IQE PLC | ANNUAL REPORT AND FINANCIAL STATEMENTS 2014
Revenues 2005 - 2014
s
n
o
i
l
l
i
m
£
140.00
105.00
70.00
35.00
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EBITDA 2005 - 2014
s
n
o
i
l
l
i
m
£
30.00
15.00
0.00
-15.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Track record of more than 20% CAGR over last 10 years
High operational gearing to transform revenues into profitability
Operational and financial resilience
Strong position in high-growth markets provides strong outlook
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Five year financial summary
Revenue
EBITDA (see below)
Operating profit
- Adjusted*
- Reported
Profit after tax
- Adjusted*
- Reported
Net cash flow from operations
- Before exceptional cash flows
- Reported
Free cash flow**
- Before exceptional cash flows
- Reported
Net (debt) / funds
2014
£’000
112,011
27,009
17,618
7,167
16,701
1,996
19,614
14,861
11,446
6,693
2013
£’000
126,774
24,920
14,556
7,346
14,202
6,126
16,173
12,762
5,389
1,978
2012
£’000
87,961
16,437
9,202
7,014
8,401
6,631
4,679
4,109
(1,569)
(2,139)
(31,251)
(34,351)
(15,483)
2011
£’000
75,318
13,955
8,657
7,373
9,727
8,443
10,823
10,823
(8,585)
(8,585)
(3,921)
2010
£’000
72,650
13,115
8,510
7,208
8,808
7,506
10,250
10,250
3,315
3,315
7,021
Equity shareholders’ funds
119,056
110,498
90,189
72,750
62,274
Basic EPS – adjusted*
Basic EPS – unadjusted
Diluted EPS – adjusted*
Diluted EPS – unadjusted
2.51p
0.25p
2.42p
0.24p
2.09p
0.93p
2.00p
0.89p
1.47p
1.16p
1.40p
1.10p
1.86p
1.62p
1.74p
1.51p
1.91p
1.63p
1.76p
1.50p
The adjusted performance measures are reconciled in note 4 on page 63.
*
** Free cash flow is defined as net cash flow before acquisitions, financing and net interest paid.
EBITDA has been calculated as follows:
Profit after tax
Tax
Interest
Share based payments
Profit & loss on disposal
Exceptional items
Depreciation
Amortisation of intangible assets
2014
£‘000
2013
£‘000
2012
£’000
2011
£’000
2010
£’000
1,996
3,247
1,924
1,458
15
7,877
6,590
3,902
6,126
(934)
2,154
1,415
-
5,065
8,503
2,591
6,631
(503)
886
1,360
-
570
5,998
1,495
8,443
(1,551)
481
1,284
-
-
4,175
1,123
7,506
(1,172)
874
1,302
-
-
3,619
986
EBITDA
27,009
24,920
16,437
13,955
13,115
1
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
The way we interact
with technology as
we and “things”
connect, is
changing - enabled
by compound
semiconductors
2
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
What’s inside?
Five-year financial summary
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1
Chairman’s statement
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5
CEO’s statement
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6
Our vision
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8
Why compound semiconductors?
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9
What we do
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11
Strategic report
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13
Our competitive advantage
......................................................................................................................................................
Our business model
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13
13
Our markets
.....................................................................................................................................................................................
14
Our strategy
....................................................................................................................................................................................
Operational highlights
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22
22
Key development milestones
..................................................................................................................................................
Current trading and outlook
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23
23
Financial highlights
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24
Financial review
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25
Innovation, research & development
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26
Our commitment
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27
Risks and risk management
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28
Directors’ biographies
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30
Directors’ report
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32
Remuneration report
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36
Corporate governance report
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41
Independent auditors’ report
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45
Financial statements
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47
Consolidated income statement
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47
Consolidated balance sheet
.....................................................................................................................................................
Consolidated statement of changes in equity
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Consolidated cash flow statement
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48
49
50
Parent company balance sheet
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51
Parent company statement of changes in equity
...........................................................................................................
52
Parent company cash flow statement
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53
Notes to the financial statements
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54
Officers and professional advisers
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88
3
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Enabling
advanced
technologies
4
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Chairman’s statement
IQE is the world’s leading manufacturer and supplier of
advanced semiconductor wafer products.
Our enabling technology is found at the very heart of billions of
smartphones, tablets and other advanced high-tech devices that
are sold each year.
As we, and the world around us become increasingly
connected, so too does demand increase for the
compound semiconductor components that are based
on IQE’s wafer products. IQE’s materials not only enable
the wireless communications that drive the “Internet of
Everything” revolution, but also the increasing number
of sensors, display, gesture recognition and other
advanced technologies upon which we are already
dependent.
It is my pleasure to introduce IQE’s Annual Report for
2014.
IQE is a global leader in the fast moving, highly dynamic
world of semiconductor technology. We estimate that
during 2014, more than one billion wireless chips and
over two billion photonics chips containing IQE materials
were shipped for use in a wide range of industrial and
consumer applications including smartphones and
tablets.
In terms of wireless components, IQE has a market share
of more than 55% of the global demand for compound
semiconductor wafers.
It is testament to the strength and robustness of IQE’s
business model that, despite the challenges of well
documented inventory management corrections across
our core customer base, the Group has delivered a 21%
year on year increase in adjusted operating profit to
£17.6m (reported operating profit £7.2m) and an increase
of more than 20% in adjusted, fully diluted earnings per
share (EPS) of 2.42p (reported fully diluted EPS 0.24p).
Improvements in operating efficiencies have contributed
to our ability to generate improved profitability on lower
revenues, as has the consolidation resulting from our
strategic acquisitions in previous years which have been
fully integrated into the Group to help yield significant
cost savings during 2014.
All in all, the foundations are in place 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 advanced semiconductor
materials technology;
❖ a highly talented, committed and experienced team;
❖ proven credibility and envied reputation;
❖ a secure multi-site, multi-platform supply;
❖ scale and cost leadership; and
❖ the largest manufacturing, research and development
capacity in the industry.
The wireless market, which accounts for approximately
80% of our sales, remains our key market.
Communications chips continue to evolve in order 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 continue to be the key enablers
underpinning this evolution.
2014 has seen record growth in our photonics business
units with demand outstripping supply in a number of
market segments. Feedback from our customers indicates
further significant growth in the photonics sector as the
need for sensors, energy generation (CPV), heating,
lighting and other energy efficient products come to the
foreground.
United Nations Educational, Scientific and Cultural
Organisation (“UNESCO”) has designated 2015 as the
International Year of Light in recognition of the growing
importance of photonics. We believe that the increase in
demand in this market sector will ensure that we
continue to deliver strong growth from further diversified
revenues over the coming years.
2014 proved to be a challenging year during which we
made excellent progress with our organisational
development programme. I would once again like to take
this opportunity to thank the IQE management and staff
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 2014
Company No: 3745726
CEO’s statement
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 within 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.
These changes have driven a revolution within the supply
chain. Skyworks has emerged as the new leader in the
chip space, as some chip companies have waned and
others have consolidated to compete. Throughout this
period of rapid change, IQE has also played a major role in
reshaping the supply chain. Both through technological
innovation, and through consolidating the materials
space, IQE has emerged as the clear industry leader for
advanced materials.
IQE is the global leader in the provision of wafers to the
wireless chip industry, with an estimated market share of
over 50%. The wireless market, which accounts for
approximately 80% of the Group’s sales, remains a key
market driver for the Group. With the adoption of
numerous optical devices in next generation handsets,
this will continue to be a major part of the Group’s future
business.
Furthermore, IQE has developed an unparalleled depth
and breadth of advanced materials technology which
spans wireless, infrared, photonics, solar, power electronics
and CMOS++. The market drivers for adoption of these
technologies are very powerful: Big Data; IoT; Energy
Efficiency (power generation and usage); Smart Cities;
Industry 4.0; Space Technologies; Robotics and
Autonomous Vehicles; and 5G . These will all drive
increasing adoption of Compound Semiconductor
Technologies. As a result, our non-wireless revenues are
growing rapidly and increasing our overall revenue
diversity.
IQE is a global leader in the supply of advanced wireless
materials, and aims to replicate this success in its other
primary markets: photonics, infrared, advanced solar
(CPV), LED, power switching and advanced electronics.
The Group has now established the platform for
delivering this strategy, through the following USPs:
❖ 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
This platform supports both the continued robust growth
potential available in our markets and enables us to
continue to diversify our revenues over the coming years.
IQE has emerged as a market leader through a period of
rapid change
The mobile communications industry has gone through a
revolution over the past decade. Less than ten years ago,
one in every two mobile phones sold was a Nokia, with
RIM’s Blackberry devices taking a strong second place in
the market. Since that time, smartphones have taken the
world by storm and communications technology has
moved rapidly from 2G to 3G and now LTE/4G. Mobile
data demand is growing exponentially, requiring ever
more complex and high performance RF front end
solutions, with increasing Compound Semiconductor
content. Apple and Samsung now dominate the handset
space, and the mobile revolution has spread to new types
of devices including tablets and wearables, and is
enabling the Internet of Things (IoT). Future handset
designs will include more and more optical content for
proximity sensing, auto focus, gesture recognition, sensing
and displays.
6
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
In addition to our leadership position in the
wireless sector, our market data indicates that IQE
has almost 50% global share across all of today’s
markets for compound semiconductor wafers.
Epiwafer market share
(all markets)
Delivering progress through a challenging year
After several years of strong growth, in 2014 the wireless
market paused for breath ahead of the next wave of
hardware innovation. Combined with an industry wide
de-stocking, this volatility created a short term challenge
for the Group. We tackled this head on and delivered
increasing underlying profitability and earnings, as well as
strengthening our balance sheet as a result of lower
deferred consideration and net debt.
We also made solid progress in line with our strategic
plan, including:
❖ Our photonics business delivered year on year growth
of 23% (in constant currency) driven primarily by the
increasing adoption of VCSEL technology into a wide
range of applications from data centres through to
industrial processes. This ramp is at an early stage and
has a long and sustainable future.
❖ Our solar energy business (CPV) moved into
production in early 2015, with our material now being
deployed into the field. Although this was later than
originally anticipated, the future for this business
remains bright as end market pull should see this
ramp through 2015/16.
❖ Conversely, our power business has progressed more
rapidly than we originally expected. A number of
major technical milestones and commercial
partnerships are positioning the Group in a strong
position to commercialise this technology.
❖ The Group made excellent progress with its
Organisational Development Programme
which included collaboration between IQE, WIN
Semiconductors and Nanyang Technological
University in the formation of the Compound
Semiconductor Development Centre (“CSDC”), which
has emerged from the Group’s Singapore operation,
referred to in the operational highlights section on
page 22.
Positioned for continued strong growth over the next
decade
Change is a constant in our world. The inexorable drive
for electronic devices to continue to achieve higher levels
of functionality, speed, performance and efficiency will
unquestionably necessitate the increasing use of more
sophisticated semiconductor materials. These advanced
semiconductors are enabling a range of new mass market
applications such as gesture recognition and short range
optical communication, and at the same time disrupting
some existing large markets such as solar energy and
power switching. We expect that this rate of change will
continue to accelerate.
We have established a global manufacturing platform that
has the capacity to be able to take advantage of the
opportunities in our markets. The Board remains focussed
on increasing throughput, which with the operational
gearing is expected to deliver improving margins and
cash generation.
This provides a bright outlook for IQE, which through its
broad technology portfolio has developed a solid
foundation in the wireless market; a high growth
photonics business; and transformational opportunities in
Solar energy and Power electronics. The Board believes
that this creates a platform for future growth as well as
increasing the diversity of the Group’s revenues.
7
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Our vision
To be the global number one provider of
advanced semiconductor materials.
Our strategy
To use our 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 of compound
semiconductor wafer products by market
share and scale and clear technology leader
with an unparalleled breadth of technology.
Leading the advancement of new materials
8
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Why compound semiconductors?
Evolution in materials
Mankind’s ability to master materials is inextricably linked
to advances in technology to such an extent that key
milestones throughout human history are identified by
the dominant material of each era. From the stone age,
through the iron and bronze ages, innovation in materials
has played a key role in technological development. We
now live in the semiconductor age.
The elements
Every material in the universe is made from one or more
of the fundamental elements. There are 118 known
elements. The periodic table is the most common way of
representing the elements by arranging them in Groups
according to their properties.
The semiconductor age
Elements in groups III, IV and V of the periodic table
exhibit some important electronic properties that can be
made to conduct or not conduct an electrical current.
These materials are known as semiconductors.
By harnessing the properties of semiconducting materials,
scientists and engineers have enabled the electronics
revolution that has transformed our lives since the early
1960s.
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 and limited 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
compliment silicon and to enable the dawn of the digital
revolution. It is 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.
Compound semiconductors
Most people will be unaware that atomically engineered
combinations of semiconductor elements called
compound semiconductors, have already revolutionised
their lives and are set to do so even more over the
coming years and decades.
The early markets for compound semiconductors have
been in wireless, laser and LED 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 future’s bright
The trends are clear, applications begin their lives based
on silicon technology, but inevitably transition to
compound semiconductors as human innovation
demands more.
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.
All major chip companies include advanced
semiconductor materials on their product roadmaps for
future generations of high performance components.
Integration is inevitable
Of course, the mass adoption of new technologies is more
than just a function of what is possible - 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 multiple technologies
to advance whilst reducing overall costs.
As silicon integration has been a key feature in increasing
performance and reducing costs, so too with the
integration of silicon with compound semiconductor
technologies. Better performance, higher efficiencies and
reduced costs will only be achieved by combining the
advanced properties of compound semiconductors with
9
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Global leader
global presence
Asia&
Singapore(
Taiwan(
North&America&
Europe&
Bath,(UK((
Cardiff,(UK(
Cardiff,(UK(
Milton(Keynes,(UK((
Bethlehem,(PA((
Greensboro,(NC(
Somerset,(NJ(
Spokane,(WA(
Taunton,(MA(
10
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
What we do
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.
The supply chain
IQE designs and manufactures advanced semiconductor
materials. Our finished products are compound
semiconductor wafers (also called “epiwafers”).
We manufacture atomically engineered wafer products to
exacting 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 customers:
Chip specialists
OEMs:
System specialists
Our customers fabricate
our wafers into chips
OEMs utilise these chips to
make devices and systems
11
IQE: Materials specialistsWe make advanced semiconductor wafers in high spec cleanrooms using sophisticated tools and extensive IP IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Efficient power
generation and usage
is a 21st century
priority - compound
semiconductors
enable high efficiency
energy sources as
well as power control
for lighting, electric
vehicles and mass
transportation
12
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Strategic report
OUR COMPETITIVE ADVANTAGE
OUR BUSINESS MODEL
Global footprint
Outsourcing pioneer
IQE’s operations span the US, Asia and Europe which also
reflects the geographical diversity of our customer base.
This allows IQE to be positioned close to its customers
and maintain strong, long-term relationships.
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.
Breadth of technology
As a pioneer 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.
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.
Furthermore, the Group has embarked on a product
diversification strategy to reduce its dependence on any
single market whilst taking full advantage of
opportunities in all new and emerging market segments
that are and will be enabled by compound
semiconductor materials.
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.
13
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
OUR MARKETS
The key advantages of compound semiconductors over
silicon are:
❖ 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
Wireless
Accounted for 79% of the Group’s sales in 2014.
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 other connected
devices.
Photonics
Accounted for 20% of the Group’s sales in 2014.
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
Photonics
20%
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
79%
14
IQE plc | Annual Report & Financial Statements 2014
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
15
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
16
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Wireless
Photonics
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.
Whilst handset replacement cycles have slowed,
innovations such as wearable devices are expected to
reignite the desire to upgrade connected devices such as
smartphones. Coupled with the widely held view that the
Internet of Everything will see 50 billion connected
devices by 2020, the overall wireless market is expected to
continue to grow with the global roll out of LTE, 4G, 5G
and the evolution of WiFi.
Smartphone shipments exceeded one billion units in 2014
and are expected to grow to more than 1.5 billion in 2017
(Source: IDC). This growth will be driven by new features,
apps, social networking, entertainment and location
based services.
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 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 802.11ac WiFi standard operates at 5GHz rather than
the 2.6GHz currently used. The higher frequency which
greatly increases 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.
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 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
have become major consumers of electrical energy,
rivalling traditional heavy industries in terms of the power
requirements needed to keep large warehouses full of
servers operating and cooled. It is therefore of little
surprise that enterprises such as data centres are amongst
the first adopters, where optical technology now offers
both higher performance and lower overall operating cost
compared with copper. A number of contract wins for
both production and development contracts were
announced during 2014.
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 Gb/s
already demonstrated.
17
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Laser projection
Infrared
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 enables 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.
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.
Gesture recognition
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 are
expected to appear in many new product launches over
the coming years.
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.
It is anticipated that many household appliances will be
controlled by gesture.
18
IQE plc | Annual Report & Financial Statements 2014
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 continue 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 factors are 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.
Solar (CPV)
Solar cells utilising compound semiconductors (called CPV or Concentrated PhotoVoltaics) provide the highest
efficiencies 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 typical efficiencies of around 18% from amorphous 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.
Industry analysts IHS estimates that the addressable market for this technology will reach almost 8GW in 2018 (IHS CPV
Report 2014). 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 working closely with its partners to ensure all the building
blocks are in place for an efficient and robust supply chain.
IQE has been through an extensive programme of product development and customer qualification and reached a
major milestone in January 2015, moving into production. Our material is now being deployed into field installations,
and this business is expected to ramp through 2015/16.
19
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Compound semiconductors enable the key twenty-first century technologies
Our power business has made strong progress through
2014, achieving several key technical milestones and
building commercial partnerships.
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 our intellectual property in this field has
the potential to revolutionise the semiconductor world,
and in so doing will create significant long-term value to
IQE stakeholders.
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 globally, 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.
The power adapters that we use for our electronic
devices, such as laptop power supplies, provide a vivid
example of this phenomenon by virtue of the electrical
energy that is lost in the form of heat generated through
the conversion process.
GaN offers superior performance and efficiency that are
orders of magnitude better than the silicon technologies
that dominate power switching devices today. Indeed,
this technology has the potential to eliminate up to 90%
of the energy lost through switching.
20
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Gallium arsenide (GaAs) vs silicon (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 were
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.
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 today’s
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 market
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 partially overcome
by using very complex circuit
design. However, the level of
complexity necessary is
significantly more expensive to
develop, and has much longer
design cycles. In contrast, the
highly advanced wireless
communication performance of
GaAs makes the circuits
considerably less complex and
hence 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
necessitates bespoke radio
solutions at the leading edge.
For example, the communication
chips in iPhones 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 2014
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
The three primary strands of our strategy are:
1. Diversify our end markets to exploit the strengths of
each of our business units to enable new and
emerging opportunities in areas such as “big data”,
aerospace, safety & security, robotics & autonomous
systems, energy efficiency & sustainability
2. Maintain our technology leadership through which
IQE will continue to exploit and commercialise its
diverse IP portfolio
3. Exploit our global presence and world leading
technology platforms to maximize operational
efficiencies and cost savings to maintain our
competitive advantage
These opportunities support both continued strong
growth and the diversification of revenues over the
coming years.
Risk mitigation strategy
The Wireless chip market, into 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.
22
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.
Through a combination of organic development and
acquisition, 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 80% of
the Group’s sales, remains a key market for the Group.
OPERATIONAL HIGHLIGHTS
Organisational development and market diversification
The Group continued with its Organisational
Development Programme which was set out in 2013.
This has involved transferring production between sites
to improve operational efficiency, enabling the Group to
reduce its operating costs and achieve its cost reduction
targets, and the creation of specific end market focussed
Business Units.
The Group has now established six Business Units along
market lines, to address its primary and emerging
markets :
❖ IQE Wireless
❖ IQE Photonics
❖ IQE InfraRed
❖ IQE Solar
❖ IQE Power
❖ IQE CMOS++
Each Business Unit has a clear product and customer
focus, but continues to benefit from the production and
technology synergies of the whole IQE Group. Each
business unit’s KPIs in terms of production, delivery and
quality metrics are monitored, managed and aligned with
the overall Group KPIs.
The Organisational Development Programme has also
included the formation of the Compound Semiconductor
Development Centre (“CSDC”), which has emerged from
the Group’s Singapore operation. This was announced
during the second half of 2014, and has become
operational in Q1 2015. This is a collaboration between
IQE, WIN Semiconductors and Nanyang Technological
University with the purpose of accelerating the
development of compound semiconductor technology in
Singapore, and providing an effective incubator for
bringing new innovations to market. IQE will be the
wafer provider to the new high volume applications
which emerge. As detailed in Note 4, this programme
necessitated the Group incurring cash costs relating to
the reorganisation of £4.8m (2013: £3.4m), provisions for
asset impairment of £6.3m, and provisions for onerous
leases of £6.7m.
KEY DEVELOPMENT MILESTONES
Wireless
IQE has continued to develop leading edge materials
solutions in conjunction with its customer base to
improve the performance of front end modules for the
ever increasing demands on reduced power, size and fit
for function. This has resulted in ongoing improvements
in efficiency of Power Amplifiers (PAs), which have
consequently been able to continue to dominate the
other solutions for this critical application. Device and
systems architectures continue to evolve, and several
programs have the potential to further increase
compound semiconductor content. In addition, work is
now beginning to address the requirements of 5G, which
because of the higher frequencies are highly likely to
require even more compound semiconductor content.
Photonics
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 is the market leader for outsourced VCSEL materials,
which has been achieved by virtue of its technology
leadership. This includes the demonstration of VCSELs
with record speeds, efficiencies and temperatures. In
addition, the 6” capability IQE demonstrated in 2014 has
been significant in reducing the unit cost of chips and
accelerating the adoption of this technology. This is
evident in the strong year on year growth in photonics
sales, which was c.30% in constant currency for non-
infrared applications.
The Group also announced its participation in a €23M
programme to establish a Pan European pilot line for the
production of VCSEL components.
InfraRed
IQE is a global leader in the supply of indium antimonide
and gallium antimonide wafers for advanced infrared
applications. We made sound technical progress during
2014 with the launch of the industry’s first 150mm indium
antimonide wafers, a major milestone in reducing the
overall cost of chips to drive increasing adoption. This
success was followed up with a number of significant
contract wins for the division. In addition, there has been
significant work in developing these materials for
consumer sensing applications, which will drive much
higher volumes of wafers in the future.
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Advanced Solar (CPV)
As announced on 24 March 2014, IQE’s stake in Solar
Junction (“SJC”) was acquired by a new strategic investor
with a strong interest in accelerating the deployment of
CPV systems on a global basis. IQE remains the materials
partner to SJC by virtue of its exclusive wafer supply
agreement. IQE achieved full qualification with SJC on
its high volume manufacturing platform, and pilot
production for field deployment commenced in January
2015. We expect this to ramp into volume through 2015
and 2016.
IQE also became a key partner in a EU funded
programme during 2014, to develop 4-junction advanced
solar cells for space applications.
Power
Gallium nitride on Silicon (GaN on Si) is driving a
technology shift in the multi-billion dollar power
switching and LED markets. IQE has continued to push
the technology boundaries and is making rapid progress
both technically and in developing commercial
relationships in the supply chain. This includes an
agreement with M/A-COM Technology Solutions Inc to
deliver 200mm GaN on Si. IQE was also selected as a key
partner in the Clean Energy Manufacturing Innovation
Institute announced by President Obama.
Gallium nitride on Silicon Carbide (GaN on SiC) is similarly
driving a technology shift in a number of high power
radio applications such as radar, CATV and base stations.
IQE has developed high quality 150mm GaN on SiC
material, which is enabling the supply chain to improve
efficiency and reduce cost in order to accelerate the
adoption of this material. The progress made by IQE was
recognised during 2014 with an award from CS
International.
CURRENT TRADING AND OUTLOOK
The Group’s global leadership in wireless and its
developing pipeline of high growth opportunities
positions it well to continue its growth profile over the
coming years.
The current financial year has started in line with
expectations, and the outlook for the full year remains
positive, with strong prospects driven by the Group’s
diversification strategy. The Board remains confident of
achieving our expectations for the full year earnings and
we anticipate that we will continue to benefit from strong
cash flows.
23
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
FINANCIAL HIGHLIGHTS
Revenues
130
s
n
o
i
l
l
i
m
£
98
65
33
0
2012
2013
2014
Fully diluted EPS1
e
c
n
e
p
K
U
3
2
1
1
0
2012
2013
2014
Operating profit1
Net debt2
s
n
o
i
l
l
i
m
£
18
14
9
5
0
2012
2013
2014
s
n
o
i
l
l
i
m
£
41
31
21
10
0
2012
2013
2014
Cash from operations1
Deferred consideration
s
n
o
i
l
l
i
m
£
20
15
10
5
0
2012
2013
2014
s
n
o
i
l
l
i
m
£
60
45
30
15
0
2012
2013
2014
1 before exceptional items
2 restated FY12 to include balances from acquisition on 15 Jan 2013
24
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
FINANCIAL REVIEW
Overview
Interest
The Group’s underlying financial performance includes a
number of adjusted profit measures that adjust for the
impact of non-cash charges and exceptional items as
detailed in note 4. These largely relate to a two year
restructuring programme that was flagged in early 2013.
No further restructuring costs are anticipated in 2015.
Revenue
Revenues of £112m were in line with expectations,
reflecting H2 revenues of £60m up 15% from H1.
Revenues were down from £126.8m in 2013 due to the
impact of an industry wide inventory correction, foreign
exchange (approx. 5%), and lower underlying growth in
demand for wireless wafers.
EPS
Strong margins and cost reductions helped improve
profitability. This enabled the Group to generate an
adjusted fully diluted EPS of 2.42p, up 21% from 2.00p in
the prior year. Reported diluted EPS was 0.24p, down
from 0.89p.
Gross profit
Adjusted gross profit increased from £27.9m to £31.6m,
due largely to cost reductions and improved efficiencies.
Reported gross profit increased from £23.1m to £26.0m.
As a percentage of sales, adjusted gross margins
increased from 22.0% to 28.2%, whereas reported gross
margins increased from 18.2% to 23.2% .
Interest costs reduced from £2.2m to £1.9m reflecting the
reduction in borrowings, and a reduction in the imputed
interest relating to the discounting of long term balances.
Pre-tax profit
Adjusted pre tax profit increased by 25% from £13.0m to
£16.2m. Reported pre tax profit remained flat at £5.2m.
(2013: £5.2m)
Taxation
The income tax charge of £3.2m primarily reflects
deferred tax on exceptional items of £3.8m. Excluding
exceptionals, there was an underlying tax credit of £0.6m
(2013: £0.6m) largely reflecting the benefit of R&D tax
credits and deferred tax credits on losses recognised.
The Group has sufficient tax losses available to shield
future tax payable of up to £39.1m.
Profit after tax
Adjusted profit after tax increased by 23% from £13.6m to
£16.7m. Reported retained profit decreased from £6.1m
to £2.0m, largely reflecting the exceptional deferred tax
charge of £3.7m.
Cash
Cash inflow from operations, before exceptional items,
increased 21% from £16.2m to £19.6m. After exceptional
items, cash generated from operations increased 16%
from £12.8m to £14.9m.
Other Income
Capital investment
Other income and expense has increased from a net
charge of £0.2m to a net charge of £1.7m. This relates to
the following one-off items as detailed in note 4: gain on
release of contingent deferred consideration, provision
for onerous leases and impairment of fixed assets.
Cash investments (excluding acquisitions) reduced £0.7m
from £10.1m to £9.4m, reflecting reduced spend on
property, plant and equipment (down £2.0m) partially
mitigated by higher spend on product development (up
£0.6m) and new IT systems (up £0.8m).
SG&A
Adjusted selling, general and administration expenses
(SG&A) increased from £13.4m to £13.9m, largely
reflecting the impact of foreign currency exchange.
Reported SG&A increased from £15.6m to £17.1m.
Operating profit
Adjusted operating profit increased by 21% from £14.6m
to £17.6m. Reported operating profit, which includes
exceptional items, remained broadly flat at £7.2m (2013:
£7.3m).
Deferred consideration
Deferred consideration at the year end was £20.6m,
down £15.0m (42%) from £35.6m
Debt
Net debt at the year end was £31.3m (2013: £34.4m),
reflecting net cash generation. The Board will not be
recommending the payment of a dividend.
25
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
INNOVATION, RESEARCH AND DEVELOPMENT
R&D activity
Government
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 organisations 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.
26
Many governments worldwide are recognising the
importance of Key Enabling Technologies (KETs) in driving
economic growth. Indeed, the European Government’s
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 channelled
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. Consequently, 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.
Innovation
Open Innovation
IQE is classified by the Welsh Government as an “Anchor
Company” in acknowledgement of its status as an
exemplar in terms of its global leadership.
As an Anchor Company, IQE was invited by the Welsh
Government to run an Open Innovation pilot programme
which has been highly successful in establishing new
technology networks to identify long-term opportunities.
IQE’s open innovation programme, ‘OpenIQE’ is actively
helping to boost regional economies by collaborating
with industrial and academic partners 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.
CoInnovate
As part of IQE’s open innovation programme, a key
“CoInnovate” conference is planned in the UK for mid 2015
and is sponsored by a number of major industry and
academic players.
The CoInnovate conference website is at:
www.coinnovate.co.uk.
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 customers' 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.
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
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.
As an AIM listed company, IQE is not eligible to participate
in the London Stock Exchange FTSE4 Good 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.
27
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Quality
Raw materials
RISKS AND RISK MANAGEMENT
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.
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.
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.
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.
28
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Supply chain risk mitigation
Upstream supply chain
The Company nurtures close working relationships with
its supply chain and works closely with vendors to resolve
potential supply issues as well as to develop new
products.
Wherever practicable, the Group qualifies and utilizes
multiple sources for its key raw materials and
continuously monitors its supply chains.
Downstream supply chain
Approximately 80% of the Group’s 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 dozen RF chip companies account for the vast
majority of all advanced communication chips made
globally. IQE’s strategy is to 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 that are characterized by their 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.
Alternative technologies
There are many examples in history where innovation has
led to new technologies that 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.
Strategic Report
A report of the Group’s performance during the year and
future developments is given in the Chairman’s
Statement and Chief Executive’s Review on pages 5 to 7.
Principal risks and uncertainties attributable to the Group
are given in Directors’ report on page 33 to 34.
Analysis of development and performance of the
business and its financial position is given in the financial
review on pages 24 to 25
The directors use a number of key performance indicators
to manage the business, disclosed in the financial review
on page 25. Non financial KPIs are not disclosed.
These areas form the required elements of the strategic
report presented on pages 13 to 29 and has been
approved by the Board of Directors and signed on its
behalf by:
Dr Andrew Nelson
Chief Executive Officer
24 March 2015
29
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Directors’ biographies
Drew Nelson OBE (60)
Phillip Rasmussen (44)
Howard Williams (60)
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.
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.
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.
30
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
David Grant CBE (67)
Simon J Gibson OBE (57)
Godfrey Ainsworth (59)
Senior Independent Director
Non-Executive Director, Chairman of
the Remuneration Committee
Chairman, Non-Executive Director,
Chairman of the Audit Committee
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, INNOVATE UK, NPL.
Professor Simon Gibson 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
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.
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, Cardiff Partnership Fund,
McMillan Williams Solicitors Limited.
31
Directors
The directors in office at 31 December 2014 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 on page 36.
Substantial interests in shares
As at 27 February 2015 , 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 International
AXA Investment Mgrs
Barclays Wealth
Hargreaves Lansdown Asset Mgt
Mr Richard I Griffiths
Herald Investment Mgt
Sanlam Four Investments UK
TD Direct Investing
M&G Investment Mgt
shareholder analysis by Equinity
10.77%
8.85%
5.60%
5.47%
5.43%
5.26%
4.93%
4.11%
3.66%
Research and development
The Group incurred costs in respect of research and
development during the year of £5,655,000 (2013:
£5,271,000) of which £4,957,000 (2013: £4,346,000) has
been capitalised in accordance with IAS 38 (“Intangible
assets”). The remaining research and development costs
totalling £698,000 (2013: £925,000) 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
2014 was 74 days (2013: 88 days).
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Directors’ report
The directors present their annual report and the
audited consolidated financial statements for the year
ended 31 December 2014.
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 23.
The review includes key performance indicators as
detailed in the Five Year Financial Summary. The principal
risks and uncertainties facing the Group are set out on
page 28. The future outlook for the Group is set out on
page 23.
As part of the rationalisation and re-organisation
programme further details of which are provided in note 4
and the post balance sheet events note 27 the Group has
entered into a joint venture agreement with WIN
Semiconductors Corp and Nangyang Technological
University to create the Compound Semiconductor
Development Centre (“CSDC”) in Singapore.
The CSDC is a centre of excellence for compound
semiconductor technology, with the aim of accelerating
the development and commercialisation of new advanced
semiconductor products. IQE has a 50% equity stake in the
new venture, and as part of its contribution to the
establishment of the CSDC IQE is providing facilities,
equipment and IP on favourable terms. Further details are
set out in note 4.
This project forms part of IQE's global reorganisation plan,
which in total is on track to deliver annual recurring
synergies in excess of £7m per annum. As part of its
contribution to this joint venture, IQE will be providing
facilities, equipment and IP on favourable terms to the
CSDC.
Dividends
The directors do not recommend the payment of a
dividend (2013: £nil).
32
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Employment policies
Technological change
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.
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.
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, and considering
financial forecast to enable them to assess 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
The Board considers that the principal risks and
uncertainties facing the Group are:
Competition
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.
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.
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.
33
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Interest rate risk
(b) Fair value 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 2014 was
8% (2013: 10%). Floating rate liabilities are primarily
indexed to LIBOR. The Group did not enter into any
interest rate swap instruments during 2014. 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
2014 annual interest charge by approximately £170,000
(2013: £180,000).
Further details are provided in note 19.
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 as five of
the Group’s principal subsidiaries are situated in North
America.
To a lesser extent, the Group also generates sales in
other currencies including Yen and Euros which are
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 2014 there were no contracts in place.
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 £200,000
(2013: £300,000).
Further details are provided in note 19.
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.
Further details are provided in note 19.
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.
Further details are provided in note 19.
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 2014 was
£152,426,000 (2013: £146,602,000).
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 2014 the gearing ratio was 21% (2013: 23%).
All covenants in relation to the Group’s borrowing
facilities have been complied with during the year.
34
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Statement of directors’ responsibilities
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 its
behalf by:
Phillip Rasmussen
Finance Director & Company Secretary
24 March 2015
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.
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.
35
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Remuneration report
This report has been prepared applying the principles
of the disclosures required for quoted companies under
the Companies Act 2006 which were last amended in
2013 to introduce enhanced statutory requirements for
the disclosure of directors’ remuneration. Although not
required to, the directors have decided to provide some
of the 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.
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.
The report has been divided into separate sections for
unaudited and audited information.
(c) Basic salary
(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 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 2014 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
36
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.
(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 Meeting on 17 May 2002,
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
7,095,762 share options to staff (2013: 13,513,274 share
options). During 2014, Directors were awarded no nil cost
options over ordinary shares in the company (2013:
6,050,881).
As at 31 December 2014, 50,536,520 share options (2013:
56,152,601 share options) granted under the IQE Plc Share
Option Scheme remain outstanding with exercise prices
ranging from nil cost to 86p/option (2013: nil cost to 86p/
option). 8,541,823 share options were exercised by
directors during the year (2013: nil). None of the directors’
share options lapsed during the year (2013: nil). The
numbers and prices of share options at 31 December 2014
and 31 December 2013 were as follows:
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Option price
Share options of nil cost to 10p/option
Share options in excess of 10p/option to 20p/option
Share options in excess of 20p/option to 30p/option
Share options in excess of 30p/option
Total
2014
No. of options
2013
No. of options
16,364,700
28,272,562
4,335,000
1,564,258
50,536,520
25,781,307
24,901,338
4,120,000
1,349,956
56,152,601
Dr G H H Ainsworth service fees of £125,000 (2013
£70,000). These fees were paid via a combination of cash
and shares to Horton Corporate Finance. Dr G H H
Ainsworth is a managing partner of Horton Corporate
Finance. VAT was charged on the invoices from Horton
Corporate Finance and this was recovered by the
company. The cash element was £95,000 (2013 £70,000).
The shares issued were to a value of £30,000 in the form
of 105,340 new ordinary shares of 1p issued during 2014
and 46,816 new ordinary shares issued in January 2015.
S J Gibson service fees of £46,250 (2013 35,000) were
paid in cash. Of these fees £8,000 (2013 £6,000) was paid
to S J Gibson and £38,250 (2013: £29,000), was paid to
Fishstone Limited. 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.
Dr D Grant service fees of £46,250 (2013: £35,000) were
paid in cash.
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. Neither had any share options in the
company at 31 December 2014 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.
(g) 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 2014, and there were no unfunded
pension promises or similar arrangements for directors
at 31 December 2014.
(h) 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.
(i) 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.
37
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
(j) Share price performance
The IQE plc share price has been compared with the AIM market all-share index for the five year period 2010 to 2014 as
this was considered to be the most representative market Group.
$
E
Q
I
70"
60"
50"
40"
30"
20"
10"
0"
IQE$vs$AIM$Share$Price$Performance$
1"Jan"2010"to"31"Dec"2014"
IQE"
AIM"
2010 2011 2012 2013 2014
2800"
2400"
2000"
1600"
1200"
800"
400"
0"
I
A
M
$
(k) Directors’ interests in ordinary shares of IQE Plc
The interests in ordinary shares of IQE Plc of those directors holding office at 31 December 2014 were as follows:
Name of director
Executive:
Dr A W Nelson
Dr H R Williams
P J Rasmussen
Non-Executive:
Dr G H H Ainsworth
S J Gibson
Dr D Grant
Total
As at
1 January 2014
As at
31 December 2014
29,325,132
1,672,430
852,822
3,121,999
301,855
215,000
35,489,238
35,259,218
4,292,965
3,473,357
3,227,339
301,855
215,000
46,769,734
During the year, the Executive Directors purchased a total of 3.3 million shares. Dr Drew Nelson also entered into a
share sale and repurchase agreement with Equities First Holdings (EFH) on 10th October 2014 for a total of 18 million
existing shares. He is obligated to repurchase all these shares at the end of a three year term, ending on 10th October
2017. The agreement provides that he has transferred all title and waives his voting rights in these shares. Under the
terms of the agreement, EFH is prohibited from short selling or voting the shares during the term of the agreement.
Furthermore, EFH will pay Dr Nelson income that reflects any dividends as they arise from all of these shares during the
entire period as if Dr Nelson had continued owning all the shares himself. As part of this overall arrangement, Phillip
Rasmussen and Dr Howard Williams have agreed to enter into separate loan agreements with Dr Nelson by pledging
2.72 million shares each to Dr Drew Nelson as security for loans provided by him of £274,000 to each of them. The
monies raised by the Executive Directors have been used in part to fund the purchase of the shares and to satisfy
income tax and NI obligations following the exercise of share options announced on 10th October 2014. Under HMRC
rules, income tax and National Insurance becomes payable directly upon the exercise of options. Consequently,
Directors often need to immediately sell at least half of the exercised shares to cover this tax and NI liability. In the case
of the IQE Directors, they have elected to raise the tax and NI monies through these arrangements in order to retain all
of the exercised share options, thereby increasing their respective holdings in the company, in addition to purchasing
additional shares. The share option exercises were part of IQE's LTIP, and the Directors were under no time obligation to
exercise such share options, but chose to do so at this time in order to maximise their respective shareholdings in the
Company. The table above includes the shares which are the subject of the repurchase obligation by Dr Nelson.
38
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Post year end Dr G H H Ainsworth received 46,816 shares in settlement of Non-executive directors fees relating to the
period from 1 October to 31 December 2014. Following this issue of New Ordinary Shares, Dr Ainsworth's total beneficial
interest in the Company is 3,274,155 shares. There have been no other changes to the director’s interests between the year
end and the date the accounts were issued.
(a) Aggregate directors’ remuneration
Basic salaries
Bonuses
Non-executive fees
Subtotal salaries and fees
Car allowance
Benefits in kind
Money purchase pension contributions
Total
The total amounts paid for directors’ remuneration during 2014 were as follows:
Name of director
Salary
fees and bonuses
Car
allowance
Benefits in
kind
Pensions
£’000
£’000
£’000
£’000
366
246
246
47
30
30
8
1
12
-
28
28
Executive:
Dr A W Nelson
Dr H R Williams
P J Rasmussen
Non-Executive:
Dr G H H Ainsworth
S J Gibson
Dr D Grant
Total
2014
£’000
858
-
217
1,075
107
21
56
1,259
2013
£’000
801
415
140
1,356
100
20
83
1,559
2014
Total
£’000
2013
Total
£’000
421
305
316
125
46
46
1,259
497
410
512
70
35
35
1,559
(b) Directors’ emoluments
The aggregate emoluments paid to each director during 2014 were as follows:
Notes:
In aggregate, the executive directors made a gain of £1,058,584 (2013: nil) on the exercise of share options during the year.
The majority of these shares were retained by the executive directors. Those sold were sold in order to satisfy the option
price and tax arising on the exercise. The shares retained are included in the closing totals shown on page 38. Dr Nelson
made a gain of £581,594 (2013: £nil) as part of these exercises.
39
IQE plc | Annual Report & Financial Statements 2014
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 2014 were as follows:
Options
granted
Options
exercised
Options
Cancelled
As at
31 December
2014
Date(s) from
which exercisable
Name of director
Executive:
Dr A W Nelson
Dr H R Williams
P J Rasmussen
As at
1 January
2014
7,946,186
5,140,250
4,261,787
Non-Executive:
Dr G H H Ainsworth
S J Gibson
Dr D Grant
Total
-
-
-
17,348,223
-
-
-
-
-
-
-
(4,800,753)
(1,870,535)
(1,870,535)
-
-
-
(8,541,823)
-
-
-
-
-
-
-
Name of director
As at
1 January
2013
Options
granted
Options
exercised
Options
Cancelled
Executive:
Dr A W Nelson
Dr H R Williams
P J Rasmussen
4,932,574
3,342,001
2,928,227
3,013,612
1,798,249
1,333,560
Non-Executive:
Dr G H H Ainsworth
S J Gibson
Dr D Grant
Total
-
-
-
11,202,802
-
-
-
6,145,421
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,145,433
3,269,715
2,391,252
1 Jan 2014 to 1 Jan 2017
1 Jan 2014 to 1 Jan 2017
1 Jan 2014 to 1 Jan 2017
-
-
-
8,806,400
As at
31
December
2013
Date(s) from
which exercisable
7,946,186
5,140,250
4,261,787
1 Jan 2013 to 1 Jan 2016
1 Jan 2013 to 1 Jan 2016
1 Jan 2013 to 1 Jan 2016
-
-
-
17,348,223
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 2014 were 27.50p/share
and 12.50p/share respectively (2013: 36.50p /share and 18.00p/share respectively). The mid-market price of IQE plc
shares closed at 17.75p/share as at 31 December 2014 (2013: 23.50p/share).
Approval
This report was approved by the Board of Directors on 24 March 2015 and signed on its behalf by:
S J Gibson, OBE
Remuneration Committee Chairman
40
IQE plc | Annual Report & Financial Statements 2014
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 2014, 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
and or shares. 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.
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.
41
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
(c) Remuneration and Nominations Committees
The remuneration committee consists of two non-
executive directors, S J Gibson and Dr G H H Ainsworth.
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. 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.
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.
Attendance at meetings
The number of meetings held during 2014 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:
Number of meetings held in 2014
Number of meetings attended in 2014:
Executive
Dr A W Nelson
P J Rasmussen
Dr H R Williams
Non-executive
Dr G H H Ainsworth
S J Gibson
Dr D Grant
Board
8
8
8
8
8
8
7
Audit Committee
4
n/a
4
n/a
4
4
4
Remuneration
Committee
2
2
n/a
n/a
2
2
n/a
42
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
The key procedures that the directors have established
with a view to providing effective internal control are as
follows:
❖ 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; and
❖ 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.
❖ 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.
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.
43
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Shareholder relations
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:
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.
PricewaterhouseCoopers LLP (Group auditors)
Fees payable to company’s auditor and its associates for the audit of parent
company and consolidated financial statements
Fees payable to company’s auditor and its associates for other services:
- The audit of company’s subsidiaries
- Audit-related assurance services
- Tax compliance service
Ernst and Young (auditors of MBE Technology Pte Limited)
- Subsidiary company’s audit
- Tax services
Total
Total
2014
£’000
Total
2013
£’000
19
94
15
-
16
3
147
18
93
15
-
17
-
143
44
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Independent auditors’ report
Independent auditors’ report to the members of IQE plc
Report on the financial statements
Our opinion
In our opinion:
❖ IQE plc’s Group financial statements and parent
company financial statements (the “financial
statements”) give a true and fair view of the state of
the Group’s and of the parent company’s affairs as at
31 December 2014 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 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.
What we have audited
IQE plc’s financial statements comprise:
❖ the consolidated and parent company balance sheets
as at 31 December 2014;
❖ the consolidated income statement and consolidated
statement of comprehensive income for the year then
ended;
❖ the consolidated and parent company cash flow
statements for the year then ended;
❖ the consolidated and parent company statements 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.
Certain required disclosures have been presented
elsewhere in the Annual Report, rather than in the notes
to the financial statements. These are cross-referenced
from the financial statements and are identified as
audited.
The financial reporting framework that has been applied
in the preparation of the financial statements 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.
Opinion on other matter prescribed by the Companies
Act 2006
In our opinion, the information given in the Strategic
Report and the Directors’ report for the financial year for
which the financial statements are prepared is consistent
with the financial statements.
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.
45
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Responsibilities for the financial statements and the
audit
Our responsibilities and those of the directors
As explained more fully in the Statement of directors’
responsibilities set out on page 35, 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 International Standards on Auditing (UK and
Ireland) (“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.
What an audit of financial statements involves
We conducted our audit in accordance with 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.
We primarily focus our work in these areas by assessing
the directors’ judgements against available evidence,
forming our own judgements, and evaluating the
disclosures in the financial statements.
We test and examine information, using sampling and
other auditing techniques, to the extent we consider
necessary to provide a reasonable basis for us to draw
conclusions. We obtain audit evidence through testing
the effectiveness of controls, substantive procedures or a
combination of both.
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.
Mark Ellis (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Cardiff
24 March 2015
(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.
46
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Financial statements
Consolidated income statement for the year ended 31 December 2014
Revenue
Cost of sales
Gross profit
Other income and expenses
Selling, general and administrative expenses
Operating profit
Finance costs
Adjusted profit before tax
Adjustments
Profit before tax
Taxation
Profit for the year
Profit attributable to:
Equity shareholders
Non-controlling interest
Basic earnings per share
Diluted earnings per share
Note
3
4
5
7
4
8
10
10
2014
£’000
112,011
(86,015)
25,996
(1,726)
(17,103)
7,167
(1,924)
16,189
(10,946)
5,243
(3,247)
1,996
1,632
364
1,996
0.25p
0.24p
2013
£’000
126,774
(103,669)
23,105
(179)
(15,580)
7,346
(2,154)
13,010
(7,818)
5,192
934
6,126
5,955
171
6,126
0.93p
0.89p
Adjusted basic and diluted earnings per share is presented in note 10.
The notes on pages 54 to 87 form part of these financial statements.
Consolidated statement of comprehensive income for the year ended 31 December 2014
Profit for the year
Currency translation differences on foreign currency net investments*
Total comprehensive income for the year
*This may be subsequently reclassified to profit or loss
Total comprehensive income attributable to:
Equity shareholders
Non-controlling interest
2014
£’000
1,996
5,192
7,188
6,822
366
7,188
2013
£’000
6,126
(3,294)
2,832
2,779
53
2,832
47
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
!
Consolidated balance sheet as at 31 December 2014
Non-current assets:
Intangible assets
Property, plant and equipment
Deferred tax assets
Total non-current assets
Current assets:
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities:
Borrowings
Trade and other payables
Provisions for other liabilities and charges
Total current liabilities
Non-current liabilities:
Borrowings
Other payables
Provisions for other liabilities and charges
Total non-current liabilities
Total liabilities
Net assets
Equity attributable to the shareholders of the parent:
Share capital
Share premium
Retained earnings
Other reserves
Non-controlling interest
Total equity
Note
11
12
8
14
15
17
16
18
17
16
18
20
2014
£’000
82,079
66,588
12,332
2013
£’000
75,859
71,840
16,040
160,999
163,739
18,276
24,463
5,584
48,323
17,702
22,907
3,258
43,867
209,322
207,606
(14,720)
(30,396)
(1,551)
(46,667)
(22,115)
(15,431)
(3,934)
(41,480)
(88,147)
121,175
6,603
49,108
50,336
13,009
119,056
2,119
121,175
(4,804)
(31,114)
-
(35,918)
(32,805)
(26,632)
-
(59,437)
(95,355)
112,251
6,475
48,958
48,704
6,361
110,498
1,753
112,251
The notes on pages 54 to 87 form part of these financial statements. These financial statements were approved by the Board of
Directors on 24 March 2015. Signed on behalf of the Board of Directors.
P J Rasmussen
Dr A W Nelson
48
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Consolidated statement of changes in equity for the year ended 31 December 2014
Share
capital
Share
premium
Retained
earnings
Exchange
rate
reserve
Other
reserves
Non-
controlling
interests
Total
equity
£’000
£’000
£’000
£’000
£’000
£’000
£’000
Balance at 1 January 2014
6,475
48,958
48,704
(401)
6,762
1,753
112,251
Comprehensive income
Profit for the year
Foreign exchange
Total comprehensive income
Transactions with owners
Share based payments
Issues of ordinary shares
Total transactions with owners
-
-
-
-
-
-
-
-
128
128
150
150
1,632
-
1,632
-
5,190
5,190
-
-
-
-
-
-
-
-
-
1,458
-
1,458
364
2
366
-
-
-
1,996
5,192
7,188
1,458
278
1,736
Balance at 31 December 2014
6,603
49,108
50,336
4,789
8,220
2,119
121,175
Share
capital
Share
premium
Retained
earnings
Exchange
rate
reserve
Other
reserves
Non-
controlling
interests
Total
equity
£’000
£’000
£’000
£’000
£’000
£’000
£’000
Balance at 1 January 2013
5,882
33,445
42,749
2,775
5,347
-
90,198
Comprehensive income
Profit for the year
Foreign exchange
Total comprehensive income
Transactions with owners
Acquisition of Kopin wireless
Share based payments
Issues of ordinary shares
Total transactions with owners
-
-
-
-
-
-
-
-
-
-
593
593
15,513
15,513
5,955
-
5,955
-
(3,176)
(3,176)
-
-
-
-
-
-
-
-
-
-
-
-
1,415
-
171
(118)
53
1,700
-
-
6,126
(3,294)
2,832
1,700
1,415
16,106
1,415
1,700
19,221
Balance at 31 December 2013
6,475
48,958
48,704
(401)
6,762
1,753
112,251
The notes on pages 54 to 87 form part of these financial statements.
49
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Consolidated cash flow statement for the year ended 31 December 2014
Cash flows from operating activities:
Adjusted cash inflow from operations
Cash impact of adjustments
Cash inflow from operations
Net interest paid
Income tax received / (paid)
Net cash generated from operating activities
Cash flows from investing activities:
Acquisition of Kopin
Capitalised development expenditure
Investment in other intangible fixed assets
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Issues of ordinary share capital
Repayment of borrowings
Increase in borrowings
Net cash (used in)/generated from financing activities
Net Increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange gains/(losses) on cash and cash equivalents
Cash and cash equivalents at 31 December
The notes on pages 54 to 87 form part of these financial statements.
Note
4
23
23
23
24
24
2014
£’000
19,614
(4,753)
14,861
(1,428)
1,258
14,691
-
(4,957)
(1,291)
(3,178)
(9,426)
278
(4,680)
1,305
(3,097)
2,168
3,258
158
5,584
2013
£’000
16,173
(3,411)
12,762
(1,546)
(686)
10,530
(36,533)
(4,346)
(556)
(5,196)
(46,631)
16,106
(4,437)
25,000
36,669
568
2,773
(83)
3,258
50
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Parent company balance sheet for the year ended 31 December 2014
Note
2014
£’000
2013
£’000
Non-current assets:
Investments
Intangible assets
Property, plant and equipment
Total non-current assets
Current assets:
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities:
Trade and other payables
Borrowings
Total current liabilities
Non-current liabilities:
Trade and other payables
Borrowings
Total non-current liabilities
Total liabilities
Net assets
Shareholders’ equity:
Share capital
Share premium
Retained earnings
Other reserves
Total equity
13
11
12
15
16
17
16
17
20
The notes on pages 54 to 87 form part of these financial statements.
These financial statements were approved by the Board of Directors on 24 March 2015
.
Signed on behalf of the Board of Directors
P J Rasmussen
Dr A W Nelson
28,430
13,265
332
18
-
43
28,780
13,308
81,606
2,065
83,671
112,451
(2,753)
(12,800)
(15,553)
(484)
(19,673)
(20,157)
(35,710)
76,741
6,603
49,108
12,624
8,406
76,741
99,342
172
99,514
112,822
(1,054)
(2,400)
(3,454)
(484)
(28,915)
(29,399)
(32,853)
79,969
6,475
48,958
17,588
6,948
79,969
51
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Parent company statement of changes in equity for the year ended 31 December 2014
Share capital
Share
premium
Retained
earnings
Other
reserves
Total
equity
£’000
£’000
£’000
£’000
£’000
Balance at 1 January 2013
5,882
33,445
20,103
5,533
64,963
Comprehensive expense
Loss for the year
Total comprehensive expense
Transactions with owners
Share based payments
Share placing
Other issues of ordinary shares
Total transactions with owners
-
-
-
569
24
593
-
-
-
15,336
177
15,513
(2,515)
(2,515)
-
-
(2,515)
(2,515)
-
-
-
-
1,415
-
-
1,415
15,905
201
1,415
17,521
Balance at 31 December 2013
6,475
48,958
17,588
6,948
79,969
Comprehensive expense
Loss for the year
Total comprehensive expense
Transactions with owners
Share based payments
Issues of ordinary shares
Total transactions with owners
-
-
-
128
128
-
-
-
150
150
(4,964)
(4,964)
-
(4,964)
(4,964)
-
-
-
1,458
-
1,458
1,458
278
1,736
Balance at 31 December 2014
6,603
49,108
12,624
8,406
76,741
The notes on pages 54 to 87 form part of these financial statements.
52
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Parent company cash flow statement for the year ended 31 December 2014
Cash flows from operating activities:
Cash inflow/(outflow) from operations
Interest paid
Taxation
Net cash generated from/(used in) operating activities
Cash flows from investing activities:
Investment in Seren Photonics Limited
Investment in other intangibles
Purchase of property plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Issues of ordinary share capital
Repayment of borrowings
Increase in borrowings
Net cash (used)/generated from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
The notes on pages 54 to 87 form part of these financial statements.
Note
23
13
11
12
2014
£’000
4,152
(1,092)
86
3,146
(50)
(316)
(7)
(373)
278
(2,463)
1,305
(880)
1,893
172
2,065
2013
£’000
(40,759)
(1,189)
-
(41,948)
-
-
(57)
(57)
16,106
(2,090)
25,000
39,016
(2,989)
3,161
172
53
IQE plc | Annual Report & Financial Statements 2014
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
IQE plc Group’s principal activity are set out on page 32 of the directors report. 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 IFRS IC 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 standards, amendments and interpretations adopted by the group The following standards have been adopted by the group for the first
time for the financial year beginning on or after 1 January 2014. They do not materially impact on the group results:
IFRS 10, ‘Consolidated financial statements’ builds on existing principles by identifying the concept of control as the determining factor in
whether an entity should be included within the consolidated financial statements of the parent company. The standard provides
additional guidance to assist in the determination of control where this is difficult to assess.
IFRS 11, ‘Joint arrangements’ focuses on the rights and obligations of the parties to the arrangement rather than its legal form. There are two
types of joint arrangements: joint operations and joint ventures. Joint operations arise where the investors have rights to the assets and
obligations for the liabilities of an arrangement. A joint operator accounts for its share of the assets, liabilities, revenue and expenses. Joint
ventures arise where the investors have rights to the net assets of the arrangement; joint ventures are accounted for under the equity
method. Proportional consolidation of joint arrangements is no longer permitted.
IFRS 12, ‘Disclosures of interests in other entities’ includes the disclosure requirements for all forms of interests in other entities, including
joint arrangements, associates, structured entities and other off balance sheet vehicles.
Amendment to IAS 32, ‘Financial instruments, Amendments to IAS 36, ‘Impairment of assets’ IFRIC 21, ‘Levies’ are standards, amendments
and interpretations which are effective for the financial year beginning on 1 January 2014 and are not material to the group.
(b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2014 and not early
adopted
A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January
2014, 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 control. The Group controls an entity when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Subsidiaries are fully 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 inter-company 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.
Joint ventures
The group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations
or joint ventures depending on the contractual rights and obligations each investor. We have assessed the nature of our joint arrangements
and determined them to be joint ventures. Joint ventures are accounted for using the equity method.
Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the
group’s share of the post-acquisition profits or losses and movements in other comprehensive income. When the group’s share of losses in
a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of
the group’s net investment in the joint ventures), the group does not recognise further losses, unless it has incurred obligations or made
payments on behalf of the joint ventures.
54
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Unrealised gains on transactions between the group and its joint ventures are eliminated to the extent of the group’s interest in the joint
ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Accounting policies of the joint ventures 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.
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 in-line with the revenue profile over the period during which the economic benefits are
expected to be received, which typically range between 3 and 8 years. The estimated remaining useful lives of development costs are
reviewed at least on an annual basis. Amortisation commences once the project is completed and revenues are being generated.
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.
55
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
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 8 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 multi 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.
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
Short 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.
56
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Provisions
Provisions are recognised when:
•
•
the Group has a legal or constructive obligation as a result of a past event;
it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation. Where a leasehold
property, or part thereof, is vacant or sub-let under terms such that the rental income is insufficient to meet all outgoings, provision is made
for the anticipated future shortfall up to termination of the lease, or the termination payment, if smaller.
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, 16,17 and 19.
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.
57
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Share based payments
The group operates a Share Option Scheme, under which the group receives services from employees as consideration for share options in
IQE plc. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense in the
Consolidated Income Statement. The total amount to be expensed is determined by reference to the fair value of the options granted
including any market performance conditions (for example, an entity's share price); excluding the impact of any service and non-market
performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified
time period) and including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The
total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied.
At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-
market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a
corresponding adjustment to equity.
When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs
are credited to share capital (nominal value) and share premium. The scheme is equity settled.
In the company’s own financial statements, the grant of share options to the employees of subsidiary undertakings is treated as a capital
contribution. Specifically, the fair value of employee services received (measured at the date of grant) is recognised over the vesting period
as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity financial statements.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself,
and the change will be treated as a cash-settled transaction.
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 functional and 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 for fiscal year 2013 and before are recognised as a credit within
the group's tax charge. For subsequent years the R&D tax credits are under the RDEC scheme and are recognised with operating profit.
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.
58
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Investment in subsidiaries
Investments in subsidiaries are held at cost of investment less provision for impairment in the parent company financial statements.
Other equity investments
Other equity investments are held at cost less provision for impairment in both the parent company and group financial statements 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.
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 tangible and 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.
As part of the rationalisation and re-organisation programme further details of which are provided in note 4 and the post balance sheet
events note 27 the Group has entered into a joint venture agreement with WIN Semiconductors Corp and Nangyang Technological
University to create the Compound Semiconductor Development Centre (“CSDC”) in Singapore.
The CSDC is a centre of excellence for compound semiconductor technology, with the aim of accelerating the development and
commercialisation of new advanced semiconductor products. IQE is has a 50% equity stake in the new venture, and as part of its
contribution to the establishment of the CSDC IQE is providing facilities, equipment and IP on favourable terms. Further details are set out
in note 4. As a consequence, IQE has booked provisions of £4.9m for asset impairment comprising the transfer of tools to the CSDC.
(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. As set out in note 4 the group has recorded one off inventory write
downs of £1.4m primarily relating to the expected formation of the Compound Semiconductor Development Centre (CSDC) in Singapore.
(d) Acquisition fair values
An assessment of the fair value of the purchase consideration and net assets acquired was undertaken for the acquisitions made during
2012 and 2013. 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 £9.9m to other income as a result of the re-assessment of the forecast volumes. Further details are
provided in note 4.
(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.
The forecast used to support deferred tax asset recognition are the same forecast used in the impairment review and support partial
recognition of the available deferred tax assets.
(f) Onerous lease provision
A provision for onerous leases has been made in the year. The provision assumes that the lease will be onerous for the next four and a half
years. Subsequent to this period we expect to be able to sublet the premises or negotiate to exit the lease. The full term of the lease
obligation is 7 years with the lease running until 2021.
(g) Adjustments to profit
The board provides an adjusted profit measure to provided additional information to aid an understanding of the group’s performance as
set out in note 4 we have detailed all of the items which are included within the adjustments to profit.
59
IQE plc | Annual Report & Financial Statements 2014
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.
2014
Income statement
Revenue
EBITDA
Exceptional items
Share based payments
Profit and Loss on disposal
Impairment
Depreciation
Amortisation
Operating profit/(loss)
Finance costs
Tax
Profit after tax
Segment assets
Operating assets
Deferred tax asset
Cash
Total assets
Segment liabilities
Operating liabilities
Provisions
Borrowings
Total liabilities
Wireless
Photonics
Electronics
£’000
£’000
£’000
89,110
22,164
(2,891)
(1,160)
(3)
(4,956)
(5,472)
(2,605)
5,077
21,761
5,603
(30)
(283)
-
-
(982)
(1,017)
3,291
156,116
6,935
29,859
5,294
(41,197)
(5,485)
(4,205)
-
1,140
(758)
-
(15)
(12)
-
(136)
(280)
(1,201)
5,431
103
(425)
-
Total
£’000
112,011
27,009
(2,921)
(1,458)
(15)
(4,956)
(6,590)
(3,902)
7,167
(1,924)
(3,247)
1,996
191,406
12,332
5,584
209,322
(45,827)
(5,485)
(36,835)
(88,147)
Other segmental information
Capital expenditure - intangible assets
Capital expenditure - property, plant and equipment
4,625
1,687
1,454
1,334
196
150
6,275
3,171
60
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
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.
2013
Income statement
Revenue
EBITDA
Exceptional items
Share based payments
Depreciation
Amortisation
Operating profit/(loss)
Finance costs
Tax
Profit after tax
Segment assets
Operating assets
Deferred tax assets
Cash
Total assets
Segment liabilities
Operating liabilities
Borrowings
Total liabilities
Wireless
Photonics
Electronics
£’000
£’000
£’000
107,219
22,541
(1,860)
(1,129)
(7,580)
(2,113)
9,859
18,685
2,279
(3,205)
(269)
(792)
(467)
(2,454)
870
100
-
(17)
(131)
(11)
(59)
157,626
13,258
25,326
2,727
5,356
55
(54,220)
(3,249)
(277)
Total
£’000
126,774
24,920
(5,065)
(1,415)
(8,503)
(2,591)
7,346
(2,154)
934
6,126
188,308
16,040
3,258
207,606
(57,746)
(37,609)
(95,355)
Other segmental information
Capital expenditure - intangible assets
Capital expenditure - property, plant and equipment
23,586
18,089
1,174
1,849
1,521
46
26,281
19,984
In the years set out below, certain customers, all within the Wireless operating segment, accounted for greater than 10% of the Group’s total
revenues:
Customer 1
Customer 2
2014
2014
2013
2013
£’000
% revenue
£’000
% revenue
33,001
27,025
29%
24%
23,899
40,480
19%
32%
There are no customers in the photonics or electronics segments that accounted for greater than 10% of the Group’s total revenues.
61
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Geographical information
Disclosure of group revenues by location of customer:
Americas
United States of America
Rest of Americas
Europe, Middle East & Africa (EMEA)
France
Germany
Israel
United Kingdom
Rest of EMEA
Asia Pacific
People’s Republic of China
Japan
Taiwan
Rest of Asia Pacific
Total revenue
Disclosure of non-current assets by location of assets:
By location
USA
Singapore
Taiwan
UK
62
2014
£’000
75,740
75,552
188
7,325
447
2,249
1,609
1,680
1,340
28,946
768
5,023
21,572
1,583
2013
£’000
105,211
105,168
43
5,959
155
917
1,156
1,171
2,560
15,604
442
5,324
8,461
1,377
112,011
126,774
Property, plant and equipment
Intangible assets
2014
£’000
45,944
6,762
7,555
6,327
66,588
2013
2014
2013
£’000
49,450
8,775
7,555
6,060
71,840
£’000
59,226
8,646
1,155
13,052
82,079
£’000
56,252
8,405
848
10,354
75,859
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
4. Adjusted profit measures
The group’s results are reported after a number of imputed non-cash charges and non-recurring items. Therefore, we have provided
additional information to aid an understanding of the group’s performance.
2014
2013
Restructuring and reorganisation
Gain on release of contingent deferred consideration
Amortisation of acquired intangibles
Discounting of long term acquisition related balances
Share based payments
Write down of investment in Solar Junction
Acquisition related inventory fair value adjustment
Total before tax
Deferred tax on adjustments
Total after tax
£’000
17,780
(9,903)
1,116
495
1,458
-
-
10,946
3,759
14,705
£’000
3,411
(3,026)
730
608
1,415
3,205
1,475
7,818
(330)
7,488
As previously reported, through 2013 and 2014 the group was engaged in restructuring and reorganising its global operations. This has
necessitated incurring certain cash costs and creating provisions for asset impairments and future lease costs. No further restructuring costs
are anticipated in 2015.
The cash costs incurred were £4.8m (2013: £3.4m) which related to redundancy costs, requalification costs and the duplication of overheads
to support the transition of customers between production facilities.
The asset and lease provisions primarily related to the group setting aside its Singapore facility and certain equipment for use by a new
joint venture called the Compound Semiconductor Development Centre (“CSDC”). The CSDC has been established to accelerate the
development of compound semiconductor technology in Singapore, and to provide an effective incubator for bringing new innovations to
market. In return, IQE will be the production partner for the high volume manufacturing that emerges from this incubator. The asset
impairments related to equipment (£4.9m) and inventories (£1.4m), and the provision for onerous leases £6.7m. There were no provisions
relating to restructuring in 2013. These provisions are accounting estimates based on judgements, accordingly, the actual amounts may
differ from these estimates.
The Group also generated a non-cash profit of £9.9m (2013 £3.0m) arising from a reduction in the estimated remaining deferred
consideration (settled via trade discount) in respect of a previous acquisition. This has been classified within other income and expenses in
the consolidated income statement.
The investment in Solar Junction Corporation was fully provided for at 31 December 2013, and classified within other income and expenses
in the consolidated income statement
In 2013 in fair valuing the assets of the acquired Kopin Wireless business, the inventories were recorded in the Group’s financial statements
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.
The deferred tax charge of £3.8m (2013: £0.3m credit) reflects the net deferred tax impact associated with these items.
The adjustments above which are classified within gross margin are £3.1m (2013: £2.4m) of the cash costs of restructuring, £1.4m (£nil)
inventory provision and £1.0m (£0.9m) of the share based payment charge. In 2013, the acquisition related inventory fair value adjustment
was also classified within gross margin
63
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Adjusted gross margin
Reported gross margin
Adjusted sales, general and administrative expenses
Reported sales, general and administrative expenses
Adjusted operating profit
Reported operating profit
Adjusted profit before tax
Reported profit before tax
Adjusted profit after tax
Reported profit after tax
Profit attributable to equity shareholders
Minority interest
Tax
Share based payments
Finance costs
Depreciation of tangible fixed assets
Amortisation of intangible fixed assets
Profit and loss on disposal
Provision for onerous lease*
Acquisition related inventory fair value adjustment*
Impairment of assets/investments*
Release of contingent deferred consideration*
Restructuring and re-organisation*
EBITDA
2014
£’000
31,552
25,996
(13,935)
(17,103)
17,618
7,167
16,189
5,243
16,701
1,996
2014
£’000
1,632
364
3,247
1,458
1,924
6,590
3,902
15
6,673
-
6,354
(9,903)
4,753
27,009
2013
£’000
27,939
23,105
(13,383)
(15,580)
14,556
7,346
13,010
5,192
13,614
6,126
2013
£’000
5,955
171
(934)
1,415
2,154
8,503
2,591
-
-
1,475
3,205
(3,026)
3,411
24,920
* Exceptional items impacting EBITDA include the following items: acquisition related inventory fair value adjustments, impairment of
assets/investments, provision for onerous lease, wireless business unit re-organisation costs and the release of contingent deferred
consideration.
64
5. Operating profit
The operating profit is stated after charging/(crediting):
Depreciation of property, plant and equipment
Amortisation of non-current intangible assets
Services provided by auditors*
Operating lease rentals
Research and development
Exchange gains
Share based payments
Cost of inventories consumed
Exceptional items**
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
2014
£’000
6,590
3,902
147
3,209
698
(26)
1,458
43,741
7,877
2013
£’000
8,503
2,591
143
3,109
925
(254)
1,415
49,727
5,065
*A schedule of services provided by the group’s auditors is disclosed in the Corporate Governance Report.
**Exceptional items include the following items: acquisition related inventory fair value adjustments, wireless business unit re-organisation
costs, impairment of assets, onerous lease provision and the release of contingent deferred consideration. Further details are provided in
note 4.
6. Employee costs
Employee costs (including directors’ remuneration)
Wages and salaries
Social security costs
Other pension costs
Charge for share based payments
Average number of employees (including directors)
Cost of sales
Selling, general and administrative
2014
£’000
25,525
2,799
1,107
1,458
30,889
2013
£’000
26,521
2,437
1,249
1,415
31,622
2014
Number
2013
Number
449
132
581
494
125
619
Directors’ emoluments and share option details are disclosed in the Remuneration Report on page 36 to 40. Key management within the
group comprises the executive and non-executive directors, the business unit and group senior management and the site general
managers. Compensation to key management, including pensions of £139,000 (2013: £171,000), was £3,198,000 (2013: £3,654,000) and the
charge for share-based payments was £917,000 (2013: £894,000).
65
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
7. Finance costs
Bank and other loans
Finance lease interest
Unwind of discount on long term balances
8. Taxation
Current tax credit
United Kingdom research and development tax credits receivable
Overseas adjustments in respect of prior years
Overseas taxes charges
Total current tax credit
Deferred tax (charge)/credit
Total tax (charge)/credit
Factors affecting total tax (charge)/credit
2014
£’000
1,347
82
495
1,924
2014
£’000
1,569
-
(444)
1,125
(4,372)
(3,247)
2013
£’000
1,464
82
608
2,154
2013
£’000
750
(428)
(171)
151
783
934
The tax credit assessed for the year is different from that resulting from applying the standard rate of corporation tax in the UK: 21.5% (2013:
23.25%). The differences are explained below:
Profit on ordinary activities before taxation
2014
£’000
5,243
2013
£’000
5,192
Tax charge at 21.5% thereon (2013: 23.25%)
(1,127)
(1,207)
Effects of :
Expenses not deductible for tax purposes
Overseas tax rate differences
Decrease in unrecognised tax losses
Other deferred tax movements
Impact on deferred tax as a result of changes in tax rates
Overseas adjustments in respect of prior years
United Kingdom research and development tax credits receivable
Total tax (charge)/credit for the year
66
(41)
(5,584)
964
972
-
-
1,569
(3,247)
(40)
(3,382)
6,484
(1,198)
(45)
(428)
750
934
IQE plc | Annual Report & Financial Statements 2014
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 where appropriate.
Deferred tax asset
At 1 January
Deferred tax (charge)/credit recognised in the year
Deferred tax assets recognised on acquisition
Foreign exchange differences
At 31 December
2014
£’000
16,040
(4,372)
-
664
12,332
2013
£’000
14,549
783
625
83
16,040
The current portion of the deferred tax asset is £600,000 (2013: £780,000) in relation to utilization of tax losses.
The deferred income tax asset recognised at 31 December 2014 of £12,332,000 (2013: £16,040,000) relates mainly to tax losses carried
forward, as well as timing differences on fair value adjustments in respect of previous acquisitions and an element of 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 net amount not recognised is an asset of £19,600,000 (2013: £20,708,000). The unrecognised amounts relate to a mix of losses,
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.
Total tax losses carried forward account for a potential deferred tax asset of £39,076,000 (2013: £25,078,000).
Company
There is an unrecognised deferred tax asset of £585,000 (2013: £800,000) which relates primarily to short term timing differences arising on
share option charges.
9. Dividends
No dividend has been paid or proposed in 2014 (2013: £nil).
67
IQE plc | Annual Report & Financial Statements 2014
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. The adjustments are detailed in note 4.
Profit attributable to ordinary shareholders
Adjustments to profit after tax (note 4)
Adjusted profit attributable to ordinary shareholders
Weighted average number of ordinary shares
Dilutive share options
Adjusted weighted average number of ordinary shares
Adjusted basic earnings per share
Basic earnings per share
Adjusted diluted earnings per share
Diluted earnings per share
2014
£’000
1,632
14,705
16,337
2013
£’000
5,955
7,488
13,443
2014
2013
Number
Number
650,836,462
642,239,979
25,116,813
30,127,305
675,953,275
672,367,284
2.51p
0.25p
2.42p
0.24p
2.09p
0.93p
2.00p
0.89p
68
11. Intangible assets
The Group
Cost
At 1 January 2014
Additions
Disposals
Foreign exchange
At 31 December 2014
Accumulated amortisation and impairment
At 1 January 2014
Charge for the year
Charge for Impairment
Disposals
Foreign exchange
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
The Group
Cost
At 1 January 2013
Additions
Acquisitions
Foreign exchange
At 31 December 2013
Accumulated amortisation and impairment
At 1 January 2013
Charge for the year
Foreign exchange
At 31 December 2013
Net book value
At 31 December 2013
At 31 December 2012
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Goodwill
Patents
Development
costs
Software
Acquisition
intangibles*
£’000
£’000
£’000
£’000
£’000
Total
£’000
52,861
-
-
3,024
55,885
-
-
-
-
-
-
55,885
52,861
526
60
-
5
591
118
56
-
-
-
174
417
408
23,167
4,957
-
890
1,595
1,231
(25)
5
5,941
84,090
27
-
398
6,275
(25)
4,322
29,014
2,806
6,366
94,662
6,578
2,609
-
-
314
9,501
619
121
39
(25)
6
760
916
1,116
-
-
116
8,231
3,902
39
(25)
436
2,148
12,583
19,513
16,589
2,046
976
4,218
5,025
82,079
75,859
Goodwill
Patents
Development
costs
Software
Acquisition
intangibles*
£’000
£’000
£’000
£’000
£’000
36,365
-
18,206
(1,710)
52,861
-
-
-
-
52,861
36,365
393
129
-
4
526
56
63
(1)
118
408
337
19,082
4,346
-
(261)
23,167
5,135
1,557
(114)
6,578
16,589
13,947
1,160
427
19
(11)
1,595
360
241
18
619
976
800
Total
£’000
59,962
4,931
21,350
(2,153)
84,090
5,797
2,591
(157)
8,231
2,962
29
3,125
(175)
5,941
246
730
(60)
916
5,025
2,716
75,859
54,165
69
* Acquisition intangibles relate to customer contract intangible assets
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
The amortisation charge of: £3,902,000 (2013: £2,591,000) 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.
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:
Allocation of goodwill by operating segment
Wireless
Photonics
Total Goodwill
2014
£’000
48,610
7,275
55,885
2013
£’000
45,971
6,890
52,861
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 plus a terminal value assuming no subsequent growth. 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 “stress test” for potential impairment, namely:
• Wireless revenue growth 3.5% pa (2013: 3% pa);
•
Photonics revenue growth 10.5% pa (2013: 3% pa) which is significantly lower than the 2014 Photonics revenue growth rate of
~23% in constant currency,
Sales into new markets of £10m over 5 years,
•
• Margin erosion 1% pa (2013: 1% pa),
Cost inflation 3% (2013: 3% pa),
•
A pre-tax discount rate of 11% (2013: 11%).
•
Management believes it is appropriate to use the same discount rate for each CGU given that they have similar risk profiles and common
funding.
Even on this “stressed” 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.
!
The Company
Cost
At 1 January 2014
Additions
Reclassification to intangibles
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Charge for the year
Adjustment
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
70
Software
£’000
-
316
16
332
-
-
-
-
332
-
12. Property, plant and equipment
a) The Group
Cost
At 1 January 2014
Additions
Disposals
Foreign exchange
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Charge for the year
Impairment charge for the year
Disposals
Foreign exchange
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
Cost
At 1 January 2013
Additions
Acquisitions
Foreign exchange
At 31 December 2013
Accumulated depreciation
At 1 January 2013
Charge for the year
Foreign exchange
At 31 December 2013
Net book value
At 31 December 2013
At 31 December 2012
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Land and
buildings
Short
leasehold
improve-
ments
Fixtures
and fittings
Plant and
machinery
£’000
£’000
£’000
£’000
Total
£’000
7,796
2
(275)
157
7,680
3,121
187
-
(275)
26
3,059
4,621
4,675
26,604
3,650
138,898
176,948
57
(31)
1,323
27,953
11,836
1,140
353
(31)
441
82
-
84
3,030
(29)
5,527
3,171
(335)
7,091
3,816
147,426
186,875
2,458
274
24
-
78
87,693
105,108
4,989
4,540
(14)
3,447
6,590
4,917
(320)
3,992
13,739
2,834
100,655
120,287
14,214
14,768
982
1,192
46,771
51,205
66,588
71,840
Land and
buildings
Short
leasehold
improve-
ments
Fixtures
and fittings
Plant and
machinery
£’000
£’000
£’000
£’000
Total
£’000
6,298
-
1,637
(139)
7,796
2,938
194
(11)
3,121
4,675
3,360
23,654
264
3,188
(502)
26,604
10,540
1,501
(205)
11,836
14,768
13,114
2,449
262
1,037
(98)
3,650
2,185
311
(38)
2,458
1,192
264
128,607
161,008
4,605
8,991
(3,305)
5,131
14,853
(4,044)
138,898
176,948
83,025
6,497
(1,829)
87,693
51,205
45,582
98,688
8,503
(2,083)
105,108
71,840
62,320
71
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
As part of the rationalisation and re-organisation programme, IQE will be providing facilities, equipment and IP on favourable terms to the
CSDC as set out in the critical accounting judgments (note 2) and the post balance sheet events note 27. As a consequence, IQE has
booked provisions of £4.9m for asset impairment relating to the transfer of tools to the CSDC. The impairment provision writes the assets
down to their recoverable amount.
b) Capitalised finance leases
Plant and machinery includes the following amounts where the group is a lessee under a finance lease:!
Cost
Accumulated Depreciation
Net book value
2014
£’000
2,728
(216)
2,512
2013
£’000
2,557
(41)
2,516
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
Cost
At 1 January 2014
Additions
Reclassification to intangibles
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Charge for the year
Adjustment
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
Cost
At 1 January 2013
Additions
At 31 December 2013
Accumulated depreciation
At 1 January 2013
Charge for the year
At 31 December 2013
Net book value
At 31 December 2013
At 31 December 2012
72
Fixtures
and fittings
£’000
78
7
(16)
69
35
16
-
51
18
43
Fixtures
and fittings
£’000
21
57
78
21
14
35
43
-
13. Investments
a) Company
Cost
At 1 January 2014
Additions
Disposal
Subsidiaries share based payments charge
At 31 December 2014
Provisions for impairment
At 1 January 2014
Disposal
Impairment charge
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
Cost
At 1 January 2013
Subsidiaries share based payments charge
At 31 December 2013
Provisions for impairment
At 1 January 2013
Impairment charge
At 31 December 2013
Net book value
At 31 December 2013
At 31 December 2012
Details of principal subsidiaries are set out in note 26.
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Investments in
subsidiaries
Other equity
investments
£’000
£’000
83,703
15,652
-
539
99,894
70,438
-
1,076
71,514
28,380
13,265
3,205
50
(3,205)
-
50
3,205
(3,205)
-
-
50
-
Investments in
subsidiaries
Other equity
investments
£’000
£’000
Total
£’000
86,908
15,702
(3,205)
539
99,944
73,643
(3,205)
1,076
71,514
28,430
13,265
Total
£’000
86,581
327
83,376
327
83,703
70,438
-
70,438
13,265
12,938
3,205
-
3,205
86,908
-
3,205
3,205
70,438
3,205
73,643
-
3,205
13,265
16,143
73
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
The additions in the year relate to the capitalization of an inter-company loan balance.
Investments are reviewed for impairment annually, where the net asset value is lower than the investment carrying value an impairment
charge is recognised in the income statement.
In the year impairment charges of £1,076,000 have been recognised to the write down of the investment in subsidiaries to recoverable
amount.
The other equity investments of £3.2m in 2012 related to the equity investment in Solar Junction Corporation. A provision for impairment
was recorded in 2013 prior to the disposal in 2014 where the Group sold its minority equity interest in Solar Junction Corporation. The
acquirer was 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 was unaffected by this transaction.
14. Inventories
Raw materials and consumables
Work-in-progress and finished goods
2014
£’000
13,177
5,099
18,276
2013
£’000
12,856
4,846
17,702
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 £5,937,000 (2013: £4,800,000). £1,399,000 (2013: 2,412,000) of inventories
were written down during 2014 and an expense recognised in the income statement.
15. Trade and other receivables
Trade receivables
Amounts owed by group undertakings
Other receivables and prepayments
2014
Group
£’000
2014
Company
£’000
2013
Group
£’000
2013
Company
£’000
12,809
-
11,654
24,463
-
81,224
382
81,606
9,312
-
13,595
22,907
-
98,380
962
99,342
As at 31 December 2014, 88% (2013: 91%) of trade receivables were within terms. Of the other trade receivables, 93% (2013: 58%) were less
than 30 days past due. An allowance has been made for estimated irrecoverable amounts from the sale of goods of £330,000 (2013:
£121,000). This allowance has been determined by reference to past default experience. Included in other receivables is accrued income of
£8,806,000 (2013: £10,269,000).
Our trade receivables are with established customers, we monitor customer D&B credit ratings and have had no material defaults in the
past. None of our receivables are with customers where we have had any history of default.
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 2014 a 1 cent movement in the US dollar to Sterling rate would impact the net value of these instruments by £47,000 (2013:
£11,000) (before the mitigating impact of cash flow hedges).
74
16. Trade and other payables
Current
Trade payables
Amounts owed by group undertakings
Deferred consideration
Other taxation and social security
Accruals and deferred income
Non-current
Deferred consideration
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
2014
Group
£’000
14,518
-
5,183
1,072
9,623
2014
Company
£’000
57
1,457
-
728
511
2013
Group
£’000
15,090
-
9,000
626
6,398
2013
Company
£’000
-
446
-
73
535
30,396
2,753
31,114
1,054
2014
Group
£’000
15,431
2014
Company
£’000
484
2013
Group
£’000
26,632
2013
Company
£’000
484
Within deferred consideration is £10.7m (2013: £26.6m) being the best estimate of the amount that will be settled through contractually
agreed price discounts over the next two years. Long term contingent deferred consideration balances are discounted at 2.5%.
The fair value of the contingent deferred consideration has been re-assessed during the year resulting in a reduction of £9.9m (2013: £3.0m).
This has been credited to the consolidated 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 2014 or 31 December 2013.
17. Borrowings
The Group
Non-current borrowings:
Bank borrowings
Finance leases
Current borrowings:
Bank borrowings
Finance leases
2014
£’000
22,002
113
22,115
13,867
853
14,720
2013
£’000
31,902
903
32,805
4,002
802
4,804
Total borrowings
36,835
37,609
75
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
a) Bank borrowings
Bank borrowings fall due for repayment as follows:
Within one year
Between one and five years
After five years
b) Finance leases
Gross finance lease liabilities – minimum lease payments:
Within one year
Between one and five years
Finance charges
Present value of finance lease liabilities
Present value of finance lease liabilities:
Within one year
Between one and five years
2014
£’000
13,867
22,002
-
35,869
2014
£’000
873
114
987
(21)
966
2014
£’000
853
113
966
2013
£’000
4,002
31,902
-
35,904
2013
£’000
851
922
1,773
(68)
1,705
2013
£’000
802
903
1,705
Lease liabilities are effectively secured as the rights to the leased asset reverts to the lessor in the event of default.
The company
The borrowings of the parent company comprise the bank loan of £32,473,000 (2013 £31,315,000) which comprise mutli-currency
acquisition and RCF facilities.
76
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
2014
£’000
12,800
19,673
-
32,473
2014
£’000
-
6,673
(1,206)
18
5,485
2014
£’000
1,551
3,934
5,485
2013
£’000
2,400
28,915
-
31,315
2013
£’000
-
-
-
-
-
2013
£’000
-
-
-
Bank borrowings fall due for repayment as follows:
Within one year
Between one and five years
After five years
18. Provisions for other liabilities and charges
(All figures £’000s)
As at 1 January
Charged/(Credited) to the income statement
Utilised during the year
Foreign exchange
As at 31 December
(All figures £’000s)
Current
Non-Current
Total Provisions for other liabilities and charges
As part of the re-organisation and rationalisation of the Group’s facilities the Group is ceasing activates at its Singapore facility and
establishing the Compound Semiconductor development Centre. The provision above represents the onerous lease obligation in respect of
the Singapore property. This is expected to be utilised over the next four and a half years. The provision has been discounted using a risk
free rate of 2.5%.
19. Financial Instruments
Financial instruments by category
Trade and other receivables (excluding prepayments) and cash and cash equivalents are classified as 'loans and receivables'. Borrowings
and trade and other payables are classified as 'other financial liabilities at amortised cost'. Both categories are initially measured at fair value
and subsequently held at amortised cost.
Derivatives (forward exchange contracts) are classified as 'derivatives used for hedging' and accounted for at fair value with gains and
losses taken to reserves through the consolidated statement of comprehensive income.
Financial risk and treasury policies
The Group's finance team maintains liquidity, manages relations with the Group’s bankers, identifies and manages foreign exchange risk
and provides a treasury service to the Group’s businesses. Treasury dealings such as investments, borrowings and foreign exchange are
conducted only to support underlying business transactions.
The Group has clearly defined policies for the management of foreign exchange rate risk. The Group finance team does not undertake
speculative foreign exchange dealings for which there is no underlying exposure. Exposures resulting from sales and purchases in foreign
currency are matched where possible and the net exposure may be hedged by the use of forward exchange contracts.
77
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Group’s receivables from customers and monies on deposit with financial institutions.
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.
Carrying amount
Cash and Cash equivalents
Trade receivables
Amounts owed by group undertakings
Other receivables – (accrued income)
2014
Group
£’000
5,584
12,809
-
8,806
27,199
2014
Company
£’000
2,065
-
81,224
83,289
2013
Group
£’000
3,258
9,312
-
10,269
22,839
2013
Company
£’000
172
-
98,380
98,552
Included in other receivables is accrued income of £8,806,000 (2013: £10,269,000).
Our trade receivables are with established customers, we monitor customer D&B credit ratings and have had no material defaults in the
past. None of our receivables are with customers where we have had any history of default.
Gross
2014
Provision
2014
Net
2014
Not past due
Past due 0-30
Past due more than 30
£’000
10,929
2,056
154
13,139
£’000
£’000
-
10,929
1,880
-
176
154
330
12,809
9,433
Gross
2013
£’000
7,364
1,210
859
Provision
2013
Net
2013
£’000
£’000
-
-
121
121
7,364
1,210
738
9,312
An allowance has been made for estimated irrecoverable amounts from the sale of goods of £330,000 (2013: £121,000). This allowance has
been determined by reference to past default experience. The individually impaired receivables mainly relate to a number of independent
customers. A portion of these receivables is expected to be recovered.
The carrying values of trade and other receivables also represent their estimated fair values.
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 2014 a 1 cent movement in the US dollar to Sterling rate would impact the net value of these
instruments by £47,000 (2013: £11,000) (before the mitigating impact of cash flow hedges).
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages its funding to
ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group uses weekly cash flow forecasts to monitor cash requirements and to optimise its borrowing position.
Typically the Group ensures that it has sufficient borrowing facilities to meet foreseeable operational expenses. At the year end the group
had available facilities of £44.8m (2013: £47.3m).
78
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
The following shows the contractual maturities of financial liabilities, including interest payments, where applicable and excluding the
impact of netting agreements and on an undiscounted basis:!
Analysis of contractual cash flow maturities
Carrying
amount
Contractual
cash flows
Less than
12 months
1 – 2
Years
2 - 5
Years
5+
Years
31 December 2014
Trade and other payables
Deferred consideration
Secured bank loans
Finance leases
£’000
24,141
9,860
35,869
966
£’000
24,141
10,084
38,555
987
£’000
24,141
-
-
9,600
14,852
15,893
869
118
-
484
5,334
-
-
-
2,476
-
£’000
£’000
£’000
70,836
73,767
39,862
25,611
5,818
2,476
Analysis of contractual cash flow maturities
Carrying
amount
Contractual
cash flows
Less than
12 months
1 – 2
Years
2 - 5
Years
5+
Years
31 December 2013
Trade and other payables
Deferred consideration
Secured bank loans
Finance leases
Market risks
1. Currency risk
£’000
21,488
9,064
35,904
1,705
£’000
21,488
9,484
40,017
1,773
£’000
£’000
£’000
£’000
21,488
-
-
-
5,430
14,937
786
869
-
9,484
17,020
118
-
-
2,630
-
68,161
72,762
27,704
15,806
26,622
2,630
The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than Sterling.
The currencies giving rise to this risk are primarily the US dollar. Full disclosures are provided in the Director’s report on page 34.
2. Interest rate risk
Historically the Group has not undertaken any hedging activity in this area however the board keeps this under regular review. All foreign
currency cash deposits are made at prevailing interest rates. The main element of interest rate risk concerns 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 US dollar term loans, which had a principal outstanding at 31 December 2014 of £1.3m (2013: £2.6m), 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 US dollar term loans, which had a principal outstanding at 31 December 2014 of £2.1m (2013: £2.0m), 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 US Dollar acquisition facility, which had a principal outstanding at 31 December 2014 of £20.2m (2013: £21.4 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 UK Pound revolving credit facility is a multi-currency facility of up to £21 million, committed until 2018. It bears interest of between
1.75% to 1.95% over LIBOR. The balance drawn at 31 December 2014 was £12.3m (2013: £9.9m).
The carrying value of loans approximates to their fair value based on the net present value of future cash flows.!
Further disclosure in respect of the interest rate risk is provided in the Directors report on page 34.
79
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Capital risk management
The capital risk management disclosures are provided in full within the Directors report on page 34.
Fair values
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:
Cash and Cash equivalents
Trade receivables
Amounts owed by group undertakings
Other receivables – (accrued income)
Trade and other payables
Deferred consideration
Secured bank loans
Finance leases
2014
Carrying
amount
£’000
5,584
12,809
-
8,806
(29,324)
(9,860)
(35,869)
(966)
2014
Fair
value
£’000
2014
Carrying
amount
£’000
5,584
12,809
-
8,806
(29,324)
(9,860)
(36,104)
(966)
3,258
9,312
-
10,269
(21,488)
(9,064)
(35,904)
(1,705)
2014
Fair
value
£’000
3,258
9,312
-
10,269
(21,488)
(9,064)
(36,216)
(1,705)
(48,820)
(49,055)
(45,322)
(45,634)
Basis for determining fair value
The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in
the table above.
Secured loans
As the loans are floating rate borrowings, amortised cost is deemed to reflect fair value excluding unamortised transaction fees.
Trade and other receivables/payables
As receivables/payables have a remaining life of less than one year, the notional amount is deemed to reflect the fair value.
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IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
20. Share capital
Group and Company
Allotted, called up and fully paid
2014
Number
of shares
2014
£’000
2013
Number
of shares
2013
£’000
Ordinary shares of 1p each
660,327,767
6,603
647,513,661
6,475
The movement in the number of ordinary shares during the year was:
At 1 January
Employee share schemes
Placing
At 31 December
2014
Number
2013
Number
647,513,661
588,215,751
12,814,106
2,396,949
-
56,900,961
660,327,767
647,513,661
12,814,106 ordinary shares (2013: 59,297,910 ordinary shares) were issued during the year as follows:
2014
Number
of shares
2014
Consideration
2013
Number
of shares
2013
Consideration
Employee share schemes
12,814,106
Nil to 19.97p
2,396,949
3.65p to 23.08p
Placing
-
12,814,106
-
56,900,961
59,297,910
29.00p
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 year is shown in the Five Year Financial
Summary and on page 34 of the Directors’ Report.
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IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
21. Share based payments
The total amount charged to the income statement in 2014 in respect of share based payments was £1,458,000 (2013: £1,415,000).
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:
Principal assumptions
Weighted average share price at grant date
Weighted average exercise price
Weighted average vesting period (years)
Option life (years)
Weighted average expected life (years)
Weighted average expected volatility factor
Weighted average risk free rate
Dividend yield
2014
17.12
12.94
3
10
3
61%
1.25%
0%
2013
25.73p
13.16p
3
10
3
61%
0.64%
0%
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 2014 was £342,000 (2013: £2,139,000).
The movements on share options during the year were as follows:
At 1 January
Granted
Exercised
Cancelled/lapsed
At 31 December
2014
2014
2013
2013
Number
of options
56,152,601
7,095,762
(11,282,603)
(1,429,240)
50,536,520
Average
exercise price
(pence)
11.24
12.94
2.87
19.17
13.12
Number
of options
38,693,514
19,564,155
(1,992,560)
(112,508)
56,152,601
Average
exercise price
(pence)
10.12
13.16
10.07
18.72
11.24
The weighted average share price at the time of the options exercised during 2014 was 21.04p (2013: 25.73p).
82
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
As at 31 December 2014, the total number of options held by employees was 50,536,520 (2013: 56,152,601) as follows:
Option price pence/share
Option period ending
Number of options
Number of options
2014
2013
5.63p - 10.17p
6.87p - 10.25p
10.40p - 19.42p
13.58p - 19.42p
16.10p - 16.10p
3.65p - 17.07p
0.00p – 45.58p
9.15p – 50.25p
0.00p – 28.17p
0.00p – 27.75p
0.00p – 86.20p
At 31 December
31 December 2014
31 December 2015
31 December 2016
31 December 2017
31 December 2018
31 December 2019
31 December 2020
31 December 2021
31 December 2022
31 December 2023
31 December 2024
-
558,173
1,453,888
4,647,872
194,306
6,614,693
1,602,277
5,675,400
5,367,392
16,939,534
7,482,985
50,536,520
973,922
610,539
1,640,388
5,254,470
233,278
7,620,931
6,819,449
5,928,249
7,294,981
19,776,394
-
56,152,601
22. 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 for the financial year amounted to £4,964,000 (2013: Loss £2,515,000).
!
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IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
!
23. Cash generated from operations
The Group
Profit before tax
Finance costs
Depreciation of property, plant and equipment
Amortisation of intangible assets
Profit and loss on disposal
Acquisition related inventory fair value adjustments
Impairment of assets / investments
Onerous lease provisions
Release of contingent deferred consideration
Contingent deferred consideration (settled through contractual discounts)
Share based payments
Cash inflow from operations before changes in working capital
(Increase)/decrease in inventories
Decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Cash inflow from operations
The Company
Loss before tax
Finance income
Foreign exchange
Impairment of investments
Depreciation
Share based payments
2014
£’000
5,243
1,924
6,590
3,902
15
-
6,354
6,673
(9,903)
(7,981)
1,458
14,275
(792)
760
618
14,861
2014
£’000
(5,044)
(2,666)
2,238
1,076
16
919
2013
£’000
5,192
2,154
8,503
2,591
-
1,475
3,205
-
(3,026)
(14,191)
1,415
7,318
6,405
2,308
(3,269)
12,762
2013
£’000
(2,574)
(4,024)
237
3,205
14
1,088
Cash outflow from operations before changes in working capital
(3,461)
(2,054)
Decrease/(Increase) in trade and other receivables
Increase in trade and other payables
Cash inflow/(outflow) from operations
5,927
1,686
4,152
(39,094)
389
(40,759)
!
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IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
!
24. Reconciliation of net cash flow to movement in net debt
Increase in cash in the year
Increase in borrowings
Repayment of borrowings
Repayment of leases
Net movement resulting from cash flows
Net debt at 1 January
Net movement resulting from cash flows
Non-cash movements (note 25)
Net debt at 31 December
25. Analysis of net debt
Cash and cash equivalents
Bank borrowings due after one year
Bank borrowings due within one year
Finance leases due after one year
Finance leases due within one year
Total borrowings
Net debt
2014
£’000
2,168
(1,305)
3,867
813
5,543
(34,351)
5,543
(2,443)
(31,251)
2013
£’000
568
(25,000)
3,660
777
(19,995)
(15,483)
(19,995)
1,127
(34,351)
At 1
January
2014
£’000
3,258
(31,902)
(4,002)
(903)
(802)
(37,609)
(34,351)
Cash
flow
£’000
2,168
(1,305)
3,867
-
813
3,375
5,543
Other
non-cash
movements
At 31
December
2014
£’000
158
11,205
(13,732)
790
(864)
(2,601)
(2,443)
£’000
5,584
(22,002)
(13,867)
(113)
(853)
(36,835)
(31,251)
Cash and cash equivalents at 31 December 2014 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.
85
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
26. Principal subsidiary undertakings
Name of company
Class of capital
Proportion of
shares held
Activity
Country of
incorporation
IQE (Europe) Limited
Ordinary shares of £1
100%*
Manufacture of advanced
semiconductor materials
IQE Inc
IQEKC LLC
IQE Taiwan ROC
IQE RF LLC
Common stock of
$0.001
100%*
Manufacture of advanced
semiconductor materials
Limited liability
company
100%
Manufacture of advanced
semiconductor materials
Ordinary shares of NT
$10
90%*
Manufacture of advanced
semiconductor materials
Limited liability
company
100%*
Manufacture of advanced
semiconductor materials
IQE Silicon Compounds Limited
Ordinary shares of £1
100%
Manufacture of silicon epitaxy
UK
USA
USA
Taiwan
USA
UK
MBE Technology Pte Ltd
Preferred shares of S
$1
Ordinary shares of S
$1
100%
100%
Wafer Technology Limited
Ordinary shares of £1
100%*
Manufacture of advanced
semiconductor materials
Singapore
Manufacture of semiconductor
compounds and ultra high
purity materials
NanoGaN Limited
Ordinary shares of
£0.001
100%
Development of advanced
semiconductor materials
Galaxy Compound
Semiconductors Inc
Common stock of
$0.00 par value
100%*
Manufacture of semiconductor
compounds and ultra high
purity materials
UK
UK
USA
* Indirect holdings
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 financial statements 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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IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
27. Post balance sheet event
On 23 March the group entered into a joint venture agreement with WIN Semiconductors Corp and Nangyang Technological University to
create the Compound Semiconductor Development Centre (“CSDC”) in Singapore. The CSDC is a centre of excellence for compound
semiconductor technology, with the aim of accelerating the development and commercialisation of new advanced semiconductor
products.
IQE is has a 50% equity stake in the new venture, and as part of its contribution to the establishment of the CSDC IQE is providing facilities,
equipment and IP on favourable terms. Further details are set out in note 4.
28. Related party transactions
The group incurred professional fees and expenses during the year of £125,000 (2013: £70,000) payable to Horton Corporate Finance and
£38,000 (2013: £29,000) payable to Fishstone Limited. Dr G H H Ainsworth, who is a director of IQE Plc, is a managing partner of Horton
Corporate Finance. S J Gibson, who is a director of IQE Plc, is also a director of Fishstone Limited. An amount of £43,000 (2013: £35,000) was
outstanding to these parties at the year-end.
During the year the group made purchases of £nil (2013 £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.
During the year the group recognised Revenue of £145,000 with Seren Photonics Limited. Dr G H H Ainsworth is a Director of IQE plc and
Seren Photonics Limited. As at the 31 December 2014 £148,000 was receivable from Seren Photonics Limited. IQE made a £50,000
investment in Seren Photonics Limited during the year in return for 69 “B” ordinary shares.
29. Operating lease commitments
The group was committed at 31 December 2014 and 31 December 2013 to making the following aggregate payments in respect of non-
cancellable operating leases:
Due within one year
Due between two and five years
Due after five years
30. Commitments
The group had no capital commitments at 31 December 2014 or 31 December 2013.
2014
£’000
3,174
12,099
5,985
21,258
2013
£’000
2,552
10,843
7,403
20,798
87
IQE plc | Annual Report & Financial Statements 2014
Company No: 3745726
Officers and professional advisers
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 D 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)
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
88
IQE plc
Pascal Close
Cardiff
United Kingdom
CF3 0LW
tel: +44 (0)29 2083 9400
Fax: +44 (0)29 2079 4592
www.iqep.com
© 2015 IQE plc