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Annual report and financial statements | 2017
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
Overview of 2017
05: Chairman’s report to shareholders
08: Business review
13: Outlook
Strategic report
15: Strategic report
18: Our business
21: CSR, health, safety & environment
28: Principal risks & uncertainties
38: Financial review
Directors’ report
41: Compliance & governance statements
52: Director’s report
55: Remuneration statements
64: Annual report on remuneration
74: Officers & professional advisors
Financial statements
80: Financial statements
91: Notes to the financial statements
It is with the deepest sadness that the Board of announced in April 2018 that its
long-serving Chief Financial Officer, Phillip J Rasmussen BSc ACA, had died. His
death follows a cycling incident that took place on 1 April 2018 whilst on holiday
abroad.
On behalf of the Board and all of Mr Rasmussen’s IQE colleagues, IQE President
and Chief Executive Officer, Drew Nelson, commented:
“The news of Phil’s death has shocked and distressed all of us at IQE. The tragedy, of
course, will be most deeply felt by Phil’s family, who we send our heartfelt condolences to
at this terrible time. It is also a tragedy for so many of us who considered Phil a friend as
much as a colleague.
Phil was a great colleague and an accomplished CFO. He made the role his own,
contributing so much over his ten years with us to IQE’s current strength; to the detailed
and principled way we do things; to the potential we see before us as a firm. It has been
my great privilege to work with Phil, to benefit from his good judgement and to count
him as a very close friend. We will do everything we possibly can to preserve his legacy
at IQE and continue with the shining example he has set for all of us.”
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Chairman’s report
to shareholders
Revenue increased by
16% to
£154.5m
(2016: £132.7m)
Adjusted operating
profit increased to
£26.4m
(2016: £22.1m)
2017 – A transformational year
It is with great pleasure that I present
our 2017 annual report and financial
statements, providing details of the
Group’s strong operational and financial
performance in what has been a
transformational year in the Group’s
history.
During 2017 we continued to deliver 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.
In addition to referring to GAAP profit
measures, I also refer to adjusted profit
measures, which are detailed in note 5.
Revenue increased by 16% to £154.5m
(2016: £132.7m). Adjusted operating profit
increased to £26.4m (2016: £22.1m),
and GAAP operating profit decreased to
£17.0m (2016: £19.8m).
This record financial performance marks
the adoption of IQE’s VCSEL technology in a
mass market application during the second
half of 2017.
We ended the year with net funds of
£45.6m (2016: net debt of £39.5m),
reflecting £95m of gross new equity raised
in November 2017 which will be used to
fund ongoing capacity expansion in 2018
to meet the rapidly rising demand as VCSEL
adoption broadens.
The scene is set
Our well proven track-record in providing
the key enabling technologies that power
a wide range of applications including
new and emerging wireless and photonics
devices, coupled with our innovative
product portfolio, should give our investors’
confidence in IQE’s position and capabilities
to provide excellent long-term shareholder
returns.
Our commitment to innovation in
advanced semiconductor technologies
clearly positions IQE centre-stage in helping
to shape the future that is transforming
the way we live, work, travel and spend our
leisure-time.
Over the last few years we have set out
our strategic roadmap, setting the scene
with our vision and ambition to develop
an unparalleled depth and breadth of
advanced materials capabilities, and to
diversify our technology and product
portfolio.
The Group continues to go from strength
to strength across each of our primary
markets: Wireless, Photonics, Infrared, and
CMOS++ and is making good technical
progress with our developing markets:
Advanced Solar and Power.
The clear focus on the execution of our
strategy is demonstrated by our strong
financial performance in 2017, with sales
of wafer products up 21% to £152.6m
(2016: £126.0m), propelling the related
operating profit (excluding license income)
up 59% to £24.5m on an adjusted basis
(2016: £15.4m), and up 15% to £15.1m on
a GAAP basis (2016: £13.2m). The increase
in adjusted profits reflect a 58% increase
in wafer related profits from £15.4m
to £24.5m partially offset by the £4.8m
reduction in license income.
Our key industry differentiators stem from
our superior technology capabilities, the
scale of our operations and the breadth
of our product and service portfolio. This
in turn is enabling the group to distinguish
itself in the market, and transition its
business model from a “materials solutions
company”, where wafers are developed to
customer specifications, into an “innovative
enabler” where IQE’s material solutions
provide chip designers with a new
“toolkit” to develop chips which push the
boundaries of performance and reduce the
barriers of cost.
The Group continues to drive progress
through innovation. We have built
our portfolio of pioneering, world-
class materials technologies including
demonstration of the first single crystal
aluminium nitride epi-wafers for high
performance wireless filters, cREO™ for
integration of complementary materials
technologies, and Quasi Photonic Crystals
and Nano-Imprint Lithography for a wide
range of optical technologies including DFB
lasers, and integrated 3D sensing solutions.
During the year, we also saw increased
levels of customer engagements in areas
such as “see in the dark” technologies that
to date have been limited to specialist
defence and security applications but are
now migrating into mass market consumer
applications.
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In addition to building our IP portfolio, excellent progress
has been made with the new wafer foundry in Newport,
South Wales. This ‘mega foundry’ will house up to 100
tools, creating a facility with unparalleled capacity and
economies of scale in our industry. The facility is being
leased, and the group is purchasing and installing
new equipment into the facility. The related capital
expenditure is included within property, plant and
equipment in note 14. This facility was not operational
in 2017 and hence no depreciation has been charged
in 2017. The related lease commitment and capital
commitments are incorporated in notes 31 and 32
respectively.
Excellent progress continues at IQE’s Joint Ventures in
the UK and Singapore, expanding external customer
engagements and improving financial performance,
reflect key milestones for these early-stage businesses.
Driving innovation
Innovation is central to economic growth and prosperity
and a key driver in improving competitiveness, adding
value, providing high quality employment opportunities
and helping to address major societal challenges.
In recent years, IQE has played a key role in promoting
wider understanding of the impact that compound
semiconductors will have in transforming the 21st
century.
IQE’s role in promoting the UK as a global hub for
compound semiconductor activities should not be
underestimated. South Wales and the West of England
has so far attracted more than £300M of committed
public/private funding across a range of compound
semiconductor related initiatives. Much of the compound
semiconductor related activity is centred around IQE’s
corporate headquarters where the company is regarded
as a regional anchor company.
Activities include Cardiff University’s Institute for
Compound Semiconductors, EPSRC’s Compound
Semiconductor Manufacturing Hub, The UK
Government’s 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.
Delivering on our strategy
IQE manufactures and supplies compound
semiconductor wafer products. Compound
semiconductors offer significantly higher performance in
electronic and photonic applications, enabling operating
speeds of more than 100 times those of silicon, helping
to create a smarter, more advanced and more connected
world that, every day, enriches our lives in so many ways.
Our highly skilled and talented people have a keen
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.
2018 marks IQE’s thirtieth year pioneering advanced
technologies at the forefront of the compound
semiconductor industry.
During the last thirty years, we have developed an
unparalleled depth and breadth of intellectual property
and technical capabilities and are truly established as
the clear global leader in advanced semiconductor wafer
products.
IQE is the undisputed global leader in the supply of
advanced wireless materials and is now replicating this
success in other primary markets, particularly the rapidly
growing photonics sector where the Group’s products
enable a wide range of technologies from 3D sensing to
high-speed optical communications.
The Group has firmly established its
platform for delivering its 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
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During 2017 we reinforced our strategy by expansion of
our technology leadership by the further development
of our broad IP portfolio through both internal
development and strategic transactions. In so doing, we
are transitioning from a “materials solutions company”,
into an “innovative enabler.”
Operational highlights
As shown in note 4, whilst advanced wafers for wireless
communications applications continue to represent a key
proportion of IQE’s business, revenues remained broadly
flat at £91.6m (2016: £91.3m), reflecting a £3m managed
reduction in supplier managed inventories (SMI), enabling
the business to focus capacity on the rapidly expanding
photonics division with the ramp of VCSEL product lines
during the second half of 2017 to support new consumer
applications including 3D sensing. Wireless SMI levels are
expected to replenish during 2018.
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
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qualifications in the pipeline.
Our fastest growth area was our photonics market,
exhibiting 109% growth to £47.6m for the full year (2016:
£22.8m), with second half sales up more than 160% over
the prior year’s second half year. The aggressive ramp of
VCSEL sales during H2 represents a unique achievement
in the industry, as IQE leveraged its expertise of mass
market supply to this complex photonics material.
InfraRed products also demonstrated solid continued
growth, increasing by 14% to £12.0m (2016: £10.6m).
During the year, we also saw increased levels of
customer engagements in areas such as “see in the dark”
technologies that to date have been limited to specialist
defence and security applications whereas we are now
engaged with major OEM and device companies in
developing InfraRed products for mass market consumer
applications.
As in prior years, we delivered increased underlying
profitability, earnings and cash-generation.
Whilst we anticipate that the wireless sector will remain
a major part of the Group’s future business, we expect
significant upside potential in the medium term due to:
innovation in smartphone hardware, including the wider
adoptions of advanced sensor technologies such as
3D sensing; the adoption of GaN on Silicon technology
for base stations; the transition to 5G communications;
and the combination of silicon with compound
semiconductors using cREO™ for other wireless
communication chips.
Organisation development
The Group continued with its Organisational
Development Programme. This has involved the transfer
of production between our sites to improve operational
efficiency. Further operating efficiencies are expected to
be achieved through merging and consolidating existing
operational facilities over time. Continuous improvement
is an ongoing process across IQE’s global operations, with
numerous programmes under way at any given time.
Market diversification
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.
The business continues to focus on its six key business
units with a priority on those market sectors such as
photonics and power, which are already exhibiting the
highest near term growth potential.
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 and to prioritise and promote the
formation of technology clusters focused on compound
semiconductors.
Realising the opportunity
I have previously expressed my excitement about our
position and the growth prospects for our industry. 2017
saw the early fruits of delivering on just one of the many
opportunities for which we have been preparing. Our
performance during 2017 demonstrated a successful
execution of a strategy that provides solid foundation for
repeated future success stories.
As a key enabler at the start of multiple, complex supply
chains, IQE’s products are not immediately apparent to
consumers even though the devices we all depend on
such as smartphones, could not work without the part
that IQE plays.
It is apparent from attendance at international
conferences and trade-shows that IQE is highly regarded
across our industry and throughout our supply chains.
The importance of IQE’s role in supply chains is
evidenced by the levels of non-disclosure agreements
between the company and its key suppliers and
customers. IQE is seen by our customers as offering
unique competitive advantage and our high regard and
systems for protecting our own as well as our customers
IP and other confidential information is highly respected
and considered as one of our key USPs.
We have started 2018 uniquely positioned to continue
to build on our successes to date to take advantage of
the plethora of high-growth opportunities that lay before
us and to deliver further strong results and to take
advantage of new, high-growth opportunities.
I would like to thank my fellow Directors and all the
management and staff of IQE for the success of the past
year and their part in its achievement.
The skills, experience and talent of our people is at the
very heart of our business. My sincere thanks go out for
the hard work and professional expertise of the whole
IQE team 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 Sir Derek Jones, who has joined our
Board as a Non-Executive Director. Sir Derek’s strong
credentials and experience brings a new perspective.
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.
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Business review
Organisation
The Group has established six market facing Business
Units within the organisation: IQE Wireless, IQE
Photonics, IQE InfraRed, IQE Solar, IQE Power, and IQE
CMOS++
Each Business Unit has a clear product and customer
focus, but continues to benefit from the production and
technology synergies of the whole Group. The emerging
markets of Solar and Power are in pre-production and
hence are not yet significant enough to be separated in
our segmental reporting.
Wireless
Compound Semiconductors play an essential role in
high speed wireless communication, and have been
an enabling technology for mass market applications
such as smartphones and wifi. IQE is the market leader
with an estimated 55%-60% share of this global market.
Wireless accounted for approximately 60% of IQE’s wafer
sales in 2017 (2016: 72%)
Following the launch of the iPhone in 2007 this market
enjoyed several years of double digit organic growth,
as the launch of new handsets were usually met with a
“feeding frenzy” of consumers eager to secure the latest
model. However, market growth has cooled since 2013
as the innovation cycle struggled to keep apace. In fact,
according to industry analyst IDC, overall smartphone
shipments during the year remained flat at 1.47 billion
units (2016: 1.47 billion units). This represents a core and
stable part of IQE’s business.
Despite the lack of growth in smartphone sales, the
relentless increase in data traffic continues to drive the
need for more sophisticated wireless chip solutions
in handsets. This is driving the market towards 5G
communication, which IQE sees as a significant upside
potential for its wireless business as this transition will
require much more complex material technologies.
Infrastructure applications such as base stations, radar
and CATV are a small but rapidly growing part of IQE’s
wireless segment. This is becoming an increasing
important part of IQE’s business as the superior
performance of this CS technology continues to replace
the incumbent silicon LDMOS technology. Indeed, in
partnership with MACOM Technologies Inc., IQE has
developed a high performance low cost solution (GaN
on Silicon) to accelerate the displacement of LDMOS.
Indeed, MACOM is in the process of qualifying this
technology downstream, and concluded a high volume
chip fabrication partnership in late 2017 in anticipation of
a production ramp on completion of these qualifications.
The fastest growing segment of the wireless chip market
over the past few years has been for high performance
filters. Although the primary materials technology
for filters (aluminium nitride, or AlN) is made from
compound semiconductor elements, the wafers have
been fabricated using a less sophisticated process called
sputtering, reflecting that producing a more sophisticated
single crystal epitaxial solution has been a significant IP
challenge. IQE overcame these hurdles in late 2017,
and prototyped single crystal AlN wafers. We are now
engaged with multiple customers who see this advance
as a potentially disruptive solution.
Wireless continues to be a
significant and stable business for
the group, and is expected to grow
at a rate of up to 5% in the near
term. Furthermore, this division has
several exciting developments which
provide routes for a return to double
digit growth, including:
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Innovation in smartphone hardware,
including the adoption of advanced
photonics sensors;
The adoption of GaN on Silicon
technology for base stations
The transition to 5G communications,
requiring more advanced CS materials
The adoption of high quality CS
materials solutions enabled by cREO™
for wireless filters
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Photonics
Photonics refers to devices that emit or detect light, such
as advanced laser and sensors. They enable a wide range
of end markets in the communications, consumer, and
industrial space. This segment accounted for 31% of IQE’s
wafer sales in 2017, up from 18% in 2016. This is IQE’s
most rapidly growing segment.
There are two critical technologies
in this segment:
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Vertical Cavity Surface Emitting
Lasers (“VCSEL”) - the key enabling
technology behind a number of
high growth markets including 3D
sensing, data communications, data
centres, gesture recognition, health,
cosmetics, illumination and heating
applications. IQE is the market leader
for outsourced VCSEL materials,
which has been achieved by virtue
of its technology leadership. This
includes the demonstration of VCSELs
with record speeds, efficiencies and
temperature performance. In addition,
with its 6” wafer capability IQE has been
successful at enabling its customers
to reduce significantly the unit cost
of chips which is accelerating the
adoption of this technology.
Indium Phosphide (“InP”) – this
technology enables fibre to the
premises (“FTTX”). The continued
development of this technology to
achieve higher performance at lower
costs, plus the explosive growth in data
traffic is leading to the extension of the
fibre optic network “to the premises” –
also known as “the last mile”. IQE has
developed advanced laser technologies
with differentiated IP which underpins
it high growth expectations for this
business.
Photonics sales increased by 109% year-on-year, with
H2 sales up more than 160% over prior year H2. This
reflects a strong ramp of VCSEL’s into a mass market
consumer application through the second half of 2017.
This was a unique achievement within the industry,
as IQE leveraged its expertise of mass market supply
to rapidly ramp the supply of this complex photonics
material into unprecedented volumes. The supply of
materials into this ramp was delivered under multiple
multi-year contracts.
There is little doubt that sensing technologies, from
facial recognition, to gesture recognition and LIDAR,
will represent a major growth area in the near term
and extending into the future. Some analysts have
referred to this as the start of a “super cycle”. Indeed,
this is reflected in the breadth of product development
programmes in which IQE is engaged, and which
now span multiple Tier 1 OEM’s (directly and via chip
customers) who are targeting mass market ramps in 3D
sensing applications over the next 12 to 18 months.
However, VCSELs have many more applications beyond
sensing, including fibre optics for data centres, industrial
heating, and machine vision to name but a few. IQE
has built a strong technical lead in this market, which
combined with its unparalleled track record for mass
market delivery, positions IQE well for continuing strong
growth.
Whilst VCSEL has been the star of the show, our InP
business continues to perform well. This market is being
driven by the need for higher speed, higher capacity
fibre optic systems to address continuing growth in
data traffic. As a result, more sophisticated materials
solutions are becoming critical to achieve higher levels
of performance. To address this evolving market, IQE
has developed novel technologies which enable higher
performance with lower cost of manufacture. This
includes an innovative solution for Distributed Feedback
Lasers (DFB’s) for high speed FTTX chips. We are
engaged in qualifications with several customers for this
technology, which are expected to ramp into production
over the next 6-12 months.
The photonics business is expected to grow at a rate of
35%-60% in the near term based on products currently
in production. The introduction of new technologies
provide potential for higher growth rates, and therefore
we will highlight new technologies as these reach
commercial adoption.
InfraRed
IQE is a global leader in the supply of indium antimonide
and gallium antimonide wafers for advanced infrared
technology, primarily “see in the dark” defence
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 has enabled the
business to secure several contract wins and drive sales
growth. We expect this business to continue to grow
between 5%-15% with its current product range.
Beyond defence, the InfraRed division has been
successful in broadening is customer engagements
into product development for mass market consumer
applications. Indeed, we are now engaged with major
OEM and device companies in developing InfraRed
products for consumer applications including sensing.
This provides potential for higher growth rates, and
therefore we will highlight new technologies as these
reach commercial adoption.
Advanced Solar (CPV)
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
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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.
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, therefore we will highlight new
technologies as these reach commercial adoption.
Power
Gallium Nitride on Silicon (GaN on Si) is driving a
technology shift in the multi-billion dollar power
switching and LED markets. IQE has continued to
push the technology boundaries and is making rapid
progress both technically and in developing commercial
relationships in the supply chain. The power switching
market alone is approximately 3-4 times the size of the
current wireless PA chip market, and represents a major
growth opportunity for IQE. IQE’s patented technology,
cREO™, provides a significant competitive advantage in
this space. We will highlight new technologies as these
reach commercial adoption.
CMOS++
Future semiconductor technology architectures are
moving strongly toward hybrid integrated chips using
a combination of traditional CMOS based chips with
Compound Semiconductor chips, all built on a silicon
base wafer. This provides the market with the significant
technical advantages of Compound Semiconductors
at the cost point of silicon, and allows the CS industry
to utilise the huge investment already made into
large scale Silicon chip manufacturing. As a result, this
greatly increases the available market for Compound
Semiconductors. IQE has developed multiple routes to
delivering this powerful new hybrid, and the addition
of cREO™ and other IP provides unique solutions to
achieving the end goal. IQE is involved in multiple
programmes across the globe, which are developing the
core technologies from which we expect highly significant
revenue streams to emerge over the next 3-5 years.
Competitive advantage
IQE has built a strong leadership position in the market
for CS materials. This leadership has been built
around an unparalleled breadth of IP, in contrast to
IQE’s competitors who operate within the constraints
of their narrow IP portfolios and inferior research and
development capabilities. Uniquely, this makes IQE
a “one stop shop” for CS materials, at a time when
the market is increasingly seeking multiple material
solutions to meet expanding and diverse end markets.
This represents a powerful competitive advantage for
IQE in a market where qualification barriers are high,
and microscopic variations in wafer crystals can have
dramatic adverse operational and financial implications
downstream.
The operational and financial risks associated with
variations between wafers creates the second layer
of IQE’s defensive moat. To provide context, every
epitaxial tool has to be individually qualified in order to
be released for production in any supply chain. This is
because the complexity of the technology creates an
inherent risk of microscopic variations between wafers
in the same production run, as well as from run-to-
run. These variations can have dramatic and costly
implications downstream. Whilst there is a significant
IP barrier in being able to produce these materials,
there is an equally challenging IP barrier of controlling
variations to be able to repeatedly and reliably produce
high quality materials in high volume which enable high
yields down stream. Accordingly, customers are “sticky”,
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a dramatically lower cost of production.
Capacity expansion
In November 2017, IQE announced the placing of 67.9
million new ordinary shares, raising gross proceeds of
approximately £95 million. The fund raise was primarily
to finance a capacity expansion programme to deliver
the scale needed to capture multiple high growth market
opportunities. Of immediate significance is the ramp
in demand for VCSELs. In addition, the fund raising is
enabling the acceleration of product development.
At the heart of the capacity expansion is the creation
of a new foundry in Newport, South Wales. This ‘Mega
Foundry’ will house up to 100 tools, creating a facility
with unparalleled capacity and economies of scale in the
industry. The first 5 tools are now in-situ and on track for
production in H2 2018, a further 5 tools are scheduled
for delivery in Q3. Preparation is underway to call off a
further 10 tools within the next 12-18 months.
The establishment of the new foundry is being supported
by the Cardiff City Region City Deal, which is funding the
construction of the infrastructure. IQE is leasing the
building under an 11 year lease, which has a 3 year rent
free period and an option to purchase. This support
has enabled IQE to focus its own investment on adding
new tools, which requires upfront investment in both
opex and capex. The lead time to get new tools into
production is approximately 9-12 months, from which
time a fully utilised tool making VCSELs has a payback of
c. 1 year.
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.
which reflects why IQE had to use M&A to consolidate
the wireless supply chain. Moreover, in simple terms, IQE
has shipped more wafers in mass production than any
other epi foundry, giving it an unparalleled pedigree in
the mass market.
Finally, as the largest outsource epi foundry IQE has
created a competitive advantage through specialism and
scale. Achieving low cost chip production necessitates
high quality wafers, because wafer defects translate
into lost capacity and low yields for chip makers. As a
materials specialist, IQE has developed the IP to make
materials of the highest quality, and it has the accolades
and market share to prove it. As the materials specialist
with the largest scale it has inherent economies of scale,
a feature which IQE is about to intensify with its New
foundry which will house up to 100 tools. This is why
the outsource model is prevalent in the more mature
silicon industry, why the wireless market shifted from
a horizontal to vertical model, and why the winner in
the initial mass market ramp of VCSELs adopted an
outsource strategy.
However, we are not resting on our laurels. IQE is
leveraging the strength and depth of its IP portfolio to
transition its business model from a “materials solutions
company”, where we develop bespoke wafer solutions to
customer defined specification, to an “innovative enabler”
where IQE provides innovative material solutions to chip
designers, enabling them to develop new chip designs
which push the boundaries of performance and reduce
the barriers of cost. A couple of examples illustrate the
power of this strategy:
Wireless “Front End Modules” – The Front End Module
(FEM) refers to the communications module in a
smartphone. It is the FEM that performs all of the
wireless communications. The FEM is made up of many
individual chips, which can essentially be grouped into
Filters (for filtering out undesired wireless frequencies),
Switches (for high speed, high efficiency switches),
and Power Amplifiers (for high efficiency amplification
of wireless signals). Each of these three types of
chips is made from different semiconductor materials
technology. The sweet spot for IQE has historically
been the Power Amplifier, but it has also developed
the technologies for Switches (SOI) and for Filters (AlN).
Armed with its patented cREO™ technology, IQE has a
clear route to combining these three material systems
on a single wafer, which paves the way for the complete
integration of the FEM on a single chip. This would
be highly disruptive. A FEM solution on a single chip
would be more efficient, with a smaller footprint at a
dramatically lower cost of production.
3D sensing solutions – tear downs of the first 3D
sensing solutions show a combination of technologies
in a complex module: a VCSEL light source, optical
components, and silicon sensing components. Again,
IQE has the underlying materials technologies for these
components, and the benefit of several patents including
Quasi Photonic Crystals and Nanoimprint Lithography for
wafer level optics. So again, with its cREO™ technology,
IQE has a route to integrating these technologies on a
single wafer. This would be highly disruptive as it would
result in a 3D sensing solution on a single chip which
would again be more efficient, with a smaller footprint at
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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
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A list of technical publications is available on the research
pages of the IQE website at www.iqep.com.
IQE’s dedicated Technology Group manages the business’
impressive IP and patent portfolio.
Industry events
IQE actively participates in major industry events and
frequently chairs, hosts and presents technical papers at
international conferences.
During 2017 IQE hosted a number of events including
VCSEL Day and a workshop on sensors, both of which
attracted a wide range of industry experts from around
the world.
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.
The Open IQE programme benefits IQE by raising the
company’s profile throughout multiple supply chains and
helps embed IQE’s technology within new and emerging
markets.
Further details about IQE’s open innovation programme
can be found on a dedicated website: www.openiqe.com
CoInnovate
A product of IQE’s open innovation programme
“CoInnovate” has become a major event in the Welsh
conference calendar. The third CoInnovate conference
was held in Cardiff, UK in January 2018 and attracted
around 300 delegates from a mix of large businesses,
SMEs and academics. The conference is organised by
IQE and jointly sponsored by the Welsh Government,
academic partners as well as IQE and industrial partners
including Airbus, GE Healthcare and General Dynamics.
The CoInnovate conference website is at: www.
coinnovate.co.uk
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Outlook
Year of opportunity
The Group’s technology and market leadership, and its strong pipeline of high
growth opportunities positions it uniquely to capitalize on its high-growth
potential over the coming years.
After a significant ramp in production during the second-half of 2017, the
current financial year has started in line with expectations. The outlook for the
full year is for continuing growth. The Board anticipates that the group will
continue to benefit from strong growth opportunities during this year and in
future years.
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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.
Our vision
To be the global number one provider of
advanced semiconductor materials.
Our strategy
To use our technology leadership and scale
to deliver the performance, cost points and
security of supply required for mass market
adoption of advanced semiconductor materials.
Our delivery
Number one provider of compound
semiconductor wafer products by market share
and scale - clear technology leader with an
unparalleled breadth of technology. Leading the
advancement of new materials
Business model
Outsourcing pioneer
The first industrial revolution ushered in an era of large,
vertically integrated enterprises. During the middle of
the 20th century, process specialisation became a major
competitive advantage and saw the introduction of
outsourcing.
New industry sectors may adopt vertically integrated
business models out of necessity, but as those
industries mature, specialisation becomes a key strategic
advantage.
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 the silicon chip industry matured, the sector 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.
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 thirty 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. As
the world’s leading outsource supplier of compound
semiconductor wafer products and services, IQE offers its
customers:
A global footprint
IQE’s operations span the US, Asia and Europe which
reflects the geographical diversity of our customer base.
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Company No: 3745726
Photonics
The proportion of sales generated from photonics
products rapidly accelerated during the second-half of
2017, accounting for 31% of the Group’s wafer sales in
2017, up from 18% in 2016.
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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Emitters include laser and LED based devices that emit
light. Lasers broadly further sub-divide into edge emitters
and surface emitters.
Edge-emitting lasers represent the base technology that
has been traditionally used in applications such as optical
communications and CD/DVD storage devices.
Surface emitting lasers are highly complex epitaxial
structures that allow light to be emitted vertically rather
than horizontally. IQE has been highly active in the
development and commercialisation of the vertical cavity
surface emitting laser (VCSEL) and enjoys a unique world-
leading position in this technology that is a key enabler
in new and emerging markets such as 3D sensing and
LIDAR for autonomous vehicles.
Infrared
Infrared sales accounted for 8% of the Group’s sales in
2017, approximately the same proportion as 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, IQE is actively engaged with tier 1 OEMs
working on major new opportunities to migrate infrared
“see in the dark” technologies into consumer markets.
CMOS++
The CMOS++ market combines the advanced properties
of compound semiconductors with the low cost of silicon.
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This allows IQE to be positioned close to its customers
and to build and maintain strong, long-term relationships
and partnerships.
Breadth of technology
As a pioneer of compound semiconductor technology,
IQE has developed an unparalleled and comprehensive
breadth of technology and advanced production
platforms.
Technology leadership
Through organic development and through acquisition,
IQE has established clear technology leadership and
created a virtuous circle, which continues to attract the
brightest and best talent in our industry.
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 and will become
even more significant as we transition from a “materials
solutions company”, in to an “innovative enabler.”
Cost leadership
In the electronics industry, cost leadership is achieved
through advanced technology and scale. IQE has
developed leadership in both.
Security of supply
Confidence in a secure supply is critical to the supply
chains in which IQE operates. IQE offers its customers
identical supply from multiple locations for all its core
technologies, allowing it to be a primary and trusted
supplier to its customers.
Our markets
The Group has established six Business Units along
market lines, to address its primary markets: Wireless,
Photonics, Infrared and CMOS++; and its emerging
markets: Solar and Power.
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.
Wireless
Whilst wireless sales remained broadly flat year-on-
year, the sector accounted for 60% of the Group’s sales
in 2017, down from 69% in 2016 primarily due to the
rapid growth in photonics. The wireless market covers
electronic radio-frequency (RF) devices that enable
wireless communications. Our markets include, but are
not limited to, mobile communications (smartphones),
base stations, mobile networks, WiFi, smart metering,
satellite navigation, and a plethora of other connected
devices.
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With the roots of our IP in trade secrets, we inevitably
initially monetised our IP through wafer sales. However,
we made no secret of our strategy to build an
increasingly diverse IP portfolio, which, over time would
naturally lead to the commercialisation of our IP through
new channels, including licensing. Initially realising
license income through JV’s, we see many opportunities
to expand our model to third party license streams
over the next few years, and in due course for this to
represent a major part of our business.
Our progress in executing this strategy is clear. From
only a handful of patents 10 years ago, we have
successfully built a portfolio of advanced materials IP
which sets us apart in our industry. Today, we have the
benefit of over 180 patents, which we will continue to
develop and expand both organically and inorganically.
Indeed, we have created a virtuous circle with the critical
mass for this model to be self-fulfilling and sustaining: we
attract the best talent in our industry, which, combined
with the best routes to commercialisation attracts the
best technology development partners, and so the cycle
continues. Add to this the progress being made by our
JV’s, and the power of the CS Cluster that is gathering
momentum, and you begin to see how we are bringing
our vision to life.
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 39 of this report.
We further segment the CMOS++
market into:
Power control
Advanced materials
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The key advantages of compound
semiconductors are that they:
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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.
IQE has developed multiple routes to delivering this
powerful new hybrid technology with the addition of
cREO™ and other IP and the Group is involved in multiple
programmes across the globe, which are developing the
core technologies from which we expect highly significant
revenue streams to emerge over the next 3-5 years.
License Income
License income, which represented 1% (2016: 5%) of
revenues reduced from £6.7m to £1.9m as expected,
reflecting that 2016 included a significant portion of up
front license fees.
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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”.
Bring on the compound semiconductors
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.
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
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the digital revolution for generations to come. Welcome
to the world of advanced, compound semiconductors.
Compound semiconductors are the DNA of next
generation technologies.
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. 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.
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, safety & security, big data and the Internet
of Things (IoT), energy efficiency (generation and
consumption), robotics and automotive products.
Global presence
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AsiaTaiwanSingaporeEUROPEUK (4 locations)USAPennsylvaniaMassachusettsNorth CarolinaNew JerseyWashington
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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.
Technology leadership through IP has always been
at the heart of IQE’s strategy. Indeed, as a pioneer of
CS technology over the past 30 years, IQE has built
an enviable global reputation in the industry for the
breadth and depth of its materials technologies and
capabilities. It’s clear from IQE’s many engagements
with leading universities, start-ups, leading chip makers
and established global electronics giants, that IQE has
succeeded in establishing itself as the ‘go to’ place for
advanced materials, supporting its customers from
research and development through to high-volume
manufacturing. The growing strength of IQE’s IP is
reflected in how its relationships within the supply chain
have evolved. Historically, IQE was only engaged by the
chip makers, whereas it now regularly engages directly
with a number of Tier 1 OEMs.
It is well understood 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 ventures
in the UK and Singapore, and its highly successful Open
Innovation Programme (openiqe.com). Moreover, IQE
has been at the heart of creating the CS Cluster in South
Wales, which is the first of its kind globally. This new
cluster is accelerating research into novel technologies,
product development and innovation. The CS cluster,
which is branded as CSconnected, follows considerable
high-level thinking across government, industry and
academia, as well as significant private and public
sector investment to establish top-class facilities and
infrastructure to support activities along the technology
development chain from blue-sky research to high-
volume production.
The journey started in 2015, when Cardiff University
announced an investment of around £75 million in
the Institute of Compound Semiconductors (ICS). The
announcement was followed by a £24 million joint
venture between IQE Plc and Cardiff University to form
the Compound Semiconductor Centre (CSC), allowing
businesses and academics to demonstrate production-
ready CS materials reducing time-to-market and cost.
The facilities at the CSC are being complemented by new
materials research, fabrication and testing at the ICS.
2016 saw the announcement by Innovate UK of a
£50 million investment to establish the Compound
Semiconductor Applications Catapult (CSAC), located in
South East Wales; a world-class, open-access R&D facility
to support businesses across the UK in exploiting novel
CS technologies in key application areas.
In addition to IQE, other organisations in the region
include Newport Wafer Fab (an open access chip
foundry), and SPTS (Orbotech) who design, manufacture
and support a range of wafer processing tools for
the semiconductor and microelectronics industries.
Downstream capabilities include Microsemi’s Advanced
Packaging business, delivering novel solutions for
miniaturised electronic circuits with wireless connectivity.
High-volume manufacturing is also certainly on the
agenda for the cluster; in September 2017, IQE, Welsh
and UK Governments and the Cardiff Capital Region
City Deal ratified the development of the Compound
Semiconductor Foundry in an historic signing ceremony.
The signing followed an agreement in May 2017 by
the Cardiff Capital Region (CCR) Regional Cabinet to
contribute £37.9 million from the CCR City Deal’s Wider
Investment Fund towards the establishment of a state-
of-the-art foundry for high-end production of compound
semiconductors. The CCR City Deal seeks to position the
region as the global leader in CS-enabled applications,
which was initiated by a £12 million investment from the
Welsh Government.
In addition, Cardiff University was awarded £10 million
by the Engineering and Physical Sciences Research
Council (EPSRC) to lead the EPSRC Manufacturing
Hub in Future Compound Semiconductors that will
combine and connect the UK research excellence in
compound semiconductors, with translational facilities
at the new CSAC Catapult to provide a pathway from
research through to device and application testing and
qualification.
A number of projects are already underway within
the CSconnected cluster, such as improving VCSEL
manufacturing efficiencies, nanoimprint lithography for
laser diodes and enabling miniaturised atomic clocks
using VCSEL pump sources, with both the latter projects
worth over £1m.
The collaborative environment fosters strong working
relationships to encourage sharing of knowledge and
ideas. The organisations involved are enthusiastic about
the future. CSconnected is open for business.
In addition to generating new IP through collaborative
partnership, IQE continues to build on its already broad
IP portfolio in areas such as cREO™, whilst also acquiring
strategic IP such as the purchase and assignment
of a portfolio of patents relating to Quasi Photonic
Crystal technologies from the Taiwan based Luxtaltek
Corporation announced in December 2017.
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CSR, health, safety and environmental
Code of business conduct, ethics and anti- corruption
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.
Commercial business practices
We are committed to acting professionally, fairly and with
integrity in all our business dealings and relationships.
Every effort is made to ensure we adopt best business
practice, which includes:
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
continuously 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.
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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;
Supporting local academic
establishments; and
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.
Confidentiality
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.
Data protection
Closely linked to our policies on confidentiality is the
way that we treat personal data. IQE complies with
the requirements of data protection legislation and is
undertaking a range of activities including group-wide
training, data audits and risk assessments, to ensure
full compliance with the new General Data Protection
Regulations (GDPR) that come into force on 25 May 2018.
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.
Our values
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 that 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
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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.
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. US – “Toys for Tots” toy drive
(donating 8 boxes of toys) and a US Food Drive (collecting
over 800 lbs of food!).
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.
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 2017, across the group,
103 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 within 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 that 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
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
Other organisations in the region include IQE Plc, a
leading provider of CS wafers and SPTS, a company
that designs, manufactures and supports a range of
wafer processing tools for the semiconductor and
microelectronics industries. Downstream capabilities
include Newport Wafer Fab Ltd., the UK’s largest chip
foundry and Microsemi’s Advanced Packaging business,
delivering novel solutions for miniaturised electronic
circuits with wireless connectivity.
A number of projects are already underway within
CSconnected, such as improving VCSEL manufacturing
efficiencies, nanoimprint lithography for laser diodes and
enabling miniaturised atomic clocks using VCSEL pump
sources, with both the latter projects worth over £1m.
The collaborative environment fosters strong working
relationships to encourage sharing of knowledge and
ideas. The organisations involved are enthusiastic about
the future and CSconnected is open for business.
All in all, the region is gaining global recognition as being
a highly active, global centre in the field of compound
semiconductors.
CS connected is an evolving Compound Semiconductor
cluster based in and around South Wales. Visit www.
csconnected.com for more information.
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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 “Business in the
Community (BITC)” Programme comprising a number
of schools and businesses in a partnership cluster to
form strong links between schools and local businesses.
BITC activities include workshops and competitions
with science and technology based themes as well as
other business related sessions ranging from interview
techniques to marketing and social media awareness.
Cluster activities
IQE has established a reputation for collaboration with
supply chain partners, academics and government
agencies through its OpenIQE programme and is actively
driving the formation of technology clusters.
The UK, and in particular, Wales, is home to a growing
number of organisations and businesses that are active
in the increasingly important compound semiconductor
industry sector.
The World’s first cluster on CS technologies and
applications, established here in the UK, will accelerate
research into novel technologies, product development
and innovation. CSconnected is the brand name for the
emerging compound semiconductor cluster that follows
considerable high-level thinking across government,
industry and academia, as well as significant investment
to establish top-class facilities and infrastructure to
support activities along Technology Readiness Level
scale.
In 2015, Cardiff University announced the establishment
of the Institute of Compound Semiconductors (ICS)
followed by the announcement of a joint venture
between IQE Plc and Cardiff University to form the
Compound Semiconductor Centre (CSC), allowing
businesses and academics to demonstrate production-
ready CS materials reducing time-to-market. The facilities
at the CSC will be complemented by new materials
research, fabrication and testing at the ICS.
2016 saw the £50 million investment by Innovate UK to
establish the Compound Semiconductor Applications
(CSA) Catapult, located in South East Wales; a world-
class, open-access R&D facility to support businesses
across the UK in exploiting novel CS technologies in key
application areas.
Cardiff University was awarded £10 million by the
Engineering and Physical Sciences Research Council
(EPSRC) to lead the EPSRC Manufacturing Hub in
Future Compound Semiconductors that will combine
and connect the UK research excellence in compound
semiconductors, with translational facilities at the
new CSA Catapult to provide a pathway from research
through to device and application testing and
qualification.
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Employee wellness
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 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. 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.
Internal communication
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 that
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.
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 a
detailed ongoing continued professional development
plan including training and accreditation of competent
persons – in the form of Regional EHS Managers. Such
appointments provide for high-level advisory roles,
identification of global best-practice and adoption of
strategic EHS initiatives for all applicable legislative
requirements wherever the Group operates.
In addition, by appointing Group-wide safety
coordinators, site-specific roles are designed to
implement those best-practices identified from strategic
initiatives in order to; minimise risks of injury at work;
ensure legislative compliance and; assist in creating and
monitoring safety practices. Further designation of safety
advisors, with the appropriate expertise to support in
specific areas of activity such as Local Exhaust Ventilation
(LEV) and pressure systems is also implemented at site
level.
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The EHS group continues to be actively involved
in industry-wide initiatives, working with industry
associations and proactively registering under regulatory
directives such as REACH and GHS-based Hazard
Communication. The group also monitors global chemical
control activities (e.g. RoHS, TSCA) to ensure continued
customer confidence and supply-chain compliance.
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, managed
by coordinators, are fed into general site management
for effective control. Regular analysis and discussion is
an agenda item at site periodic management meetings.
Coordinators prepare regular site performance metrics
for dissemination to Group-level.
EHS Regional Managers oversee site trend analyses 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 Statistical averages.
Regional Managers and the Director responsible for EHS,
drive strategic initiatives, agreed at Board level, through
each organisation to promote best-practice and ensuring
conformance to global, regional and local regulations and
directives. Initiatives are designed to ensure the Group’s
objectives of maintaining at or beyond state-of-the-art
EHS Management.
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 EHS Report to the Board.
The Environment
IQE is committed to protecting local and global
environments and endeavours to ensure that our
activities and manufacturing operations are conducted in
an environmentally responsible manner.
We are committed to minimising the environmental
impact of our operations by encouraging all employees
to promote and adopt 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’s policy for conducting business
in an environmentally responsible
manner states that we “will ensure
that:
•
•
•
•
•
•
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”.
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, and
Providing evidence of continual
improvement of environmental
management
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By the end of 2017, all IQE’s continuously operating
facilities had successfully completed independent third
party audits of our compliance with ISO 14001:2015, the
new revised standard. These audits were very successful
with no material deficiencies recorded.
All our plants therefore, clearly demonstrate the
commitment to environmental compliance, reducing
waste, recycling materials, energy conservation and risk
management where appropriate, complementary to our
commercial objectives of reducing costs and improving
operational efficiency.
Environmental Legislation Compliance
Compliance with environmental legislation is critical
to our global businesses and is assured through the
employment of appropriately qualified and competent
managers, reporting through to the Chief Operating
Officer. These managers have access to third party
professional advisors as required.
IQE maintains membership of a number of professional
bodies, which provide a good source of reference and
support, enabling it to keep up-to-date with 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, relating to the disclosure of greenhouse gas
emissions and other environmental matters, does not
apply to IQE.
Environmental Performance 2017
IQE closely monitors environmental compliance. In 2017,
we experienced no external environmental incidents or
compliance concerns at any of our locations.
Recycling and Energy Conservation
At each of our global sites, we operate continuous
improvement programmes to reduce waste and to
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 safely exists. IQE also closely
monitors 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.
Risk Management
IQE employs risk management techniques to identify,
evaluate and prioritize Health, Safety & Environmental
risks followed by application of resources to minimize,
monitor, and control the probability or impact of
unfortunate events. IQE’s risks may be inherent to the
business or come from a variety of sources including
engineering or administrative control failures, accidents,
incidents and/or natural causes.
IQE has performed risk management evaluations at
its sites and identified the highest potential risks and
opportunities. A summary of the mitigation, likelihood
and impact of the risks identified is included on pages 28
to 35.
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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.
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;
setting the overall policies for risk
management and control;
ensuring that the above are
communicated effectively across the
business.
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; and
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 below are listed in order of
severity. Mitigation, where possible, is described next to
each identified risk area.
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Year on year
change in
likelihood:
Decreased
Principal Risk: COMPETITION
Business Risk
Mitigation:
Focus on quality, value and customer service.
Develop and maintain close relationships with customers
to become the “materials partner of choice”, by forming
multilevel partnerships from material design, to pilot and
volume production.
Continue to invest in product development to ensure
competitive advantage.
Loss of
share with
a significant
customer
Price erosion
due to
predatory
pricing from a
competitor
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, but our multiple site capabilities provide
some mitigation against this risk.
Contractual commitments from customers.
Potential
impact:
High
Effect:
Sales
volumes and
profitability
Principal Risk: TECHNOLOGICAL CHANGE
Business Risk
Mitigation:
IQE actively engages with customers, educational institutions
and 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”.
A disruptive
technological
change 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
Year on year
change in
likelihood:
Unchanged
Potential
impact:
High
Effect:
Sales
volumes and
profitability
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Principal Risk: HEALTH, SAFETY AND ENVIRONMENT
Business Risk
Mitigation:
Gas release to
atmosphere
Loss of
ISO14001
registration at
a production
facility
IQE operates in a COMAH and PPC Regulated environment
and employs the highest levels of technical and engineering
control measures to prevent and reduce the possibility of a
failure event occurring.
Only trained and competent persons are permitted to work
with potentially harmful materials.
Highly qualified environmental professionals operating
within the organisation are trained and certified to Lead
Auditor Standard by BSI.
We continuously audit and monitor environmental
performance and management systems, driving continuous
improvement across all facilities by sharing best practice.
EMS systems at all sites are externally assessed by BSI/BV –
up to twice annually.
Principal Risk: HUMAN RESOURCING
Business Risk
Mitigation:
Loss of key
people and
critical skills
Insufficient
skilled
employees
Poor
engagement
and morale
As IQE continues to develop its new manufacturing site in
Newport, South Wales, the demand for human resourcing
naturally increases, which in turn, increases the overall
risk to the Group. However, the risk is mitigated through
effective recruitment planning.
Retention and development of its workforce is also critical to
the long-term success of the Group.
IQE’s people are the heart of the business. In order to
promote the development and retention of its staff, IQE
offers career progression, personal development and a
range of benefits and incentives. This is reflected in low staff
turnover, with many employees who have been with the
company since it was formed almost thirty 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.
Year on year
change in
likelihood:
Unchanged
Potential
impact:
High
Effect:
Reputational
damage, costs,
sales and
profitability
Year on year
change in
likelihood:
Increased
Potential
impact:
Medium
Effect:
Quality issues
and increased
cost
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Company No: 3745726
Principal Risk: NATURAL DISASTERS
Business Risk
Mitigation:
Natural
disaster
disrupts
production
capability,
supply of
materials or
customer
demand.
IQE operates multiple global manufacturing facilities,
which mitigates against the impact of natural disasters
on IQE.
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 including for natural catastrophe despite the
availability of natural catastrophe cover in the insurance
market reducing during 2017.
Contracts entered into by IQE, including those for the
supply of epiwafers to customers provide relief from
IQE’s obligations to perform during Force Majeure
events.
Data is appropriately stored and backed-up with IT
system recovery plans in place.
Principal Risk: FINANCIAL LIQUIDITY
Business Risk
Mitigation:
The business
does not
maintain
sufficient
funding and
liquidity to
meet its
obligations as
they fall due.
The Group prepares regular financial forecasts to
evaluate its funding and liquidity requirements for
the foreseeable future. These forecasts are reviewed
and approved by the Board. Based on the forecasts,
appropriate funding and liquidity solutions are put
in place to ensure that appropriate headroom is
maintained.
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Year on year
change in
likelihood:
Unchanged
Potential
impact:
Medium/High
Effect:
Costs,
sales and
profitability
Year on year
change in
likelihood:
Decreased
At the year-end 31 December 2017 we had net funds of
£45.6M.
Potential
impact:
Medium/Low
Effect:
Financial
loss and
reputational
damage
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Company No: 3745726
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Principal Risk: BUSINESS INTERRUPTION – SUPPLY CHAIN
Business Risk
Mitigation:
Dependency
on sole
supplier
Availability of
qualified raw
materials
The raw materials that sustain IQE’s products are not scarce
resources.
Active programme to maintain cross qualified second
sources.
Rigorous supplier quality management processes.
Year on year
change in
likelihood:
Unchanged
Maintain close relationships with its key suppliers in order
to keep well informed about potential supply issues.
Potential
impact:
Medium
Effect:
Quality issues,
costs, sales
volumes and
profitability
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Company No: 3745726
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Year on year
change in
likelihood:
Reduced
Potential
impact:
Medium/Low
Effect:
Costs,
sales and
profitability
Principal Risk: CUSTOMER CONCENTRATION
Business Risk
Mitigation:
Dependency
on low number
of customers
could result
in significant
impact from
a loss of
share from a
customer.
The group
has three
customers that
individually
account for
more than
10% of the
group sales.
(2016: two
customers
more than
10%)
IQE has a diverse portfolio of intellectual property and
is in product development and qualifications across
many different end markets, which is evident from the
continuing diversification of IQE’s revenues. The group
made great progress in diversifying revenues in 2017
with the adoption of its VCSEL technology in the mass
market.
As an epitaxial wafer supplier with a bespoke offering
for each customer we pursue a diversification strategy
to become embedded in as many volume supply chains
as possible, sometimes into the same end customer but
also across competing end products. This provides a
hedge against allocation decisions and the competitive
landscape in the end market
The wireless sector, which accounted for 60% of IQE’s
revenues in 2017 is highly concentrated with the top 5
RF Chip companies accounting for the vast majority of
the wireless market.
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.
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Company No: 3745726
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Principal Risk: LEGAL COMPLIANCE
Business Risk
Mitigation:
Regular reporting of export and ITAR compliance and
detailed internal control processes and procedures.
Continuing education of the team on the legislative
developments and requirements.
Internal reviews and external audits.
Failure to
comply with
applicable
laws and
regulations
such as those
concerning
export control,
anti- bribery
& corruption
and data
protection
as well as
employment
and company
law.
Principal Risk: LOSS OF INTELLECTUAL PROPERTY
Business Risk
Mitigation:
Infringement
of IQE patents
by third parties
Loss of trade
secrets to third
parties
Claims
alleging IQE
has breached
third party
intellectual
property rights
As IQE has increased its IP portfolio during the year, this
has naturally increased the aggregate risk, however, the risk
in respect of each element of IP has not increased and is
mitigated as follows.
IQE protects its technology by strategically patenting in key
areas.
Policies and procedures that ensure contractual non-
disclosure and confidentiality obligations are agreed with
third parties including employees, vendors, and customers.
Routine searching of worldwide patent databases in relevant
areas of technology in order to identify and assess possible
infringement of IQE intellectual property.
Year on year
change in
likelihood:
Unchanged
Potential
impact:
Medium/Low
Effect:
Financial
loss and
reputational
damage
Year on year
change in
likelihood:
Increased
Potential
impact:
Medium/Low
Effect:
Costs,
sales and
profitability
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Company No: 3745726
Principal Risk: INFORMATION TECHNOLOGY FAILURE
Business Risk
Mitigation:
Loss of
information
Failure of
equipment
Information and cyber security mitigation plans in place to
protect our information assets.
All IQE personnel are required to complete a rolling
programme of training modules concerning information
security. IQE monitors and acts upon the completion and
assessment metrics for such training.
Year on year
change in
likelihood:
Unchanged
A risk framework with plans for the management, mitigation
and resolution of device failures are in place.
Potential
impact:
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Hardware and software systems have in-built resiliency
including redundant elements.
Data is appropriately stored and backed-up with IT system
recovery plans in place.
Principal Risk: TAX LIABILITY
Business Risk
Mitigation:
The business
is found to be
liable to pay
sums to tax
authorities,
which had
not been
previously
anticipated.
Failure to
comply with
tax regulations
Failure to
operate in a
tax efficient
manner.
The group has historically used independent tax specialists
on an ad hoc basis as needed. This has included small, mid-
tier and global providers as deemed most cost effective in
the circumstances.
As reported, a material tax exposure was identified in
October 2017 relating to a transaction in 2013 where local
and a mid-tier firm provided tax structuring advice.
To assess if there were any other significant tax exposures,
the group engaged independent tax advisors to assess
the risk of unidentified tax exposures. Where the risk of
potential tax exposures were identified, the group engaged
independent global tax specialists to assist detailed
assessment and quantification of these potential exposures.
These reviews did not identify any further material tax
liabilities. The group is also engaging global independent tax
specialists on a proactive and ongoing basis to manage tax
compliance and tax strategy.
Medium
Effect:
Costs, sales,
profitability
and
reputational
damage
Year on year
change in
likelihood:
Unchanged
Potential
impact:
Medium/Low
Effect:
Financial
loss and
reputational
damage
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Company No: 3745726
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Brexit
As previously stated ahead of the 23 June 2016 referendum
on whether the UK should remain in the European Union,
the management team has not changed in its view that the
intention for the UK to leave the European Union (commonly
referred to as ‘Brexit’) will have no significant impact on IQE’s
business. The Group operates and trades globally, with Asia
and the USA forming the Group’s dominant markets.
There is some uncertainty regarding the availability of EU
funding for new research and development proposals involving
UK organisations and this uncertainty may continue until the
Brexit negotiations between the EU and the UK government
are concluded. However, IQE is actively engaged on a number
of collaborative activities in areas of research and development
including gallium nitride (GaN) and other advanced materials
as well as emerging technologies such as graphene. IQE
has established trading, development partnerships and
grant funding from across all territories in which it operates.
Whilst continued membership of the EU would have offered
a great deal of upside potential for collaboration across
member states, IQE’s strength in its market sector means
that such collaborations will continue despite likely changes
in any government funding mechanisms. Innovation and
collaboration are vital components in developing advanced
capabilities and technology leadership. IQE has a long history
of engagement with other industrial partners, academia and
government agencies across the world for the development
and commercialisation of next generation technologies and
there is no reason to consider that the decision to leave
the European Union will have any long-term impact on our
business opportunities.
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Company No: 3745726
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Financial review
In addition to reporting GAAP profit measures, the Group
also provides additional non-GAAP profit measures. Full
details of these adjusted measures are provided in note
5. In addition, the prior year financial results have been
restated, as detailed in note 2.
Consolidated revenues were up 16% to £154.5m. Wafer
sales, which represented 99% (2016: 95%) of revenues,
were up 21% (2016: up 19%) reflecting continuing
organic growth. License income, which represented 1%
(2016: 5%) of revenues reduced from £6.7m to £1.9m
as expected, reflecting that 2016 included a significant
portion of up front license fees. Growth in underlying
demand was accompanied by a currency tailwind of c. 5%
(2016: c. 11%). This similarly affects costs, which are also
largely denominated in foreign currency.
The growth in wafer sales was largely driven by
photonics, where sales were up 109% to £47.6m. This
was primarily driven by the adoption of IQE’s VCSEL
technology in a mass market consumer application which
ramped strongly in H2. Indeed, photonics sales in H2
were up more than 160% over H2 2016. InfraRed sales
also enjoyed double digit growth, with sales up 14%
to £12.0m. Wireless sales were broadly flat at £91.6m
(2016: £91.3m), affected by a £3m managed reduction
of SMI inventories to focus capacity on the ramp in
photonics. The SMI inventories are expected to replenish
in 2018. Finally CMOS++ sales were flat at £1.4m (2016:
£1.4m).
As a consequence of these growth rates, wafer sales
continued to diversify, with wireless accounting for 60%
(2016: 72%), photonics 31% (2016 : 18%), InfraRed 8%
(2016: 8%), and CMOS++ 1% (2016:1 %).
Gross profit increased from £34.2m to £38.6m. Excluding
license income, which has a 100% margin, the gross
margin on wafer sales increased from 21.8% to 24.1%.
Adjusted gross margin, which excludes the charge
for share based payments, increased from £36.4m to
£43.6m, reflecting an improvement in the adjusted
gross margin on wafer sales from 23.6% to 27.4%. This
improvement in margins primarily reflects the benefit of
a favourable sales mix with a greater proportion of higher
margin photonics sales in 2017 over 2016.
As expected, other income reduced from £2.3m in 2016
to £nil. The gain in 2016 related to the release of the
remaining balance of contingent deferred consideration
relating to a previous acquisition. This gain did not
relate to underlying trade and hence was excluded from
adjusted earnings in 2016.
Selling, general and administrative (“SG&A”) expenses
increased from £16.6m to £21.6m. Adjusted SG&A,
which excludes charges for share based payments,
the amortisation of acquired intangibles, and non-cash
rent increased from £14.2m to £17.3m. In addition to
investing for growth, the increase includes the impact
of inflation, foreign exchange, and an increase in
amortisation.
Operating profit decreased from £19.8m to £17.0m,
reflecting the adjustments noted above, whilst adjusted
operating profit increased from £22.1m to £26.4m. The
increase in adjusted profits reflect a 58% increase in
wafer related profits from £15.5m to £24.5m partially
offset by the £4.8m reduction in license income.
The segmental analysis in note 4, reflects the adjusted
operating margins for the primary segments (before
central corporate support costs): Wireless ~15%,
Photonics ~38% and InfraRed ~27%. In the current
environment we believe that these represent sustainable
margins, and hences provide the opportunity for future
margin expansion through continuing diversification of
revenues. Central corporate support costs are expected
to grow approximately 5-10% reflecting a combination of
inflation and business growth.
Finance costs increased from £1.5m to £2.1m. Adjusted
finance costs, which exclude imputed interest associated
with the discounting, increased from £1.5m to £2.0m.
This underlying increase in cash interest reflects an
increase in borrowings to finance capacity expansion and
the impact of foreign exchange. The borrowings were
repaid in full prior to year end from the proceeds of the
equity fund raising.
The charge for taxation increased from £0.3m to £0.4m.
Adjusted tax, which excludes the tax affect associated
with the non-GAAP adjustments, was a credit of £0.5m
(2016 : credit £0.1m), reflecting the benefit of deferred
tax assets recognised less taxes paid relating to 2017.
The cash payment of taxes increased from £0.8m to
£5.8m due to the settlement of US taxes relating to prior
years as detailed in note 2. Cash taxes are expected to
remain at approximately £1m to £2m for the near future,
whilst the effective rate is expected to be approximately
15% to 20% reflecting the deferred tax charge associated
with the utilisation of tax losses.
Cash invested decreased from £30.3m in 2016 to £28.2m
in 2017. The reduction reflects that in 2016 the group
made the final payment of deferred consideration
(£11.3m) in respect of the Kopin acquisition. Excluding
this, the group increased its investment from £19.1m
to £28.2m, namely: capital expenditure up £0.3m to
£11.3m; investment in product development up £8.2m to
£14.5m; and investment in intangible assets up £0.6m to
£2.4m.
The capital expenditure of £11.3m reflects cash paid
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
directly to equipment suppliers. In addition, the group
financed £6.6m of capital expenditure via finance lease
where the bank settled the purchase cost directly with
the equipment suppliers. This finance lease was settled
prior to the year end (and title to the equipment passed
to the group), and hence the cash flow is classified as
part of the repayment of borrowings. Aggregating these
amounts, the total cash invested in equipment was
£17.9m.
The group increased its investment in product
development from £6.3m to £14.5m. IQE is developing
products to address a wide range of end market
applications within its business segments. Although
there are “families” of products such as VCSEL’s, EEL’s,
and HBT’s, each product is developed bespoke to the
customers’ individual specification. IQE does not produce
any commodity or “off the shelf” products. The year
on year increase in investment, was largely due to the
development of the VCSEL technology which ramped into
mass market through H2.
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The investment in intangible assets includes the
purchase of patents from third parties, the cost of
patenting internally generated IP, and software. The year
on year increase includes the purchase of a portfolio of
54 patents relating to Quasi Photonics Crystals reported
in December 2017.
In November 2017, the group issued 67.9 million new
ordinary shares, raising gross proceeds of approximately
£95 million. This fund raise was primarily to finance
a capacity expansion programme to deliver the scale
needed to capture multiple high growth market
opportunities, and in particular the continuing increase
in demand for VCSELs. In addition, the fund raising is
enabling the acceleration of product development. Part
of the proceeds from the share issue was applied to
repay outstanding borrowings in order to save interest
charges.
KPIs (dash-board)
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
Operating profit (£M) (before exceptional items)Sales (£M)Cash from operations (£M) (before exceptional cash flows)FD EPS (pence) (before exceptional items)Leverage (£M)Gearing (%)Deferred considerationNet debt
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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 2017, 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 55 to 70.
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
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, Mr Phil Smith and
Sir Derek Jones who have each 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 Board considers that throughout
2017, 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 2017. However, a
formal review is scheduled for 2018.
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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 2017 financial year and
accords with the Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting.
The terms and conditions of appointment of the non-
executive directors are available for inspection upon
request to the Company Secretary.
Sir David Grant is Chairman of the Remuneration
Committee and the Nominations Committee. There
have been two changes to the membership of the Board
during the year. Prof Simon Gibson retired from the
board on 13 June 2017 and Sir Derek Jones joined the
board on 29 November 2017.
The Senior Independent Director, Mr Phil Smith, 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.
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 72
and 73. These show the range of business and financial
experience upon which the Board is able to call.
The Board’s 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 recognises 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.
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
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,
financial issues, including changes
in accounting policy, the approval
of dividends, bank facilities and
guarantees, and
the approval of significant contracts.
•
•
•
•
•
•
•
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Committees of the Board
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, Mr Phil Smith, Sir Derek
Jones 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.
(c) Remuneration Committee
The Remuneration Committee consists of the four non-
executive directors. Mr Phil Smith and Sir Derek Jones
joined the Committee at the beginning of 2018. Sir David
Grant is 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.
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
The Nominations Committee consists of the four non-
executive Directors and is chaired by Sir David Grant. Mr
Phil Smith and Sir Derek Jones joined the Committee at
the beginning of 2018.
The Board has delegated responsibility for nominations
to this Committee. The Nominations Committee has
specific terms of reference, which deal with its authority
and responsibilities and these are available for inspection
from the Company Secretary or at www.iqep.com. The
activities of the Nominations Committee have been set
out in the Nominations Committee Report on pages 46
and 47.
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Company No: 3745726
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Attendance at meetings
The number of meetings held during 2017 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 2017
11*
5
3
5
Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
Attendance
Executive
Dr A W Nelson
Mr P J Rasmussen
Dr H R Williams
Non-executive
Dr G H H Ainsworth
Sir D Grant
Mr P Smith
Prof S J Gibson**
Sir D Jones***
9
11
11
10
9
11
3
2
N/A
N/A
N/A
5
5
5
2
1
N/A
N/A
N/A
3
3
N/A
N/A
N/A
N/A
N/A
N/A
5
5
N/A
N/A
N/A
* Two of the meetings were called at short notice such that they were quorate, but not all directors were available
to attend. As appropriate, Directors that are unavailable to attend a meeting are consulted and their views are made
known in advance or at the meeting. Such directors receive a briefing on matters discussed as soon as possible
following the meeting.
** Prof S J Gibson retired from the Board on 13 June 2017
*** Sir D Jones joined the Board on 29 November 2017
Shareholder Relations
The Board regard regular communications with
shareholders as one of its key responsibilities. During
2017, the Chief Executive Officer and Chief Financial
Officer met with institutional investors on a regular basis
to discuss the Group’s performance, the shareholders’
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 2017,
they met with several major institutional shareholders,
primarily to consult on corporate governance matters
and to provide an independent view of the position and
prospects of the Group.
feel cannot be resolved through normal shareholder
meetings, the 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 annual
reports are also available by request. The web site can be
found at www.iqep.com.
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
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
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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.
Audit and accountability
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 page 47, 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.
Risk management
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 29 to 35.
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 2017. However, a formal review is scheduled for
2018.
Going concern
After making enquiries and considering the available
resources, the financial forecast together with available
cash and committed borrowing facilities, the Directors
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 2020,
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 2020 is an appropriate period
over which to provide its viability statement as it reflects
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period of time over which information and forecasts
concerning demand for development, qualification and
production of wafers, is considered reasonably reliable.
In making their assessment, the Directors have taken
account of the Group’s 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 2020.
Board committees
Terms of reference for the Remuneration Committee,
Nominations Committee and Audit Committee are
available on the corporate website (www.iqep.com).
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 five times 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.
Main responsibilities
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.
Recent appointments to the Board
During the year, the Committee recommended to the
Board that Sir Derek Jones be appointment of as Non-
Executive 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.
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Activities during the year
The Audit Committee met five 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.
During 2017, the Audit Committee completed a review of
its external auditors and, further to the recommendation
of the Audit Committee, the Board appointed KPMG
LLP (“KPMG”) as its new auditor in December 2017.
KPMG replaces PricewaterhouseCoopers LLP (“PwC”)
who had acted as IQE’s auditors since 2005. As part of
the handover process, PwC provided IQE with a written
statement, which confirmed there were no matters which
needed to be brought to the attention of the Company’s
members, creditors or directors.
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.
On the recommendation of the Nominations Committee,
the Board approved the appointment of Sir Derek Jones
with effect from 29 November 2017. This followed the
appointment of Mr Phil Smith on 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.
Audit Committee Report
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, inter-
nal 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
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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 2017 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.
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.
The completeness of recorded tax liabilities, and the accounting for current and deferred
tax. Following review of reports by independent tax specialists assessing the group tax affairs
in the UK, the US, Taiwan and Singapore, and review of reports by management assessing
current and deferred tax accounting, the Committee concurred that the provision for tax
liabilities, and the current and deferred tax accounting was appropriate.
The accounting and presentation for Joint Ventures. Following review of reports by
management and the external auditors, the Committee concluded the accounting for Joint
Ventures, and the related disclosure in the 2017 financial statements 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 46 the Committee concluded that the Going Concern principle was
appropriate.
At the request of the Board, the Committee considered whether the 2017 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 also 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 pre-close full
year trading statements.
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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.
During the 2015 to 2017 financial years,
PricewaterhouseCoopers LLP (“PwC”) had been the
Company’s external auditors for over 10 years. Therefore,
the Committee considered the reappointment of the
external auditor and their independence on an annual
basis.
During 2017, the Audit Committee completed a review
of its auditors and, further to the recommendation of
the Audit Committee, the Board appointed KPMG LLP
(“KPMG”) as its new auditor in December 2017.
The provision of external audit and tax compliance are
separated where possible. Tax advice is provided by
independent advisors including KPMG, PwC, EY and
Bevan & Buckland.
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 that identifies the auditor’s 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 2017 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
that 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 KPMG for audit services, audit-related
services and non-audit work.
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The nature of the services provided by the auditors and the amounts paid to them are as detailed below:
PricewaterhouseCoopers LLP (group auditors to December 2017)
Fees payable to the company's auditor and its associates for the audit of parent company
and consolidated financial statements
Fees payable to company's auditor and its associates for other services:
- The audit of company's subsidiaries
- Audit related assurance services
- Tax advisory
- Tax compliance service
2017
£'000
2016
£'000
-
99
-
11
5
-
10
11
5
-
Total PricewaterhouseCoopers LLP (group auditors to December 2017)
16
125
KPMG LLP (group auditors from December 2017)
Fees payable to the company's auditor and its associates for the audit of parent company
and consolidated financial statements
Fees payable to company's auditor and its associates for other services:
- The audit of company's subsidiaries
- Audit related assurance services
- Tax advisory*
- Tax compliance service
Total KPMG LLP (group auditors)
2017
£'000
2016
£'000
120
10
-
104
-
234
-
-
-
-
-
-
*Includes fees payable for services engaged prior to the appointment as group auditors of £84,000
Ernst and Young (auditors or MBE Technology Pte Limited)
- Subsidiary company's audit
- Tax services
2017
£'000
2016
£'000
8
8
9
3
Total Ernst and Young (auditors or MBE Technology Pte Limited)
16
12
Total
266
137
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Internal control
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.
Internal Audit
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 the management report any material
exceptions to the Audit Committee. There were no
material exceptions identified during 2017.
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 29 to 35.
The key procedures that the direc-
tors 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.
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Director’s report
The directors present their annual report and the audited
consolidated financial statements for the year ended 31
December 2017.
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.
Corporate details
IQE public limited company is incorporated and
registered in England and Wales number 3745726. The
registered office is Pascal Close, St Mellons, Cardiff, CF3
0LW.
Future developments
A review of the group’s trading during the year,
its financial position at the year-end and future
developments is provided on pages 8 to 13. The review
includes key performance indicators as detailed in the
Five Year Financial Summary. The principal risks and
uncertainties facing the group are set out on page 29 to
35. The future outlook for the Group is set out on page
13.
The directors’ beneficial interests in the company’s
issued ordinary share capital, long term incentive share
plans and share options are set out in the remuneration
report.
Directors’ third party indemnity provisions
The Company has purchased and maintained
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 Companies Act 2006. These indemnities were
in force throughout the year and up to the date of this
Report and Annual Accounts.
Employment policies
A review of the group’s employment policies is set out in
the Strategic Report.
Principal risks and uncertainties
Details of the principal risks and uncertainties impacting
the Group are set out in the Strategic Report on page 29
to 35.
Dividends
The directors do not recommend the payment of a
dividend (2016: £nil).
Directors
The directors of the Company, who were in office during
the year and up to the date of signing the financial
statements, unless otherwise stated are set out below:
Financial risk management
The Group operates a central treasury function
which acts in accordance with specific board policies.
Speculative transactions are not permitted. Financial risk
management objectives and policies of the Group and
the significant treasury policies that relate to price risk,
credit risk, liquidity risk and cash flow risk are set out in
note 21 of the Financial Statements.
G H H Ainsworth - Chairman
S Gibson - Non Executive Director (resigned 13 June
2017)
D Jones – Non executive Director (appointed 29
November 2017)
D Grant – Non Executive Director
P Smith – Non Executive Director
D Nelson – Chief Executive Officer
P Rasmussen – Chief Financial Officer
H Williams – Chief Operations Officer
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Substantial interests in shares
As at 28 February 2018 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:
Exchange they are required to prepare the Group financial
statements in accordance with International Financial
Reporting Standards as adopted by the EU (IFRSs as
adopted by the EU) and applicable law and have elected
to prepare the parent Company financial statements on
the same basis.
T Rowe Price International
OppenheimerFunds
Hargreaves Lansdown Asset Mgt
Interactive Investor
Barclays Wealth
Schroder Investment Mgt
Dr Andrew W Nelson
T Rowe Price
9.28%
6.61%
6.54%
4.44%
4.16%
3.90%
3.90%
3.35%
Shareholder analysis by Canaccord Genuity
Research and development
The group incurred costs in respect of research and
development during the year of £17,011,000 (2016:
£8,358,000) of which £15,434,000 (2016: £7,599,000) has
been capitalised in accordance with IAS 38 (“Intangible
assets”). The remaining research and development
costs totalling £1,577,000 (2016: £759,000) have been
charged to the income statement, net of grant funding of
£1,507,000 (2016: £616,000).
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.
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 21.
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 that 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.
Statement of directors’ responsibilities in respect of
the financial statements
The directors are responsible for preparing the Annual
report and accounts for the year ended 31 December 2017
and the Group and parent Company financial statements
in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and
parent Company financial statements for each financial
year. As required by the AIM Rules of the London Stock
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 parent Company and of their profit or loss for that
period.
In preparing each of the Group and
parent Company financial statements,
the directors are required to:
•
•
•
•
•
select suitable accounting policies and
then apply them consistently;
make judgements and estimates that
are reasonable, relevant and reliable;
state whether they have been prepared
in accordance with IFRSs as adopted by
the EU;
assess the Group and parent
Company’s ability to continue as a
going concern, disclosing, as applicable,
matters related to going concern; and
use the going concern basis of
accounting unless they either intend
to liquidate the Group or the parent
Company or to cease operations, or
have no realistic alternative but to do
so.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and explain
the parent Company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the parent Company and enable them to ensure that
its financial statements comply with the Companies
Act 2006. They are responsible for such internal
control as they determine is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of
the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the directors are
also responsible for preparing a Strategic Report and a
Directors’ Report that complies with that law and those
regulations.
The directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the company’s website. Legislation in the
UK governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
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Company No: 3745726
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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
PricewaterhouseCoopers LLP resigned as auditors on 21
December 2017 and the directors appointed KPMG LLP.
A resolution to reappoint KPMG 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 20 March 2018
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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 2017 for
which we will be seeking shareholder approval at the Annual General Meeting on 4
June 2018. 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 the 2016 AGM, we voluntarily
decided to do so. We appointed Kepler, a brand of Mercer Ltd., to undertake a review
of IQE’s remuneration arrangements and this culminated in IQE’s remuneration policy
for the years 2017 to 2019, as set out below. This remuneration policy, along with the
annual report for 2016 remuneration was approved at the 2017 AGM, with 99.99%
and 99.73% voting in favour respectively. This annual report for 2017 remuneration
will be put to a shareholder vote on a voluntary basis at the 2018 AGM.
Sir David Grant, Remuneration Committee Chairman
NOTE: This report includes audited and unaudited information, which is identified
throughout the report.
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Company No: 3745726
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Directors’ Remuneration Policy (Unaudited)
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 established 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 was approved by shareholders at
the 2017 AGM.
Policy Table (Unaudited)
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
n/a
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).
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
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.
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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
in the Annual Report on
Remuneration.
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Company No: 3745726
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LTIP
To drive
sustained
long-term
performance
that supports
the creation of
shareholder
value.
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.
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.
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 2018, the performance
condition for the award will
continue to be based on EPS
growth from RPI +4% to 10%
p.a. over 3 years. The 2017 LTIP
award included a provision to
double the award if absolute
TSR growth over the 3-year
performance period is 100%
or more. This provision will not
apply to the 2018 LTIP award
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 in the on in the Annual
Report on Remuneration.
Notes to the policy table (Unaudited)
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
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
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.
Remuneration policy for other employees
All employees are eligible to participate in a discretionary
annual bonus and our HMRC-approved share option
scheme. Only executive directors participated in the
Group’s LTIP during 2017.
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 2017.
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Company No: 3745726
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Non-Executive Director Remuneration
(Unaudited)
Details of the policy on fees paid to the company’s Non-
Executive Directors are set out in the table below:
Subject to re-election by shareholders, Non-Executive
Directors are appointed by the full Board and retire by
rotation in accordance with the company’s articles of
association.
The remuneration of Non-Executive Directors are
matters reserved for the full Board subject to a limit
of £150,000 per annum (exclusive of value added tax
if applicable) or such other figure as shareholders my
approve plus reasonable expenses in accordance with
the company’s articles of association.
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
Phil Smith
30 November 2016
Sir Derek Jones
1 December 2017
Function
Operation
Opportunity
Performance metrics
Fees
To attract and
retain Non-
Executive
Directors of the
highest calibre
with broad
commercial
and other
experience
relevant to the
Company.
The fees paid to 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.
n/a
Fee levels are
reviewed annually,
with any adjustments
effective 1 January
in the year following
review.
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 that 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.
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Company No: 3745726
Pay scenarios (Unaudited)
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 four different performance scenarios: ‘Minimum’, ‘On-
target’ ‘Maximum’ and ‘Stretch’.
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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 2017, 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.
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 (Unaudited)
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:
Component
Approach
Maximum annual
grant value
Base salary
Pension
Benefits
Annual Bonus
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.
100% of salary
LTIP
New appointees will be granted awards under the LTIP on
the same terms as other executives, as described in the
policy table.
Up to 200% of salary
on appointment;
normally 100% of
salary thereafter
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Company No: 3745726
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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.
Non-Executive Directors
In recruiting a new Non-Executive Director, the
Remuneration Committee will utilise the policy as set out
in the table on page 60 .
Service contracts and treatment
for leavers and change of control
(Unaudited)
Executive
Date of service contract
Dr Andrew Nelson
1 June 2016
Phillip Rasmussen
7 January 2007
Dr Howard
Williams
1 June 2016
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.
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:
Reason for leaving
Calculation of vesting / payment
Annual bonus
Resignation
No annual bonus payable.
‘Good leaver’1
Change of control
LTIP
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.
Resignation
Outstanding awards lapse
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.
‘Good leaver’1 and
change of control
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).
In the event of a change of control, awards may alternatively be exchanged for new
equivalent awards in the acquirer where appropriate.
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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 (Unaudited)
employees on the executive remuneration policy and
implementation.
Consideration of shareholder views
(Unaudited)
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 (Unaudited)
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
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 the previous
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 director’s
remuneration report.
Remuneration Committee role,
membership and advice (Unaudited)
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.
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Annual report on remuneration
The main activities of the
Remuneration Committee during the
year were as follows:
•
•
•
•
Determined annual bonuses payable to
executive directors in 2017.
Reviewed and approved vesting of LTIP
awards.
Reviewed and approved the executive
directors’ salaries for 2017.
Determined performance targets for
the executive directors’ 2018 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.
During the year, the Committee
comprised 2 Non-Executive
Directors:
•
•
Sir David Grant, Non-Executive
Director and Remuneration Committee
Chairman attended 3 out of 3 meetings
during the year
Dr Godfrey Ainsworth, Company
Chairman, attended 3 out of 3 meetings
during the year
Mr Phil Smith and Sir Derrick Jones joined the Committee
at the beginning of 2018. 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
Representatives from Kepler, a brand
of Mercer Ltd, independent advisors to
the Committee
Kepler, a brand of Mercer (Kepler), provides 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. Fees of £61,000
were paid to Kepler in respect of services they provided
to the Company in 2017 and December 2016 (as they
began their appointment in December 2016). 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.
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Company No: 3745726
Single total figure of remuneration for Executive Directors (Audited
Information)
The table below sets out a single figure for the total remuneration received by each Director for the year ended 31
December 2017 and the prior year:
Dr Andrew Nelson
Phillip Rasmussen
Dr Howard Williams
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Salary
Benefits1
Annual bonus2
Long-term incentive3
Pension4
Total
2017
£’000
515
6
515
-
51
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
503
10
503
-
50
345
4
345
-
34
728
337
5
337
-
36
715
345
1
345
-
34
725
337
1
337
-
36
711
1,087
1,066
1.
2.
3.
Taxable benefits for 2017 consist of health cover, private medical insurance, life assurance, long-term
disability insurance, fuel and car repairs.
Annual bonus payments for performance during 2017 were 100% of salary. Details are included below in
“Incentive outcomes for year ending 31 December 2017 and 31 December 2016”.
No LTIP awards were due to vest in 2017 or 2016, as the 2014 and 2015 awards were delayed until 2016
and, as such, will vest based on performance to 1 January 2019. In addition, the Directors did not exercise
any share options during the year (2016: nil).
4.
Executive directors participate in a defined contribution scheme, in relation to which the Company
contributed 10% of salary.
Incentive outcomes for year ending 31 December 2017 and 31 December 2016
(Unaudited)
Annual Bonus
In 2016 financial objectives were met in full and the maximum bonus of 100% of salary was paid.
In 2017 financial objectives were met in full and the maximum bonus of 100% of salary was paid.
Long-term incentive plan
No LTIP awards were due to vest in 2016 or 2017, as 2014 and 2015 awards were delayed until 2016 and, as such, will
vest based on performance to 1 January 2019.
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Percentage change in CEO
remuneration (Unaudited)
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
2016 and 2017. 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 2016-17
CEO
+2.4%
- 6.0%
+2.4%
All UK
employees
+3.0%
-5.4%
+68%
Base salary
Taxable benefits
Annual bonus
Relative importance of spend on pay
(Unaudited)
The graph below shows shareholder distributions (i.e.
dividends and share buybacks) and total employee pay
expenditure for the financial years ended 31 December
2016 and 31 December 2017, along with the percentage
change.
Historical TSR performance
Review of past performance (Unaudited)
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 2013 to 31 December 2017.
600.0
450.0
300.0
150.0
0.0
2013
IQE
AIM
2014
2015
2016
2017
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The table below details the Chief Executive’s “single figure” remuneration over the same period.
Historical CEO remuneration
CEO single figure of remuneration (£000)
STI award as a % of maximum opportunity
LTI award as a % of maximum opportunity
2013
1,266
0%
100%
2014
2015
889
0%
83%
851
0%
100%
2016
1,066
100%
n/a
2017
1,087
100%
n/a
Scheme interests awarded in 2017 (Audited Information)
Executive director
Award type
Date of award
# shares
awarded
Face value
End of performance
period
Dr Andrew Nelson
Nil-cost option
6 January 2017
4,069,579
£1,638,180
31 December 2019
Phillip Rasmussen
Nil-cost option
6 January 2017
2,726,537
£1,104,247
31 December 2019
Dr Howard Williams
Nil-cost option
6 January 2017
2,726,537
£1,104,247
31 December 2019
The face value of shares was based on the share price at date of award of 40.5p
Vesting of these awards is subject to EPS growth in excess of RPI as illustrated below, where EPS is measured over the
period from 1 January 2017 to 1 January 2020. All awards will vest on the third anniversary of the date of grant on 6
January 2020.
Exit payments made in the year (Unaudited)
No exit payments were paid to any director during the year.
Payments to past directors (Unaudited)
No payments were made to past directors during the year.
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Single total figure of remuneration
for Non-Executive Directors (Audited
Information)
The table below sets out a single figure for the total
remuneration received by each Non-Executive Director
for the year ended 31 December 2017 and the prior year:
NED fees
2017
£’000
125
50
23
50
4
2016
£’000
125
50
50
n/a
n/a
Dr Godfrey Ainsworth
Sir David Grant
Prof Simon Gibson1
Phil Smith
Sir Derek Jones2
1. Prof Simon Gibson retired from the Board on 13
June 2017.
2. Sir Derek Jones was appointed to the Board as an
independent director on 29 November 2017.
Implementation of remuneration policy for 2018 (Unaudited)
Base salary
The Committee approved the following base salary increases, in line with the average increase for all UK employees:
Executive Director
Annual base salary at
1 January 2017
Annual base salary at
1 January 2018
Percentage
increase
Dr Andrew Nelson
Phillip Rasmussen
Dr Howard Williams
£515,000
£345,000
£345,000
525,300
351,900
351,900
2%
2%
2%
Pension
Executive Directors are entitles to a pension contribution of 10% of salary or equivalent cash allowance.
Annual bonus (Unaudited)
For 2018 the Committee approved the following annual bonus opportunities for Executive Directors, as outlined in the
Policy Table. The Committee considers annual bonus targets for 2018 to be commercially sensitive at this time but will
disclose them retrospectively once they are no longer commercially sensitive.
EBITDA
(% weighting)
Cashflow
(% weighting)
Personal/strategic
objectives (% weighting)
Maximum annual bonus
opportunity (% salary)
60%
20%
20%
100%
Payment of the personal element is also subject to IQE achieving Threshold EBITDA performance.
LTIP (Audited Information)
For 2018, normal LTIP awards of up to 100% of salary may be made to executive directors, 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 below. No award will vest below Threshold performance, and vesting will increase on a straight-line basis
between Threshold and Stretch.
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Implementation of remuneration policy for 2018 – continued (Unaudited)
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).
Vesting schedule
Compound annual growth rate in EPS from 1 January 2018 to 31 Dec 2020
3-year EPS growth % of normal maximum
Threshold
Stretch
+6%
12%
25%
100%
Chairman and Non-Executive Director Fees (Unaudited)
The Board reviewed the Group’s Chairman’s fee and decided to make no change for 2018. 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.
Directors’ interests (Unaudited)
A table setting out the beneficial interests of the Directors and their families in the share capital of the Company as at
31 December 2017 is set out below.
Since 31 December 2017 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 2017
Shares owned
outright as at
31 Dec 2017
Shareholding
requirement
% salary/fee
Curren
shareholding %
salary/fee
Requirement
met?
Dr Andrew
Nelson
Phillip
Rasmussen
Dr Howard
Williams
Dr Godfrey
Ainsworth
Sir David
Grant
Phil Smith
Sir Derek
Jones1
35,259,218
28,459,218
3,473,357
1,573,357
4,292,965
2,392,965
3,154,197
2,154,197
215,000
215,000
0
N/A
0
0
200%
200%
200%
N/A
1.
Sir Derek Jones was appointed on 29 November 2017.
Yes
Yes
Yes
N/A
7,571%
625%
950%
2,360%
589%
N/A
N/A
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2017
Dr Andrew
Nelson
Phillip
Rasmussen
Dr Howard
Williams
Dr Godfrey
Ainsworth
Sir David
Grant
Phil Smith
Sir Derek
Jones1
2016
Dr Andrew
Nelson
Phillip
Rasmussen
Dr Howard
Williams
Dr Godfrey
Ainsworth
Sir David
Grant
Phil Smith
Sir Derek
Jones1
Options
Unvested
and subject
to continued
performance
Unvested
and subject
to continued
employment
Vested but
unexercised
Vested
during
year
Lapsed
during
year
Exercised
during
year
11,886,782
7,952,645
7,952,645
-
-
-
-
-
-
-
-
-
-
-
-
3,145,433
2,211,444
3,089,907
N/A
Options
Unvested
and subject
to continued
performance
Unvested
and subject
to continued
employment
Vested but
unexercised
Vested
during
year
Lapsed
during
year
Exercised
during
year
7,817,203
5,226,108
5,226,108
-
-
-
-
-
-
-
-
-
-
-
-
2,861,192
2,211,444
3,089,907
N/A
Summary of shareholder voting at the 2016 AGM (Unaudited)
Results of the vote on the remuneration report at the IQE’s AGM on 13 June 2017 are as below:
Total number of votes
% of votes cast
For (including discretionary)
Against
271,462,338
191,120
Total votes cast (excluding withheld votes)
271,653,458
Votes withheld
522,222
Total votes cast (including withheld votes)
272,175,680
99.73%
0.07%
99.81%
0.19%
100%
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Director’s biographies
Dr Godfrey H H Ainsworth FCA (62)
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. In April 2018, Dr Ainsworth became
Executive Chairman providing support to the CEO, concentrating on investor and
external relations and providing oversight support on an interim basis to the Finance
Team..
Sir David Grant CBE (70) Non-executive 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 (60) Senior Independent 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: INNOVATE UK.
Sir Derek Jones KCB (65) Non-executive Director
Sir Derek Jones was the Permanent Secretary of the Welsh Government as well as a
member of the UK Civil Service Board and its Senior Leadership Committee until he
retired from the Welsh Government in February 2017. He spent the earlier part of his
government career in Whitehall, working at HM Treasury and the then Department for
Trade & Industry, where he headed the Far East Trade Desk. In government in Wales
he has also served as Director of Finance and Director of Economic Affairs. Outside
government, Sir Derek was Director of Business & Strategic Partnerships at Cardiff
University, responsible for securing long-term collaborations with the private sector
and is an Honorary Professor and Fellow of the University. Sir Derek is currently the
Chair of the Prince’s Trust in Wales and is a Vice President of Cardiff Business Club. He
was made Companion of the Order of the Bath (CB) in 2009 and subsequently Knight
Commander (KCB) in 2014, for services to economic and social conditions. Due to his
work in government, Sir Derek does not hold any other current directorships and has
not held any past directorships within the last five years.
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Dr Drew Nelson OBE (63)
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 (47) 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 also served as Company Secretary
from January 2009 until March 2017. It is with the deepest sadness that in April 2018,
the Board announced that its long-serving Chief Financial Officer, Phillip J Rasmussen
BSc ACA, had died. His death follows a cycling incident that took place on 1 April 2018
whilst on holiday abroad.
Dr Howard Williams (63) 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 (32) Company Secretary
Jason Howells studied at University of Oxford where he gained a BA (Hons) in
Jurisprudence and subsequently completed his Postgraduate Diploma in Legal Practice
at Cardiff University. He qualified as a solicitor at Eversheds LLP, a predecessor of
Eversheds Sutherland (International) LLP. After seven years at Eversheds, which included
a secondment to GlaxoSmithKline, he moved to Capita Property and Infrastructure in
2015 before joining IQE in October 2016. Jason was appointed Company Secretary in
March 2017.
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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-executive)
Dr A W Nelson OBE, BSc, Ph.D, FREng (President and Chief Executive Officer)
Mr P Smith BSc, Hon LLD, DUniv., CEng, FIET (Senior Independent Non-executive Director)
Sir David Grant CBE PhD FREng FLSW CEng FIET (Non-executive Director)
Mr P J Rasmussen BSc, ACA (Chief Financial Officer)
Dr H R Williams BSc, Ph.D, CEng, MIMechE, MCIBSE (Operations Director)
Sir Derek Jones KCB (Non-executive Director) appointed 29 November 2017
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
KPMG LLP
3 Assembly Square, Britannia Quay, Cardiff CF10 4AX
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
Stifel Nicolaus Europe Limited
4th Floor 150 Cheapside, London, United Kingdom, EC2V 6ET
Registrars
Link Asset Services
The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU
Investor relations
Chris Meadows
Tel +44(0)29 2083 9400
investors@iqep.com
IQE PLC | Report and Annual Accounts 2017
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Company No: 3745726
Independent
Independent
auditor’s report
auditor’s report
Overview
Overview
Materiality:
group financial
Materiality:
statements as a whole
group financial
statements as a whole
Coverage
£940k
4.1% of group profit before tax
£940k
4.1% of group profit before tax
97%of group profit before tax
Coverage
97%of group profit before tax
Risks of material misstatement
Risks of material misstatement
Revenue recognition
Recurring risks
Recurring risks
Revenue recognition
Valuation of intangible assets
and goodwill
Valuation of intangible assets
and goodwill
Capitalisation of development
costs
Capitalisation of development
costs
Parent Company only Valuation of investments in
Parent Company only Valuation of investments in
subsidiaries
subsidiaries
to the members of IQE plc
to the members of IQE plc
1. Our opinion is unmodified
1. Our opinion is unmodified
We have audited the financial statements of IQE
plc (“the Company”) for the year ended 31
We have audited the financial statements of IQE
December 2017 which comprise the consolidated
plc (“the Company”) for the year ended 31
income statement, consolidated statement of
December 2017 which comprise the consolidated
comprehensive income, consolidated balance
income statement, consolidated statement of
sheet, consolidated statement of changes in equity,
comprehensive income, consolidated balance
consolidated cash flow statement, parent company
sheet, consolidated statement of changes in equity,
balance sheet, parent company statement of
consolidated cash flow statement, parent company
changes in equity, parent company cash flow
balance sheet, parent company statement of
statement, and the related notes, including the
changes in equity, parent company cash flow
accounting policies in note 2.
statement, and the related notes, including the
accounting policies in note 2.
In our opinion:
In our opinion:
— the financial statements give a true and fair
view of the state of the Group’s and of the
— the financial statements give a true and fair
parent Company’s affairs as at 31 December
view of the state of the Group’s and of the
2017 and of the Group’s profit for the year then
parent Company’s affairs as at 31 December
ended;
2017 and of the Group’s profit for the year then
ended;
— the group financial statements have been
properly prepared in accordance with
— the group financial statements have been
International Financial Reporting Standards as
properly prepared in accordance with
adopted by the European Union (IFRSs as
International Financial Reporting Standards as
adopted by the EU);
adopted by the European Union (IFRSs as
— the parent Company financial statements have
adopted by the EU);
been properly prepared in accordance with
— the parent Company financial statements have
IFRSs as adopted by the EU and as applied in
been properly prepared in accordance with
accordance with the provisions of the
IFRSs as adopted by the EU and as applied in
Companies Act 2006; and
accordance with the provisions of the
Companies Act 2006; and
— the financial statements have been prepared in
— the financial statements have been prepared in
accordance with the requirements of the
Companies Act 2006.
Basis for opinion
accordance with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
We conducted our audit in accordance with
(UK)”) and applicable law. Our responsibilities are
International Standards on Auditing (UK) (“ISAs
described below. We have fulfilled our ethical
(UK)”) and applicable law. Our responsibilities are
responsibilities under, and are independent of the
described below. We have fulfilled our ethical
Group in accordance with, UK ethical requirements
responsibilities under, and are independent of the
including the FRC Ethical Standard as applied to
Group in accordance with, UK ethical requirements
listed entities. We believe that the audit evidence
including the FRC Ethical Standard as applied to
we have obtained is a sufficient and appropriate
listed entities. We believe that the audit evidence
basis for our opinion.
we have obtained is a sufficient and appropriate
basis for our opinion.
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In
arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows:
The risk
Our response
Revenue recognition
Refer to note 2.21 (accounting
policy).
Carrying value of intangible
assets and goodwill (£108.5
million; 2016: £104.0m)
Refer to note 2.5 (accounting
policy) and note 13 (financial
disclosures).
Our procedures included:
— Control design: Matched sales invoices to
related orders and dispatch notes at the
transaction level.
— Enquiry of customers: Obtained direct
confirmation of SMI balances of £7,317k
held by customers to determine the level of
inventory held by each at the year-end.
— Test of details: Vouched specific billings
and accruals around the year-end cut-off
period to dispatch note.
— Historical comparison: Assessed the
returns and rebates provisions based on
historical trends, contract terms and any
specific known product issues identified
either at or subsequent to the year-end.
Inappropriate inclusion of a sale in
2017 rather than 2018:
Professional standards require us to
make a rebuttable presumption that the
fraud risk from revenue recognition is a
significant risk.
Pressures on achieving internal and
external expectations of results increase
the risk of fraudulent revenue
recognition.
The Group recognises revenue when
the risks and rewards of the underlying
sale have been transferred to the
customer, which is on the delivery and
acceptance of the goods by the
customer. For certain sales, the Group
recognises revenue on Supplier
Managed Inventory (SMI) contracts at
the point of receipt into the customer’s
warehouse. Those contracts require the
Group to maintain the inventory level at
the customer within a specified range.
Provisions for sales returns and rebates
as a result of delivered wafers not being
within the required specification may be
insufficient at the year-end.
Forecast based valuation:
Our procedures included:
The carrying amount of intangible assets
in the Group is significant, £108.5m at
31 December 2017, consisting of
goodwill (£64.4m), development costs
(£35.5m) and other intangibles (£8.6m).
The recoverable amounts of the
goodwill (which relates to the III/V
Epitaxy and Substrates CGUs) are
determined from Value in Use
calculations.
The VIU calculations represent a key
judgement area as changes in the
underlying assumptions, particularly
relating to forecast cash flows and
discount rates, could result in a material
misstatement through an impairment
being required against the goodwill or
one or more intangible assets.
Development costs are tested for
impairment only when an indicator of
impairment is present. If any such
indicators are identified, VIU calculations
are prepared.
— Control design: Evaluated the Group’s
budgeting procedures upon which the
forecast cash flows are based. Assessed
whether the forecasts (including growth
rate) were consistent with current business
strategies in place.
— Historical comparisons: Compared
budgets for the prior year(s) with actual
results and understanding the reasons for
the variances.
— Benchmarking assumptions: Challenged
the Group’s selection of discount and
growth rates by using external data
(including competitor analysis) using our
own valuation specialist to determine an
appropriate range and comparing the actual
rate used to that range.
— Sensitivity analysis: Performed analysis to
assess the sensitivity of the Value in Use
calculations to changes in the discount rate,
growth rate and the forecast cash flows.
— Assessing transparency: Assessed the
adequacy of the Group’s disclosures in
respect of the impairment testing of
goodwill and intangibles and whether
disclosures about the sensitivity of the
outcome of the impairment assessment to
changes in key assumptions properly
reflected the risks inherent in it.
2. Key audit matters: our assessment of risks of material misstatement (continued)
Capitalisation of development
costs (£15.4 million; 2016: £6.3m)
Refer to note 2.5 (accounting
policy) and note 13 (financial
disclosures).
The risk
Our response
Risk of over-capitalisation:
Our procedures included:
Capitalised development costs are
significant and increasing due to
investment in areas including VCSEL,
GaN, cREO and Photonics.
The amounts involved are significant,
and the application of accounting
standards to determine the criteria is
inherently subjective as this involves an
assessment of the probability of future
outcomes.
The capitalisation also includes the
assessment of the time period that
constitutes the process development
phase and the accurate recording of the
related costs to exclude from the
capitalised costs any related to saleable
wafer product produced at the same
time.
— Our expertise: Reviewed the Group’s
accounting paper and critically assessed this
against the criteria of the relevant
accounting standard for the capitalisation of
costs and our understanding of the progress
of the Group’s projects.
— Test of details: Vouched a sample of labour
costs allocated to development projects
back to supporting documentation, primarily
timesheets and payroll records for relevant
employees. Vouched a sample of material
costs to supporting documentation including
vouching substrate costs to purchase
invoices and analysing gas consumption.
— Benchmarking assumptions: Challenged
the reasonableness of the assumptions
applied in respect of the proportion of labour
and overhead costs capitalised with
reference to the number of development
runs performed during the year compared to
the total number of all runs.
— Calculation reperformance: Re-performed
management’s calculation of standard costs
used in allocating costs throughout the year,
using actual costs incurred. Critically
assessed any differences arising.
— Test of details: Vouched a sample of
development items from development run
records back to supporting documentation
to check whether that the selected wafer is
not showing as having been sold and has a
nil value in the associated inventory records.
Where development projects result in the
production of saleable wafers, recalculated
the capitalised cost to ensure all costs in
respect of those delivered have been
appropriately expensed.
— Test of details: Vouched a sample of
wafers sold during the year, selected from
sales records, back to
production/development run records to
ensure that the cost of sold wafers has not
been capitalised inappropriately.
Parent Company: Valuation of
investments in subsidiaries
(£88.1 million; 2016: £48.2m)
Refer to note 2.28 (accounting
policy) and note 15 (financial
disclosures).
Forecast-based valuation:
Our procedures included:
The recoverable amounts of
investments in subsidiaries are
determined from Value in Use
calculations.
The VIU calculations represent a key
judgement area as movements in the
underlying assumptions, particularly
relating to forecast cash flows and
discount rates, could result in a material
misstatement of the balance.
— Assessing forecasts: The work on the
group’s forecasts as described in the
goodwill impairment risk above.
— Assessing transparency: Assessing the
adequacy of the disclosures in relation to
the Company’s investments in its
subsidiaries.
3. Our application of materiality and an overview
of the scope of our audit
Profit before tax, normalised
£22,447k
Group Materiality
£940k
Materiality for the group financial statements as a
whole was set at £940k, determined with reference
to a benchmark of group profit before tax,
normalised to exclude the impact of this year’s
share-based payment charge as disclosed in note 4,
of £22,447k, of which it represents 4.1%.
Materiality for the parent company financial
statements as a whole was set at £300k, as
communicated by the group audit team. This is
lower than the materiality we would otherwise have
determined by reference total assets, and represents
0.13% of the Company’s total assets.
£940k
Whole financial
statements materiality
£500k
Range of materiality at 13
components (£300k-£500k)
Profit before tax, normalised
Group materiality
£50k
Misstatements reported to the
audit committee
Group revenue
Group profit before tax
3
97%
94
18
98%
80
Group total assets
11
99%
88
Key:
Full scope for group audit purposes 2017
Specified risk-focused audit procedures 2017
We agreed to report to the Audit Committee any
corrected or uncorrected identified misstatements
exceeding £50k, in addition to other identified
misstatements that warranted reporting on
qualitative grounds.
Of the group’s 13 reporting components, we
subjected 8 to full scope audits for group purposes
and 3 to specified risk-focused audit procedures.
The latter were not individually financially significant
enough to require a full scope audit for group
purposes, but did present specific individual risks
that needed to be addressed. The group team
performed procedures on the items excluded from
normalised group profit before tax.
The components within the scope of our work
accounted for the percentages illustrated opposite.
The remaining 2% of total group revenue, 3% of
group profit before tax and 1% of total group assets
is represented by 2 reporting components, none of
which individually represented more than 2% of any
of total group revenue, group profit before tax or
total group assets. For these residual components,
we performed analysis at an aggregated group level
to re-examine our assessment that there were no
significant risks of material misstatement within
these.
The work on 1 of the 13 reporting components was
performed by a component auditor and the rest,
including the audit of the parent company, was
performed by the Group team. The Group team
instructed the component auditor as to the
significant areas to be covered, including the
relevant risks detailed above and the information to
be reported back. The Group team approved the
component materiality, of £500k, having regard to
the mix of size and risk profile of the Group across
the components. Video and telephone conference
meetings were held with the component auditor.
At these meetings, the findings reported to the
Group team were discussed in more detail, and any
further work required by the Group team was then
performed by the component auditor.
The Group’s 2 joint ventures were not individually
significant enough to require an audit for group
reporting purposes, but a review was performed of
the management accounts and the Board minutes
of these joint ventures and the audit team held
discussions with the joint venture management
teams. We performed analysis at an aggregated
group level to re-examine our assessment that
there were no significant risks of material
misstatement within these.
4. We have nothing to report on going concern
We are required to report to you if we have concluded that
the use of the going concern basis of accounting is
inappropriate or there is an undisclosed material uncertainty
that may cast significant doubt over the use of that basis for
a period of at least twelve months from the date of approval
of the financial statements. We have nothing to report in
these respects.
5. We have nothing to report on the other information in
the Annual Report
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work we have
not identified material misstatements in the other
information.
Strategic report and directors’ report
Based solely on our work on the other information:
— we have not identified material misstatements in the
strategic report and the directors’ report;
— in our opinion the information given in those reports for
the financial year is consistent with the financial
statements; and
— in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
6. We have nothing to report on the other matters on
which we are required to report by exception
Under the Companies Act 2006, we are required to report
to you if, in our opinion:
— 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; or
— certain disclosures of directors’ remuneration specified
by law are not made; or
— we have not received all the information and
explanations we require for our audit.
We have nothing to report in these respects.
(cid:24)(cid:15) Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page(cid:1)
5(cid:20), the directors are responsible for: the preparation of the(cid:1)
financial statements including being satisfied that they give(cid:1)
a true and fair view; such internal control as they determine(cid:1)
is necessary to enable the preparation of financial(cid:1)
statements that are free from material misstatement,(cid:1)
whether due to fraud or error; assessing the Group and(cid:1)
parent Company’s ability to continue as a going concern,(cid:1)
disclosing, as applicable, matters related to going concern;(cid:1)
and using the going concern basis of accounting unless(cid:1)
they either intend to liquidate the Group or the parent(cid:1)
Company or to cease operations, or have no realistic(cid:1)
alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about(cid:1)
whether the financial statements as a whole are free from(cid:1)
material misstatement, whether due to fraud or error, and(cid:1)
to issue our opinion in an auditor’s report. Reasonable(cid:1)
assurance is a high level of assurance, but does not(cid:1)
guarantee that an audit conducted in accordance with ISAs(cid:1)
(UK) will always detect a material misstatement when it(cid:1)
exists. Misstatements can arise from fraud or error and are(cid:1)
considered material if, individually or in aggregate, they(cid:1)
could reasonably be expected to influence the economic(cid:1)
decisions of users taken on the basis of the financial(cid:1)
statements.
A fuller description of our responsibilities is provided on the(cid:1)
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
(cid:25)(cid:15) The purpose of our audit work and to whom we owe(cid:1)
our responsibilities
This report is made solely to the Company’s members, as a(cid:1)
body, in accordance with Chapter 3 of Part 16 of the(cid:1)
Companies Act 2006. Our audit work has been undertaken(cid:1)
so that we might state to the Company’s members those(cid:1)
matters we are required to state to them in an auditor’s(cid:1)
report and for no other purpose. To the fullest extent(cid:1)
permitted by law, we do not accept or assume(cid:1)
responsibility to anyone other than the Company and the(cid:1)
Company’s members, as a body, for our audit work, for this(cid:1)
report, or for the opinions we have formed.
Andrew Campbell-Orde (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
3 Assembly Square
Britannia Quay
Cardiff
CF10 4AX
20 March 2018
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Five year financial summary
2017
£’000
Restated
2016
£’000
Restated
2015
£’000
Restated
2014
£’000
Restated
2013
£’000
Revenue
154,480
132,707
114,024
112,011
126,774
Adjusted EBITDA (see below)
36,977
31,730
29,001
27,009
24,920
Operating profit
·
·
Adjusted*
Reported
Profit after tax
·
·
Adjusted*
Reported
Net cash flow from operations
Before adjustments (note 5)
Reported
Free cash flow**
Before exceptional cash flows
Reported
Net cash/(debt)
26,359
17,019
24,823
14,485
31,089
29,717
(2,945)
(4,317)
45,612
22,119
19,826
20,692
18,023
24,281
22,463
4,382
2,564
18,977
21,166
17,045
17,847
22,575
20,971
12,114
10,510
17,618
7,167
15,496
791
19,614
14,861
11,446
6,693
14,556
7,346
13,232
5,156
16,173
12,762
5,389
1,978
(39,549)
(23,223)
(31,251)
(34,351)
Equity shareholders’ funds
287,584
184,666
142,299
117,851
109,528
Basic EPS – adjusted***
Basic EPS – unadjusted
Diluted EPS – adjusted***
Diluted EPS – unadjusted
3.59p
2.09p
3.36p
1.95p
3.06p
2.66p
2.89p
2.52p
2.53p
2.65p
2.45p
2.56p
2.32p
0.06p
2.24p
0.06p
1.94p
0.78p
1.86p
0.75p
Adjusted EBITDA has been calculated as follows:
2017
£’000
Restated
2016
£’000
Restated
2015
£’000
Restated
2014
£’000
Restated
2013
£’000
Profit after tax
14,485
18,023
17,847
Tax
Interest
Share based payments
Profit & Loss on disposal
Exceptional items
Depreciation
Amortisation of intangible assets
435
2,099
7,526
22
385
5,637
6,388
340
1,463
2,881
47
(1,962)
5,561
5,377
248
1,790
2,001
(5,187)
1,070
6,192
5,040
791
4,452
1,924
1,458
15
7,877
6,590
3,902
5,156
36
2,154
1,415
-
5,065
8,503
2,591
Adjusted EBITDA
36,977
31,730
29,001
27,009
24,920
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The comparative financial information has been restated. Details of the restatement are set out in note 2.30
* The adjusted performance measures are reconciled in note 5.
** Free cash flow is defined as net cash flow before acquisitions, financing and net interest paid.
*** Adjusted EPS measures exclude share based payments, exceptional items, deferred tax, acquisition accounting amortisation and
the impact of discounting.
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Consolidated income statement for the year ended 31 December 2017
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 income tax
Adjustments
Profit before income tax
Taxation
Profit for the year
Profit attributable to:
Equity shareholders
Non-controlling interest
Earnings per share attributable to owners of the
parent during the year
Basic earnings per share
Diluted earnings per share
Note
4
5
5
6
8
5
9
12
12
2017
£’000
154,480
(115,857)
38,623
-
Restated
2016
£’000
132,707
(98,538)
34,169
2,340
(21,582)
(16,636)
(22)
17,019
(2,099)
24,340
(9,420)
14,920
(435)
14,485
14,385
100
14,485
2.09p
1.95p
(47)
19,826
(1,463)
20,630
(2,267)
18,363
(340)
18,023
17,859
164
18,023
2.66p
2.52p
Adjusted basic and diluted earnings per share is presented in note 12.
All items included in the profit for the year relate to continuing operations.
The company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the
parent company profit and loss account.
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
The notes on pages 91 to 131 form an integral part of these consolidated financial statements.
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Consolidated statement of comprehensive income for the year ended 31
December 2017
Profit for the year
Currency translation differences on foreign currency net investments*
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity shareholders
Non-controlling interest
2017
£’000
14,485
(10,944)
3,541
3,469
72
3,541
Restated
2016
£’000
18,023
23,620
41,643
40,919
724
41,643
* Items that may subsequently be reclassified to profit or loss.
Items in the statement above are disclosed net of tax. The income tax relating to each component of other
comprehensive income is disclosed in note 9.
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
The notes on pages 91 to 131 form an integral part of these consolidated financial statements.
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Consolidated balance sheet as at 31 December 2017
Non-current assets
Intangible assets
Fixed asset investments
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
Trade and other payables
Current tax liabilities
Borrowings
Provisions for other liabilities and charges
Total current liabilities
Non-current liabilities
Borrowings
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
2017
£’000
Restated
2016
£’000
13
15
14
10
17
16
17
18
19
20
19
20
22
108,513
103,972
75
90,800
17,768
7,680
-
85,001
18,181
6,889
224,836
214,043
33,707
32,240
45,612
111,559
336,395
28,498
30,868
4,957
64,323
278,366
(43,172)
(36,916)
(210)
-
(1,534)
(5,533)
(7,652)
(1,421)
(44,916)
(51,522)
-
(666)
(666)
(45,582)
290,813
7,560
145,927
97,967
36,130
(36,854)
(2,167)
(39,021)
(90,543)
187,823
6,755
51,081
83,582
43,248
287,584
184,666
3,229
3,157
290,813
187,823
The notes on pages 91 to 131 form an integral part of these consolidated financial statements. The comparative
financial information for the year ended 31 December 2016 has been restated. Details of the restatement are set out
in note 2.30.
The financial statements on pages 91 to 131 were authorised for issue by the board of directors on 20 March 2018
and were signed on its behalf.
P J Rasmussen
Dr A W Nelson
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Consolidated statement of changes in equity for the year ended 31 December
2017
Share
capital
Share
premium
Retained
earnings
Exchange
rate reserve
Other
reserves
Non-
controlling
interests
Restated
Total
equity
£’000
£’000
£’000
£’000
£’000
£’000
£’000
6,755
51,081
83,582
30,985
12,263
3,157
187,823
-
-
-
-
-
-
-
-
-
-
805
805
94,846*
94,846
14,385
-
-
(10,916)
14,385
(10,916)
-
-
-
100
(28)
14,485
(10,944)
72
3,541
-
-
-
-
-
-
-
-
3,854
683
(739)
3,798
-
-
-
-
3,854
683
94,912
99,449
7,560
145,927
97,967
20,069
16,061
3,229
290,813
Balance at 1 January
2017 - Restated
Comprehensive
income
Profit for the year
Other comprehensive
income for the year
Total
comprehensive
income for the year
Transactions with
owners
Share based payments
Tax relating to share
options
Proceeds from shares
issued
Total transactions
with owners
Balance at 31
December 2017
*See note 22 on page122
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Share
capital
Share
premium
Retained
earnings
Exchange
rate reserve
Other
reserves
Non-
controlling
interests
Restated
Total
equity
£’000
£’000
£’000
£’000
£’000
£’000
£’000
6,655
49,600
65,723
7,925
10,221
2,433
142,557
-
-
-
-
-
-
-
-
100
1,481
100
1,481
17,859
-
-
23,060
17,859
23,060
-
-
-
164
18,023
560
23,620
724
41,643
-
-
-
-
-
-
2,042
-
2,042
-
-
-
2,042
1,581
3,623
6,755
51,081
83,582
30,985
12,263
3,157
187,823
Balance at 1
January 2016 -
Restated
Comprehensive
income
Profit for the year
Other
comprehensive
income for the year
Total
comprehensive
income for the
year
Transactions with
owners
Share based
payments
Proceeds from
shares issued
Total transactions
with owners
Balance at 31
December 2016 -
Restated
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
The notes on pages 91 to 131 form an integral part of these consolidated financial statements.
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Consolidated cash flow statement for the year ended 31 December 2017
Cash flows from operating activities
Adjusted cash inflow from operations
Cash impact of adjustments
Cash generated from operations
Net interest paid
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisition deferred consideration Kopin Wireless
Purchase of property, plant and equipment
Purchase of intangible assets
Capitalised development expenditure
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Proceeds from borrowings
Repayments of borrowings
Net cash generated from financing activities
Net increase/(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
Note
5
25
26
26
27
27
2017
£’000
31,089
(1,372)
29,717
(2,125)
(5,844)
21,748
-
(11,260)
(2,419)
(14,511)
2016
£’000
24,281
(1,818)
22,463
(1,489)
(839)
20,135
(11,250)
(10,956)
(1,794)
(6,310)
(28,190)
(30,310)
94,912
27,864
(75,430)
47,346
40,904
4,957
(249)
45,612
578
12,623
(3,341)
9,860
(315)
4,644
628
4,957
The notes on pages 91 to 131 form an integral part of these consolidated financial statements
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Parent company balance sheet for the year ended 31 December 2017
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Deferred tax assets
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
Borrowings
Total non-current liabilities
Total liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Retained earnings
Other reserves
Total equity
Note
13
14
15
10
17
18
19
19
22
2017
£’000
2,076
10
88,161
5,252
95,499
114,229
31,281
145,510
241,009
(21,236)
-
Restated
2016
£’000
1,748
5
48,558
-
50,311
96,944
-
96,944
147,255
(23,784)
(8,573)
(21,236)
(32,357)
-
-
(21,236)
219,773
7,560
145,927
50,476
15,810
219,773
(34,524)
(34,524)
(66,881)
80,374
6,755
51,081
10,089
12,449
80,374
The notes on pages 91 to 131 form an integral part of these financial statements.
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
The financial statements on pages 91 to 131 were authorised for issue by the board of directors approved on 20
March 2018 and were signed on its behalf.
P J Rasmussen
Dr A W Nelson
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Parent company statement of changes in equity for the year ended 31
December 2017
Share
capital
Share
premium
Retained
earnings
Other
reserves
Restated
Total
equity
£’000
£’000
£’000
£’000
£’000
Balance at 1 January 2017 - Restated
6,755
51,081
10,089
12,449
80,374
Comprehensive expense
Profit for the year
Total comprehensive expense
Transactions with owners
Share based payments
Tax relating to share options
Proceeds from shares issued
Total transactions with owners
-
-
-
-
-
-
-
-
805
805
94,846
94,846
40,387
40,387
-
-
40,387
40,387
-
-
-
-
3,854
246
(739)
3,361
3,854
246
94,912
99,012
Balance at 31 December 2017
7,560
145,927
50,476
15,810
219,773
Share
capital
£’000
Share
premium
£’000
Retained
earnings
£’000
Other
reserves
£’000
Restated
Total
Equity
£’000
Balance at 1 January 2016
6,655
49,600
12,505
10,407
79,167
Comprehensive expense
Loss for the year - restated
Total comprehensive expense
Transactions with owners
Share based payments
Proceeds from shares issued
Total transactions with owners
-
-
-
-
-
-
100
100
1,481
1,481
(2,416)
(2,416)
-
-
(2,416)
(2,416)
-
-
-
2,042
-
2,042
2,042
1,581
3,623
Balance at 31 December 2016 -
Restated
6,755
51,081
10,089
12,449
80,374
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
The notes on pages 91 to 131 form an integral part of these financial statements.
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Parent company cash flow statement for the year ended 31 December 2017
Cash flows from operating activities
Cash outflow from operations
Interest paid
Income tax paid
Net cash used in operating activities
Purchase of intangible assets
Purchase of property plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Proceeds from borrowings
Repayments of borrowings
Net cash generated from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
25
2017
£’000
(21,785)
(1,846)
-
2016
£’000
(8,812)
(1,278)
(78)
(23,631)
(10,168)
(375)
(11)
(386)
94,913
27,194
(65,781)
56,326
32,309
(1,028)
31,281
(347)
(6)
(353)
578
12,623
(2,842)
10,359
(162)
(866)
(1,028)
The notes on pages 91 to 131 form an integral part of these financial statements.
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Notes to the financial statements for
the year ended 31 December 2017
1. General information
IQE plc (‘the company’) and its subsidiaries (together
‘the group’) develop, manufacture and sell advanced
semiconductor materials. The group has manufacturing
facilities in Europe, United States of America and Asia and
sells to customers located globally.
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.
2. Significant accounting policies
The principal accounting policies applied in the
preparation of these consolidated financial statements
are set out below. These policies have been consistently
applied to all years presented.
2.1 Basis of preparation
The financial statements of IQE plc have been prepared
in accordance with
International Financial Reporting
Standards (IFRS) and IFRS Interpretations Committee (IFRS
IC) interpretations adopted by the European Union and
in accordance with the Companies Act 2006 applicable to
companies reporting under IFRS. The financial statements
have been prepared under the historical cost convention
except where fair value measurement is required by IFRS.
The preparation of financial statements in conformity
with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise
its judgement in the process of applying the group’s
accounting policies. The areas involving a higher degree
of judgement or complexity, or areas where assumptions
and estimates are significant to the consolidated financial
statements are disclosed in note 3.
2.2 Going concern
The group meets
its day to day working capital
requirements through its bank facilities and available cash.
The Group’s forecasts and projections, taking account
of reasonably possible changes in trading performance,
show that the group has adequate cash resources to
continue operating for the foreseeable future such that
the directors consider it appropriate to adopt the going
concern basis of accounting in preparing the consolidated
financial statements.
2.3 Changes in accounting policy and disclosures
(a) New standards, amendments and interpretations.
following new standards, amendments and
The
interpretations have been adopted by the group for the
first time for the financial year beginning on 1 January
2017:
·
Amendment to IFRS 12 “Disclosure of other
·
·
·
Amendments to clarify the classification and measurement of share-based payment transactions
interests in entities’ clarifying scope.
IAS Amendments to IAS 7, Statement of cash
flows on disclosure initiative.
Amendments to IAS 12,’Income taxes’ on
Recognition of deferred tax assets for unrealised
losses.
The adoption of these standards and amendments has
not had a material impact on the groups consolidated
financial statements.
(b) New standards, amendments and interpretations
issued but not effective and not adopted early
A number of new standards, amendments to standards
and interpretations which are set out below are effective
for annual periods beginning after 1 January 2017 and
have not been applied in preparing these consolidated
financial statements.
·
·
·
·
·
·
·
·
·
Amendments to clarify the classification and measurement of share-based payment transactions
Annual improvements 2014-2016 cycle
Amendment to IFRS 2, ‘Share based payments’
to clarify the classification and measurement of
certain share based payment transactions
IFRS 9 ‘Financial instruments’
IFRS 15 ‘Revenue from contracts with customers’
IFRS 16 ‘Leases’
IFRS 17 ‘Insurance contracts’
Amendment to IAS 28 ‘Investments in associates
and joint ventures’ to clarify certain fair value
measurements
Amendment to IAS 40 ‘Investment property’
to clarify transfers or property, to, or from,
investment property
The Directors anticipate that none of the new standards,
amendments to standards and interpretations is
expected to have a significant effect on the financial
statements of the group or parent company, except for
IFRS 16 ‘Leases’ and IFRS 15, ‘Revenue from contracts
with customers’.
IFRS16, ‘Leases’ addresses the definition of a lease, the
recognition and measurement of leases and establishes
principles for reporting useful information to users of
financial statements about the leasing activities of both
lessees and lessors. A key change arising from IFRS 16
is that most operating leases will be accounted for on
balance sheet for lessees. The standard replaces IAS
17 ‘Leases’, and related interpretations. The standard is
effective for annual periods beginning on or after 1 January
2019. The Group currently leases a number of assets,
principally property, under operating leases. The adoption
of IFRS 16 will have a significant impact on the financial
statements as the standard will require the operating
leases to be accounted for through the recognition of
a ‘right of use asset’ and a corresponding lease liability.
Interest-bearing borrowings and non-current assets will
increase on implementation of this standard. Operating
lease costs will no longer be classified within the income
statement based on amounts paid, but via a ‘right of use
asset’ depreciation charge recognised within operating
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profit and a lease interest expense within finance costs.
The impact will depend on the transition approach and
the lease contracts in effect at the date of adoption. At
31 December 2017, operating lease commitments were
£38,542,000 (see note 31) and operating lease charges for
2017 were £8,175,000 (see note 6).
IFRS15, ‘Revenue from contracts with customers’ deals
with revenue recognition and establishes principles
for reporting useful information to users of financial
statements about the nature, amount, timing and
uncertainty of revenue and cash flows arising from
contracts with customers. Revenue is recognised when a
customer obtains control of a good or service and thus
has the ability to direct the use and obtain the benefits
from the good or service. The standard replaces IAS 18
‘Revenue’ and IAS 11 ‘Construction Contracts’, and related
interpretations. The standard is effective for annual
periods beginning on or after 1 January 2018. The group
has undertaken an assessment of the impact of IFRS 15
and at present, the directors anticipate that any changes
in the recognition of revenue will relate to circumstances
where the Group produces bespoke customer products
with a guaranteed contractual right to payment. In
these situations revenue is likely to be accelerated and
recognised earlier in the manufacturing process than is
currently the case where revenue is typically recognised
on the delivery and acceptance of the goods by the
customer. Acceleration of revenue recognition in these
circumstances will increase revenue and accrued income
and reduce work in progress and finished goods in the
year the standard is adopted. The detailed impact of this
change for each customer arrangement at the balance
sheet date is still being quantified.
2.4 Consolidation
The consolidated financial statements comprise the results
of IQE plc (the Company) and its subsidiary undertakings,
together with the Group’s share of the results of its
associates and joint ventures.
Subsidiaries
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 and unrealised
gains or losses on transactions between group companies
are eliminated and 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 of 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.
Gains by the Group on transactions with joint ventures
are eliminated against the carrying value of the Group’s
interest in its joint ventures to the extent that the gain
does not exceed the carrying amount. In circumstances
where a gain exceeds the carrying amount the Group has
made an accounting policy choice to recognise the gain
in the comprehensive income statement, subject to an
assessment of recoverability of value from the joint venture
rather than recognising the gain as deferred income in the
consolidated balance sheet.
When the group’s share of losses in a joint venture equals
or exceeds its interests in the joint ventures (which includes
any long term interests that, in substance, form part of the
group’s net investment in the joint ventures), the group
does not recognise further losses, unless it has incurred
obligations or made payments on behalf of the joint
ventures. Unrealised gains on transactions between the
group and its joint ventures are eliminated to the extent
of the group’s interest in the joint ventures. Unrealised
losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred.
Accounting policies of the joint ventures have been
changed where necessary to ensure consistency with the
policies adopted by the group.
Business combinations
The acquisition of subsidiaries is accounted for using the
purchase method. The cost of an acquisition is measured
at the fair value of the consideration. The acquired
identifiable assets, liabilities and contingent liabilities are
recognised at their fair value at the date of acquisition.
Where the fair values of contingent deferred consideration,
assets and liabilities acquired are initially recognised on a
provisional basis, these are reassessed during the 12 month
period following the date of the business combination.
Adjustments to the fair values as at the date of acquisition
within this ‘measurement period’ are recorded, with any
net impact being added to or deducted from the goodwill
recognised. Such adjustments are recognised in both the
current period and restated comparative period balance
sheets as if the final fair values had been used in the
initial recognition of the acquisition. Subsequent to the
measurement period, any adjustments to the recorded
fair value of contingent deferred consideration are taken
through the income statement as an exceptional income
or expense.
The group recognises any non-controlling interest on an
acquisition-by-acquisition basis, either at fair value or at
the non-controlling interest’s proportionate share of the
recognised amounts of the acquiree’s identifiable net
assets.
Acquisition related costs are expensed as incurred.
2.5 Intangible assets
a) Goodwill
Goodwill arising on an acquisition is recognised as an
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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 immediately charged to the
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 the assets 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.
development has been released into production.
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 paid to utilise third party
software are expensed as incurred.
e) Other intangibles recognised on acquisition
Other intangible assets which form part of the identifiable
net assets of an acquired business are recognised at
their fair value and amortised on a systematic basis over
their useful economic life which is up to 7 years.
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:
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 product or process is intended for use or
sale;
the development is technically feasible to
complete;
there is an ability to use or sell the product or
process;
it can be demonstrated how the product or
process will generate probable future economic
benefits;
there are adequate technical, financial and other
resources to complete the development; and
the development expenditure can be reliably
measured.
“Directly attributable costs” refers to the materials
consumed; the directly attributable labour; and the directly
attributable 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 the
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.
2.6 Property, plant and equipment
Property, plant and equipment are 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 property, plant and equipment 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.
Costs incurred after initial recognition are included in
the assets’ carrying amounts or recognised as a separate
asset as appropriate only when it is probable that future
economic benefits associated with them will flow to
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the Group and the cost of the item can be measured
reliably. The carrying amount of the replaced part is
derecognised. All other repairs and maintenance are
charged to the income statement during the financial
year in which they are incurred.
Gains and losses on disposals are determined by
comparing the proceeds with the carrying amount and
are recognised within ‘profit/loss on disposal of property,
plant and equipment’ 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
2017 which resulted in no material changes to asset
residual values and useful economic lives (2016: 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.
2.7 Impairment of non-financial assets
Intangible assets that have an indefinite useful life
or intangible assets not ready to use are not subject
to amortisation and are reviewed for potential
impairment at least annually or more frequently if
events or circumstances indicate a potential impairment.
Assets that are subject to amortisation are reviewed
for impairment whenever events or changes in
circumstances indicate that the carrying amount may not
be recoverable. An impairment loss is recognised for the
amount by which the asset’s carrying amount exceeds
its recoverable amount. 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).
2.8 Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined using the first-
in, first-out (FIFO) method. Cost comprises direct
materials and, where applicable, direct labour costs
and attributable overheads that have been incurred
in bringing the inventories to their present location
and condition based on normal operating capacity
Net realisable value is the estimated selling price in
the ordinary course of business, less applicable selling
expenses.
2.9 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.
2.10 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.
2.11 Preference share debt instruments
Preference share financial assets are debt instruments
due from a related party (see note 30). Debt instruments
are initially recognised at fair value and subsequently
measured at amortised cost.
2.12 Financial assets
The group classifies its financial assets as loans and
receivables. The classification depends on the purpose
for which the financial assets were acquired and
the classification is determined at the date of initial
recognition. Loans and receivables are non-derivative
financial assets with fixed or determinable payments that
are not quoted in an active market. They are included
in current assets, except for maturities greater than
12 months after the reporting period where the item
is classified as a non-current asset. The group’s loans
and receivables comprise trade and other receivables
(note 2.9), cash and cash equivalents (note 2.10) and
preference share debt instruments (note 2.11).
Financial assets are recognised on the group’s
balance sheet when the group becomes a party to the
contractual provisions of the financial instrument and
are derecognised when the rights to receive cash flows
have expired or have been transferred and the group
has transferred substantially all the risks and rewards
of ownership. Loans and receivables are carried at
amortised cost using the effective interest method.
A financial asset is impaired and impairment losses are
incurred if there is objective evidence of impairment as
a result of one or more events that occurred after the
initial recognition of the asset and that loss event has
an impact on the future cash flows of the financial asset
that can be reliably estimated. Evidence of impairment
may include indications that the debtor is experiencing
significant financial difficulty, default or delinquency in
payment and can include situations where observable
data indicates that there is a measurable decrease in the
estimated future cash flows, such as changes in arrears
or economic conditions that correlate with defaults.
Trade and other 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. Debt
instruments, represented by preference share debt are
held at amortised cost less provision for impairment.
2.13 Financial liabilities
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. Financial
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liabilities are non-derivative financial liabilities with fixed
or determinable payments and they are included in
current liabilities, except for maturities greater than 12
months after the reporting period where the item is
classified as a non-current liability. The group’s financial
liabilities comprise trade and other payables (note 2.14),
borrowings (note 2.15) and finance leases (note 2.17) in
the balance sheet.
2.14 Trade payables
Trade payables are obligations to pay for goods or
services that have been acquired in the ordinary course
of business from suppliers. Trade payables 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.
2.20 Provisions
Provisions for onerous leases and restructuring costs
are recognised when: the Group has a present 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. Restructuring provisions comprise site closure
costs and employee termination payments. Provisions
are not recognised for future operating losses.
Provisions are measured at the present value of the
expenditures expected to be required to settle the
obligation using a pre-tax rate that reflects the time value
of money and the risks specific to 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.
2.15 Borrowings
Borrowings are recognised initially at fair value, net of
transaction costs incurred. Borrowings are subsequently
carried at amortised cost using the effective interest
method.
2.16 Borrowing costs
General and specific borrowing costs directly attributable
to the acquisition, construction or production of
qualifying assets, which are assets that take a substantial
period of time to get ready for their intended use, are
added to the cost of those assets, until such time as the
assets are substantially ready for their intended use. All
other borrowing costs are recognised in profit or loss in
the period in which they are incurred.
2.17 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 (net of any incentives received
from the lessor) are charged to the Consolidated Income
Statement in equal annual amounts over the lease term.
2.18 Government grants
Government grants are recognised at fair value when
there is reasonable assurance that the Group has
complied with the conditions attaching to them and the
grants will be received. Grants related to purchase of
assets are treated as deferred income and allocated to
the income statement over the useful lives of the related
assets while grants related to expenses are treated as
other income in the income statement.
2.19 Share capital
Ordinary shares are classified as equity. Incremental
costs directly attributable to the issue of new ordinary
shares or options are shown in equity as a deduction, net
of tax, from the proceeds.
2.21 Revenue recognition
Revenue represents the fair value of the consideration
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 for the sale of goods and services is recognised
when the risks and rewards of the underlying sale have
been transferred to the customer, which is on the
delivery and acceptance of the goods or services by the
customer.
Accrued income is recognised for sales under supplier
managed inventory arrangements where, at the balance
sheet date, goods have been delivered to the customer
but billing has not yet taken place, on the basis that
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.
Intellectual property license income relates to the
sale of finite and perpetual period licenses. Revenue
is recognised for intellectual property licenses with a
finite period on an accruals basis in accordance with the
terms of the relevant licensing agreement. Revenue is
recognised for perpetual intellectual property licenses
when a signed agreement or other persuasive evidence
of an arrangement exists, the intellectual property has
been delivered, the license fee is fixed or determinable
and collection of the resulting receivable is reasonably
assured.
An acquisition was made during 2012, where the
consideration was settled through agreed contractual
price discounts. Subsequent to the measurement period,
any adjustments to the recorded fair value of contingent
deferred consideration was taken through the income
statement within other income as an exceptional income
or expense. The revenues of products sold which were
subject to this discount were recognised at full market
value. On settlement of the transaction, the discount was
applied to reduce the deferred consideration balance.
This arrangement concluded in 2016 and the outstanding
deferred consideration balance was fully settled during
2016.
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2.22 Segmental reporting
Operating segments are reported in a manner consistent
with the internal reporting provided to the Executive
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 a product or service 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.
2.23 Pension costs
The group operates defined contribution pension
schemes. A defined contribution plan is a pension
plan under which the group pays fixed contributions
into a separate entity. Contributions are charged in the
Consolidated Income Statement as they become payable
in accordance with the rules of the scheme. The group
has no further obligations once the contributions have
been made.
2.24 Share based payments
The group operates a number of equity-settled share
based compensation plans under which the group
receives services from employees as consideration
for equity instruments 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 as a credit in other
reserves in the consolidated statement of changes in
equity except for the social security element of the
award which is treated as cash settled with the liability
recognised in other taxation and social security within
trade and other payables in 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 or hold shares for a specific period of time).
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 consolidated 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 the balance to share
premium. 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 charge will be
treated as a cash-settled transaction.
2.25 Foreign currency
Items included in the financial statements of each
subsidiary are measured using the currency of the
primary economic environment in which the subsidiary
operates (“the functional currency”). The consolidated
financial statements are presented in sterling, which is
the group’s presentational currency.
Foreign currency transactions are translated into the
subsidiaries functional currency at the rates of exchange
ruling at the date of the transaction, or at the forward
currency hedged rate where appropriate. Monetary
assets and liabilities in foreign currencies are translated
into the subsidiaries functional currency at the rates
ruling at the balance sheet date. All exchange differences
are taken to the income statement.
The balance sheets of overseas subsidiaries are
translated into sterling at the closing rates of exchange at
the balance sheet date, whilst the income statements are
translated into sterling at the average rate for the period.
The resulting translation differences are taken directly to
reserves.
Foreign exchange gains and losses on the retranslation
of foreign currency borrowings that are used to finance
overseas operations are accounted for on the ‘net
investment’ basis and are recorded directly in reserves
provided that the hedge is ‘effective’ as defined in IAS 39
“Financial Instruments : recognition and measurement”.
2.26 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. Exceptional items 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 5.
2.27 Current and deferred tax
Income tax for the year comprises current and deferred
tax. Tax is recognised in the income statement, except
to the extent that it relates to items recognised in other
comprehensive income or directly in equity, respectively.
Current tax is the expected tax payable on the taxable
income for the year using rates substantially enacted
at the balance sheet date, and any adjustments to tax
payable in respect of prior years.
Amounts receivable from tax authorities in relation to
research and development tax relief under the RDEC
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scheme are recognised within operating profit in the
period in which the research and development costs are
treated as an expense. 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.
2.28 Investment in subsidiaries
Investments in subsidiaries are held at cost of investment
less provision for impairment in the parent company
financial statements.
2.29 Other equity investments
Other equity investments are held at cost less provision
for impairment in both the parent company and group
financial statements on the basis that the Group (and
Company) does not have the ability to exert significant
influence or control over the strategic and operating
activities of the other equity investments.
2.30 Prior year restatements
The comparative information contained in the financial
statements has been restated to reflect certain prior year
adjustments detailed below.
Taxation
Group
a)
In October 2017, the Group identified historical tax
liabilities dating back to 2013 in a US subsidiary. The
historical tax liabilities, interest and penalties have been
quantified at £4,671,000 and the liability was settled
in full in 2017 with the relevant US tax authority. The
comparative information in the financial statements has
been restated to reflect the tax liability as follows:
·
Current liabilities in the consolidated balance
sheet as at 31 December 2016 has been
restated to include a current tax liability of
£4,671,000 to reflect the cumulative historic tax
liability.
The impact of the prior year restatement has been
to reduce total comprehensive income in 2016 by
£1,475,000, reduce brought forward reserves at 1
January 2016 by £3,196,000, reduce net assets by
£4,671,000 and reduce basic, diluted, adjusted basic and
adjusted diluted earnings per share measures by 0.11p.
The prior year restatement has no impact on the prior
year cash flow as the tax liability was settled in 2017.
Financial assets
b)
The Group classifies its preference share financial assets
as debt instruments. Debt instruments are initially
recognised at fair value and subsequently measured at
amortised cost.
The debt instruments recognised in the balance sheet
were originally recognised at their nominal value.
However, this did not discount the carrying value to
reflect the forecast repayment profile of the debt.
The initial fair value of the debt instruments has been
restated to reflect the impact of discounting on the debt
cash flows. The fair value of the instrument at initial
recognition has been recalculated by discounting the
cash flows using a rate of 5.5%. This rate was determined
based on a comparable market transaction.
The impact of this restatement on the comparative
information in the financial statements has been as
follows:
·
·
Brought forward retained earnings at 1 January
2016 in the comparative financial information
in the consolidated balance sheet and
consolidated statement of changes in equity
has been restated by £1,281,000 to reflect the
restated initial fair value of the instruments on
initial recognition in 2015.
The interest charge in the consolidated income
statement for the year ended 31 December
2016 has been restated to include a credit of
£170,000 to reflect the non-cash unwind of the
discounting associated with the initial fair value
recognition of the instrument.
·
·
·
The brought forward retained earnings at 1
January 2016 in the consolidated balance sheet
and consolidated statement of changes in equity
have been restated by £3,196,000 to reflect the
historic tax liability relating to 2013, 2014 and
2015.
The tax credit in the consolidated income
statement for the year ended 31 December
2016 has been restated to reflect the historic
tax liability of £748,000 relating to 2016;
Other comprehensive income in the
consolidated statement of changes in equity for
the year ended 31 December 2016 has been
restated by £727,000 to reflect an exchange
loss on the opening 1 January 2016 restated tax
liability; and
The impact of the prior year restatement in the 2016
comparative financial information has been to reduce
brought forward reserves by £1,281,000, increase profit
for the year by £170,000 for the non-cash unwind of
discount, reduce net assets by £1,111,000 and increase
basic earnings per share by 0.03p, increase diluted
earnings per share by 0.02p. The prior year restatement
has no impact on adjusted basic or adjusted diluted
earnings per share or on cash flow.
Segmental analysis disclosure
c)
In the reported results for the 6 months ended 30 June
2017, as part of the group’s ongoing improvements
to the disclosures in its financial reports the group
separately disclosed central corporate costs, which has
previously been allocated by segment. The segmental
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analysis disclosure for 2016 has similarly been updated
in this annual report. Central corporate costs include
all head office and other corporate related support
functions.
Restatement of the 2016 disclosure has no impact on
profit for the year, net assets, cash flow or earnings per
share.
d)
Social security costs associated with
outstanding long term incentive and share
option awards
In 2016 the social security costs associated with
outstanding share options was unrecorded and therefore
the comparative information in the financial statement
has been restated as follows:
·
·
Profit for the year in the consolidated income
statement has been restated by £839,000
(company: £835,000) to reflect the social
security costs associated with outstanding share
options;
Other taxation and social security within trade
and other payables in the consolidated balance
sheet has been restated by £839,000 (company:
£835,000) to reflect the social security liability
associated with outstanding share options.
The impact of the prior year restatement in the 2016
comparative financial information has been to reduce
profit for the year by £839,000, increase trade and other
payables by £839,000, reduce net assets by £839,000
and reduce basic and diluted earnings per share
measures by 0.12p. The prior year restatement has no
impact on adjusted basic or adjusted diluted earnings
per share or on cash flow.
Company
e)
Fixed asset investments and amounts due to
group undertakings
Fixed asset investments and amounts owed to group
undertakings in the Company balance sheet have been
restated to reflect a presentational error following the
acquisition of a group company by IQE plc from an
intermediate subsidiary parent company in 2016.
The comparative financial information has been restated
to correctly gross up the carrying value of fixed asset
investments and to gross up amounts owed to group
undertakings as follows:
·
·
·
“Fixed asset investments” in the comparative
financial information in the company balance
sheet has been restated by £19,091,000 to
reflect the cost of investment in the acquired
subsidiary undertaking.
Amounts owed to group undertakings in
the comparative financial information in the
company balance sheet has been restated
by £20,488,000 to reflect the exchange
adjusted purchase consideration that remains
outstanding to the intermediate subsidiary
parent company.
Loss for the year in the comparative financial
information for the company has been restated
by £1,397,000 to reflect the exchange loss
on the retranslation of the foreign currency
denominated purchase consideration that
remains outstanding on the intercompany
account.
3. Critical accounting judgements
and key sources of estimation
uncertainty
The group’s principal accounting policies are described
in note 2. 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 significant
judgement and estimation are set out below:
(a) Critical accounting judgements in applying the
Group’s accounting policies
Joint Ventures - Evaluation of rights, levels of
control and influence
The determination of the level of influence or control that
the Group has over a business is a mix of contractually
defined and subjective factors that can be critical to
the appropriate accounting treatment of an entity in
the Group’s consolidated financial statements. Control
or influence is achieved through Board representation
and by obtaining rights of veto over significant decisions
relevant to the activities of the entity.
Investments where the Group holds less than 20%
of the equity are treated as fixed asset investments.
These investments are carried at cost less provision for
impairment.
Investments where the Group does not have control but
owns between 20% and 51% of the equity of an entity
and is in a position to exercise significant influence over
the entity’s strategic, operating and financial policies are
treated as a joint arrangement or an associate.
The Group applies judgement when assessing whether
its joint arrangements represent a joint operation
or a joint venture. The Group determines the type of joint
arrangement in which it is involved by considering its
rights and obligations arising from the arrangement
including an assessment of the structure and legal form
of the arrangement and the terms agreed by the parties
in the contractual arrangement. The Group’s 50% interest
in The Compound Semiconductor Centre Limited (see
note 29) and 51% interest in CSDC Private Limited (see
note 29) are treated as joint ventures.
Joint Ventures – Right of use asset
The Group established the Compound Semiconductor
Centre Limited on 9 July 2015 with its joint venture
partner as a centre of excellence for the development
and commercialisation of advanced compound
semiconductor wafer products in Europe.
On establishment of the joint venture the Group
contributed assets valued at £12,000,000 as part of its
initial investment and entered into an agreement with
the joint venture that conveys to the Group the right
to use the assets of the joint venture for a minimum
five year period. This agreement that contains rights
attaching to the use of the joint venture’s assets has been
treated as an operating lease in accordance with IFRIC 4
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redeem the debt. In light of the progress that CSCL has
made against its original business plan, current cash flow
forecasts and the assessed ability of CSCL to redeem
shareholder preference debt the Board has concluded
that the amortised cost carrying value of the preference
share debt is not impaired.
3.4 Inventory provisions
Inventories are carried at the lower of cost and net
realisable value. Net realisable value is reviewed in
detail on an on-going basis and provision for inventory
obsolescence is made based on a number of factors
including the age of inventories, the risk of obsolescence
and the expected future usage. Differences between
such estimates and actual market conditions may have a
material impact on the amount of the carrying values of
inventory and may result in adjustments to cost of sales.
See note 16 for additional details.
3.5 Deferred tax assets
Deferred tax assets are only recognised to the extent
that it is probable that future taxable profits will be
available against which deductible temporary differences
can be utilised. This necessitates an assessment of future
trading forecasts, capital expenditure and the utilisation
of tax losses for each relevant tax jurisdiction where the
Group operates.
The Group has recognised significant deferred income
tax assets in relation to historical tax losses in its
operations in the United Kingdom (£30,126,000) and
United States of America (£79,493,000) which require
judgement to determine the extent of the assets
recoverability at each balance sheet date. The Group
assesses recoverability of its deferred tax assets by
reference to Board approved budgets and cash flow
forecasts which are also used as the basis for the Group’s
impairment and going concern reviews.
3.6 Onerous lease provision
A provision for onerous leases was made in 2015
following the restructuring of the Group’s operations
in Singapore. The provision assumes that the lease will
be onerous for the next 18 months. 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 extends until 2021.
3.7 Adjustments to profit
The board provides an adjusted profit measure to
provide additional information to aid an understanding
of the group’s performance as set out in note 5 where we
have detailed all of the items which are included within
the adjustments to profit.
‘Determining whether an arrangement contains a lease’
in the application of the Group’s accounting policies.
The requirements of IAS17 have been considered in
determining whether this lease should be classified as an
operating lease or a finance lease including that the lease
term is not for the major part of the expected useful
economic life of the assets and the present value of the
minimum lease payments is not substantially all of the
fair value of the assets, the Group has concluded that it
has an operating lease.
(b) Critical accounting estimates and key sources of
estimation uncertainty
3.1 Useful economic lives and residual values of
property, plant and equipment
The useful economic life and residual value of property,
plant and equipment is reviewed annually. The useful
economic life and residual value of an asset is assessed
by considering the expected usage, estimated technical
obsolescence, physical wear and tear and the operating
environment in which the asset is located. Differences
between such estimates and actual results may have a
material impact on the amount of the carrying values
of the property, plant and equipment and may result in
adjustments to future rates of depreciation.
3.2 Useful economic lives of development cost
intangible assets
The periods of amortisation used for product and
process development cost assets require judgements
to be made on the estimated useful economic lives of
the intangible assets to determine an appropriate rate
of amortisation. Capitalised development costs are
amortised in line with the expected production volume
profile of the products to which they relate over the
period during which economic benefits are expected to
be received which is typically between 3 – 8 years.
The amortisation charge for development cost intangible
assets in the current year is £4,349,000. If useful
economic lives of development cost intangible assets
were reduced by 1 year across the whole portfolio of
assets the impact on current year amortisation would be
to increase the charge by £670,000 to £5,019,000.
3.3 Impairment of financial assets – preference
share debt
The Group classifies its preference share financial
assets as debt instruments. The initial fair value of
the instruments issued by the Group’s joint venture,
Compound Semiconductor Centre Limited (‘CSCL’) in
2015 have been restated in the financial statements to
reflect discounting associated with the debt cash flows
(see note 2.30).
The carrying value of the preference share financial
assets are subject to review for impairment on an annual
basis or if events or circumstances provide an indication
that the carrying value may no longer be recoverable
from future estimated cash flows.
The carrying value of the preference share debt due
from CSCL has been reviewed for impairment based
upon a combination of the progress and milestones that
CSCL has achieved against its original business plan,
current cash flow forecasts and the capacity for CSCL to
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4.
Segmental analysis
The Chief Operating Decision Maker is defined as the executive directors. The executive directors consider that the
Wireless, Photonics, Infra-red and CMOS++ markets are the Group’s primary reporting segments. The executive
directors assess the performance of these operating segments based on their adjusted operating profit.
Further detail on the nature of the segments is provided in the Strategic Report.
Revenue
Wireless
Photonics
Infra-Red
CMOS++
Total Segment Revenue
License income from joint ventures
Total Revenue
Adjusted operating profit
Wireless
Photonics
Infra-Red
CMOS++
Central corporate costs
Segment adjusted operating profit
Profit from license income from joint ventures
Adjusted operating profit
Adjusted items (see note 5)
Net reduction in contingent deferred consideration
Restructuring and reorganisation
Operating profit
Finance costs
Profit before tax
2017
£’000
91,628
47,641
11,955
1,382
Restated
2016
£’000
91,291
22,792
10,560
1,406
152,606
126,049
1,874
6,658
154,480
132,707
13,718
18,198
3,259
(1,677)
(9,013)
24,485
1,874
26,359
13,040
9,254
2,651
(1,576)
(7,908)
15,461
6,658
22,119
(9,340)
(4,255)
-
-
2,340
(378)
17,019
19,826
(2,099)
14,920
(1,463)
18,363
The segmental disclosure for 2016 has been restated to separately disclose central costs following a reorganisation of
the Group’s functions. Central corporate costs include all head office and other corporate related support functions.
Finance costs are not allocated to the segments because treasury is managed centrally.
Measures of total assets and liabilities for each reportable segment are not reported to the chief operating decision
maker and therefore have not been disclosed.
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In the years set out below, certain customers accounted for greater than 10% of the Group’s total revenues:
Customer 1
Customer 2
Customer 3
Segment
Wireless
Wireless
Photonics
2017
£’000
2017
% revenue
2016
£’000
2016
% revenue
27,444
23,714
23,000
18%
15%
15%
32,480
28,456
499
24%
21%
0%
There are no customers in the 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:
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Americas
United States of America
Rest of Americas
Europe, Middle East & Africa (EMEA)
France
Germany
Israel
United Kingdom
Rest of EMEA
Asia Pacific
People’s Republic of China
Japan
Taiwan
Rest of Asia Pacific
Total revenue
2017
£’000
95,084
95,021
63
14,332
498
6,697
1,843
2,570
2,724
45,064
1,246
5,057
31,350
7,411
2016
£’000
88,794
88,697
97
15,915
435
4,652
2,077
7,340
1,411
27,998
1,413
3,830
17,287
5,468
154,480
132,707
Disclosure of non-current assets by location of assets:
Property, plant and equipment
Intangible assets
By location
USA
Singapore
Taiwan
UK
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£’000
50,025
7,704
13,100
19,971
90,800
101
2016
£’000
56,097
7,865
12,615
8,424
85,001
2017
£’000
73,528
9,761
2,579
22,645
108,513
2016
£’000
77,336
10,204
2,339
14,093
103,972
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5. Adjusted profit measures
The group’s results are reported after a number of adjusted items. The directors believe that the selected adjusted
measures allow management and other stakeholders to better compare the performance of the Group between the
current and prior year, without the effects of one-off or non-operational items and better reflects the normalised
underlying earnings in the year. The tables below provide additional information to aid an understanding of the
adjusted items and the impact on the Group’s performance.
(All figures £’000s)
Revenue
Cost of sales
Gross profit
Other income
SG&A
Profit on disposal of
PPE
Adjusted
Items
2017
Reported
Results
Adjusted
Results
Adjusted
Items
Restated
2016
Reported
Results
-
154,480
132,707
-
132,707
Adjusted
Results
154,480
(110,840)
(5,017)
(115,857)
(96,292)
43,640
(5,017)
38,623
36,415
(2,246)
(2,246)
-
-
-
-
2,340
(98,538)
34,169
2,340
(17,259)
(4,323)
(21,582)
(14,249)
(2,387)
(16,636)
(22)
-
(22)
(47)
-
(47)
Operating profit
26,359
(9,340)
Finance costs
(2,019)
(80)
Profit before tax
24,340
(9,420)
Taxation
483
(918)
17,019
(2,099)
14,920
(435)
22,119
(2,293)
(1,489)
26
20,630
(2,267)
62
(402)
19,826
(1,463)
18,363
(340)
Profit for the period
24,823
(10,338)
14,485
20,692
(2,669)
18,023
(All figures £’000s)
Change in US tax rate
Pre tax
Adjustment
Tax
Impact
-
(7,003)
Share based payments
(7,526)
5,439
2017
Adjusted
Results
(7,003)
(2,087)
Pre tax
Adjustment
Tax
Impact
-
(2,881)
-
-
Restated
2016
Adjusted
Results
-
(2,881)
Amortisation of acquired
intangibles
Gain on release of deferred
consideration
Non cash rent charge
Discounting
Restructuring
Total
(1,429)
563
(866)
(1,374)
444
(930)
-
(385)
(80)
-
-
69
14
-
-
(316)
(66)
-
(9,420)
(918)
(10,338)
2,340
(980)
1,360
-
26
(378)
(2,267)
-
2
132
(402)
-
28
(246)
(2,669)
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
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The nature of the adjusted items is as follows:
·
·
·
·
·
·
·
Change in US tax rate – This refers to a deferred tax charge of £7,003k (2016: £nil) relating to the impact of
the change in US Federal tax rates from 35% to 21% and the associated reduction in value of the Group’s US
deferred tax asset.
Share based payments – The charge recorded in accordance with IFRS 2 ‘Share based payment’, of which
£5,017k (2016: £1,920k) has been classified within cost of sales in gross profit and £2,509k (2016: £961k) has
been classified as selling, general and administrative expenses in operating profit.
Amortisation of acquired intangibles – The amortisation of customer contract intangible assets which arose
in respect of the fair value exercise in previous acquisitions. The charge of £1,429k (2016: £1,374k) has been
classified as selling, general and administrative expenses within operating profit.
Gain on release of deferred consideration – The gain in 2016 related to the release of the balance of a
provision for deferred consideration. This gain was classified as other income in operating profit. The
deferred consideration was settled in full in 2016.
Non-cash rent charge – The charge associated with rent free periods on leased property of £385k (2016:
£nil) (New foundry in Newport) has been classified as selling, general and administrative expenses within
operating profit.
Discounting - This relates to the discounting of long term financial assets of £235k (2016: £nil) and the
unwinding of discounting of long term balances of £155k (2016: £26k), and has been classified as finance
costs within profit before tax.
Restructuring – This cost relates to restructuring and reorganisation activities which were concluded in 2016.
An amount of £326k was classified as cost of sales in gross profit, and £52k was classified as selling, general
and administrative expenses within operating profit
These adjustments were non-cash, other than the restructuring charge in 2016. The cash impact of adjustments in
the consolidated cash flow statement represent the rental cost associated with an onerous property lease provision.
Adjusted EBITDA (adjusted earnings before interest, tax, depreciation and amortisation) has been calculated as
follows:
2017
£’000
2016
£’000
Profit attributable to equity shareholders
14,385
17,859
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
Non cash property lease charge (rent free period)*
Gain on release of contingent deferred consideration*
Restructuring and re-organisation costs*
Adjusted EBITDA
100
435
7,526
2,099
5,637
6,388
22
385
-
-
36,977
164
340
2,881
1,463
5,561
5,377
47
-
(2,340)
378
31,730
* Exceptional items impacting Adjusted EBITDA include non-cash property lease charges associated with rent free
periods, wireless business unit re-organisation costs and the release of contingent deferred consideration.
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6. 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
Exceptional items**
2017
£’000
5,637
6,388
247
8,715
69
1,434
7,526
64,116
22
385
Restated
2016
£’000
5,561
5,377
125
7,827
143
(1,269)
2,881
53,948
47
(1,962)
The operating lease rental in the comparative financial information has been restated to include the cash costs
payable to the Group’s joint venture, Compound Semiconductor Centre Limited, associated with the Group’s right of
use of the joint ventures assets (see note 3 and 30).
*A schedule of services provided by the group’s auditors and related fees is disclosed in the Corporate Governance
Report.
**Exceptional items include the following items: non cash property lease charges associated with rent free periods,
re-organisation costs and the release of contingent deferred consideration. Further details are provided in note 5.
7. 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)
Manufacturing
Selling, general and administrative
2017
£’000
32,783
3,621
1,286
7,526
45,216
Restated
2016
£’000
27,834
2,816
1,035
2,881
34,566
2017
Number
2016
Number
400
191
591
364
111
475
The charge for share based payments in the employee cost note for the year ended 31 December 2016 has been
restated. Details of the restatement are set out in note 2.30.
Directors’ emoluments and compensation, share options and other long term incentive plan details, including details
of all outstanding options and long term incentive awards and the value of director pension contributions paid are set
out in the Remuneration Report on page 55 to 70 where the relevant disclosures have been highlighted as audited.
Key management within the group comprises the executive and non-executive directors, members of the
management board and business unit leaders. Compensation to key management, including pensions of £253,000
(2016: £228,000), was £4,997,000 (2015: £4,545,000) and the charge for share-based payments was £5,792,000 (2016:
£1,235,000).
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8.
Finance costs
Bank and other loans
Unwind of discount on long term balances
2017
£’000
2,019
80
2,099
Restated
2016
£’000
1,489
(26)
1,463
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The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
9.
Taxation
Current tax on profits for the year
Total current tax charge
Origination and reversal of temporary differences
Total deferred tax credit
Total tax charge
2017
£’000
505
505
(70)
(70)
435
Restated
2016
£’000
1,694
1,694
(1,354)
(1,354)
340
Factors affecting total tax charge
The tax credit assessed for the year is different from that resulting from applying the standard rate of corporation tax
in the UK of 19.25% (2016: 20.00%). The differences are explained below:
Profit on ordinary activities before taxation
Tax charge at 19.25% thereon (2016: 20.00%)
Effects of :
Expenses not deductible for tax purposes
Overseas tax rate differences
Recognition of previously unrecognised tax losses
Tax losses utilised for which no deferred tax asset was recognised
Other deferred tax movements
Re-measurement of deferred tax – change in UK tax rate
Impact on deferred tax as a result of changes in tax rates
Total tax charge for the year
2017
£’000
14,920
(2,872)
(1,063)
309
3,957
1,250
5,394
(407)
(7,003)
(435)
Restated
2016
£’000
18,363
(3,673)
(119)
(800)
3,285
-
967
-
-
(340)
Other deferred tax movements primarily relates to
deferred tax recognised on share options.
The comparative financial information for the year ended
31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
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.
The US tax Reform Bill, H.R.1, which was substantively
enacted on 22 December 2017, included legislation to
reduce the main rate of US Federal tax from 35% to 21%
from 1 January 2018. Accordingly, the closing US deferred
tax asset 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.
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10. Deferred Taxation
Deferred tax asset
At 1 January
Income statement credit recognised in the year
Tax credit relating to components of other comprehensive income
Exchange differences
At 31 December
2017
£’000
18,181
70
683
(1,166)
17,768
2016
£’000
14,210
1,354
-
2,617
18,181
The current portion of the deferred tax asset is £5,000,000 (2016: £1,300,000) in relation to utilisation of tax losses.
The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of
balances within the same tax jurisdiction, is as follows:
Group
Deferred tax liabilities
At 1 January 2016
Credited/(charged) to income statement
Exchange differences
At 31 December 2016
Credited to income statement
Exchange differences
At 31 December 2017
Deferred tax assets
At 1 January 2016
Credited/(charged) to income statement
Exchange differences
At 31 December 2016
Credited/(charged) to income statement
Credited to equity
Exchange differences
At 31 December 2017
Accelerated
Capital
Allowances
£’000
Intangibles
£’000
(8,336)
(708)
(1,649)
(10,693)
3,228
683
(6,782)
Tax
Losses
£’000
26,661
1,918
4,831
33,410
(8,933)
-
(2,075)
22,402
(7,547)
722
(1,023)
(7,848)
3,098
249
(4,501)
Other
£’000
3,432
(578)
458
3,312
2,677
683
(23)
6,649
Total
£’000
(15,883)
14
(2,672)
(18,541)
6,326
932
(11,283)
Total
£’000
30,093
1,340
5,289
36,722
(6,256)
683
(2,098)
29,051
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 group did not recognise deferred income tax assets of £505,000 (2016: £14,339,000) in respect of losses
amounting to £2,805,000 (2016: £39,856,000) that can be carried forward against future taxable income. The deferred
tax asset would be recognised if sufficient profits from the same trade arise in future periods.
Tax losses arising in the UK totalling £32,931,000 have no date of expiry. Tax losses arising in the US can be carried
forward against future taxable income for 20 years before expiring. Of the Group’s total US tax losses of £79,493,000
losses amounting to £nil and £1,000 expire in 2018 and 2019.
Deferred tax liabilities have not been recognised for the withholding tax and other taxes that would be payable on the
unremitted earnings of certain subsidiaries. Such amounts are permanently reinvested.
R&D Tax Credits
The Group recognised a credit of £487,000 (2016: £792,000) within operating profit in relation to claims made under
the R&D Expenditure Credit Scheme (RDEC).
IQE PLC | Report and Annual Accounts 2017
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Company
Deferred tax assets
At 1 January 2016
Charged / (credited) to equity
At 31 December 2016
Credited to income statement
Credited to equity
At 31 December 2017
Tax
Losses
£’000
Share
Options
£’000
Other
Timing
Differences
£’000
-
-
-
-
-
-
-
-
-
4,974
246
5,220
-
-
-
32
-
32
Total
£’000
-
-
-
5,006
246
5,252
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There is an unrecognised deferred tax asset of £nil (2016: £1,645,000) which relates primarily to short term timing
differences arising on share option charges.
11. Dividends
No dividend has been paid or proposed in 2017 (2016: £nil).
12. 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 adjusted items in order
to provide a more meaningful measure of underlying profit. The adjustments are detailed in note 5.
Profit attributable to ordinary shareholders
Adjustments to profit after tax (note 5)
Adjusted profit attributable to ordinary shareholders
Weighted average number of ordinary shares
Dilutive share options
2017
£’000
14,385
10,338
24,723
Restated
2016
£’000
17,859
2,669
20,528
2017
Number
2016
Number
689,537,776
671,532,674
47,142,160
38,548,084
Adjusted weighted average number of ordinary shares
736,679,936
710,080,758
Adjusted basic earnings per share
Basic earnings per share
Adjusted diluted earnings per share
Diluted earnings per share
3.59p
2.09p
3.36p
1.95p
3.06p
2.66p
2.89p
2.52p
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
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13.
Intangible assets
Goodwill
£’000
Patents
£’000
Development
costs
£’000
Software
£’000
Customer
contracts
£’000
Group
Cost
At 1 January 2017
69,574
Additions
Reclassified to
investments
-
-
Foreign exchange
At 31 December 2017
(5,166)
64,408
2,195
874
-
(26)
3,043
Accumulated amortisation and impairment
At 1 January 2017
Charge for the year
Foreign exchange
At 31 December 2017
Net book value
-
-
-
-
291
55
(6)
340
44,899
15,434
(75)
(2,637)
57,621
18,847
4,349
(1,113)
22,083
5,265
1,548
-
(13)
6,800
1,268
555
(11)
1,812
8,129
-
-
(702)
7,427
5,684
1,429
(562)
6,551
Total
£’000
130,062
17,856
(75)
(8,544)
139,299
26,090
6,388
(1,692)
30,786
At 31 December 2017
At 31 December 2016
64,408
69,574
2,703
1,904
35,538
26,052
4,988
3,997
876
2,445
108,513
103,972
Goodwill
£’000
Patents
£’000
Development
costs
£’000
Software
£’000
Customer
contracts
£’000
Total
£’000
Group
Cost
At 1 January 2016
57,853
Additions
Adjustment (see below)
Disposal
Foreign exchange
At 31 December 2016
-
-
-
11,721
69,574
1,756
421
-
(8)
26
2,195
Accumulated amortisation and impairment
At 1 January 2016
Charge for the year
Foreign exchange
At 31 December 2016
-
-
-
-
224
52
15
291
34,751
6,310
(484)
-
4,322
44,899
13,381
3,700
1,766
3,811
1,373
-
-
81
5,265
943
251
74
18,847
1,268
6,694
104,865
34
-
-
1,401
8,129
3,474
1,374
836
5,684
8,138
(484)
(8)
17,551
130,062
18,022
5,377
2,691
26,090
Net book value
69,574
1,904
26,052
3,997
2,445
103,972
At 31 December 2016
At 31 December 2015
57,853
1,532
21,370
2,868
3,220
86,843
Reclassification in 2017 relates to the Group’s investment in Seren Photonics Limited which has been reclassified to
fixed asset investments.
Adjustment in 2016 relates to the write down of development costs relating to NanoGan following a reduction in the
deferred consideration payable in relation to the NanoGaN acquisition.
Customer contract intangible assets relate to customer contracts acquired as part of a business combination.
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The amortisation charge of £6,388,000 (2016: £5,377,000) has been charged to selling, general and administrative
expenses in the Consolidated Income Statement.
The carrying value of deferred development costs are 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:
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Allocation of goodwill by CGU
III/V Epitaxy
Substrates
Total Goodwill
2017
£’000
57,284
7,124
64,408
2016
£’000
61,776
7,798
69,574
The recoverable amount of the CGUs has been determined based on value in use calculations, using cash flow
projections for a five year period plus a terminal value. The Board approved 2018 budget, adjusted to exclude cash
flows associated with expansion capital expenditure, has been used for the first year of the forecast.
Key assumptions applied in the forecasts include:
·
·
·
EBITDA growth in years 2 to 5 of 10%,
A long term growth rate of 2% (2016: 2%)
Pre-tax weighted average cost of capital discount rate of 10% (2016: 10%)
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 c21% over the five year period driven
by growth in Photonics and emerging markets.
No impairment would arise if the discount rate for the III/V Epitaxy and substrate CGU was increased from 10% to
15%.
No impairment would arise if the EBITDA compound growth rate in the 5 year forecast period for both the III/V Epitaxy
and substrates CGU’s was restricted to zero.
No impairment would arise if the discount rate for the III/V Epitaxy and substrate CGU was increased from 10% to
15% and the EBITDA growth rate in the 5 year forecast period was restricted to zero.
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Company
Cost
At 1 January 2017
Additions
At 31 December 2017
Accumulated amortisation
At 1 January 2017
Charge for the year
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
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
Patents
£’000
Software
£’000
1,372
227
1,599
-
-
-
1,599
1,372
416
148
564
40
47
87
477
376
Total
£’000
1,788
375
2,163
40
47
87
2,076
1,748
Patents
£’000
Software
£’000
Total
£’000
1,073
299
1,372
-
-
-
1,372
1,073
368
48
416
-
40
40
376
368
1,441
347
1,788
-
40
40
1,748
1,441
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14. Property, plant and equipment
Group
Cost
At 1 January 2017
Additions
Disposals
Foreign exchange
At 31 December 2017
Accumulated depreciation
At 1 January 2017
Charge for the year
Disposals
Foreign exchange
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
Land and
buildings
£’000
Short leasehold
improvements
£’000
Fixtures
and fittings
£’000
Plant and
machinery
£’000
Total
£’000
8,682
321
-
(272)
8,731
3,610
182
-
(64)
3,728
5,003
5,072
34,400
70
-
(2,358)
32,112
17,774
547
-
(945)
17,376
14,736
16,626
5,437
367
-
(169)
5,635
3,817
335
-
(153)
3,999
1,636
1,620
149,022
197,541
15,628
(1,638)
(9,370)
16,386
(1,638)
(12,169)
153,642
200,120
87,339
112,540
4,573
(1,615)
(6,080)
5,637
(1,615)
(7,242)
84,217
109,320
69,425
61,683
90,800
85,001
Property, plant and equipment includes assets in the course of construction with a net carrying value of £9,989,000
(2016: £nil) primarily relating to plant and equipment purchased for the group’s manufacturing site at Newport, United
Kingdom.
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
Land and
buildings
£’000
Short leasehold
improvements
£’000
Fixtures
and fittings
£’000
Plant and
machinery
£’000
Total
£’000
7,813
4
-
865
8,682
3,270
200
-
140
3,610
5,072
4,543
28,542
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
153,185
11,842
(1,129)
25,645
13,002
(1,129)
32,483
149,022
197,541
66,776
88,031
4,548
(737)
16,752
87,339
5,561
(737)
19,685
112,540
61,683
45,888
85,001
65,154
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Company
Cost
At 1 January 2017
Additions
At 31 December 2017
Accumulated depreciation
At 1 January 2017
Charge for the year
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
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
Fixtures and fittings
£’000
76
11
87
71
6
77
10
5
Fixtures and fittings
£’000
70
6
76
66
5
71
5
4
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15.
Investments
Group
Cost
At 1 January 2017
Reclassified from intangible assets
At 31 December 2017
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Other equity
investments
£’000
-
75
75
Total
£’000
-
75
75
The reclassification in 2017 relates to the reclassification of the investment in Seren Photonics Limited from intangible
assets to fixed asset investments.
Company
Cost
At 1 January 2017 – restated
Subsidiaries share based payments charge
At 31 December 2017
Provisions for impairment
At 1 January 2017
Reversal of impairment
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
Company
Cost
At 1 January 2016
Additions
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
Investments in subsidiaries
£’000
Other equity
investments
£’000
Total
£’000
120,072
121
120,193
71,514
(39,482)
32,032
75
-
75
-
-
-
75
75
88,161
48,558
119,997
121
120,118
71,514
(39,482)
32,032
88,086
48,483
Investments in subsidiaries
£’000
Other equity
investments
£’000
Restated
Total
£’000
100,509
19,091
397
119,997
71,514
71,514
48,483
28,995
75
100,584
-
-
19,091
397
75
120,072
-
-
75
75
71,514
71,514
48,558
29,070
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Additions to investments in subsidiaries for the year ended 31 December 2016 have been restated. Details of the
restatement are set out in note 2.30.
Details of the company’s subsidiaries are set out in note 28.
Investments are reviewed for impairment annually. Where the net realisable value is lower than the investment
carrying value an impairment charge is recognised in the income statement. Indicators that impairment losses might
have reversed are assessed annually. Where events or circumstances indicate that the impairment loss no longer
exists, a reversal of the impairment charge is recognised in the income statement.
Provisions for impairment associated with the company’s investment in its subsidiaries, EPI Holding Limited and
Wafer Technology Limited have been reversed based upon actual and forecast performance of the underlying trading
businesses. The recoverable amount of each investment 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 2018 budget is used for the first year of the forecast. The cash flow projections used are consistent with the
cash flow projections used for the goodwill impairment review (see note 13).
16.
Inventories
Raw materials and consumables
Work-in-progress and finished goods
2017
£’000
25,067
8,640
33,707
2016
£’000
22,528
5,970
28,498
The directors are of the opinion that the replacement values of inventories are not materially different to the carrying
values stated above. These carrying values are stated net of impairment provisions of £6,273,000 (2016: £8,076,000).
£440,000 (2016: £121,000) of inventories were written down during 2017 and an expense recognised in the income
statement.
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17. Trade and other receivables
Current
Trade receivables
Amounts owed by group undertakings
Other receivables
Prepayments and accrued income
Non-current
Financial assets
2017
Group
£’000
2017
Company
£’000
Restated
2016
Group
£’000
Restated
2016
Company
£’000
18,440
-
3,712
10,088
32,240
2017
Group
£’000
7,680
-
114,138
-
91
114,229
14,424
-
3,554
12,890
30,868
-
96,711
74
159
96,944
2017
Company
£’000
Restated
2016
Group
£’000
2016
Company
£’000
-
6,889
-
Non-current financial assets have been restated.
Details of the restatement are set out in note 2.30. The
comparative financial information has also been restated
to separately reclassify other receivables previously
reported within prepayments and accrued income.
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.
As at 31 December 2016, 86% (2016: 71%) of trade
receivables were within terms. Of the other trade
receivables, 69% (2016: 81%) were less than 30 days
past due. An allowance has been made for estimated
irrecoverable amounts from the sale of goods of
£222,000 (2016: £229,000). This allowance has been
determined by reference to past default experience.
Included in prepayments and accrued income is accrued
income of £7,317,000 (2016: £10,421,000) relating to
wireless supplier managed inventory sales. There was no
accrued income relating to photonics supplier managed
inventory arrangements (2016: £nil).
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
Amounts owed by group undertakings are unsecured
and repayable on demand. Interest is charged at a rate of
5% per annum (2016: 5% per annum).
Financial assets relate to £8,800,000 of Preferred ‘A’
shares (2016: £8,000,000) issued by the Compound
Semiconductor Centre Limited (‘CSC’), a joint venture
between the Group and Cardiff University (see Note:
29 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.
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18. Trade and other payables
Current
Trade payables
Amounts owed by group undertakings
Other taxation and social security
Other payables
Accruals and deferred income
2017
Group
£’000
2017
Company
£’000
Restated
2016
Group
£’000
Restated
2016
Company
£’000
23,554
-
4,778
5,580
9,260
43,172
1,139
14,351
4,151
-
1,595
21,236
23,331
-
2,046
2,336
9,203
36,916
773
20,488
940
-
1,583
23,784
The comparative financial information for the year ended 31 December 2016 has been restated to separately
reclassify other payables previously reported within accruals and deferred income, to reclassify overseas tax payable
as current tax liabilities as a separate line in the Consolidated Balance Sheet and to restate other taxation and social
security as detailed in note 2.30.
Amounts owed by group undertakings in the company has been restated. Details of the restatement are set out in
note 2.30.
Amounts owed to group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5%
per annum (2016: 5% per annum).
The carrying values of trade and other payables also represent their estimated fair values.
There are no foreign currency exchange contracts held at 31 December 2017 or 31 December 2016.
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19. Borrowings
The Group
Non-current borrowings:
Bank borrowings
Current borrowings:
Bank borrowings
Total borrowings
Bank borrowings
Bank borrowings fall due for repayment as follows:
Within one year
Between one and five years
After five years
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2017
£’000
-
-
-
-
-
2017
£’000
-
-
-
-
2016
£’000
36,854
36,854
7,652
7,652
44,506
2016
£’000
7,652
34,906
1,948
44,506
The borrowings of the parent company comprise the bank loan of £nil (2016: £42,069,000). The prior period bank
loans comprised multi-currency acquisition, capital expenditure and revolving credit facilities and an overdraft of £nil
(2016: £1,028,000).
The Company
Non-current borrowings:
Bank borrowings
Current borrowings:
Bank overdraft
Bank borrowings
Total borrowings
Bank borrowings fall due for repayment as follows:
Within one year
Between one and years
2017
£’000
-
-
-
-
-
-
2017
£’000
-
-
-
2016
£’000
34,524
34,524
1,028
7,545
8,573
43,097
2016
£’000
8,573
34,524
43,097
The Group and Company repaid bank loans comprising its multi-currency acquisition loan, capital expenditure loan
and revolving credit facilities on 21 November 2017 following an equity placing (see note 22).
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20.
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 liabilities and charges
2017
£’000
3,588
-
(1,372)
(16)
2,200
2017
£’000
1,534
666
2,200
2016
£’000
4,038
104
(1,283)
729
3,588
2016
£’000
1,421
2,167
3,588
During 2015, as part of the re-organisation and rationalisation of the Group’s operations the Group restructured its
activities in Singapore and established with its joint venture partners the Compound Semiconductor Development
Centre. The Group sub-lets space at its Singapore manufacturing facility to its joint venture (see note 30) and
established an onerous lease provision for vacant space at the property following the re-organisation. The onerous
lease provision is expected to be utilised over the next one and a half years. The provision has been discounted using
a risk free rate of 2.5%.
21.
Financial Instruments
Financial instruments by category
Trade and other receivables (excluding prepayments)
and cash and cash equivalents are classified as ‘loans and
receivables’. Borrowings and trade and other payables
are classified as ‘other financial liabilities at amortised
cost’. Both categories are initially measured at fair value
and subsequently held at amortised cost. 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.
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.
Customer credit risk is managed at the Group and site
level with credit risk assessments completed for all
customers. If no independent credit rating is available the
credit quality of the customer is assessed by reference
to the customers’ financial position, past experience
and other relevant factors. Individual credit limits are
set based on internal or external ratings in accordance
with the Group’s credit risk policies. 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. The group has
historically experienced low levels of payment default.
Counterparty risk associated with monies on deposit
with financial institutions is managed at the Group level
in accordance with the Group’s treasury policies. The
credit quality of banks has been assessed by reference
to external credit ratings, based on reputable credit
agencies long term issuer ratings.
The maximum exposure to credit risk at the reporting
date in relation is the carrying value of each class
of financial asset is 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.
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Assets as per balance sheet
Carrying amount – Loans and Receivables
2017
Group
£’000
2017
Company
£’000
Restated
2016
Group
£’000
Restated
2016
Company
£’000
Cash and cash equivalents
Trade receivables
45,612
18,440
31,281
-
4,957
14,424
-
-
Amounts owed by group undertakings
-
114,138
-
96,711
Other receivables excluding prepayments
Financial Assets (Preference share receivables)
11,029
7,680
82,761
-
-
145,419
13,975
6,889
40,245
74
-
96,785
Included in other receivables is accrued income of £7,317,000 (2016: £10,421,000).
The Group is exposed to credit concentration risk with its three largest customers which represent 64% (2016: 56%)
of outstanding trade receivables and accrued income balances. Customer credit risk is managed according to strict
credit control policies. The majority of the group’s revenues are derived from large multinational organisations that
are established customers of the Group with no prior history of default such that credit risk is considered to be
low. The Group monitors customer D&B credit ratings and has had no material defaults in the past. None of the
receivables are with customers where we have had any history of default.
Not past due
Past due 0-30
Past due more than 30
Gross
2017
£’000
15,012
2,513
1,137
18,662
Provision
2017
£’000
-
-
222
222
Net
2017
£’000
15,012
2,513
915
Gross
2016
£’000
9,569
4,112
972
18,440
14,653
Provision
2016
£’000
-
-
229
229
Net
2016
£’000
9,569
4,112
743
14,424
An allowance has been made for estimated irrecoverable
amounts from the sale of goods of £222,000 (2016:
£229,000). 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 18). 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 2017 a 1
cent movement in the US dollar to Sterling rate would
impact the net value of these instruments by £13,000
(2016: £20,000) (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.
The Group ensures that it has sufficient borrowing
facilities to meet foreseeable operational expenses. At
the year end the group had available facilities of £1.0m
(2016: £65.0m).
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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
31 December 2017
Trade and other payables
Analysis of contractual cash
flow maturities -
Other financial liabilities at
amortised cost
31 December 2016 - restated
Trade and other payables
Secured bank loans
Carrying
amount
Contractual
Cash flows
Less than 12
months
1 –2
Years
£’000
29,134
29,134
£’000
29,134
29,134
£’000
£’000
29,134
29,134
-
-
2–5
Years
£’000
5+
Years
£’000
-
-
-
-
Carrying
amount
Contractual
Cash flows
Less than 12
months
1 – 2
Years
2 – 5
Years
5+
Years
£’000
25,667
44,506
70,173
£’000
25,667
47,745
73,412
£’000
£’000
£’000
£’000
25,667
-
-
-
9,251
32,731
2,860
2,903
34,918
32,731
2,860
2,903
Financial risk management
Market risk
Foreign Exchange Risk
The Group operates internationally and is exposed to
foreign exchange risk arising from various currency
exposures, primarily with respect to the US dollar,
Taiwanese dollar, Singapore dollar, Japanese yen
and Euro. Foreign exchange risk arises from future
commercial transactions, recognised assets and liabilities
and net investments in foreign operations.
The group’s presentational currency is sterling. The
majority of the Group’s sales are denominated in US
dollars and 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
2017 and 31 December 2016 there were no contracts in
place.
The group has certain investments in foreign operations
in North America, Taiwan and Singapore, whose net
assets are exposed to foreign currency translation risk.
Translation exposures that arise on converting the
results of overseas subsidiaries are not hedged.
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 £8,000 (2016:
£62,000).
Cash flow and fair value 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.
The Group’s interest rate risk arises from its cash and
cash equivalents and its preference share financial assets
following repayment of all the Group’s bank borrowings
during the year. Cash and cash equivalents, including
foreign currency cash deposits earn interest at prevailing
variable market rates of interest whilst the preference
share debt earns interest at HSBC Bank Plc base rate.
Prior to the repayment of all the group’s bank borrowings
during the year the group’s borrowings consisted of a
series of variable and fixed rate term loans, a revolving
credit facility, overdrafts and an asset lending facility.
Bank loans, the revolving credit facility and overdrafts
were secured against the assets of the group and the
asset lending facility was secured against the specific
assets to which it related.
The fixed rate US dollar term loans, which had a principal
outstanding of £2.4m at 31 December 2016 bore interest
of 5% until 2017. These loans were repayable by monthly
instalment prior to its repayment.
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The US Dollar acquisition facility, which had a principal
outstanding of £6.5m at 31 December 2016 bore interest
of between 2.5% to 2.95% over LIBOR. This loan was
repayable by quarterly instalments prior to its repayment.
The US Dollar revolving credit facility was a multi-currency
facility of up to $63 million, committed until 2018 that
bore interest of between 1.75% and 1.90% over LIBOR.
The UK Sterling capital expenditure facility, which had
a principal outstanding of £5.0m at 31 December 2016
bore interest at 1.90% over the Bank of England base
rate. This loan was repayable by monthly instalment prior
to its repayment.
The UK asset lending facility, which was drawn down
during the year bore interest at 1.7% per annum over
LIBOR. This loan was repayable by monthly instalment
prior to its repayment.
The group’s policy is to regularly review its exposure to
interest rate risk, and in particular the mix between fixed
and floating rate financial assets and financial liabilities.
The percentage of financial assets bearing variable rate
interest was 100% (2016: 100%). The Group had no
interest bearing financial liabilities at 31 December 2017.
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 on the interest bearing
financial assets held at 31 December 2017 would impact
annual interest income by approximately £230,000. At 31
December 2016 the group had interest bearing financial
liabilities. A 50 basis point (0.5%) movement in interest
rates on the interest bearing financial liabilities held at 31
Fair values
December 2016 would have impacted the annual interest
charge prior to the redemption of the bank borrowings
by approximately £170,000.
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. Total capital at 31 December 2017 was
£245,201,000 (2016: £227,372,000).
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 nil (2016: 17%).
All covenants in relation to the group’s borrowing
facilities were complied with prior to the repayment of
the borrowings during the year.
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)
2017
Carrying
amount
£’000
45,612
18,440
3,712
7,317
7,680
2017
Fair
value
£’000
45,612
18,440
3,712
7,317
7,680
Trade and other payables
Secured bank loans
(29,133)
(29,133)
-
-
Restated
2016
Carrying
amount
£’000
4,957
14,424
3,554
10,421
6,889
(25,667)
(44,506)
53,628
53,628
(29,928)
Restated
2016
Fair
value
£’000
4,957
14,424
3,554
10,421
6,889
(25,667)
(44,798)
(30,220)
Basis for determining fair value
The following summarises the significant methods and assumptions used in estimating the fair values of financial
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instruments reflected in the table above.
Cash and cash equivalents
Cash and cash equivalents earn interest at prevailing
variable market rates of interest such that the carrying
value of cash and cash equivalents is deemed to reflect
fair value.
Trade receivables, other receivables and accrued
income
Trade receivables, other receivables and accrued income
are short term assets with a remaining life of less than
one year such that the amortised cost carrying value of
the assets is deemed to reflect fair value.
Trade and other payables
Trade and other payables are short term liabilities with
a remaining life of less than one year such that the
amortised cost carrying value of the liabilities is deemed
to reflect fair value.
Financial Assets (Preference share receivables)
The fair value of preference share receivables at the
initial date of recognition has been restated to reflect
the impact of discounting the cash flows using a rate of
5.5% (see note 2.29). The carrying value of the preference
shares have been assessed for impairment (see note
3.4) with the cash flow forecasts used as part of this
assessment indicating that amortised cost is deemed to
reflect fair value.
Secured loans
As the loans are floating rate borrowings, amortised cost
is deemed to reflect fair value excluding unamortised
transaction fees.
22. Share capital
Group and Company
Allotted, called up and fully paid
2017
Number
of shares
2017
£’000
2016
Number
of shares
2016
£’000
Ordinary shares of 1p each
756,050,549
7,560
675,506,061
6,755
The movement in the number of ordinary shares during the year was:
At 1 January
Employee share schemes
Translucent equity consideration
Equity placing
At 31 December
2017
Number
2016
Number
675,506,061
665,533,170
12,602,907
-
67,941,581
4,831,424
5,141,467
-
756,050,549
675,506,061
80,544,488 ordinary shares (2016: 9,972,891 ordinary shares) were issued during the year as follows:
2017
Number
of shares
2017
Consideration
Equity share placing
67,941,581
1.40p
Employee share schemes
12,602,907
Nil to 50.3p
Translucent equity consideration
-
-
2016
Number
of shares
-
4,831,424
5,141,467
2016
Consideration
-
Nil to 36.5p
Nil
80,544,488
9,972,891
The share premium arising from the equity share placing consideration received of £95,118,213 (2016: £nil) was
£94,438,797 (2016: £nil). Costs associated with the equity share placing totalling £2,006,366 have been debited to
share premium.
The share premium arising from consideration received from employee share scheme exercises of £2,541,029 (2016:
£578,000) was £2,415,000 (2016: £1,481,000).
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23. Share based payments
The total amount charged to the income statement in 2017 in respect of share based payments was £7,526,000
(2016: £2,881,000). Included within the share based payments charge is a £5,668,000 (2016: £2,037,000) charge
relating to the Company’s Long Term Incentive Plan.
Long term incentive plan
IQE plc operates a long term incentive plan for executive directors. Details of the long term incentive plan are set out
in the Remuneration Report set out on page 55 to 70.
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.
Long term incentive awards and share options are valued using either the Black-Scholes option-pricing model or the
Monte Carlo simulation model with the total fair value of the award that is to be expensed charged to the income
statement over the vesting period of the long term incentive award or share option. The principal assumptions used in
the calculation of the fair value of long term incentive awards and 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
2017
24.56p
8.93p
3
10
3
56%
1.20%
0%
2016
25.21p
15.63
3
10
3
52%
1.25%
0%
The expected volatility factor is based on historical share price volatility over the three years immediately preceding
the grant of the option. The expected life is the average expected period to exercise. The risk free rate of return is
the yield of zero-coupon UK government bonds of a term consistent with the assumed option life.
Non-market performance conditions are incorporated into the calculation of fair value by estimating the proportion of
share options that will vest and be exercised based on a combination of historical trends and future expected trading
performance. These are reassessed at the end of each period for each tranche of unvested options.
The fair value of long term incentive awards and share options granted during the year ended 31 December 2017 was
£3,998,000 (2016: £3,678,693).
The movements on long term incentive awards and share options during the year were as follows:
2017
Number
of options
2017
Average exercise price
(pence)
At 1 January
Granted
Exercised
60,557,376
10,382,654
(11,468,580)
Cancelled/lapsed
(2,119,505)
At 31 December
57,351,945
IQE PLC | Report and Annual Accounts 2017
9.42
6.42
15.68
18.63
7.29
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2016
Number
of options
45,532,098
19,258,119
(3,744,854)
(487,987)
60,557,376
2016
Average exercise price
(pence)
13.14
2.02
15.63
17.81
9.42
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The weighted average share price at the date share options were exercised during 2017 was 94.50p (2016: 21.48p).
No long term incentive awards were exercised during the year (2016: Nil).
As at 31 December 2017, the total number of long term incentive awards and share options held by employees was
57,351,945 (2016: 60,557,376) as follows:
Option price pence/share
Option period ending
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
0.00p – 169.50p
At 31 December
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
31 December 2027
2017
Number of
options
-
1,496,029
3,354,566
913,777
3,121,379
5,210,518
9,509,225
3,799,428
370,000
19,206,869
10,370,154
57,351,945
2016
Number of
options
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
24. 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 profit for the financial year amounted to
£40,387,000 (2016: Restated loss £2,416,000).
IQE PLC | Report and Annual Accounts 2017
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25. Cash generated from operations
Group
Profit before tax
Finance costs
Depreciation of property, plant and equipment
Amortisation of intangible assets
Loss on disposal of fixed assets
Non cash rent charges on rent free periods on leased property
Gain on release of contingent deferred consideration
Contingent deferred consideration (settled through contractual discounts)
Share based payments
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2017
£’000
Restated
2016
£’000
14,920
18,363
2,099
5,637
6,388
22
385
-
-
7,526
1,463
5,561
5,377
47
-
(2,340)
(3,959)
2,881
Cash inflow from operations before changes in working capital
36,977
27,393
Increase in inventories
(Increase)/Decrease in trade and other receivables
Increase/(Decrease) in trade and other payables
Cash inflow from operations
(6,391)
(6,762)
5,893
29,717
(4,206)
1,437
(2,161)
22,463
The comparative financial information for the year ended 31 December 2016 has been restated. Details of the
restatement are set out in note 2.30.
Company
Profit /(loss) before tax
Finance income
Finance costs
Foreign exchange
Gain on release of deferred consideration
Depreciation
Amortisation
Reversal of impairment
Share based payments
Cash (outflow)/inflow from operations before changes in working capital
Increase in trade and other receivables
(Decrease)/increase in trade and other payables
Cash outflow from operations
2017
£’000
35,381
(5,246)
1,846
(2,498)
-
6
47
(39,482)
6,921
(3,025)
(13,024)
(5,736)
(21,785)
2016
£’000
(2,416)
(4,290)
1,278
8,283
(484)
5
40
-
2,477
4,893
(14,942)
1,237
(8,812)
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26. Reconciliation of net cash flow to movement in net funds / (debt)
Increase / (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 cash / debt at 31 December
27. Analysis of net funds / (debt)
2017
£’000
40,904
(27,864)
68,697
6,733
88,470
2016
£’000
(315)
(12,623)
3,252
89
(9,597)
(39,549)
(23,223)
88,470
(3,309)
45,612
(9,597)
(6,729)
(39,549)
At 1
January 2017
£’000
Cash flow
£’000
Other non-cash
movements
£’000
At 31
December 2017
£’000
Bank borrowings due after one year
Bank borrowings due within one
year
Total borrowings
Cash and cash equivalents
Net funds / (debt)
(36,854)
(7,652)
(44,506)
4,957
(39,549)
40,277
7,289
47,566
40,904
88,470
(3,423)
363
(3,060)
(249)
(3,309)
-
-
-
45,612
45,612
Cash and cash equivalents at 31 December 2017 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 £6,564,000 (2106: £nil) relating to finance leases that were used to fund capital
expenditure where the bank settled the purchase cost directly with the equipment supplier and foreign exchange
movements on US dollar denominated borrowings.
IQE PLC | Report and Annual Accounts 2017
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Country of
incorporation
Registered
Office
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28. Subsidiary undertakings
Name of company
IQE (Europe) Limited
Class of
capital
Ordinary
shares of £1
Proportion
of shares
held
100%*
IQE Inc
IQE KC LLC
IQE Taiwan ROC**
IQE RF LLC
Common
stock of
$0.001
Limited
liability
company
Ordinary
shares of
NT$10
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
100%*
100%*
90%
100%*
100%
100%
100%
100%*
NanoGaN Limited
Ordinary
shares of
£0.001
100%
Galaxy Compound
Semiconductors Inc
Common
stock of $0.00
par value
100%*
100%
100%
100%
EPI Holding Limited
Ordinary
shares of £1
KTC Wireless LLC
IQE USA Inc
IQE Solar LLC
IQE Properties Inc
Limited
liability
company
Limited
liability
company
Limited
liability
company
Limited
liability
company
Activity
Manufacture
of advanced
semiconductor
materials
Manufacture
of advanced
semiconductor
materials
Manufacture
of advanced
semiconductor
materials
Manufacture
of advanced
semiconductor
materials
Manufacture
of advanced
semiconductor
materials
Manufacture of
silicon epitaxy
Manufacture
of advanced
semiconductor
materials
Manufacture of
semiconductor
compounds and
ultra high purity
materials
Development
of advanced
semiconductor
materials
Manufacture of
semiconductor
compounds and
ultra high purity
materials
Dormant holding
company
Dormant holding
company
Dormant holding
company
UK
USA
USA
Taiwan
USA
UK
Singapore
UK
UK
USA
UK
USA
USA
USA
UK
100%*
Dormant company
USA
100%*
Property holding
company
Wafer Technology
International Limited
Ordinary
shares of £1
100%
Dormant holding
company
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
119 Technology Drive,
Bethlehem, PA 18015,
USA
200 John Hancock Road,
Taunton, MA 02780,
USA
No. 2-1, Li-Hsin Road
Hsinchu Science Park
Hsinchu 300, Taiwan
265 Davidson Avenue
Somerset, NJ 08873,
USA
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
30 Tampines industrial
Avenue 3 Singapore
528775
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
9922 E Montgomery
Avenue, #7, Spokane,
WA 99206, USA
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
119 Technology Drive,
Bethlehem, PA 18015,
USA
119 Technology Drive,
Bethlehem, PA 18015,
USA
119 Technology Drive,
Bethlehem, PA 18015,
USA
119 Technology Drive,
Bethlehem, PA 18015,
USA
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
* Indirect holdings
** The consolidated results of the Group include revenue (£28,844k), EBITDA (£4,302k) and net assets of (£32,290k)
relating to IQE Taiwan ROC
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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29.
Joint Ventures
The group holds investments in two joint ventures as follows:
Name of
company
Class of
capital
Proportion of
shares held
Activity
Country of
incorporation
Registered
Office
Compound
Semiconductor
Centre Limited.
CSDC Private
Limited.
50%*
51%*
Common
stock of
£1 par
value
Common
stock of
$1 par
value
* Indirect holdings
Research, development
and Manufacture
of semiconductor
materials
Research, development
and Manufacture
of semiconductor
materials
UK
Pascal Close, St
Mellons, Cardiff
CF3 0LW, UK
Singapore
30 Tampines
industrial
Avenue 3
Singapore
528775
On 23 March 2015 the group entered into a joint
venture agreement with WIN Semiconductors Corp
and Nangyang Technological University to create the
Compound Semiconductor Development Centre (“CSDC”)
in Singapore. The CSDC is a centre of excellence in Asia
for the development and commercialisation of advanced
semiconductor products. The shareholder agreement
establishes that this new entity is jointly controlled by
the shareholders who have an equal share of the voting
rights.
On 9 July 2015 the group entered into a joint venture
agreement with Cardiff University to create the
Compound Semiconductor Centre (“CSC”) in the United
Kingdom. The CSC is a centre of excellence in Europe
for the development and commercialisation of advanced
semiconductor products. The shareholder agreement
establishes that this new entity is jointly controlled by
the shareholders who have an equal share of the voting
rights.
Both 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 2. Both of the Joint ventures financial year end is 31
December 2017 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.
Summarised financial information for each of the joint ventures for the reporting period is set out below:
a) Summary information for Compound Semiconductor Centre Limited
Summary income statement
Revenue
LBITDA
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
2017
£’000
6,369
(463)
(6,702)
(6,702)
(6,702)
2017
£’000
34,301
413
(1,033)
(21,759)
11,922
2016
£’000
3,955
(680)
(4,422)
(4,422)
(4,422)
2016
£’000
38,678
4,052
(4,857)
(19,249)
18,624
IQE PLC | Report and Annual Accounts 2017
128
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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
2017
£’000
11,922
50%
5,961
(12,000)
6,039
-
2017
£’000
(5,402)
-
(3,351)
(8,753)
Summary income statement
Revenue
EBITDA
Loss from continuing operations
Loss for the period
2017
£’000
2017
SG$’000
10,373
(1,469)
(1,431)
(1,431)
18,199
(2,577)
(2,511)
(2,511)
Total comprehensive expense for the period
(1,431)
(2,511)
Summary balance sheet
Non-current assets
Current assets
Current Liabilities
Non-current Liabilities
Deficit attributable to Joint venturers
2017
£’000
-
2,854
(1,646)
(4,861)
(3,653)
2017
SG$’000
-
5,189
(2,993)
(8,838)
(6,642)
2016
£’000
7,163
(1,014)
(1,129)
(1,129)
(1,129)
2016
£’000
-
3,897
(1,319)
(4,810)
(2,232)
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2016
£’000
18,624
50%
9,312
(12,000)
2,688
-
2016
£’000
(726)
(2,465)
(2,211)
(5,402)
2016
SG$’000
13,264
(1,877)
(2,090)
(2,090)
(2,090)
2016
SG$’000
-
6,959
(2,356)
(8,590)
(3,987)
Carrying value of equity interest CSDC Private Limited
2017
£’000
2017
SG$’000
2016
£’000
2016
SG$’000
Net liabilities of CSDC Private Limited
(3,653)
(6,642)
(2,232)
(3,987)
Proportion of the Groups ownership interest
Groups share of net assets
Cumulative unrecognised losses
Carrying amount of the Groups interest in the JV
51%
(1,863)
1,863
-
51%
(3,387)
3,387
-
51%
(1,138)
1,138
-
51%
(2,033)
2,033
-
Summary of cumulative unrecognised losses
Cumulative unrecognised losses brought forward
Unrecognised losses in the year
2017
£’000
2017
SG$’000
(1,138)
(725)
(2,033)
(1,354)
2016
£’000
(562)
(576)
2016
SG$’000
(967)
(1,066)
Cumulative unrecognised losses carried forward
(1,863)
(3,387)
(1,138)
(2,033)
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30. Related party transactions
The group incurred professional fees and expenses
during the year of £150,000 (2016: £126,493) payable to
Horton Corporate Finance and £35,420 (2016: £42,000)
payable to Fishstone Limited. Dr G H H Ainsworth, who
is a director of IQE Plc, is the managing partner of Horton
Corporate Finance. S J Gibson, who was a director of IQE
Plc during the year is also a director of Fishstone Limited.
An amount of £37,500 (2016: £41,750) was outstanding
to these parties at the year-end.
At 31 December 2017 IQE plc holds a fixed asset
investment in Seren Photonics Limited represented by
69 “B” ordinary shares at a cost of £50,000 and £25,000
Convertible Loan Stock. Dr G H H Ainsworth is a Director
of IQE plc and Seren Photonics Limited. During the year
the group did not trade with Seren Photonics Limited and
as at the 31 December 2017 no balances were receivable
from or payable to Seren Photonics Limited.
Transactions with Joint Ventures
Compound Semiconductor Development Centre
Private Limited
CSDC was established by the Group and its joint venture
partners as a centre of excellence for the development
and commercialisation of advanced compound
semiconductor wafer products in Asia and on its
formation entered into an agreement to license certain
intellectual property and plant and equipment from the
Group.
The activities of CSDC include research and development
into advanced compound semiconductor wafer products
and the provision of contract manufacturing services for
compound semiconductor wafers to a subsidiary of the
IQE plc group, MBE Technology Pte Limited.
CSDC operates from space within the Group’s
manufacturing facility in Singapore. During the year the
group sub-let space at its manufacturing facility to CSDC
for £672,000 (2016: £586,000) at a rental cost per square
foot equivalent to the cost paid by the Group on the
head lease associated with the property.
The Group licenses intellectual property and equipment
to the joint venture and recognised revenue in the
year of £1,874,000 (2016: £1,728,000) and purchased
advanced compound semiconductor wafer products
from CSDC for £10,373,430 (2016: £7,163,000).
An amount of £25,575 was due from (2016: £1,402,000
due to) CSDC Private Limited at 31 December 2017.
Compound Semiconductor Centre Limited
CSC was established by the Group and its joint
venture partner as a centre of excellence for the
development and commercialisation of advanced
compound semiconductor wafer products in Europe.
On its formation the Group contributed assets to the
joint venture valued at £12,000,000 as part of its initial
investment.
The activities of CSC include research and development
into advanced compound semiconductor wafer products,
the provision of contract manufacturing services for
compound semiconductor wafers to certain subsidiaries
within the IQE plc group and the provision of compound
semiconductor manufacturing services to other third
parties.
CSC operates from its manufacturing facilities in
Cardiff, United Kingdom and leases certain additional
administrative building space from the Group. During
the year the CSC leased this space from the Group
for £115,000 (2016: £115,000) and procured certain
administrative support services from the Group for
£235,000 (2016: £235,000). As part of the administrative
support services provided to CSC the Group procured
goods and services, recharged to CSC at cost, totalling
£4,497,000 (2016: £2,932,900).
During the year CSC provided the Group with certain
contract manufacturing services. Contract manufacturing
services are purchased from CSC at a price which
reflects CSC’s cash cost of production (including direct
labour, materials and site costs) but excludes any related
depreciation or amortisation of CSC’s property, plant
and equipment and intangible assets respectively under
the terms of the joint venture agreement between the
parties. Contract manufacturing services purchased from
CSC totalled £6,050,165 (2016: £3,955,000) in the year.
During the year the Group recognised license revenue
of £nil (2016: £4,930,000) from CSC and received a short
term loan of £600,000 (2016: £nil) that has been fully
repaid. At 31 December 2017 an amount of £104,646
(2016: £2,714,268) was owed to the CSC at year end.
During the year CSC issued 800 A preference shares
of £1,000 each to the Group. In the groups year-end
balance sheet ‘A’ Preference Shares with a nominal
value of £8,800,000 (2016: £8,000,000) are included in
financial assets at an amortised cost of £7,680,000 (2016:
£6,889,000) and the Group has a shareholder loan of
£234,356 (2016: £230,000) due from CSC.
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31. Operating lease commitments
The group was committed at 31 December 2017 and 31 December 2016 to making the following aggregate payments
in respect of non-cancellable operating leases:
Due within one year
Due between two and five years
Due after five years
2017
£’000
8,770
21,588
8,184
38,542
Restated
2016
£’000
8,019
11,954
19,361
39,334
The operating lease commitment has been restated to include the cash costs payable to the Group’s joint venture,
Compound Semiconductor Centre Limited, associated with the Group’s right of use of the joint ventures assets (see
note 3 and 30).
Operating leases relate to various building, equipment and vehicle leases.
32. Commitments
The group had capital commitments at 31 December 2017 of £5,875,000 (2016: £356,000) primarily relating to plant
and equipment purchased for the group’s manufacturing site at Newport, United Kingdom.
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