IQE Annual Report 2016 | Quarterlytics

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FY2016 Annual Report · IQE

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IQE PLC | Report and Annual Accounts 2016

Overview
of 2016

Strategic
report

Directors’
report

Financial
statements

05: Chairman’s report to shareholders
09: Business review
14: Outlook

16: Business overview
18: Our business
24: Environmental & CSR
28: Principal risks & uncertainties

39: Compliance and governance statements
50: Directors’ report
52: Remuneration statements
66: Ofﬁcers and professional advisers

71: Financial statements
78: Notes to the ﬁnancial statements

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Chairman’s report to shareholders

Celebrating success

It is my great pleasure to introduce our 2016 annual
report and financial statements, providing details of
the Group’s strong operational and financial
performance in what I can confidently describe as a
highly successful year during which we delivered on
our strategy to diversify our revenues and grow our
intellectual property (IP) portfolio.

I am pleased to report that our strategy has
delivered strong revenue growth, earnings growth
and cash generation.

REVENUE
UP BY
16%

Revenue increased by 16%
to £132.7m (2015: £114.0m).
Adjusted operating profit
increased by 18% to £22.1m
(2015: £18.9m). Adjusted,
fully diluted earnings per
share rose by more than
15% to 3.0p (2015: 2.6p).

This encouraging financial performance reflects the
strength of our powerful portfolio of IP, which is
delivering continued growth and opportunities
across a diverse range of applications and markets,
coupled with an advantageous currency tailwind in
the second half.

EPS *
UP BY
15%

We fully settled our deferred
consideration relating to
previous acquisitions and
our capital investment
increased during the year to
enable us to address the
emerging growth
opportunities.

Building on strong foundations

Over the last few years we have laid out our
strategic roadmap with the vision and ambition to
develop an unparalleled depth and breadth in
advanced materials technology.

We reshaped the Group to strengthen IQE’s position
in each of our primary markets: Wireless, Photonics,
Infrared, Advanced Solar, Power, and CMOS++
(advanced electronics). The clear focus on
execution of our strategy is paying off: in 2016, our
strong financial performance results from
achievements in diversifying our technology and
product portfolio.

Our key industry differentiation comes from our
superior technology capabilities, scale of operation
and breadth of products and services giving us the
ability to continue to deliver at the leading edge of
semiconductor technology.

The Group has continued to drive progress through
innovation. We have built our portfolio of pioneering,
world-class materials technologies including cREO,
which offers a unique approach to the manufacture
of a wide range of innovative Compound
Semiconductor on Silicon products and GaN on Si,
which is playing an increasingly important role in RF
Power markets.

Above all, our broad range of photonics capabilities,
including the world’s first 6” VCSEL technology, is
making major waves in a range of new applications
and has significantly contributed to IQE’s revenue
growth during 2016.

A fast moving marketplace

Technology is a meaningful part of our lives; it
affects the way we live, work, socialise and
communicate. As end-users, we want our battery
powered handheld and wearable devices to last
longer, our connectivity to be faster and our
technology to be smarter.

Your current smartphone, the device in your pocket,
is more powerful than the most advanced
supercomputers at the end of the 20th Century. With
further rapid technological advances, particularly in
materials technologies, imagine how the world will
look in the next few decades.

To meet consumers’ increasing expectations of what
is possible, enabling technologies are becoming
increasingly more complex and innovation is
become the key differentiator.

IQE’s materials are at the very heart of many of
today’s advanced electronic products and with
emerging technology breakthroughs in fields such
as artificial intelligence, the Internet of Things, and
3D sensing, the possibilities are seemingly limitless.
Technology is evolving at an amazing rate and IQE
will play an increasingly important role in
transforming and shaping the world in which we live.

* the measures presented above are all adjusted. See Notes 4 and 10 of the Financial Statements for reported measures

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

IQE has been at the forefront of the compound
semiconductor industry since 1988 and has
developed an unparalleled depth and breadth of
intellectual property and technical capabilities to
establish itself as a clear global leader in its chosen
field.

IQE is the undisputed global leader in the supply of
advanced wireless materials and is very soon set to
replicate this success in its other primary markets,
particularly the rapidly growing photonics sector
where the Group’s products enable a wide range of
optical-fibre communications networks and
increasingly in consumer devices in the form of
sensor technologies.

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.

The Group has established the platform for
delivering this strategy:

Global footprint spanning US, Europe and Asia

Breadth and depth of advanced semiconductor
materials IP

Talented, committed and experienced team

Proven credibility and reputation

Secure multi-site supply

Scale and cost leadership

Largest capacity in the industry

During 2016 we reinforced our strategy by:

Continued expansion of our technology
leadership by developing a broad IP portfolio
through both internal development and recent
strategic transactions.

Using our previous investment in IP to grow
revenues and profits

Further sharpening our strategic diversification in
our markets by seizing major opportunities in the
rapidly growing sensor technology markets that
are enabled by compound semiconductors.

Improving operational performance

IQE at the epicenter ….

Innovation has always been a key element in
fostering economic growth: it contributes to
improved competitiveness, creates value, increases
employment opportunities and helps to address
major societal challenges.

The last two years have ushered in a period of
greater understanding of the impact that compound
semiconductors will have in transforming the 21st
century.

In the UK alone, we have seen significant
investments in compound semiconductor technology
by government agencies and academic institutions
aimed at developing world-class capabilities. To
date, more than £300M of UK public funding has
been committed to a number of initiatives, largely
focussed around Wales and South West England –
the home of IQE’s corporate headquarters.

Initiatives include the Cardiff University’s Institute for
Compound Semiconductors, EPSRC’s Compound
Semiconductor Hub, The Compound Semiconductor
Applications Catapult and the Compound
Semiconductor Centre, the unique joint venture
between IQE and Cardiff University to establish a
prototyping and commercialisation facility for
compound semiconductor materials technologies.

It is expected that the fruits of the initiatives
announced during 2015 and 2016 will begin to be
realised during 2017 and 2018.

By putting innovation at the heart of its strategy, IQE
has laid the foundations for a very exciting future.

Strategy and delivery

IQE manufactures and supplies compound
semiconductor wafer products that offer high
performance electrical and photonic properties,
operating at speeds more than 100 times faster than
silicon. Compound semiconductors are the material
of choice for today’s ever increasing demands on
electronic materials 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Advanced wafers for wireless communications
applications continue to represent a key part of
IQE's core business, growing 15% to £91.3m (2015:
£79.5m) with further growth expected ahead of the
next wave of innovation in smartphone and related
communications technologies. The group continues
to maintain its key wireless customer base and is
pursuing a number of initiatives to grow market
share with a number of new product qualifications in
the pipeline.

Our fastest growth area was our photonics market,
exhibiting 42% growth to £22.8m (2015: £16.0m)
with further significant growth anticipated during
2017. Infrared products also demonstrated solid
growth, increasing by 19% to £10.6m (2015: £8.9m).

As in 2015, we delivered increased underlying
profitability, earnings and cash-generation, and
settled all the deferred consideration relating to
previous acquisitions.

We strongly anticipate the wireless sector to remain
a major part of the Group’s future business, which
will only be enhanced with the adoption of numerous
photonics devices in next generation handsets.

We expect significant upside potential to this growth
in the medium term due to: innovation in
smartphone hardware, including the adoptions of
advanced sensors (including 3D sensing); 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.

Operational highlights

A diverse range of growth drivers and end markets
resulted in a 19% growth in wafer sales, reflecting
organic growth in all markets, supplemented by a
currency tailwind

During the year, the Group strengthened its direct
engagement with multiple Tier 1 original equipment
manufacturers (OEMs), reflecting IQE’s strong IP
position and the increasing importance of epitaxial
IP as a key enabling technology in electronic
systems.

A number of major milestones were achieved in
2016, enabled by IQE’s growing portfolio of leading
edge IP, and these provide a good lead indicator of
significant growth opportunities ahead. Key
achievements included:

Key milestones delivered on several major
photonics programmes during H2 2016, providing
significant growth opportunities for 2017 and
beyond;
Excellent progress with our new cREO
technology had delivered some early wins,
including delivering a step change in GaN on
Silicon technology (the elimination of “parasitic
channel”), and active engagement in
development programmes for advanced RF filter
applications;

A key customer is engaged in end market
qualification using IQE’s GaN on Silicon material,
signifying that this technology is close to
commercialisation

Significant contract wins in InfraRed, and
progress in a number of development
programmes continue the growth of this business
unit, and progress towards new high volume
applications.

Positive market dynamics, including increasing
mergers and acquisition activity and sector
investment, reflect the increasing focus on
compound semiconductors as a critical enabling
technology to major growth themes, including
high speed communication, the “internet of
things”, big data, advanced medical technology,
energy efficiency, and autonomous vehicles.

Good progress by IQE’s Joint Ventures in the UK
and Singapore mark key milestones in their
developing as centres of excellence in driving
innovation and commercialisation of advanced
CS technologies. The UK Joint Venture was a
catalyst to securing c.£300m of funding towards
the continued development of a UK CS Cluster,
and the Singapore JV has been selected as a
partner in a major programme for CS on silicon
technology.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Other operational highlights during 2016 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.

The organisation also continued to focus on six key
business units with a priority on those market
sectors such as photonics and power, with the
highest near term growth potential.

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.

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.

IQE has engaged with a number of stakeholders
including government agencies and academic
institutions to drive the economic agenda to prioritise
and promote the formation of technology clusters
focused on compound semiconductors.

Seizing the opportunity

As I look ahead, I couldn’t be more excited about
our position and the growth prospects for our
industry and it is clear that the opportunities ahead
are even brighter. IQE’s performance over the
course of 2016 demonstrated successful execution
of a strategy that provides solid foundation for the
future success.

IQE’s position in the supply chain does not provide
us with the status of being a household name
amongst consumers. 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.

We are restricted by non-disclosure agreements
across the supply chain which means that we are
unable to name our customers, but 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 the past year and
their part in its achievement.

Our employees represent the cornerstone of our
business. We start the year extremely well
positioned to continue delivering strong results and
to take advantage of new, high-growth opportunities.
I express my thanks for the dedication and
professional expertise of our directors, staff, and the
whole workforce for their commitment and
dedication; they continue to be the foundation of our
achievements.

I would also like to take this opportunity to extend a
warm welcome to Phil Smith, who joins our Board as
a Non-Executive Director. Phil brings with him strong
credentials and a wealth of experience gained
across the technology sector. I also offer
congratulations to fellow Board Member Sir David
Grant on the award of his knighthood.

Finally, as always, I would like to thank you, my
fellow shareholders, for your support. I trust that you
share our excitement about the role we are destined
to play in what promises to be an exciting future for
IQE and for our industry.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Business review

This section provides an update on activities across our business.

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Wireless

Wireless sales accounted for 69% of the Group’s
sales in 2016, slightly down from 70% in 2015. 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.

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.

According to industry analyst, IDC, smartphone
shipments in 2016 increased by 2.8% to 1.47 billion
units (2015: 1.43 billion units). Sales were bolstered
by a significant upturn in Q4 following Apple’s launch
of the iPhone 7 and iPhone 7+.

Whilst handset replacement cycles have slowed in
recent years, expected innovations in areas such as
wearable devices and 3D sensing are expected to
reignite the desire to upgrade connected devices
such as smartphones.

The ongoing evolution of our connected world in the
form of the Internet of Things (IoT) is forecast to see
50 billion connected devices by 2020. In addition,
the overall wireless market is expected to continue

to grow with the global roll out of LTE, 4G, 5G and
the evolution of WiFi.

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 yields, production efficiencies and reduced
materials “real-estate” from the ongoing drive
towards smaller component sizes.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Photonics

The proportion of sales generated from photonics
products continued its upward trajectory, accounting
for 17% of the Group’s sales in 2016, up from 14%
in 2015.

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 enable
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.

3D sensing

There is little doubt that sensing technologies will
represent a major growth area in the near term and
extending into the future.

Initially, consumer devices are likely to be the early
adopters of 3D sensing technologies. In fact, laser
(VCSEL)/detector pairs are already being deployed
to enable “environment awareness” features in a
number of smartphone and wearable applications
and “time-of-flight” laser technology is being adopted
for high speed auto-focus functionality in camera
applications.

3D sensing is an essential feature for devices that
need detailed and accurate information about their
environment for applications such as augmented
reality.

Future applications for 3D sensing will extend into
autonomous vehicles for sensing features in the
environment in order to make safety judgements.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Gesture recognition

Solar

Closely related to 3D sensing, 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.

Laser projection

Conventional projection technologies use
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.

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 governments around the world 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.

Technologies which convert sunlight into electricity
are also called PhotoVoltaics (or “PV”). The
prevalent solar technology is based on silicon
material, which typically achieves a conversion of
between 15%-18% of the suns energy into
electricity. IQE has been at the centre of developing
solar materials using compound semiconductors,
which can deliver much higher levels of efficiency.
This technology, which is also known as
Concentrating Photovoltaics, or “CPV”, can already
deliver efficiencies in excess of 44%, and has a
route map to much higher levels of efficiency.
Although this offers a lower overall cost of energy
generation in sunny territories, the challenge in
mass adoption is in reducing the end system install
costs, which has been hampered by global
macroeconomics as the cost of oil has plummeted.

The terrestrial market remains an exciting market
opportunity, but as a result of the shifting
macroeconomics, focus has shifted to the space
market, where these advanced materials are used to
power satellites where the higher efficiency has a
dramatic cost benefit on payload. Product
qualifications are underway with leading satellite
manufacturers, paving the way for commercial
revenues.

Infrared

IQE is a global leader in the supply of indium
antimonide and gallium antimonide wafers for
advanced infrared applications. We are the
technology leader with the launch of the industry’s
first 150mm indium antimonide wafers, a major
milestone in reducing the overall cost of chips to
drive increasing adoption. This success was
followed up with a number of significant contract
wins for the division. In addition, there has been
significant work in developing these materials for
consumer sensing applications, which will drive
much higher volumes of wafers in the future.

We expect this market to growth at a rate of
approximately 5-10% for the near future.

IQE PLC | Report and Annual Accounts 2016

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 cent’s unique ‘cREO™’ technology provides a
significant new platform to drive our business into
several new large volume areas. Our 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 Control

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 2016, achieving several key technical
milestones and establishing and building
commercial partnerships.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Research, development and innovation

R&D activity
Technology leadership lies at the heart of IQE’s
strategy. This is supported by a culture of innovation
and constant improvement.

The Group is engaged in a number of research and
development programmes in collaboration with
customers, academia, research organisations and
government agencies. These programmes are
funded through a combination of internal cash
generation, customer funding, and government
support.

Development programmes are geared towards next
generation applications as well as process
improvements leading to greater throughput, higher-
quality products, better manufacturing yield,
increased production uptime and new product
development.

Whilst many R&D programmes are subject to non-
disclosure agreements and confidentiality, there are
some programmes in the public domain, examples
of which include:

Integration of III-V with Si

Sb-based materials

Quantum Technologies

Quantum Dot VCSELs

Dilute nitrides for lasers and SWIR detectors

Multi junction CPV solar cells

Mixed nitride-antimonide-based detectors

High power InP-based quantum cascade lasers

Graphene for RF electronics

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.

Open Innovation

IQE is classified by the Welsh Government as an
“Anchor Company” in acknowledgement of its status
as an exemplar in terms of its global leadership.

As an Anchor Company, IQE was invited by the
Welsh Government to run an Open Innovation pilot
programme which has been highly successful in
establishing new technology networks to identify
long-term opportunities.

IQE’s open innovation programme, ‘OpenIQE’ is
actively helping to boost regional economies by
collaborating with industrial and academic partners
to identify supply chain opportunities within Wales
and across Europe.

Further details about IQE’s open innovation
programme can be found on a dedicated website:

www.openiqe.com

CoInnovate

As part of IQE’s open innovation programme, a key
“CoInnovate” conference was held in Cardiff, UK in
2015 and again in 2016. 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. After its first two successful years,
CoInnovate 2017 is scheduled to run in June 2017.

The CoInnovate conference website is at:
www.coinnovate.co.uk

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Outlook

Year of opportunity

The Group’s technology and market leadership, and
its strong pipeline of high growth opportunities
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 very positive, with good upside
potential. The Board remains confident that the
group is on track to achieve expectations for the full
year, and anticipates that the group will continue to
benefit from strong cash flows.

3 D sensing

IoT

m unications

5 G C o m

A utono m ous vehicles

IQE PLC | Report and Annual Accounts 2016

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Company No: 3745726

Strategic report

Celebrating success

The Group is committed to generating shareholder value by delivering increased revenues and profitability
from continued investment in IP as well as through the development of new products and services for our
global markets and delivering long-term sustainable revenues at high margins.

To b e t h e g l o b a l
n u m b e r o n e p r o v i d e r o f
a d v a n c e d s e m i c o n d u c t o r
m a t e r i a l s

t e c h n o l o g y
i v e r
T o u s e o u r
t o d e l
l e a d e r s h i p a n d s c a l e
p o i n t s a n d
f o r m a s s
c o s t
t h e p e r f o r m a n c e ,
s u p p l y r e q u i r e d
a d v a n c e d
t y o f
i o n o f
s e c u r i
s e m i c o n d u c t o r m a t e r i a l s
a d o p t
m a r k e t

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p r o d u c t s
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t e c h n o l o g y
w a f e r
c o m p o u n d s e m i c o n d u c t o r
N u m b e r
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l e l e d b r e a d t h o f
-
s h a r e a n d s c a l e
t h e a d v a n c e m e n t
t h a n u n p a r a l
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L e a d i n g
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l e a d e r
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i a l s

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Business overview

Outsourcing pioneer

In the early days of the industrial revolution it
became absolutely necessary for manufacturers to
be vertically integrated since there were no
alternative sources of specialised goods and
services.

Only towards the middle of the 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.

Smart specialisation

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 a 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 and Global Foundries.

Our competitive advantage

Pioneering specialisation within the compound
semiconductor industry

The compound semiconductor industry shares
similar attributes with the silicon chip industry. Some
of the processes such as epitaxy require large scale
investment, complex infrastructure support in the
form of cleanrooms, environmental controls and
most importantly, highly specialised skills and
expertise.

In 1988, IQE, then EPI, 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-nine year history.

By specialising in the complex epitaxy process, IQE
offers its customers economies of scale, access to
leading edge technology at the same time as leaving
them with 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.

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 to build
and maintain strong, long-term relationships and
partnerships.

T h r o u g h o r g a n i c d e v e l o p m e n t a n d t h r o u g h a c q u i s i t i o n , I Q E
Te c h n o l o g y l e a d e r s h i p
i s h e d c l e a r t e c h n o l o g y l e a d e r s h i p a n d c r e a t e d a v i r t u o u s
c i r c l e , w h i c h c o n t i n u e s t o a t t r a c t t h e b r i g h t e s t a n d b e s t t a l e n t

i n o u r i n d u s t r y.

h a s e s t a b l

Cos t leade rsh ip
In the e lec t ron ics indus t ry, cos t leade rsh ip is ach ieved
th rough advanced techno logy and sca le . IQE has
deve loped leade rsh ip in bo th .

Breadth of technology
As a pioneer of compound semiconductor technology,
IQE has developed an unparalleled and comprehensive
breadth of technology and advanced production

platforms.

Intellectual property
IQE has and continues to develop a world leading 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 develop and exploit new
opportunities in new and emerging markets.
Our IP continues to add signiﬁcant value to our product and service
offering for both existing customers and the large number
of new entrants to global technology markets.

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 PLC | Report and Annual Accounts 2016

Company No: 3745726

Our markets

The Group has established six Business Units along
market lines, to address its primary and emerging
markets: Wireless, Photonics, Infrared, Solar, Power
and CMOS++.

We report our wireless, photonics, infrared and
CMOS++ revenues and Adjusted Operating Profit
within our segmental analysis whilst the emerging
markets of power control and solar are not yet
significant enough to be separated in our segmental
reporting.

Infrared

Infrared sales accounted for 8% of the Group’s sales
in 2016. The Infrared market uses indium
antimonide (InSb) and gallium antimonide (GaSb)
engineered materials that enable high resolution
Infrared systems. Whilst key markets are currently
limited to defence applications, there are likely to be
major future opportunities in commercial markets in
areas such as sensing and for autonomous and
driverless vehicles.

Wireless

CMOS++

Photonics

The proportion of sales generated from photonics
products continued its upward trajectory, accounting
for 17% of the Group’s sales in 2016, up from 14%
in 2015. The photonics market covers applications
that either emit or detect light. We segment the
photonics market into:

Emitters and detectors

Solar (CPV)

Lighting

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The CMOS++ market combines the advanced
properties of compound semiconductors with the low
cost of silicon.

We further segment the CMOS++ market into:

Power control

Advanced materials

The key advantages of compound semiconductors
are that they:

are much more efficient at emitting and
processing high-speed wireless signals

are much more efficient at emitting and sensing
light

operate at much higher speeds and lower
power consumption

It is these advanced properties which determine the
top level high margin markets for our materials.

License Income

Licensing income reflects a new revenue stream
from the commercialisation of our IP portfolio
accounting for 5% of the Group’s sales in 2016,
down from the previous year’s peak at 7% of
revenues. IQE has developed a powerful IP portfolio
which we are now able to monetise from both
product sales and licensing of the IP.

Further details on the performance of each market
sector are shown in the business review section of
this annual report.

Our KPIs are highlighted on page 37 of this report.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Our business

Epitaxy 101

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.

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 those from group V and above are
generally non-metals and tend to be poor
conductors of electricity.

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.

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.

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
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 new industry was born that has, for the
last five-decades, transformed our lives in so many
ways.

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”.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Bring on the compound semiconductors

Other properties offered by compound
semiconductor materials include the ability to emit
and sense light in the 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.

Compound semiconductors are the DNA of next
generation technologies.

Impressive as the impact of silicon has been on our
lives, being a single element, 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 capability and
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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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 IP and process 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.

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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, crystalline, semiconductor wafer 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,
lasers and LEDs, and it requires high specification
cleanrooms, sophisticated production tools and high
levels of process knowhow and intellectual property.

IQE produces atomically engineered layers of
crystalline materials containing a variety of
semiconductor materials such as gallium, arsenic,
aluminium, indium and phosphorous.

substrate / wafer

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

The stage is set

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 and know how 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.

Enabling new and emerging technologies

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.

Global presence

USA
Pennsylvania
Massachusetts
North Carolina
New Jersey
Washington

EUROPE
UK (4 locations)

Asia
Taiwan
Singapore

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Innovation through collaboration

Building high-tech clusters

Intellectual property relating to advanced materials
is playing an increasingly important 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
was evident from the level of M&A activity in the CS
space during 2016, including the formation of a JV
by Qualcomm and TDK, the acquisitions by II-VI Inc
of Epiworks and Anadigics, and the attempted
acquisitions of GCS and Aixtron. The multiples
being paid in these deals reflect the increasing value
being placed on compound semiconductor
technology.

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 which reflect
that 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 in the UK and Singapore, 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.

IQE’s vision is to be at the epicentre of the world’s
first compound semiconductor cluster, based in the
UK. There was significant progress during 2016,
and momentum continues to build :

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Cardiff University is investing c.£75m in the
formation of the Institute of Compound
Semiconductors as part its £300m innovation
campus;

IQE and Cardiff University invested £24m in the
formation of the Compound Semiconductor
Centre;

The UK government has committed £50m
funding for a Compound Semiconductor Catapult
in Cardiff, which will leverage a further £100m
funding from Innovate UK and Industry;

The Cardiff City Region Deal has identified the
emerging CS cluster in Cardiff as one of its 5
headline goals.

EPSRC’s £10m investment to create a CS
Manufacturing Hub in Cardiff, led by Cardiff
University and partnered by UCL, the University
of Manchester and the University of Sheffield.

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 in to a world class end-to-end
supply chain for compound semiconductor
technologies in the UK.

As a key industry player, IQE has been actively
driving the establishment of the UK compound
semiconductor cluster launched in March 2017 as
CS-connected (www.csconnected.com).

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Environmental and CSR

Code of business conduct, ethics and anti-
corruption

Every effort is made to ensure we adopt best
business practice, which includes:

Our business conduct policy sets out the values and
standards of behaviour expected from all
employees. It addresses expectations relating to the
day-to-day conduct of business as representatives
of IQE. The policy also deals with how employees
can report any concerns that may arise.

The policy actively promotes corporate social
responsibility across our organisation. It addresses
local, national and international initiatives and how
we work with a wide range of third party
organisations in areas such as ethical employment
policies, educational and community work.

It sets out the responsibilities of employees in
ensuring that they carry out their business activities
in a manner aligned with IQE’s values and business
principles and which attract the respect of
colleagues and business partners. All staff are
required to ensure that they comply with all relevant
laws and regulations of the countries in which we
operate and do business. The policy also clarifies
behaviours that are unacceptable, and which could
bring IQE’s reputation into disrepute.

The policy contains guidance on avoiding conflicts of
interest, confidentiality, adherence to export
controls, our approach to gifts and hospitality,
bribery and corruption and managing relationships
with third parties.

Upholding the policy is the responsibility of all IQE
employees. We encourage everyone to report any
behaviour which may be in breach of the Code, is
unethical or illegal. This is achieved by fostering a
culture of openness and accountability, and by
providing a clear procedure that enables any
individual to raise breaches of policy or malpractice
directly at the highest level.

All those working for or on behalf of IQE are
required to confirm that they have read and
understood the business conduct policy, and a copy
of the policy is readily available to all employees on
the Group’s intranet.

In our dealings with customers:

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.

In our dealings with suppliers

Identifying and selecting suppliers using fair and
reasonable methodologies;

Identifying and using suppliers who operate to
ethical business standards;

Identifying and using local suppliers where
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.

In our relationships with employees and other
stakeholders

Ensuring employment practices throughout the
Group are fair and in full compliance with
employment legislation;

Working with and supporting local and national
charities;

Encouraging volunteer work in community
activities;

Commercial business practices

Supporting local academic establishments; and

We are committed to acting professionally, fairly and
with integrity in all our business dealings and
relationships.

Participating in voluntary business advisory
services via professional bodies.

As a company trading on AIM, a market operated by The London Stock Exchange plc, 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Confidentiality

Our values

Our business conduct policy emphasises the
essential need for confidentiality in all of our
dealings. Maintaining confidentiality is engrained in
our culture. Our policy and practice ensures that all
staff fully understand what constitutes confidential
information and restricts internal access on a need
to know basis. Information relating to third parties is
not disclosed without the third parties’ written
consent.

Bribery Act

We implement and enforce effective systems to
uphold our zero tolerance approach to bribery and
corruption. To ensure we only work with third parties
whose standards are consistent with our own, all
agents and third parties who act on behalf of the
Group are obliged by written agreement to comply
with the standards set out in the Code. A programme
of supplier audits exists to ensure suppliers adhere
to IQE’s standards.

Human rights

IQE is committed to respecting the human rights of
all those working with or for us. We do not accept
any form of child or forced labour and we will not do
business with anyone who fails to uphold these
standards.

Modern Slavery

The Modern Slavery Act addresses the role of
businesses in preventing modern slavery within their
organisation and in their supply chains.

The Company has a zero-tolerance approach to
modern slavery and is committed to acting ethically
and with integrity in all of its business dealings and
relationships and to implementing and enforcing
effective systems and controls to ensure modern
slavery is not taking place anywhere in its business
or in any of its supply chains.

The company has 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.

How we invest in our people and our
communities

Our success depends on our people. The Group
recognises the importance of its employees and in
effective teamwork in enabling us to achieve our
corporate goals.

IQE has grown organically and through a number of
successful acquisitions, which has bought together
the “best of the best” in our industry. We believe that
our teamwork and collaboration is a powerful
competitive advantage which keeps us at the cutting
edge of technology and drives constant
improvement throughout our organisation.

At the foundation of our organisation is teamwork
and our common shared values. Our values define
who we are, and how we operate. They clearly
underpin the expectations we have of all employees
and in everything we do:

Integrity - behaving ethically, safely, honestly and
lawfully

Accountability - working to clear and mutually
accepted responsibilities; hands on management
and decision making

Excellence - striving for excellence in all we do;
focus on continuous improvement

Valuing People - treating people with respect and
dignity; communicating with clarity and honesty;
providing opportunities for people to reach their
potential

Teamwork - working collaboratively towards
common goals

We strive to make IQE a “great place to work” where
our values are not just words but the behaviours that
we live by each day, every day. This is aimed at
providing an environment of mutual respect, where
we are all valued for our contribution and everyone
is proud to be part of “Team IQE”.

We pursue equality of opportunity in all employment
practices, policies and procedures regardless of
race, nationality, gender, age, marital status, sexual
orientation, disability and religious or political beliefs.
As part of our policies we set out our approach to
diversity.

Bonus plan

All employees participate in our bonus plan, which is
designed to reward high levels of performance.
The plan rewards the achievement of clearly defined
objectives. These objectives are agreed up front
based on the Key Strategic Objectives set by the
Board and create clarity for all staff of the “cause
and effect” of their achievements with their reward.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Spot awards

‘Spot awards’ are modest awards issued monthly to
any member of staff who has gone “above and
beyond” their duties for the benefit of the company.
They represent a means of providing timely
recognition and a “thank you” to promote a culture of
“going the extra mile” to get the job done and
achieve excellence. Any member of staff can
recommend a colleague for a spot award. These
recommendations are moderated to ensure fairness
and consistency of approach. During 2016, across
the group, 28 spot awards were issued.

Teamphoria©

Teamphoria© is a software solution which promotes
staff engagement within the group. This software
provides a quick and easy communications forum
for our employees to share feedback, share ideas
and promote teamwork. For example, it allows any
member of staff to recognise a job well done by a
colleague, raise questions, share frustrations, or
make a suggestion for improvement, and all in real-
time. It promotes an open culture and encourages
timely communication across functions and from
top-to-bottom with the organisation.

This has been a useful tool in promoting open
communication and teamwork, and in reinforcing our
culture and values.

Share options

The company operates a share incentive scheme
which is open to all employees. The IQE Plc Share
Option Scheme allows the company to grant options
over up to 15% of the issued share capital.
Periodically the Remuneration Committee approves
the award of options to employees within the rules of
the share option scheme. These options are subject
to performance conditions.

Personal and professional development and
performance management

We aim to support all employees to develop to their
full potential and enjoy a rewarding and fulfilling
career at IQE. We are committed to recognising,
encouraging and developing talent across all
aspects of our organisation. We value and
encourage self-development and life-long learning.
We believe in matching the right people to the right
roles and in ensuring that they are appropriately
trained and supported. We aim to provide personal
and professional development opportunities for all
staff throughout their employment.

In delivering the Group’s strategy, the Board and
Executive Committee set clear Key Strategic
Objectives for the group. These objectives underpin
clear roles and responsibilities, reporting lines, and
detailed action plans which form part of our
employees personal and company performance
objectives. This ensures that each employee has
clear objectives and understands how they
contribute to the overall success of the team and the
Group.

We believe in providing fair, balanced and
constructive feedback in real-time. Through this we
aim to bring personal development “to life” and
promote a culture of learning and development.
This is supported by an annual appraisal process,
which provides the opportunity to take stock,
recognise success and support areas for
development. To ensure the effectiveness of our
annual appraisals, we provide regular training to
both reviewees and reviewers in their respective
roles and responsibilities, and we are building a
”training library” of easily accessible training
solutions covering a variety of self-help, internal
training and external development solutions.

We recognise that our continuing commercial
success is dependent upon our ability to attract,
retain, motivate and nurture the best talent in our
industry. As the foundation for this, we are
committed to promoting an environment and culture
which provides for life-long learning and

Young Engineer of the Year Award
IQE’s Dr. Andrew Griffiths was presented with the title “Young Engineer of the Year” at the 2016 ESTNet
Awards at a Gala ceremony in Cardiff. Andrew, who joined IQE after completing his Ph.D, is currently
working at the company’s facility in Bethlehem, Pennsylvania. Andrew was the second IQE employee to
clinch the award after another IQE engineer, Jason Good, was awarded the title in 2015.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Community engagement

IQE actively engages with local
communities at each of its facilities from
sponsoring charitable events to providing
sports kits to schools.

IQE’s staff are encouraged to participate in
various events from volunteering work
such as Massachusetts volunteer
programmes including “Necessities of Life”
to activities including marathon running
and a 5,000 mile bicycle ride “Heart
Across America” raising money and
awareness for heart disease and stroke.

Education engagement

IQE actively engages with a number of
schools, colleges and universities around
the World and is actively promoting and
encouraging the take up of science,
technology, engineering and maths
(STEM) subjects through a number of
initiatives. In the UK, IQE is engaged with
STEMNET, where IQE STEM
Ambassadors participate in a variety of
educational events with a particular
emphasis on addressing the gender
imbalance in engineering disciplines.

IQE’s Cardiff facility is participating in a
three year “Business Class” Programme
comprising a number of schools and
businesses in a partnership cluster to form
strong links between schools and local
businesses.

Cluster activities

IQE has established a reputation for
collaboration with supply chain partners,
academics and government agencies and
is actively driving the formation of
technology clusters.

CS connected is an evolving Compound
Semiconductor cluster based in and
around South Wales. Visit
www.csconnected.com for more
information.

IQE supporting skills and careers events

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IQE CEO Dr Drew Nelson chairing CS International Conference

IQE actively participating at international compound semiconductor events

Wales First Minister, Carwyn Jones AM visits IQE’s PA site during visit to USA

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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:

Identification and assessment of individual risks

Design of controls and operational processes to
mitigate the risks

Testing of controls through internal review and
audits

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.

Develop and maintain close relationships with customers to become the

Price erosion due to

“materials partner of choice”, by forming multilevel partnerships from

predatory pricing

from a competitor

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

IQE PLC | Report and Annual Accounts 2016

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 and

not maintain

liquidity requirements for the foreseeable future.

suﬃcient funding
and liquidity to meet

its obligations as

they fall due.

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 2016 we have £65.5m of committed facilities

against which there was net debt of £39.5m.

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.

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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 2016

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
employees

Poor engagement

and morale

IQE’s people are the heart of the business and in order to promote the
development and retention of its staﬀ IQE oﬀers career progression, personal

development and a range of beneﬁts and incentives to its staﬀ.

This is reﬂected in low staﬀ turnover, with many employees who have been

with the company since it was formed over twenty years ago.

In addition, IQE operates a highly eﬀective, robust, and fully documented

quality management system across all of its operations. These systems

ensure that all key data and procedures are fully documented, reﬂecting IQE’s

“learning organisation” philosophy. These rigorous systems provide IQE and

its customers with a high level of conﬁdence in terms of process

reproducibility and product traceability, and minimise the potential impact of

losing key personnel.

Principal risk: BUSINESS INTERRUPTION - SUPPLY CHAIN

BUSINESS RISK

MITIGATION

Dependency on sole

The raw materials which sustain IQE’s products are not scarce resources.

supplier

Availability of
qualiﬁed raw

materials

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

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 companies

number of customers

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.

Y-o-Y CHANGE

IN LIKELIHOOD

Potential Impact:
Medium

Eﬀect:

Quality issues and

increased cost

Y-o-Y CHANGE
IN LIKELIHOOD

Potential Impact:

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 2016

Company No: 3745726

Principal risk: LEGISLATIVE COMPLIANCE

BUSINESS RISK

MITIGATION

Failure to comply

Regular reporting of export and ITAR compliance and detailed internal control

with applicable

processes and procedures

Continuing education of the team on the legislative developments and
requirements.

Internal reviews and external audits

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

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Employee wellness

Internal communication

As part of our employee welfare responsibilities we
aim to promote wellbeing, and provide practical
wellness support for our staff. In 2016 we initiated
an employee education programme to support our
staff making healthy lifestyle choices. This
programme offers healthy lifestyle support and
advice, and encourages better health and wellbeing
for all employees.

Our wellness programme aims to support individuals
in making small sustainable changes to improve
wellbeing. We aim to improve sustainability by
working in groups and making events fun. A great
example in 2016 was our ‘Walking Works
Challenge’, which was won by Brian Ruchert from
our Spokane facility, who walked 796 miles (over
1,587,609 steps) in a 12 week period. Well done
Brian!

To assist our employees to be proactive about their
health we also provide regular health checks, and
offer access to medical assistance through a
number of programmes.

Communities and Charity

As a significant employer in some of the locations in
which we operate, we recognise the opportunity we
have to make a positive contribution to our local
communities. Therefore, we seek to contribute to
the economic, social and environmental
sustainability of our local communities through a
range of activities and initiatives.

We encourage this to be driven “bottom-up”, to
ensure that our efforts are relevant to our employees
and what is important to the local communities in
which they operate. Through this approach we are
seeking to support our staff in their efforts to give
something back to their communities.

IQE are committed to developing future talent,
promoting STEM subjects within education and
preparing young adults for the world of work. To this
aim we participate in numerous careers fairs with
local schools and FE facilities.

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.

We believe that effective and timely communication
is an essential part of positive employee
engagement.

We strive to ensure that our internal communication
meets our needs as a diverse global business
operating throughout the UK, US and Asia. To
achieve this we have developed a communication
framework, which sets out our expectations and
standards for internal communication. Through this
we seek to achieve a clear and common
understanding of our strategy, priorities, business
performance and how we are doing against our
action plans. For example, this includes regular
“town hall” meetings hosted by senior executives,
informal meetings for small groups of staff to meet
with site management, all staff updates by email,
video, Teamphoria©, and a group newsletter.
We also encourage employees to communicate and
provide constructive feedback. We offer a variety of
opportunities for this, including face-to-face
meetings, 360 feedback, various employee surveys,
and Teamphoria©. This is done in an open
environment which is independent of hierarchy,
where a new joiner can speak freely with peers and
senior executives alike.

Part of the communication framework is our
employee feedback survey. This annual feedback
survey gives employees the opportunity to give
anonymous feedback to management, which is
assessed and used to guide our improvement plans.
The survey helps to ensure that we listen to our
employees and strive for continuing improvement.

We hold an annual Strategy Conference in which
the Executives and Senior Management take stock
of our markets, the competitive landscape, and how
we can adapt our organisation to meet changing
needs. This culminates in a common understanding
of our strategy, the key goals that we need to
achieve over the coming year, and our respective
roles in the delivery of those plans. The Non-
Executives Directors attend some of these sessions.

Our Chairman has a rolling programme of factory
visits which enable him to engage directly with local
management and employees and to review with
them their successes and to hear at first hand the
issues and challenges they face.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Health and Safety

IQE pays a great deal of attention to ensuring the
health and safety of everyone involved in the
business.

All employees are encouraged to take an active role
in ensuring that our working environment is a safe
place to work and visit by actively reporting all safety
observations and incidents, being involved in safety
audits, risk assessments and regular awareness
training sessions.

The environment, health & safety (EHS) group, has
detailed ongoing continued professional
development plan including training and
accreditation of competent persons, appointment of
safety coordinators whose role is to minimise risks
of injury at work; ensure legislative compliance; and
assist in creating and monitoring safety practices to
be followed at each site.
The structure 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, working with industry associations and
proactively registering under new regulatory
directives such as REACH and GHS-based Hazard
Communication.

The EHS group has also recently completed an
audit and review of chemical control processes to
ensure continued compliance with HazComm
regulations.

Safety and Environmental Teams & Reporting

The EHS Group is organised to effectively promote
and increase the awareness of Safety and
Environmental issues, directives and legal
obligations, advising each group subsidiary and the
Board accordingly.

Daily EHS activities and reporting at local sites are
managed by coordinators, feeding into general site
management for effective control. Regular analysis
and discussion is an agenda item at site periodic
Management meetings.

EHS Regional Managers oversee the trend analysis
produced at each site and undertake regular
conference calls to discuss major issues and site
developments. Regional face-to-face meetings and
data collation culminate in quarterly Board Reports,
demonstrating major trends in EHS activities and
comparisons with industry best-practice and
National Average statistics.

Regional Managers and the Director responsible for
EHS drive strategic initiatives through each
organisation to promote best-practice, ensuring that
the Group conforms to all global, regional and local
regulations and directives. Initiatives are designed to
ensure that the Group’s objectives of maintaining at
or beyond state-of-the-art EHS Management are
met.

A full and comprehensive presentation of
occupational trends, accidents, safety and
environmental incidents, together with compliance
with all regulatory requirements, Group and local
objectives are published in the Annual Board Report.

The environment

IQE is committed to protecting both the local and
global environments in which we operate. We
endeavour to ensure that our activities, including our
manufacturing operations, are conducted in an
environmentally responsible manner.

We are committed to minimising the impact of our
operations on the environment and encourage all
employees to think about ways of modifying their
behaviour to reduce the impact on the environment
by for example, reducing waste, restricting
unnecessary travel, saving water and by reducing
energy usage.

IQE policy for conducting business in an
environmentally responsible manner states:

We fully integrate environmental considerations
into the business planning and decision making
processes.

Compliance obligations are identified and our
operations must be conducted in accordance
with these obligations.

We validate our fulfilment of compliance
obligations by means of documented periodic
review.

We employ best practice to reduce the
environmental impact of our operations, prevent
pollution, minimise waste and maximise the
efficient use of energy and resources to protect
the environment.

We continually improve our environmental
management system and its performance by
setting measurable objectives and reviewing
them on a regular basis.

We provide suitable information and training to all
employees, and interested parties to ensure that
the aims of the environmental management
system are achieved.

In addition, each of our sites will supplement this
policy to meet local requirements.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Recycling

Environmental Legislation

Compliance with environmental legislation is critical
to our businesses throughout the UK, the US and
Asia. To manage our compliance we employ
appropriately qualified and competent managers,
who report directly to our Chief Operating Officer.
These managers have access to third party
professional advisors as needed.

We also maintain membership of a number of
professional bodies, which provide another good
source of reference and support, which enables us
to keep up-to-date on the continually evolving
legislation. This includes regular updates from:
British Safety Council, British Standards Institution,
Institute of Environmental Management and
Assessment in the UK, the US National Safety
Council, the US National Fire Protection Agency and
the US Federal Register.

As a Company trading on AIM, a market operated by
The London Stock Exchange plc, the Companies
Act 2006 (Strategic Report and Directors’ Reports)
Regulations 2013, which relates to the disclosure of
greenhouse gas emissions and other environmental
matters does not apply to IQE.

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At each of our sites across the globe we operate
constant improvement programmes to reduce
waste. In addition, we recycle and re-use wherever
practicable. Currently, at each site we recycle:
plastics, steel, aluminium, paper, cardboard and
process by-products where the opportunity to do so
exists.

Environmental concerns

We have experienced no external environmental
incidents or concerns throughout 2016 at any of our
locations.

Energy

We closely monitor the consumption of electricity,
gas and water at all facilities and have targeted
environmental improvement programs as part of
ISO14001 to reduce carbon dioxide emissions and
the depletion of natural resources.
Environmental Management

ISO 14001 is a global standard for environmental
management which was developed to help
organisations reduce their environmental impact. It
provides a framework for organisations to
demonstrate their commitment to preserving and
protecting the environment by:

Reducing harmful effects on the environment

Providing evidence of continual improvement of
environmental management

In 2016, IQE’s facilities in Cardiff (IQE-Europe),
North Carolina and Taiwan were subject to
independent third party audit of our compliance with
ISO 14001. These audits were very successful with
no material deficiencies recorded.

All our high-volume epitaxy manufacturing facilities
are ISO 14001 certified, clearly demonstrating IQE’s
commitment to reducing waste and recycling
materials where appropriate. This is complementary
to our commercial objectives of reducing costs and
improving operational efficiency.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Financial review

In order to provide a fuller understanding of the
Group’s underlying performance, we have included
a number of adjusted profit measures as
supplementary information. As detailed in note 4, the
adjusted measures eliminate the impact of certain
non-cash charges and non-recurring items.

Revenues of £132.7m were up 16% on 2015
(£114.0m). Revenues from wafer sales were up
19% reflecting strong growth in each of IQE’s
primary markets : Photonics revenues were up 43%;
wireless revenues up 15% and InfraRed revenues
up 19%. Growth in underlying demand was
accompanied by a currency tailwind, with the US
dollar strengthening 11% against sterling in H2
primarily due to the Brexit vote in June. License
revenue of £6.7m was better than expected, albeit
down from £8.0m in the prior year, which as flagged
benefited from a significant element of up front
income.

Adjusted gross profit increased from £32.4m to
£36.4m largely driven by the increase in revenue. As
a percentage of sales, adjusted gross margins
reduced from 28% to 27% reflecting the impact of
sales mix. In particular, high margin license income
reduced from 2015 which included a significant
element of upfront income. Adjusted gross margins
on wafer sales increased from 23% to 24% driven
by increasing efficiencies. Reported gross profit
increased from £30.7m to £34.7m, with percentage
margin reducing from 27% to 26%.

Other income increased from £0.8m to £2.3m. This
relates to gains on the reduction of the estimated
remaining balance of contingent deferred
consideration payable in respect of a previous
acquisition. The balance under this contingent
deferred consideration arrangement have now been
settled in full. These gains, which do not relate to
underlying trade, have been excluded from the
adjusted profit measure.

Adjusted selling, general and administration
expenses (SG&A) increased from £13.5m to
£14.2m, which primarily reflects the impact of
currency movements. Reported SG&A increased
from £15.5m to £16.4m.

The profit on disposal of fixed assets of £5.2m in
the prior year primarily reflected a gain of £4.8m on
the establishment of the UK Joint Venture, in which
the Group contributed equipment in return for a 50%
equity share in the JV. There was a loss on disposal
of fixed assets in the ordinary course of business of
less than £0.1m (2015: profit £0.4m).

Adjusted operating profit increased by 17% from
£18.9m to £22.1m, despite the reduction in high
margin license income, reflecting the benefit of
higher sales and operational efficiencies. Reported
operating profit decreased from £21.2m to £20.7m,
primarily reflecting that the prior year included a
profit on disposal of fixed assets of £5.2m.

Interest costs increased from £1.4m to £1.5m,
largely due to the impact of foreign exchange.

There was a net tax credit of £0.8m on underlying
profits compared to £0.5m. In addition there was a
£0.4m tax charge relating to exceptional items
compared with a tax credit of £0.3m on exceptional
items in 2015. The Group has sufficient tax losses
available to shield future tax payable of circa
£39.9m.

Adjusted profit after tax increased by 19% from
£18.1m to £21.4m, and reported profit after tax
decreased £20.1m to £19.4m. The adjusted fully
diluted earnings per share was 3.00p, up 15% from
2.60p in the prior year. Reported diluted earnings
per share was 2.71p, down from 2.90p in 2015. The
Board will not be recommending the payment of a
dividend.

Cash inflow from operations increased 7% from
£20.9m to £22.5m, representing a 102% conversion
of adjusted operating profit into cash (2015: 111%).

Capital investment of £19.1m represents a £9.1m
increase over the prior year to address growth
opportunities, principally in photonics, GaN and
cREO. Investment in capital equipment was up
£7.1m, and investment in intangibles was up £1.9m.

Balance sheet leverage was down 2% from
£40.4m to £39.5m, as gearing reduced from 22% to
17%. Deferred consideration relating to previous
acquisitions was reduced by £17.1m in the year and
has now been settled in full. Net debt increased by
£16.3m from £23.2m to £39.5m, although c.£7m of
this increase represents a presentational foreign
currency impact.

Impact of foreign currency

IQE revenues are denominated in a range of
currencies, but primarily they are billed in US
dollars. Therefore, given that revenues are reported
in sterling there is a foreign currency translation
benefit, particularly with the dramatic devaluation of
sterling in the second half of 2016 following the
Brexit referendum on 23rd June 2016. This is
estimated to account for approximately 10% of the
Group’s revenue growth (being the movement in the
average exchange rate).

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Similarly, IQE’s costs are denominated in a range of
currencies, but primarily billed in US dollars. As a
result, the impact of foreign currency movements on
the Group’s results presented in sterling is largely
presentational because of this underlying natural
hedge.

There is also a presentational effect on the Group’s
balance sheet, as both non-sterling assets and
liabilities will be translated at the year-end spot rate.
This is estimated to account for an increase in asset
and liabilities of approximately 17% (being the
movement in the year end spot rates). Therefore,
although the balance sheet leverage has reduced by
2%, the underlying increase is approximately 19%.

Strategic Report

In addition to the information provided in the
Chairman’s Report and this Strategic Report, the
directors use a number of key performance
indicators to manage the business, disclosed in the
financial review on page 36. Non financial KPIs are
not disclosed.

Signed on behalf of the Board of Directors

P J Rasmussen

Dr A W Nelson

KPIs (dash-board)

Sales (£M)

Operating proﬁt (£M)
(before exceptional items)

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Cash from operations (£M)
(before exceptional cash ﬂows)

FD EPS (pence)
(before exceptional items)

Leverage (£M)

Gearing (%)

Net debt
Deferred consideration

Leverage and gearing: restated FY12 to include balances from acquisition on 15 Jan 2013

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Five year summary

2016
£’000

2015
£’000

2014
£’000

2013
£’000

2012
£’000

Revenue

132,707

114,024

112,011

126,774

87,961

EBITDA (see below)

31,730

29,001

27,009

24,920

16,437

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

22,119

20,665

21,440

19,440

24,281

22,463

4,382

2,564

18,977

21,166

18,066

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)

(39,549)

(23,223)

(31,251)

(34,351)

(15,483)

Equity shareholders’ funds

191,287

144,601

119,056

110,498

90,189

Basic EPS – adjusted*

Basic EPS – unadjusted

Diluted EPS – adjusted*

Diluted EPS – unadjusted

3.17p

2.87p

3.00p

2.71p

2.68p

3.00p

2.60p

2.90p

* The adjusted performance measures are reconciled in note 4 on page 86.

** 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

2016
£‘000

2015
£‘000

19,440

20,149

(408)

1,633

2,042

(1,962)

5,561

5,377

(773)

1,790

2,001

(5,187)

(211)

6,192

5,040

2.51p

0.25p

2.42p

0.24p

2014
£‘000

1,996

3,247

1,924

1,458

7,877

6,590

3,902

2.09p

0.93p

2.00p

0.89p

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

EBITDA

31,730

29,001

27,009

24,920

16,437

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Compliance/Governance Statements

Statement of compliance with UK Corporate
Governance Guidance

The Board of Directors believes in high standards of
corporate governance, and is accountable to
shareholders for the Group’s performance in this
area.

Although IQE, as a company trading on AIM, a
market operated by The London Stock Exchange
plc, is not required to comply with the UK Corporate
Governance Code, the directors have decided to
provide corporate governance disclosures similar to
those that would be required of a fully listed
company.

This statement describes how throughout the year
ended 31 December 2016, the Group has continued
to apply the principles of the UK Corporate
Governance Code (the “Code”) and adopt the spirit
of the Code. The Code is available on the website
of the Financial Reporting Council (FRC) at:
www.frc.org.uk .

This statement addresses the main subject areas of
the Code namely leadership, effectiveness,
accountability and relations with shareholders.
Remuneration is dealt with in the Remuneration
Report on pages 52 to 65.

The Company is a smaller company for the
purposes of the Code, and as a consequence
certain provisions of the Code either do not apply to
the Company or may be judged to be
disproportionate or less relevant in its case.

The Board considers that throughout 2016, IQE has
sought to comply with the Code and has identiﬁed
the following main areas of non-compliance:

The Chairman of the Audit Committee is not
deemed independent by virtue of his length of
service. Further explanation of this and the
planned changes are set out below and in the
Audit Committee report.

Whilst the performance of the Directors, the
Chairman and of the Board are assessed on an
ongoing basis, the Code requires a formal annual
review process to be completed and
documented, which was not completed during
2016. However, following the appointment of the
new Senior Independent Non-Executive Director
in December 2016, a formal review is scheduled
for 2017.

The Board views maintaining high standards in its
governance and management of the affairs of the
Group, 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. This process was in place throughout
the 2016 ﬁnancial year and accords with the
Revised Guidance for Directors on Internal Control
(formerly called the Turnbull Guidance).

The Board

The Board comprises the Non-Executive Chairman
Dr Godfrey Ainsworth, the Chief Executive Ofﬁcer Dr
Drew Nelson, two executive directors and three non-
executive directors.

The fees of the non-executive directors are paid in
cash and/or shares.

The Board consider Sir David Grant and Mr Phil
Smith, who have held ofﬁce for less than nine years,
to be independent in accordance with the Code, 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.

Following the Annual General Meeting, Sir David
Grant was appointed as Chairman of the
Remuneration Committee and the Nominations
Committee. There has been one change to the
membership of the Board during the year. Mr Phillip
Smith joined the board on 19 December 2016 and is
taking over the role of Senior Independent Director.

The Senior Independent Director is recognised as
the independent Board member who acts as an
independent sounding board for the Chairman and
serves as an intermediary for the other directors if
needed.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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How the board operates

The Board meets regularly through the year, and is
provided with appropriate strategic, operational and
ﬁnancial information prior to each meeting together
with monthly reports to enable it to monitor the
performance of the group.

At Board meetings, the Chairman ensures that all
Directors are able to make an effective contribution
throughout meetings and every Director is
encouraged to participate and provide their
perspective and opinions. The Chairman always
seeks to achieve unanimous decisions of the Board
following due discussion of agenda items.

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.

The Board has a formal schedule of matters referred
to it for decision, this list includes appropriate
strategic, ﬁnancial, organisational and compliance
issues, including the approval of high level
announcements, circulars and the report and
accounts and certain strategic and management
issues.

Examples of such items include but are not limited
to:

The approval of interim and annual results,

the approval of the annual budget,

approval of acquisitions or disposals,

approval of major items of capital expenditure,

approval of changes to corporate or capital
structure, and

financial issues, including changes in accounting
policy, the approval of dividends, bank facilities
and guarantees.

the approval of significant contracts

Furthermore, the Senior Independent Director is
available to discuss any concerns of shareholders
and/or employees which have not adequately been
resolved by the executive directors or Chairman, or
for which such contact is inappropriate, such as
concerns of any suspected impropriety. These
concerns can be conveyed in private and
investigated as required by the Code.

Rules concerning the appointment and replacement
of Directors of the Company are contained in the
Articles of Association (“Articles”). Amendments to
the Articles must be approved by a special
resolution of shareholders.

Under the Articles, all Directors are subject to
election by shareholders at the ﬁrst Annual General
Meeting following their appointment, and to re-
election thereafter at intervals of no more than three
years.

The Board has considered the FRC’s guidance to
companies outside the FTSE 350 to consider the
annual re-election of all Directors, and consider that
this would be overly burdensome for the current
nature of the group.

Biographies of the Directors are set out on pages 66
and 67. These show the range of business and
ﬁnancial experience upon which the Board is able to
call.

The Boards goal is to ensure that its membership
should be balanced between executives and non-
executives and have the appropriate skills and
experience and knowledge of the business.

The Board recognise the special position and role of
the Chairman under the Code, and has approved
the formal division of responsibilities between the
Chairman and Chief Executive.

The Chairman is responsible for the leadership of
the Board and ensuring its effectiveness, and the
Chief Executive manages the Group and has the
prime role, with the assistance of the Board, of
developing and implementing business strategy.

One of the roles of the Non-Executive Directors
under the leadership of the Chairman is to
undertake detailed examination and discussion of
the strategies proposed by the Executive Directors,
so as to ensure that decisions are in the best long-
term interests of shareholders and take proper
account of the interests of the Group’s other
stakeholders. The Chairman ensures that meetings
of Non-Executive Directors without the Executive
Directors are held.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Committees of the Board

The Remuneration Committee consists of two non-
executive directors, Sir David Grant and Dr Godfrey
Ainsworth. During the year Prof. Simon Gibson
resigned from the Committee and Sir David Grant
was appointed Chairman of the Committee. The
Committee meets at least twice a year.

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 from 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.

(d) Nominations Committee

Following the AGM in June 2016, the Board
established a separate Nominations Committee
which consists of Dr Godfrey Ainsworth and is
chaired by Sir David Grant.

The Board has delegated responsibility for
nominations to this Committee. The activities of the
Nominations Committee have been set out in the
Nominations Committee Report on page 44.

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The Board has four sub committees, the Executive
Committee, the Remuneration Committee, the
Nominations Committee and the Audit Committee.

The Board has delegated speciﬁc responsibilities to
these committees as follows:

(a) Executive Committee

The Executive Committee consists of the executive
directors under the chairmanship of Dr Drew Nelson
and is responsible for the development of strategy,
annual budgets and operating plans linked to the
management and control of the day-to-day
operations of the group.

The Executive Committee is also responsible for
monitoring key research and development
programmes and for ensuring that the Board policies
are carried out on a group-wide basis.

(b) Audit Committee

The Audit Committee consists of the non-executive
directors, Dr Godfrey Ainsworth, Prof. Simon
Gibson, Mr Phil Smith and Sir David Grant. The
Committee meets at least twice a year under the
chairmanship of Dr Godfrey Ainsworth.

The Audit Committee has speciﬁc written terms of
reference which deal with its authority and
responsibilities and these are available for
inspection from 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 does not have an independent Internal
Audit function, however the Group operates internal
audit on a peer review basis, with a scope of
evaluating and testing the group’s ﬁnancial control
procedures. The internal audit reviews are reported
directly to the Chairman of the Audit Committee, and
shared with the external auditors as appropriate.

The Chief Financial Ofﬁcer, senior ﬁnance managers
and the external auditors attend meetings of the
Audit Committee by invitation. The Committee also
holds separate meetings with the external auditors,
as appropriate.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Attendance at meetings

The number of meetings held during 2016 by the Board, the Audit Committee, the Nominations Committee and
the Remuneration Committee are as shown below. The number of meetings attended by the executive and
non-executive directors is also shown below:

Number of meetings in 2016

Attendance:

Executive

Dr A W Nelson

P J Rasmussen

Dr H R Williams

Non-executive

Dr G H H Ainsworth

Professor S J Gibson

Sir D Grant

BOARD

P Smith (appointed 19 Dec 2016)

n/a

Shareholder Relations

The Board regard regular communications with
shareholders as one of its key responsibilities.
During 2016, the Chief Executive Ofﬁcer and Chief
Financial Ofﬁcer met with institutional investors on a
regular basis to discuss the group’s performance,
the shareholder’s views, and to ensure that the
strategies and objectives of the group are well
understood.

The Chief Executive Ofﬁcer keeps the Board fully
informed of any signiﬁcant matters discussed with
shareholders and of shareholders’ views.
Furthermore all members of the Board receive
copies of analysts’ reports of which the Company is
made aware.

The Chairman and Senior Independent Director
make themselves available to meet with major
institutional shareholders as needed through the
year. During 2016, they met with major institutional
shareholders on a number of occasions, primarily to
consult on corporate governance matters and to
provide an independent view of the position and
prospects of the Group.

The Non-Executive Directors, having considered the
Code, are of the view that this approach to
shareholder communication remains appropriate for
the Group. However, should shareholders have
concerns which they feel cannot be resolved
through normal shareholder meetings, the

AUDIT
COMMITTEE
3

REMUNERATION
COMMITTEE
4

NOMINATION
COMMITTEE
3

n/a

Chairman, the Senior Independent Director and the
remaining Non-Executive Directors may be
contacted through the Company Secretary.

The company employs an Investor Relations
Manager who supports the Chief Executive Ofﬁcer
and Chief Financial Ofﬁcer with day-to-day investor
relations. Together, they respond to investor
enquiries throughout the year. In addition, all
shareholders attending the AGM are given a
presentation on the business and are invited to ask
the Directors questions about the business.

The Investor Relations Manager also maintains the
group’s web site, which provides details of the
group’s business including its strategy, technologies,
operations and products. The web site has a
separate investor relations section which provides
the group’s news ﬂow, share price information, and
ﬁnancial reports including the annual and interim
reports. Hard copies of these ﬁnancial reports are
also available by request. The web site can be found
at www.iqep.com.

In accordance with the recommendations of the
Code, the Company will advise shareholders’
attending the AGM of the number of proxy votes
lodged in respect of each resolution, analysed
between ‘For’, ‘Against’, ‘at the Chairman’s
discretion’ and abstentions. These are advised
after the resolutions have been dealt with on a show
of hands, providing that a poll has not been called
for or required.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Audit and accountability

Risk management

The Code requires that Directors review the
effectiveness of the Group’s system of internal
controls on a continuing basis. The scope of the
review covers all key controls including ﬁnancial,
operational and compliance controls as well as risk
management.

The Board has put in place a framework of internal
controls to manage the risks faced by the Group,
and the Audit Committee has responsibility to
review, monitor and make policy recommendations
to the Board upon all such matters.

The Directors acknowledge their responsibility for
the Group’s system of internal control. The Board,
through the Audit Committee, keeps this system
under continuous review and formally considers its
content and its effectiveness on a bi-annual basis.

In completing their review of the effectiveness of the
Group’s system of internal controls the Audit
Committee has taken account of any material
developments up to the date of the signing of the
ﬁnancial statements. In addition, recognition is
given to the external audit ﬁndings, which help to
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 directors acknowledge their responsibility for
preparing the Annual Report and Accounts. As set
out in the Audit Committee Report on pages 46 to
49, the Committee reviews the Group’s reporting
processes with the aim of ensuring that the ﬁnancial
reporting ,when taken as a whole, is fair, balanced
and understandable, and provides the information
necessary for shareholders to assess the company’s
position and performance, business model and
strategy.

The Board reviews and approves an Annual
Business Plan prior to the start of each ﬁnancial
year. The Annual Business Plan sets out the key
strategic, operational and ﬁnancial objectives for the
year, together with a detailed ﬁnancial budget. This
is provided in the context of a Three Year Plan.

The Executive Committee is accountable to the
Board for delivery of the Annual Business Plan. The
Executives report performance against the plan on a
monthly basis, which includes detailed analysis of
budgetary variances and updated ﬁnancial
projections.

Each Executive Director is responsible for identifying
and managing the risks relating to their respective
areas of responsibility, including the risks relating to
strategy, the Annual Business Plan, and day-to-day
business.

To provide a framework for the delivery the group’s
strategy and plans, the Executive Committee has
developed an organisational structure with clear
roles and responsibilities, and clear lines of
reporting. This includes a Management Board,
which is made up of the heads of each business
function.

The Management Board is responsible for the
development and delivery of the detailed actions
plans which underpin the group’s Annual Business
Plan. This team meets formally with the Executive
Directors on a monthly basis to assess progress
against their plans, and to put in place any
countermeasures necessary to keep the business
plan on track.

In addition to day-to-day risk management, the
executive directors formally assess the major
business risks and evaluate their potential impact on
the Group. These risks and the reporting of the risk
assessment is included in the strategic report on
pages 28 to 31.

Performance evaluation

The Chief Executive reviews the performance of the
executive directors on a periodic basis and reports
to the Remuneration Committee.

Whilst the performance of the Directors, the
Chairman and of the Board are assessed on an
ongoing basis, the Code requires a formal annual
review process to be completed and documented,
which was not completed during 2016. However,
following the appointment of the new Senior
Independent Non-Executive Director in December
2016, a formal review is scheduled for 2017.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Going concern

Nominations Committee Report

The Nominations Committee reviews the Board
structure, leads the process for Board appointments
and makes recommendations to the Board,
including on Board succession planning. The Chief
Executive attends meetings of the Nomination
Committee by invite.

The Nominations Committee evaluates the balance
of skills, knowledge and experience on the Board
and, in the light of this evaluation, prepares a
description of the role for new appointments. In
identifying potential candidates for positions as Non-
Executive Directors, the Committee has full regard
to the principles of the Code regarding the
independence of Non-Executive Directors.

The Committee met twice during the year and was
instrumental in determining the requirement and
process for the identiﬁcation and subsequent
appointment of additional non-executive directors.

All Directors are appointed by the Board following a
rigorous selection process and recommendation by
the Committee. Board appointments are made on
merit, against criteria identiﬁed by the Committee
having regard to the beneﬁts of diversity on the
Board, including gender.

The Nominations Committee is responsible for the
Board’s policy on diversity. The Board recognises
the beneﬁts of diversity. Diversity of skills,
background, knowledge, international and industry
experience, and gender, are amongst many other
factors taken into consideration when seeking to
appoint new Directors to the Board. Notwithstanding
the foregoing, all Board appointments will always be
made on merit.

The Directors, after making enquiries, and
considering the available resources, the ﬁnancial
forecast together with available cash and committed
borrowing facilities, have formed a judgement that
there is a reasonable expectation that the Company
and the Group have adequate resources to continue
operating for the foreseeable future and therefore
the going concern basis has been adopted in
preparing these ﬁnancial statements.

In reaching this conclusion, the Board has
considered the magnitude of potential impacts
resulting from uncertain future events or changes in
conditions, the likelihood of their occurrence and the
likely effectiveness of mitigating actions that the
Directors would consider undertaking.

Long term viability statement

The Directors have considered the viability of the
Group over a three year period to December 2019,
taking account of the Group’s current position and
the potential impact of the principal risks and
uncertainties documented in the Strategic Report.

In making this statement the Directors have
considered the resilience of the Group, taking
account of its current position, the principal risks
facing the business in severe but reasonable
scenarios, and the effectiveness of any mitigating
actions.

The Directors have determined that the three-year
period to December 2019 is an appropriate period
over which to provide its viability statement. In
making their assessment, the Directors have taken
account of the Group’s current funding headroom
(see note 19), its ability to raise new ﬁnance in most
market conditions and other potential mitigating
actions.

Based on this assessment, the Directors have a
reasonable expectation that the Company will be
able to continue in operation and meet its liabilities
as they fall due over the period to December 2019.

Board committees

Terms of reference for the Remuneration
Committee, Nominations Committee and Audit
Committee are available on the corporate website
(www.iqep.com).

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Main responsibilities

Recent appointments to the Board

The main responsibilities of the Committee are as
follows:

To lead the process for identifying and
nominating candidates for the approval of the
Board, to fill Board vacancies as and when they
arise

To put in place plans for succession

To regularly review the Board’s structure, size
and composition taking into account the
challenges and opportunities facing the Group
and the balance of skills, knowledge and
experience needed by the Board and make
recommendations to the Board with regard to any
changes

The Committee’s terms of reference are available
on request from the Company Secretary.

During the year, the Committee recommended to the
Board that Mr Phil Smith be appointment of as Non-
Executive Director and Senior Independent Director.

The Committee initiated the recruitment process
following the AGM in June 2016, at which Prof
Simon Gibson and Dr Godfrey Ainsworth indicated
that they did not intend to stand for re-election at the
end of their current three year term.

The Committee engaged an independent external
consultant, Ms Kirsten Bodley, to complete a
preliminary evaluation and provide a list of potential
candidates with the necessary skills and experience.
Ms Bodley has no other connection with the
Company and is an independent provider of
services to the Company.

In scoping the search for candidates, each Board
member was consulted in order to agree the
necessary skills and experience of candidates to be
considered for appointment. Based on these criteria
a list of potential candidates was developed, which
was ﬁltered to a short-list of candidates for interview
by the Nominations Committee.

On the recommendation of the Nominations
Committee, the Board approved the appointment of
Mr Phil Smith with effect from 19 December 2016.

The Nominations Committee remains engaged in a
search for an additional independent non-executive
director with appropriate ﬁnancial experience and
qualiﬁcations to support the Board and Audit
Committee, noting that the incumbent Audit
Committee Chairman is not deemed independent by
virtue of the length of his tenure.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Audit Committee Report

Activities during the year

The Audit Committee met three times during the
year. The meetings were also attended by the Chief
Financial Ofﬁcer, other senior members of the
ﬁnance team , and representatives of the Group’s
external auditors by invitation.

At meetings attended by the external auditors time is
allowed for the Audit Committee to discuss issues
with the external auditors without the Chief Financial
Ofﬁcer and management being present.

As part of the review and audit process, the
Chairman of the Audit Committee and the Chief
Financial Ofﬁcer visit each of the group’s major
subsidiaries to review and challenge local
management on their draft ﬁnancial results, and
ﬁnancial controls. The Chairman reports his
observations from these visits to the Audit
Committee and the Board as part of the process for
approving of the Annual Report and Accounts.

The Committee operates under formal terms of
reference and these are reviewed annually. An
annual rolling agenda is used to ensure that all
matters within the Audit Committee’s Terms of
Reference during the year are appropriately
covered. The Committee considers that it has
discharged its responsibilities as set out in its terms
of reference to the extent appropriate during the
year.

The Audit Committee is currently chaired by Dr
Godfrey Ainsworth FCA, a Chartered Accountant
and is considered by the Board and Audit
Committee to have current relevant ﬁnancial
knowledge, qualiﬁcations and experience for this
role.

Dr Ainsworth is not considered independent by
virtue of the length of his tenure on the IQE Board
which, taken in conjunction with his role as
Chairman of both the Board and Audit Committee,
represents an area of non-compliance with the
current UK Corporate Governance Code.

Given the knowledge, experience and skills of Dr
Ainsworth the Board has asked that he remains as
Chairman of the Audit Committee until a suitable
independent non-executive director with appropriate
ﬁnancial experience is appointed.

Main responsibilities

Reviewing the effectiveness of the Company’s
financial reporting, internal control policies and
procedures for the identification, assessment and
reporting of risk

Reviewing significant financial reporting issues
and judgements

Monitoring the integrity of the Company’s
financial statements

Keeping the relationship with the auditors under
review, including their terms of engagement, fees
and independence

Monitoring the role and effectiveness of internal
audit

Advising the Board on whether the Committee
believes the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable
and provides the information necessary for
shareholders to assess the Company’s
performance, business model and strategy

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Financial reporting

During the year, the Audit Committee reviewed the appropriateness of the Group’s interim and full year
ﬁnancial statements, including the consideration of signiﬁcant ﬁnancial reporting judgments made by
management taking into account reports from management and from the external auditors. The main areas of
focus considered by the Committee during 2016 were as follows:

Review of judgemental areas, and specifically the
level of accounting provisions. Following review
of reports from management and the external
auditors, the Committee concurred that the
provisioning policy had been applied consistently
and the level of provisions remains appropriate.

Review for the potential impairment of goodwill
and other intangible assets. Following review of
reports from management and the external
auditors, the Committee concurred that the
expected future cash flows of the group support
the carrying value of goodwill, and that there
were no triggering events which suggested any
potential impairment of other intangible assets.

Review of product development costs capitalised.
Following review of reports from management
and the auditors, and discussion with the Group
Technology Development Director, the
Committee concurred that the product
development costs were capital in nature, and
that the treatment was in accordance with IAS
38.

The presentation of the financial statements,
including the presentation of adjusted
performance measures. Following review of
reports from management and the external
auditors, the Committee concurred that the
presentation was appropriate and balanced.

Accounting for current and deferred tax.
Following review of reports from management
and the external auditors, the Committee
concurred that the tax accounting was
appropriate.

The Committee assessed the appropriateness of
the going concern assumption. In doing this the
committee reviewed the resources available to
the Group, taking account of the Group’s trading
and cash flow forecast together with available
funding headroom. Based on this as disclosed on
page 44 the committee concluded that the Going
Concern principle was appropriate.

At the request of the Board, the Committee
considered whether the 2016 annual report was
fair, balanced and understandable and whether it
provided the necessary information for
shareholders to assess the Company’s
performance, business model and strategy.
Having taken account of the other information
provided to the Board throughout the year, the
Committee was satisfied that, taken as a whole,
the annual report was fair, balanced and
understandable.

The Committee was satisﬁed that based on its
review, challenge and debate of the draft ﬁnancial
statements and the key accounting items, that the
assumptions made, the judgements applied and the
accounting and disclosures were appropriate.

The Committee reviewed and recommended the
approval of the narrative reporting statements on
corporate governance, internal control and risk
management in the annual report and the half year
and trading statements.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

External auditors

The Audit Committee has developed a formal
Auditor Independence Policy. In accordance with
this policy, the Committee oversees the relationship
with the external auditors and monitors all services
provided by them and all fees payable to them. This
is to ensure that potential conﬂicts of interest are
considered, and that an independent, objective and
professional relationship is maintained.

PricewaterhouseCoopers LLP (“PwC”) has been the
Company’s external auditors for over 10 years.
Therefore the Committee considers the
reappointment of the external auditor and their
independence on an annual basis and conﬁrmed the
continuing appointment of PwC.

The Audit Committee are satisﬁed that PwC remain
independent and objective. This assessment
reﬂects the control procedures that PwC has put in
place to maintain its independence, including the
regular rotation of the audit partner and key staff.
The current audit partner has reported on IQE for
two years.

The provision of external audit and tax compliance
are separated where possible. Tax advice is
provided by Bevan Buckland in the UK, and EY and
KPMG in the US and Asia. The one exception is in
Taiwan where PwC provide Audit and local Tax
compliance services as this is standard local
compliance practice.

The Audit Committee also monitors the
effectiveness of the annual audit. Before the end of
the ﬁnancial year, the Committee receives a
detailed audit plan from the auditors which identiﬁes
the auditors assessment of the key risks and their
intended areas of focus. This is agreed with the

Committee to ensure that the scope and coverage of
audit work is appropriate.

IQE’s management also provide the Committee with
feedback on the effectiveness of the audit. In
connection with 2016 IQE’s management was
satisﬁed that there had been appropriate focus and
challenge on the primary areas of audit risk and they
assessed the quality of the audit process as good.
The Committee concurred with the view of
management.

The Committee also regularly reviews the nature,
extent, objectivity and cost of non-audit services
provided by the external auditors. In doing this the
Committee does not approve the contract for
additional services from them which would
compromise their audit independence. 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 both the Chairman of the
Audit Committee and the Senior Independent
Director. The policy also establishes guidelines for
the recruitment of employees or former employees
of the external auditor.

In addition, the group’s auditors are 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.

To ensure compliance with this policy the Audit
Committee reviewed and approved the
remuneration received by PwC for audit services,
audit-related services and non-audit work.

The nature of the services provided by the auditors
and the amounts paid to them are as detailed below:

Total 2016 £’000

Total 2015 £’000

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 PricewaterhouseCoopers LLP (group auditors)

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

90
11
-
5
-
125

9
3
12

137

88
11
-
8
5
131

6
4
10

141

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Internal control

Internal Audit

The Audit Committee reviews the effectiveness of
the Group’s system of internal controls and risk
management activities bi-annually as part of the half
year end full year public reporting.

The group currently operates a system of “peer
review” for its internal audit, which the Committee
considers remains appropriate for the size and
geographical spread of the Group.

In addition, site ﬁnancial controllers and plant
managers are obliged to positively conﬁrm, on a
monthly basis, that the agreed procedures are in
place and are being adhered to, with speciﬁc
reference to key controls such as bank and control
account reconciliations.

This process remained in operation for the year
under review, and up to the date of approval of the
Annual Report and Financial Statements. It has
been reviewed by the Committee, and they remain
satisﬁed with the arrangements. No signiﬁcant
failings or weaknesses were identiﬁed by the
internal audit process but several minor
improvements were identiﬁed and implemented.

As part of its work, and in line with its terms of
reference, the Committee also considers the
discharge of the Board’s responsibilities in the areas
of corporate governance, ﬁnancial reporting and
internal control, including the internal management
of risk, as identiﬁed in the FRC’s revised guidance
on Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting.

Risk management activities are dealt with in more
detail in the Strategic Report on pages 28 to 31.

The key procedures that the directors have
established with a view to providing effective internal
control include the following:

a clearly defined organisational structure and
limits of authority;

corporate policies and procedures for financial
reporting and control, project appraisal, human
resources, quality control, health and safety,
information security and corporate governance;

the preparation of annual budgets and regular
forecasts which require approval from both the
Group Executive Committee and the Board;

the monitoring of performance against budget
and forecasts and the reporting of any variances
in a timely manner to the Board;

regular review and self-assessment of the risks
to which the group is exposed, taking steps to
monitor and mitigate these wherever possible;

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.

Internal audit reviews are periodically conducted
to evaluate and test the Group’s financial control
procedures, reporting directly to the Chairman of
the Audit Committee. This involves the monitoring
and reviewing of the effectiveness of internal
audit activities.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Director’s Report

The directors present their annual report and the
audited consolidated ﬁnancial statements for the
year ended 31 December 2016.

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 9 to
13 and 36 to 38. 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 pages
28 to 31. The future outlook for the Group is set out
on page 14.

Dividends

The directors do not recommend the payment of a
dividend (2015: £nil).

Directors

The directors in ofﬁce at 31 December 2016 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 pages 52 to 65.

Substantial interests in shares

As at 28 February 2017 the company had been
notiﬁed pursuant to the Companies Act of the
following substantial interests in the shares of the
company as deﬁned by the Listing Rules in addition
to those disclosed for the directors:

............................

T Rowe Price International
AXA Investment Mgrs
Barclays Wealth
Hargreaves Lansdown Asset Mgt
Dr Andrew W Nelson
Herald Investment Mgt
Miton Asset Mgt
TD Direct Investing

.....................................
..............................................
...................
.......................................
....................................
..............................................
.........................................

10.18%
9.65%
5.81%
5.66%
5.22%
4.65%
4.06%
3.64%

shareholder analysis by Canaccord Genuity

Research and development

The group incurred costs in respect of research and
development during the year of £8,358,000 (2015:
£5,117,000) of which £7,599,000 (2015: £4,979,000)
has been capitalised in accordance with IAS 38
(“Intangible assets”). The remaining research and
development costs totalling £143,000 (2015:
£138,000) have been charged to the income
statement (net of grant funding).

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 2016 was 90 days (2015: 61 days).

Employment policies

A review of the group’s employment policies is
provided on pages 24 to 35.

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.

Principal risks and uncertainties

Details of the principal risks and uncertainties
impacting the group have been included in the
strategic report on pages 28 to 31.

Treasury

IQE operates a central treasury function which acts
in accordance with speciﬁc board policies.
Speculative transactions are not permitted. The
signiﬁcant treasury policies relate to Interest rates,
foreign currency and liquidity are detailed in note 19.

Insurance and Indemnities

We have purchased and maintain appropriate
insurance cover in respect of directors’ and ofﬁcers’
liabilities. The Company has also entered into
qualifying third party indemnity arrangements for the
beneﬁt of all its Directors in a form and scope which
comply with the requirements of the Act. These
indemnities were in force throughout the year and
up to the date of this Report and Annual Accounts.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Statement of directors’ responsibilities in
respect of the ﬁnancial statements

The directors are responsible for preparing the
Annual Report and the ﬁnancial statements in
accordance with applicable law and regulation.

Company law requires the directors to prepare
ﬁnancial statements for each ﬁnancial year. Under
that law the directors have prepared the group
ﬁnancial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted
by the European Union and 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
company and of the proﬁt or loss of the group and
company for that period. In preparing the ﬁnancial
statements, the directors are required to:

select suitable accounting policies and then apply
them consistently;

state whether applicable IFRSs as adopted by
the European Union have been followed for the
group financial statements and IFRSs as adopted
by the European Union have been followed for
the company financial statements, subject to any
material departures disclosed and explained in
the financial statements;

make judgements and accounting estimates that
are reasonable and prudent; and

prepare the financial statements on the going
concern basis unless it is inappropriate to
presume that the group and company will
continue in business.

The directors are responsible for keeping adequate
accounting records that are sufﬁcient to show and
explain the group and company's transactions and
disclose with reasonable accuracy at any time the
ﬁnancial position of the group and company and
enable them to ensure that the ﬁnancial statements
comply with the Companies Act 2006 and, as
regards the group ﬁnancial statements, Article 4 of
the IAS Regulation.

The directors are also responsible for safeguarding
the assets of the group and company 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 company’s website. Legislation
in the United Kingdom governing the preparation
and dissemination of ﬁnancial statements may differ
from legislation in other jurisdictions.

The directors consider that the annual report and
accounts, taken as a whole, is fair, balanced and
understandable and provides the information
necessary for shareholders to assess the group and
company’s performance, business model and
strategy.

Each of the directors, whose names and functions
are listed in Directors' report conﬁrm that, to the best
of their knowledge:

the company financial statements, which have
been prepared in accordance with IFRSs as
adopted by the European Union, give a true and
fair view of the assets, liabilities, financial position
and loss of the company;

the group financial statements, which have been
prepared in accordance with IFRSs as adopted
by the European Union, give a true and fair view
of the assets, liabilities, financial position and
profit of the group; and

the Directors' Report includes a fair review of the
development and performance of the business
and the position of the group and company,
together with a description of the principal risks
and uncertainties that it faces.

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 by:

Phillip Rasmussen
Chief Financial Ofﬁcer
21 March 2017

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Remuneration Statements

Directors’ Report on Remuneration

Chairman’s statement

Dear Shareholders,

On behalf of the Board, I am pleased to present the
Remuneration Committee’s report of the Directors’
remuneration for the year ended 31 December 2016
for which we will be seeking shareholder approval at
the Annual General Meeting on 13 June 2017. As an
AIM-listed company, IQE is not required to submit a
remuneration policy to a shareholder vote.
However, in light of the feedback received from
shareholders on directors’ remuneration around last
year’s AGM, we have voluntarily decided to do so.
During the year we appointed Kepler, a brand of
Mercer Ltd., to undertake a review of IQE’s
remuneration arrangements and this report contains
IQE’s proposed remuneration policy for the next 3
years, which will be put to a shareholder vote at the
2017 AGM, as well as the annual report for 2016
remuneration.

The review covered all elements of directors’ pay
and proposed a number of changes, including:

Limiting the increase in executive directors’
salaries to the average % increase across the UK
workforce of 2.4% effective 1 January.

Leaving pension contributions unchanged.

Discontinuing the car allowance (from 2016
onwards).

Formalising the annual bonus structure, which
will be based primarily on IQE’s financial
performance, and targets will be published at the
end of the year.

Incorporating Total Shareholder Return into the
long-term incentive. The normal maximum LTIP
opportunity will remain at 100% of salary.
Executive directors’ will have the opportunity to
double this if and only if they at least double
shareholder value, i.e. deliver a TSR of 100% or
more (>26% p.a.) over the three year
performance period.

Leaving NED and Chairman fees unchanged for
2017.

Sir David Grant CBE,
Remuneration Committee Chairman

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Directors’ Remuneration Policy

IQE aims to attract, retain and motivate high calibre
executives, whilst recognising the need to be cost
effective, and to incentivise signiﬁcant industry out-
performance. The Committee is proposing a
remuneration policy that balances these factors,

taking account of investor feedback and prevailing
best practice.

This section of the directors’ remuneration report
sets out the Policy for Executive Director
remuneration which will be put to a shareholder vote
at the 2017 AGM.

Policy table

Function

Operation

Opportunity

Performance metrics

Base salary
To recognise the
individual’s skills
and experience
and to provide a
competitive total
package.

Base salaries are reviewed
annually, with reference to
market levels, individual
contribution, the experience of
each Executive and increases
across the Group. Any
adjustments become effective
on 1 January.

Pension
To provide an
opportunity for
executives to
build up income
on retirement.

Beneﬁts
To provide non-
cash beneﬁts
which are
competitive in the
market in which
the executive is
employed.

All Executives are members of
the Group pension scheme
and/or receive a cash pension
allowance.
Salary is the only element of
remuneration that is
pensionable.
Executives receive beneﬁts
which consist primarily of health
cover, private medical
insurance, life assurance, long-
term disability insurance and
reimbursement for fuel,
although may include other
beneﬁts that the Committee
deems appropriate in the
circumstances.

n/a

Any base salary increases are
applied in line with the outcome
of the Committee’s review.
In respect of existing executive
directors, it is anticipated that
salary increases will generally
be in line with those of salaried
employees as a whole. In
exceptional circumstances
(including, but not limited to, a
material increase in job size or
complexity, material market
misalignment) the Committee
has discretion to make
appropriate adjustments to
salary levels to ensure they
remain appropriate.
Executive Directors receive a
pension contribution of 10% of
salary or an equivalent cash
allowance.

Beneﬁts may vary according to
role and individual
circumstances. Eligibility to
beneﬁts and the cost of beneﬁts
are reviewed periodically.
The Committee retains
discretion to approve a higher
cost in exceptional
circumstances (e.g. relocation
or expatriation) or in
circumstances where market
rates have changed (e.g. cost
of insurance cover).

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Policy table (continued)

Function

Operation

Opportunity

Performance metrics

For Executive Directors, the
maximum annual bonus
opportunity is 100% of base
salary.
The bonus will pay 0% at
Threshold, 50% at Target and
100% at Maximum, with
straight-line vesting between
these levels, and no vesting
below Threshold.

Annual Bonus
To incentivise
and reward
strong
performance
against ﬁnancial
and personal
annual targets,
thus delivering
value to
shareholders and
being consistent
with the delivery
of the strategic
plan.

Performance measures, targets
and weightings are set at the
start of the year.
The scheme is based on a
combination of ﬁnancial
performance and personal
objectives. At the end of the
year the Remuneration
Committee determines the
extent to which targets have
been achieved.
Bonus payments are delivered
in cash.
Clawback (of any bonus paid)
may be applied during
employment or for 2 years post-
termination in the event of
gross misconduct, material
ﬁnancial misstatement, error in
calculation of outcomes or in
any other circumstance that the
Committee considers
appropriate.

Performance is assessed on an
annual basis against ﬁnancial
and personal / strategic
objectives set at the start of
each year.
Financial measures will be
weighted appropriately each
year according to business
priorities, and will represent no
less than 70% of the annual
bonus. Performance vs
targeted levels will be
measured at budgeted FX
rates.
Personal/strategic objectives
will represent no more than
30% of the bonus and will be
set annually to capture
expected individual
contributions to IQE’s strategic
plan. The personal element
shall not pay out unless
ﬁnancial performance is at least
at Threshold.
The committee has discretion to
adjust formulaic bonus
outcomes to ensure fairness for
shareholders and participants,
to ensure pay aligns underlying
company performance, and to
avoid unintended outcomes.
These adjustments can be
either upwards (within plan
limits) or downwards (including
down to zero). The committee
may consider measures outside
of the bonus framework to
ensure there is no reward for
failure.
Further details of the measures,
weightings and targets
applicable are provided on
page 64 in the Annual Report
on Remuneration

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Policy table (continued)

Function

Operation

Opportunity

Performance metrics

LTIP
To drive
sustained long-
term performance
that supports the
creation of
shareholder
value.

The LTIP provides for normal
awards of up to 100% of salary.
A multiplier of up to 2x may
apply to the normal level of
vesting in case of truly
exceptional performance.
In exceptional circumstances,
including but not limited to
recruitment, normal awards
may be made up to 200% of
salary to secure the right
individual.
Up to 25% of the LTIP will be
paid for achieving Threshold
performance, increasing on a
straight-line basis to full vesting
for achieving Stretch
performance.

Under the long-term incentive
plan (LTIP) annual awards of
shares or nil-cost options may
be made to participants. Award
levels and performance
conditions are reviewed before
each award cycle to ensure
they remain appropriate.
The Committee has the
discretion to authorise a
payment, in cash or shares,
equal to the value of dividends
which would have accrued on
vested shares during the
vesting period.
Malus (of any unvested LTIP)
and clawback (of any vested
LTIP) may be applied during
employment or for 2 years post-
termination in the event of
gross misconduct, material
ﬁnancial misstatement, error in
calculation of outcomes or in
any other circumstance that the
Committee considers
appropriate.

Vesting of LTIP awards is
subject to achieving
performance conditions and
continued employment.
The Committee has the
discretion to change the
performance measures for new
cycles to ensure that they
continue to be linked to the
delivery of the Company’s
strategy. Any signiﬁcant change
would be subject to prior
shareholder consultation.
For 2017, the performance
condition for the normal award
will continue to be based on
EPS growth +6% to +12% p.a.
over 3 years. To further
reinforce IQE’s ambitious
growth strategy, awards can be
doubled if absolute TSR growth
over the 3-year performance
period is 100% or more.
If no entitlement has been
earned at the end of the
relevant performance period,
awards lapse.
The Committee has discretion
to adjust the EPS outcome to
ensure it fairly reﬂects
underlying performance. The
Committee also considers
environmental, social,
governance and health and
safety criteria, to ensure there
is no reward for failure.
Details of the targets to be used
in future LTIP grants are
included on page 64 in the
Annual Report on
Remuneration.

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Notes to the policy table

Performance measure selection and approach to
target setting

The measures used under the annual bonus plan
are selected annually to reﬂect IQE’s main
objectives for the year and reﬂect both ﬁnancial
performance and personal contributions to the
strategic plan.

The Committee considers EPS to be a key measure
of IQE’s long-term bottom line performance. TSR is
a measure which strongly aligns management and
shareholder interests.

Targets applying to the bonus and LTIP are reviewed
annually, based on a number of internal and external
reference points. Performance targets are intended
to be stretching and achievable, and reﬂect IQE’s
strategic priorities and its market opportunities.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Notes to the policy table (continued)

Non-Executive Director remuneration

Remuneration policy for other employees

All employees are eligible to participate in a
discretionary annual bonus and our HMRC-
approved share option scheme. At present, only
executive directors participate in the Group’s LTIP.

Shareholding guidelines

The Committee wishes to encourage Executive
Directors to build up a signiﬁcant shareholding in the
Company. Shareholding guidelines will therefore be
put in place to require Executive Directors to acquire
a shareholding (excluding shares held conditionally
pursuant to LTIP performance) equivalent to 200%
of base salary. Until the relevant shareholding levels
are achieved, 50% of any shares vesting (post-tax)
under the new LTIP are required to be held.
Executive Directors are expected to build up the
required shareholding within ﬁve years of
appointment to the Board. Details of the Executive
Directors’ current shareholdings are provided in the
Annual Report on Remuneration. All Executive
Directors held shares equivalent to a number in
excess of 200% of salary as at 31 December 2016.

Subject to annual re-election by shareholders, Non-
Executive Directors are appointed for an initial term
of 3 years. Subsequent terms may be offered. The
appointment and re-appointment and the
remuneration of Non-Executive Directors are
matters reserved for the full Board.

The Non-Executive Directors are not eligible to
participate in the Company’s performance related
bonus plan, long-term incentive plans or pension
arrangements.

Full terms and conditions for each of the Non-
Executive Directors are available at the company’s
registered ofﬁce during normal business hours and
will be available at the AGM for 15 minutes prior to
the meeting and during the meeting.

NED

Date of appointment letter

Dr Godfrey Ainsworth

16 June 2016

Sir David Grant

1 September 2012

Prof Simon Gibson

20 June 2016

Phil Smith

30 November 2016

Details of the policy on fees paid to the company’s
Non-Executive Directors are set out in the table
below:

Function

Fees

To attract and retain
Non-Executive
Directors of the
highest calibre with
broad commercial
and other
experience relevant
to the Company.

Operation

Opportunity

Perfomance metrics

The fees paid to the Chairman are
determined by the Committee, whilst
the fees of the Non-Executive
Directors are determined by the
Board (excluding the NED or group of
NEDs whose remuneration is being
discussed).

Fee levels are benchmarked against
similar roles at comparable
companies. Time commitment and
responsibility are taken into account
when reviewing fee levels.

Fee levels are reviewed
annually, with any adjustments
effective 1 January in the year
following review.

n/a

It is expected that increases to
non-executive director fee
levels will normally be in line
with salaried employees over
the life of this policy. However,
in the event there is a material
misalignment with market or a
material change in the time
commitment required to fulﬁl a
non-executive director role, the
Board has the power to make
an appropriate adjustment to
the fee level

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Pay scenarios

The charts below provide an illustration of the
potential future reward opportunities for the
Executive Directors, and the split between the
different elements of remuneration under three

different performance scenarios: ‘Minimum’, ‘On-
target’ and ‘Maximum’. the Remuneration
Committee may make use of all the existing
components of remuneration, as follows:

Dr A W Nelson

Mr P J Rasmussen

Dr H R Williams

s
0
0
0
£

’

2500

1875

1250

625

LTIP
Annual bonus
Fixed salary

577

963

13%
27%

2,122

49%

1,607

32%

24%

100%

60%

36%

27%

Minimum Target Maximum Stretch

s
0
0
0
£

’

2500

1875

1250

625

LTIP
Annual bonus
Fixed salary

643

13%
27%

60%

385

100%

1,420

49%

24%

27%

1,075

32%

36%

Minimum Target Maximum Stretch

s
0
0
0
£

’

2500

1875

1250

625

LTIP
Annual bonus
Fixed salary

639

13%
27%

60%

381

100%

1,416

49%

24%

27%

1,071

32%

36%

Minimum Target Maximum Stretch

The ‘minimum’ scenario comprises just ﬁxed
remuneration, i.e. base salary, pension and beneﬁts
which are the elements of the remuneration
package not linked to performance. The ﬁgures for
base salary and pension (10% of salary) are as of 1
January, while those for taxable beneﬁts are based
on the single ﬁgure table for 2016.

The ‘on-target’ scenario reﬂects ﬁxed remuneration
as above, plus a target bonus payout of 50% of
maximum and threshold vesting for the LTIP of 25%
of maximum.

The ‘maximum’ scenario reﬂects ﬁxed remuneration,
plus full payout of the annual bonus (100% of
salary) plus full vesting of the normal LTIP of 100%
of salary.

Component

Approach

The ‘stretch-maximum’ scenario reﬂects ﬁxed
remuneration, plus full payout of the annual bonus
at 100% of salary, plus the normal LTIP of 100% of
salary with a 2x multiplier applied for doubling
shareholder value over 3 years.

Approach to recruitment remuneration

External appointments

In the cases of hiring or appointing a new Executive
Director from outside the Company,

the Remuneration Committee may make use of all
the existing components of remuneration, as
follows:

Base salary

Pension

Beneﬁts

Annual Bonus

LTIP

The base salaries of new appointees will be determined by reference to
relevant market data, experience and skills of the individual, internal
relativities and current basic salary. Where new appointees have initial basic
salaries set below market, any shortfall may be managed with phased
increases over multiple years subject to the individual’s development in the
role.
New appointees will receive pension contributions or an equivalent cash
supplement in line with existing policy.
New appointees will be eligible to receive beneﬁts which may include (but are
not limited to) those outlined in the policy table.
The structure described in the policy table will apply to new appointees with
the relevant maximum being pro-rated to reﬂect the proportion of employment
over the year. Targets for the personal element will be tailored to each
executive.
New appointees will be granted awards under the LTIP on the same terms as
other executives, as described in the policy table.

Maximum annual
grant value

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100% of salary

Up to 200% of
salary on
appointment;
normally 100% of
salary thereafter

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

In determining the appropriate remuneration for a
new executive director appointee, the Remuneration
Committee will take into consideration all relevant
factors (including nature and quantum of each
component of remuneration and the jurisdiction from
which the candidate was recruited) to ensure that
arrangements are in the best interests of IQE and its
shareholders. The Committee may make an award
in respect of a new appointment to ‘buy out’
remuneration arrangements forfeited on leaving a
previous employer on a like-for-like basis, which
may be awarded in addition to the ongoing
remuneration elements outlined in the table above.
In doing so, the Committee will consider relevant
factors, including time to vesting, performance
conditions attached to awards, and the likelihood of
these conditions being met. Any ‘buy-out’ awards
will typically be made under the existing annual
bonus and LTIP schemes, although in exceptional
circumstances the Committee may exercise the
discretion available under Listing Rule 9.4.2 R to
make awards using a different structure. Any ‘buy-
out’ awards would have a fair value no higher than
the awards forfeited.

Internal appointments

In the case an internal promotion to the Board, the
Remuneration Committee will use the same policy
as detailed above, although there will be no
opportunity for a buyout. However, where an
individual has contractual commitments made prior
to their promotion to Executive Director level, the
Company will continue to honour these
arrangements.

Calculation of vesting / payment

Reason for
leaving

Annual bonus

Resignation

No annual bonus payable.

Non-Executive Directors

In recruiting a new Non-Executive Director, the
Remuneration Committee will utilise the policy as
set out in the table on pages 44 to 45.

Service contracts and treatment for leavers and
change of control

Executive Director service contracts, including
arrangements for early termination, are carefully
considered by the Committee. Each of the Executive
Directors has a rolling service contract requiring 6
months’ notice of termination on either side. Such
contracts contain no speciﬁc provision for
compensation for loss of ofﬁce, other than an
obligation to pay for any notice period waived by the
Company, where pay refers to salary, beneﬁts and
pension only. Executive Director’s service contracts
are available to view at the Company’s registered
ofﬁce.

Executive director

Date of appointment letter

Dr Andrew Nelson

1 June 2016

Phillip Rasmussen

7 January 2007

Dr Howard Williams

1 June 2016

When considering exit payments, the Committee
reviews all potential incentive outcomes to ensure
they are fair to both shareholders and participants.
The table below summarises how the awards under
the annual bonus and LTIP are typically treated in
different circumstances, with the ﬁnal treatment
remaining subject to the Committee’s discretion:

‘Good leaver’1

Change of control

Cash bonuses will typically be paid to the extent that performance objectives have been met. Any
resulting bonus will typically be prorated for time worked. The Committee retains discretion to vary
this treatment in individual circumstances.

LTIP

Resignation

Outstanding awards lapse

‘Good leaver’1 and
change of control

The Committee determines whether and to what extent outstanding awards vest based on the
extent to which performance conditions have been achieved and the proportion of the vesting period
worked. The Committee retains discretion to vary this treatment in individual circumstances.

The determination of vesting will be made as soon as reasonably practical following the end of the
performance period or such earlier date as the Committee may agree (within 12 months in the event
of death).

IQE PLC | Report and Annual Accounts 2016

In the event of a change of control, awards may alternatively be exchanged for new equivalent
awards in the acquirer where appropriate.
58

Company No: 3745726

Annual Report on Remuneration

Remuneration Committee role, membership and
advice

The primary role of the Committee is to determine
and agree with the Board fair and reasonable
remuneration arrangements for the Chairman and
Executive Directors. The main activities of the
Remuneration Committee during the year were as
follows:

Reviewed shareholder feedback from AGM.

Appointed Kepler, a brand of Mercer as
independent advisors to the Committee.

Reviewed the remuneration policy.

Benchmarked remuneration of executive
directors.

Determined annual bonuses payable to executive
directors for 2016.

Reviewed and approved vesting of LTIP awards.

Reviewed and approved the executive directors’
salaries for 2017.

Determined performance targets for the
executive directors’ 2017 annual bonus and LTIP
awards in line with the Company's strategic plan.

Drafted the Directors Remuneration Report.

The Committee’s terms of reference are set out on
the Company’s website at www.iqep.com.

1 ‘Good leaver’ is deﬁned as a participant ceasing to be
employed by the Group by reason of death, disability, ill health,
retirement or any other reason that the Committee determines in
its absolute discretion.

External appointments

With the approval of the Board in each case, and
subject to the overriding requirements of the Group,
Executive Directors may accept external
appointments as Non-Executive Directors of other
companies and retain any fees received. None of
the executive directors received any remuneration
from external directorships.

Consideration of conditions elsewhere in the
company

When making decisions on changes to Executive
Director remuneration, the Committee considers
changes to pay and conditions across the Group.
To this end, the HR Manager provides the
Committee with a summary of the proposed level of
average increase for employees prior to the annual
salary review. For Executive Directors, the
Remuneration Committee does not formally consult
with employees on the executive remuneration
policy and implementation.

Consideration of shareholder views

The Remuneration Committee maintains a regular
dialogue with the company’s major shareholders.
Following the 2016 AGM, we consulted with
shareholders regarding the concerns raised
regarding last year’s remuneration report.
Subsequently, we appointed Kepler as the
company’s independent consultant to assist the
Committee and help us review our approach to
executive remuneration, monitor trends and
developments in corporate governance, market
practice and shareholder views, and reporting in the
DRR.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

During the year, the Committee comprised 3 Non-
Executive Directors:

Sir David Grant, Senior Independent Non-
Executive Director and Remuneration Committee
Chairman since 23rd June 2016, attended 4 out
of 4 meetings during the year

Simon Gibson was Remuneration Committee
Chairman until the AGM on 23rd June 2016,
following which he stepped off the Committee, he
attended 3 out of 3 meetings during this period

Dr Godfrey Ainsworth, Company Chairman,
attended 4 out of 4 meetings during the year

The Board undertakes an annual evaluation of the
Committee’s performance to ensure its continued
ability to independently and objectively review
executive director remuneration at the Group.

The following individuals may be invited to attend
Committee on certain occasion to provide advice
and to help the Committee to make informed
decisions. No individuals are involved in decisions
relating to their own remuneration.

Dr Andrew Nelson, Chief Executive Officer

Jason Howells, Company Secretary and
Secretary to the Remuneration Committee

Kepler, a brand of Mercer Ltd, independent
advisors to the Committee

During the year, the Committee appointed Kepler, a
brand of Mercer (Kepler), to provide independent
advice to the Committee. Kepler is a signatory to
the Code of Conduct for Remuneration Consultants
in the UK, operated by the Remuneration
Consultants Group, and which requires all advice to
be objective and independent (see
www.remunerationconsultantsgroup.com for more
information). Services provided by Kepler included
advice on remuneration packages for executives,
assistance with a review of incentive arrangements
and support on drafting this DRR, as well as other
ad-hoc advice on remuneration. No fees were paid
to Kepler in 2016 as they began their appointment in
December. The Committee is comfortable that
Kepler is independent, does not have any
connections with IQE that may impair their
independence, and does not provide any services to
the Group other than its advice on remuneration.

Single total ﬁgure of remuneration for Executive Directors (audited)

The table below sets out a single ﬁgure for the total remuneration received by each Director for the year ended
31 December 2016 and the prior year:

Dr A W Nelson

P Rasmussen

Dr H R Williams

2016
£’000

503

1,066

2015
£’000

2016
£’000

2015
£’000

2016
£’000

2015
£’000

480

298

851

337

715

322

270

671

337

711

322

364

759

Salary

Beneﬁts1

Annual bonus2

Long-term incentive3

Pension4

Total

1. Taxable beneﬁts for 2016 consist of health cover, private
medical insurance, life assurance, long-term disability insurance,
fuel and car repairs. In 2015 Dr Andrew Nelson received a car
allowance of £66k and Phillip Rasmussen and Dr Howard
Williams received a car allowance of £44k, these were
discontinued in 2016.
2. Annual bonus payments for performance during 2016 were
100% of salary, no annual bonus was paid for 2015. Details are
included below in “Incentive outcomes for year ending 31
December 2016 and 31 December 2015”.

3. LTIP awards granted on 26 April 2013 vested in full based on
EPS growth between 1 January 2013 to 31 December 2015. The
value of these awards are included in the 2015 single ﬁgure of
remuneration above, based on the share price of 20.25p on date
of vest, 26 April 2016.
No LTIP awards were due to vest in 2016, as 2014 awards were
delayed until 2016 and, as such, will vest based on performance
to 1 January 2019.
4. Executive directors participate in a deﬁned contribution
scheme, in relation to which the Company contributed 10% of
salary. Dr Andrew Nelson did not receive a pension contribution
in 2015.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Incentive outcomes for year ending 31
December 2016 and 31 December 2015

Annual Bonus

For 2016 and 2015 annual bonus payments were at
the discretion of the Remuneration Committee. No
annual bonuses were paid to executive directors for
2015, In 2016 ﬁnancial objectives were met in full
and the maximum bonus of 100% of salary was
paid. Going forward, the bonus will be more
structured, capturing both ﬁnancial performance,
e.g. proﬁt and cash, and personal/strategic
objectives, as described below and on page 64.

Long-term incentive plan

LTIP awards granted on 26 April 2013 were subject
to 3-year real EPS growth from 1 January 2013 to
31 December 2015, with nil vesting below RPI plus
4% at which point 25% vesting occurs, increasing on
a straight-line basis to full vesting for RPI plus 10%.
Actual EPS growth was 20.2% in excess of 2013
RPI of 2.7% and, as such, the 2013 LTIP awards
vested in full.

No LTIP awards were due to vest in 2016, as 2014
awards were delayed until 2016 and, as such, will
vest based on performance to 1 January 2019.

Percentage change in CEO remuneration

The table below shows the percentage change in
CEO remuneration from the prior year compared to
the average percentage change in remuneration for
other employees. The CEO’s annual remuneration
includes base salary, taxable beneﬁts and annual
bonus. The % change in annual remuneration for
other employees is calculated using the increase in
the earnings of all employees who were employed in
the UK throughout 2015 and 2016. The Committee
considers the UK employee population to be the
most appropriate comparison for CEO vs. other
employee pay, as all executive directors are
currently employed in the UK, our UK employee
population includes employees at all levels of the
organisation, and pay inﬂation in our other
geographies is affected by local market factors.

% change 2015-2016

CEO

5%1

(86%)1

n/a2

All UK
employees
2.4%

0.3%

9.7%

Base salary

Taxable beneﬁts

Annual bonus

1. The Committee rebalanced the CEO’s ﬁxed pay from taxable
beneﬁts to salary as it discontinued the car allowance in 2016.
2. No annual bonus was paid to the CEO in 2015, the annual
bonus paid for 2016 was equivalent to 100% of salary.

Relative importance of spend on pay

The graph on the right shows shareholder
distributions (i.e. dividends and share buybacks)
and total employee pay expenditure for the
ﬁnancial years ended 31 December 2015 and
31 December 2016, along with the percentage
change.

+17%

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2015
2016

+91%

n/a

Employee
remuneration

Distribution to
shareholders

Investment in
Capex, R&D and
intangibles

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£40

£30

£20

£10

£0

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Review of past performance

The following graph charts the TSR of the Company
and the FTSE AIM Index (to which IQE is a member)
over the period from 1 January 2012 to 31
December 2016.

Historical TSR performance

The table below details the Chief Executive’s “single
ﬁgure” remuneration over the same period.

IQE
AIM

Historical CEO remuneration

CEO single ﬁgure of remuneration (£000)

STI award as a % of maximum opportunity

780

1,266

LTI award as a % of maximum opportunity

100%

889

83%

851

100%

1,066

100%

n/a

2012

2013

2014

2015

2016

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Scheme interests awarded in 2016

Executive director

Award type

Date of award

Shares
awarded

Face value

End of
performance
period

Dr Andrew Nelson

Nil-cost option

7 Jan 2016

7,532,962

£1,506,592

31 Dec 2018

Phillip Rasmussen

Nil-cost option

7 Jan 2016

5,046,300

£1,009,260

31 Dec 2018

Dr Howard Williams

Nil-cost option

7 Jan 2016

5,046,300

£1,009,260

31 Dec 2018

As described in last year's report, the LTIP awards
made on 7 January 2016 comprised the 2016 grant
and the delayed 2014 and 2015 grants. Each grant
was based on the directors’ salary and average share
price at the time that it would ordinarily have been
granted. The face value of shares was based on the
share price at date of award of 20p.

Vesting of these awards is subject to EPS growth in
excess of RPI as illustrated in the chart on the right,
where EPS is measured over the period from 1
January 2016 to 1 January 2019. All awards will vest
on the third anniversary of the date of grant on 7
January 2019.

In respect of the delayed 2014 and 2015 LTIP awards,
the Committee will also take into account the EPS
growth in the period to 2016 and 2017, respectively,
consistent with the performance periods that would
have applied in respect of those grants.

Exit payments made in the year

No exit payments were paid to any director during
the year.

Payments to past directors

No payments were made to past directors during the
year.

Single total ﬁgure of remuneration for Non-
Executive Directors

The table on the right sets out a single ﬁgure for the
total remuneration received by each Non-Executive
Director for the year ended 31 December 2016 and
the prior year:

EPS growth

y
r
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a
s
f
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%

100%

25%

10%

3-year EPS real CAGR
(RPI + x% p.a.)

Dr Godfrey Ainsworth
Sir David Grant
Prof Simon Gibson
Phil Smith1

NED fees

2016
£’000

125
50
50
n/a

2015
£’000

125
50
50
n/a

1. Phil Smith was appointed to the Board as an independent
director on 19 December 2016.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Implementation of remuneration policy for 2017

Base salary

Pension

The Committee approved the following base salary
increases, in line with the average increase for all
employee:

Executive Directors are entitles to a pension
contribution of 10% of salary or equivalent cash
allowance.

Executive director

Annual base salary at
1 Jan 2016

Dr Andrew Nelson

Phillip Rasmussen

Dr Howard Williams

Annual bonus

£503,000

£337,000

For 2017 the Committee intends to approve the
following annual bonus opportunities for Executive
Directors, subject to approval of the new
remuneration policy, as outlined in the Policy Table.

Annual base salary at
1 Jan 2017
£515,000

£345,000

Percentage increase

2.4%

The Committee considers annual bonus targets for
2017 to be commercially sensitive at this time but
will disclose them retrospectively once they are no
longer commercially sensitive.

Payment of the personal element is also subject to
IQE achieving Threshold EBITDA performance.

EBITDA
(% weighting)

Cashﬂow
(% weighting)

Personal/strategic
objectives
(% weighting)

Maximum annual bonus
opportunity
(% salary)

60%

20%

100%

Compound annual growth rate in
EPS from 1 Jan 2017 to 31 Dec
2019

Vesting
Schedule

3-year EPS
growth

% of normal
maximum

Threshold

Stretch

+6%

12%

25%

100%

For truly exceptional absolute TSR growth, at or above 100%
growth over the three-year performance period, the level of
vesting under the normal award will be subject to a 2x multiplier.

LTIP

It is proposed that for 2017, normal LTIP awards of up
to 100% of salary may be made to executive directors,
subject to approval of the new remuneration policy, as
outlined in the Policy Table. For all participants, awards
will vest after three years in accordance with the
performance conditions outlined in the table on the
right. No award will vest below Threshold performance,
and vesting will increase on a straight-line basis
between Threshold and Stretch.

UK high street retail prices are not particularly relevant
to IQE global semiconductor revenues or the way we
drive business performance internally, so we have
converted the EPS scale from real growth of 4-10% p.a.
to nominal growth of 6-12% p.a. (which assumes a
long-run UK RPI of 2% p.a. for equivalence).

Chairman and Non-Executive Director Fees

The Committee reviewed the Group’s Chairman’s fee
and decided to make no change for 2017. It will
therefore remain at £125k p.a. NEDs will continue to
receive a fee of £50k p.a. with no additional fees for
chairing a Board Committee or for fulﬁlling the role of
Senior Independent Director.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Directors’ interests (audited)

A table setting out the beneﬁcial interests of the
Directors and their families in the share capital of the
Company as at 31 December 2016 is set out below.

Since 31 December 2016 there have been no
changes in the Directors’ interests in shares.

Details of Directors’ share options are set out in the
tables below.

Shares owned
outright as at
1 Jan 2016

Shares owned
outright as at
31 Dec 2016

Shareholding
requirement
% salary/fee

Current
shareholding
% salary/fee

Requirement
Met?

Dr Andrew Nelson

Phillip Rasmussen

Dr Howard Williams

Dr Godfrey Ainsworth

Sir David Grant

Simon Gibson

Phil Smith1

35,259,218

3,473,357

4,292,965

3,274,155

215,000

301,855

n/a

3,473,357

4,292,965

3,154,197

215,000

301,855

n/a

200%

n/a

2664%

392%

484%

959%

163%

229%

n/a

✓

n/a

The table above includes shares which are the subject of the repurchase obligation by Dr Nelson entered into in October 2014.

Unvested and
subject to
continued
performance

7,817,203

5,226,108

Options

Vested but
unexercised

Unvested and
subject to
continued
employment

Vested
during
year

Lapsed
during
year

Exercised
during
year

2,861,192

2,211,444

3,089,907

n/a

Dr Andrew Nelson

Phillip Rasmussen

Dr Howard Williams

Dr Godfrey Ainsworth

Sir David Grant

Simon Gibson

Phil Smith1

1. Phil Smith was appointed on 19 December 2016.

Summary of shareholder voting at the 2016 AGM

Results of the vote on the remuneration report at the
IQE’s AGM on 23 June 2016 are as below:

Total number
of votes

% of votes
cast

In responding to the outcome from our last AGM vote
on the remuneration report we are proposing a
number of changes to our remuneration which should
help mitigate any concerns from our shareholders.
These include:

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discretionary)

Against

Total votes cast
(excluding withheld
votes)
Votes withheld

Total votes cast
(including withheld
votes)

94,384,040

205,278,487

299,662,527

9,196,528

308,859,055

31%

67%

Appointing Kepler, a brand of Mercer, as the
Committee’s independent advisors.

Formalising the structure of the bonus scheme.

Incorporated TSR into the LTIP.

Reviewing all elements of pay against companies
of similar size and sector, alongside a review of
our NED and Chairman fees.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Director’s biographies

Dr Godfrey H H Ainsworth FCA (61)
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 was appointed to the Board of EPI (prior to its merger with QED Inc to form IQE plc)
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 (59)
Non-Executive Director
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.

Sir David Grant CBE (69)
Senior Independent Director, Chairman of the Remuneration and Nomination Committees
Sir 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, NPL.

Phil Smith (59)
Non-executive Director
Phil Smith BSc, Hon LLD, DUniv. FIET, became Chairman of Cisco for the UK and Ireland
in August 2016, after eight years as Chief Executive. Mr Smith is also the Chairman of
Innovate UK and Chairman of the Tech Partnership. Additionally, he sits on the Board of
the National Centre for Universities and Business (NCUB). Mr Smith has a thirty-ﬁve year
track record in the technology industry in leading companies including Philips Electronics
and IBM. In September 2014 he was awarded an Honorary Doctorate by Birmingham City
University, cited for his outstanding contribution to the IT industry, a “leader among
leaders”. In March 2015 Mr Smith was awarded an Honorary Degree of Doctor of Laws
by the University of Warwick and in 2016 an Honorary Degree of Doctor of Science by his
alma mater, Glasgow University.
Current directorships: Cisco UK Ltd, INNOVATE UK.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Dr Drew Nelson OBE (62)
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.

Phillip Rasmussen (46)
Chief Financial Ofﬁcer
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 companies
trading on AIM. 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 (62)
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.

Jason Howells (31)
Company Secretary
Jason Howells studied at University of Oxford where he gained a BA (Hons) in
Jurisprudence followed by seven years at Eversheds LLP which included a secondment
to GlaxoSmithKline. He moved to Capita Property and Infrastructure in 2015 before
joining IQE in October 2016.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Officers and 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-ExecuHve)
Dr A W Nelson OBE, BSc, Ph.D, FREng (President and Chief ExecuHve Oﬃcer)
Professor S J Gibson OBE (Non-ExecuHve)
Sir David Grant CBE PhD FREng FLSW CEng FIET (Senior Independent Non-ExecuHve Director)
Mr P J Rasmussen BSc, ACA (Chief ﬁnancial Oﬃcer)
Dr H R Williams BSc, Ph.D, CEng, MIMechE, MCIBSE (OperaHons Director)
Mr P Smith BSc, Hon LLD, DUniv., CEng, FIET (Non-execuHve Director) appointed 19th December 2016

Company Secretary
Mr J M Howells MA (oxon)

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 rela@ons
Chris Meadows
Tel +44(0)29 2083 9400
Fax +44(0)29 2079 4592
investors@iqep.com

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Independent auditors report

Independent auditors’ report to the members of
IQE plc

Report on the ﬁnancial statements

Our opinion

In our opinion:

IQE plc’s group financial statements and parent
company financial statements (the “financial
statements”) give a true and fair view of the state
of the group’s and of the parent company’s affairs
as at 31 December 2016 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 2016;

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, as
regards the parent company ﬁnancial statements, as
applied in accordance with the provisions of the
Companies Act 2006, and applicable law.

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.

Opinions on other matters prescribed by the
Companies Act 2006

In our opinion, based on the work undertaken in the
course of the audit:

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; and

the Strategic Report and the Directors’ Report
have been prepared in accordance with
applicable legal requirements.

In addition, in light of the knowledge and
understanding of the group, the parent company and
their environment obtained in the course of the
audit, we are required to report if we have identiﬁed
any material misstatements in the Strategic Report
and the Directors’ Report. We have nothing to report
in this respect.

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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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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. With respect to the
Strategic Report and Directors’ Report, we consider
whether those reports include the disclosures
required by applicable legal requirements.

Colin Bates (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Cardiff
21 March 2017

Directors’ remuneration

Under the Companies Act 2006 we are required to
report to you if, in our opinion, certain disclosures of
directors’ remuneration speciﬁed by law are not
made. We have no exceptions to report arising from
this responsibility.

Responsibilities for the ﬁnancial statements and
the audit

Our responsibilities and those of the directors

As explained more fully in the Statement of directors’
Responsibilities set out on page 51, 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Financial statements

Consolidated income statement for the year ended 31 December 2016

Revenue

Cost of sales

Gross proﬁt

Other income and expenses

Selling, general and administrative expenses

(Loss)/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
Adjusted basic and diluted earnings per share is presented in note 10.
The notes on pages 78 to 113 form part of these ﬁnancial statements.
All items included in the proﬁt for the year relate to continuing operations.

Note

2016
£’000

132,707

(97,979)

34,728

2,340

(16,356)

(47)

20,665

(1,633)

20,630

(1,598)

19,032

408

19,440

19,276

164

19,440

2.87p

2.71p

Consolidated statement of comprehensive income for the year ended 31 December 2016

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

*This may be subsequently reclassiﬁed to proﬁt or loss

2016
£’000

19,440

24,347

43,787

43,063

724

43,787

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

2015
£’000

20,149

3,165

23,314

23,000

314

23,314

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Consolidated balance sheet as at 31 December 2016

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

2016
£’000

103,972

85,001

18,181

8,000

2015
£’000

86,843

65,154

14,210

8,000

215,154

174,207

28,498

30,868

4,957

64,323

21,215

23,050

4,644

48,909

279,477

223,116

(7,652)

(36,939)

(1,421)

(46,012)

(36,854)

(2,167)

(39,021)

(85,033)

194,444

6,755

51,081

89,476

43,975

191,287

3,157

194,444

(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

The notes on pages 78 to 113 form part of these ﬁnancial statements. These ﬁnancial statements were approved by the
Board of Directors on 21 March 2017.

Signed on behalf of the Board of Directors

P J Rasmussen

Dr A W Nelson

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Consolidated statement of changes in equity for the year ended 31 December 2016

Share
capital

Share
premium

Retained
earnings

Exchange
rate reserve

Other
reserves

Non-
controlling
interests

Total
equity

£’000

Balance at 1 January 2016

6,655

49,600

70,200

7,925

10,221

2,433

147,034

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

100

1,481

19,276

23,787

164

560

724

19,440

24,347

43,787

2,042

1,581

3,623

Balance at 31 December 2016

6,755

51,081

89,476

31,712

12,263

3,157

194,444

Share
capital

Share
premium

Retained
earnings

Exchange
rate reserve

Other
reserves

Non-
controlling
interests

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

492

19,864

3,136

285

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

The notes on pages 78 to 113 form part of these ﬁnancial statements.

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Consolidated cash ﬂow statement for the year ended 31 December 2016

Cash ﬂows from operating activities:

Adjusted cash inﬂow from operations

Cash impact of adjustments

Cash inﬂow from operations

Net interest paid

Income tax paid

Net cash generated from operating activities

Cash ﬂows from investing activities:

Acquisition deferred consideration Kopin Wireless

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 generated from/(used in) ﬁnancing activities

Net decrease 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 78 to 113 form part of these ﬁnancial statements.

Note

2016
£’000

24,281

(1,818)

22,463

(1,489)

(839)

20,135

(11,250)

(6,310)

(1,794)

(10,956)

(30,310)

578

(3,341)

12,623

9,860

(315)

4,644

628

4,957

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

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Parent company balance sheet for the year ended 31 December 2016

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

Note

2016
£’000

29,467

1,748

31,220

96,944

128,164

(2,461)

(8,573)

(11,034)

(34,524)

(45,558)

82,606

6,755

51,081

12,321

12,449

82,606

2015
£’000

29,070

1,441

30,515

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

The notes on pages 78 to 113 form part of these ﬁnancial statements. These ﬁnancial statements were approved by the
Board of Directors on 21 March 2017.

Signed on behalf of the Board of Directors

P J Rasmussen

Dr A W Nelson

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IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Parent company statement of changes in equity for the year ended 31 December 2016

Share
capital

£’000

Share
premium

Retained
earnings

Other
reserves

£’000

Total
equity

£’000

Balance at 1 January 2016

6,655

49,600

12,505

10,407

79,167

Comprehensive expense

Loss for the year

Total comprehensive expense

Transactions with owners

Share based payments

Issues of ordinary shares

Total transactions with owners

100

1,481

(184)

2,042

1,581

3,623

Balance at 31 December 2016

6,755

51,081

12,321

12,449

82,606

Share
capital

£’000

Share
premium

Retained
earnings

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

492

(119)

2,001

544

2,545

Balance at 31 December 2015

6,655

49,600

12,505

10,407

79,167

The notes on pages 78 to 113 form part of these ﬁnancial statements.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Parent company cash ﬂow statement for the year ended 31 December 2016

Cash ﬂows from operating activities:

Cash (outﬂow)/inﬂow from operations
Interest paid

Taxation
Net cash (used in)/generated from operating activities

Cash ﬂows from investing activities:
Investment in Seren Photonics Limited
Investment in other intangibles

Purchase of property plant and equipment

Net cash used in investing activities
Cash ﬂows from ﬁnancing activities:
Issues of ordinary share capital

Repayment of borrowings
Increase in borrowings

Net cash generated from/(used in) ﬁnancing activities
Net decrease in cash and cash equivalents

Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December

The notes on pages 78 to 113 form part of these ﬁnancial statements.

Note

11
12

2016
£’000

(8,812)
(1,278)
(78)

(10,168)

-
-
(347)
(6)

(353)

578
(2,842)
12,623

10,359
(162)
(866)

(1,028)

2015
£’000

6,430
(1,088)
-

5,342

(25)
(25)
(104)
(2)

(131)

544
(13,000)
4,314

(8,142)
(2,931)
2,065

(866)

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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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 50 of the
directors’ report. The company is a public limited company
admitted to trading on AIM, a market operated by The London
Stock Exchange plc 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 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 2016. They do not
materially impact on the group results:

• Annual improvements 2010 – 2012
• Annual improvements 2012 – 2014
• Amendment to IFRS 11, 'Joint arrangements' on

acquisition of an interest in a joint operation

• Amendment to IAS 16, 'Property, plant and equipment'
and IAS 38,'Intangible assets', on depreciation and
amortisation

• Amendments to IFRS 10 ‘Consolidated ﬁnancial

statements’ and IAS 28 ‘Investments in associates and
joint ventures’

(b) New standards, amendments and interpretations issued
but not effective for the ﬁnancial year beginning 1
January 2016 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 2017 (noted
below), and have not been early adopted in preparing
these consolidated ﬁnancial statements.

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)

None of these are expected to have a signiﬁcant effect on
the consolidated ﬁnancial statements of the group,
however we are undertaking a review of the group’s
contracts with customers in preparation of the adoption of
IFRS 15.

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 2017 (noted below), and have not been adopted
in preparing these consolidated ﬁnancial statements.

• Annual improvements 2014-2016 cycle
• Amendment to IFRS 2, ‘Share based payments’ –

classiﬁcation and measurement of share based payment
transactions

• Amendment to IFRS 7, ‘Statement of cash ﬂows’ on

disclosure initiative

• Amendment to IAS 12, ‘Income Taxes’ on recognition of

deferred tax assets for unrealised losses

• Amendment to IFRS 10 and IAS 28 on sale of

contribution of assets (postponed)

• IFRS 16, Leases

With the exception of IFRS 16, none of these
amendments are expected to have a signiﬁcant effect on
the consolidated ﬁnancial statements of the group. To
prepare for the adoption of IFRS 16 we are undertaking a
review of the group’s leasing arrangements.

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.

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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Joint ventures (continued)

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 patents, trademarks

and licences over their estimated useful lives of 10 to 15
years.

The carrying value of patents, trademarks and licences is
reviewed for potential impairment at least annually, or more
frequently if events or circumstances indicate a potential
impairment. Any impairment identiﬁed is immediately charged
to the Consolidated Income Statement.

c) Development costs

Expenditure incurred that is directly attributable to the
development of new or substantially improved products or
processes is recognised as an intangible asset when the
following criteria are met:

the product of process is intended for use or sale;

the development is technically feasible to complete;

there is an ability to use or sell the product or process;

it can be demonstrated how the product or process will
generate probable future economic beneﬁts;

there are adequate technical, ﬁnancial and other resources
to complete the development; and

the development expenditure can be reliably measured.

Directly attributable costs refers to the materials consumed;
the directly attributable labour; and the incremental overheads
incurred in the development activity. General operating costs,
administration costs and selling costs do not form part of
directly attributable costs.

All research and other development costs are expensed as
incurred.

Capitalised development costs are amortised in-line with the
expected production volume 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 10 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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e) Other intangibles recognised on acquisition

Inventories

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. Depreciation is charged to cost of sales and
selling and general administration expenses in the income
statement.

The assets residual values and useful economic lives are
reviewed, and adjusted if appropriate, at the end of each
reporting period. A review was completed during 2016 which
resulted in no material changes to asset residual values and
useful economic lives (2015: no material changes). The
carrying value of property, plant and equipment is reviewed for
potential impairment at least annually. Any impairment
identiﬁed is immediately charged to the Consolidated Income
Statement.

Impairment of non-current assets

Non-current assets are reviewed for potential impairment at
least annually, or more frequently if events or circumstances
indicate a potential impairment. An impairment loss is
recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s fair value (less disposal
costs) and value in use.

Value in use is based on the present value of the future cash
ﬂows relating to the asset, discounted at the Group’s weighted
average cost of capital. For the purpose of assessing
impairment, assets are grouped at the lowest levels for which
there are separately identiﬁable cash ﬂows (Cash Generating
Units).

Inventories are stated at the lower of cost and net realisable
value. Cost is determined using the ﬁrst-in, ﬁrst-out (FIFO)
method. Cost comprises direct materials and, where
applicable, direct labour costs and attributable overheads that
have been incurred in bringing the inventories to their present
location and condition based on normal operating capacity.
Net realisable value is the estimated selling price in the
ordinary course of business, less applicable variable selling
expenses.

Trade receivables

Trade receivables are amounts due from customers for
merchandise sold or services performed in the ordinary course
of business. If collection is expected in one year or less (or in
the normal operating cycle of the business if longer), they are
classiﬁed as current assets. If not, they are presented as non-
current assets.

Trade receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method, less provision for impairment.

Cash and cash equivalents

In the consolidated statement of cash ﬂows, cash and cash
equivalents includes cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original
maturities of three months or less and bank overdrafts. In the
consolidated balance sheet bank overdrafts are presented
within cash and cash equivalents as group treasury
arrangements are pooled by territory. In the 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

Financial instruments

Financial assets and liabilities are recognised on the group’s
balance sheet when the group becomes a party to the
contractual provisions of the ﬁnancial instrument.

The ﬁnancial assets held by the group are other equity
investments, receivables and cash and cash equivalents.
Receivables do not carry interest and are stated at their
nominal value as reduced by appropriate allowances for
estimated irrecoverable amounts. Cash and cash equivalent
comprise cash in hand. Other equity investments are held at
cost less provision for impairment.

Financial liabilities and equity instruments are classiﬁed
according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that
evidences a residual interest in the assets of the Group after
deducting all of its liabilities. Trade payables are stated at their
nominal value and do not bear interest.

Equity instruments issued by the company are recorded at the
proceeds received net of any direct issue costs.

Interest bearing loans are recorded at the proceeds received
net of any direct issue costs. Finance charges are accounted
for on an accrual basis using the effective interest method.

The group does not use derivative ﬁnancial instruments for
speculative purposes. The group uses forward currency
contracts as appropriate to manage foreign exchange risk.

Detailed disclosures of the group’s ﬁnancial instruments are
provided in 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.

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. The outstanding deferred consideration
balance has been fully settled during 2016.

Segmental reporting

Operating segments are reported in a manner consistent with
the internal reporting provided to the Board of Directors, who
oversee the allocation of resources and the assessment of
operating segment performance.

A business segment is a group of assets and operations
engaged in providing products or services that are subject to
risks and returns that are different from those of other
business segments.

A geographical segment is engaged in providing products or
services within a particular economic environment that are
subject to risks and returns that are different from those of
components operating in other economic environments.

Pension costs

The group operates deﬁned contribution pension schemes.
Contributions are charged in the Consolidated Income
Statement as they become payable in accordance with the
rules of the scheme.

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 and in Other Reserves on the Consolidated
Balance Sheet. 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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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.

Share based payments (continued)

In the company’s own ﬁnancial statements, the grant of share
options to the employees of subsidiary undertakings is treated
as a capital contribution. Speciﬁcally, the fair value of
employee services received (measured at the date of grant) is
recognised over the vesting period as an increase to
investment in subsidiary undertakings, with a corresponding
credit to equity in the parent entity ﬁnancial statements.

The social security contributions payable in connection with
the grant of the share options is considered an integral part of
the grant itself, and the change will be treated as a cash-
settled transaction.

Exceptional items

Exceptional items are disclosed separately in the ﬁnancial
statements where it is necessary to do so to provide further
understanding of the ﬁnancial performance of the group. They
are material items of income or expense that have been
shown separately due to the signiﬁcance of their nature or
amount. Details of the exceptional items are included in note
4.

Foreign currencies

Items included in the ﬁnancial statements of each subsidiary
are measured using the currency of the primary economic
environment in which the subsidiary operates (“the functional
currency”). The consolidated ﬁnancial statements are
presented in sterling, which is the group’s functional and
presentational currency.

Foreign currency transactions are translated into the
subsidiaries functional currency at the rates of exchange ruling
at the date of the transaction, or at the forward currency
hedged rate where appropriate. Monetary assets and
liabilities in foreign currencies are translated into the
subsidiaries functional currency at the rates ruling at the
balance sheet date. All exchange differences are taken to the
income statement.

The balance sheets of overseas subsidiaries are translated
into sterling at the closing rates of exchange at the balance
sheet date, whilst the income statements are translated into
sterling at the average rate for the period. The resulting
translation differences are taken directly to reserves.

Foreign exchange gains and losses on the retranslation of
foreign currency borrowings that are used to ﬁnance overseas
operations are accounted for on the ‘net investment’ basis and
are recorded directly in reserves provided that the hedge is
‘effective’ as deﬁned in IAS 39 “Financial Instruments :
recognition and measurement”.

Taxation

Income tax on the proﬁt or loss for the year comprises current
and deferred tax.

Current tax is the expected tax payable on the taxable income
for the year using rates substantially enacted at the balance
sheet date, and any adjustments to tax payable in respect of
prior years.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

(d) Onerous lease provision

A provision for onerous leases was made in 2014. The
provision assumes that the lease will be onerous for the
next two 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 5
years with the lease running until 2021.

(e) 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.

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)

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.

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 £2.3m (2015:
£0.8m) to other income as a result of the re-assessment
of the forecast volumes. The deferred consideration for
the RFMD acquisition is now fully settled. Further details
are provided in note 4.

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.

IQE PLC | Report and Annual Accounts 2016

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3. Segmental analysis

The board of directors considers that the wireless, photonics,
infra red 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.

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

Further detail on the nature of the segments is provided in the
Strategic Report.

2016

£’000

91,291

22,792

10,560

1,406

2015

£’000

79,482

15,985

8,878

1,655

126,049

106,000

6,658

8,024

132,707

114,024

7,950

6,888

2,227

(1,604)

15,461

6,658

22,119

(3,560)

2,340

(378)

(1,489)

19,032

7,147

4,320

1,181

(1,695)

10,953

8,024

18,977

5,187

(3,596)

779

(568)

(1,403)

19,376

* The proﬁt arising from license income sales to joint ventures in 2015 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.
No such elimination has occurred in 2016.

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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

3. Segmental analysis

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

2016
£’000

32,480

28,456

2016
% revenue

24%

21%

2015
£’000

35,022

19,468

2015
% revenue

31%

17%

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

2016
£’000

88,794

88,697

2015
£’000

69,851

69,745

106

Europe, Middle East & Africa (EMEA)

15,915

16,589

France

Germany

Israel

United Kingdom

Rest of EMEA

Asia Paciﬁc

People’s Republic of China

Japan

Taiwan

Rest of Asia Paciﬁc

Total revenue

435

4,652

2,077

7,340

1,411

27,998

1,413

3,830

17,287

5,468

169

3,415

1,137

9,540

2,328

27,584

949

4,665

19,905

2,065

132,707

114,024

Disclosure of non-current assets by location of assets:

Property, plant and equipment

Intangible assets

By location

USA

Singapore

Taiwan

2016
£’000

56,097

7,865

12,615

8,424

85,001

2015
£’000

44,377

6,630

8,872

5,275

65,154

2016
£’000

77,336

10,204

2,339

14,093

103,972

2015
£’000

63,694

8,502

1,297

13,350

86,843

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4. Adjusted proﬁt measures

The group’s results are reported after a number of imputed
non-cash charges and non-recurring items.

Therefore, we have provided additional information to aid an
understanding of the group’s performance.

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

The non-cash accounting charges of £3.6m (2015: £3.6m)
reﬂect a charge for share based payments of £2.0m (2015
£2.0m), the amortisation of acquired intangibles £1.4m (2015
£1.2m) and the unwind of the discounting of long term
balances £0.2m (2015 £0.4m).

The Group generated a non-cash proﬁt of £2.3m (2015
£0.8m) arising from a reduction in the estimated remaining
deferred consideration (settled via trade discount) in respect
of a previous acquisition. The deferred consideration has now
been fully settled. This has been classiﬁed within other income
and expenses in the consolidated income statement.

The restructuring and reorganisation costs of £0.4m (2015:
£0.6m) reﬂects some one-off costs relating to staff, facility and
asset write downs associated with the restructuring of the
groups manufacturing operations.

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

2016
£’000

(3,560)

2,340

(378)

(1,598)

(402)

(2,000)

2015
£’000

5,187

(3,596)

779

(568)

1,802

281

2,083

The deferred tax charge of £0.4m (2015: £0.3m credit) reﬂects
the net deferred tax impact associated with these
adjustments.

The gain on disposal of ﬁxed assets in 2015 related to a non-
cash exceptional gain of £4.8m relating to IQE’s contribution
to the creation of a joint venture Compound Semiconductor
Centre Limited. In addition, other unrelated disposals of ﬁxed
assets in 2015 realised a net gain of £0.4m.

Certain items noted above are accounting estimates based on
judgements, accordingly, the actual amounts may differ from
these estimates. The adjustments above are classiﬁed £1.7m
(2015: £1.8m) within gross margin, and £2.1m (2015: £2.0m)
within selling, general and administrative expenses

2016
£’000

36,415

34,728

(14,249)

(16,356)

22,119

20,665

20,630

19,032

21,440

19,440

2015
£’000

32,439

30,652

(13,462)

(15,452)

18,977

21,166

17,574

19,376

18,066

20,149

IQE PLC | Report and Annual Accounts 2016

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

Non-controlling interest

Tax

Share based payments

Finance costs

Depreciation of tangible ﬁxed assets

Amortisation of intangible ﬁxed assets

Loss/(Proﬁt) on disposal of ﬁxed assets

Impairment of assets*

Gain on release of contingent deferred consideration*

Restructuring and re-organisation costs*

EBITDA

2016
£’000

19,276

164

(408)

2,042

1,633

5,561

5,377

(2,340)

378

31,730

2015
£’000

19,864

285

(773)

2,001

1,790

6,192

5,040

(5,187)

453

(779)

115

29,001

* Exceptional items impacting EBITDA include the following items: impairment of assets, 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

Loss/(gain) on disposal of ﬁxed assets

Elimination of unrealised gains with joint ventures

Exceptional items**

2016
£’000

2015
£’000

5,561

5,377

125

3,717

143

(1,269)

2,042

53,948

(1,962)

6,192

5,040

141

3,081

138

(675)

2,001

45,338

(5,187)

7,286

(211)

*A schedule of services provided by the group’s auditors and
related fees is disclosed in the Audit Committee Report on
page 48.

**Exceptional items include the following items: re-
organisation costs, impairment of assets and the release of
contingent deferred consideration. Further details are provided
in note 4.

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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

2016
£’000

27,834

2,816

1,035

2,042

33,727

2015
£’000

23,314

2,664

956

2,001

28,935

2016
Number

2015
Number

364

111

475

364

124

488

Directors’ emoluments and share option details are disclosed
in the Remuneration Report on page 52 to 65. 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
£228,000 (2015: £164,000), was £4,545,000 (2015:
£3,581,000) and the charge for share-based payments was
£1,235,000 (2015: £1,284,000).

7. Finance costs

Bank and other loans

Finance lease interest

Unwind of discount on long term balances

8. Taxation

Current tax charge

Overseas taxes charges

Total current tax charge

Deferred tax credit

Total tax credit

2016
£’000

1,489

144

1,633

2016
£’000

(946)

1,354

408

2015
£’000

1,402

387

1,790

2015
£’000

(635)

1,408

773

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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8. Taxation (continued)

Factors affecting total tax credit

20.00% (2015: 20.25%). The differences are explained below:

The tax credit assessed for the year is different from that
resulting from applying the standard rate of corporation tax in

the UK:

Proﬁt on ordinary activities before taxation

Tax charge at 20.00% thereon (2015: 20.25%)

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

Total tax credit for the year

2016
£’000

19,032

(3,806)

(119)

(800)

3,285

1,848

408

2015
£’000

19,376

(3,924)

(41)

(311)

1,774

3,268

242

(235)

773

Finance (No.2) Bill 2016, which was substantively enacted in
September 2016, included legislation to reduce the main rate
of corporation tax from 20% to 19% from 1 April 2017 with a
further reduction to 17% 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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8. Taxation (continued)

Deferred tax asset

At 1 January

Deferred tax credit recognised in the year

Foreign exchange differences

At 31 December

2016
£’000

14,210

1,354

2,617

18,181

The current portion of the deferred tax asset is £1,300,000 (2015: £2,000,000) in relation to utilisation of tax losses.

Analysis of deferred tax

Accelerated capital allowances

Tax losses carried forward

Timing differences on Intangible assets

Other

At 31 December

2016
£’000

(10,693)

33,410

(7,848)

3,312

18,181

2015
£’000

12,332

1,408

470

14,210

2015
£’000

(8,336)

26,661

(7,547)

3,432

14,210

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 £14,339,000
(2015: £10,808,000). 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 £39,856,000 (2015: £37,469,000).

Company

There is an unrecognised deferred tax asset of £1,645,000
(2015: £522,000) which relates primarily to short term timing
differences arising on share option charges.

R&D Tax Credits

The Group recognised a credit of £792,000 (2015: £537,000)
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 2016 (2015: £nil).

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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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

2016
£’000

19,276

2,000

21,276

2016
Number

671,532,674

38,548,084

710,080,758

3.17p

2.87p

3.00p

2.71p

2015
£’000

19,864

(2,083)

17,781

2015
Number

662,633,162

21,247,935

683,881,097

2.68p

3.00p

2.60p

2.90p

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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Goodwill
£’000

Patents
£’000

Development
costs
£’000

Software
£’000

Acquisition
intangibles*
£’000

Total
£’000

1,756

421

(8)

2,195

224

291

34,751

6,310

(484)

4,322

44,899

13,381

3,700

1,766

3,811

1,373

5,265

943

251

6,694

104,865

8,138

(484)

(8)

1,401

17,551

8,129

130,062

3,474

1,374

836

18,022

5,377

2,691

18,847

1,268

5,684

26,090

Accumulated amortisation and impairment

The adjustment relates to the reduction in the deferred consideration payable in relation to the NanoGaN acquisition

69,574

1,904

26,052

3,997

2,445

103,972

57,853

1,532

21,370

2,868

3,220

86,843

Goodwill
£’000

Patents
£’000

Development
costs
£’000

Software
£’000

Acquisition
intangibles*
£’000

Total
£’000

Accumulated amortisation and impairment

591

1,162

1,756

174

224

29,014

4,979

758

2,806

1,003

6,366

94,662

298

7,174

3,029

34,751

3,811

6,694

104,865

9,501

3,601

279

13,381

760

182

943

2,148

12,583

1,208

5,040

118

399

3,474

18,022

57,853

11,721

69,574

55,885

1,968

57,853

11. Intangible assets

The Group

Cost

At 1 January 2016

Additions

Adjustment (see below)

Disposal

Foreign exchange

At 31 December 2016

At 1 January 2016

Charge for the year

Foreign exchange

At 31 December 2016

Net book value

At 31 December 2016

At 31 December 2015

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

57,853

55,885

1,532

417

21,370

19,513

2,868

2,046

3,220

86,843

4,218

82,079

* Acquisition intangibles relate to customer contract intangible assets

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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11. Intangible assets (continued)

The amortisation charge of: £5,377,000 (2015: £5,040,000)
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

2016
£’000

61,776

7,798

69,574

2015
£’000

51,403

6,450

57,853

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
assuming no subsequent growth. The Board approved budget
is used for the ﬁrst year of the forecast.

Key assumptions applied in the forecasts include:

Cost inﬂation 4% (2015: 2%),
A long term growth rate of 2% (2015: 2%)
A discount rate of 10% (2015: 9%)

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 c17% over the ﬁve year period
driven by growth in Photonics and emerging markets. This is
consistent with the overall group’s compound growth rate over
the last 5 years.

An impairment of the III/V Epitaxy CGU goodwill would not
arise in the event that the discount rate was increased from
10% to 15%. No impairment would arise if the EBITDA
compound growth rate fell to zero over the same period.

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11. Intangible assets (continued)

The Company

Cost

At 1 January 2016

Additions

At 31 December 2016

Accumulated amortisation

At 1 January 2016

Charge for the year

At 31 December 2016

Net book value

At 31 December 2016

At 31 December 2015

The Company

Cost

At 1 January 2015

Additions

At 31 December 2015

Accumulated amortisation

At 1 January 2015

Charge for the year

At 31 December 2015

Net book value

At 31 December 2015

At 31 December 2014

Patents
£’000

Software
£’000

1,073

299

1,372

1,073

368

416

376

368

Patents
Patents
£’000

Software
Software
£’000

1,073

332

368

332

Total
£’000

1,441

347

1,788

1,748

1,441

Total
Total
£’000

332

1,109

1,441

332

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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12. Property, plant and equipment

a) The Group

Cost

At 1 January 2016

Additions

Disposals

Foreign exchange

At 31 December 2016

Accumulated depreciation

At 1 January 2016

Charge for the year

Disposals

Foreign exchange

At 31 December 2016

Net book value
At 31 December 2016

At 31 December 2015

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

Land and
buildings

Short
leasehold
improve-
ments

Fixtures
and ﬁttings

Plant and
machinery

£’000

7,813

28,542

865

8,682

3,270

200

140

3,610

5,072

4,543

513

5,345

34,400

14,841

549

2,384

17,774

16,626

13,701

4,166

643

628

5,437

3,144

264

409

3,817

1,620

1,022

112,664

11,842

(1,129)

25,645

149,022

66,776

4,548

(737)

16,752

87,339

61,683

45,888

Land and
buildings

Short
leasehold
improve-
ments

Fixtures
and ﬁttings

Plant and
machinery

£’000

7,680

27,953

133

7,813

3,059

189

3,270

4,543

4,621

123

(467)

933

28,542

13,739

1,196

(380)

286

14,841

13,701

14,214

3,816

298

(20)

4,166

2,834

251

3,144

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

Total

£’000

153,185

13,002

(1,129)

32,483

197,541

88,031

5,561

(737)

19,685

112,540

85,001

65,154

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

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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

2016
£’000

2015
£’000

2,856

(408)

2,448

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 2016

Additions

At 31 December 2016

Accumulated depreciation

At 1 January 2016

Charge for the year

At 31 December 2016

Net book value

At 31 December 2016

At 31 December 2015

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

Fixtures
and ﬁttings
£’000

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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13. Investments

Cost

At 1 January 2016

Subsidiaries share based payments charge

At 31 December 2016

Provisions for impairment

At 1 January 2016

At 31 December 2016

Net book value

At 31 December 2016

At 31 December 2015

Cost

At 1 January 2015

Additions

Subsidiaries share based payments charge

At 31 December 2015

Provisions for impairment

At 1 January 2015

At 31 December 2015

Net book value

At 31 December 2015

At 31 December 2014

Investments in
subsidiaries
£’000

Other equity
investments
£’000

100,509

397

100,906

71,514

29,392

28,995

Investments in
subsidiaries
£’000

Other equity
investments
£’000

99,894

615

100,509

71,514

28,995

28,380

Total
£’000

100,584

397

100,981

71,514

29,467

29,070

Total
£’000

99,944

615

100,584

71,514

29,070

28,430

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.

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14. Inventories

Raw materials and consumables

Work-in-progress and ﬁnished goods

2016
£’000

22,528

5,970

28,498

2015
£’000

16,669

4,546

21,215

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 £8,076,000 (2015: £6,381,000).

The increase in provision includes a £1,200,000 gross up of
provisions following an improvement to management
information due to the implementation of a new system.
£121,000 (2015: 746,000) of inventories were written down
during 2016 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

As at 31 December 2016, 71% (2015: 82%) of trade
receivables were within terms. Of the other trade receivables,
81% (2015: 64%) were less than 30 days past due. An
allowance has been made for estimated irrecoverable
amounts from the sale of goods of £229,000 (2015:
£204,000). This allowance has been determined by reference
to past default experience. Included in other receivables is
accrued income of £10,421,000 (2015: £7,739,000).

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.

2016

Group
£’000

14,424

16,444

30,868

2016

Group
£’000

8,000

2016

Company
£’000

96,711

233

96,944

2016

Company
£’000

2015

Group
£’000

12,666

10,384

23,050

2015

Group
£’000

8,000

2015

Company
£’000

77,258

453

77,711

2015

Company
£’000

Amounts owed by group undertakings are unsecured and
repayable on demand. Interest is charged at a rate of 5% per
annum (2015: 5% per annum).

Financial assets relate to £8,000,000 of Preferred ‘A’ shares
(2015: £8,000,000) issued by the 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.

IQE PLC | Report and Annual Accounts 2016

Company No: 3745726

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16. Trade and other payables

Current

Trade payables

Deferred consideration

Overseas tax payable

Other taxation and social security

Accruals and deferred income

Non-current

Deferred consideration

Within deferred consideration is £nil (2015: £5.6m) being the
best estimate of the amount that will be settled through
contractually agreed price discounts. 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
£2.3m (2015: £0.8m). 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.

2016

Group
£’000

23,331

862

1,207

11,539

36,939

2016

Company
£’000

773

105

1,583

2,461

2016

Group
£’000

2016

Company
£’000

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

2,307

2015

Company
£’000

484

Amounts owed to group undertakings are unsecured and
repayable on demand. Interest is charged at a rate of 5% per
annum (2015: 5% per annum).

The carrying values of trade and other payables also
represent their estimated fair values.

There is no foreign currency exchange contracts held at 31
December 2016 or 31 December 2015.

17. Borrowings

The Group

Non-current borrowings:

Bank borrowings

Finance leases

Current borrowings:

Bank borrowings

Finance leases

Total borrowings

2016
£’000

2015
£’000

36,854

24,626

36,854

24,626

7,652

3,162

3,241

44,506

27,867

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17. Borrowings (continued)

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.

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

2016
£’000

7,652

34,906

1,948

44,506

2016
£’000

2015
£’000

3,162

23,084

1,542

27,788

2015
£’000

(1)

2015
£’000

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 £42,069,000 (2015 £25,402,000) which comprise mutli currency
acquisition, capital expenditure and RCF facilities, and an overdraft of £1,028,000 (2015: £866,000).

The Company

Non-current borrowings:

Bank borrowings

Current borrowings:

Bank overdraft

Bank borrowings

2016
£’000

34,524

1,028

7,545

8,573

2015
£’000

22,722

866

2,680

3,546

Total borrowings

43,097

26,268

IQE PLC | Report and Annual Accounts 2016

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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

2016
£’000

8,573

34,524

43,097

2016
£’000

4,038

104

(1,283)

729

3,588

2016
£’000

1,421

2,167

3,588

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

During 2015, as part of the re-organisation and rationalisation
of the Group’s operations the Group 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 two and a half years. The provision has
been discounted using a risk free rate of 2.5%.

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19. Financial instruments

Financial instruments by category

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, of which all are reviewed for
appropriate credit worthiness.

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.

2016
Group
£’000

4,957

14,424

2016
Company
£’000

2015
Group
£’000

4,644

12,666

2015
Company
£’000

96,711

77,258

10,421

8,000

37,802

96,711

7,739

8,000

33,049

77,258

Trade and other receivables (excluding prepayments) and
cash and cash equivalents are classiﬁed as 'loans and
receivables'. Borrowings and trade and other payables are
classiﬁed as 'other ﬁnancial liabilities at amortised cost'. Both
categories are initially measured at fair value and
subsequently held at amortised cost. All ﬁnancial instruments
are classiﬁed as Level 2 per the fair value hierarchy.

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.

Carrying amount – Loans and Receivables

Cash and Cash equivalents

Trade receivables

Amounts owed by group undertakings

Other receivables

Financial Assets (Preference share receivables)

Included in other receivables is accrued income of
£10,421,000 (2015: £7,739,000).

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.

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19. Financial instruments (continued)

Not past due
Past due 0-30
Past due more than 30

Gross Provision
2016
£’000
£’000

2016
£’000
£’000

9,569
4,112
972
14,653

-
-
229
229

Net
2016
£’000
£’000

9,569
4,112
743
14,424

Gross
2015
£’000
£’000

10,033
1,823
1,014
12,870

Provision
2015
£’000
£’000

-
-
204
204

Net
2015
£’000
£’000

10,033
1,823
810
12,666

An allowance has been made for estimated irrecoverable
amounts from the sale of goods of £229,000 (2015:
£204,000). 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 2016 a 1 cent
movement in the US dollar to Sterling rate would impact the
net value of these instruments by £20,000 (2015: £53,000)
(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 £65.0m (2015:
£41.1m).

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
- Other ﬁnancial liabilities at amortised cost

Carrying
amount

Contractual
Cash ﬂows

Less than
12 months

1 – 2
Years

2 – 5
Years

£’000

5+
Years

£’000

36,078

£’000

36,078

44,506

47,745

9,251

32,731

2,860

2,903

80,584

83,823

45,329

32,731

2,860

2,903

31 December 2016

Trade and other payables

Deferred consideration

Secured bank loans

Finance leases

Analysis of contractual cash ﬂow maturities
- Other ﬁnancial liabilities at amortised cost
31 December 2015

Trade and other payables

Deferred consideration

Secured bank loans

Finance leases

Carrying
amount

Contractual
Cash ﬂows

Less than
12 months

£’000

29,798

11,539

27,788

£’000

29,798

11,539

30,881

£’000

29,798

11,055

3,956

1 – 2
Years

£’000

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

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19. Financial instruments (continued)

Market risks

1. Currency risk

(a) Cash ﬂow risk

The group’s presentational currency is sterling. However, the
majority of sales are denominated in US dollars. Therefore,
the group’s cash ﬂows are affected by ﬂuctuations in the rate
of exchange between Sterling and the US dollar.

This exposure is managed by a natural currency hedge
because a signiﬁcant portion of the group’s cost base is also
denominated in US dollars. In particular, the majority of the
group’s raw materials are purchased in US dollars, and a
signiﬁcant portion of labour and overheads are also
denominated in US dollars as 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 2016 and 31
December 2015 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 £0.1m (2015: £0.1m).

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.

The variable rate US dollar term loans, which had a principal
outstanding at 31 December 2016 of £nil (2015: £0.3m), and
bear interest of between 2.0% to 2.95% over LIBOR. These
loans were repayable by monthly instalment with the
outstanding balance repaid in full during 2016.

The ﬁxed rate US dollar term loans, which had a principal
outstanding at 31 December 2016 of £2.4m (2015: £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 2016 of £6.5m (2015: £8.1m),
bears interest of between 2.5% to 2.95% over LIBOR. This
loan is repayable by quarterly instalments with a remaining
term of 1 years.

The US Dollar revolving credit facility is a multi-currency
facility of up to $63 million, committed until 2018. It bears
interest of between 1.75% to 1.90% over LIBOR. The balance
drawn at 31 December 2016 was £30.9m (2015: £17.6m).

The UK Sterling capital expenditure facility, which had a
principal outstanding at 31 December 2016 of £5.0m (2015:
£nil), bears interest at 1.90% over the bank of England base
rate. This loan are repayable by monthly instalment with
remaining terms of up to 3 years.

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 2016 was 7% (2015: 8%).

Floating rate liabilities are primarily indexed to LIBOR. The
group did not enter into any interest rate swap instruments
during 2016. 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 2016
annual interest charge by approximately £170,000 (2015:
£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 2016
was £233,993,000 (2015: £187,390,000).

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 2016 the gearing ratio was 17%
(2015: 22%).

All covenants in relation to the group’s borrowing facilities
have been complied with during the year.

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19. Financial instruments (continued)

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

2016

Carrying
amount
£’000

4,957

14,424

10,421

8,000

2016

Fair
value
£’000

4,957

14,424

10,421

8,000

(36,078)

(44,506)

(44,798)

2015

Carrying
amount
£’000

4,644

12,668

7,739

8,000

(29,798)

(11,539)

(27,788)

(79)

2015

Fair
value
£’000

4,644

12,668

7,739

8,000

(29,798)

(11,539)

(28,136)

(79)

(42,782)

(43,074)

(36,153)

(36,501)

Basis for determining fair value

Trade and other receivables/payables

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.

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

2016

Number
of shares

2016

£’000

2015

Number
of shares

2015

£’000

675,506,061

6,755

665,533,170

6,655

The movement in the number of ordinary shares during the year was:

At 1 January

Employee share schemes

Translucent deferred consideration

At 31 December

2016
Number

2015
Number

665,533,170

660,327,767

4,831,424

5,141,467

5,205,403

675,506,061

665,533,170

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20. Share capital (continued)

9,972,891 ordinary shares (2015: 5,205,403 Ordinary shares) were issued during the year as follows:

Employee share schemes

Translucent deferred consideration

2016
Number
of shares

4,831,424

5,141,467

9,972,891

2016
Consideration

2015
Number
of shares

2015
Consideration

Nil to 36.5p

5,205,403

Nil to 15.66p

Nil

5,205,403

The share premium arising from the consideration received of £578,000 (2015: £544,000) was £1,481,000 (2015: £492,000).

21. Share based payments

The total amount charged to the income statement in 2016 in
respect of share based payments was £2,042,000 (2015:
£2,001,000). Included within the share based payments
charge is a £1,216,000 (2015: £1,186,000) 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

2016

25.21

15.63

52%

1.25%

2015

22.46

12.49

53%

1.25%

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 2016 was £3,678,693 (2015: £33,000).

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20. Share based payments (continued)

The movements on share options during the year were as follows:

At 1 January

Granted

Exercised

Cancelled/lapsed

At 31 December

2016
Number
of options

45,532,098

19,258,119

(3,744,854)

(487,987)

60,557,376

2016
Average exercise
price (pence)

2015
Number
of options

2015
Average exercise
price (pence)

13.14

2.02

15.63

17.81

9.42

50,536,520

540,000

(4,354,287)

(1,190,135)

45,532,098

13.12

20.50

12.49

18.19

13.14

The weighted average share price at the time of the options exercised during 2016 was 21.48p (2015: 21.72p).

As at 31 December 2016, the total number of options held by employees was 60,557,376 (2015: 45,532,098) as follows:

Option price pence/share

Option period ending

2016
Number of options

2015
Number of options

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

0.00p – 37.92p

At 31 December

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

31 December 2026

4,690,404

136,875

4,880,325

1,288,498

4,665,068

5,112,392

14,001,062

5,984,633

540,000

19,258,119

60,557,376

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

20. 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
£184,000 (2015: Loss £119,000).

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23. Cash generated from operations

The Group

Proﬁt before tax

Finance costs

Depreciation of property, plant and equipment

Amortisation of intangible assets

Loss/(proﬁt) on disposal of ﬁxed assets

Non cash element of joint venture transactions

Impairment of assets

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 in trade and other payables

Cash inﬂow from operations

The Company

Loss before tax

Finance income

Finance costs

Foreign exchange

Gain on release of deferred consideration

Depreciation

Amortisation

Share based payments

Cash inﬂow/(outﬂow) from operations before changes in working capital

(Increase)/Decrease in trade and other receivables

Increase/(Decrease) in trade and other payables

Cash (outﬂow)/inﬂow from operations

2016
£’000

2015
£’000

19,032

19,376

1,633

5,561

5,377

(2,340)

(3,959)

2,042

27,393

(4,206)

1,437

(2,161)

22,463

2016
£’000

(184)

(4,290)

1,278

6,886

(486)

1,644

4,893

(14,942)

1,237

(8,812)

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)

(4,230)

1,088

1,614

1,387

(245)

8,126

(1,451)

6,430

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Company No: 3745726

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24. Reconciliation of net cash ﬂow to movement in net debt

2016

£’000

(315)

(12,623)

3,252

(9,597)

(23,223)

(9,597)

(6,729)
(39,549)

2015

£’000

(1,109)

(4,349)

14,191

918

9,651

(31,251)

9,651

(1,623)
(23,223)

At 1
January
2016
£’000

(24,626)

(3,162)

(79)

(27,867)

4,644

(23,223)

Cash
ﬂow
£’000

(12,623)

3,252

(9,282)

(315)

(9,597)

Other
non-cash
movements
£’000

395

(7,742)

(10)

(7,357)

628

(6,729)

At 31
December
2016
£’000

(36,854)

(7,652)

(44,506)

4,957

(39,549)

Decrease 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

Cash and cash equivalents at 31 December 2016 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.

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26. Subsidiary undertakings

Name of company

Class of capital

Proportion of
shares held

Activity

Country of
incorporation

IQE (Europe) Limited

IQE Inc

IQE KC LLC

IQE Taiwan ROC

IQE RF LLC

Ordinary shares of
£1

Common stock of
$0.001

Limited liability
company

100%*

100%

Ordinary shares of
NT$10

90%*

Limited liability
company

IQE Silicon Compounds
Limited

Ordinary shares of
£1

MBE Technology Pte Ltd

Wafer Technology Limited

Preferred shares of
S$1
Ordinary shares of
S$1
Ordinary shares of
£1

EPI Holding Limited

KTC Wireless LLC

IQE USA Inc

IQE Solar LLC

IQE Properties Inc

Ordinary shares of
£1

Limited liability
company

Manufacture of advanced
semiconductor materials

Manufacture of silicon epitaxy

USA

Taiwan

USA

Manufacture of advanced
semiconductor materials

Singapore

100%*

100%

100%*

100%

Manufacture of semiconductor
compounds and ultra high
purity materials

Dormant holding company

100%*

Dormant company

100%*

Property holding company

USA

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%*

Wafer Technology
International Limited

Ordinary shares of
£1

100%

Dormant holding company

* Indirect holdings

The proportion of voting rights of subsidiaries held by the
group is the same as the proportion of shares held.

All UK subsidiaries are exempt from the requirements to ﬁle
audited ﬁnancial statements by virtue of section 479A of the
Companies Act 2006. In adopting the exemption IQE plc has
provided statutory guarantee to these subsidiaries in
accordance with section 479C of the Companies Act 2006.

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27. Joint ventures

The group holds investments in two joint ventures as follows:

Name of company

Class of capital

shares held Activity

Proportion of

Country of
incorporation

Compound Semiconductor
Centre Limited.

Common stock of
£1 par value

CSDC Private Limited.

Common stock of
$1 par value

* Indirect holdings

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.

50%* Research, development and

Manufacture of semiconductor
materials

51%* Research, development and

Singapore

Manufacture of semiconductor
materials

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 2016 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
EBITDA

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

2016
£’000

3,955

(680)

(4,422)

2016
£’000

38,678

4,052

(4,857)

(19,249)

18,624

2015
£’000

1,521

(315)

(954)

2015
£’000

33,310

5,168

(666)

(14,766)

23,046

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27. Joint ventures (continued)

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

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

EBITDA

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

2016
£’000

18,624

50%

9,312

(12,000)

2,688

2016
£’000

(726)

(2,465)

(2,211)

(5,402)

2015
£’000

23,046

50%

11,523

(12,000)

477

2015
£’000

(249)

(477)

(726)

2016
SG$’000

2015
SG$’000

13,264

(1,877)

(2,090)

12,208

(1,822)

(1,820)

(1,897)

2016
SG$’000

2015
SG$’000

6,959

(2,356)

(8,590)

(3,987)

2016
SG$’000

(3,987)

51%

(2,033)

2,033

4,445

(3,834)

(2,508)

(1,897)

2015
SG$’000

(1,897)

51%

(967)

967

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Company No: 3745726

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27. Joint ventures (continued)

Summary of cumulative unrecognised losses

Cumulative unrecognised losses brought forward

Unrecognised losses in the year

Cumulative unrecognised losses carried forward

28. Related party transactions

The group incurred professional fees and expenses during the
year of £126,493 (2015: £125,000) payable to Horton
Corporate Finance and £42,000 (2015: £45,000) 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 £41,750 (2015: £63,500)
was outstanding to these parties at the year-end.

During the year the group recognised Revenue of £nil (2015:
£207,000) with Seren Photonics Limited. Dr G H H Ainsworth
is a Director of IQE plc and Seren Photonics Limited. As at the
31 December 2016 £nil (2015: £ nil) was receivable from
Seren Photonics Limited. During 2015 IQE provided loans to
Seren Photonics Limited of £25,000 and during 2014, IQE
made a £50,000 investment in Seren Photonics Limited during
the year in return for 69 “B” ordinary shares.

2016

SG$’000

2015
SG$’000

(967)

(1,066)

(2,033)

(967)

During the year the group recognised Revenue of £1,728,000
(2015: £240,000) and also made purchases of £7,163,000
(2015: £5,860,000) with CSDC Private Limited a joint venture
of the Group. An amount of £1,402,000 was due from (2015:
£457,000 due to) CSDC Private Limited at year end.

During the year the group recognised revenue of £4,930,000
(2015: £7,784,000) which is net of an elimination of unrealised
proﬁt of £nil (2015: £7,286,000). The group also made
purchases of £3,955,000 (2015: £1,521,000) and recharged
other costs of £350,000 (2015: £145,832) 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 £2,714,268 (2015:
£728,156) was owed to the CSC at year end. In the groups
year end balance sheet there are receivables of £8,000,000
(2015: £8,000,000) relating to Preferred ‘A’ Shares held in
CSC and a shareholder loan of £230,000 (2015: £115,000).

29. Operating lease commitments

Due within one year

Due between two and ﬁve years

Due after ﬁve years

Operating leases relate to various building, equipment and vehicle leases.

29. Operating lease commitments

The group had capital commitments at 31 December 2016 of
£356,000 (2015: £747,000).

2016
£’000

1,969

6,034

10,481

18,484

2015
£’000

2,082

6,519

11,378

19,979

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