
design costs can be defrayed
over larger volume.
In contrast higher performance
GaAs enables more complex 3G,
4G and LTE solutions and is cost
effective.
Clearly, there is a middle
ground where the material
chosen will depend on the
individual architecture adopted.
21
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
22
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Our strategy
Industry Positioning
IQE has been at the forefront of the
compound semiconductor industry
for over 25 years, and has developed
an unparalleled depth and breadth of
technology with in its industry.
The Group leverages its technology
leadership and scale to deliver the
performance, cost points and security
of supply to support increasing mass
market adoption across a significant
number of high volume market
verticals.
IQE is currently global leader in the
supply of advanced wireless
materials, and has aims to replicate
this success in its other primary
markets: photonics, infrared,
advanced solar (CPV), LED, power
switching and advanced electronics.
The Group has established the
platform for delivering this strategy :
• Global footprint spanning US,
Europe and Asia
• Breadth and depth of advanced
semiconductor materials
technology
• Talented, committed and
experienced team
• Proven credibility and reputation
• Secure multi-site supply
• Scale and cost leadership
• Largest capacity in the industry
These opportunities support both
continued strong growth and the
diversification of revenues over the
coming years.
!
Risk Mitigation Strategy
The Wireless chip market, to which
IQE supplies the core wafer
technology, is dominated by a
relatively small number of large chip
manufacturers. These in turn supply
very large end market customers
such as Apple and Samsung.
Large supply contracts, major
platform design wins and the
demand for a fast and flexible supply
chain mean that big shifts in market
share between chip suppliers is
commonplace.
IQE has implemented a strategy to
mitigate against being overly
dependent on a limited number of
chip manufacturers by establishing
strong supply relationships with all
major chip companies, thereby
ensuring IQE will always be part of
the supply chain, regardless of who
wins the large contracts.
The January 2013 acquisition of the
epitaxial business of Kopin Inc, a
NASDAQ listed competitor in the
wireless market, marked the
completion of this strategy. Kopin’s
major long standing customer was
Skyworks Inc., the largest of the
wireless chip and front end solution
companies by a significant margin.
This move followed the mid-2012
acquisition of RFMDs epitaxial
division by IQE. RFMD is the second
largest supplier into the wireless
solutions market.
These deals consolidated IQE’s market
leadership, strengthened its
technology portfolio, broadened its
customer base, and are enabling it to
access significant synergies, including
enhanced economies of scale and
cost reductions.
IQE is now the clear global leader in
the provision of wafers to the wireless
chip industry, with an estimated
market share of between 50%-60%.
The wireless market, which accounts
for approximately 85% of the Group’s
sales, remains a key market for the
Group.
!
Market Diversification
Strategy
In 2013, IQE embarked on the re-
organisation of the Group into
business units dedicated to each of
its primary markets: wireless,
photonics, InfraRed, CPV (advanced
solar), power switching, LEDs and
advanced electronics. This has
involved a number key hires, adding
depth and breadth to the team.
The Group has made strong progress
in its diversification strategy,
delivering on a number of key
milestones in 2013 including :
• Qualification of CPV materials with
SJC on IQE’s high volume
production platform. This included
transfer of technology, qualification
of wafers through SJC chip process,
first qualifications with customers,
and strong progress in qualifying a
high capacity outsource supply
chain through a major chip foundry
in conjunction with IQE
• Major contract announced with
Philips for VCSEL applications across
multiple end market applications
• New 150mm VCSEL product
launched for high volume, price
sensitive applications
• Achievement of VCSEL speed
performance and energy efficiency
world records announced
• Development of Silicon Photonics
technology announced
• World’s first 150mm InSb product
launched for infrared applications
• Award winning 150mm GaN HEMT
epi wafers on SiC launched for high
power RF applications
• 200mm GaN on Si (SMART-LEES)
• Licensing and supply agreement
with MACOM
!
23
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Current trading and outlook
The Group’s global leadership in
wireless, its solid platform for
expansion and its strong pipeline of
high growth opportunities in other
markets positions it well to continue
its growth profile over the coming
years.
!
The current financial year has started
in line with expectations, including
the destocking flagged by wireless
customers during the last quarter of
2013.
The outlook for 2014 remains very
positive, with excellent prospects
driven by the Group’s diversification
strategy, and the Board remains
confident of achieving full year
earnings expectations and strong
cash flow.
24
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Operational highlights
Integration of wireless
acquisitions
The acquisition of Kopin Wireless was
completed during mid January 2013,
and followed the acquisition of RFMD’s
epitaxial division in mid 2012. The
performance of these acquired
businesses during 2013 stands
testament that their integration into the
IQE group has been seamless.
Operational delivery has been excellent
throughout, including near perfect
customer feedback, scorecards, and
recognition (including customer
awards).
These acquired operations are now
integral parts of IQE’s Wireless Business
unit, and are engaged fully on all fronts
including strategic, operational and
technical aspects, and through activities
which include planning, execution and
performance improvement. This has
been possible thanks to a high level of
trust and co-operation between the
sites, and has included sharing of best
practice and technology.
Reshaping the group to
meet emerging markets
Wireless accounts for approximately
85% of our sales. It is, and will remain a
key market for us. But our aspirations
far exceed global leadership in wireless
communication. Compound
semiconductors lie at the heart of a
wave of next generation technologies
which is opening new markets for us.
This gives us a clear means to deliver
strong growth over the coming years,
and to diversify revenues. This strategy
is beginning to bear fruit, as evidenced
by the Philips contract announced in
the fourth quarter of 2013.
In anticipation of this we have already
begun to reshape our organisation to
meet the challenges and opportunities
of this exciting future. For example, we
are organising the group into business
units dedicated to each of our primary
markets : wireless, photonics, InfraRed,
CPV (advanced solar), power switching,
LEDs and advanced electronics. This
has also involved a number of new
appointments, which has added
additional depth and breadth to an
already strong team.
!
Synergies
The acquisitions in 2012 and 2013
consolidated our market place,
strengthened our technology
leadership, broadened our customer
base and are enabling significant
synergies, including enhanced
economies of scale and cost reductions.
We have already started to see the
benefit of these synergies during 2013,
and are seeing further efficiencies and
cost reductions in 2014.
Productionising CPV
material
We made significant progress during
2013 towards productionising and
commercialising our Advanced Solar
(CPV) technology. This included
qualifying our CPV material with Solar
Junction during the third quarter of
2013. The significance of this is that we
have demonstrated our capability to
deliver leading edge solar material from
our high volume production platform.
Solar Junction is in the process of
addressing the final steps towards
commercial production, namely
demonstrating high volume chip
fabrication and completing
qualifications with the systems
companies. These remain on track to
complete over the coming months.
VCSEL
VCSEL is the key enabling technology
behind a number of high growth
photonics markets including data
communications, data centres, sensing
applications, gesture recognition,
health, cosmetics, illumination and
heating applications.
IQE has developed technology
leadership, and is the market leader for
outsourced VCSEL materials. Over the
past year, the group has demonstrated
major new technical milestones at
record speeds, efficiencies and
temperatures.
Our technology leadership and
reputation for operational excellence
has helped secure major new high
volume supply contracts, including a
contract with Philips electronics during
the fourth quarter of 2013.
!
Gallium Nitride (GaN)
Gallium nitride on Silicon (GaN on Si) is
a technology which is driving a
technology shift in the multi-billion
dollar power switching and LED
markets.
IQE has achieved several major
technology breakthroughs over the
past 12 months, including the
demonstration of high quality 150mm
and 200mm GaN on Si. Our technology
leadership was instrumental in IQE
securing a key role in President Obama’s
Clean Energy Manufacturing Innovation
Institute as part of the US governments
Manufacturing Innovation Initiatives
(NNMI) to improve the competitiveness
of US manufacturing.
IQE has also announced a close working
relationship with MACOM in the form of
a new licensing and supply agreement
for 200mm GaN on Si, initially
challenging silicon LDMOS in base
station applications.
Gallium nitride on Silicon Carbide (GaN
on SiC) is similary driving a technology
shift in a number of high power radio
applications such as radar, CATV and
base stations. In the second quarter of
2013 IQE launched a high quality
150mm GaN on SiC material. This large
diameter material is enabling the
supply chain to improve efficiency and
reduce cost to accelerate the adoption
of this material.
25
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Financial highlights
!
Revenues
EBITDA
s
n
o
i
l
l
i
m
£
130
98
65
33
0
2009
2010
2011
2012
2013
s
n
o
i
l
l
i
m
£
26
20
13
7
0
2009
2010
2011
2012
2013
Operating profit
EPS
Reported
Adjusted
Unadjusted
Adjusted
e
c
n
e
p
K
U
3.00
2.25
1.50
0.75
0.00
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
16
12
8
4
0
s
n
o
i
l
l
i
m
£
26
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Financial Review
Overview
The Group delivered record full year
sales and profits which included the
benefit of recent acquisitions. This was
achieved despite a softening in the
smartphone market and foreign
currency headwinds during the
second half of 2013 as sterling
appreciated 3% against the US dollar.
The Group’s underlying financial
performance includes a number of
adjusted profit measures that
eliminate the impact of non-cash
charges (largely relating to share
based payments and acquisition
accounting) and exceptional items as
detailed in note 4.
Revenues grew 44% year on year from
£88.0m to £126.8m driven by
increased sales volumes which have in
part been as a result of the recent
acquisitions. Kopin Wireless, which
was acquired on 16 January 2013,
contributed revenues of £30.9m.
Strong margins, cost reductions and
acquisition synergies helped improve
profitability in the second half of 2013.
This enabled the Group to generate a
full year adjusted fully diluted EPS of
2.00p, up 43% from 1.40p in 2012.
Diluted EPS was 0.89p, down 19%
from 1.10p in 2012.
Gross profit
Adjusted gross margin increased by
43% from £19.5m to £27.9m, largely
driven by increased sales. Reported
gross profit increased by 25% from
£18.5m to £23.1m. As a percentage of
sales, adjusted gross margins were
broadly consistent year on year at
22%. Reported gross margins
declined from 21% to 18% reflecting
the increase in non-cash charges and
exceptional items as detailed in note
4.
SG&A
Adjusted selling, general and
administration expenses (SG&A)
increased by £3.1m (30%) from £10.3m
to £13.4m, which largely reflects the
SG&A costs of the acquired
businesses.
Reported SG&A increased by £4.1m
(36%) from £11.5m to £15.6m.
!
Other income and
expense
Other income and expense reflects a
£3.0m non-cash profit arising from a
reduction in the estimated remaining
deferred consideration (to be settled
via trade discount) in respect of a
previous acquisition, less a £3.2m
provision for the impairment of the
investment in Solar Junction. See
note 26 for further details.
Operating profit
Adjusted operating profit increased
by 59% from £9.2m to £14.6m.
Reported operating profit increased
by 5% from £7.0m to £7.3m.
EBITDA
Group EBITDA was up 52% from
£16.4m to £24.9m.
Interest
Interest costs of £2.2m (2012: £0.9m)
include £0.6m (2012: £0.3m) of non
cash interest charges relating to the
discounting of long term balances
arising on acquisition.
Pre tax profit
Adjusted pre tax profit increased by
51% from £8.6m to £13.0m. Reported
pre tax profit decreased by 15% from
£6.1m to £5.2m.
Tax credits
The income tax credit of £0.9m (2012:
credit £0.5m) reflects UK R&D tax
credits of £0.7m (2012: £0.5m),
overseas tax charges of £0.6m (2012 :
nil), and deferred tax credits of £0.8m
(2012: nil). The deferred tax credit
represents a £6.5m credit relating to
the recognition of tax losses, less a
£5.7m charge primarily relating to the
reduction in deferred consideration.
The Group has sufficient tax losses
available to shield future tax payable
of up to £36.7m.
!
Profit after tax
Adjusted profit after tax increased by
62% from £8.4m to £13.6m, which
included a £1.4m contribution from
the acquired business. Reported
retained profit decreased by 8% from
£6.6m to £6.1m.
Dividends
The Board will not be recommending
the payment of a dividend.
Cash generated
Cash generated from operations
increased £8.7m (up 212%) from £4.1m
to £12.8m.
Cash invested
Capital expenditure reduced from
£11.6m to £5.2m, reflecting the return
to more normal levels of maintenance
expenditure after the significant
investment programme completed in
2012.
Investment in product development
of £4.3m was broadly consistent with
the prior year (£4.0m), and reflects
ongoing development in new
products to access new and emerging
markets.
Details of the acquisition of Kopin
Wireless are set out in note 18. The
initial consideration for the acquisition
of (£36.5m) is reflected in the cash
generated from new equity issued
and increased borrowings (£36.7m).
Net Debt
Net Debt at the year end was £34.4m
(2012: £15.5m), reflecting £25m of debt
to part fund the Kopin Wireless
acquisition.
Post balance sheet
events
Post year end the Group sold its
minority equity interest in Solar
Junction Corporation. Details are
provided in note 26.
!
!
!
!
27
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Innovation, research and development
Open Innovation
In recognition of IQE’s reputation for
quality, innovation, research and
development, the Group’s corporate
headquarters in Cardiff, UK, has been
selected by the Welsh Government
to head up an Open Innovation
initiative.
The aim of IQE’s open innovation
programme: ‘OpenIQE’ is to help
boost regional economies by
collaborating with industry and
academia to identify supply chain
opportunities within Wales and
across Europe.
!
!
!
!
Further details about IQE’s open
innovation programme can be found
on a dedicated website:
www.openiqe.com.
!
R&D activity
Technology leadership lies at the
heart of IQE’s strategy. This is
supported by a culture of innovation
and constant improvement.
We are engaged in a number of
research and development
programmes in collaboration with
customers, academia, research
organizations and government
agencies. These programmes are
funded through a combination of
internal cash generation, customer
funding, and government support.
Development programmes are
geared towards next generation
applications as well as process
improvements leading to greater
throughput, higher-quality products,
better manufacturing yield, increased
production uptime and new product
development.
Whilst many R&D programmes are
subject to non-disclosure
agreements and confidentiality, there
are some programmes in the public
domain, examples of which include:
• Multi junction CPV solar cells
• Integration of III-V with Si
• Graphene for RF electronics
• Sb-based materials
• QD VCSELs (EU VISIT program)
• Dilute nitrides for lasers and SWIR
detectors
• Mixed nitride-antimonide-based
detectors
• High power InP-based quantum
cascade lasers
A list of technical publications is
available within the research pages
of the IQE website at www.iqep.com.
!
Industry events
IQE actively participates in major
industry events and frequently chairs,
hosts and presents technical papers
at international conferences.
Government
Many governments worldwide are
recognizing the importance of Key
Enabling Technologies (KETs) in
driving economic growth. Indeed,
the European Governments
economic growth strategy (“Horizon
2020”) has identified six such KETs
which it believes will drive the
economic growth of Europe over the
remainder of this decade. Under
Horizon 2020, European funding will
be channeled towards supporting
the commercialization of KETs,
including pilot line production. IQE’s
products are well aligned with these
KETs. During 2013, Dr Drew Nelson
was appointed to the High Level
Group, which is advising the
European Commission on the
implementation of this strategy.
With over 25 years of experience, IQE
is widely recognised by government
departments and agencies as world
experts in advanced materials.
Indeed, IQE has developed strong
relationships with government
agencies across the US, Europe and
Asia, and is actively involved in
several high profile government
funded programmes. By way of
example, IQE was selected as a key
partner is the Clean Energy
Manufacturing Innovation Institute
announced by President Obama in
January 2014.
!
28
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Our commitment
Corporate social
responsibility
The IQE Group actively promotes a
philosophy of corporate social
responsibility across all of its
operations and engages in a number
of local, national and international
initiatives working with a wide range
of third party organisations and
authorities in areas such as ethical
employment policies, educational and
community work.
Every effort will be made by all Group
companies to ensure best business
practice is deployed by:
• Respecting the need for
confidentiality across our global
customer base by ensuring that any
references to customer's names,
products or services are not
disclosed to third parties without
the customer's consent;
• Being open and honest about our
products and services and
communicating with customers all
appropriate information they need
to make informed decisions;
• Ensuring that any issues or problems
are dealt with efficiently, with
fairness and in a timely manner;
• Working closely with customers and
potential customers to help us
improve the value of the products
and services we offer them;
• Ensuring that we benchmark and
evaluate what we do in order to
constantly improve products and
services in the marketplace;
• Communicating with all
stakeholders as and when
appropriate, effectively and
transparently subject to ensuring
confidential information is not
compromised;
• Identifying and selecting suppliers
using fair and reasonable
methodologies;
• Identifying and using suppliers who
operate to ethical business
standards;
• Identifying and using local suppliers
wherever possible;
• Working closely with suppliers to
help us improve the value of the
products and services we offer
customers to the benefit of the
supply chain;
• Ensuring that our terms and
conditions are fair and reasonable;
• Ensuring employment practices
throughout the Group are fair and in
full compliance with employment
legislation;
• Working with and supporting local
and national charities;
• Encouraging volunteer work in
community activities;
• Supporting local academic
establishments; and
• Participating in voluntary business
advisory services via professional
bodies.
Each of the Group's subsidiaries is
responsible for communicating and
applying group policies within their
businesses taking account of local
legislation and potential risks.
The group also actively engages with
a number of industry groups,
educational bodies and charities to
promote science and technology and
to help contribute to community
causes.
Each of the Group's subsidiaries is
responsible for communicating and
applying group policies within their
businesses taking account of local
legislation and potential risks.
As an AIM listed company, IQE is not
eligible to participate in the London
Stock Exchange FTSE4Good
programme, but nevertheless
maintains standards and applies the
principles of this index. The group also
actively engages with a number of
industry groups, educational bodies
and charities to promote science and
technology and to help contribute to
community causes.
!
Business conduct and
ethics
Our Code of Conduct requires our
employees to carry on their business
activities in a respectful manner and
to avoid bringing IQE’s reputation into
disrepute. This includes complying
with the laws and regulations in the
countries in which we operate and do
business.
Our Code of Conduct also requires
staff to uphold high standards of
ethics throughout the group. Our
policy and controls are designed to
prevent bribery, and contain whistle
blowing provisions which enable any
employee to raise concerns about a
potential breach of policy or
malpractice.
!
!
!
!
!
29
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The environment
IQE is fully committed to creating
business growth whilst ensuring that
the impact on the environment is
minimised and that all activities are
conducted safely by appropriately
trained and qualified employees. The
group works closely with all key
stakeholders to ensure that its global
facilities, and those activities over
which it has influence through its
supply chain, operate in a way that is
ethical and in accordance with best
practice.
Policies relating to quality and
environmental standards are available
on the company’s website at
www.iqep.com along with access to
third party accreditation certificates.
Quality
IQE’s reputation for quality and
excellence in products and service is
second to none. A philosophy of total
quality is integrated throughout the
group’s operations and each of the
group’s manufacturing facilities
worldwide is independently
accredited to the international
standard for Quality Management:
ISO9001:2008.
IQE's ongoing commitment to provide
the highest quality of service ensures
customer satisfaction covering the
entire customer relationship
experience, from order inception
through to delivery and after-sales
support.
IQE's quality assurance program
includes wafer evaluation using the
most advanced measurement
techniques applied specifically to its
customers' structures, thereby
ensuring consistent delivery of the
highest-quality products. Rigorous
data logging and documentation of all
manufacturing processes and
procedures maintain a system of full
product traceability. IQE's thorough
materials characterization processes
ensure excellent repeatability and
reproducibility.
Customers strongly value the trust and
confidence they have established with
IQE as a "pure play" supplier with
whom they share their most
confidential and proprietary device
design information. The IQE strategy is
to consolidate and maintain its
position as the pre-eminent supplier
of epiwafers rather than vertically
integrate into device or component
manufacturing. This philosophy
protects customer interests to the
fullest and facilitates excellent supply
chain relationships.
Employing its extensive wafer
production experience, IQE continually
maintains its technological leadership
through the development and
implementation of new growth and
characterization technologies and new
materials solutions. IQE is actively
involved in partnerships with its
suppliers of crystal growth and
characterization equipment to
develop the next generations of
epitaxy and metrology equipment
with specific focus on increasing
production efficiencies, reducing
epiwafer costs, and maintaining its
technological leadership.
!
30
Risks and risk management
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Raw materials
The primary raw materials used in
IQE’s processes are not scarce and are
in general sourced from multiple
continents.
In some cases, materials may have
uses in multiple industries and as
such, may be prone to temporary
fluctuations in supply and demand
where there are surges in usage.
One such example is Indium which is
in relatively abundant supply. Indium
is used in small quantities in the
manufacture of flat panel displays. A
sudden surge in demand for flat
panels had a short term impact on
global indium pricing but such
impacts are normally short-lived and
their affect on IQE usually negligible.
Natural disasters
IQE operates multiple global
manufacturing facilities which
customers see as key mitigation
against the impact of natural
disasters.
However, the impact of such disasters
on other parts of the supply chain
cannot be ruled out but such macro-
economic factors would have a much
wider impact on the global economy.
!
Alternative technologies
There are many examples in history
where innovation has lead to new
technologies which disrupt demand
for well established incumbent
technologies.
The Board believes that this
represents much more of an
opportunity than a threat for IQE’s
business, where compound
semiconductors are seen as the
disruptive technology. Indeed, as
expectations and demand for higher
performance and greater efficiencies
continue to increase, this creates new
market opportunities for compound
semiconductors.
There has been much commentary in
the UK about the threat that silicon
will replace compound
semiconductor technology in mobile
communication. The Board believes
that this is contrary to both the
underlying technology trends, and
the fundamental properties of these
respective materials. Indeed, it is
widely expected that the next
disruptive technology in the
semiconductor industry will be the
combination of compound
semiconductor and silicon
technologies, which will enable true
‘System on Chip’ integration. IQE
concurs with this view and is
positioning itself to play a significant
role in this transformation.
As a world leader in advanced
semiconductor materials, IQE is
actively engaged on a number of
collaborative activities in areas of
research and development including
materials such as graphene.
!
Supply chain risk
mitigation
Approximately 85% of the groups
sales are concentrated in the wireless
communications market, where we
supply advanced semiconductor
materials to the companies (RF chip
companies) that make the wireless
communication chips used in
smartphone, tablets, and other
wireless devices.
The top 12 RF chip companies
account for the vast majority of all
advanced communication chip made
globally. IQE’s strategy is embed itself
as a significant supplier of advanced
semiconductor materials with all of
the major RF chip companies in order
to reduce the potential impact of
swings in market share between
these companies.
This risk mitigation strategy for
wireless products was significantly
enhanced following the acquisitions
in 2012 and 2013, which brought
significant supply relationships with
two of the worlds largest RF chip
companies. Following these
acquisitions, it is estimated that IQE
has in excess of 50% market share
globally.
Process improvements
IQE’s strategy is to focus on high-
growth technology markets such as
the wireless sector where growth in
smartphone units sold is
accompanied by greater demand for
higher performance materials such as
those supplied by IQE.
Constant improvement and
innovation throughout the supply
chain can reduce the area of
advanced semiconductor required,
for example by shrinking chip size or
improving production yields. Whilst
such improvements can be a drag on
demand, the resulting cost reduction
can greatly assist even faster
adoption of wireless technology in
new devices and applications thereby
stimulating overall growth.
!
31
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Board of directors
!
Drew Nelson OBE (59)
President and Chief Executive Officer !
Dr Drew Nelson has over 30 years experience in the semiconductor industry in a variety of
research and managerial positions. Following a PhD in Semiconductor Physics, he joined BT
Research Laboratories in 1981, leading the group responsible for the development of advanced
optoelectronic devices for optical fibre communications. He subsequently managed the
technology transfer from BT to Agilent for mass production. He co-founded EPI in 1988 (which
became IQE in 1999) and was appointed Chief Executive Officer of IQE Plc in April 1999. Dr
Nelson has held several Non-Executive Directorship appointments, and served on several
Government and Industry bodies. He received an OBE in 2001 for services to the Electronics
Industry. He is currently a member of the High Level Group appointed by the EC to oversee
the implementation of Key Enabling Technologies (KETs) throughout Europe. !
Current directorships: PhotonStar LED Group plc.
Phillip Rasmussen (43)
Group Finance Director and Company Secretary !
Phillip Rasmussen qualified as a Chartered Accountant with Coopers and Lybrand, a
predecessor firm of PwC. During his career with PwC he spent two years in Toronto, Canada
and gained significant experience of working with and advising a broad range of companies
in a variety of sectors, including multinational main market and AIM listed companies. Before
joining IQE, Mr Rasmussen was Director of Transaction Services with PwC in Bristol and worked
with IQE on two major acquisitions during 2006. He was appointed to the Board of IQE Plc in
March 2007 and appointed as Company Secretary in January 2009. !
Current directorships: none
Howard Williams (59)
Operations Director !
Dr Howard Williams has held a number of positions within both Manufacturing and Service industry
sectors, with roles ranging from Engineering Management to General Management. He was a
member of the founding team of EPI in 1988 and was appointed Operations Director for EPI in 1996.
He was appointed General Manager of IQE Inc in 2002 and General Manager of IQE (Europe) Limited
in 2003. He was subsequently appointed Chief Operations Officer in 2004 and was appointed to
the Board of IQE Plc as Operations Director in December 2004. !
Current directorships: none
32
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Godfrey Ainsworth (58)
!
Chairman, Non-Executive Director, Chairman of the Audit Committee
Dr Godfrey Ainsworth qualified as a Chartered Accountant and was employed by Coopers &
Lybrand before becoming an audit partner and then corporate finance partner with Spicer
& Oppenheim. He founded Gambit Corporate Finance in 1992, a practice specialising in the
provision of corporate finance services where he was Managing Partner until his retirement
from the firm on 30 November 2009. He has held several Non-Executive Directorship
appointments, including assignments for 3i plc and the Welsh Development Agency. He
has provided advice to IQE (formerly EPI) since its inception and was appointed to the
Board in 1997. He was appointed to the Board of IQE Plc in April 1999, and was appointed
chairman in February 2002.
Current directorships: Omniport Holdings Limited, Seren Photonics Limited, Mesuro Limited,
Cardiff Partnership Fund
Simon J Gibson OBE (56)
!
Non-Executive Director, Chairman of the Remuneration Committee
Simon is Chief Executive of Wesley Clover Corporation. Wesley Clover is an investment vehicle and
holding company. He has broad management experience in high-technology industries in both North
America and Europe. Before joining Wesley Clover, he was co-founder, President and CEO of Ubiquity
Software Corporation. Ubiquity was acquired by Avaya Inc in 2007. Prior to Ubiquity he held senior
management roles at Newbridge Networks and Mitel.
He is the Chairman and founder of the Alacrity Foundation, a graduate entrepreneurship program
which operates in the UK and Canada. The Foundation provides young people with post graduate
education, opportunity alignment and access to capital; with the objective of creating a new
companies. He was appointed to the Board of IQE in January 2002.
Current Directorships: Wesley Clover Wales Limited, Celtic Manor Resort Limited, Alacrity Foundation
!
David Grant (66)
Senior Independent Director
Dr David Grant has a background in engineering and technology and was appointed to the Board
of IQE Plc in September 2012. He was Vice-Chancellor of Cardiff University from 2001 to 2012.
Previously he held leadership positions in a number of international businesses including United
Technologies Corp., Dowty Group plc and GEC plc. He has been a Vice-President of the IET, and was
a Vice-President of the Royal Academy of Engineering from 2007 to 2012. He was awarded the IEE's
Mensforth Gold Medal in 1996 and in 1997 he was made a CBE for his contribution to the UK's
Foresight Programme. He has a PhD in Engineering Science from the University of Durham.
Current directorships: Renishaw plc, DSTl, STEMNET
!
!
!
!
33
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Corporate governance report
Although not required to, the
directors have decided to provide
corporate governance disclosures
similar to those that would be
required of a fully listed company.
The Board recognises that it is
accountable to the group’s
shareholders for the standard of
governance and therefore seeks to
maintain high standards in its
management of the affairs of the
group, seeing it as a fundamental
part of discharging its stewardship
responsibilities. Accordingly, both the
Board and the Audit Committee
continue to keep under review the
group’s whole system of internal
control, which comprises not only
financial controls but also operational
controls, compliance and risk
management.
Throughout the year ended 31
December 2013, the company has
continued to apply the principles of
best practice governance adopting
the spirit of the UK Corporate
Governance guidance.
The Board of Directors
The management of the group is
directed by the Board of directors,
which is responsible for ensuring the
development and implementation of
the group’s overall strategy. The
Board of directors comprises the non-
executive Chairman Dr G H H
Ainsworth, the Chief Executive Dr A W
Nelson, two executive directors and
two non-executive directors. There is
a clear division of responsibility
between the non-executive
Chairman, who is responsible for the
running of the Board, and the Chief
Executive, who is responsible for the
running of the group in accordance
with the authority delegated by the
Board. This ensures that there is a
balance of power and authority such
that no one individual has unfettered
powers of decision.
!
The fees of the non-executive
directors are paid in cash. The Board
considers that the non-executive
directors are independent of
management and free from any
business or other relationship which
could materially interfere with the
exercise of their independent
judgement. The terms and
conditions of appointment of the
non-executive directors are available
for inspection upon request to the
Company Secretary.
Dr David Grant is recognised as the
senior independent non-executive
director to whom concerns by staff of
any suspected impropriety can be
conveyed in private and investigated
as required by the Code of Best
Practice.
Under the Company’s Articles of
Association each of the directors is
required ordinarily to retire by
rotation once every three years.
The Board held regular meetings
during the year. The Board has a
formal schedule of matters referred to
it for decision, which includes the
approval of interim and annual
results, the annual budget,
acquisitions and disposals, major
items of capital expenditure, share
capital issues, governance issues and
executive appointments. The Board is
provided with appropriate strategic
and financial information prior to
each meeting together with monthly
reports to enable it to monitor the
performance of the group. The Chief
Executive reviews the performance of
the executive directors on an annual
basis.
All directors have direct access to the
advice and services of the Company
Secretary who is responsible for
ensuring that Board procedures are
followed, and are allowed to take
independent professional advice if
necessary at the company’s expense.
!
34
Board committees
The Board has delegated specific
responsibilities to the following
committees:
(a) Executive Committee
The executive committee consists of
the executive directors under the
chairmanship of Dr A W Nelson and is
responsible for the development of
strategy, annual budgets and
operating plans linked to the
management and control of the day-
to-day operations of the group. The
executive committee is also
responsible for monitoring key
research and development
programmes and for ensuring that
the Board policies are carried out on
a group-wide basis.
(b) Audit Committee
The Audit Committee consists of the
non-executive directors, Dr G H H
Ainsworth, S J Gibson and Dr D Grant.
The committee meets at least twice a
year under the chairmanship of Dr G
H H Ainsworth.
The Audit Committee has specific
written terms of reference which deal
with its authority and responsibilities
and these are available for inspection
upon request to the Company
Secretary. Its duties include
monitoring internal controls
throughout the group, approving the
group’s accounting policies, and
reviewing the group’s interim results
and full year financial statements
before submission to the full Board.
The Audit Committee also reviews
and approves the scope and content
of the group’s annual risk assessment
programme and the annual audit,
and monitors the independence of
the external auditors.
The Group has an Internal Audit
function, with a scope of evaluating
and testing the group’s financial
control procedures. The Internal Audit
function reports directly to the
Chairman of the Audit Committee,
and liaises with the external auditors
as appropriate.
The Finance Director, other financial
management and the external
auditors attend meetings of the Audit
Committee by invitation. The
committee also holds separate
meetings with the external auditors,
as appropriate.
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The group's policy on directors’
remuneration has been in line with
the Code provisions throughout the
year, full details of which are given in
the remuneration report. Members
of the Remuneration Committee do
not participate in decisions
concerning their own remuneration.
Attendance at meetings
The number of meetings held during
2013 by the Board, the Audit
Committee and the Remuneration
Committee are as shown below. The
number of meetings attended by the
executive and non-executive
directors is also shown below:
The Board has not established a
separate nominations committee and
has delegated responsibility for
nominations to the Remuneration
Committee There are currently no
plans for further appointments to the
Board.
!
(c) Remuneration and Nominations
Committees
The Remuneration Committee
consists of the non-executive
directors, S J Gibson, Dr G H H
Ainsworth and Dr D Grant. The
committee meets at least twice a year
under the chairmanship of S J Gibson.
The Chief Executive attends meetings
of the remuneration committee by
invitation to respond to questions
raised by the committee, but he is
excluded from any matter concerning
the details of his own remuneration.
The Remuneration Committee has
specific terms of reference which deal
with its authority and duties and
these are available for inspection
upon request to the Company
Secretary. The Remuneration
Committee is responsible for setting
salaries, incentives and other benefit
arrangements of executive directors
and senior executives and overseeing
the group’s employee share schemes.
In addition to the formal meetings listed above, there were a number of meetings conducted by telephone and
electronic media for circumstances requiring Board, Audit Committee or Remuneration Committee approvals.
35
!BoardAudit CommitteeRemuneration CommitteeNumber of meetings held in 2013732Number of meetings attended in 2013:ExecutiveDr A W Nelson7-2P J Rasmussen73-Dr H R Williams7--Non-executiveDr G H H Ainsworth732S J Gibson732Dr D Grant732 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
• a clearly defined organisational
structure and limits of authority;
• corporate policies and procedures
for financial reporting and control,
project appraisal, human resources,
quality control, health and safety,
information security and corporate
governance;
• the preparation of annual budgets
and regular forecasts which require
approval from both the group
executive committee and the
Board;
• the monitoring of performance
against budget and forecasts and
the reporting of any variances in a
timely manner to the Board;
• regular review and self-assessment
of the risks to which the group is
exposed, taking steps to monitor
and mitigate these wherever
possible including, where
appropriate, taking out insurance
cover;
• approval by the Audit Committee
of audit plans and, on behalf of the
Board, receipt of reports on the
group’s accounting and financial
reporting practices and its internal
controls together with reports from
the external auditors as part of their
normal audit work; and
• an internal audit function, which is
mandated to evaluate and test the
Group’s financial control
procedures, reporting directly to
the Chairman of the Audit
Committee.
!
Shareholder relations
The Chief Executive and the Finance
Director meet on a regular basis with
representatives of institutional
shareholders to discuss their views
and to ensure that the strategies and
objectives of the group are well
understood. The Chief Executive
keeps the Board fully informed of the
views of institutional shareholders.
Issues discussed with institutional
shareholders include the group’s
performance and the impact of any
major transactions. The Chairman has
met with individual shareholders on
an ad hoc basis.
The company also has a manager
responsible for investor relations and
operates a web site, which provides
details of the group’s facilities and
products and includes a separate
investor relations section on which
financial data and other significant
announcements are published. The
web site can be found at
www.iqep.com. The group’s annual
report and financial statements,
interim reports and other
documentation is available online
and by mail where requested.
The Annual General Meeting allows
shareholders to raise questions with
the Board, although shareholder
enquiries and questions are also
addressed throughout the year. In
accordance with the
recommendation of the Hampel
Code, the company will advise
shareholders attending the Annual
General Meeting of the number of
proxy votes lodged for each
resolution in the categories ‘For’ and
‘Against’, together with the numbers
‘at the Chairman’s discretion’ and
abstentions. These will be advised
after the resolutions have been dealt
with on a show of hands.
!
!
Internal control
The Board acknowledges its
responsibility for the group’s system
of internal control, the effectiveness
of which has been reviewed by the
Audit Committee during the year and
reported on to the Board. The review
has taken account of any material
developments up to the date of the
signing of the financial statements.
The processes to identify and manage
key risks to the success of the group
are an integral part of the internal
control environment. Such processes
are on-going, are regularly reviewed
and improved as necessary, and are in
accordance with the internal control
guidelines for directors. They include
strategic planning, the appointment
of senior executives, the monitoring
on a regular basis of performance,
control of capital expenditure and
significant revenue investment, and
the setting of high standards for
health, safety and environmental
performance. These processes have
been in place throughout the
financial year and up to the date of
approval of the financial statements.
The effectiveness of the control
systems and procedures is monitored
regularly through management self-
assessment and review by internal
audit. In addition, recognition is
given to the external audit findings,
which inform the Audit Committee’s
views of areas of increased risk.
The system of internal control
comprises those controls established
in order to provide assurance that the
assets of the group are safeguarded
against unauthorised use or disposal
and to ensure the maintenance of
proper accounting records and the
reliability of financial information
used within the business or for
publication. Any system of internal
control can only provide reasonable,
but not absolute, assurance against
material misstatement or loss, as it is
designed to manage rather than to
eliminate the risk of failing to achieve
the business objectives of the group.
The key procedures that the directors
have established with a view to
providing effective internal control
are as follows:
36
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Audit and related
services
The Board is aware of the importance
of maintaining the independence of
the group auditors, and does not
contract for additional services from
them which would compromise their
audit independence. Additional
services are also subject to
appropriate market testing.
The Audit Committee keeps under
review the nature and extent of audit
and non-audit services provided to
the group by the auditors in
accordance with a policy which it
established in 2004. Under this
policy, the award to the group’s
auditors of audit-related services, tax
consulting services or other non-
audit related services in excess of
£10,000 must first be approved by the
Chairman of the Audit Committee.
In addition, the group’s auditors will
be required to make a formal report
to the Audit Committee annually on
the safeguards that are in place to
maintain their independence and the
internal safeguards in place to ensure
their objectivity.
The nature of the services provided
by the auditors and the amounts paid
to them are as detailed below:
37
Total 2013 £‘000Total 2012 £‘000PricewaterhouseCoopers LLP (group auditors) Fees payable to company’s auditor and its associates for the audit of parent company and consolidated financial statements1818Fees payable to company’s auditor and its associates for other services:- The audit of company’s subsidiaries9367- Audit-related assurance services1315- Due diligence253- Tax compliance service--Ernst and Young (auditors of MBE Technology Pte Limited)- Subsidiary company’s audit1718- Tax services-7Total143178 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Directors’ report
The directors present their annual
report and the audited financial
statements for the year ended
31 December 2013.
Activities
The principal activity of the group
during the year was the development,
manufacture and sale of advanced
semiconductor materials. The principal
activity of the company is that of a
holding company for the group, the
provision of services to subsidiary
companies, and the research,
development and provision of
engineering consultancy services to
the compound semiconductor
industry.
Business review
A review of the group’s trading during
the year and its position at the year
end is provided on pages 15 to 22. The
review includes key performance
indicators as detailed in the Five Year
Financial Summary. Non financial KPIs
are commercially sensitive and are
therefore not disclosed. The principal
risks and uncertainties facing the
group are set out on pages 31 and 39.
The future outlook for the Group is set
out on page 24.
On the 15th January 2013 the group
completed the acquisition of the
epitaxial business of Kopin Inc; details
38
of the transaction are disclosed in note
18 together with the RFMD acquisition
made last year. These recent
transactions provided the Group with
the ability to access significant
synergies which are in the process of
being realised.
Post year end, the Group sold its
minority equity interest in Solar
Junction Corporation. Details are
provided in the post balance sheet
events note 26.
Dividends
The directors do not recommend the
payment of a dividend (2012: £nil).
Directors
The directors in office at 31 December
2013 and throughout the year and
their beneficial interests in the
company’s issued ordinary share
capital and share options are set out in
the remuneration report.
!
Research and
development
The group incurred costs in respect of
research and development during the
year of £5,627,000 (2012: £4,185,000) of
which £4,702,000 (2012: £4,042,000)
has been capitalised in accordance
with IAS 38 (“Intangible assets”). The
remaining research and development
costs totalling £925,000 (2012:
£143,000) have been charged to the
income statement.
Payment terms
The group seeks to agree favourable
credit terms with its suppliers where
possible, and adhere to the agreed
terms. The group’s average number of
days’ purchases outstanding in respect
of trade creditors at 31 December 2013
was 88 days (2012: 85 days).
Substantial interests in
shares
As at 14 March 2014, the company had
been notified pursuant to the
Companies Act of the following
substantial interests in the shares of
the company as defined by the Listing
Rules in addition to those disclosed for
the directors:
!
T Rowe Price Inc
..............................................................................................
10.58%
AXA Framlington Investment Management
............................................
9.11%
Hargreaves Lansdown
......................................................................................
6.52%
Barclays Stock Brokers Limited
.....................................................................
6.47%
T D Direct Investing
..........................................................................................
4.76%
Herald Investment Management Limited
...............................................
4.59%
Nelson A W Dr
.....................................................................................................
4.53%
M&G Investment Management
....................................................................
3.55%
Four Capital Partners
.........................................................................................
3.31%
Shareholder analysis by Argus Vickers
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Employment policies
It is the group’s policy that there
should be no discrimination in
considering applications for
employment including those from
disabled persons. All employees,
including the disabled, are given
equal opportunities in terms of career
development and promotion.
Appropriate training is arranged for
disabled persons, including retraining
for alternative work of employees
who become disabled, to promote
their career development within the
organisation.
The group remains committed to its
policy of keeping employees fully
informed about all matters which
concern them. Formal
communications are used to achieve
this objective, including intranet, e-
mail and notice board
announcements. Employee
involvement takes different forms in
each subsidiary, ranging from formal
committee meetings to less formal
discussion groups. Schemes have
been implemented to ensure that
employees are properly rewarded for
performance and loyalty.
Going concern
The directors, after making enquiries,
have considered the future prospects
of the group and have a reasonable
expectation that it will have adequate
resources to continue operating for
the foreseeable future and therefore
the going concern basis has been
adopted in preparing these financial
statements.
Principal risks and
uncertainties
In addition to the risks and risk
management section on page 31, the
Board considers that the principal
risks and uncertainties facing the
group are:
!
Competition
Retention of key employees
The Board recognises that the
retention and development of its
workforce is critical to its long term
success as a leading technology
group. IQE’s people are the heart of
the business and in order to promote
the development and retention of its
staff IQE offers career progression,
personal development and a range of
benefits and incentives to its staff.
This is reflected in low staff turnover,
with many employees who have
been with the company since it was
formed over twenty years ago.
In addition, IQE operates a highly
effective, robust, and fully
documented quality management
system across all of its operations.
These systems ensure that all key
data and procedures are fully
documented, reflecting IQE’s “learning
organisation” philosophy. These
rigorous systems provide IQE and its
customers with a high level of
confidence in terms of process
reproducibility and product
traceability, and minimise the
potential impact of losing key
personnel.
Treasury
IQE operates a central treasury
function which acts in accordance
with specific board policies.
Speculative transactions are not
permitted. The significant treasury
policies relate to Interest rates,
foreign currency and liquidity, details
are provided below.
!
IQE’s business model involves
building close working relationships
with its customers and often involves
forming multilevel partnerships from
the product design stages through to
pilot and volume production. Such
arrangements can lead to long
qualification timescales but once a
product range and relationship is
established, it can also create
significant barriers to entry for
competitors.
In some cases, customers seek second
source supply arrangements to meet
their own business continuity
planning policies. As such, there is a
risk that market share may be eroded.
The Board believes that IQE’s strategy
to provide multiple site capabilities
for all leading product lines provides
an effective mitigation against this
risk.
Technological change
Any technology based company faces
a threat from technology change that
has not been anticipated. IQE actively
engages with customers, educational
institutions and government agencies
on a range of research and
development (R&D) programmes. The
company’s involvement in R&D
activities coupled with its broad
range of products and process
technologies helps ensure a forward
looking approach that positions IQE
as a driver of technological change.
Supply chain
Changes in the supply chain such as
scarcity of key raw materials could
impact the business. IQE builds close
relationships with its key suppliers in
order to keep well informed about
potential supply issues. The raw
materials which sustain IQE’s
products are not scarce resources.
!
39
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Interest rate risk
The Board is aware of the risks
associated with changes in interest
rates and does not speculate on
future changes in interest rates or
currencies.
The group’s policy is to regularly
review its exposure to interest rate
risk, and in particular the mix
between fixed and floating rate
facilities. The percentage of
borrowings on fixed rate terms at 31
December 2013 was 10% (2012: 29%).
Floating rate liabilities are primarily
indexed to LIBOR. The group did not
enter into any interest rate swap
instruments during 2013. This
remains under regular review.
As a guide to the sensitivity of the
group’s results to movements in
interest rates, a 50 basis point (0.5%)
movement in interest rates would
have impacted the 2013 annual
interest charge by approximately
£180,000 (2012: £50,000).
Currency risk
(a) Cash flow risk
The group’s presentational currency is
sterling. However, the majority of
sales are denominated in US dollars.
Therefore, the group’s cash flows are
affected by fluctuations in the rate of
exchange between Sterling and the
US dollar.
This exposure is managed by a
natural currency hedge because a
significant portion of the group’s cost
base is also denominated in US
dollars. In particular, the majority of
the group’s raw materials are
purchased in US dollars, and a
significant portion of labour and
overheads are also denominated in
US dollars.
To a lesser extent, the group also
generates sales in other currencies
including Yen and Euros which are
also partially hedged where possible
by purchases of some raw materials
in these currencies.
Taking into account the extent of the
natural hedge within the business
model, management periodically use
forward exchange contracts to
mitigate the impact of the residual
foreign currency exposure. As at 31
December 2013 there were no
contracts in place.
(b) Fair value risk
The group has operations in the UK,
North America and Asia. Translation
exposures that arise on converting
the results of overseas subsidiaries
are not hedged. Net assets held in
foreign currencies are hedged
wherever practical by matching
borrowings in the same currency.
As a guide to the sensitivity of the
group’s results to movements in
foreign currency exchange rates, a
one cent movement in the US dollar
to Sterling rate would impact annual
earnings by approximately £300,000
(2012: £200,000).
Liquidity risk
Prudent liquidity risk management
requires maintaining sufficient cash
and cash equivalents and the
availability of funding through
committed credit facilities.
Management utilises detailed rolling
cash flow forecasts as part of its cash
management. This includes weekly
forecasts for the next quarter and
monthly forecasts for the next 12
months.
!
Credit risk
The majority of the group’s revenues
are derived from large multinational
organisations. Therefore the credit
risk is considered to be small.
Where the group assesses a potential
credit risk, this is dealt with either by
up-front payment prior to the
shipment of goods or by other credit
risk mitigation measures. As a result
the group has historically had and
continues to have a very low level of
payment default.
Capital risk
The group’s main objectives when
managing capital are to safeguard
the group’s ability to continue as a
going concern in order to provide
returns for shareholders and benefits
for other stakeholders and to
maintain an optimal capital structure
to reduce the cost of capital.
The group defines total capital as
equity in the consolidated balance
sheet plus net debt or less net funds
(note 24). Total capital at 31
December 2013 was £148,849,000
(2012: £106,079,000).
Consistent with others in the industry,
the group monitors capital on the
basis of the gearing ratio. This ratio is
calculated as net debt divided by
total capital. At 31 December 2013 the
gearing ratio was 24% (2012: 15%).
All covenants in relation to the
group’s borrowing facilities have
been complied with during the year.
!
!
!
!
40
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The directors are responsible for
keeping adequate accounting records
that are sufficient to show and
explain the company’s transactions
and disclose with reasonable
accuracy at any time the financial
position of the company and the
group and enable them to ensure
that the financial statements and the
Directors’ Remuneration Report
comply with the Companies Act 2006.
They are also responsible for
safeguarding the assets of the
company and the group and hence
for taking reasonable steps for the
prevention and detection of fraud
and other irregularities.
The directors are responsible for the
maintenance and integrity of the
group’s website, www.iqep.com.
Legislation in the United Kingdom
governing the preparation and
dissemination of financial statements
may differ from legislation in other
jurisdictions.
!
Provision of information
to auditors
So far as the directors are aware,
there is no relevant audit information
of which the company’s auditors are
unaware. The directors have taken all
the steps that ought to have been
taken as directors in order to make
themselves aware of any relevant
audit information and to establish
that the company’s auditors are
aware of that information.
Independent Auditors
A resolution to reappoint
PricewaterhouseCoopers LLP will be
proposed at the forthcoming Annual
General Meeting.
!
Approved by the Board of Directors
and signed on behalf of the Board.
!
!
!
Phillip Rasmussen
Finance Director & Company
Secretary
26 March 2014
Statement of directors’
responsibilities
The directors are responsible for
preparing the Annual Report and the
financial statements in accordance
with applicable law and regulations.
Company law requires the directors
to prepare financial statements for
each financial year. Under that law
the directors have prepared the
group and parent company financial
statements in accordance with
International Financial Reporting
Standards (IFRSs) as adopted by the
European Union. Under company law
the directors must not approve the
financial statements unless they are
satisfied that they give a true and fair
view of the state of affairs of the
group and the company and of the
profit or loss of the group for that
period.
In preparing these financial
statements, the directors are required
to:
• select suitable accounting policies
and then apply them consistently;
• make judgements and accounting
estimates that are reasonable and
prudent;
• state whether applicable IFRSs as
adopted by the European Union
have been followed, subject to any
material departures disclosed and
explained in the financial
statements;
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
company will continue in business.
41
(c) Basic salary
Basic salary is determined by
reference to individual
responsibilities, performance and
external market data.
(d) Performance bonus
Bonus payments are linked to the
executive directors achieving internal
annual plan targets in respect of
profitability and other non-financial
performance criteria. Bonuses were
awarded to certain directors in
respect of 2013 in accordance with
this scheme.
!
!
!
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Remuneration report
committee throughout the year were
Dr G H H Ainsworth and S J Gibson.
The Chairman of the committee is S J
Gibson.
The committee follows the principles
of the UK Corporate Governance
guidance , and is responsible for
determining the company’s policy on
compensation of executive directors
and the basis of their service
agreements with due regard to the
interests of shareholders. It also
approves the allocation of share
options to employees.
The committee operates under clear
written terms of reference and has
access to and takes independent
professional advice as appropriate.
The committee met twice during 2013
to review the performance of the
executive directors and other senior
executives, and set the scale and
structure of their remuneration.
(b) Remuneration policy
In establishing its remuneration
policy, the committee has given
consideration to Schedule B of the
Best Practices Provisions annexed to
the Listing Rules of the Financial
Conduct Authority. The remuneration
packages for executive directors and
senior executives, as determined by
the committee, are intended to
attract and retain high quality
executives, induce loyalty and
motivate them to achieve a high level
of corporate performance in line with
the best interests of shareholders,
while not being excessive. The
remuneration of the executive
directors consists of annual salary,
performance bonus, share options,
taxable benefits in kind and pension
contributions.
There is an annual review at which
the committee approves the basic
salary and profit sharing bonus
scheme for each executive director.
The committee receives input from
the Chief Executive regarding
recommended packages for
executive directors and senior
executives.
Introduction
This report has been prepared in
accordance with the Directors’
Remuneration Report Regulations
2007 which introduced new statutory
requirements for the disclosure of
directors’ remuneration. Although
not required to, the directors have
decided to provide directors’
remuneration disclosures similar to
those that would be required of a
fully listed company. In particular,
the Remuneration Report describes
how the Board has applied the
principles of good governance
relating to directors’ remuneration
adopting the spirit of the UK
Corporate Governance guidance. A
resolution to approve the report will
be proposed at the forthcoming
Annual General Meeting of the
company.
The report has been divided into
separate sections for unaudited and
audited information.
Unaudited information
(a) Remuneration Committee
The Board considers itself ultimately
responsible for the framework and
cost of executive remuneration, but
has delegated responsibility for
determining the remuneration levels
and conditions of service for
executive directors and senior
executives to the remuneration
committee. The committee’s
approach is fully consistent with the
company’s overall philosophy that all
employees should be competitively
rewarded in order to attract and
retain their valued skills in the
business, as well as supporting
corporate strategy by directly
aligning executive management with
the company’s strategic business
goals.
The remuneration committee is
comprised exclusively of independent
non-executive directors of the
company who have no personal
financial interest, other than as
shareholders, in the matters to be
decided. The members of the
42
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
(e) Taxable benefits in kind
The company reimbursed all fuel and
maintenance costs in respect of the
executive directors’ private cars, and
these costs are treated as taxable
benefits in kind. Other taxable
benefits comprise medical health and
life insurance.
(f) Share incentive schemes
The company operates a number of
share incentive schemes. The IQE Plc
Share Option Scheme, as adopted on
26 May 2000 and amended by
shareholders at the company’s
Annual General Meetings on 17 May
2002, 21 July 2008 and 22 July 2009,
allows the company to grant options
over up to 15% of the issued share
capital and those options are subject
to performance conditions.
During the year, the committee
approved the grant of 13,513,274
share options to staff (2012: 2,761,361
share options). During 2013, Directors
were awarded nil cost options over
6,050,881 ordinary shares in the
company (2012: 6,710,583).
!
As at 31 December 2013, 56,152,601
share options (2012: 38,693,514 share
options) granted under the IQE Plc
Share Option Scheme remain
outstanding with exercise prices
ranging from nil cost to 86p/option
(2012: nil cost to 86p/option). No
share options were exercised by
directors during the year (2012:
14,935,129). None of directors share
options lapsed during the year (2012:
2,251,349). The numbers and prices of
share options at 31 December 2013
and 31 December 2012 were as
follows:
!
(g) Directors’ interests in ordinary shares of IQE Plc
The interests in ordinary shares of IQE Plc of those directors holding office at 31 December 2013 were as follows:
There have been no changes to the director’s interests between the year end and the date the accounts were issued
43
!Option price2013 No. of options2012 No. of optionsShare options of nil cost to 10p/option25,781,30721,133,727Share options in excess of 10p/option to 20p/option24,901,33814,234,831Share options in excess of 20p/option to 30p/option4,120,0001,970,000Share options in excess of 30p/option1,349,9561,354,956Total56,152,60138,693,514Name of directorAs at 1 January 2013As at 31 December 2013Executive:Dr A W Nelson29,830,13229,325,132Dr H R Williams1,672,4301,672,430P J Rasmussen852,822852,822Non-Executive:Dr G H H Ainsworth3,121,9993,121,999S J Gibson301,855301,855Dr D Grant-215,000Total35,779,23835,489,238 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
(h) Pension arrangements
The executive directors are members
of the group defined contribution
pension schemes and their pension
contributions are based on a
percentage of basic annual salary.
Their dependants are eligible for the
payment of a lump sum in the event
of death in service. There have been
no changes in the terms of directors’
pension entitlements during 2013,
and there were no unfunded pension
promises or similar arrangements for
directors at 31 December 2013.
(i) Executive Directors’ service
contracts
It is the company’s policy to appoint
executive directors under service
agreements which are terminable by
either party giving between six and
twelve months’ notice. Each of the
agreements contain post-termination
restrictive covenants, which place
limitations on solicitation of
customers and employees of the
group and on acting in competition
with the business of the group. There
are no predetermined provisions for
compensation on termination within
executive directors’ service
agreements. However, the company
is against rewards for failure and
believes that severance arrangements
should be restricted to basic pay and
consequential payments such as
earned bonus. In circumstances
where there is no conflict of interest,
the company allows executive
directors to serve as non-executive
directors elsewhere. In such
circumstances the remuneration
received is retained by the director.
(j) Non-Executive Directors’ contracts
The non-executive directors have
entered into service agreements with
the company, and these are
terminable by either party on three
months’ notice. Non-executive
directors have specific terms of
engagement, and their fees are
determined by the Board within the
limits set by the company’s Articles of
Association. Non-executive directors
do not take part in discussions on
their own remuneration. There were
no changes to non-executive
remuneration during 2013.
The services of Dr G H H Ainsworth
were paid in cash. £70,000 (2012:
£70,000), was paid to Horton
Corporate Finance for his fees and
expenses for 2013. Dr G H H
Ainsworth is a director of Horton
Corporate Finance. VAT was charged
on the invoices from Horton
Corporate Finance and this was
recovered by the company.
The services of S J Gibson were paid
in cash. £35,000 (2012: £35,000), was
paid to Fishstone Limited for his fees
and expenses for 2013. S J Gibson is a
shareholder in Fishstone Limited. VAT
was charged on the invoices from
Fishstone Limited and this was
recovered by the company.
The services of Dr D Grant were paid
in cash. £35,000 (2012: £12,000).
The non-executive directors receive
no other pay or benefits, do not
participate in the company’s share
schemes, and are not eligible for
pension scheme membership. No
non-executive director had any share
options in the company at
31 December 2013 and it is not
intended that share options will be
issued to them in the future in
accordance with Best Practice
Guidelines issued by the Association
of British Insurers.
(k) Share price performance
The IQE plc share price has been
compared with the AIM market all-
share index for the five year period
2009 to 2013 as this was considered
to be the most representative market
group.
!
!
!
Five year share price performance: IQE plc share price compared with AiM all share index, 2009 to 2013.
44
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Audited information
(a) Aggregate directors’ remuneration
The total amounts paid for directors’ remuneration during 2013 were as follows:
(b) Directors emoluments
The aggregate emoluments paid to each director during 2013 were as follows:
Notes:
Non of the executive directors exercised any share options during the year and therefore made no gain (2012: £3,493,661) on
the exercise of share options. Dr Nelson made no gain during the year (2012: £1,570,762).
45
2013 £’0002012 £’000Basic salaries801718Bonuses41551Non-executive fees140117Subtotal salaries and fees1,356886Car allowance100115Benefits in kind2020Money purchase pension contributions8349Total1,5591,070Name of directorSalary fees and bonusesCar allowanceBenefits in kindPensions2013 Total2012 Total£’000£’000£’000£’000£’000£’000Executive:Dr A W Nelson444449-497322Dr H R Williams33628343410220P J Rasmussen 43628840512226A G Meldrum (resigned 21 September 2012)-----185Non-Executive:Dr G H H Ainsworth7070S J Gibson3535Dr D Grant (appointed 18 September 2012)3512Total1,5591,070 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
(c) Directors’ interests in share options of IQE Plc
The interests in share options in IQE Plc of those directors who held office at 31 December 2013 were as follows:
!
!
The directors do not hold shares or share options in any group company other than IQE plc.
The highest and lowest mid-market share prices in respect of the shares of IQE Plc during 2013 were 36.5p/share and 18.00p/
share respectively (2012: 33.25p/share and 18.72p/share respectively). The mid-market price of IQE plc shares closed at 23.50p/
share as at 31 December 2013 (2012: 30.75p/share).
!
Approval
This report was approved by the Board of Directors on 26 March 2014 and signed on its behalf by:
!
!
!
!
S J Gibson, OBE
Remuneration Committee Chairman
46
Name of directorAs at 1 January 2013Options grantedOptions exercisedOptions CancelledAs at 31 December 2013Date(s) from which exercisableExecutive:Dr A W Nelson4,932,5743,013,612--7,946,1861 Jan 2013 to 1 Jan 2016Dr H R Williams3,342,0011,798,249--5,140,2501 Jan 2013 to 1 Jan 2016P J Rasmussen2,928,2271,333,560--4,261,7871 Jan 2013 to 1 Jan 2016Non-Executive:Dr G H H Ainsworth-----S J Gibson-----Dr D Grant-----Total11,202,8026,145,421 - -17,348,223Name of directorAs at 1 January 2012Options grantedOptions exercisedOptions CancelledAs at 31 December 2012Date(s) from which exercisableExecutive:Dr A W Nelson12,845,1242,370,669(10,283,219)-4,932,5741 Jan 2012 to 1 Jan 2015Dr H R Williams5,386,4331,499,656(3,494,088)(50,000)3,342,0011 Jan 2012 to 1 Jan 2015P J Rasmussen2,586,3931,499,656(1,157,822)-2,928,2271 Jan 2012 to 1 Jan 2015Non-Executive:Dr G H H Ainsworth----S J Gibson----Dr D Grant----Total20,817,9505,369,981(14,935,129)(50,000)11,202,802
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Independent auditors’ report to the members of
IQE plc
Report on the financial statements
Our opinion
In our opinion:
• the financial statements, defined below, give a true and fair view of the state of the group’s and of the parent company’s
affairs as at 31 December 2013 and of the group’s profit and the group’s and the parent company’s cash flows for the year
then ended;
• the group financial statements have been properly prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act
2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
This opinion is to be read in the context of what we say in the remainder of this report.
What we have audited
The group financial statements and parent company financial statements (the “financial statements”), which are prepared by
IQE plc, comprise:
• the group and parent company statement of financial position as at 31 December 2013;
• the group income statement and statement of comprehensive income for the year then ended;
• the group and parent company statement of cash flows for the year then ended;
• the group and parent company statement of changes in equity for the year then ended; and
• the notes to the financial statements, which include a summary of significant accounting policies and other explanatory
information.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the
European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the
Companies Act 2006.
In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in
respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future
events.
What an audit of financial statements involves
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). An
audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of:
• whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been
consistently applied and adequately disclosed;
• the reasonableness of significant accounting estimates made by the directors; and
• the overall presentation of the financial statements.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies
with the audited financial statements and to identify any information that is apparently materially incorrect based on, or
materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
47
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
!
Other matters on which we are required to report by exception
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
!
Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’
remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.
!
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Directors’ Responsibilities Statement set out on page 12, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or
assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
!
Mark C Ellis (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Cardiff
26 March 2014
!
(a) The maintenance and integrity of the IQE plc website is the responsibility of the directors; the work carried out by
the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the financial statements since they were initially presented on the website.
!
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
!
48
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Financial'statements
Consolidated income statement for the year ended 31 December 2013
!
!!
Consolidated statement of comprehensive income for the year ended 31
December 2013
The notes on pages 56 to 84 form part of these financial statements.
!
!!
49
Note2013 £’0002012 £’000Revenue3126,77487,961Cost of sales(103,669)(69,491)Gross profit23,10518,470Other income and expenses4(179)-Selling, general and administrative expenses(15,580)(11,456)Operating profit57,3467,014Finance costs7(2,154)(886)Adjusted profit before tax13,0108,585Adjustments4(7,818)(2,457)Profit before tax5,1926,128Income tax credit8934503Profit for the year6,1266,631Profit attributable to:Equity shareholders5,9556,128Non-controlling interest1715036,1266,631Adjusted earnings per share102.09p1.47pBasic earnings per share100.93p1.16pAdjusted diluted earnings per share102.00p1.40pDiluted earnings per share100.89p1.10p2013 £’0002012 £’000Profit for the year6,1266,631Currency translation differences on foreign currency net investments*(3,294)(2,497)Total comprehensive income for the year2,8324,134* This may be subsequently reclassified to the income statement when it becomes realisedTotal comprehensive income attributable to:Equity shareholders2,7794,134Non-controlling interest53-2,8324,134 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Consolidated balance sheet as at 31 December 2013%
!
!
The notes on pages 56 to 84 form part of these financial statements.
These financial statements were approved by the Board of Directors on 26 March 2014. Signed on behalf of the Board
of Directors'
!
!
50
!Note2013 £’0002012 £’000Non-current assets:Intangible assets1175,85954,165Property, plant and equipment1271,84062,320Investments13-3,205Deferred tax asset816,04014,549Total non-current assets163,739134,239Current assets:Inventories1417,70218,351Trade and other receivables1522,90719,186Cash and cash equivalents3,2582,773Total current assets43,86740,310Total assets207,606174,549Current liabilities:Borrowings17(4,804)(2,428)Trade and other payables16(31,114)(31,709)Total current liabilities(35,918)(34,137)Non-current liabilities:Borrowings17(32,805)(15,828)Other payables16(26,632)(34,386)Total non-current liabilities(59,437)(50,214)Total liabilities(95,355)(84,351)Net assets112,25190,198Equity attributable to shareholders: Share capital196,4755,882Share premium48,95833,445Retained earnings48,70442,749Other reserves6,3618,122110,49890,198Non-controlling interest1,753-Total equity112,25190,198!P J Rasmussen!Dr A W Nelson IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Consolidated statement of changes in equity for the year ended 31 December 2013%
!
!
!
The notes on pages 56 to 84 form part of these financial statements.%
!
!
51
Share capitalShare premiumRetained earningsExchange rate reserveOther reservesNon-controlling interestsTotal equity£’000£’000£’000£’000£’000£’000£’000Balance at 1 January 20125,25122,12236,1185,2723,987-72,750Comprehensive incomeProfit for the year--6,631---6,631Foreign exchange---(2,497)--(2,497)Total comprehensive income--6,631(2,497)--4,134Transactions with ownersEmployee share option scheme----1,360-1,360Issues of ordinary shares63111,323----11,954Total transactions with owners63111,323--1,360-13,314Balance at 31 December 20125,88233,44542,7492,7755,347-90,198Share capitalShare premiumRetained earningsExchange rate reserveOther reservesNon-controlling interestsTotal equity£’000£’000£’000£’000£’000£’000£’000Balance at 1 January 20135,88233,44542,7492,7755,347-90,198Comprehensive incomeProfit for the year--5,955--1716,126Foreign exchange---(3,176)-(118)(3,294)Total comprehensive income--5,955(3,176)-532,832Transactions with ownersAcquisition of Kopin Wireless-----1,7001,700Employee share option scheme----1,415-1,415Issues of ordinary shares59315,513----16,106Total transactions with owners59315,513--1,4151,70019,221Balance at 31 December 20136,47548,95848,704(401)6,7621,753112,251 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Consolidated cash flow statement for the year ended 31 December 2013%
!
!!
!
The notes on pages 56 to 84 form part of these financial statements.%
52
!Note2013 £’0002012 £’000Cash flows from operating activities:Adjusted cash inflow from operations16,1734,679Cash impact of adjustments(3,411)(570)Cash inflow from operations2212,7624,109Net interest paid(1,546)(616)Income tax received(686)1,284Net cash generated from operating activities10,5304,777Cash flows from investing activities:Acquisition deferred consideration-(7,043)Acquisition of Kopin Wireless(36,533)-Investment in Solar Junction Corporation13-(3,205)Capitalised development expenditure(4,346)(4,042)Investment in other intangible fixed assets(556)(307)Purchase of property, plant and equipment(5,196)(11,562)Net cash used in investing activities(46,631)(26,159)Cash flows from financing activities:Issues of ordinary share capital16,10611,445Repayment of borrowings23(4,437)(1,383)Increase in borrowings2325,00010,877Net cash generated from financing activities36,66920,939Net decrease in cash and cash equivalents568(443)Cash and cash equivalents at 1 January242,7733,233Exchange gains on cash and cash equivalents(83)(17)Cash and cash equivalents at 31 December243,2582,773 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Parent company balance sheet for the year ended 31 December 2013%
!
!!
The notes on pages 56 to 84 form part of these financial statements.
These financial statements were approved by the Board of Directors on 26 March 2014. Signed on behalf of the Board
of Directors'
!
53
!Note2013 £’0002012 £’000Non-current assets:Investments 1313,26516,143Fixed assets1243-Total non-current assets13,30816,143Current assets:Trade and other receivables1599,34256,392Cash and cash equivalents1723,161Total current assets99,51459,553Total assets112,82275,696Current liabilities:Trade and other payables16(1,054)(684)Borrowings17(2,400)-Total current liabilities(3,454)(684)Non-current liabilities:Trade and other payables16(484)(484)Borrowings17(28,915)(9,565)Total non-current liabilities(29,399)(10,049)Total liabilities(32,853)(10,733)Net assets79,96964,963Shareholders’ equity:Share capital196,4755,882Share premium48,95833,445Retained earnings17,58820,103Other reserves6,9485,533Total equity79,96964,963!P J Rasmussen!Dr A W Nelson IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Parent company statement of changes in equity for the year ended 31 December 2013%
!
!
!
The notes on pages 56 to 84 form part of these financial statements.%
54
Share capitalShare premiumRetained earningsOther reservesTotal equity£’000£’000£’000£’000£’000Balance at 1 January 20125,25122,12218,1294,17349,675Comprehensive incomeProfit for the year--1,974-1,974Total comprehensive expense--1,974-1,974Transactions with ownersShare based payments---1,3601,360Share placing4389,546--9,984Other issues of ordinary shares1931,777--1,970Total transactions with owners63111,323-1,36013,314Balance at 31 December 20125,88233,44520,1035,53364,963Comprehensive incomeProfit for the year--(2,515)-(2,515)Total comprehensive income--(2,515)-(2,515)Transactions with ownersShare based payments---1,4151,415Share placing56915,336--15,905Other issues of ordinary shares24177--201Total transactions with owners59315,513-1,41517,521Balance at 31 December 20136,47548,95817,5886,94879,969 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Parent company cash flow statement for the year ended 31 December 2013'
The notes on pages 56 to 84 form part of these financial statements.%
!!
!
!
!
!
55
!Note2013 £’0002012 £’000Cash flows from operating activities:Cash outflow from operations22(40,759)(10,717)Interest received-2,845Interest paid(1,189)-Taxation-75Net cash used in operating activities(41,948)(7,797)Cash flows from investing activities:Investment in Solar Junction13-(3,205)Purchase of property, plant and equipment(57)-Net cash used in investing activities(57)(3,205)Cash flows from financing activities:Issues of ordinary share capital16,10611,445Repayment of borrowings(2,090)-Increase in borrowings25,0002,478Net cash generated from financing activities39,01613,923Net (decrease)/increase in cash and cash equivalents(2,989)2,921Cash and cash equivalents at 1 January3,161240Cash and cash equivalents at 31 December1723,161 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Notes'to'the'financial'statements
1. Significant accounting policies
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have
been consistently applied to all years presented.
General Information
The company is a public limited company, which is listed on the Alternative Investment Market (AIM) and incorporated and
domiciled in England and Wales. The address of its registered office is Pascal Close, St Mellons, Cardiff, CF3 0LW.
Basis of preparation
This financial information has been prepared on a going concern basis under the historical cost convention except where fair value
measurement is required by IFRS, and in accordance with the Companies Act 2006 applicable to companies reporting under IFRS,
International Financial Reporting Standards (“IFRS”) as adopted by the European Union and IFRIC interpretations. The application of
these standards and interpretations necessitates the use of estimates and judgements. The main areas involving estimates are set
out below in note 2.
Changes in accounting policy and disclosures
(a) New and amended standards adopted by the group
There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January
2013 that have had a material impact on the group.
(b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2013 and not
early adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1
January 2013, and have not been early adopted in preparing these consolidated financial statements. None of these are expected to
have a significant effect on the consolidated financial statements of the group.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the company and its subsidiary undertakings.
Subsidiaries are all entities over which the Group has the power to govern their financial and operating policies generally
accompanying a shareholding of more than half of the voting rights.
Subsidiaries are consolidated from the date on which control is transferred to the Group and are de-consolidated from the date
that control ceases.
Inter-company transactions, balances, income and expenses on transactions between group companies are eliminated. Profits and
losses resulting from intercompany transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency with the policies adopted by the group.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of an acquisition is measured at the fair value
of the consideration. The acquired identifiable assets, liabilities and contingent liabilities are recognised at their fair value at the date
of acquisition.
Where the fair values of contingent deferred consideration, assets and liabilities acquired are initially recognised on a provisional
basis, these are reassessed during the 12 month period following the date of the business combination. Adjustments to the fair
values as at the date of acquisition within this ‘measurement period’ are recorded, with any net impact being added to or deducted
from the goodwill recognised. Such adjustments are recognised in both the current period and restated comparative period
balance sheets as if the final fair values had been used in the initial recognition of the acquisition.
Subsequent to the measurement period, any adjustments to the recorded fair value of contingent deferred consideration are taken
through the income statement as an exceptional income or expense.
The group recognises any non-controlling interest on an acquisition-by-acquisition basis, either at fair value or at the non-
controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets.
Acquisition related costs are expensed as incurred.
56
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Intangible assets
a) Goodwill
Goodwill arising on an acquisition is recognised as an asset and initially measured at cost, being the excess of the fair value of the
consideration over the fair value of the identifiable assets, liabilities and contingent liabilities acquired.
Goodwill is not amortised. However, it is reviewed for potential impairment at least annually or more frequently if events or
circumstances indicate a potential impairment. For the purpose of impairment testing, goodwill is allocated to each of the Cash
Generating Units to which is relates. Any impairment identified is charged directly to Consolidated Income Statement. Subsequent
reversals of impairment losses for goodwill are not recognised.
b) Patents trademarks and licences
Separately acquired patents, trademarks and licences are shown at historical cost. Patents, trademarks and licences acquired in a
business combination are recognised at fair value at the acquisition date. Patents, Trademarks and licences have a finite useful life
and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost
of trademarks and licences over their estimated useful lives of 10 to 15 years.
The carrying value of patents, trademarks and licences is reviewed for potential impairment at least annually, or more frequently if
events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated
Income Statement.
c) Development costs
Expenditure incurred that is directly attributable to the development of new or substantially improved products or processes is
recognised as an intangible asset when the following criteria are met :
• the product of process is intended for use or sale;
• the development is technically feasible to complete;
• there is an ability to use or sell the product or process;
• it can be demonstrated how the product or process will generate probable future economic benefits;
• there are adequate technical, financial and other resources to complete the development; and
• the development expenditure can be reliably measured.
Directly attributable costs refers to the materials consumed; the directly attributable labour; and the incremental overheads
incurred in the development activity. General operating costs, administration costs and selling costs do not form part of directly
attributable costs.
All research and other development costs are expensed as incurred.
Capitalised development costs are amortised on a straight line basis over the period during which the economic benefits are
expected to be received, which typically range between 2 and 5 years. The estimated remaining useful lives of development costs
are reviewed at least on an annual basis.
The carrying value of capitalised development costs is reviewed for potential impairment at least annually, or more frequently if
events or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated
Income Statement.
d) Software
Directly attributable costs incurred in the development of bespoke software for the group’s own use are capitalised and amortised
on a straight line basis over the expected useful life of the software, which typically range between 3 and 5 years.
The carrying value of capitalised software costs is reviewed for potential impairment at least annually, or more frequently if events
or circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income
Statement.
The costs of maintaining internally developed software, and annual license fees to utilise third party software, are expensed as
incurred.
e) Other intangibles recognised on acquisition
Other intangible assets which form part of the identifiable net assets of an acquired business are recognised at their fair value and
amortised on a systematic basis over their useful economic life which is up to 7 years.
This includes customer contracts, the fair value of which has been evaluated using the mulit period excess earnings method “MEEM”.
The MEEM model valuation was cross checked to the cost of product development and qualification to which the contract relates.
The carrying value of other intangible assets is reviewed for potential impairment at least annually, or more frequently if events or
circumstances indicate a potential impairment. Any impairment identified is immediately charged to the Consolidated Income
Statement.
57
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairment. Cost comprises all
costs that are directly attributable to bringing the asset into working condition for its intended use. Depreciation is calculated to
write down the cost of fixed assets to their residual values on a straight-line basis over the following estimated useful economic
lives:
Freehold buildings
Leasehold improvements
Plant and machinery
Fixtures and fittings
................................................
.........................
...................................
.......................................
25 years
5 to 27 years
5 to 15 years
4 to 5 years
No depreciation is provided on land or assets yet to be brought into use.
The assets residual values and useful economic lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
The carrying value of property, plant and equipment is reviewed for potential impairment at least annually. Any impairment
identified is immediately charged to the Consolidated Income Statement.
Impairment of non-current assets
Non-current assets are reviewed for potential impairment at least annually, or more frequently if events or circumstances indicate a
potential impairment. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset’s fair value (less disposal costs) and value in use.
Value in use is based on the present value of the future cash flows relating to the asset, discounted at the Group’s weighted average
cost of capital. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows (Cash Generating Units).
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method.
Cost comprises direct materials and, where applicable, direct labour costs and attributable overheads that have been incurred in
bringing the inventories to their present location and condition based on normal operating capacity. Net realisable value is the
estimated selling price in the ordinary course of business, less applicable variable selling expenses.
Trade receivables
Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If
collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current
assets. If not, they are presented as non-current assets.
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest
method, less provision for impairment.
Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents includes cash in hand, deposits held at call with banks, other
short-term highly liquid investments with original maturities of three months or less and bank overdrafts. In the consolidated
balance sheet, bank overdrafts are shown within borrowings in current liabilities.
Trade payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from
suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating
cycle of the business if longer). If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest
method.
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Financial instruments
Financial assets and liabilities are recognised on the group’s balance sheet when the group becomes a party to the contractual
provisions of the financial instrument.
The financial assets held by the group are other equity investments, receivables and cash and cash equivalents. Receivables do not
carry interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Cash
and cash equivalent comprise cash in hand. Other equity investments are held at cost less provision for impairment.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Trade payables are stated at their nominal value and do not bear interest.
Equity instruments issued by the company are recorded at the proceeds received net of any direct issue costs.
Interest bearing loans are recorded at the proceeds received net of any direct issue costs. Finance charges are accounted for on an
accrual basis using the effective interest method.
The group does not use derivative financial instruments for speculative purposes. The group uses forward currency contracts as
appropriate to manage foreign exchange risk.
Detailed disclosures of the group’s financial instruments are provided in notes 15 and 16.
Leases
Leases which transfer substantially all the risks and rewards of ownership of an asset are treated as a finance lease. Assets held
under finance leases are capitalised at their fair value at the inception of the lease and depreciated over the estimated useful
economic life of the asset or lease term if shorter. The finance charges are allocated to the Consolidated Income Statement in
proportion to the capital amount outstanding.
All other leases are classified as operating leases. Operating lease rentals are charged to the Consolidated Income Statement in
equal annual amounts over the lease term.
Revenue recognition
Revenue represents the amounts receivable for goods and services provided in the ordinary course of business net of value added
tax and other sales related taxes. Revenue is recognised when the risks and rewards of the underlying sale have been transferred to
the customer, which is on the delivery of the goods or services and acceptance by the customer.
Accrued income is recognised for sales where, at the balance sheet date, billing has not yet taken place but contractual terms
dictate that the risks and rewards have been transferred to the customer and the customer is committed to payment. Billing is
deferred to a contractually defined trigger point.
An acquisition was made during 2012, where the consideration is being settled through agreed contractual price discounts.
Subsequent to the measurement period, any adjustments to the recorded fair value of contingent deferred consideration are taken
through the income statement within other income as an exceptional income or expense. The revenues of products sold which are
subject to this discount are recognised at full market value. On settlement of the transaction, the discount is applied to reduce the
deferred consideration balance.Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Board of Directors, who
oversee the allocation of resources and the assessment of operating segment performance.
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and
returns that are different from those of other business segments.
A geographical segment is engaged in providing products or services within a particular economic environment that are subject to
risks and returns that are different from those of components operating in other economic environments.
Pension costs
The group operates defined contribution pension schemes. Contributions are charged in the Consolidated Income Statement as
they become payable in accordance with the rules of the scheme.
59
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Exceptional items
Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide further
understanding of the financial performance of the group. They are material items of income or expense that have been shown
separately due to the significance of their nature or amount. Details of the exceptional items are included in note 4.
Foreign currencies
Items included in the financial statements of each subsidiary are measured using the currency of the primary economic
environment in which the subsidiary operates (“the functional currency”). The consolidated financial statements are presented in
sterling, which is the group’s presentational currency.
Foreign currency transactions are translated into the subsidiaries functional currency at the rates of exchange ruling at the date of
the transaction, or at the forward currency hedged rate where appropriate. Monetary assets and liabilities in foreign currencies are
translated into the subsidiaries functional currency at the rates ruling at the balance sheet date. All exchange differences are taken
to the income statement.
The balance sheets of overseas subsidiaries are translated into sterling at the closing rates of exchange at the balance sheet date,
whilst the income statements are translated into sterling at the average rate for the period. The resulting translation differences are
taken directly to reserves.
Foreign exchange gains and losses on the retranslation of foreign currency borrowings that are used to finance overseas operations
are accounted for on the ‘net investment’ basis and are recorded directly in reserves provided that the hedge is ‘effective’ as defined
in IAS 39 “Financial Instruments : recognition and measurement”.
Taxation
Income tax on the profit or loss for the year comprises current and deferred tax.
Current tax is the expected tax payable on the taxable income for the year using rates substantially enacted at the balance sheet
date, and any adjustments to tax payable in respect of prior years.
Amounts receivable from tax authorities in relation to R&D tax relief claims are recognised as a credit within the group's tax charge.
Where amounts are outstanding at the year end and have not been formally agreed, an appropriate estimate of the amount is
included within other receivables.
Deferred tax is provided in full on temporary differences between the carrying amounts of assets and liabilities in the financial
statements and the amounts used for taxation purposes. Deferred tax is calculated at the tax rates that have been enacted or
substantially enacted at the balance sheet date. Deferred tax assets are only recognised to the extent that it is probable that future
taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are
recognised for taxable temporary differences, unless specifically exempt.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current taxation assets against current
taxation liabilities and it is the intention to settle these on a net basis.
Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised directly in equity, in
which case it is recognised in equity.
Investment in subsidiaries
Investments in subsidiaries are held at cost of investment less provision for impairment in the parent company accounts.
Other equity investments
Other equity investments are held at cost less provision for impairment in both the parent company and group accounts on the
basis that the Group (and Company) does not have the ability to exert significant influence or control over the strategic and
operating activities of the other equity investments.
!
!
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IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
2. Critical accounting judgements and key sources of estimation uncertainty
The group’s principal accounting policies are described in note 1. The application of these policies necessitates the use of estimates
and judgements in a number of areas. Accordingly, the actual amounts may differ from these estimates. The main areas involving
estimation are set out below:
(a) Impairment of intangible assets
Goodwill on the group’s balance sheet is not subject to amortisation because it is assumed to have an indefinite useful life. In
accordance with IAS 36 “Impairment of assets”, the carrying value of goodwill is assessed at least annually for impairment. This
assessment is based on cash flow forecasts. In light of these forecasts the Board has concluded that goodwill is not impaired.
The group capitalises the cost of developing new and substantially improved products and processes if there is a reasonable
expectation of obtaining an appropriate economic return. This necessitates an assessment of the future technical viability and
future commercial benefits of the product or process. The carrying value for each project is assessed for impairment on an on-
going basis.
The key assumptions and judgements adopted in preparing the impairment review are set out in note 11.
(b) Impairment of receivables
Trade and other receivables are carried at the contractual amount due less any estimated provision for non-recovery. Provision is
made based a number of factors including the age of the receivable, previous collection experience and the financial circumstances
of the counterparty.
(c) Inventory provisions
Inventories are carried at the lower of cost and net realisable value. Provision is made based on a number of factors including the
age of inventories, the risk of obsolescence and the expected future usage.
(d) Acquisition fair values
An assessment of the fair value of the purchase consideration and net assets acquired was undertaken for the acquisition made
during 2013. The basis of the key judgments made is set out in note 18. We have reassessed the fair value of the deferred contingent
consideration in relation to the 2012 RFMD acquisition. This resulted in an exceptional release of £3.0m to other income as a result
of lower forecast volumes.
(e) Deferred tax assets
Deferred tax assets are only recognised to the extent that it is probable that future taxable profits will be available against which
deductible temporary differences can be utilised. This necessitates an assessment of future trading forecasts for each relevant tax
authority, capital expenditures and the utilisation of tax losses.
!
!
61
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
3. Segmental analysis
The board of directors considers that the wireless, photonics and electronics markets are the group’s primary reporting segments.
The board of directors assesses the performance of these operating segments based on their earnings before interest, tax,
depreciation, amortisation, exceptional items and share based payments (EBITDA).
Further detail on the nature of the segments is provided in the Chief Executive’s Review.
!
!
!
Costs not directly attributable to a segment are allocated based on the proportion of revenue attributable to that segment.
Finance costs are not allocated to the segments because treasury is managed centrally.
!
!!
62
!2013
Wireless
£’000!Photonics
£’000
Electronics
£’000
Total
£’000Income statementRevenue107,21918,685870126,774EBITDA22,5412,27910024,920Exceptional items(1,860)(3,205)-(5,065)Share based payments(1,129)(269)(17)(1,415)Depreciation(7,580)(792)(131)(8,503)Amortisation(2,113)(467)(11)(2,591)Operating profit/(loss)9,859(2,454)(59)7,346Finance costs(2,154)Tax934Profit after tax6,126Segment assetsOperating assets157,62625,3265,356188,308Deferred tax asset13,2582,7275516,040Cash3,258Total assets207,606Segment liabilitiesOperating liabilities(54,220)(3,249)(277)(57,746)Borrowings(37,609)Total liabilities(95,355)Other segmental informationCapital expenditure - intangible assets 23,5861,1741,52126,281Capital expenditure - property, plant and equipment18,0881,8494619,983 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
In the periods set out below, certain customers, all within the Wireless operating segment, accounted for greater than 10% of the
Group’s total revenues:
!
There are no customers in the photonics or electronics segments that accounted for greater than 10% of the Group’s total revenues.
63
2013 £’0002013 % revenue2012 £’0002012 % revenueCustomer 140,48032%22,36425%Customer 223,89919%398<1%Customer 3 8,5367%12,84915%2012Wireless
£’000Photonics
£’000Electronics
£’000Total
£’000Income statementRevenue68,96218,04995087,961EBITDA12,9293,732(224)16,437Exceptional items(455)(115)-(570)Share based payments(1,066)(279)(15)(1,360)Depreciation(4,921)(786)(291)(5,998)Amortisation(877)(612)(6)(1,495)Operating profit/(loss)5,6101,940(536)7,014Finance costs(886)Tax503Profit after tax6,631!Segment assetsOperating assets137,04030,2264,510171,776Cash2,773Total assets174,549Segment liabilitiesOperating liabilities(60,738)(5,077)(280)(66,095)Borrowings(18,256)Total liabilities(84,351)Other segmental informationCapital expenditure - intangible assets 22,2132,55899825,769Capital expenditure - property, plant and equipment31,7171,336333,056 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
3. Segmental analysis continued
!
!
Geographical information
Disclosure of group revenues by location of customer:
!
!
!!
Disclosure of non-current assets by location of assets:
!!
64
2013 £’0002012 £’000Americas105,21164,967United States of America105,16864,425Rest of Americas43542Europe, Middle East & Africa (EMEA)5,9595,721France155503Germany9171,391Israel1,1561,042United Kingdom1,1711,439Rest of EMEA2,5601,346Asia Pacific15,60417,273People’s Republic of China442865Japan5,3246,006Taiwan8,4619,074Rest of Asia Pacific1,3771,328Total revenue126,77487,961Property, plant and equipmentIntangible assets!By location2013 £’0002012 £’0002013 £’0002012 £’000USA49,45045,64756,25236,013Singapore8,77511,1678,4059,041Taiwan7,555-848-UK6,0605,50610,3549,11171,84062,32075,85954,165 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
4. Adjusted profit measures
!
!
The Group’s results are reported after a number of imputed non-cash charges (largely relating to acquisition accounting), and non-
recurring items. Therefore, we have provided additional information to aid an understanding of the Group’s performance.
!
In fair valuing the assets of the acquired Kopin Wireless business, the inventories were recorded in the Group’s accounts at their fair
value. Therefore, the reported gross margin reflects a reduced profit on the sale (post acquisition) of the inventories acquired. The
£1.5m adjustment above eliminates this fair value uplift so that the adjusted gross margin reflects the normal trading profit.
As previously highlighted, the group is restructuring and reorganisation its operations. During 2013, the Group incurred costs of
£3.4m in connection with these programmes, which included redundancy costs, requalification costs and the duplication of
overheads to support the transition of customers between production facilities.
The Group also generated a non-cash profit of £3.0m arising from a reduction in the estimated remaining deferred consideration
(to be settled via trade discount) in respect of a previous acquisition. This has been classified as other income in the consolidated
income statement.
Subsequent to the year end the Group disposed of its equity investment in Solar Junction Corporation. The consideration is
deferred and contingent upon certain aspects of Solar Junction’s future business development. Given the uncertainty in
establishing IQE’s potential share of this consideration, no accrual has been made for any future receipts and the £3.2m carrying
value of the investment has been fully provided for at 31 December 2013, and classified within other income and expenses in the
consolidated income statement.
The 2012 transaction costs of £0.6m related to one-off costs relating to the acquisition of Kopin Wireless in January 2013
The other items relate to non-cash items relating to acquisition accounting and share based payments.
The deferred tax credit of £0.3m (2012 : £0.7m) reflects the net deferred tax impact associated with these items. As noted in the
Financial Review, the remaining underlying deferred tax credit of £0.8m relates to a credit of £6.5m relating to the recognition of tax
losses, less a £5.7m charge primarily relating to the reduction in deferred consideration.
The cash impact of these items during 2013 was £3.4m relating to the restructuring and reorganisation costs (2012: £0.6m relating to
the transaction costs).
65
2013 £’0002012 £’000 Acquisition related inventory fair value adjustment1,475-Restructuring and reorganisation2,415-Share based payments944989Adjustments to gross profit4,834989Release of contingent deferred consideration(3,026)-Impairment of investments3,205-Restructuring and reorganisation996-Transaction costs-570Amortisation of acquired intangibles 730258Share based payments471371Adjustments to operating profit7,2102,188Discounting of long term acquisition related balances608269Adjustments to profit before tax7,8182,457Deferred tax on adjustments(330)(687)Adjustments to profit after tax7,4881,770Represented by :Cash impact3,411570Non-cash impact4,0771,2007,4881,770 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
4. Adjusted profit measures continued
!
!
!
!
Earnings before interest, tax, depreciation, amortisation and exceptional items (EBITDA) have been calculated as follows:
!!!
!
* Exceptional items impacting EBITDA include the following items: acquisition related inventory fair value adjustments, transaction costs, impairment of
investments, wireless business unit re-organisation costs and the release of contingent deferred consideration
66
2013 £’0002012 £’000 Adjusted gross margin27,93919,459Reported gross margin23,10518,470Adjusted sales, general and administrative expenses (13,383)(10,257)Reported sales, general and administrative expenses(15,580)(11,456)Adjusted operating profit14,5569,202Reported operating profit7,3467,014Adjusted profit before tax13,0108,585Reported profit before tax5,1926,128Adjusted profit after tax13,6148,401Reported profit after tax6,1266,6312013 £’0002012 £’000 Profit attributable to equity shareholders5,9556,631Minority interest171-Tax(934)(503)Share based payments1,4151,360Finance costs2,154886Depreciation of tangible fixed assets8,5035,998Amortisation of intangible fixed assets2,5911,495Acquisition related inventory fair value adjustment*1,475-Transaction costs*-570Impairment of investments*3,205-Release of contingent deferred consideration*(3,026)-Restructuring and re-organisation*3,411-EBITDA24,92016,437 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
5. Operating profit
*A schedule of services provided by the group’s auditors is disclosed in the Corporate Governance Report.
**A reconciliation of the exceptional items is provided in note 4.
!
!
!
6. Employee costs
!
The aggregate directors' remuneration, directors' emoluments and directors' interests in share options of IQE plc are disclosed on
pages 41 to 44 within the remuneration report and form part of the financial statements.
Key management within the group comprises the executive and non-executive directors, the business unit and group senior
management and the site managers. Compensation to key management, including pensions of £171,000 (2012: £83,000), was
£3,654,000 (2012: £2,132,000) and the charge for share-based payments was £317,000 (2012: £230,000).
!
!
67
2013 £’0002012 £’000The operating profit is stated after charging/(crediting):Depreciation of property, plant and equipment8,5035,998Amortisation of non-current intangible assets2,5911,495Services provided by auditors*143178Operating lease rentals3,1092,511Research and development925143Exchange gains(254)(258)Share based payments1,4151,360Cost of inventories consumed49,72734,110Exceptional items**5,0655702013 £’0002012 £’000Employee costs (including directors’ remuneration)Wages and salaries26,52118,593Social security costs2,4372,051Other pension costs1,249904Charge for share based payments1,4151,36031,62222,908!2013!2012NumberNumberAverage number of employees (including directors)Cost of sales494389Selling, general and administrative12590619479 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
7. Finance costs
!
!
8. Taxation
!
Factors affecting total tax credit
The tax credit assessed for the period is different from that resulting from applying the standard rate of corporation tax in the UK:
23.25% (2012: 24.5%). The differences are explained below:
!
68
2013 £’0002012 £’000Bank and other loans1,464588Finance lease interest8229Discounting of long term acquisition related balances6082692,154886Current tax credit2013 £’0002012 £’000United Kingdom research and development tax credits receivable750501Adjustments to overseas tax in respect of prior years (428)-Overseas taxes (payable)/receivable(171)10Total current tax credit151511Deferred tax charge783(8)Total tax credit9345032013 £’0002012 £’000Profit on ordinary activities before taxation5,1926,128Tax charge at 23.25% thereon (2012: 24.5%)(1,207)(1,501)Effects of :Expenses not deductible for tax purposes(40)(63)Overseas tax rate differences(3,382)375Decrease/(Increase) in unrecognised tax losses6,484423Other deferred tax movements(1,198)768Impact on deferred tax as a result of changes in tax rates(45)-Overseas adjustments in respect of prior years(428)-United Kingdom research and development tax credits receivable750501Total tax credit for the year934503 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
!
The Finance Act 2013, which was substantively enacted on 2 July 2013, included legislation to reduce the main rate of corporation
tax from 23% to 21% from 1 April 2014 and to 20% from 1 April 2015. Accordingly, the closing UK deferred tax asset/liability in the
financial statements has been recognised at 20%.
Deferred tax is measured at the tax rates that are expected to apply in the relevant territory in the period when the asset is realised
or the liability is settled, based on tax rates and tax laws that have been substantively enacted at the balance sheet date.
The majority of the deferred tax assets arise in the United States, these are provided at the effective United States Federal and State
tax rates.
!
!
The deferred income tax asset recognised at 31 December 2013 of £16,040,000 (2012: £14,549,000) relates mainly to timing
differences on fair value adjustments in respect of the 2012 RFMD acquisition, as well as an element of tax losses carried forward
and accelerated depreciation. These are recognised to the extent that the realisation of the related tax benefit through future
taxable profits from the same trade is probable. The group currently benefits from a 0% tax rate on trading income arising in
Singapore.
The net amount not recognised is an asset of £20,708,000 (2012: £25,036,000). Tax losses carried forward account for an asset of
£25,078,000 (2012: £31,228,000). The remaining unrecognised amounts relating to a mix of temporary timing differences including
accelerated depreciation and income tax deductions receivable on the exercise of employee share options. The asset would be
recognised if sufficient profits from the same trade arise in future periods.
Company
There is an unrecognised deferred tax asset of £800,000 (2012: £814,000) which relates primarily to short term timing differences
arising on share option charges.
!
!
9. Dividends
!
!
No dividend has been paid or proposed in 2013 (2012: £nil).
69
Deferred tax asset2013 £’0002012 £’000At 1 January14,5491,876Deferred tax credit/(expense) recognised in the year783(8)Deferred tax assets recognised on acquisition (note 18)62513,187Foreign exchange differences83(506)At 31 December16,04014,549 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
!
!
10. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number
of ordinary shares in issue during the year.
Diluted earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average
number of shares and ‘in the money’ share options in issue. Share options are classified as ‘in the money’ if their exercise price is
lower than the average share price for the year. As required by IAS 33, this calculation assumes that the proceeds receivable from
the exercise of ‘in the money’ options would be used to purchase shares in the open market in order to reduce the number of new
shares that would need to be issued.
The directors also present an adjusted earnings per share measure which eliminates certain non-cash items in order to provide a
more meaningful underlying profit measure. Specifically, the non-cash accounting charges eliminated are:
• financing charges relating to discounting of long term acquisition balances;
• amortisation of intangibles arising on acquisition;
• share based payments; and,
• exceptional items.
!
!
!
!
* 2012 adjustments profit after tax has been represented to include the deferred tax impact of exceptional items consistent with 2013.
!
70
!2013 £’0002012 £’000Profit attributable to ordinary shareholders5,9556,631Adjustments to profit after tax (note 4) 7,4881,770*Adjusted profit attributable to ordinary shareholders13,4438,4012013 Number2012 NumberWeighted average number of ordinary shares642,239,979571,972,538Dilutive share options30,127,30529,715,163Adjusted weighted average number of ordinary shares672,367,284601,687,701Adjusted basic earnings per share2.09p1.47pBasic earnings per share0.93p1.16pAdjusted diluted earnings per share2.00p1.40pDiluted earnings per share0.89p1.10p IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
11. Intangible assets
!
* Acquisition intangibles relate to customer contract intangible assets
The amortisation charge of: £2,591,000 (2012: £1,495,000) has been charged to selling, general and administrative expenses in the
Consolidated Income Statement.
The carrying value of deferred development costs continue to be supported by forecast cash flows.
The NanoGaN adjustment shown above relates to a reduction in the estimated deferred consideration payable.
71
!The Group!Goodwill £’000!Patents £’000Development costs £’000!Software £’000Acquisition intangibles* £’000!Total £’000CostAt 1 January 201336,36539319,0821,1602,96259,962Additions -1294,346427294,931Acquisitions (note 18)18,206--193,12521,350Foreign exchange(1,710)4(261)(11)(175)(2,153)At 31 December 201352,86152623,1671,5955,94184,090Accumulated amortisation and impairmentAt 1 January 2013-565,1353602465,797Charge for the year-631,5572417302,591Foreign exchange-(1)(114)18(60)(157)At 31 December 2013-1186,5786199168,231Net book valueAt 31 December 201352,86140816,5899765,02575,859At 31 December 201236,36533713,9478002,71654,165!The Group!Goodwill £’000!Patents £’000Development costs £’000!Software £’000Acquisition intangibles* £’000!Total £’000CostAt 1 January 201219,82330516,098942-37,168Additions -884,042219174,366NanoGaN adjustment (see below)(478)-(600)--(1,078)Acquisitions (note 18)18,287---3,11621,403Foreign exchange(1,267)-(458)(1)(171)(1,897)At 31 December 201236,36539319,0821,1602,96259,962Accumulated amortisation and impairmentAt 1 January 2012-264,092344-4,462Charge for the year-301,188192581,495Foreign exchange--(145)(3)(12)(160)At 31 December 2012-565,1353602465,797Net book valueAt 31 December 201236,36533713,9478002,71654,165At 31 December 201119,82327912,006598-32,706 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
11. Intangible assets continued
Impairment tests for goodwill
!
Goodwill is allocated to the group’s cash generating units (CGUs) identified according to operating segment. An operating segment
level summary of the goodwill allocation is presented below:
!
Multiple production facilities are included in a single CGU reflecting that production can (and is) transferred between sites to suit
capacity planning and operational efficiency.
The recoverable amount of all CGUs has been determined based on value in use calculations, using pre-tax cash flow projections
for a five year period. The Board approved budget is used for the first year of the forecast. Beyond this the Board has used
assumptions which are below expectations in order to allow for a “reasonably possible change” in considering the potential for any
impairment, namely : revenue growth 3% pa (2012: 5% pa); margin erosion 1% pa (2012: 1% pa), cost inflation 3% (2012: 3% pa). A
pre-tax discount rate of 11% (2012: 11%) has been used in these calculations, which management believe is appropriate for each
CGU given that they have similar risk profiles and common funding.
Even on this prudent basis, there remains a significant level of headroom in the calculations. In addition, to test the sensitivity of
the discount rate, if a 12.5% discount rate is used there is still no impairment of assets.
!
12. Property, plant and equipment
!
72
2013 £’0002012 £’000Allocation of goodwill by operating segmentWireless45,97129,379Photonics6,8906,986Total Goodwill52,86136,365!!!a) The Group!!Land and buildingsShort leasehold improve- ments!!Fixtures and fittings!!Plant and machinery!!!Total£’000£’000£’000£’000£’000Cost At 1 January 20136,29823,6542,449128,607161,008Additions-2642624,6055,131Acquisitions (note 18)1,6373,1881,0378,99114,853Foreign exchange(139)(502)(98)(3,305)(4,044)At 31 December 20137,79626,6043,650138,898176,948Accumulated depreciationAt 1 January 20132,93810,5402,18583,02598,688Charge for the year1941,5013116,4978,503Foreign exchange(11)(205)(38)(1,829)(2,083)At 31 December 20133,12111,8362,45887,693105,108Net book valueAt 31 December 20134,67514,7681,19251,20571,840At 31 December 20123,36013,11426445,58262,320 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
b) Capitalised finance leases
Plant and machinery includes the following amounts where the group is a lessee under a finance lease:
The group leases various plant and machinery assets under non-cancellable finance lease agreements. The lease terms are up to
three years, and the ownership of the assets lie within the group.
c) The Company
!
!
73
!!!a) The Group!!Land and buildingsShort leasehold improve- ments!!Fixtures and fittings!!Plant and machinery!!!Total£’000£’000£’000£’000£’000Cost At 1 January 20126,39311,2842,398112,248132,323Additions1522510712,70913,056Acquisitions (note 18)-13,032-6,96820,000Disposals--(2)(228)(230)Foreign exchange(110)(887)(54)(3,090)(4,141)At 31 December 20126,29823,6542,449128,607161,008Accumulated depreciationAt 1 January 20122,8029,9552,13380,08594,975Disposals--(2)(228)(230)Charge for the year1517991044,9445,998Foreign exchange(15)(214)(50)(1,776)(2,055)At 31 December 20122,93810,5402,18583,02598,688Net book valueAt 31 December 20123,36013,11426445,58262,320At 31 December 20113,5911,32926532,16337,3482013 £‘0002012 £‘000Cost2,5572,576Accumulated depreciation(41)(46)Net book value2,5162,530Fixtures and Fittings £’000Cost At 1 January 201321Additions57At 31 December 201378Accumulated depreciationAt 1 January 201321Charge for the year14At 31 December 201335Net book valueAt 31 December 201343At 31 December 2012- IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
13. Investments
a) Company
!
Details of principal subsidiaries are set out in note 25.
b) Group
The other equity investments of £3.2m in 2012 related to the equity investment in Solar Junction Corporation. A provision for
impairment has been recorded in the year. Further details are included in the post balance sheet event note 26.
74
Investments in subsidiaries
£’000Other equity investments
£’000
Total
£’000CostAt 1 January 201383,3763,20586,581Subsidiaries share based payments charge327-327At 31 December 201383,7033,20586,908Provisions for impairmentAt 1 January 201370,438-70,438Impairment charge (note 26)-3,2053,205At 31 December 201370,4383,20573,643Net book valueAt 31 December 201313,265-13,265At 31 December 201212,9383,20516,143Investments in subsidiaries
£’000Other equity investments
£’000
Total
£’000CostAt 1 January 201284,125-84,125Investment in Solar Junction Corporation-3,2053,205Adjustment to NanoGaN Limited deferred consideration (note 11)(1,078)-(1,078)Subsidiaries share based payments charge329-329At 31 December 201283,3763,20586,581Provisions for impairmentAt 1 January 2012 and 31 December 201270,438-70,438Net book valueAt 31 December 201212,9383,20516,143At 31 December 201113,687-13,687
IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
14. Inventories
!
!
The directors are of the opinion that the replacement values of inventories are not materially different to the carrying values stated
above. These carrying values are stated net of impairment provisions of £4,800,000 (2012: £1,781,000). £2,412,000 of inventories were
written down and an expense recognised in the income statement.
!
!
15. Trade and other receivables
!
!
As at 31 December 2013, 91% (2012: 93%) of trade receivables were within terms. Of the other trade receivables, 58% (2012: 64%)
were less than 30 days past due. An allowance has been made for estimated irrecoverable amounts from the sale of goods of
£121,000 (2012: £79,000). This allowance has been determined by reference to past default experience. Included in other receivables
is accrued income of £10,269,000 (2012: £7,375,000).
The carrying values of trade and other receivables also represent their estimated fair values.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable as set out above. In
terms of trade receivables, the terms of sale provide that the group has recourse to the products sold in the event of non-payment
by a customer.
Trade receivables and accrued income are primarily denominated in US dollars, as are trade payables (note 16). The natural hedge
between these financial instruments limits the exposure of the group to movements in foreign exchange rates. Based on the
balances held at 31 December 2013 a 1 cent movement in the US dollar to Sterling rate would impact the net value of these
instruments by £11,000 (2012: £11,000) (before the mitigating impact of cash flow hedges).
!
75
20132012The Group£’000£’000Raw materials and consumables12,85614,334Work-in-progress and finished goods4,8464,01717,70218,3512013201320122012Group £’000Company £’000Group £’000Company £’000Trade receivables9,312-9,870-Amounts owed by group undertakings-98,380-56,251Other receivables and prepayments13,5959629,31614122,90799,34219,18656,392 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
16. Trade and other payables
!
!
!
!
Within deferred consideration is £26.6m (2012: £43.9m) being the best estimate of the amount that will be settled through
contractually agreed price discounts over the next four years. The fair value of contingent deferred consideration has been re-
assessed during the year resulting in a reduction of £3.0m. This has been credited to the income statement within other income
and expenses. The exceptional income has been excluded from our adjusted profit measure set out in note 4.
The carrying values of trade and other payables also represent their estimated fair values.
There is no foreign currency exchange contracts held at 31 December 2013 or 31 December 2012.
!
!
17. Borrowings
!
!
76
Current2013201320122012Group £’000Company £’000Group £’000Company £’000Trade payables15,090-16,046-Amounts owed by group undertakings-446--Deferred consideration9,000-10,000-Other taxation and social security62673316139Accruals and deferred income6,3985355,34754531,1141,05431,709684Non-current2013201320122012Group £’000Company £’000Group £’000Company £’000Deferred consideration (note 18)26,63248434,386484The Group20132012£’000£’000Non-current borrowings:Bank borrowings31,90214,094Finance leases9031,73432,80515,828Current borrowings:Bank borrowings4,0021,687Finance leases8027414,8042,428Total borrowings37,60918,256 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
a) Bank borrowings
!
The group’s bank borrowings consist of a series of variable and fixed rate term loans, and a revolving credit facility. Bank loans are
secured against the assets of the group.
The variable rate term loans, which had a principle outstanding at 31 December 2013 of £2.6m (2012 : £4.1m), and bear interest of
between 2.0% to 2.95% over LIBOR. These loans are repayable by monthly instalment with remaining terms of up to 4 years.
The fixed rate term loans, which had a principle outstanding at 31 December 2013 of £2.0m (2012 : £2.1m), and bear interest of 5%
until 2017 and is variable thereafter. These loans are repayable by monthly instalment with remaining terms of up to 20 years.
The acquisition facility, which had a principle outstanding at 31 December 2013 of £21.7 million, bears interest of between 2.5% to
2.95% over LIBOR. This loan is repayable by quarterly instalments with a remaining term of 4 years
The revolving credit facility is a multi-currency facility of up to £21 million, committed until 2016. It bears interest of between 1.75%
to 1.95% over LIBOR. The balance drawn at 31 December 2013 was £9.9m (2012 : £9.6m).
The group’s bank borrowings are subject to financial covenants. All covenants in relation to the group’s borrowing facilities have
been complied with during the year.
The carrying value of loans approximates to their fair value based on the net present value of future cash flows.
!
b) Finance leases
Lease liabilities are effectively secured as the rights to the leased asset reverts to the lessor in the event of default.
!
!
!
77
20132012£’000£’000Bank Borrowings fall due for repayment as follows:Within one year4,0021,687Between one and five years31,90214,094After five years--35,90415,78120132012£’000£’000Gross finance lease liabilities – minimum lease payments:Within one year851813Between one and five years9221,8031,7732,616Finance charges(68)(141)Present value of finance lease liabilities1,7052,47520132012£’000£’000Present value of finance lease liabilities:Within one year802741Between one and five years9031,7341,7052,475 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
17. Borrowings continued
The company
The borrowings of the parent company comprise the bank loan of £31,315,000 (2012 £9,565,000) which is denominated in US
Dollars.
!
!
!
18. Business combination
Kopin
On 15 January 2013, IQE plc completed the acquisition of Kopin Wireless, the compound semiconductor epiwafer manufacturing
business of Kopin Corporation (“Kopin”), a NASDAQ listed entity.
The consideration for the acquisition was $75m, of which $60m was paid in cash on completion, and $15m falls payable in January
2016. The deferred consideration is secured over the US assets acquired.
The assets acquired were the trade and assets of Kopin Wireless a US domiciled business, which operates from a long leasehold
premises located in Massachusetts USA; and its 90% equity stake in its Taiwanese subsidiary (KTC), which operates from a freehold
premises in Hsinchu Taiwan.
The upfront consideration of $60m was financed by $40m of acquisition finance provided by HSBC. The balance was financed from
the proceeds of a placing of 56,900,961 new ordinary shares at 29p.
The fair value of the assets acquired is summarised as follows:
!
!
78
Fair value£’000Intangible assets3,144Property, plant and equipment14,853Working capital (including cash acquired)11,122Deferred tax asset625Total identifiable net asset29,744Non-controlling interest(1,700)Goodwill18,206Total46,250Consideration on completion37,500Deferred cash consideration8,750Total consideration46,25020132012£’000£’000Bank borrowings fall due for repayment as follows:Within one year2,400-Between one and five years28,9159,565After five years--31,3159,565 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
The fair value of the intangible assets represents the estimated fair value of the qualifications for customer contracts. The fair value
has been determined based on the mulit period excess earnings method “MEEM”.
The fair value of the property plant and equipment has been estimated based on a market valuation or depreciated replacement
cost basis as appropriate.
Inventory has been recognised at fair value which for raw materials this is the lower of cost at net realisable value and for finished
goods is selling price less costs to sell less a sales margin.
Deferred tax has been recognised in respect of temporary timing differences between the accounting and tax treatments for the
assets and liabilities recognised.
The Non-controlling interest has been valued on a proportionate share of the net assets of IQE Taiwan formally Kopin Taiwan
Corporation.
Goodwill reflects items not separately recognisable under IFRS, and largely relates to the financial and operational synergies of the
enlarged group including improved economies of scale and equipment utilisation. The goodwill on acquisition is $29.1m of which
$27.1m is expected to be tax deductible.
The fair value of the consideration has been calculated by discounting the $15m deferred consideration as it is payable on the 16
January 2016. The discount rate adopted was 2.3%. The discount rate has been determined based on a three year liability with
similar characteristics.
Post-acquisition the acquired business contributed £30.9m of revenue and £1.4m of profit after tax to the consolidated income
statement. If the transaction had completed at the beginning of the financial period the acquired business would have contributed
£31.9m of revenue and £1.4m of profit after tax to the consolidated income statement.
!
!
19. Share capital
!
The movement in the number of ordinary shares during the year was:
!
!
59,297,910 ordinary shares (2012: 63,104,112 ordinary shares) were issued during the year as follows:
!
!
79
2013201320122012Group and CompanyNumber of shares£’000Number of shares£’000Allotted, called up and fully paidOrdinary shares of 1p each647,513,6616,475588,215,7515,8822013 Number2012 NumberAt 1 January588,215,751525,111,639Employee share schemes2,396,94919,336,112Placing56,900,96143,768,000At 31 December647,513,661588,215,7512013 Number of shares2013 Consideration2012 Number of shares2012 ConsiderationEmployee share schemes2,396,9493.65p to 23.08p19,336,112Nil cost to 52.08pPlacing56,900,96129.00p43,768,00024.00p59,297,91063,104,112 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
19. Share capital continued
The group’s objectives when managing capital are to safeguard the entity’s ability to continue as a going concern so that it can
continue to provide returns for shareholders and benefits for other stakeholders.
The group sets the amount of capital in proportion to risk. The group manages the capital structure and makes adjustments to it
in the light of changes in economic conditions and the characteristic of the underlying assets. The group monitors capital by
reviewing net debt against shareholders’ funds. The position of these indicators and the movement during the period is shown in
the Five Year Financial Summary.
!
!
20. Share based payments
The total amount charged to the income statement in 2013 in respect of share based payments was £1,415,000 (2012: £1,360,000).
Share option scheme
The IQE Plc Share Option Scheme was adopted on 26 May 2000 and amended by shareholders at the Annual General Meeting on
17 May 2002. Under the scheme, the Remuneration Committee can grant options over shares in the company to employees of the
group.
Options are granted with a contractual life of ten years and with a fixed exercise price equal to the market value of the shares under
option at the date of grant or as otherwise disclosed in the remuneration report. Options become exercisable between one and
four years from the date of grant subject to continued employment and the achievement of performance conditions, including
growth in EBITDA and earnings per share against various targets. The group has no legal or constructive obligation to repurchase or
settle the options in cash.
Options are valued using the Black-Scholes option-pricing model and the total amount to be expensed is charged to income
statement over the vesting period of the option. The principal assumptions used in the calculation of the fair value of share options
are as follows:
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The expected volatility factor is based on historical share price volatility over the three years immediately preceding the grant of
the option. The expected life is the average expected period to exercise. The risk free rate of return is the yield of zero-coupon UK
government bonds of a term consistent with the assumed option life.
Performance conditions are incorporated into the calculation of fair value by estimating the proportion of share options that will
vest and be exercised based on a combination of historical trends and future expected trading performance. These are reassessed
at the end of each period for each tranche of unvested options.
The fair value of options granted during the year ended 31 December 2013 was £2,139,326 (2012: £1,521,920).
The movements on share options during the year were as follows:
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Principal assumptions20132012Weighted average share price at grant date25.73p27.75pWeighted average exercise price13.16p6.40pWeighted average vesting period (years)33Option life (years)1010Weighted average expected life (years)33Weighted average expected volatility factor61%61%Weighted average risk free rate0.64%0.37%Dividend yield0%0% 2013 Number of options2013 Average exercise price (pence) 2012 Number of options2012 Average exercise price (pence)At 1 January38,693,51410.1251,043,12510.14Granted19,564,15513.169,471,9446.40Exercised(1,992,560)10.07(17,702,729)8.88Cancelled/lapsed(112,508)18.72(4,118,826)7.11At 31 December56,152,60111.2438,693,51410.12 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
As at 31 December 2013, the total number of options held by employees was 56,152,601 (2012: 38,693,514) as follows:
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21. Parent company profit and loss
As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented as part of
these financial statements. The parent company’s (loss)/profit for the financial year amounted to (£2,515,000) (2012: profit
£1,974,000).
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22. Cash generated from operations
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Option price pence/shareOption period ending2013 Number of options2012 Number of options5.63p - 10.17p31 December 2014973,9221,234,3186.87p - 10.25p31 December 2015610,539704,85610.40p - 19.42p31 December 20161,640,3881,850,6380.00p - 19.42p31 December 20175,254,4705,380,79116.10p - 16.10p31 December 2018233,278247,0290.00p - 17.07p31 December 20197,620,9318,619,5210.00p – 45.58p31 December 20206,819,4496,879,4499.15p – 50.25p31 December 20215,928,2496,060,1540.00p – 28.17p31 December 20227,294,9817,716,7580.00p – 86.20p31 December 202319,776,394-At 31 December56,152,60138,693,514 The Group2013 £’0002012 £’000Profit before tax 5,1926,128Finance costs (note 4)2,154886Depreciation of property, plant and equipment 8,5035,998Amortisation of intangible assets2,5911,495Acquisition related inventory fair value adjustment1,475-Impairment of investments3,205-Release of contingent deferred consideration(3,026)-Contingent deferred consideration (settled through contractual discounts) (14,191)(8,379)Share based payments1,4151,360Cash inflow from operations before changes in working capital7,3187,488Decrease/(increase) in inventories6,405(3,030)Decrease/(increase) in trade and other receivables2,308(5,924)(Decrease)/Increase in trade and other payables(3,269)5,575Cash inflow from operations12,7624,109 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
22. Cash generated from operations continued
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23. Reconciliation of net cash flow to movement in net debt
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24. Analysis of net debt
Cash and cash equivalents at 31 December 2013 comprised balances held in instant access bank accounts.
Non-cash movements include the new finance leases and foreign exchange movements on US dollar denominated borrowings.
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20132012£’000£’000Increase/(decrease) in cash in the year568(443)Increase in borrowings(25,000)(10,877)Repayment of borrowings3,6601,335Repayment of leases77748Net movement resulting from cash flows(19,995)(9,937)Net debt at 1 January(15,483)(3,921)Net movement resulting from cash flows(19,995)(9,937)Non-cash movements (note 24)1,127(1,625)Net debt at 31 December(34,351)(15,483) The Company2013 £’0002012 £’000Profit before tax (2,574)1,918Finance costs (4,024)(2,845)Foreign exchange237-Impairment of investments3,205-Depreciation14-Share based payments1,0881,031Cash inflow from operations before changes in working capital(2,054)104Increase in trade and other receivables(39,094)(10,258)Increase/(decrease) in trade and other payables389(563)Cash outflow from operations(40,759)(10,717)At 1 January 2013 £’000!Cash flow £’000Other non-cash movements £’000At 31 December 2013 £’000Cash and cash equivalents2,773568(83)3,258Bank borrowings due after one year(14,094)(22,433)4,625(31,902)Bank borrowings due within one year(1,687)1,093(3,408)(4,002)Finance leases due after one year(1,734)-831(903)Finance leases due within one year(741)777(838)(802)Total borrowings(18,256)(20,563)1,210(37,609)Net debt(15,483)(19,995)1,127(34,351) IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
25. Principal subsidiary undertakings
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* Indirect holding
The proportion of voting rights of subsidiaries held by the group is the same as the proportion of shares held.
All UK subsidiaries are exempt from the requirements to file audited accounts by virtue of section 479A of the Companies Act 2006.
In adopting the exemption IQE plc has provided statutory guarantee to these subsidiaries in accordance with section 479C of the
Companies Act 2006.
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!!Name of company!!Class of capital!Proportion of shares held!!Activity!Country of incorporationIQE (Europe) Limited Ordinary shares of £1100%*Manufacture of advanced semiconductor materials UKIQE Inc Common stock of $0.001100%*Manufacture of advanced semiconductor materials USAIQEKC LLCLimited liability company100%Manufacture of advanced semiconductor materials USAIQE Taiwan ROCOrdinary shares of NT$10 90%*Manufacture of advanced semiconductor materials TaiwanIQE RF LLC Limited liability company100%*Manufacture of advanced semiconductor materials USAIQE Silicon Compounds LtdOrdinary shares of £1100%Manufacture of silicon epitaxy UKMBE Technology Pte Ltd Preferred shares of S$1 Ordinary shares of S$1 100% 100%Manufacture of advanced semiconductor materialsSingaporeWafer Technology LimitedOrdinary shares of £1100%*Manufacture of semiconductor compounds and ultra high purity materials UKNanoGaN Limited Ordinary shares of £0.001100%Development of advanced semiconductor materials UKGalaxy Compound Semiconductors Inc Common stock of $0.00 par value100%*Manufacture of semiconductor compounds and ultra high purity materialsUSA IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
26. Post balance sheet event
Post year end the Group sold its minority equity interest in Solar Junction Corporation. The acquirer is a strategic investor with
strong interests in accelerating the large scale adoption and commercialisation of Solar Junction’s technology. IQE’s long term
wafer supply agreement will be unaffected by this transaction.
The consideration is deferred and contingent upon certain aspects of Solar Junction’s future business development. Given the
uncertainty in establishing IQE’s potential share of this consideration, no accrual has been made for any future receipts and the
£3.2m carrying value of the investment has been fully provided for at 31 December 2013.
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27. Related party transactions
The group incurred professional fees and expenses during the year of £70,000 (2012: £70,000) payable to Horton Corporate Finance
and £35,000 (2012: £35,000) payable to Fishstone Limited. Dr G H H Ainsworth, who is a director of IQE Plc, is a director of Horton
Corporate Finance. S J Gibson, who is a director of IQE Plc, is also a director of Fishstone Limited. The group incurred professional
fees and expenses during the year of £35,000 (2012: £12,000) payable to Dr D Grant. The total amount outstanding to these parties
at the year-end was £35,000 (2012: £26,000).
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During the year the group made purchases at arms length of £88,904 from Greenlux limited. Dr A W Nelson who is a Director of IQE
plc is an equity shareholder of Greenlux Limited. No amounts were payable to Greenlux Limited at the end of the year.
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28. Operating lease commitments
The group was committed at 31 December 2013 and 31 December 2012 to making the following aggregate payments in respect of
non-cancellable operating leases:
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29. Commitments
The group had no capital commitments at 31 December 2013 or 31 December 2012.
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20132012£’000£’000Due within one year2,5522,062Due between two and five years10,8437,440Due after five years7,4039,06520,79818,567 IQE plc | Annual Report & Financial Statements 2013
Company No: 3745726
Officers and professional advisers
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IQE plc is a public limited company incorporated in England and Wales.
Directors
Dr G H H Ainsworth BSc, Ph.D, FCA (Chairman, Non-Executive)
Dr A W Nelson OBE, BSc, Ph.D, FREng (President and Chief Executive Officer)
Mr S J Gibson OBE (Non-Executive)
Dr David Grant CBE, FREng, FLSW, CEng, FIET (Senior Independent Non-Executive Director)
Mr P J Rasmussen BSc, ACA (Finance Director and Company Secretary)
Dr H R Williams BSc, Ph.D, CEng, MIMechE, MCIBSE (Operations Director)
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Registered office
Pascal Close, Cardiff, United Kingdom, CF3 0LW
Principal Bankers
HSBC Bank Plc
8 Canada Square, London, E14 5HQ
Auditors
PricewaterhouseCoopers LLP
One Kingsway, Cardiff, CF10 3PW
Nominated advisers and brokers
Canaccord Genuity Limited
88 Wood Street, London, EC2V 7QR
Joint brokers
Peel Hunt LLP
Moor House, 120 London Wall, London EC2Y 5ET
Registrars
Capita Registrars
Northern House, Woodsome Park, Fenay Bridge, Huddersfield, HD8 0GA
Investor relations
Chris Meadows
Tel +44(0)29 2083 9400
Fax +44(0)29 2079 4592
investors@iqep.com
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IQE plc
Pascal Close
Cardiff
United Kingdom
CF3 0LW
tel: +44 (0)29 2083 9400
Fax: +44 (0)29 2079 4592
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www.iqep.com
© 2014 IQE plc