IQE Annual Report 2015 | Quarterlytics

Plain-text annual report

Enabling 21st century technologiesIQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Five year summary 2015 £’000 2014 £’000 2013 £’000 2012 £’000 2011 £’000 Revenue 114,024 112,011 126,774 87,961 75,318 EBITDA (see below) 29,001 27,009 24,920 16,437 13,955 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 18,977 21,166 18,086 20,149 22,575 20,971 12,114 10,510 17,618 7,167 16,701 1,996 19,614 14,861 11,446 6,693 14,556 7,346 14,202 6,126 16,173 12,762 5,389 1,978 9,202 7,014 8,401 6,631 4,679 4,109 (1,569) (2,139) 8,657 7,373 9,727 8,443 10,823 10,823 (8,585) (8,585) (23,223) (31,251) (34,351) (15,483) (3,921) Equity shareholders’ funds 144,601 119,056 110,498 90,189 72,750 Basic EPS – adjusted* Basic EPS – unadjusted Diluted EPS – adjusted* Diluted EPS – unadjusted 2.68p 3.00p 2.60p 2.90p 2.51p 0.25p 2.42p 0.24p 2.09p 0.93p 2.00p 0.89p * The adjusted performance measures are reconciled in note 4 on page 69. ** Free cash ﬂow is deﬁned as net cash ﬂow before acquisitions, ﬁnancing and net interest paid. Proﬁt after tax Tax Interest Share based payments Proﬁt & loss on disposal Exceptional items Depreciation Amortisation of intangible assets 2015 £‘000 20,149 (773) 1,790 2,001 (5,187) (211) 6,192 5,040 2014 £‘000 1,996 3,247 1,924 1,458 15 7,877 6,590 3,902 2013 £‘000 6,126 (934) 2,154 1,415 - 5,065 8,503 2,591 1.47p 1.16p 1.40p 1.10p 2012 £’000 6,631 (503) 886 1,360 - 570 5,998 1,495 1.86p 1.62p 1.74p 1.51p 2011 £’000 8,443 (1,551) 481 1,284 - - 4,175 1,123 EBITDA 29,001 27,009 24,920 16,437 13,955 Page !1 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 to be the global number one provider of advanced semiconductor materials 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 Number one provider of compound semiconductor wafer products by market share and scale - clear technology leader with an unparalleled breadth of technology. Leading the advancement of new materials Page !2 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Inside this report Five-year ﬁnancial summary ................................................................................................... 1 Our vision .............................................................................................................................. 2 Message from the Chairman .................................................................................................. 4 CEO’s review ......................................................................................................................... 6 A brief history of compound semiconductors ....................................................................... 10 Our core technology - making wafers ................................................................................... 12 Ubiquitously enabling new and emerging technologies ......................................................... 16 Innovation through collaboration .......................................................................................... 17 Strategic report .................................................................................................................... 18 Our competitive advantage ............................................................................................ 18 Our business model ....................................................................................................... 19 Our markets ................................................................................................................... 20 Our strategy ................................................................................................................... 25 Operational highlights ..................................................................................................... 26 Key development milestones .......................................................................................... 27 Financial review .............................................................................................................. 28 KPIs and ﬁnancial highlights ........................................................................................... 29 Current trading and outlook ............................................................................................ 30 Innovation, research & development ............................................................................... 30 Our commitment (CSR) .................................................................................................. 31 Principal risks and uncertainties ...................................................................................... 33 Directors’ biographies .......................................................................................................... 38 Directors’ report ................................................................................................................... 40 Remuneration report ............................................................................................................ 42 Corporate governance report ............................................................................................... 47 Independent auditors’ report ................................................................................................ 51 Financial statements ............................................................................................................ 53 Consolidated income statement ..................................................................................... 53 Consolidated balance sheet ........................................................................................... 54 Consolidated statement of changes in equity ................................................................. 55 Consolidated cash ﬂow statement .................................................................................. 56 Parent company balance sheet ...................................................................................... 57 Parent company statement of changes in equity ............................................................ 58 Parent company cash ﬂow statement ............................................................................. 59 Notes to the ﬁnancial statements ......................................................................................... 60 Ofﬁcers and professional advisers ........................................................................................ 96 Page !3 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Message from the Chairman It is my great pleasure to introduce our 2015 Annual Report. Enhancing core market leadership in Wireless and expanding diversiﬁcation activity I am immensely proud of the excellent reputation IQE has established as a world leading innovator and supplier of During the past three years, IQE has successfully formed industry speciﬁc business units dedicated to each of our advanced semiconductor products. Our standing as the global leader within our industry has led to consistent and robust business and ﬁnancial performance through some tough economic times. Our proven track-record in providing the key enabling technologies for today’s wireless products, coupled with our innovative product portfolio spanning a wide range of new and emerging applications, should give investors the conﬁdence that IQE is uniquely positioned to provide excellent long-term shareholder returns. It is through our commitment to innovation in advanced semiconductor technologies that IQE is helping to shape the future that will transform the way we live, work and play. IQE is the world’s leading manufacturer and supplier of Compound Semiconductor wafers. Most people don’t realise when they’re accessing the internet on their smartphone or tablet the communications networks and mobile technology they are using would not be possible without compound semiconductors manufactured and supplied by IQE. The world of semiconductor technology is one of the most dynamic, advanced and fast-moving industries in the world. Our technologies feature in many of the world’s most exciting products, from the latest smartphones, to the future connected-world through the Internet of Things (IoT) and from advanced healthcare technologies through to electrically powered, connected and driverless vehicles. primary markets: wireless, photonics, Infrared, CPV, power and CMOS++ (advanced electronics) and we are well poised to strengthen our position to signiﬁcantly grow our business in these markets over the coming years. The wireless market, which accounts for approximately 70% of our sales, remains our key market in which IQE’s global market share is more than 50%. Although subject to short term inventory cycles, the wireless communications market continues to represent an exciting long term growth prospect by the proliferation of wireless communication, and the need for continual improvement in chip performance. The importance of maintaining and expanding a comprehensive Intellectual Property (IP) portfolio cannot be over stated, even in established markets such as our wireless business, where continuous improvements in technological performance are the key elements in achieving competitive advantage for IQE, our customers and handset manufacturers alike. Our photonics business, which enables a diverse range of end applications, from data communications and advanced optical-ﬁbres, to sensors in consumer and industrial applications, continues to demonstrate strong performance and represents our fastest growing business segment. Page !4 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 This business unit is being propelled by our technology leadership in advance lasers (VCSELs), and has already begun the transition from development and pilot revenues into high volume manufacturing following a number of key contract wins. Hot on the heels of the Catapult announcement, in March 2016, the UK government signed a Cardiff Capital Region (CCR) City Deal which includes signiﬁcant investment in technology and innovation aimed at bringing long term prosperity to South Wales. Guided by our vision that compound semiconductor technology is at the very heart of the next wave of the At the same time as announcing the Cardiff City Deal, the UK Chancellor also agreed to open negotiations on a electronics revolution, we continue to push the limits of materials technology, constantly improving the quality of existing products whilst developing new and enhanced capabilities. Collaboration and Innovation is IQE’s lifeblood. City Deal for the Swansea Bay Region. IQE has actively supported both Cardiff and Swansea City Deal bids, both of which open excellent opportunities for investment in new and emerging technologies that utilise compound semiconductors. 2015 has been a pivotal year for IQE with formation of Unparalleled industry reputation. the Compound Semiconductor Centre (CSC), a joint venture between IQE and Cardiff University, one of Britain’s leading research universities. The CSC represents a key milestone in bringing industry and academia together towards a shared vision to create a major new compound semiconductor cluster for next- generation technologies. Today we are building upon our expertise and our technology to create a unique global capability for new and emerging 21st century technologies, focusing on important materials such as gallium nitride (GaN) for next generation wireless, power and photonics applications. Our vision of creating a technology cluster was endorsed at the start of 2016 when UK Chancellor, George Osborne formally announced the establishment of a Compound Semiconductor Applications Catapult, a hub of excellence for applied research. The Catapult centre will be located in South Wales, forming part of a UK network of Catapults in disciplines ranging from high- value manufacturing to space applications. IQE, along with Cardiff University, will form a key resource to the new Catapult. I opened my introduction with a comment about IQE’s enviable reputation. Our position in the supply chain does not provide us with the status of being a household name. However, it never ceases to amaze me at the high-esteem held for IQE within our industry and across our supply chains which include a number of major multinational blue-chip companies. Whilst we are unable to quote our customers, the feedback from major international events is testament to the professionalism, expertise and integrity of our teams. I would like to thank all the management and staff of IQE for the success of 2015. Their commitment and dedication continue to be the foundation of our achievements. Finally, and as always, I would also like to express my sincere thanks to you, my fellow shareholders, for your continued belief in and support of IQE. Page !5 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 CEO’s review The focus of everyone at IQE, is on growing the business strategy: we further sharpened our strategic through our technical leadership. We have a solid and growing customer base, we are diversifying our product portfolio and our service offering and we are enhancing our technology capabilities through acquiring and developing new and innovative intellectual property (IP) and in so doing, we will create shareholder value for the long-term. IQE’s core business is the manufacture and supply of compound semiconductor wafer products. Our wafers are similar to silicon wafers that are used to make the silicon chips that have transformed our world over the last ﬁve decades. Compound semiconductors offer far superior performance operating at speeds more than 100 times faster than silicon, and with a wide range of photonics and power efﬁcient properties that make compound semiconductors the material of choice for today’s ever increasing demands on technology. Our products help to create a smarter, more advanced and more connected world that, every day, enriches people’s lives in many ways. We have a passion and a drive for innovation that constantly challenges conventional and incumbent technologies to achieve the higher performance levels demanded across multiple markets such as communications, healthcare, aerospace, automotive, safety & security, the Internet of Things and efﬁcient energy generation and usage. Our strategy is clear: 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 in a demanding, highly technical, leading edge industry sector. 2015 saw continued momentum in our business with the reinforcement of the three primary strands of our diversiﬁcation in our markets by improving operational performance, we exploited our global presence and world leading technology platforms by entering into two joint venture arrangements, in Singapore and the UK, and we maintained our technology leadership by developing a broad IP portfolio through both internal development and strategic transactions. Diversifying our end markets Wireless products continue to represent a key part of IQE's core business but revenue has declined ahead of the next wave of innovation in smartphone and related communications hardware. In the short term, we expect the market for wireless materials to grow at a rate of approximately 5%. IQE’s business is well underpinned with a major contract win (c.$55m) announced in January 2016, and recent market share gains following new product qualiﬁcations. As in 2014, we delivered increasing underlying proﬁtability and earnings, as well as strengthening our balance sheet as a result of lower deferred consideration and net debt. We should not lose sight of the fact that the wireless sector remains a major part of the Group’s future business, and will only be enhanced with the adoption of numerous photonics devices in next generation handsets. We anticipate signiﬁcant upside potential to this growth in the medium term due to: innovation in smartphone hardware, including the adoptions of advanced sensors; the adoption of GaN on Silicon technology for base stations; the transition to 5G communications, which will require more advanced materials; and the combination of silicon with compound semiconductors using cREO for other wireless communication chips. Page !6 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Power and energy IQE has built an enviable position with a number of key players in the rapidly growing gallium nitride (GaN) markets. In addition to establishing relationships with leading players in the power RF GaN markets for base- stations, IQE has also been working closely with industrial partners, academics and government agencies on developing a product pipeline for GaN power device technologies for a range of markets from alternative energy sources to commercial and aerospace applications. Notably, such programmes include active participation in initiatives such as the US government funded programme to develop GaN on silicon power switching technology for grid applications. IQE’s materials development is at an advanced stage, with new product launches expected over the coming months. IQE has made solid progress in its other markets, in line with our strategic plan. The Group’s revenues continue to diversify as its photonics sales grow rapidly. The growth in the photonics business follows on from strong long-term engagement by IQE with its customer base in the development of new and innovative products. The increasing number and quality of customer product development programmes is a positive lead indicator which is providing a high level of conﬁdence over the growth outlook for photonics. A mix of applications contributed to this growth, particularly data centre connectivity, ﬁbre-optic communications and a broad range of sensor products. Other Group business units also performed well, achieving a number of key technical and commercial milestones which is moving the Group ever closer toward new product launches in high volume, high growth, power control and energy markets. Infrared IQE is already the global market leader in the manufacture and supply of indium antimonide and gallium antimonide engineered materials that enable high resolution Infrared systems, with an estimated market share of around 80%. Whilst key markets are currently limited to defence programmes, there are likely to be major future opportunities in commercial markets in areas such as gesture recognition, 3D imaging and sensing applications for autonomous and driverless vehicles. Page !7 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Exploiting our global presence and world leading technology IQE’s management and expert teams ﬁrmly believe that Compound Semiconductor technology will play a signiﬁcant role in the future of 21st century technologies. To capitalise on the opportunities ahead, the Group entered into two joint venture arrangements during 2015: one in Singapore and the other in the United Kingdom. The joint ventures will help provide a focal point for effective collaboration between industry, academia and government agencies for the development and commercialisation of next generation technologies. The Compound Semiconductor Development Centre (CSDC) Based in Singapore, the CSDC is jointly owned by IQE, WIN Semiconductor and Singapore’s National Technology University (NTU), bringing together local management teams with key academics. Its purpose is to accelerate the development of compound semiconductor technologies in Asia as well as to provide an effective incubator for bringing new innovations to market. It represents a highly innovative approach to making the most of the skills and talent that exist in Singapore. As part of its contribution to this joint venture, IQE provided facilities, equipment and IP to the CSDC. The Compound Semiconductor Centre (CSC) In the UK, The CSC was established as a Joint Venture between IQE and Cardiff University. This is a key step in creating the World's ﬁrst Compound Semiconductor Cluster. IQE’s vision is to build a cluster into one of global signiﬁcance and scale, leading to widespread economic beneﬁts for the region, and providing a broad range of compound semiconductor capabilities to support the rapid growth in 21st century technologies, both in Europe and across the rest of the World. The CSC will work closely alongside other industry, academic and government initiatives such as Cardiff University’s Institute for Compound Semiconductors, also announced during 2015, as well as the UK government’s investment in a dedicated Compound Semiconductor Applications Catapult announced by the UK Chancellor, George Osborne, at the start of 2016. Both of these investments provide a strong endorsement for the future growth of our industry sector and the strength already established in IQE’s supply chain. These JVs are commercial entities seeking to develop and commercialise new products, to which IQE has ﬁrst manufacturing rights. IQE’s equity share in each JV is ~50%, and it jointly controls these JVs with its JV partners. The license revenue earned and recognised by IQE reﬂects only its share (~50%) of the gross income (ie is stated after the elimination of unrealised gains). Given that the JVs are related parties, the licence fees were determined with independent validation. Page !8 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 These license fees are primarily upfront fees, although there is a recurring element. This is consistent with the Group’s strategy to monetise its IP through production and licensing where appropriate. The Group is also exploring further opportunities to license IP to third parties. By its nature this income is inherently lumpy. In Q1 of 2016 the group has earned further upfront license income with JVs of approximately £2m. Both the CSDC and the CSC clearly highlight IQE’s dominant position in technology leadership, and form strong relationships within which IQE’s technologies will be embedded. Also in 2015, IQE was announced as a key partner in a new consortium to establish the United States’ ﬁrst Integrated Photonics Institute for Manufacturing Innovation (IP-IMI), created as part of President Obama's National Network for Manufacturing Innovation (NNMI). The consortium, known as the American Institute for Manufacturing Integrated Photonics (AIM Photonics), comprises 55 leading industrial partners and is led by the Research Foundation of the State University of New York (SUNY). IQE’s role in the consortium is to provide advanced epitaxy services to the Institute partners. Inclusion as a key partner in this new US Manufacturing Institute is testament to IQE’s reputation as a global world leader in compound semiconductor materials, a key enabling technology (KET) for photonics. Increasing our IP portfolio The technology business continues to strengthen with a notable licensing agreement with Silex Systems Limited’s subsidiary, Translucent Inc. to acquire Translucent Inc.’s Unique cREO™ Technology. The cREO™ technology offers a unique approach to the manufacture of a wide range of innovative Compound Semiconductor on Silicon products, including gallium nitride (GaN) on silicon (Si) for the burgeoning Power switching and RF technologies markets. This is a great opportunity for IQE to take the unique cREO™ technology to market and thereby create a signiﬁcant new platform to drive our business into several new large volume areas. The two joint venture initiatives in Singapore and Cardiff are also creating next generation IP which will support continued economic growth and prosperity and IQE has licensed additional IP during 2015. The Group is continuing to develop a broad IP portfolio through both internal development, and selective transactions. A bright future It is widely acknowledged that compound semiconductor technologies will play a pivotal role in meeting global societal challenges of the 21st century, and are expected to be the next engine of growth, transforming the way we live and work over the coming decades in the same way that silicon has changed the world over the last ﬁve decades. The Internet of Things (IoT), big data, sustainable energy, electric and driverless vehicles, personalised healthcare and advanced communications, educational and entertainment technologies will all be enabled by compound semiconductors. IQE has established a leading global technical and commercial leadership position, and this is just the beginning of the compound semiconductors momentum. Dr A W Nelson CEO and President 22 March 2016 Page !9 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 A brief history of compound semiconductors The elements Everything in the universe is made of 118 known elements. The periodic table, ﬁrst published in 1869 by Dmitri Mendeleev, shows the elements arranged in groups or columns according to their properties. During the two decades that followed, the ability to control electrical currents using semiconductors allowed engineers to develop a range of new electronic technologies. The evolution of silicon In terms of electrical properties, the elements up to and including those in group III are in general, known as metals and tend to be good conductors of electricity, Whilst germanium is a very efﬁcient semiconductor material, the ready availability of silicon (basically sand) made for a compelling low-cost alternative and hence a whilst those from group V and above are generally non- metals and tend to be poor conductors of electricity. new industry was born that has, for the last ﬁve-decades, transformed our lives in so many ways. Between the metals and non-metals, (and generally in group IV), are elements whose electrical properties are somewhere between conducting and non-conducting (insulating). These elements, which include silicon and germanium, are known as semiconductors. Silicon has been the backbone of the electronics revolution from the 1960s, largely by virtue of continuous miniaturisation which has led to an exponential increase in technological performance - a concept notably observed by one of the founders of Intel, Gordon Moore, and known as “Moore’s Law”. The behaviour of semiconducting elements was discovered during the 19th century and it later became known through experimentation that their electrical properties could be altered by adding very small amounts of different impurities and that by placing together two pieces of material with different impurities, an electrical current could be controlled by allowing it to ﬂow in one direction but not the other. The semiconductor age is born It was in 1947 that William Shockley, John Bardeen and Walter Brattain, working at Bell Labs, built the World’s ﬁrst transistor using the element germanium. Page !10 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Bring on the compound semiconductors form of general lighting (LEDs) and communications (lasers and receivers for ﬁbre-optics). The photonic and power efﬁciency properties offered by compound semiconductors that could not be achieved with silicon alone, will enable technologies essential in areas such as safety and security systems, healthcare technologies, aerospace and automotive applications including electrically powered and autonomous vehicles. It is our ability to harness the advanced properties of the full range of semiconducting materials that will drive the digital revolution for generations to come. Welcome to the world of advanced, compound semiconductors. Impressive as the impact of silicon has been on our lives, it has a very basic and limited set of properties that restricts its application in many new and emerging technology areas that demand ultra-high performance levels along with sensing and other capabilities. By atomically engineering crystal structures that combine elements either side of those in group IV of the periodic table (eg groups III and V), a set of new semiconductor materials has emerged whose enhanced properties offer signiﬁcant performance improvements over those of silicon alone. These compound semiconductors enable high speed processing in excess of 100 times that of silicon, as well as an array of other properties including the ability to emit and sense light, all the way from the infrared, through the visible and into the ultra-violet part of the spectrum. Compound semiconductors have already complimented silicon in areas such as wireless communications, where chips made from material combinations such as gallium and arsenic (gallium arsenide, or GaAs) are found in virtually every smartphone where they enable high speed, high efﬁciency wireless communications in cellular and WiFi networks. Other properties offered by compound semiconductor materials include the ability to emit and sense light in the Page !11 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Our core technology - making wafers COMPONENT ASSEMBLY INTEGRATION & PACKAGING CHIP FABRICATION SUBSTRATE EPITAXY Epitaxy IQE's core business is the manufacture of compound semiconductor wafers or "epiwafers" using a process called epitaxy. The epitaxial growth process is a nanotechnology whereby complex atomic structures are produced under strictly controlled conditions. The end product is a pure, crystaline semiconductor wafer (substrate) upon which complex structures comprising many individual atomic layers are grown. These epitaxial layers uniquely deﬁne the wireless, photonic and electronic performance of our epiwafers which are then processed by our customers to produce the "chips" that are found in virtually all of today's technology devices and gadgets. Epitaxy is the ﬁrst key stage in the process of manufacturing the critical components in a wide range of devices from mobile handsets to solar cells and LEDs, and it requires high speciﬁcation cleanrooms, sophisticated production tools and high levels of intellectual property. IQE produces atomically engineered layers of crystalline materials containing a variety of semiconductor materials such as gallium, arsenic, aluminium, indium and phosphorous. The layers are grown onto a crystal substrate or wafer and the ﬁnished product containing the wafer and its atomically modiﬁed surface is known as an epiwafer. It is the number of layers, their atomic composition and the order in which they are grown that determines the precise physical, electronic and optical properties of the material. An epiwafer can include hundreds of individual layers, each of which may be as thin as two or three atoms. IQE's intellectual property (IP) or know-how is the science and technology behind the materials and the way in which the atomic structures can be manufactured to yield the wide range of wireless, photonic and electronic properties that are essential in today's electronically enabled age. Page !12 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Page !13 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Page !14 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Epitaxy The stage is set Epitaxy > ˈɛpɪtaksi noun In crystallography, the natural or artiﬁcial growth of crystals on a crystalline substrate that determines their orientation. Epitaxy is a process for depositing layers in a highly controlled way to form precisely deﬁned crystalline structures that have speciﬁc atomic arrangements. The layers deposited using an epitaxial deposition process are designed to produce highly speciﬁc electrical, optical and mechanical properties. Layers of atoms are arranged on a crystalline substrate of gallium arsenide (GaAs) or indium phosphide (InP). The composition of the atomic layers is varied to include different elements such as gallium, indium, aluminium, nitrogen, arsenic and phosphorous. Carefully controlled “impurity” atoms such as sulphur and zinc are also added to control the electrical properties of the material. Ga Al As 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 and a breadth of IP relating to the design and manufacture of advanced materials that is second to none. We have been unwavering in our vision and have developed a robust strategy which gives us conﬁdence over the growth prospects of the business and our ability to create shareholder value. As Ga Al Al As Ga Al Ga Al As Ga Ga As Al Ga As Al Ga As Al Ga As Al Ga As As Ga As Ga As Ga As Ga As Ga As Ga As Ga Ga As Ga As Ga As Ga As Ga As Ga As Ga As substrate / wafer Page !15 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Ubiquitously enabling new and emerging technologies The unsung heroes Semiconductors in the form of both silicon and compound semiconductors, form the heart of many of today’s technologies. Without semiconductors, many devices and applications that we rely on simply would not exist, yet these atomically engineered materials go largely unnoticed amongst the end user brands with which we are so familiar. Semiconductors are a key enabling technology that feed into multiple supply chains feeding a wide range of market sectors including: aerospace, healthcare technologies, aerospace, safety & security, big data and the Internet of Things (IoT), energy efﬁciency (generation and consumption), robotics and automotive products. AUTOMOTIVE COMMUNICATIONS ROBOTICS HEALTHCARE ENERGY EFFICIENCY AEROSPACE INTERNET of THINGS SAFETY & SECURITY Page !16 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Innovation through collaboration IQE’s vision is to be at the epicentre of the world’s ﬁrst compound semiconductor cluster, based in the UK. There has been signiﬁcant progress in making this a reality over the past 12 months, and momentum continues to build : Cardiff University is investing c.£75m in the formation of the Institute of Compound Semiconductors as part of its £300m innovation campus; IQE and Cardiff University invested £24m in the formation of the Compound Semiconductor Centre In January 2016 George Osborne announced £50m funding for a Compound Semiconductor Catapult in Wales, which will leverage a further £100m funding from Innovate UK and Industry In March 2016, the Cardiff City Region Deal was announced which identiﬁes the emerging CS cluster in Cardiff as one of its 5 headline goals. This level of investment is recognition of the increasing signiﬁcance of compound semiconductor technology in the electronics industry, and the UK’s ambitions to build on its existing academic and industrial strengths to develop a world class end-to-end supply chain for compound semiconductor technologies in the UK. Building a high-tech cluster Intellectual property relating to advanced materials is playing an increasing role in the evolution of the semiconductor industry. It is widely accepted that advanced materials are needed to overcome the challenges and realise the opportunities facing the electronics industry. This is evident from recent M&A activity in the CS space, including the formation of a JV by Qualcomm and TDK (January 2016), the acquisitions by II-VI Inc of Epiworks (January 2016) and Anadigics (March 2016), and the pending acquisition by Sanan of GCS. The prices being paid in these deals is running into revenue multiples of 3x to 4x, reﬂecting that ‘the heat is rising’. IQE has been at the forefront of advanced semiconductor technology for over a quarter of a century. It has built a reputation within the CS industry for the breadth and depth of its materials technologies and capabilities. This is now becoming increasingly recognised outside the CS industry, where IQE is becoming recognised as the ‘go to’ advanced materials innovator and provider. Indeed, IQE is now engaged directly with a number of Tier 1 OEMs, bypassing the normal “materials-chip-OEM” model. There are many examples in history that show collaboration is a powerful tool in accelerating innovation. The beneﬁts are even greater when whole ecosystems “cluster” in the same location, breaking down the barriers created by geography and time zones. Indeed, Silicon Valley in California is a prime example of how the beneﬁt of clustering can propel an industry to a global platform. It is the beneﬁts of collaboration and clustering that underpin IQE’s strategic rationale for the joint venture partnerships it announced during 2015, and its highly successful Open Innovation programme (openiqe.com) The silicon supply chain is no stranger to the beneﬁts of clustering. Indeed, there are 4 clusters within Europe which are centred around the development and commercialisation of Silicon technology. These are strongholds of innovation and value creation, with over 800 companies and 150,000 employees. Page !17 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: our competitive advantage Global footprint IQE’s operations span the US, Asia and Europe which reﬂects the geographical diversity of our customer base. This allows IQE to be positioned close to its customers and maintain strong, long-term relationships. 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. Intellectual property IQE has and continues to develop a world leading intellectual property (IP) portfolio through a combination of innovative development programmes as well as by acquisition. Our IP is becoming increasingly attractive to customers wishing to access IQE’s vast technical experience and expertise to exploit new opportunities in new and emerging markets. Our IP continues to add signiﬁcant value to our product and service offering to both existing customers and the large number of new entrants to global technology markets. 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. IQE locations USA Bethlehem, PA Taunton, MA Greensboro, NC Somerset, NJ Spokane, WA EUROPE Cardiff 1, UK Cardiff 2, UK Milton Keynes, UK Bath, UK Asia Hsinchu, Taiwan Singapore Page !18 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: our business model Outsourcing pioneer Pioneering specialisation within the compound In the early days of the industrial revolution it became absolutely necessary for manufacturers to be vertically integrated since there were no alternative sources of specialised goods and services. Only towards the middle of the 20th 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. 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 exceeds ﬁxed costs. The last decade has demonstrated an unprecedented number of key industry suppliers selecting outsourcing as a key business advantage. Page !19 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: our markets Organisation CMOS++ The Group has established six Business Units along The CMOS++ market combines the advanced properties market lines, to address its primary and emerging markets: of compound semiconductors with the low cost of silicon. We segment the CMOS++ market into: Power control Advanced materials The key advantages of compound semiconductors are: Compound semiconductors are much more efﬁcient at emitting and processing high-speed wireless signals Compound semiconductors are much more efﬁcient at emitting and sensing 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. Licence Income Licensing income reﬂects a new revenue stream to commercialise our IP portfolio accounting for 7% of the Group’s sales in 2015. IQE has developed a powerful IP portfolio which we are now able to monetise from both product sales and licensing of the IP. The IP licence income in 2015 includes a combination of upfront and recurring income. Wireless Photonics Infrared CMOS++ Licensing The emerging markets of Solar and Power control are not yet signiﬁcant enough to be separated in our segmental reporting. Wireless Wireless sales accounted for 70% of the Group’s sales in 2015 down from 80% 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 Photonics sales accounted for 14% of the Group’s sales in 2015 up from 11% in 2014. The photonics market covers applications that either emit or detect light. We segment the photonics market into: Emitters and detectors Solar (CPV) Lighting Infrared Infrared sales accounted for 8% of the Group’s sales in 2015 and 2014. The Infrared market uses indium antimonide and gallium antimonide engineered materials that enable high resolution Infrared systems. Whilst key markets are currently limited to defence programmes, there are likely to be major future opportunities in commercial markets in areas such as sensing applications for autonomous and driverless vehicles. Page !20 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Wireless The wireless communications market has grown rapidly in recent years reﬂecting the increasing adoption of wireless technology, coupled with the need for an increased compound semiconductor content to support greater sophistication of mobile devices. 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. According to industry analyst, IDC, smartphone shipments reached 1.43 billion units in 2015, led by Samsung with a 24% market share (342.8 million units) and Apple with a 16% market share (231.5 million units). Gartner estimated that smartphones represented 75% of the total of 1.91 billion handset sales in 2015, forecasting modest growth of 1.9% in 2016. 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 with operating frequencies expected to operate above 60GHz compared with less than 3GHz protocols for existing 4G networks. 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. Page !21 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Photonics Photonics represents applications which emit and detect light. We segment this market into emitters and detectors, infra-red, solar and lighting. Emitters and detectors This encompasses a wide range of applications including optical interconnects, laser projectors, optical storage, cosmetic applications, gesture recognition, ﬁnger navigation and a wide range of other sensing applications. Optical interconnects Currently, wired data transmission in the home, the ofﬁce and in data centres is largely undertaken using copper cables. However, data trafﬁc is growing at an explosive rate due to technologies such as high deﬁnition imaging, video streaming, the Internet of Things (IoT) 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. 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. 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. Precision focusing The “time of ﬂight” measurement used for gesture recognition applications is also being utilised in high- speed, precision focusing applications for a wide range of camera devices, including smartphones. Laser projection 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 miniaturised and does not require focusing optics. This technology is called pico projection. Page !22 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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. 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. 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. Solar 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% which compares with typical efﬁciencies of around 18% from amorphous silicon solar panels, while thin ﬁlm technology is typically around 10 to 15% efﬁcient. A further advantage of compound semiconductors is their tolerance of higher temperatures and robustness to cosmic radiation, which makes compound semiconductor based alternatives especially suitable for space power applications. Page !23 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 CMOS++ 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’s deal to acquire Translucent’s unique ‘cREO™’ technology creates a signiﬁcant new platform to drive our business into several new large volume areas. Translucent’s cREO™ technology offers a unique approach to the manufacture of a wide range of innovative Compound Semiconductor on Silicon products, including gallium nitride (GaN) on silicon (Si) for the burgeoning Power switching and RF technologies markets. The technology is protected by a wide ranging IP portfolio. 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 shareholders. 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. Our power business has made strong progress through 2015, achieving several key technical milestones and building commercial partnerships. Page !24 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Industry positioning The Group has established the platform for Strategic report: our strategy IQE has been at the forefront of the compound semiconductor industry since 1988 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), power switching and advanced electronics. 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 Page !25 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: operational highlights Also, as part of its strategy for diversiﬁcation, IQE has engaged with major industry players across multiple market sectors with the aim of establishing high-tech supply chains or “clusters” based on compound semiconductor technologies. A key element in the formation of a compound semiconductor cluster was the establishment of the Compound Semiconductor Centre (CSC), a Joint Venture (JV) with Cardiff University. The CSC was formed in August 2015 and IQE’s contribution was equipment with a market value of £12m, which was matched by a £12m cash contribution from Cardiff University. Operational highlights during 2015 included continued organisational development, improvements in operational efﬁciencies and market diversiﬁcation. Organisation development The Group continued with its Organisational Development Programme. 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. Improvements in operational efﬁciencies Continuous improvement is an ongoing process across IQE’s global operations, with numerous programmes under way at any given time. A key feature of IQE’s global footprint is the ability to develop and adopt best practice across multiple platforms, multiple products and multiple market sectors. Market diversiﬁcation The Group has established six Business Units along market lines, to address its primary and emerging markets. Each Business Unit has a clear product and customer focus, but continues to beneﬁt from the production and technology synergies of the whole Group. Our manufacturing sites monitor production efﬁciencies, delivery performance and quality, aligned to the overall Group objectives.   Page !26 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: key development milestones Intellectual property IQE continues to develop a powerful Intellectual Property (IP) portfolio and works closely with a number of partners to develop and commercialise leading edge technologies. However, largely due to the highly sensitive commercial nature of such developments, IQE enters into non- disclosure agreements (NDAs) with its partners to protect both its own and its customers’ IP. The developments outlined here relate to programmes about which information is available in the public domain. The Photonics Institute for Manufacturing Innovation (IP-IMI) IQE has been announced as a key partner in a new consortium to establish the United States’ ﬁrst Integrated Photonics Institute for Manufacturing Innovation (IP-IMI). Created as part of President Obama's National Network for Manufacturing Innovation (NNMI), the IP-IMI is designed to bring industry together with academia and government to advance the state-of-the-art in the design, manufacture, testing, assembly, and packaging of photonic integrated circuits. The consortium, known as the American Institute for Manufacturing Integrated Photonics (AIM Photonics), comprises 55 leading industrial partners, including Intel, IBM, Inﬁnera, HP, Honeywell and TI along with numerous other leading edge companies, universities and laboratories, and is led by the Research Foundation of the State University of New York (SUNY). IQE’s role in the consortium is to provide advanced epitaxy services to the Institute partners. The institute will provide central facilities through which academia, SMEs and large corporations can access latest technology for design and manufacture of photonics devices providing a route to commercialisation through high-value, high-volume manufacturing. Exclusive Licence of the Unique ‘cREO™’ Technology In September 2015, IQE signed a deal to take Translucent Inc’s unique ‘cREO™’ technology to market. The deal provides a signiﬁcant new platform to drive our business into several new large volume areas. Translucent’s cREO™ technology offers a unique approach to the manufacture of a wide range of innovative Compound Semiconductor on Silicon products, including gallium nitride (GaN) on silicon (Si) for the burgeoning Power switching and RF technologies markets. It is protected by a wide ranging IP portfolio consisting of 74 granted patents, and 13 additional patent applications. Gallium Nitride (GaN) 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 supplying commercially ready 100mm gallium nitride (GaN) on silicon carbide (SiC) epiwafers that were used to produce record results for both high gain and high power density transistor devices, enabling for the ﬁrst time, ﬂexible monolithic microwave integrated circuit (MMIC) design for efﬁcient high-voltage/high- power broadband operation at frequencies ranging from 0 to 40 GHz. These results, achieved on our GaN on SiC epiwafers, demonstrate the ability of IQE to produce record- breaking, world leading results on commercial platforms that enable today’s leading edge satellite communications and will be essential for enabling next generation wireless technologies. Page !27 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: ﬁnancial review Revenue SG & A Revenues of £114.0m were up 2% on 2014 (£112.0m). Strong growth in photonics revenues (up 28% to £16.0m), and the generation of license income (£8.0m) as a new income stream, were partially offset by a reduction in wireless revenues (down 11% to £79.5m). Revenues in other markets were broadly ﬂat year-on-year at £10.5m (2014: £10.4m). The license income was earned from licenses to Joint Ventures (JVs). These JVs are commercial entities seeking to develop and commercialise new products, to which IQE has ﬁrst manufacturing rights. IQE’s equity share in each JV is ~50%, and it shares control of these JVs with its JV partners. The license revenue earned and recognised by IQE reﬂects only its share (~50%) of the gross income (ie is stated after the elimination of unrealised gains). Given that the JVs are related parties, the licence fees were determined with independent validation. These license fees are primarily upfront fees, although there is a recurring element. This is consistent with the Group’s strategy to monetise its IP through production and licensing where appropriate. The Group is also exploring further opportunities to license IP to third parties. By its nature this income is inherently lumpy. In Q1 of 2016 the group has earned further upfront license income with JV’s of approximately £2m. The reduction in wireless revenues reﬂects the well publicised slowdown in the smartphone market during the second half of 2015, which was exacerbated by inventory adjustments through the supply chain. Gross proﬁt Adjusted gross proﬁt increased from £31.6m to £32.4m largely driven by the increase in revenue. Reported gross proﬁt increased from £26.0m to £30.7m. As a percentage of sales, adjusted gross margins were stable at 28%, whereas reported gross margins increased from 23% to 27%. Other income Other income of £0.8m relates to a gain on the reduction of the estimated remaining balance of contingent deferred consideration payable in respect of a previous acquisition. The payments under this contingent deferred consideration arrangement cease during 2016. The prior year comparative was a £1.7m charge which related to provisions for onerous leases and the impairment of ﬁxed assets, which were partially offset by a gain on release of contingent deferred consideration. Adjusted selling, general and administration expenses (SG&A) decreased from £13.9m to £13.5m, which includes the beneﬁt of improved efﬁciencies. Reported SG&A decreased from £17.1m to £15.5m. Operating proﬁt The proﬁt on disposal of ﬁxed assets of £5.2m primarily reﬂects a gain of £4.8m on the establishment of the UK JV, in which the Group contributed equipment in return for its 50% equity share (see note 4). In addition, other unrelated disposals of equipment realised a net gain of £0.4m. Adjusted operating proﬁt increased by 8% from £17.6m to £19.0m, reﬂecting higher sales and the margin beneﬁt from license income. Reported operating proﬁt increased 3x from £7.2m to £21.2m, which also reﬂects the restructuring charges included in 2014. Interest Interest costs reduced from £1.9m to £1.8m reﬂecting the reduction in borrowings, and a reduction in the imputed (non cash) interest charges relating to the discounting of long term balances. Tax There was a net tax credit of £0.5m in respect of the underlying proﬁt, which was consistent with the prior year (2014: £0.5m credit). In addition, there was a £0.3m tax credit relating to the exceptional items, compared with a tax charge of £3.8m on exceptional items in 2014. The Group has sufﬁcient tax losses available to shield future tax payable of circa £37.5m. Proﬁt after tax Adjusted proﬁt after tax increased by 8% from £16.7m to £18.1m, and reported proﬁt after tax increased from £2.0m to £20.1m. The adjusted fully diluted earnings per share was 2.60p, up 7% from 2.42p in the prior year. Reported diluted earnings per share was 2.90p, up from 0.24p in 2014. The Board will not be recommending the payment of a dividend. Cash ﬂow Cash inﬂow from operations, before exceptional items, increased 15% from £19.6m to £22.6m. After exceptional items, cash generated from operations increased 41% from £14.9m to £21.0m. Page !28 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: ﬁnancial review (continued) Capital investment Debt Cash investment was £10.0m up from £9.4m in the prior Balance sheet leverage was down £11.6m from £51.9m year. Investment in new product development of £5.0m was consistent with the prior year (£5.0m), whilst investment in other intangibles was slightly lower at £1.2m (2014: £1.3m). The investment in property, plant and equipment increased by £0.6m from £3.2m to £3.8m, which remains towards the lower end of the normal expected levels of maintenance capex. to £40.3m, as gearing reduced from 30% to 22%. This reﬂects that deferred consideration relating to previous acquisitions reduced by £3.5m from £20.6m to £17.1m, and that net debt reduced by £8.1m from £31.3m to £23.2m. This continues the trend in strong cash generation whilst maintaining investment in new technologies. Strategic report: KPIs and ﬁnancial highlights (Dashboard) Sales (£M) Operating proﬁt (£M) (before exceptional items) Cash from operations (£M) (before exceptional cash ﬂows) FD EPS (pence) (before exceptional items) Leverage (£M) Deferred consideration Net debt Gearing (%) Leverage and gearing: restated FY12 to include balances from acquisition on 15 Jan 2013 Page !29 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: current trading and outlook The Group’s global leadership in wireless and its developing pipeline of high growth opportunities The Board remains conﬁdent of achieving our expectations for the full year and we anticipate that we positions it well to continue its growth proﬁle over the coming years. The current ﬁnancial year has started well and trading is in line with expectations. The outlook for the full year remains positive, with strong prospects reﬂecting increasing revenue diversity and a broad IP portfolio. will continue to beneﬁt from strong cash ﬂows. Strategic report: innovation, research and development R&D activity Open Innovation Technology leadership lies at the heart of IQE’s strategy. This is supported by a culture of innovation and constant improvement. 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. The Group is engaged in a number of research and 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 was held in Cardiff, UK in June 2015. The conference was jointly sponsored by the Welsh Government, academic partners as well as IQE and industrial partners including Airbus, GE Healthcare and General Dynamics, The CoInnovate conference website is at: www.coinnovate.co.uk 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. Page !30 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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; Strategic report: our commitment Working with and supporting local and national charities; Encouraging volunteer work in community activities; Supporting local academic establishments; and Participating in voluntary business advisory services via professional bodies. Each of the Group's subsidiaries is responsible for communicating and applying Group policies within their businesses taking account of local legislation and potential risks. 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. The company has also developed and implemented policies to comply with the requirements of the UK’s Modern Slavery Act. Reference to the policy may be found on the corporate website at www.iqep.com. The community IQE engages with the communities in which it operates, supporting charitable causes, encouraging staff participation in sponsoring events and challenges, as well as taking part in initiatives such as Young Enterprise, Business Class (Business in the Community) and STEMNET, encouraging students to follow science, technology engineering and mathematics from school through to university studies. Page !31 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Quality Health & Safety IQE’s reputation for quality and excellence in products and service is second to none. A philosophy of total IQE pays a great deal of attention to ensuring the health and safety of everyone involved in the business. 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 providing the highest quality of service ensures customer satisfaction covering the entire customer relationship experience, from initial enquiry through to delivery and after-sales support. IQE's quality programme 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 characterisation 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 characterisation technologies and new materials solutions. IQE is actively involved in partnerships with its suppliers to develop the next generations of epitaxy and metrology equipment with a focus on increasing production efﬁciencies, reducing epiwafer costs, and maintaining its technological leadership. The environment, health & safety (EHS) group completed a restructure at the beginning of 2016, which included continuation of training and accreditation of competent persons, appointment of safety practitioners whose role is to minimise risks of injury at work; ensure legislative compliance; and assist in creating and monitoring safety practices to be followed. The restructure also included the designation of safety advisors, with the appropriate expertise to support in speciﬁc areas of activity such as LEV and pressure systems. The EHS group is actively involved in industry-wide initiatives and is proactively registering under new initiatives such as REACH. The EHS group has also recently completed an audit and review of chemical control processes to ensure continued compliance with HazComm regulations. 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. IQE’s policies and procedures are in the process of being updated to meet the September 2015 vision of the environmental management standard, ISO14001, which will be rolled-out across the Group during 2016-17. The new standard places a greater emphasis on Risk and opportunity management embedded in the organisation. 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. Page !32 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Strategic report: principal risks and uncertainties The Group has an established process for the identiﬁcation and management of risk as part of the governance framework. Management of risk is the responsibility of the Board of Directors. In managing risk a comprehensive and robust system of controls and risk management processes have been developed and implemented by the board. The Board’s role in risk management includes: promoting a culture that emphasises integrity at all levels of business operations; embedding risk management within the core processes of the business; approving appetite for risk; determining the principal risks; ensuring that these are communicated effectively across the businesses; and, setting the overall policies for risk management and control. The principal risks affecting the Group are identiﬁed by the Group Executive team within their functional areas of responsibility and reviewed by the Board. Risk management within the business involves: 1. Identiﬁcation and assessment of individual risks 2. Design of controls and operational processes to mitigate the risks 3. Testing of controls through internal review and audits 4. Conclusion on the effectiveness of the control environment in place In identifying risks we analyse risks across four key areas: strategic risk; commercial risk; operational risk; and, ﬁnancial risk. The principal risks identiﬁed are listed in order of severity. Mitigation, where possible, is shown by each identiﬁed risk area. Principal risk: COMPETITION BUSINESS RISK MITIGATION Loss of share with a Focus on quality, value and customer service signiﬁcant customer. Price erosion due to predatory pricing from a competitor Develop and maintain close relationships with customers to become the “materials partner of choice”, by forming multilevel partnerships from material design, to pilot and volume production. Continue to invest in product development to ensure competitive advantage. Qualiﬁcation timescales can be long but once a product and relationship is established, it creates signiﬁcant barriers to entry for competitors. In some cases, customers seek second source supply arrangements to meet their own business continuity planning policies, our multiple site capabilities provide some mitigation against this risk. Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: High Eﬀect: Sales volumes and proﬁtability Page !33 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Principal risk: TECHNOLOGICAL CHANGE BUSINESS RISK MITIGATION A disruptive IQE actively engages with customers, educational institutions and technological change government agencies on a range of research and development (“R&D”) programmes. Where appropriate IQE has protected IP through patents. It is not always appropriate to protect “process know how” through patents. Rigorous controls over segregation of duties, data protection, and access controls are implemented to secure our “trade secrets”. has not been anticipated as a result of a lack of investment in new products and materials. We do not adequately identify and protect our IP Principal risk: FINANCIAL LIQUIDITY BUSINESS RISK MITIGATION The business does The Group prepares regular ﬁnancial forecasts to evaluate its funding not maintain suﬃcient funding and liquidity to meet its obligations as they fall due. and liquidity requirements for the foreseeable future. These forecasts are reviewed and approved by the Board. Based on these forecasts appropriate funding and liquidity solutions are put in place to ensure that appropriate headroom is maintained. At the year-end 31 December 2015 we have £41.1m of committed facilities against which there was net debt of £23.2m. Principal risk: NATURAL DISASTERS BUSINESS RISK MITIGATION Natural disaster IQE operates multiple global manufacturing facilities which mitigates disrupts production against the impact of natural disasters on IQE. capability, supply of materials or customer demand. Our active programme to second source or dual site sources for all critical supplies mitigates supplier risk. Similarly our larger customers have multi-site production to mitigate their risk. IQE maintains appropriate business interruption insurance. Page !34 Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: High Eﬀect: Sales volumes and proﬁtability Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: High Eﬀect: Financial loss & reputational damage Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: Medium/High Eﬀect: Costs, Sales and proﬁtability IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Principal risk: RETENTION OF KEY EMPLOYEES BUSINESS RISK MITIGATION Loss of key people Retention and development of its workforce is critical to the long term and critical skills success of the Group. Insuﬃcient skilled IQE’s people are the heart of the business and in order to promote the employees development and retention of its staﬀ IQE oﬀers career progression, Poor engagement and morale 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. Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: Medium Eﬀect: Quality issues and increased cost Principal risk: BUSINESS INTERRUPTION - SUPPLY CHAIN BUSINESS RISK MITIGATION Dependency on sole The raw materials which sustain IQE’s products are not scarce Y-o-Y CHANGE IN LIKELIHOOD supplier Availability of qualiﬁed raw materials resources. Active programme to maintain cross qualiﬁed second sources. Rigorous supplier quality management processes. Maintain close relationships with its key suppliers in order to keep well Potential Impact: informed about potential supply issues. Principal risk: CUSTOMER CONCENTRATION BUSINESS RISK MITIGATION Dependency on low The wireless sector is highly concentrated with the top 5 RF Chip number of customers companies accounting for the vast majority of the wireless market. could result in signiﬁcant impact from a loss of share from a customer. The group has two customers which individually account for more than 10% of the group sales. 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. The customer qualiﬁcation times and high quality standards creates signiﬁcant barriers to entry for competitors. Maintain and advance our technological advantage to deliver value and retain a competitive position. Focus on quality, value and customer service. Page !35 Medium Eﬀect: Quality issues and cost pressure Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: Medium/Low Eﬀect: Costs, Sales and proﬁtability IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Principal risk: LEGISLATIVE COMPLIANCE BUSINESS RISK MITIGATION Failure to comply Regular reporting of export and ITAR compliance and detailed internal control processes and procedures Continuing education of the team on the legislative developments and requirements. Internal reviews and external audits with applicable legislation, such as: Export Control, International Traﬃc In Arms (ITAR), Bribery Act, Employment legislation and company legislation. Y-o-Y CHANGE IN LIKELIHOOD Potential Impact: Medium/Low Eﬀect: Financial loss & reputational damage EU Referendum The UK government has announced that there will be a referendum on whether the UK should remain in the European Union which will be held on the 23rd June 2016. The result on the 23rd of June is unlikely to have any signiﬁcant short term impact on IQE’s business as IQE trades both within and external to Europe, with Asia and the USA being the Group’s dominant markets and the US Dollar being the Groups dominant currency. However, 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. IQE has established trading, development partnerships and grant funding from across the EU. IQE’s position is that continued membership of the EU would be the most preferred outcome from the forthcoming referendum. Continued membership of the EU offers potential longer- term opportunities for closer collaboration between industry, academia and government agencies across Europe for the development and commercialisation of next generation technologies. The Company’s management believe that Europe can play a much larger global role in developing and commercialising new and emerging technologies that can and will address 21st century societal issues. Horizon 2020 and its ﬂagship pilot line initiatives (ECSEL), Important Projects of Common European Interest, and Photonics 21 are clear examples of Europe’s ambition to play a leading role in next generation technologies, whilst addressing the major societal challenges faced by all economies. Innovation and collaboration are vital components in developing advanced capabilities and technology leadership. Membership of a reformed EU should help engender an environment that encourages collaboration between companies, academics and government agencies across member states, and the UK should play a major role in these collaborative innovation activities. Page !36 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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 4 to 7. The directors use a number of key performance indicators to manage the business, disclosed in the ﬁnancial review on page 28. Non ﬁnancial KPIs are not disclosed. These areas form the required elements of the strategic report presented on pages 18 to 37 and has been approved by the Board of Directors and signed on its behalf by: Phillip Rasmussen Chief Financial Ofﬁcer & Company Secretary 22 March 2016 Drew Nelson CEO & President 22 March 2016 Page !37 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Directors’ biographies Dr Drew Nelson OBE (61) 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. Directorships: PhotonStar LED Group plc. (to 8th December 2015) Phillip Rasmussen (45) Chief Financial Oﬃcer 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. Dr Howard Williams (61) Chief Operations Oﬃcer 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 (which became IQE in 1999) 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. Page !38 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Dr Godfrey H H Ainsworth FCA (60) Chairman, Non-Executive Director, Chairman of the Audit Committee Following a Ph.D at Cardiff University, 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 in November 2009. He has held several Non-Executive Directorship appointments, including assignments for 3i plc, The Business Growth Fund 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. Professor Simon J Gibson OBE (58) Non-Executive Director, Chairman of the Remuneration Committee 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 David Grant CBE (68) Senior Independent Director Dr David Grant has a background in engineering and technology and was appointed to the Board of IQE Plc in September 2012. He was Vice- Chancellor of Cardiff University from 2001 to 2012. Previously he held leadership positions in a number of international businesses including United Technologies Corp., Dowty Group plc and GEC plc. He has been a Vice-President of the IET, and was a Vice-President of the Royal Academy of Engineering from 2007 to 2012. He was awarded the IEE's Mensforth Gold Medal in 1996 and in 1997 he was made a CBE for his contribution to the UK's Foresight Programme. He has a PhD in Engineering Science from the University of Durham. Current directorships: Renishaw plc, DSTl, STEMNET, INNOVATE UK, NPL. Page !39 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Directors’ report The directors present their annual report and the audited consolidated ﬁnancial statements for the year ended 31 December 2015. 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 20 to 29. 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 33 to 36. The future outlook for the Group is set out on page 29. Dividends The directors do not recommend the payment of a dividend (2014: £nil). Directors The directors in ofﬁce at 31 December 2015 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 42 to 46. Substantial interests in shares As at 29 February 2016, 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 Milton Asset Mgt Mr Richard I Griﬃths Herald Investment Mgt Hargreaves Lansdown Asset Mgt Barclays Wealth Sanlam Four Investments UK TD Direct Investing M&G Investment Mgt ..................................... ............................................ ....................................... ................................... ................... .............................................. ......................... ......................................... ...................................... 10.68% 8.79% 6.08% 5.38% 5.22% 4.91% 4.83% 4.38% 3.40% 3.11% Research and development The group incurred costs in respect of research and development during the year of £5,117,000 (2014: £5,665,000) of which £4,979,000 (2014: £4,957,000) has been capitalised in accordance with IAS 38 (“Intangible assets”). The remaining research and development costs totalling £138,000 (2014: £698,000) 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 2015 was 51 days (2014: 74 days). Employment policies It is the group’s policy that there should be no discrimination in considering applications for employment including those from disabled persons. All employees, including the disabled, are given equal opportunities in terms of career development and promotion. Appropriate training is arranged for disabled persons, including retraining for alternative work of employees who become disabled, to promote their career development within the organisation. The group remains committed to its policy of keeping employees fully informed about all matters which concern them. Formal communications are used to achieve this objective, including intranet, e-mail, notice board announcements and “Town Hall” meetings. 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 consider 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. shareholder analysis by Equiniti Page !40 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Principal risks and uncertainties Details of the principal risks and uncertainties impacting the group have been included in the strategic report on pages 33 - 36. Treasury IQE operates a central treasury function which acts in accordance with speciﬁc board policies. Speculative transactions are not permitted. The signiﬁcant treasury policies relating to interest rates, foreign currency and liquidity are detailed in note 19. Statement of directors’ responsibilities The directors are responsible for preparing the Annual Report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the directors have prepared the group and parent company ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the ﬁnancial statements unless they are satisﬁed that they give a true and fair view of the state of affairs of the group and the company and of the proﬁt or loss of the group and company for that period. In preparing these ﬁnancial statements, the directors are required to: select suitable accounting policies and then apply them consistently; The directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the company and the group and enable them to ensure that the ﬁnancial statements and the Directors’ Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the group’s website, www.iqep.com. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Provision of information to auditors So far as the directors are aware, there is no relevant audit information of which the company’s auditors are unaware. The directors have taken all the steps that ought to have been taken as directors in order to make themselves aware of any relevant audit information and to establish that the company’s auditors are aware of that information. Independent Auditors A resolution to reappoint PricewaterhouseCoopers LLP will be proposed at the forthcoming Annual General Meeting. Approved by the Board of Directors and signed on behalf make judgements and accounting estimates that are reasonable and prudent; by: 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. P J Rasmussen Finance Director & Company Secretary 22 March 2016 Page !41 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Remuneration report Introduction 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. (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, Dr D Grant 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 2015 to review the performance of the executive directors and other senior executives, and set the scale and structure of their remuneration. (b) Remuneration policy In establishing its remuneration policy, the committee has given consideration to Schedule B of the Best Practices Provisions annexed to the Listing Rules of the Financial Conduct Authority. The remuneration packages for executive directors and senior executives, as determined by the committee, are intended to attract and retain high quality executives, induce loyalty and motivate them to achieve a high level of corporate performance in line with the best interests of shareholders, while not being excessive. The remuneration of the executive directors consists of annual salary, performance bonus, share options, taxable beneﬁts in kind and pension contributions. There is an annual review at which the committee approves the basic salary and proﬁt sharing bonus scheme for each executive director. The committee receives input from the Chief Executive regarding recommended packages for executive directors and senior executives. (c) Basic salary Basic salary is determined by reference to individual responsibilities, performance and external market data. (d) Performance bonus Bonus payments are linked to the executive directors achieving internal annual plan targets in respect of proﬁtability and other non-ﬁnancial performance criteria. No bonuses were awarded to the directors in respect of 2015. (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. Page !42 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 (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 540,000 share options to staff (2014: 7,095,762 share options). During 2015, No share options were awarded to Directors in either 2014 or 2015. On 7th January 2016 the Directors were awarded 17,625,562 deferred shares under the Company’s Long Term Incentive Plan (“LTIP”) based on external benchmarking. As at 31 December 2015, 45,532,098 share options (2014: 50,536,520 share options) granted under the IQE Plc Share Option Scheme remain outstanding with exercise prices ranging from nil cost to 50p/option (2014: nil cost to 86p/option). No share options were exercised by directors during the year (2014: 8,541,823 share options). None of the directors’ share options lapsed during the year (2014: nil). The numbers and prices of share options at 31 December 2015 and 31 December 2014 were as shown in the table below: 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 2015 No. of options 2014 No. of options 14,821,836 25,062,958 4,384,014 1,263,290 16,364,700 28,272,562 4,335,000 1,564,258 45,532,098 50,536,520 (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 2015, and there were no unfunded pension promises or similar arrangements for directors at 31 December 2015. (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. There were no changes to non-executive remuneration during 2015. Page !43 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Dr G H H Ainsworth service fees of £125,000 (2014: £125,000). In 2015 these fees were paid in cash to Horton Corporate Finance. In 2014 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 £125,000 (2014: £95,000). The shares issued in relation to 2014 remuneration 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 £50,000 (2014 £46,250) were paid in cash. Of these fees £8,000 (2014 £8,000) was paid to S J Gibson and £42,000 (2014: £38,250), 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 £50,000 (2014: £46,250) 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 2015 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. (j) Share price performance The IQE plc share price has been compared with the AIM market all-share index for the four year period 2012 to 2015 as this was considered to be the most representative market group. Share price performance (IQE vs AiM) 35p 30p 25p 20p 15p 10p IQE AiM 2012 2013 2014 2015 Page !44 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 (k) Directors’ interests in ordinary shares of IQE Plc - (audited) The interests in ordinary shares of IQE Plc of those directors holding ofﬁce at 31 December 2015 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 As at 1 January 2015 31 December 2015 35,259,218 4,292,965 3,473,357 3,227,339 301,855 215,000 46,769,734 35,259,218 4,292,965 3,473,357 3,274,155 301,855 215,000 46,816,550 On 7th January 2016 the directors were awarded deferred shares under the Company’s LTIP, see page 43. There have no other changes to the director’s interests between the year end and the date the accounts were issued. (l) Aggregate directors’ remuneration - (audited) The total amounts paid for directors’ remuneration during 2015 were as follows: Basic salaries Bonuses Non-executive fees Subtotal salaries and fees Car allowance Beneﬁts in kind Money purchase pension contributions Total (m) Directors’ emoluments - (audited) The aggregate emoluments paid to each director during 2015 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 Salary fees and bonuses £’000 Car Allowance £’000 Beneﬁts in kind £’000 Pensions £’000 480 322 322 66 44 44 7 1 7 - 28 28 Page !45 2015 £’000 1,124 - 225 1,349 154 15 56 2014 £’000 858 - 217 1,075 107 21 56 1,574 1,259 2015 Total £’000 553 395 401 125 50 50 2014 Total £’000 421 305 316 125 46 46 1,574 1,259 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 (n) Directors’ interests in share options of IQE Plc - (audited) The interests in share options in IQE Plc of those directors who held ofﬁce at 31 December 2015 were as follows: Name of director 1 January 2015 As at Options granted Options exercised Options Cancelled As at 31 December 2015 Date(s) from which exercisable 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 3,145,433 3,269,715 2,391,252 - - - 8,806,400 - - - - - - - - - - - - - - - - - - - - - 3,145,433 1 Jan 2014 to 1 Jan 2017 3,269,715 1 Jan 2014 to 1 Jan 2017 2,391,252 1 Jan 2014 to 1 Jan 2017 - - - 8,806,400 Name of director 1 January 2014 As at Options granted Options exercised Options Cancelled As at 31 December 2014 Date(s) from which exercisable 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 7,946,186 5,140,250 4,261,787 - - - 17,348,223 - - - - - - - (4,800,753) (1,870,535) (1,870,535) - - - (8,541,823) - - - - - - - 3,145,433 1 Jan 2014 to 1 Jan 2017 3,269,715 1 Jan 2014 to 1 Jan 2017 2,391,252 1 Jan 2014 to 1 Jan 2017 - - - 8,806,400 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 2015 were 26.75p/share and 17.25p/share respectively (2014: 27.50p /share and 12.50p/share respectively). The mid- market price of IQE plc shares closed at 17.50p/share as at 31 December 2015 (2014: 17.75p/share). In aggregate, the executive directors made a gain of £nil (2014: £1,058,584) 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 45. Dr Nelson made a gain of £nil (2014: £581,594) as part of these exercises. Approval This report was approved by the Board of Directors on 22 March 2016 and signed on its behalf by: S J Gibson, OBE Remuneration Committee Chairman Page !46 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Corporate governance report Although not required to, the directors have decided to Dr David Grant is recognised as the senior independent 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 2015, 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. 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. Page !47 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 (b) Audit Committee (c) Remuneration and Nominations Committees 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. Number of meetings held in 2015 Number of meetings attended in 2015 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 The remuneration committee consists of three non- executive directors, S J Gibson, Dr D Grant 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 2015 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: Board Audit Committee Remuneration Committee 8 8 8 8 8 8 7 4 n/a 4 n/a 4 4 4 2 2 n/a n/a 2 2 2 Page !48   IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Internal control a clearly deﬁned organisational structure and limits of The Board acknowledges its responsibility for the group’s system of internal control, the effectiveness of which has been reviewed by the audit committee during the year and reported on to the Board. The review has taken account of any material developments up to the date of the signing of the ﬁnancial statements. The processes to identify and manage key risks to the success of the group are an integral part of the internal control environment. Such processes are on-going, are regularly reviewed and improved as necessary, and are in accordance with the internal control guidelines for directors. They include strategic planning, the appointment of senior executives, the monitoring on a regular basis of performance, control of capital expenditure and signiﬁcant revenue investment, and the setting of high standards for health, safety and environmental performance. These processes have been in place throughout the ﬁnancial year and up to the date of approval of the ﬁnancial statements. The effectiveness of the control systems and procedures is monitored regularly through management self- assessment and review by internal audit. In addition, recognition is given to the external audit ﬁndings, which inform the audit committee’s views of areas of increased risk. The system of internal control comprises those controls established in order to provide assurance that the assets of the group are safeguarded against unauthorised use or disposal and to ensure the maintenance of proper accounting records and the reliability of ﬁnancial information used within the business or for publication. Any system of internal control can only provide reasonable, but not absolute, assurance against material misstatement or loss, as it is designed to manage rather than to eliminate the risk of failing to achieve the business objectives of the group. The key procedures that the directors have established with a view to providing effective internal control are as follows: 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. Shareholder relations The Chief Executive and the Finance Director meet on a regular basis with representatives of institutional shareholders to discuss their views and to ensure that the strategies and objectives of the group are well understood. The Chief Executive keeps the Board fully informed of the views of institutional shareholders. Issues discussed with institutional shareholders include the group’s performance and the impact of any major transactions. The Chairman has met with individual shareholders on an ad hoc basis. The company also has a manager responsible for investor relations and operates a web site, which provides details of the group’s facilities and products and includes a separate investor relations section on which ﬁnancial data and other signiﬁcant announcements are published. The web site can be found at www.iqep.com. The group’s annual report and ﬁnancial statements, interim reports and other documentation is available online and by mail where requested. Page !49 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 The Annual General Meeting allows shareholders to raise Audit and related services 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. 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 (audited) are as detailed below: 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 - Financial due diligence service - Tax advisory - Tax compliance service Total 2015 £’000 Total 2014 £’000 19 88 11 - 8 5 19 94 12 3 - - Total PricewaterhouseCoopers LLP (group auditors) 131 128 Ernst and Young (auditors of MBE Technology Pte Limited) - Subsidiary company’s audit - Tax services Total Ernst and Young (auditors of MBE Technology Pte Limited) Total 6 4 10 141 16 3 19 147 Page !50 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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 2015 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 The ﬁnancial statements, included within the Financial Report and Annual Accounts (the “Annual Report”), comprise: the consolidated and parent company balance sheets as at 31 December 2015; the consolidated income statement and 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 statement of changes in equity for the year then ended; and the notes to the ﬁnancial statements, which include a summary of signiﬁcant accounting policies and other explanatory information. 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 IFRSs as adopted by the European Union, and applicable law 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. Page !51 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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. Colin Bates (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Cardiff March 2016 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 41, 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 parent 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. Page !52 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Consolidated income statement Consolidated income statement for the year ended 31 December 2015 Revenue Cost of sales Gross proﬁt Other income and expenses Selling, general and administrative expenses Proﬁt on disposal of property, plant and equipment 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 4 5 7 4 8 10 10 2015 £’000 114,024 (83,372) 30,652 779 (15,452) 5,187 21,166 (1,790) 17,574 1,802 19,376 773 20,149 19,864 285 20,149 3.00p 2.90p Adjusted basic and diluted earnings per share is presented in note 10. The notes on pages 60 to 95 form part of these ﬁnancial statements. All items included in the proﬁt for the year relate to continuing operations. Consolidated statement of comprehensive income for the year ended 31 December 2015 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 Page !53 2015 £’000 20,149 3,165 23,314 23,000 314 23,314 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 2014 £’000 1,996 5,192 7,188 6,822 366 7,188 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Consolidated balance sheet Consolidated balance sheet as at 31 December 2015 Non-current assets: Intangible assets Property, plant and equipment Deferred tax assets Financial 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 2015 £’000 2014 £’000 11 12 8 15 14 15 17 16 18 17 16 18 20 86,843 65,154 14,210 8,000 82,079 66,588 12,332 - 174,207 160,999 21,215 23,050 4,644 48,909 18,276 24,463 5,584 48,323 223,116 209,322 (3,241) (43,693) (1,116) (48,050) (24,626) (484) (2,922) (28,032) (76,082) 147,034 6,655 49,600 70,200 18,146 144,601 2,433 147,034 (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 The notes on pages 60 to 95 form part of these ﬁnancial statements. These ﬁnancial statements were approved by the Board of Directors on 22 March 2016. Signed on behalf of the Board of Directors. P J Rasmussen Dr A W Nelson Page !54 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Consolidated statement of changes in equity Consolidated statement of changes in equity for the year ended 31 December 2015 Share capital £’000 Share premium £’000 Retained earnings £’000 Exchange rate reserve £’000 Other reserves £’000 Non- controlling interests £’000 Total equity £’000 Balance at 1 January 2015 6,603 49,108 50,336 4,789 8,220 2,119 121,175 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 - - - - 52 52 - - - - 492 492 19,864 - - 19,864 3,136 3,136 - - - - - - - - - 2,001 - 2,001 285 29 314 - - - 20,149 3,165 23,314 2,001 544 2,545 Balance at 31 December 2015 6,655 49,600 70,200 7,925 10,221 2,433 147,034 Share capital £’000 Share premium £’000 Retained earnings £’000 Exchange rate reserve £’000 Other reserves £’000 Non- controlling interests £’000 Total equity £’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 The notes on pages 60 to 95 form part of these ﬁnancial statements. Page !55 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Consolidated cash ﬂow statement Consolidated cash ﬂow statement for the year ended 31 December 2015 Cash ﬂows from operating activities: Adjusted cash inﬂow from operations Cash impact of adjustments Cash inﬂow from operations Net interest paid Income tax (paid) / received Net cash generated from operating activities Cash ﬂows from investing activities: 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 ﬁnancing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Exchange gains on cash and cash equivalents Cash and cash equivalents at 31 December The notes on pages 60 to 95 form part of these ﬁnancial statements. Note 23 24 24 25 25 2015 £’000 22,575 (1,604) 20,971 (1,403) (459) 19,109 (4,979) (1,198) (3,825) (10,002) 544 (15,109) 4,349 (10,216) (1,109) 5,584 169 4,644 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 Page !56 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Parent company balance sheet Parent company balance sheet for the year ended 31 December 2015 Note 2015 £’000 2014 £’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 29,070 1,441 4 30,515 77,711 - 77,711 108,226 (2,307) (3,546) (5,853) (484) (22,722) (23,206) (29,059) 79,167 6,655 49,600 12,505 10,407 79,167 28,430 332 18 28,780 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 The notes on pages 60 to 95 form part of these ﬁnancial statements. These ﬁnancial statements were approved by the Board of Directors on 22 March 2016. Signed on behalf of the Board of Directors. P J Rasmussen Dr A W Nelson Page !57 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Parent company statement of changes in equity Parent company statement of changes in equity for the year ended 31 December 2015 Share capital £’000 Share premium £’000 Retained earnings £’000 Other reserves £’000 Total equity £’000 Balance at 1 January 2015 6,603 49,108 12,624 8,406 76,741 Comprehensive expense Loss for the year Total comprehensive expense Transactions with owners Share based payments Issues of ordinary shares Total transactions with owners - - - 52 52 - - - 492 492 (119) (119) - - - - - 2,001 - 2,001 (119) (119) 2,001 544 2,545 Balance at 31 December 2015 6,655 49,600 12,505 10,407 79,167 Share capital £’000 Share premium £’000 Retained earnings £’000 Other reserves £’000 Total equity £’000 Balance at 1 January 2014 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 60 to 95 form part of these ﬁnancial statements. Page !58 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Parent company cash ﬂow statement Parent company cash ﬂow statement for the year ended 31 December 2015 Cash ﬂows from operating activities: Cash inﬂow from operations Interest paid Taxation Net cash generated from operating activities Cash ﬂows from investing activities: Investment in other equity investments 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 in ﬁnancing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December The notes on pages 60 to 95 form part of these ﬁnancial statements. Note 23 13 11 12 17 2015 £’000 6,430 (1,088) - 5,342 (25) (104) (2) (131) 544 (13,000) 4,314 (8,142) (2,931) 2,065 (866) 2014 £’000 4,152 (1,092) 86 3,146 (50) (316) (7) (373) 278 (2,463) 1,305 (880) 1,893 172 2,065 Page !59 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 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 40 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 2015. They do not materially impact on the group results: • Annual improvements 2011 - 2013 (b) New standards, amendments and interpretations issued but not effective for the ﬁnancial year beginning 1 January 2015 and not early adopted A number of new standards and amendments to standards and interpretations have been endorsed for annual periods beginning after 1 January 2015 (noted below), 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. • Annual improvements 2014 (2012-2014 cycle) • Amendment to IFRS 11, 'Joint arrangements' on acquisition of an interest in a joint operation • Amendments to IAS 16, 'Property, plant and equipment' • Amendments to IAS 27, 'Separate ﬁnancial statements' on the equity method • Amendment to IAS 1, 'Presentation of ﬁnancial statements' on the disclosure initiative • Amendment to IFRS 10, 11 and 12 on transition guidance • Amendments to IAS 32 and IFRS 7 Financial instruments on asset and liability offsetting • IAS 28 (revised), 'Investments in associates and joint ventures' • IFRS 13, 'Fair value measurement' • Amendment to IAS 12,'Income taxes' on deferred tax • Amendment to IAS 16, 'Property, plant and equipment' and IAS 38,'Intangible assets', on depreciation and amortisation • Amendment to IAS 36, 'Impairment of assets' on recoverable amount disclosures. A number of new standards and amendments to standards and interpretations have been issued but are not yet endorsed for annual periods beginning after 1 January 2015 (noted below), and have not been 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. IFRS 15 Revenue from contracts with customers (effective for annual periods beginning on or after 1 January 2018) IFRS 9 Financial instruments (effective for annual periods beginning on or after 1 January 2018) 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 intercompany transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. Page !60 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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. 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. Page !61 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 (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 or 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 expected 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. (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 .................. ................................. ..................................... 15 to 25 years  5 to 27 years  5 to 15 years  3 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). Page !62 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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 and parent company 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. 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 note 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. Page !63 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Revenue recognition Revenue represents the amounts receivable for goods, services and intellectual property licenses 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, services or intellectual property 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 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. 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. Page !64 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Foreign currencies Items included in the ﬁnancial statements of each subsidiary are measured using the currency of the primary economic environment in which the subsidiary operates (“the functional currency”). The consolidated ﬁnancial statements are presented in sterling, which is the group’s presentational currency. Foreign currency transactions are translated into the subsidiaries functional currency at the rates of exchange ruling at the date of the transaction, or at the forward currency hedged rate where appropriate. Monetary assets and liabilities in foreign currencies are translated into the subsidiaries functional currency at the rates ruling at the balance sheet date. All exchange differences are taken to the income statement. The balance sheets of overseas subsidiaries are translated into sterling at the closing rates of exchange at the balance sheet date, whilst the income statements are translated into sterling at the average rate for the period. The resulting translation differences are taken directly to reserves. Foreign exchange gains and losses on the retranslation of foreign currency borrowings that are used to ﬁnance overseas operations are accounted for on the ‘net investment’ basis and are recorded directly in reserves provided that the hedge is ‘effective’ as deﬁned in IAS 39 “Financial Instruments: recognition and measurement”. Taxation Income tax on the proﬁt or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year using rates substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years. Amounts receivable from tax authorities in relation to R&D tax relief claims 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. 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. Page !65 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 2 - Critical accounting judgements and key sources of estimation uncertainty The group’s principal accounting policies are described in note 1. The application of these policies necessitates the use of estimates and judgements in a number of areas. Accordingly, the actual amounts may differ from these estimates. The main areas involving estimation are set out below: (a) Impairment of 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, future commercial beneﬁts and expected useful economic life of the product or process. The carrying value for each project is assessed for impairment on an on-going basis. The key assumptions and judgements adopted in preparing the impairment review are set out in note 11. (b) Impairment of receivables Trade and other receivables are carried at the contractual amount due less any estimated provision for non-recovery. Provision is made based a number of factors including the age of the receivable, previous collection experience and the ﬁnancial circumstances of the counterparty. (c) Inventory provisions Inventories are carried at the lower of cost and net realisable value. Provision is made based on a number of factors including the age of inventories, the risk of obsolescence and the expected future usage. (d) Acquisition fair values An assessment of the fair value of the purchase consideration and net assets acquired was undertaken for the 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 £0.8m (2014: £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 forecasts used to support deferred tax asset recognition are the same forecasts used in the impairment review and support partial recognition of the available deferred tax assets. (f) Onerous lease provision A provision for onerous leases was made in the prior year. The provision assumes that the lease will be onerous for the next three 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 6 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. Page !66 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 3 - Segmental analysis The board of directors considers that the wireless, photonics, infrared and CMOS++ markets are the group’s primary reporting segments. The board of directors assesses the performance of these operating segments based on their adjusted operating proﬁt. Further details on the nature of the segments is provided in the strategic report. Revenue Wireless Photonics Infra Red CMOS++ Total Segment Revenue License income from sales to joint ventures Total Revenue Adjusted operating proﬁt Wireless Photonics Infra Red CMOS++ Segment adjusted operating proﬁt Proﬁt from license income from sales to joint ventures* Adjusted operating proﬁt Gain on disposal of ﬁxed assets Non-cash accounting charges Net reduction in contingent deferred consideration Restructuring and reorganisation Finance Costs Proﬁt before tax 2015 £’000 79,482 15,985 8,878 1,655 2014 £’000 89,110 12,485 9,276 1,140 106,000 112,011 8,024 - 114,024 112,011 7,147 4,320 1,181 (1,695) 10,953 8,024 18,977 5,187 (3,596) 779 (568) (1,403) 19,376 15,827 1,833 1,144 (1,186) 17,618 - 17,618 - (3,070) 9,903 (17,779) (1,429) 5,243 * The proﬁt arising from license income sales to joint ventures represents revenue of £15,310,000 offset by an elimination of unrealised proﬁt of £7,286,000 relating to our retained interest in the Compound Semiconductor Centre Limited joint venture. Costs not directly attributable to a segment are allocated based on the proportion of revenue attributable to that segment. Staff work for multiple segments, therefore it is not possible to allocate staff related expenses and the share based payment charge to speciﬁc segments. Finance costs are not allocated to the segments because treasury is managed centrally. Measures of total assets and liabilities for each reportable segment are not reported to the chief operating decision maker and therefore have not been disclosed. Page !67 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 3 - Segmental analysis (continued) In the years set out below, certain customers accounted for greater than 10% of the Group’s total revenues: Customer 1 Customer 2 Segment Wireless Wireless 2015 £’000 2015 % revenue 2014 £’000 2014 % revenue 35,022 19,468 31% 17% 33,001 27,025 29% 24% There are no customers in the photonics, Infra Red or CMOS++ segments that accounted for greater than 10% of the Group’s total revenues. 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 2015 £’000 69,851 69,745 106 16,589 169 3,415 1,137 9,540 2,328 27,584 949 4,665 19,905 2,065 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 1,583 114,024 112,011 Property, plant and equipment Intangible assets 2015 £’000 44,377 6,630 8,872 5,275 65,154 2014 £’000 45,944 6,762 7,555 6,327 66,588 2015 £’000 63,694 8,502 1,297 13,350 86,843 2014 £’000 59,226 8,646 1,155 13,052 82,079 Page !68 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 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 a better understanding of the group’s performance. Gain on disposal of ﬁxed assets Non-cash accounting charges Gain on release of contingent deferred consideration Restructuring and reorganisation Total before tax Deferred tax on adjustments Total after tax 2015  £’000 5,187 (3,596) 779 (568) 1,802 281 2,083 2014  £’000 - (3,070) 9,903 (17,779) (10,946) (3,759) (14,705) As disclosed in note 27, in July 2015 the group established a joint venture with Cardiff University to develop and commercialise compound semiconductor technologies in Europe. To establish the joint venture, IQE contributed equipment with a market value of £12m, which was matched by a £12m cash contribution from Cardiff University. This created a non-cash exceptional gain of £4.8m in IQE’s accounts reﬂecting the Group’s share of the difference between the book value and market value of the equipment contributed. In addition, other unrelated disposals of ﬁxed assets realised a net gain of £0.4m. The non-cash accounting charges of £3.6m (2014 : £3.1m) reﬂect a charge for share based payments of £2.0m (2014 £1.5m), the amortisation of acquired intangibles £1.2m (2014 £1.1m) and the unwind of the discounting of long term balances £0.4m (2014 £0.5m). The Group generated a non-cash proﬁt of £0.8m (2014 £9.9m) 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 restructuring and reorganisation costs of £0.6m (2014: £17.8m) reﬂects some one-off redundancy and asset write downs associated with the restructuring of the groups manufacturing operations. The deferred tax credit of £0.3m (2014: £3.8m charge) reﬂects the net deferred tax impact associated with these adjustments. Certain items noted above are accounting estimates based on judgements, accordingly, the actual amounts may differ from these estimates. The adjustments above are classiﬁed £1.8m (2014: £5.6m) within gross margin, and £2.0m (2014: £3.2m) within sales general & admin costs. 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 Page !69 2015 £’000 2014 £’000 32,439 30,652 (13,462) (15,452) 18,977 21,166 17,574 19,376 18,066 20,149 31,552 25,996 (13,935) (17,103) 17,618 7,167 16,189 5,243 16,701 1,996 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 4 - Adjusted proﬁt measures (continued) Earnings before interest, tax, depreciation and amortisation (EBITDA) has been calculated as follows: Proﬁt attributable to equity shareholders Minority interest Tax Share based payments Finance costs Depreciation of tangible ﬁxed assets Amortisation of intangible ﬁxed assets (Proﬁt) / loss on disposal of ﬁxed assets Provision for onerous lease* Impairment of assets* Gain on release of contingent deferred consideration* Restructuring and re-organisation costs* EBITDA 2015 £’000 19,864 285 (773) 2,001 1,790 6,192 5,040 (5,187) - 453 (779) 115 29,001 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 * Exceptional items impacting EBITDA include the following items: impairment of assets, provision for onerous lease, wireless business unit re-organisation costs and the release of contingent deferred consideration. 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 raw materials consumed Gain on disposal of fixed assets Elimination of unrealised gains with joint ventures Exceptional items** 2015 £’000 2014 £’000 6,192 5,040 141 3,030 138 (675) 2,001 45,338 (5,187) 7,286 (211) 6,590 3,902 147 3,209 698 (26) 1,458 43,741 15 - 7,877 *A schedule of services provided by the group’s auditors and related fees is disclosed in the Corporate Governance Report. **Exceptional items include the following items: re-organisation costs, impairment of assets and the release of contingent deferred consideration. Exceptional items in 2014 also included onerous lease provisions. Further details are provided in note 4. Page !70 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 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 2015 £’000 23,314 2,664 956 2,001 28,935 2014 £’000 25,525 2,799 1,107 1,458 30,889 2015 Number 2014 Number 364 124 488 449 132 581 Directors’ emoluments and share option details are disclosed in the Remuneration Report on pages 45 to 46 in sections k to n. Key management within the group comprises the executive and non-executive directors, the business unit leaders, and other staff who report directly to the executive directors. Compensation to key management, including pensions of £164,000 (2014: £154,000), was £3,581,000 (2014: £3,133,000) and the charge for share-based payments was £1,284,000 (2014: £703,000). 7 - Finance costs Bank and other loans Finance lease interest Unwind of discount on long term balances 8 - Taxation Current tax (charge)/credit United Kingdom research and development tax credits receivable Overseas adjustments in respect of prior years Overseas taxes charges Total current tax (charge)/credit Deferred tax credit/(charge) Total tax credit/(charge) Page !71 2015 £’000 1,402 1 387 1,790 2015 £’000 - - (635) (635) 1,408 773 2014 £’000 1,347 82 495 1,924 2014 £’000 1,569 - (444) 1,125 (4,372) (3,247) IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 8 - Taxation (continued) Factors aﬀecting total tax credit/(charge) The tax credit assessed for the year is different from that resulting from applying the standard rate of corporation tax in the UK: 20.25% (2014: 21.5%). The differences are explained below: Proﬁt on ordinary activities before taxation Tax charge at 20.25% thereon (2014: 21.5%) Eﬀects of : Expenses not deductible for tax purposes Overseas tax rate diﬀerences Recognition of tax losses Tax losses utilised for which no deferred tax asset was recognised Other deferred tax movements Impact on deferred tax as a result of changes in tax rates United Kingdom research and development tax credits receivable Total tax credit/(charge) for the year 2015 £’000 19,376 (3,924) (41) (311) 1,774 3,268 242 (235) - 773 2014 £’000 5,243 (1,127) (41) (5,584) 964 - 972 - 1,569 (3,247) Finance (No.2) Act 2015, which was substantively enacted on 26 October 2015, included legislation to reduce the main rate of corporation tax from 20% to 19% from 1 April 2017 with a further reduction to 18% from 1 April 2020. Accordingly, the closing UK deferred tax asset/liability in the ﬁnancial statements has been recognised on this basis. 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 Analysis of deferred tax Accelerated capital allowances Tax losses carried forward Timing diﬀerences on Intangible assets Other At 31 December Page !72 2015 £’000 12,332 1,408 - 470 2014 £’000 16,040 (4,372) - 664 14,210 12,332 2015 £’000 (8,336) 26,661 (7,547) 3,432 14,210 2014 £’000 (7,361) 19,481 (6,124) 6,336 12,332 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 8 - Taxation (continued) Deferred tax assets are recognised for tax losses carried forward 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 £10,808,000 (2014: £19,595,000). The unrecognised amounts relate to tax losses carried forward. 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 £37,469,000 (2014: £39,076,000). Company There is an unrecognised deferred tax asset of £522,000 (2014: £585,000) which relates primarily to short term timing differences arising on share option charges. R&D Tax Credits The Group recognised a credit of £537,000 (2014: £925,000) within operating proﬁt in relation to claims made under the R&D Expenditure Credit Scheme (RDEC). 9 - Dividends No dividend has been paid or proposed in 2015 (2014: £nil). 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 the dilutive effect of ‘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 Page !73 2015 £’000 19,864 (2,083) 17,781 2014 £’000 1,632 14,705 16,337 2015 Number 662,633,162 21,247,935 683,881,097 2014 Number 650,836,462 25,116,813 675,953,275 2.68p 3.00p 2.60p 2.90p 2.51p 0.25p 2.42p 0.24p Accumulated amortisation and impairment 11 - Intangible assets The Group Cost At 1 January 2015 Additions Foreign exchange At 31 December 2015 At 1 January 2015 Charge for the year Foreign exchange At 31 December 2015 Net book value At 31 December 2015 At 31 December 2014 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 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Goodwill £’000 Patents £’000 Development costs £’000 Software £’000 Acquisition intangibles* £’000 Total £’000 55,885 - 1,968 57,853 - - - - 591 1,162 3 1,756 174 49 1 224 29,014 4,979 758 2,806 1,003 2 6,366 94,662 30 298 7,174 3,029 34,751 3,811 6,694 104,865 9,501 3,601 279 13,381 760 182 1 943 2,148 1,208 118 12,583 5,040 399 3,474 18,022 57,853 55,885 1,532 417 21,370 19,513 2,868 2,046 3,220 4,218 86,843 82,079 Goodwill £’000 Patents £’000 Development costs £’000 Software £’000 Acquisition intangibles* £’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 Page !74 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 11 - Intangible assets (continued) The amortisation charge of: £5,040,000 (2014: £3,902,000) 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 tested for impairment annually and whenever there is an indication of impairment at the level of the cash-generating unit (CGU) or group of CGUs to which it is allocated. Multiple production facilities are included in a single CGU reﬂecting that production can (and is) transferred between sites for different operating segments to suit capacity planning and operational efﬁciency. Given the interdependency of facilities, goodwill is therefore tested for impairment by grouping operational sites into a CGU or CGUs based on type of production. This gives rise to the following allocation of Goodwill: Allocation of goodwill by CGU : III/V Epitaxy Substrates Total Goodwill 2015 £’000 51,403 6,450 57,853 2014 £’000 49,694 6,161 55,885 The recoverable amount of the CGUs has been determined based on value in use calculations, using cash ﬂow projections for a ﬁve year period plus a terminal value. The Board approved budget is used for the ﬁrst year of the forecast. Key assumptions applied in the forecasts include: • Margin erosion 1.5% pa (2014: 1% pa), • Cost inﬂation 2% (2014: 3% pa), • A long term growth rate of 2% (2014: n/a) • A discount rate of 9% (2014: 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. In respect of the III/V Epitaxy CGU, the forecast EBITDA compound growth rate is c.6% over the ﬁve year period. Driving this growth is Photonics revenue growth of c.10.5% pa (2014: 10.5% pa) which is signiﬁcantly lower than the 2015 Photonics revenue growth rate. Also included is revenue into emerging markets growing to c.£23m after 5 years (2014: £10m after 5 years). No impairment would arise if the EBITDA compound growth rate fell to zero over the same period. An impairment of the III/V Epitaxy CGU goodwill would arise in the event that the discount rate was increased from 9% to 13%. Page !75 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 11 - Intangible assets (continued) The Company Cost At 1 January 2015 Additions At 31 December 2015 Accumulated depreciation At 1 January 2015 Charge for the year At 31 December 2015 Net book value At 31 December 2015 At 31 December 2014 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 At 31 December 2014 Net book value At 31 December 2014 At 31 December 2013 Patents £’000 Software £’000 Total £’000 - 1,073 1,073 - - - 1,073 - 332 36 368 - - - 368 332 332 1,109 1,441 - - - 1,441 332 Patents £’000 Software £’000 Total £’000 - - - - - - - - - - 316 16 332 - - - 332 - - 316 16 332 - - - 332 - Page !76 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 12 - Property, plant and equipment a) The Group Cost At 1 January 2015 Additions Disposals* Foreign exchange At 31 December 2015 Accumulated depreciation At 1 January 2015 Charge for the year Disposals* Foreign exchange At 31 December 2015 Net book value At 31 December 2015 At 31 December 2014 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 Land and buildings £’000 Short leasehold improvements £’000 Fixtures and ﬁttings £’000 Plant and machinery £’000 7,680 27,953 3,816 - - 133 7,813 3,059 189 - 22 123 (467) 933 298 (20) 72 28,542 4,166 13,739 1,196 (380) 286 2,834 251 - 59 3,270 14,841 3,144 4,543 4,621 13,701 14,214 1,022 982 147,426 5,710 (43,794) 3,322 112,664 100,655 4,556 (40,351) 1,916 66,776 45,888 46,771 Land and buildings £’000 Short leasehold improvements £’000 Fixtures and ﬁttings £’000 Plant and machinery £’000 Total £’000 186,875 6,131 (44,281) 4,460 153,185 120,287 6,192 (40,731) 2,283 88,031 65,154 66,588 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 During 2014 as part of the rationalisation and re-organisation programme, IQE provided facilities, equipment and IP on favourable terms to the CSDC. As a consequence, IQE booked provisions of £4.9m for asset impairment relating to the transfer of tools to the CSDC. The impairment provision wrote the assets down to their recoverable amount. *As part of the ongoing standardisation and improvement of the group underlying accounting records, accumulated cost and depreciation of £29.5m were eliminated in respect of fully depreciated assets no longer used within the business. Page !77 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 12 - Property, plant and equipment (continued) 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 2015 £’000 2,856 (408) 2,448 2014 £’000 2,728 (216) 2,512 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 2015 Additions Reclassiﬁcation to intangibles At 31 December 2015 Accumulated depreciation At 1 January 2015 Charge for the year At 31 December 2015 Net book value At 31 December 2015 At 31 December 2014 Cost At 1 January 2014 Additions Reclassiﬁcation to intangibles At 31 December 2014 Accumulated depreciation At 1 January 2014 Charge for the year At 31 December 2014 Net book value At 31 December 2014 At 31 December 2013 Page !78 Fixtures and ﬁttings £’000 69 1 - 70 51 15 66 4 18 Fixtures and ﬁttings £’000 78 7 (16) 69 35 16 51 18 43 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 13 - Investments a) Company Cost At 1 January 2015 Additions Disposal Subsidiaries share based payments charge At 31 December 2015 Provisions for impairment At 1 January 2015 Disposal Impairment charge At 31 December 2015 Net book value At 31 December 2015 At 31 December 2014 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 Investments in subsidiaries  £’000 Other equity investments  £’000 99,894 - - 615 100,509 71,514 - - 71,514 28,995 28,380 50 25 - - 75 - - - - 75 50 Investments in subsidiaries  £’000 Other equity investments  £’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 - Total   £’000 99,944 25 - 615 100,584 71,514 - - 71,514 29,070 28,430 Total   £’000 86,908 15,702 (3,205) 539 99,944 73,643 (3,205) 1,076 71,514 28,430 13,265 Details of the company’s subsidiaries are set out in note 26. 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. During 2014 impairment charges of £1,076,000 were recognised to the write down of the investment in subsidiaries to recoverable amount. Page !79     IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 14 - Inventories Raw materials and consumables Work-in-progress and ﬁnished goods 2015 £’000 16,669 4,546 21,215 2014 £’000 13,177 5,099 18,276 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 £6,381,000 (2014: £5,937,000). £746,000 (2014: £1,339,000) of inventories were written down during 2015 and an expense recognised in the income statement. 15 - Trade and other receivables Current Trade receivables Amounts owed by group undertakings Other receivables and prepayments Non-current Financial assets 2015 Group £’000 12,666 - 10,384 23,050 2015 Group £’000 8,000 2015 Company £’000 2014 Group £’000 2014 Company £’000 - 12,809 77,258 453 77,711 2015 Company £’000 - - 11,654 24,463 2014 Group £’000 - - 81,224 382 81,606 2014 Company £’000 - As at 31 December 2015, 82% (2014: 88%) of trade receivables were within terms. Of the other trade receivables, 64% (2014: 93%) were less than 30 days past due. An allowance has been made for estimated irrecoverable amounts from the sale of goods of £204,000 (2014: £330,000). This allowance has been determined by reference to past default experience. Included in other receivables is accrued income of £7,739,000 (2014: £8,806,000). 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 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. Amounts owed by group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5% per annum (2014: 5% per annum). Financial assets relate to £8,000,000 of Preferred ‘A’ shares (2014: £nil) issued by Compound Semiconductor Centre Limited (‘CSC’), a joint venture between the Group and Cardiff University (see Note: 27 for further details. The preference shares carry the following rights: • No voting rights • Dividend equivalent to the HSBC Bank PLC base rate for the applicable period on the amount paid up, subject to CSC having available proﬁts. • Repayable in proportion to the outstanding principle from surplus cash generated. The carrying values of trade and other receivables also represent their estimated fair values. Page !80 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 16 - Trade and other payables Current Trade payables Amounts owed to group undertakings Deferred consideration Overseas tax payable Other taxation and social security Accruals and deferred income Non-current Deferred consideration 2015 Group £’000 12,832 - 16,649 704 1,085 12,423 43,693 2015 Group £’000 484 2015 Company £’000 691 - 1,005 - 120 491 2014 Group £’000 14,518 - 5,183 522 1,072 9,101 2,307 30,396 2014 Company £’000 57 1,457 - - 728 511 2,753 2015 Company £’000 484 2014 Group £’000 15,431 2014 Company £’000 484 Within deferred consideration is £5.6m (2014: £10.7m) being the best estimate of the amount that will be settled through contractually agreed price discounts over the next year (2014: 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 £0.8m (2014: £9.9m). 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. Amounts owed to group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5% per annum (2014: 5% per annum). The carrying values of trade and other payables also represent their estimated fair values. There are no foreign currency exchange contracts held at 31 December 2015 or 31 December 2014. 17 - Borrowings The Group Non-current borrowings: Bank borrowings Finance leases Current borrowings: Bank borrowings Finance leases 2015 £’000 24,626 - 24,626 3,162 79 3,241 2014 £’000 22,002 113 22,115 13,867 853 14,720 Total borrowings 27,867 36,835 Page !81 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 17 - Borrowings (continued) a) Bank borrowings Bank borrowings fall due for repayment as follows: Within one year Between one and ﬁve years After ﬁve years For details of the Group’s bank borrowings see note 19. 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 2015 £’000 3,162 23,084 1,542 27,788 2014 £’000 13,867 20,398 1,604 35,869 2015 £’000 2014 £’000 80 - 80 (1) 79 2015 £’000 79 - 873 114 987 (21) 966 2014 £’000 853 113 966 79 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 £25,402,000 (2014 £32,473,000) which comprise mutli currency acquisition and RCF facilities, and an overdraft of £866,000 (2014: £nil). The Company Non-current borrowings: Bank borrowings Current borrowings: Bank overdraft Bank borrowings 2015 £’000 22,722 22,722 866 2,680 3,546 2014 £’000 19,673 19,673 - 12,800 12,800 Total borrowings 26,268 32,473 Page !82 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 17 - Borrowings (continued) 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 As at 1 January Charged to the income statement Utilised during the year Foreign exchange As at 31 December Current Non-Current Total Provisions for other liabilities and charges 2015 £’000 3,546 22,722 - 26,268 2015 £’000 5,485 116 (1,489) (74) 4,038 2015 £’000 1,116 2,922 4,038 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 During 2014, as part of the re-organisation and rationalisation of the Group’s facilities the Group is ceased activities at its Singapore facility and established 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 three 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), preference share receivables 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. Page !83 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 19 - Financial instruments (continued) 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 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. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable as set out below. 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 2015 Group £’000 4,644 12,666 2015 Company £’000 - - Amounts owed by group undertakings - 77,258 Other receivables Financial Assets (Preference share receivables) 7,739 8,000 33,049 - - 77,258 2014 Group £’000 5,584 12,809 - 8,806 - 27,199 2014 Company £’000 2,065 - 81,224 - 83,289 Included in other receivables is accrued income of £7,739,000 (2014: £8,806,000). The majority of the group’s revenues are derived from large multinational organisations and are with established customers. Therefore the credit risk is considered to be small. 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. Not past due Past due 0-30 Past due more than 30 Gross Provision Net Gross Provision 2015 £’000 2015 £’000 2015 £’000 2014 £’000 2014 £’000 Net 2014 £’000 10,033 1,823 1,014 12,870 - - 204 204 10,033 10,929 - 10,929 1,823 810 2,056 154 12,666 13,139 176 154 330 1,880 - 12,809 An allowance has been made for estimated irrecoverable amounts from the sale of goods of £204,000 (2014: £330,000). 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 2015 a 1 cent movement in the US dollar to Sterling rate would impact the net value of these instruments by £53,000 (2014: £47,000) (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 £41.1m (2014: £44.8m). Page !84 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 19 - Financial instruments (continued) 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 31 December 2015 Trade and other payables Deferred consideration Secured bank loans Finance leases Analysis of contractual cash ﬂow maturities 31 December 2014 Trade and other payables Deferred consideration Secured bank loans Finance leases Market risks 1 - Currency risk (a) Cash ﬂow risk Carrying amount £’000 Contractual cash ﬂows £’000 Less than 12 months £’000 1-2 Years £’000 29,798 11,539 27,788 79 29,798 11,539 30,881 80 29,798 11,055 3,956 80 2-5 Years £’000 - 484 5+ Years £’000 - - - - 6,251 18,137 2,537 - - - 69,204 72,298 44,889 6,251 18,621 2,537 Carrying amount £’000 Contractual cash ﬂows £’000 Less than 12 months £’000 1-2 Years £’000 - 24,141 - 9,600 2-5 Years £’000 - 484 5+ Years £’000 - - 14,852 15,893 5,334 2,476 869 118 - - 24,141 9,860 35,869 966 24,141 10,084 38,555 987 70,836 73,767 39,862 25,611 5,818 2,476 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 three 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 also partially hedged where possible by purchases of some raw materials in these currencies. Taking into account the extent of the natural hedge within the business model, management periodically use forward exchange contracts to mitigate the impact of the residual foreign currency exposure. As at 31 December 2015 and 31 December 2014 there were no contracts in place. (b) Fair value risk The group has operations in the UK, North America and Asia. Translation exposures that arise on converting the results of overseas subsidiaries are not hedged. Net assets held in foreign currencies are hedged wherever practical by matching borrowings in the same currency. As a guide to the sensitivity of the group’s results to movements in foreign currency exchange rates, a one cent movement in the US dollar to Sterling rate would impact annual earnings by approximately £300,000 (2014: £200,000). 2 - Interest rate risk The Board is aware of the risks associated with changes in interest rates and does not speculate on future changes in interest rates or currencies. 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, a revolving credit facility and overdrafts. Bank loans are secured against the assets of the group. Page !85 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 19 - Financial instruments (continued) 2 - Interest rate risk (continued) The variable rate US dollar term loans, which had a principal outstanding at 31 December 2015 of £0.3m (2014: £1.3m), and bear interest of between 2.0% to 2.95% over LIBOR. These loans are repayable by monthly instalment with remaining terms of less than one year. The ﬁxed rate US dollar term loans, which had a principal outstanding at 31 December 2015 of £2.1m (2014: £2.1m), and bear interest of 5% until 2017 and is variable thereafter. These loans are repayable by monthly instalment with remaining terms of up to 20 years. The US Dollar acquisition facility, which had a principal outstanding at 31 December 2015 of £8.1m (2014: £20.2 million), bears interest of between 2.5% to 2.95% over LIBOR. This loan is repayable by quarterly instalments with a remaining term of 2 years. The UK Pound revolving credit facility is a multi-currency facility of up to £30 million, committed until 2018. It bears interest of between 1.75% to 1.95% over LIBOR. The balance drawn at 31 December 2015 was £17.6m (2014: £12.3m). 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 2015 was 8% (2014: 8%). Floating rate liabilities are primarily indexed to LIBOR. The group did not enter into any interest rate swap instruments during 2015. 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 2015 annual interest charge by approximately £170,000 (2014: £170,000). The carrying value of loans approximates to their fair value based on the net present value of future cash ﬂows. Capital risk management 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 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. The group deﬁnes total capital as equity in the consolidated balance sheet plus net debt or less net funds plus deferred consideration (note 16). Total capital at 31 December 2015 was £187,390,000 (2014: £173,039,000). Consistent with others in the industry, the group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt plus deferred consideration divided by total capital. At 31 December 2015 the gearing ratio was 22% (2014: 30%). All covenants in relation to the group’s borrowing facilities have been complied with during the year. 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 Other receivables – (accrued income) Financial Assets (Preference share receivables) Trade and other payables Deferred consideration Secured bank loans Finance leases 2015 Carrying amount £’000 2015 Fair value £’000 2014 Carrying amount £’000 2014 Fair value £’000 4,644 12,668 7,739 8,000 (29,798) (11,539) (27,788) (79) 4,644 12,668 7,739 8,000 (29,798) (11,539) (28,136) (79) (36,155) (36,503) 5,584 12,809 8,806 - (29,324) (9,860) (35,869) (966) (48,820) 5,584 12,809 8,806 - (29,324) (9,860) (36,104) (966) (49,055) Page !86 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 19 - Financial instruments (continued) 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. Financial Assets (Preference share receivables) As the preference shares receivables are ﬂoating rate receivables, amortised cost is deemed to reﬂect fair value. 20 - Share capital Group and Company Allotted, called up and fully paid Ordinary shares of 1p each 2015 Number of shares 2015 £’000 2014 Number of shares 2014 £’000 665,533,170 6,655 660,327,767 6,603 The movement in the number of ordinary shares during the year was: At 1 January Employee share schemes At 31 December 2015 Number 2014 Number 660,327,767 647,513,661 5,205,403 12,814,106 665,533,170 660,327,767 5,205,403 ordinary shares (2014: 12,814,106 Ordinary shares) were issued during the year as follows: Employee share schemes 2015 Number of shares 5,205,403 5,205,403 2015 Consideration Nil to 15.66p 2014 Number of shares 12,814,106 12,814,106 2014 Consideration Nil to 19.97p The share premium arising from the consideration received of £544,000 (2014: £278,000) was £492,000 (2014: £150,000). Page !87 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 21 - Share based payments The total amount charged to the income statement in 2015 in respect of share based payments was £2,001,000 (2014: £1,458,000). Included within the share based payments charge is a £1,186,000 (2014: £848,000) charge relating to the Company’s Long Term Incentive Plan. 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 2015 22.46 12.49 3 10 3 53% 1.25% 0% 2014 17.12 12.94 3 10 3 61% 1.25% 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. Non-market 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 2015 was £33,000 (2014: £342,000). The movements on share options during the year were as follows: At 1 January Granted Exercised Cancelled/lapsed At 31 December 2015 Number of options 2015 Average exercise price (pence) 2014 Number of options 2014 Average exercise price (pence) 50,536,520 540,000 (4,354,287) (1,190,135) 45,532,098 13.12 20.50 12.49 18.19 13.14 56,152,601 7,095,762 (11,282,603) (1,429,240) 50,536,520 11.24 12.94 2.87 19.17 13.12 Page !88 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 21 - Share based payments (continued) The weighted average share price at the time of the options exercised during 2015 was 21.72p (2014: 21.04p). As at 31 December 2015, the total number of options held by employees was 45,532,098 (2014: 50,536,520) as follows: Option price pence/share Option period ending 2015 Number of options 2014 Number of options 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 – 23.83p 18.42p – 25.17p At 31 December 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 31 December 2025 - 1,698,091 4,024,597 179,306 5,366,327 1,398,748 5,059,830 5,322,392 15,611,687 6,357,106 514,014 45,532,098 558,173 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 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 £119,000 (2014: Loss £4,964,000). Page !89 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 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) / loss on disposal of ﬁxed assets Non cash element of joint venture transactions Impairment of assets Onerous lease provisions Gain on 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) in inventories Decrease in trade and other receivables (Decrease)/increase in trade and other payables Cash inﬂow from operations The Company Loss before tax Finance costs Finance income Foreign exchange Impairment of investments Depreciation Share based payments Cash outﬂow from operations before changes in working capital Decrease in trade and other receivables Increase in trade and other payables Cash inﬂow from operations Page !90 2015 £’000 19,376 1,790 6,192 5,040 (5,187) (714) 453 - (779) (4,837) 2,001 23,335 (2,813) 2,739 (2,290) 20,971 2015 £’000 (119) 1,088 (4,230) 1,614 - 15 1,387 (245) 8,126 (1,451) 6,430 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) 1,092 (3,758) 2,238 1,076 16 919 (3,461) 5,927 1,686 4,152 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 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 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 Cash and cash equivalents Net debt 2015 £’000 (1,109) (4,349) 14,191 918 9,651 (31,251) 9,651 (1,623) (23,223) 2014 £’000 2,168 (1,305) 3,867 813 5,543 (34,351) 5,543 (2,443) (31,251) At 1 January 2015 £’000 (22,002) (13,867) (113) (853) (36,835) 5,584 (31,251) Cash ﬂow £’000 (4,349) 14,191 - 918 10,760 (1,109) 9,651 Other non-cash movements £’000 At 31 December 2015 £’000 1,725 (3,486) 113 (144) (1,792) 169 (1,623) (24,626) (3,162) - (79) (27,867) 4,644 (23,223) Cash and cash equivalents at 31 December 2015 comprised balances held in instant access bank accounts and other short term deposits with a maturity of less than 3 months. Non-cash movements include foreign exchange movements on US dollar denominated borrowings. Page !91 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 26 - Subsidiary undertakings Name of company Class of capital Proportion of shares held Activity Country of incorporation IQE (Europe) Limited Ordinary shares of £1 100%* IQE Inc IQE KC LLC IQE Taiwan ROC IQE RF LLC IQE Silicon Compounds Limited MBE Technology Pte Ltd Common stock of $0.001 Limited liability company Ordinary shares of NT$10 Limited liability company 100%* 100% 90%* 100%* Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials Manufacture of advanced semiconductor materials UK USA USA Taiwan USA UK Ordinary shares of £1 100% Manufacture of silicon epitaxy Preferred shares of S$1 Ordinary shares of S$1 100% 100% Manufacture of advanced semiconductor materials Singapore Wafer Technology Limited Ordinary shares of £1 100%* 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 EPI Holding Limited Ordinary shares of £1 100% Dormant holding company KTC Wireless LLC IQE USA Inc IQE Solar LLC IQE Properties Inc Wafer Technology International Limited * Indirect holdings Limited liability company Limited liability company Limited liability company Limited liability company 100% Dormant holding company 100% Dormant holding company 100%* Dormant company 100%* Property holding company Ordinary shares of £1 100% Dormant holding company UK UK USA UK USA USA USA USA UK 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. Page !92 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 27 - Joint ventures The group holds investments in two joint ventures as follows: Name of company Class of capital Proportion of shares held Activity Compound Semiconductor Centre Limited. Common stock of £1 par value 50%* CSDC Private Limited. Common stock of $1 par value 51%* * Indirect holdings Research, development and Manufacture of semiconductor materials Research, development and Manufacture of semiconductor materials Country of incorporation UK Singapore On 23 March 2015 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 in Asia for the development and commercialisation of advanced semiconductor products. The shareholder agreement establishes that this new entity is jointly controlled by the shareholders who have an equal share of the voting rights. On 9 July 2015 the group entered into a joint venture agreement with Cardiff University to create the Compound Semiconductor Centre (“CSC”) in the United Kingdom. The CSC is a centre of excellence in Europe for the development and commercialisation of advanced semiconductor products. The shareholder agreement establishes that this new entity is jointly controlled by the shareholders who have an equal share of the voting rights. All of the above Joint ventures are accounted for using the equity method in these consolidated ﬁnancial statements as set out in the groups accounting policies note 1. All of the Joint ventures ﬁnancial year end is the 31 December 2015 which is co-terminus with the Group and has been used in preparing these Group accounts. No dividends have been received from the Joint ventures in the period. We enclose below, summarised ﬁnancial information for these joint ventures for the reporting period: (a) Summary information for Compound Semiconductor Centre Limited (“CSC Ltd”) Summary income statement Revenue Loss from continuing operations Loss for the period Total comprehensive expense for the period Summary balance sheet Non-current assets Current assets Current Liabilities Non-current Liabilities Equity attributable to Joint Venturers Carrying value of equity interest in CSC Ltd Net assets of CSC Ltd Proportion of the Groups ownership interest Groups share of net assets Elimination of unrealised gains on transactions with CSC Ltd Cumulative unrecognised losses Carrying amount of the Groups interest in the JV Page !93 2015 £’000 1,521 (954) (954) (954) 2015 £’000 33,310 5,168 (666) (14,766) 23,046 2015 £’000 23,046 50% 11,523 (12,000) 477 -   IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 27 - Joint ventures (continued) (a) Summary information for CSC Ltd (continued) Summary of cumulative unrecognised losses Unrecognised losses brought forward Unrecognised unrealised gains on transactions with CSC Ltd Unrecognised losses in the year Cumulative unrecognised losses carried forward (b) Summary information for CSDC Private Limited Summary income statement Revenue Loss from continuing operations Loss for the period Total comprehensive expense for the period Summary balance sheet Non-current assets Current assets Current Liabilities Non-current Liabilities Deﬁcit attributable to Joint venturers Carrying value of equity interest CSDC Private Limited Net liabilities of CSDC Private Limited Proportion of the Groups ownership interest Groups share of net assets Cumulative unrecognised losses Carrying amount of the Groups interest in the JV Summary of cumulative unrecognised losses Cumulative unrecognised losses brought forward Unrecognised losses in the year Cumulative unrecognised losses carried forward Page !94 2015 £’000 - (249) (477) (726) 2015 SG$’000 12,208 (1,820) (1,897) (1,897) 2015 SG$’000 - 4,445 (3,834) (2,508) (1,897) 2015 SG$’000 (1,897) 51% (967) 967 - 2015 SG$’000 - (967) (967)           IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 28 - Related party transactions The group incurred professional fees and expenses during the year of £125,000 (2014: £125,000) payable to Horton Corporate Finance and £45,000 (2014: £38,000) 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 £63,500 (2014: £43,000) was outstanding to these parties at the year-end. During the year the group recognised Revenue of £207,000 (2014: £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 2015 £nil (2014: £148,000) was receivable from Seren Photonics Limited. During 2015 IQE provided loans to Seren Photonics Limited of £25,000 (2014: £nil). During 2014, IQE made a £50,000 investment in Seren Photonics Limited during the year in return for 69 “B” ordinary shares. During the year the group recognised Revenue of £240,000 (2014: £nil) and also made purchases of £5,860,000 (2014: £nil) with CSDC Private Limited a joint venture of the Group. An amount of £457,000 (2014:£nil) was owed to CSDC Private Limited at year end. During the year the group recognised revenue of £7,784,000 (2014: £nil) which is net of an elimination of unrealised proﬁt of £7,286,000 (2014: £nil). The group also made purchases of £1,521,000 (2014:£nil) and recharged other costs of £145,832 (2014: £nil) with Compound Semiconductor Centre Limited (‘CSC’) a joint venture of the Group. Transactions relating to the formation of the CSC are disclosed further in note 4. An amount of £728,156 (2014:£nil) was owed to the CSC at year end. In the groups year end balance sheet there are receivables of £8,000,000 (2014: £nil) relating to Preferred ‘A’ Shares held in CSC and a shareholder loan of £115,000 (2014: £nil). 29 - Operating lease commitments The group was committed at 31 December 2015 and 31 December 2014 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 capital commitments at 31 December 2015 of £747,000 (2014:£nil). 2015 £’000 2,082 6,519 11,378 19,979 2014 £’000 3,174 12,099 5,985 21,258 Page !95 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 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 David Grant CBE, FREng, FLSW, CEng, FIET (Senior Independent Non-Executive Director) Mr P J Rasmussen BSc, ACA (Finance Director and Company Secretary) Dr H R Williams BSc, Ph.D, CEng, MIMechE, MCIBSE (Operations Director) 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 Page !96 PHOTONIC APPLICATIONS: Company No: 3745726 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 enabled by compound semiconductor technology Page !97 IQE PLC | REPORT AND ANNUAL ACCOUNTS 2015 Company No: 3745726 Page !98

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