Annual report and financial statements
2018
Contents
Overview of 2018
02 - Chairman’s overview
Strategic Report
04 - Epitaxy
07 - Breadth of Technology
11 - Our Business
14 - Research, development and Innovation
18 - Our People
24 - Environment, Health & Safety
28 - Principal Risks and Uncertainties
40 - Operational Review
43 - Financial Review
Directors’ Report
48 - Directors’ report
Governance
50 - Governance
64 - Remuneration Statements
80 - Directors’ Biographies
82 - Officers and Advisers
Financial Statements
88 - Financial Statements
98 - Notes to the Financial Statements
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Chairman’s overview
I am pleased to present our 2018 annual report and financial statements.
IQE is the world’s leading supplier of advanced semiconductor materials
solutions that enable global innovation. We develop and manufacture
compound semiconductor wafers and complementary materials
technologies that are at the heart of the digital electronic revolution.
Our compound semiconductor technology plays an increasingly important
role in shaping the way we live, work and spend our leisure time. We
are playing a key role in developing and bringing to market, a range of
new, world leading technologies that will see our materials embedded
across a very large range of new and emerging applications including 5G
communications, next generation smartphones and tablets, hyperscale
datacentres, global internet connectivity via low earth orbit satellites
and UAVs, advanced healthcare including wearable sensors, defence and
aerospace and in electrically powered and driverless vehicles.
IQE is a global technology leader operating in a
dynamic and competitive market. Our compound
semiconductor materials offer significant performance
advantages and functionality over silicon-based
semiconductors in terms of speed, power and light.
During 2018 our wireless materials continued to
enjoy a large market share for the power-amplifier
modules in mobile devices, including smartphones
and tablets. Market share for our photonic materials
also significantly increased in mobile devices across
a number of sensing applications including proximity
sensing, structured light and time-of-flight cameras,
particularly for 3D sensing for facial recognition
applications.
IQE established and maintained a highly significant
technological and process advantage in the high-
volume manufacture of large diameter (150mm)
wafers for vertical cavity surface emitting laser (VCSEL)
products that form the heart of a rapidly growing trend
for optical sensing applications, such as face ID, where
we command a significant global market share of these
fast-growing sensing markets.
Our 2018 revenues were achieved with a similar
manufacturing capacity compared with 2017, and
ahead of additional investment in new capacity coming
online. Our significant two-year investment program
across our global operations will be complete by the
end of the first-half of 2019 with the commissioning
of our new mega epi foundry in Newport, Wales, UK,
which is dedicated to photonics applications. Our
expansion program also includes the installation of
additional wireless capacity in Taiwan, expansion of
our gallium nitride (GaN) capacity in Massachusetts
and additional capacity for our infrared production in
Milton Keynes.
Whilst face recognition represents the first application
for advanced 3D sensing and is being adopted across
many leading mobile device OEMs, the opportunities
for the technology extend far beyond basic security
applications into areas such as augmented reality,
machine vision and LiDAR. It is across this range
of sensing applications where we have made a
considerable investment during 2018 in engaging with
more than 25 VCSEL chip companies underscoring
IQE’s exceptional leadership position in the emerging
VCSEL supply chains based on our technical excellence,
our proven ability to ramp and commitment to install
production capacity. We will bring additional photonics
capacity into production with the first phase of ten new
production tools at the Newport epi foundry during the
first half of 2019. We are in final design stage with more
than twelve photonics customers who are at various
stages of active qualification of this new facility.
During the year, IQE announced the exercise of an
exclusive option to acquire the cREO™ IP portfolio from
Translucent, Inc, technology. The Group also completed
a key production qualification milestone for its
proprietary NanoImprint Lithography (NIL) Technology
for Distributed Feedback (DFB) lasers and the renewal
of a major contract with a Tier 1 wireless customer.
Board changes
The untimely and tragic death in April 2018 of
Phil Rasmussen, IQE’s Chief Financial Officer, was
a devastating blow for his family and to everyone
who knew and worked with him. Phil had held the
role of CFO for more than ten years and he made
an immeasurable contribution to the growth and
development of the business during that time. We
are supporting his wife Elissa in the formation
of a charitable foundation in his name with the
aim of providing scholarships for students from
disadvantaged backgrounds in South Wales to study at
University.
Tim Pullen joined IQE as Chief Financial Officer on
4th February 2019. Tim, whose appointment was
announced on 15th October 2018, was most recently
Chief Financial Officer of ARM Limited, a global
semiconductor and software design company owned
by Softbank Group. Tim’s appointment as CFO is
strongly aligned with the aim of having a Board with
the appropriate balance of skills and expertise to steer
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726
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the Company through the next exciting phase in its
evolution. To this end, I am also delighted to confirm
that Phil Smith, the former CEO and Chairman of
Cisco, who joined the Board in December 2016 will
take up the position of Non-Executive Chairman on my
retirement before our AGM on 25 June 2019.
Summary
I remain very excited about the growth prospects for
our industry, and IQE’s positioning to take advantage of
this growth. Whilst a substantial inventory correction in
the first half of 2018 followed by the sudden disruption
in November of a significant supply chain severely
reduced the short-term demand for VCSEL wafers
which materially impacted our full year revenues
and profitability, I firmly believe that the position and
prospects of IQE will not be defined by our 2018
financial performance. We look forward to enjoying the
benefit from the significant investment programmes
that we will complete this year.
I would like to thank my fellow Directors and all the
management and staff of IQE for the achievements
of the past year in preparing the Group to take full
advantage of the exciting market and technological
opportunities that lay ahead.
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.
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.
Dr Godfrey H H Ainsworth
Executive Chairman, IQE plc.
20 March 2019
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726
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Strategic report
IQE’s core business is the design and manufacture of compound semiconductor
wafers or “epiwafers” using a process called epitaxy.
Epitaxy 101
Epitaxy is the process of growing structures in a
specific crystalline orientation on top of another
crystalline layer or substrate, where the orientation is
determined by the underlying crystal.
The word epitaxy derives from the Greek
prefix epi meaning “upon” and taxis meaning
“arrangement” or “order.” The atoms in an
epitaxial layer have a specific registry relative
to the underlying crystal.
The elements
The periodic table, first published in 1869 by Dmitri
Mendeleev, shows the 118 currently known chemical
elements arranged in eight groups according to their
properties.
Of particular interest in electronics and photonics is
the fact that 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, those 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 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”.
Introducing 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
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report come. Welcome to the world of advanced, compound
semiconductors. Compound semiconductors are the
DNA of next generation technologies.
IQE’s Epiwafers
IQE manufactures compound semiconductor material
in the form of a wafer or “epiwafer” by growing complex
atomic structures on the surface of a substrate (a disc
of pure crystalline material) using a process called
epitaxy.
Epitaxial growth is a process whereby complex atomic
structures are produced under precisely controlled
conditions. The end product is a pure, crystalline,
semiconductor wafer upon which complex structures
comprising many individual atomic layers have been
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.
of the periodic table (e.g. 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.
Compound semiconductors provide significant
performance advantages that are absolutely essential
for a growing range of technology applications.
In general terms, these advantages fall into three
categories: speed, light and power.
SPEED - Compound semiconductors such as GaAs and
InP can operate at speeds that are several orders of
magnitudes higher than is possible using silicon alone.
LIGHT – Unlike silicon, compound semiconductors
can generate and receive a broad range of the
electromagnetic spectrum from high frequency
ultraviolet through the visible spectrum to long
wavelength infrared light.
POWER – Compound semiconductors including silicon
carbide (SiC) and GaN are capable of operating at high
powers (high voltages and current levels) and are highly
efficient at converting different types of power and at
high frequencies.
Today, Semiconductors in the form of both silicon
and compound semiconductors, form the heart of
many technology applications that have an everyday
impact on the way we live, work and spend our leisure
time. Without semiconductors, many devices and
applications that we rely on simply would not exist.
Semiconductors are a key enabling technology that
feed into multiple supply chains feeding a wide range
of market sectors including: communications and
connected devices (5G), healthcare technologies,
electrically powered connected autonomous vehicles,
aerospace technologies, safety & security systems,
efficient energy generation and consumption, robotics
and AI.
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 the digital revolution for generations to
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report IQE’s vision strategy and delivery
Our vision
It is IQE’s vision to maintain and grow our established
position as the leading global provider of advanced
semiconductor materials – the global “go to” compound
semiconductor materials specialist.
Our strategy
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.
To realise this vision requires the ability to deliver
“enabling technology”, which meets the performance
and price points needed for adoption, and which can
be delivered reliably, on-time, every-time with the ability
to scale rapidly.
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.
Competitive Advantage
IQE operates in a highly competitive, fast-moving
environment at the leading edge of technology.
IQE has established a strong leadership position in
the market for compound semiconductor materials.
Our leadership has been built around an unparalleled
breadth of IP, in contrast to IQE’s competitors who
operate within the constraints of narrow IP portfolios
and inferior research and development capabilities.
Uniquely, this makes IQE a “one stop shop” for our
products at a time when the market is increasingly
seeking multiple material solutions to meet expanding
and diverse end markets.
We believe that our broad product portfolio across
multi-site operations represents a powerful competitive
advantage in a market where qualification barriers
are high, and microscopic variations in wafer crystals
can have dramatic adverse operational and financial
implications downstream.
Our delivery
IQE is extremely well positioned to rise to this
challenge, having built the broadest portfolio of
materials IP in the industry, and developed a unique
platform for a secure low-cost supply. Moreover, IQE
has developed a reputation to match – for excellence
and reliability.
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.
Our business model
The pioneer in outsourcing
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
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Breadth of technology
As a pioneer of compound semiconductor technology, IQE has developed an
unparalleled and comprehensive breadth of technology and advanced production
platforms.
During our thirty-year history, we have also developed an unparalleled depth of
specialised process know-how and expertise in the development and manufacture
of highly advanced semiconductor materials technologies.
Technology leadership
In addition to our process know-how, we add further
value by offering innovative new products and
technologies that enhance our customers’ competitive
advantages. This is represented in our increasing
intellectual property portfolio and widely recognised
technology leadership.
Through both organic growth and acquisition, IQE has
established clear technology leadership and created a
virtuous circle, which continues to attract the brightest
and best talent in our industry.
Process qualification
Semiconductor devices operate at atomic and even
sub-atomic levels, often carrying out billions of
operations per second which means that reliability is
absolutely essential.
The global semiconductor industry operates to exacting
standards, requiring the ultimate product quality with
uncompromising reproducibility and repeatability. In
order to meet customers’ requirements, it is usual to
go through a thorough qualification process to prove
that production quality is optimised, reliable and
repeatable with 100% accuracy. Any failures at the start
of the process (the epitaxy) can have a catastrophic
impact further along the supply chain which means
that quality must be guaranteed.
Each 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”, 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.
For each new product, it is necessary to qualify the
raw materials, the equipment and all processes and
procedures and each qualification process can take
many months to complete, with products being fully
tested across multiple processes.
The qualification processes require significant
investment from all parties including IQE and our
customers, but once proven, the process is fixed for
the life of that product and becomes a major barrier to
entry for competitors.
Quality
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
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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.
Customer relations
Our direct and OEM customers operate in highly competitive consumer, industrial and business markets where
protection of their know-how and IP is absolutely essential. Our customers provide us with their product designs,
forecasts and business plans and need to be certain that we can be trusted to protect their valuable information. IQE
has a proven track-record for our integrity, business ethics and the protection of confidential information.
A global footprint
IQE’s operations span the US, Asia and Europe which reflects the geographical diversity of our customer base. This
allows IQE to be positioned close to its customers and to build and maintain strong, long-term relationships and
partnerships.
Process flexibility
It is common practice to qualify multiple products
from multiple customers across a number of tools at
multiple sites. This allows for a reasonable degree of
production flexibility to help manage any fluctuations in
market demand.
There are some product groups that cannot be mixed
on a single tool but in general, it is possible to serve
multiple end markets using various combinations of
tools with minimal reconfiguration. For example, it
is perfectly feasible to run wireless products on the
same tool as some photonics products. However, IQE’s
epitaxy production operates in process batches and
we employ sophisticated methods to optimise our
production to maximise efficiency and minimise costs.
Security of supply
Confidence in a secure supply is critical to the supply
chains in which IQE operates. IQE offers its customers
the opportunity of multi-sourcing qualified products
from multiple locations across all its core technologies,
allowing it to be a primary and trusted supplier to its
customers.
Cost leadership
In the electronics industry, cost leadership is achieved
through advanced technology and economies of scale.
IQE has developed leadership in both.
Our dedication and specialisation in advanced
semiconductor materials technologies provides our
customers with unrivalled product and service quality
whilst delivering highly attractive pricing through
unparalleled economies of scale across the industry’s
most comprehensive product portfolio.
Intellectual property
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 process know-how
and IP has been at the heart of IQE’s strategy over
our thirty-year history. In recent years, our technology
leadership has enabled the Group to offer additional
value to customers through our unique IP portfolio of
new product solutions.
IQE has built an enviable global reputation in the
industry for the breadth and depth of its materials
technologies and capabilities. It is evident 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
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic ReportSingapore (JV)Bethlehem, PAGreensboro, NCSpokane, WATaunton, MAUSACardiff, UK (1 + JV)Milton Keynes, UKNewport, UKEUROPETaiwanAsia 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
primarily engaged with chip makers, whereas it now
regularly engages directly with a number of Tier 1
OEMs.
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.”
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 an “outsource
epi wafer company”, where we develop bespoke
wafer solutions to customer defined specifications, to
a “materials solutions provider “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 cREOTM
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 require 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 a dramatically
lower cost of production.
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Key Business Inputs
Our business relies on four key inputs: customers, people, equipment and materials
CUSTOMERS - Our customers traditionally share with IQE their detailed technical specifications, business
plans and product forecasts. IQE designs its processes and allocates production capacity to meet those
requirements, adding value by offering additional support with IQE’s own technology and innovation.
PEOPLE - Our highly skilled, trained and experienced people provide their expertise to deliver outstanding
product quality and unparalleled customer service.
EQUIPMENT - IQE works with its supply partners to utilise the best available equipment which it modifies to
meet its own exacting standards and to preserve and protect its own know-how and IP.
MATERIALS - IQE works closely with its supply-chain partners to ensure the highest quality raw materials in
terms of substrates, source-gases and other raw materials.
Business units
The Group has established external market facing Business Units within the organisation. The three primary business
units are: wireless, photonics and infrared. We also have an Emerging Technologies unit that includes Solar, Power,
Silicon and advanced Compound Semiconductor on Silicon technologies.
Each of our business units has a clear product and customer focus, but continues to benefit from the production and
technology synergies of the whole Group.
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Business units
The wireless market covers 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.
WIRELESS (5G)
Our products will play an increasingly important role in
enabling 5G systems and connected devices globally.
For over a decade, compound semiconductors have
been the key enabling technology for mass market
applications such as smartphones, wifi and wirelessly
connected devices thanks to their high-speed and high-
performance capabilities.
IQE is the clear market leader in compound
semiconductor wafers for wireless applications with an
estimated 55%-60% share of this global market.
After the first smartphone was launched in 2007,
the wireless market enjoyed several years of double-
digit organic growth, as the launch of newer, faster
and more powerful devices enticing consumers to
upgrade to the latest models. However, since 2013 the
innovation cycle appears to have slowed and market
growth has cooled. According to industry analyst IDC,
overall smartphone shipments had stagnated since
2016 with sales in 2018 showing a 3% decline but
expected to return to growth in 2019.
Whilst smartphone sales volumes may have declined,
the relentless increase in data traffic continues to drive
the need for more sophisticated wireless chip solutions
in handsets. It is anticipated that this will drive the
market towards 5G connectivity sooner rather than
later, which provides significant upside potential for
IQE’s wireless business as the transition will require
much more complex material technologies.
Furthermore, infrastructure applications such as
base stations, radar and CATV are likely to become
an increasingly important part of IQE’s wireless
business as the superior performance of our materials
technology continues to displace the incumbent silicon
LDMOS technology.
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 AlN) is made
from compound semiconductor elements, the wafers
have been fabricated using a much less sophisticated
“sputtering” process.
Employing its new cREO process, IQE has overcome
some challenges to produce prototypes of single
crystal AlN wafers for 5G filter applications and are
engaged with multiple potential customers with this
potentially disruptive high-performance solution.
Wireless sales grew 6.6% year-on-year and the sector
accounted for 62.5% of the Group’s sales in 2018.
PHOTONICS
The photonics market covers applications that
either transmit or sense light. A number of optical
communications and sensing applications depend on
the ability to emit or detect light.
Emitters include laser and LED based devices that
transmit 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.
11
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Photonics products made using IQE’s advanced
semiconductor materials enable a wide range of end
markets in consumer, communications and industrial
applications.
IQE is a world leader in photonics technologies
generally, but two in particular have been at the heart
of IQE’s growth in recent years: VCSELs and Indium
Phosphide (InP) products.
Vertical Cavity Surface Emitting Lasers (“VCSEL”)
are 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-inch / 150mm 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.
Advanced sensing technologies, from face recognition,
to gesture recognition, LIDAR and machine vision, will
represent a major growth area in the near term and
extending into the future.
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 strong
growth.
Whilst VCSEL has been the centre of attention, our InP
business continues to provide solid performance, being
driven by the need for higher speed, higher capacity
fibre optic systems to address continuing growth in
data traffic.
Our InP technologies enables fibre to the premises
(FTTX). The deployment of this technology to achieve
higher performance at lower costs, coupled with the
continuing growth in data traffic is leading to the
extension of the fibre optic network “to the premises”
(also known as “the last mile”). IQE’s advanced laser
technologies with differentiated IP underpins its high
growth expectations for this business.
The proportion of sales generated from photonics
products accounted for 28.0% of the Group’s wafer
sales in 2018.
INFRARED
Although similar in nature to our photonics business,
infrared applications tend to specialise in safety,
security and defence applications that deploy indium
antimonide (InSb) and gallium antimonide (GaSb)
engineered materials that enable high resolution, long
wavelength infrared systems.
IQE is the undisputed global leader in the supply of
indium antimonide and gallium antimonide wafers for
advanced infrared technology - primarily “see in the
dark” defence applications.
Whilst key markets are currently limited to defence
applications, IQE is actively engaged with tier 1 OEMs
working on major new opportunities to migrate mid to
far infrared technologies into consumer markets.
We are the technology leader with the launch of the
industry’s first 6-inch / 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.
Beyond defence, the InfraRed division has been
successful in broadening its 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
we will highlight these new applications as these reach
commercial adoption.
Infrared sales accounted for 8.4% of the Group’s sales
in 2018.
EMERGING TECHNOLOGIES
Solar
Compound semiconductor technologies provide a
route to highly efficient solar energy harvesting. The
prevalent solar technology is based on silicon which
typically achieves a conversion of less than 18% of the
sun’s energy into electricity.
IQE has been at the centre of developing solar
materials using compound semiconductors, which
can deliver much higher levels of efficiency. This
technology, which is also known as Concentrating
Photovoltaics, or “CPV”, can already deliver efficiencies
in excess of 45% 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, and we
will highlight these new technologies as they 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
12
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report commercial relationships in the supply chain. The
power switching market alone is approximately
3-4 times the size of the current wireless power
amplifier chip market, and represents a major growth
opportunity for IQE. IQE’s patented technology, cREO,
provides a significant competitive advantage in this
space.
CMOS++
The CMOS++ business unit focusses on advanced
semiconductor materials related to silicon including the
combination of the advanced properties of compound
semiconductors with those of lower cost of silicon
technologies.
The key advantages of compound
semiconductors are that they:
• are much more efficient at emitting and
processing high-speed wireless signals
• are much more efficient at emitting and
sensing light
• operate at much higher speeds and lower
power consumption
It is these advanced properties which determine the
top level high margin markets for our materials.
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.
As advanced materials technologies enter mass
adoption across multiple markets, we are approaching
a paradigm shift with the merging of compound
semiconductor and silicon technologies on the horizon.
IQE is well positioned to be a pioneer of the compound
materials on silicon (CMOS) generation.
13
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Research, development
and innovation
IQE’s core business is the design and manufacture of compound semiconductor
wafers or “epiwafers” using a process called epitaxy.
R&D activity
Technology leadership lies at the heart of IQE’s
strategy. This is supported by a culture of innovation
and constant improvement.
The Group is engaged in a number of research and
development programmes in collaboration with
customers, academia, research organisations and
government agencies.
These programmes are funded through a combination
of internal cash generation, customer funding, and
government support.
Development programmes are geared towards
next generation applications as well as process
improvements leading to greater throughput, higher-
quality products, better manufacturing yield, increased
production uptime and new product development.
Whilst many R&D programmes are subject to
non-disclosure agreements and confidentiality,
there are some programmes in the public
domain, examples of which include:
• Integration of III-V with Si
• Sb-based materials
• Quantum Technologies
• Quantum Dot VCSELs
• Dilute nitrides for lasers and SWIR
detectors
• Multi junction CPV solar cells
• Mixed nitride-antimonide-based
detectors
• High power InP-based quantum cascade
lasers
• Graphene for RF electronics
A list of technical publications is available on the
research pages of the IQE website at www.iqep.com.
IQE’s dedicated Technology Group manages the
business’ rapidly expanding IP and patent portfolio.
14
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Innovation through collaboration
Building high-tech clusters
Collaboration is a powerful tool in accelerating
innovation. The benefits are even greater when whole
ecosystems “cluster” in geographically close locations,
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 its joint ventures
in the UK and Singapore, and its highly successful Open
Innovation Programme (openiqe.com). Moreover,
IQE has been at the heart of establishing a new CS
Cluster in South Wales, UK, which is the first of its kind
globally. This new cluster is accelerating research into
novel technologies, product development, innovation
and prototyping. The CS cluster, which is branded as
CSconnected (csconnected.com), 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 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 agreement
for building a Compound Semiconductor Foundry in
Newport, South Wales.
The signing followed an agreement in May 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.
Industry events
IQE actively participates in major industry events and
frequently chairs, hosts and presents technical papers
at international conferences.
Open Innovation
IQE is classified by the Welsh Government as an
“Anchor Company” in acknowledgement of its status as
an exemplar in terms of its global leadership.
As an Anchor Company, IQE was invited by the
Welsh Government to run an Open Innovation pilot
programme which has been highly successful in
establishing new technology networks to identify long-
term opportunities.
IQE’s open innovation programme, ‘OpenIQE’ is actively
helping to boost regional economies by collaborating
with industrial and academic partners to identify supply
chain opportunities within Wales and across Europe.
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
15
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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.
In May 2019, CoInnovateCS will be launched in the US
and co-located with CS-Mantech in Minneapolis.
The CoInnovate conference website is at:
www.coinnovate.co.uk
The CoInnovateCS conference website is at:
www.coinnovatecs.com
16
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Our people
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 in confidence and if they
wish, anonymously. When a worker does not wish to
raise concerns with their line manager or with the HR
Department, or they are concerned that matters they
have previously raised have not been investigated
or reported properly, they are encouraged to raise
concerns with the Company Secretary, who will arrange
for a further review, make necessary enquiries and
report to the Board.
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. How we invest in our people and
our communities is discussed further below.
Our policy 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 UK Corporate
Governance Code, is unethical or illegal. This is
18
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.
The opportunities and challenges we manage within
our own business also extend to our global supply
chain, which we view as an extension of our business.
For this reason, we are committed to ensure the same
responsible business standards and ethical behaviours
we expect of ourselves are upheld by the hundreds
of suppliers in our supply chain. In order to uphold
our high standards of ethical procurement all our
supply chain staff are regularly trained in the IQE Code
of Business Ethics and Conduct. In 2018, training
modules focussed on key topics for anti-bribery and
corruption, conflicts of interest, corporate responsibility
and respect in the workplace.
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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.
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.
Delivering IQE’s vision of being the global number one
provider of advanced semiconductor materials and
improving our positive social impact is not something
we can achieve on our own. Every day we are working
with hundreds of suppliers who are helping us achieve
success with our current and new technologies. Our
suppliers help us innovate, create value, capacity and
capability, deliver quality and service and drive market
transformation with responsible and sustainable
living. A significant portion of our growth comes from
innovation, delivering leading-edge products into the
marketplace. We anticipate that a large proportion
of our innovations are linked to working with our
strategic supply chains. That’s why we invest in long-
term mutually beneficial relationships with our key
suppliers, so we can share capabilities and co-innovate
for shared growth. Strategic supply chain partnerships
are about shaping the next horizon together and is a
unique opportunity to unlock value for IQE and our
partners. It helps us strengthen supplier and customer
collaboration, it enables improved overall end-to-end
operational efficiency and mutual capability building
and sharing.
In order to maintain our competitive advantage we
regularly evaluate and feedback the performance of
our key suppliers against three main criteria of Quality,
Competitiveness and Technology Leadership. We
firmly believe that having industry leading supply chain
partners that continually strive to drive continuous
improvement in these areas creates the differentiation
that IQE offers to its customers.
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 FTSE4Good
programme, but nevertheless maintains standards
and applies the principles of this index. The Group also
actively engages with a number of industry groups,
educational bodies and charities to promote science
and technology and to help contribute to community
causes. How we invest in our people and our
communities is discussed further below.
Confidentiality
Our business conduct policy emphasises the
essential need for confidentiality in all of our dealings.
19
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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.
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.
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
continues to undertake a range of activities including
group-wide training, data audits and risk assessments
pursuant to the new General Data Protection
Regulations (GDPR) that came into force on 25 May
2018 and the Data Protection Act 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 such
standards. A programme of supplier audits exists to
ensure suppliers adhere to IQE’s standards.
How we invest in our people and our communities
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.
Our success depends on our people. The Group recognises the importance of its workforce 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 brought 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. This is supported by
our culture of integrity, accountability, excellence and
valuing people.
As IQE continues to grow we believe now is the time
to undertake the process of revisiting our vision
and strategy, redefining our values and creating an
overarching brand for our people strategy. After
several workshops and much debate, during IQE’s
Leadership Conference in September 2018 we agreed
that our unique culture was central to our success and
captioned “One IQE”. This is based on the concept
of everyone across IQE’s global operations working
together as one organisation.
We underpinned this people concept with five
key statements:
• Commit, collaborate and communicate,
all working as One IQE;
• Embrace change and recognise we need
it to drive our business to new heights;
• Understand that each of us can make a
difference and together we can achieve
great things;
• Use the right metrics to inform data-
driven decisions and to record and
measure progress;
• Strive for excellence every day with a real
focus on the task ahead.
20
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report To build upon this we established a project known
as ‘EPIC’ to further identify, review and define our
values through consultation with our workforce. By
June 2019, Project EPIC will have defined the values
it has identified. Having redefined IQE’s values, we
will then work to embed them into every part of our
organisation through a “Values in Action” strategy.
This will support our goal of making IQE a great place
to work where our values are demonstrated in our
behaviours every day.
Personal and professional development and
performance management
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 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
believe in matching the right people to the right roles
and in ensuring that they are appropriately trained
and supported. We are committed to promoting an
environment and culture that provides for agile and
life-long learning. We aim to provide personal and
professional development opportunities for all staff
throughout their employment.
In June 2018, IQE established an internal forum
and oversight body, ‘Change 8’ or ‘C8’, to provide a
framework and governance to Group-wide change
projects. One of the C8 projects, ‘Talent’, is tasked
with building a world-class engineering and leadership
Academy.
The Talent project has the following aims:
• transform how we train, embracing
digital training methods and agile
learning;
• ensure our engineering and technical
staff have defined training pathways to
competence and we can demonstrate
visibility around training execution and
evaluation;
• shape the culture whilst embracing
technology to simplify and create
access for all to learn in an agile work
environment;
• align our Learning Management
System (which houses our leadership,
management and engineering e-courses)
with our Quality Management System to
ensure compliance with all requirements
on the management of competence.
In implementing the Group’s strategy, the Board
and Executive Committee set clear Key Strategic
Objectives for the Group. A framework for the
continuous review and development of IQE’s strategy
is being driven through our C8 project, ‘Foresight’ and
translated at department level through our C8 project,
‘Cascade’ - ensuring we translate and align objectives
at strategic, department, team and individual levels.
Our leaders ensure their teams have 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 appraisal process, which provides the opportunity
to take stock, recognise success and support areas
for development. To ensure the effectiveness of our
quarterly appraisals, we provide regular training and
guidance to both reviewees and reviewers in their
respective roles and responsibilities. The Learning
Management System ‘Vault’ has a suite of e-courses
around developing goals, giving feedback and
conducting appraisals which are accessible to all staff.
Bonus plan
All IQE 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 upfront 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”. They also promote a culture of
“going the extra mile” to get the job done and achieve
excellence. We will further utilise them to reward
“values in action” as part of our culture and values
project, EPIC explained further above.
Any member of staff can recommend a colleague for a
spot award. These recommendations are moderated
to ensure fairness and consistency of approach.
During 2018, across the Group, 147 spot awards were
issued.
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.
21
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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. It aims to
support individuals in making small sustainable
changes to improve wellbeing and to improve
sustainability by working in groups and making
events fun. A great example was our ‘Walking Works
Challenge’. Those employees taking part recorded
66,495,977 steps over 14 weeks. Our top walker
recorded 3,427,623 steps and the winning team
recorded 6,554,454 steps.
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.
Equality
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.
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 and engagement
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.
At the end of 2018, we launched a monthly global One
IQE corporate newsletter, taking great care to ensure
inclusiveness of the whole Group. One IQE leads with
a message from our CEO, providing focus on priorities.
It provides updates from our Customer Business Units
and from our Operations, Technology, Global Supply
Management, IT, Finance and Human Resources
functions. The newsletter includes two feature sections
including one dedicated to Quality and Continuous
Improvement, detailing our roadmap and progress as
we continue to focus on excellence. The second feature
called ‘Pulse’ celebrates our staff achievements, awards
and learning.
As well as a producing a digital newsletter on a
monthly basis, ‘Town Hall’ meetings – face-to-face
communication forums led by members of IQE’s
Senior Leadership Team – are being held at each
IQE site on a quarterly basis. Our Chairman also has
a rolling programme of factory visits, which enable
him to engage in person with local management and
employees. During these site visits, the Chairman can
celebrate their successes and hear at first hand the
issues and challenges they face.
Further to a review of internal communications,
we have also put in place a weekly Executive Team
Review, which brings together the Senior Leadership
Team under the chairmanship of our CEO, to discuss
priorities, risks and opportunities. The Leadership
team then meet with their heads of departments on a
weekly basis, who then cascade information to Team
Leaders. Geography has minimal or no impact on
attendance as leaders are well-skilled in managing
remote teams and meetings include the option to join
remotely by Skype.
These regular meetings are complemented and
reinforced through IQE’s annual Strategy Conference
when the Executives and Senior Management come
together to 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- Executive Directors also attend sessions of the
Conference.
Another 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 have also set up internal committees to engage
employees in decision-making. At the beginning of
2019 we established the Employee Pensions & Benefits
Governance Committee ‘EPBGC’. This Committee’s
members were chosen by IQE staff and represent
the interests of the staff in all decisions concerning
employee benefits. The Committee is chaired by IQE’s
independent Non-Executive Director and Chair of the
Audit & Risk Committee, Sir Derek Jones.
Corporate Social Responsibility
Educational Institutions
IQE 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 also participating in a “Business
in the Community (BITC)” Programme comprising a
number of schools and businesses in a partnership
cluster with the aim of building strong links between
schools and local businesses. BITC activities include
22
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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.
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 engages with local communities at each of its
facilities in a wide variety of ways such as sponsoring
charitable events and providing sports kits to schools.
IQE’s staff are also encouraged to participate in
various events including through volunteering work at
holiday soup kitchens, raising money for the Special
Olympics and blood donations facilitated at IQE sites.
During 2018, UK staff donated 93 units and our US
staff donated over 150 units of blood. Our US staff
also participated in the US Food Drive (20 + dinners);
School Supply Drive (14 boxes); and the Holiday Angel
Tree and Shoes for Kindness Drive, which helps pay off
Community School Lunch Debt.
In 2019, we are in the process of establishing a
charitable foundation in memory of our late CFO, Phillip
Rasmussen. The foundation will support disadvantaged
young people in South Wales. Developing people
was a passion for Phil. He really believed that anyone
regardless of their background or circumstances, if
supported, could achieve anything. The PR Foundation
will be a lasting and fitting legacy. Work is underway
to formalise a constitution and to appoint a board of
trustees and advisors as well as establish an internal
events committee to begin fundraising.
23
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Environment, Health
& Safety
Health and Safety
Safety and Environmental Teams & Reporting
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 reporting all safety observations
and incidents, being involved in safety audits, risk
assessments and regular awareness training sessions.
IQE’s Environment, Health & Safety (EHS) group has a
detailed and continuing professional development plan
including training and accreditation of competent EHS
professionals – in the form of Regional EHS Managers
and Site Safety Managers, Engineers and Coordinators.
The Regional EHS Manager 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. The Site-specific Safety Roles
are directly responsible for localised EHS program
implementation and operations at each IQE Site.
The Regional EHS Managers work directly with Site
Safety roles, in order to implement those best practices
identified from strategic initiatives to; minimise risks
of injury at work; ensure legislative compliance; and
assist in creating and monitoring safety practices. In
addition, localised Safety Advisors, with the appropriate
expertise to support in specific areas of activity such as
Local Exhaust Ventilation (LEV) and pressure systems
are also implemented at site level.
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.
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 company and the Board accordingly.
Daily EHS activities and reporting at local sites,
managed by the localised safety roles, are fed into
general site management for effective control.
Regular analysis and discussion is an agenda item at
periodic site management meetings. Localised EHS
roles 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 ensure conformance to global, regional and local
regulations and directives. Initiatives are designed
to ensure the Group’s objectives of maintaining
its position 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 IQE Board of Directors.
Safety Performance 2018
As outlined above, IQE closely monitors Safety
performance. In 2018, the UK Sites experienced no
24
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report RIDDOR reportable injures or dangerous occurrences,
and the US-TW facilities experienced one employee
injury accident that was recordable. Furthermore,
no IQE sites experienced any work related employee
injury that resulted in lost work days or restricted
work activity. NB – UK sites report all minor accidents
including minor cuts, slips etc. - not merely those that
are reportable. US reports feature only OSHA 300
reportable incidents (c.f. RIDDOR in the UK).
2018 UK /SG Accidents by Facility
10
9
8
7
6
5
4
3
2
1
0
8
7
6
5
4
3
2
1
0
IQE EU
IQE SI
IQE SG
IQE WT
2018 US /TW Accidents by Facility
IQE TW
IQE NI
IQE PA
IQE WA
IQE NC
IQE MA
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, recycling, 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;
• appropriate resources will be made
available to ensure this policy can be
implemented;
• 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 will work with IQE supply chain to
minimise their environmental impacts;
• 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 supplement this policy to
meet local requirements.
Environmental Management
ISO 14001 is a global standard for environmental
management that 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.
All IQE’s continuously operating facilities have
successfully completed independent third party audits
25
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report of our compliance with ISO 14001:2015 - the new
revised standard. These audits were very successful
with no material deficiencies recorded.
All our plants clearly demonstrate commitment to
environmental compliance, reducing waste, recycling
materials, energy conservation, risk management and
where appropriate, in ways that are 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 the British Safety Council, British Standards
Institution, Institute of Environmental Management
and Assessment in the UK, and the US National Safety
Council, US National Fire Protection Agency and 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 2018
IQE closely monitors environmental compliance. In
2018, 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 minimise,
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 below on
pages 29.
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 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.
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.
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. The
Group’s Senior Leadership Team are responsible to the
Executive Directors for the development and delivery
of the detailed action plans which underpin the Group’s
Annual Business Plan. As described further under
the internal communication and engagement section at
page 22, this team meets formally with the Executive
Directors on a weekly basis to assess progress against
their plans, and to put in place any countermeasures
necessary to keep the business plan on track.
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.
26
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Risk management within the business involves:
In identifying risks, we analyse risks across four
key areas:
• identification
and
assessment
of
individual risks;
• strategic risk;
• design of controls and operational
• commercial risk;
processes to mitigate the risks;
• testing of controls through internal review
and audits;
• conclusion on the effectiveness of the
control environment in place.
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.
The principal risks affecting the Group are identified
by the Group Executive team within their functional
areas of responsibility and reviewed by the Audit & Risk
Committee.
• operational risk; and
• financial risk.
The Board has put in place a framework of internal
controls to manage the risks faced by the Group, and
the Audit & Risk Committee has responsibility to review,
monitor and make policy recommendations to the
Board upon all such matters.
The principal risks identified below are listed in order of
severity. Mitigation, where possible, is described next
to each identified risk area.
27
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Principal Risks
& Uncertanties
Year on year
change in
likelihood:
Decreased
Potential
impact:
High
Effect:
Loss of
market share,
reduced sales
volumes and
profitability
Principal Risk: COMPETITION
Business Risk
Mitigation:
Loss of
dominant
market share
Loss of
share with
a significant
customer
Price erosion
due to
predatory
pricing from a
competitor
Entry of a new
competitor
IQE’s leading market position depends upon proprietary
technology, product quality and product diversification.
IQE’s competitive advantages are discussed further at page
6.
We maintain close relationships with customers and
suppliers to become the “materials partner of choice” by
forming multilevel partnerships from material design stage
to pilot and volume production. This helps us to monitor
the activity of our competitors and show our customers the
advantages offered by IQE. We also continue to invest in
product development to ensure competitive advantage.
Our focus is constantly on quality, value and customer
service with technology leadership and complimentary
value added solutions that enhance our customers’
competitiveness.
We continue to invest in product development and
metrology to ensure competitive advantage. Our investment
in capacity providing a credible option for mass production
in any scenario.
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.
Also, qualification times for customer products take
several quarters and once a product and relationship are
established, this becomes a significant barrier to entry for
competitors.
Given the lower margins on legacy Wireless products
versus higher margins on newer Photonics products, there
is less motivation for competitors to invest time to obtain
additional share in these legacy products.
Contractual commitments from customers are also utilised
to maintain share.
28
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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
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.
Year on year
change in
likelihood:
Unchanged
Potential
impact:
High
Effect:
Sales
volumes and
profitability
Year on year
change in
likelihood:
Unchanged
Potential
impact:
High
Effect:
Reputational
damage, costs,
sales and
profitability
29
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Year on year
change in
likelihood:
Reduced
Potential
impact:
Medium to
High
Effect:
Costs,
sales and
profitability
Principal Risk: INFLUENCE OF MARKET CONDITIONS
Business Risk
Mitigation:
Due to
competing
technologies
and changing
applications,
historical GaAs
products are
decreasing
Cost of new
product
development
will increase
Downturn of
a large end
market
While GaAs products have been the foundation for mobile
communications for the past 20+ years, Si products are
overtaking the low performance applications of GaAs
while the shift to higher frequencies may require tougher
specification for GaAs or entirely alternative materials such
as GaN and InP at the high end of the market spectrum.
We have therefore maintained close relationships with
our customers to be their “materials partner of choice.”
This positions us to leverage our new GaN and InP wafer
products into our customer’s next generation designs. We
also continue to invest in product development of GaN,
InP, cREO and Porous Si to ensure competitive advantage
when engaging with new customers. The CAGR of new GaN
products is exceeding the declining percentage of GaAs
products, but it may take 2-3 years for the increasing GaN
revenue to catch-up and surpass the declining maturity cycle
of GaAs.
There are estimates that new 5G applications will offer new
large volume GaAs opportunities in areas such as fixed point
antenna beam steering.
IQE is dependent, to a significant extent, on the strength
of the defense and security industry and the defense
budgets made available by national governments to
purchase, develop or fund compound semiconductor
based infrared product technologies. Changes in defense
funding or spending, including those pertaining to the
wider geo-political situation, could affect the sales of IQE
products or services, and this could adversely affect its
business, results of operations or financial conditions. IQE’s
strategy to mitigate against these risk has been to diversify
the application of these products into areas which lie
outside of defense and security for example in automotive,
environmental and biosensor markets. By doing so the
customer and product application base has increased
substantially, thus enabling the business to strengthen its
position and competitiveness within the markets that it
operates.
30
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Year on year
change in
likelihood:
Increased
Potential
impact:
Medium
Effect:
Quality issues
and increased
cost
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.
In 2018 we made a decision to bring recruitment in-house
and decrease our dependence on agencies. This has been
a success as recruitment is on track, taking an average of
35 days from advert to job offer. Our recruitment specialist
continuously works on recruitment campaigns and on our
recruitment pipeline. We have formed direct links with
Universities to feed our pipeline and are actively managing
succession planning across all areas of the business.
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 over twenty years ago.
We have recently reviewed and benchmarked our employee
benefits to ensure that we offer incentives that are better
than our competition and in 2019 we are updating our
Share Option and Long Term Incentive plans across the
Group.
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.
31
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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
since 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.
At the 31 December 2018 year-end, the Group had net
cash of £20.8m. On 24 January 2019, the Group secured
additional committed funding in the form of a new $35m
three-year multi-currency revolving credit facility with HSBC.
Year on year
change in
likelihood:
Unchanged
Potential
impact:
Medium/High
Effect:
Costs,
sales and
profitability
Year on year
change in
likelihood:
Unchanged
Potential
impact:
Medium
Effect:
Financial
loss and
reputational
damage
32
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Principal Risk: BUSINESS INTERRUPTION – SUPPLY CHAIN
Business Risk
Mitigation:
Dependency
on sole
supplier
Availability of
qualified raw
materials
The cost of
producing
products can
be significantly
affected by
the cost of
the underlying
commodities
Limitation
of SiC raw
material for
GaN epiwafer
products
The majority of raw materials that sustain IQE’s products are
not scarce resources.
Active programme to maintain cross qualified second
sources.
Rigorous supplier quality management processes.
We maintain close relationships with our key suppliers in
order to keep well informed about potential supply issues.
Commodity based items are protected wherever possible
through Long-Term Supply Agreements that allow our
supply chain to plan ahead and mitigate commodity
fluctuations through hedging and/or buying ahead.
For the majority of IQE’s new GaN products, the substrate
material is SiC and there are only two qualified, high volume
suppliers of SiC substrates in the world. Due to rapid
worldwide market expansion in RF & Power Electronic
industries, there is currently a shortage of SiC substrates.
We continue to foster close partnerships with both
SiC suppliers while also establishing Long-Term Supply
Agreements to ensure SiC supply is sufficient to meet IQE’s
growing needs.
Year on year
change in
likelihood:
Unchanged
Potential
impact:
Medium
Effect:
Quality issues,
costs, sales
volumes and
profitability
33
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Year on year
change in
likelihood:
Reduced
Potential
impact:
Medium/Low
Effect:
Costs,
sales and
profitability
Principal Risk: CUSTOMER CONCENTRATION
Business Risk
Mitigation:
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 continued to
diversify revenues in 2018 with the adoption of its VCSEL
technology in the mass market. The wireless sector which
accounted for 62.5% of IQE’s revenue in 2018, continues to
contribute a significant proportion of Group revenues, but
will be reduced as IQE revenues diversify into photonics and
infrared.
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. Great progress has been made in 2018
with a large number of new engagements for VCSELs, some
of which have already reached mass production.
The wireless sector 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.
Dependency
on a low
number of
customers
could result
in a significant
impact from
the loss of
share from a
customer.
The Group
has three
customers that
individually
account for
more than
10% of Group
sales.
(2017: three
customers
more than
10%)
Two Wireless
customers
accounted
for 58% of
Wireless
revenue in
2018.
One photonics
customers
accounted
for 37% of
photonics
revenue in
2018.
34
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Principal Risk: LEGAL COMPLIANCE
Business Risk
Mitigation:
Engagement of expert advisors.
Year on year
change in
likelihood:
Detailed internal control processes and procedures.
Unchanged
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.
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
35
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report 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. In 2018, we linked-
up with our prestigious cyber security partner, who is
supporting us with our ongoing enhancement plans
through 2019.
We are continuing with our successful cyber training
systems. 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.
In 2018, new modules were added and several modules
updated and replayed.
A risk framework with plans for the management,
mitigation and resolution of device failures is in place.
Year on year
change
in likelihood:
Unchanged
Potential
impact:
Medium
Effect:
Hardware and software systems have in-built resiliency
including redundant elements. More sophisticated
resiliency was introduced in 2018 and futher
improvements will be continued through 2019.
Costs, sales,
profitability and
reputational
damage
Data is appropriately stored and backed-up with IT
system recovery plans in place.
36
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Principal Risk: TAX COMPLIANCE
Business Risk
Mitigation:
The Group concluded a global assessment to assess the
risk of unidentified tax exposures in conjunction with an
independent global tax specialist during 2018. The global
risk assessment has not identified any material tax liabilities
or issues of significant non-compliance. The Group engages
global independent tax specialists on a proactive and
ongoing basis to manage tax compliance and tax strategy.
Failure to
comply with
tax regulations
and/or
operate in a
tax efficient
manner
resulting in tax
liabilities which
had not been
previously
anticipated.
Year on year
change
in likelihood:
Reduced
Potential
impact:
Medium/Low
Effect:
Financial
loss and
reputational
damage
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.
IQE has conducted a detailed analysis on the potential
disruption that could be caused by Brexit and the UK
leaving Europe in a “no deal” scenario. The financial
impact of World Trade Organisation tariffs has been
evaluated as being de minimis. Safety stock holding
of critical supply items have been increased for UK
operations to mitigate potential customs delays and
the cost to store such safety stocks is not material.
Currently, no licence is required to move our goods
within the EU. If the UK leaves the EU without a deal,
this will change. However, the UK Government has
set up a new Open General Export Licence (OGEL)
for the purpose of exporting dual use goods to EU
member States. This new OGEL, similar to the one
we use to export goods to the USA, has been created
for the “no-deal” eventuality. To mitigate the risk of a
no-deal Brexit, IQE (Europe) Limited and IQE Silicon
Compounds Limited applied for and have been granted
an OGEL for exporting dual use goods to EU member
States. The licence will come into force at 23:00 UK
time on 29 March 2019 if the UK leaves the EU without
a deal.
Whilst IQE does not believe that Brexit will have a
significant impact on its cashflow, it does have the
benefit of a $35m multi-currency revolving credit facility
provided by HSBC. The Facility has a three-year term
and is US dollar denominated, which mitigates the
risk of fluctuations in the value of sterling that may be
caused by Brexit.
IQE does not foresee any plausible scenarios where
Brexit will have a significant impact on the Company
or any of its subsidiaries’ ability to access workers with
requisite skills. Nor does it envisage any circumstances
in which a party might gain a competitive advantage
over IQE as a result of Brexit.
There remains some uncertainty regarding the
availability of funding for new research and
development proposals involving UK organisations.
However, 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.
37
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Section 172(1) Statement - Stakeholders
The Directors have given due regard to the matters
set out in section 172(1)(a) to (f) when performing
their duties under section 172 of the Companies Act.
They have considered the long-term consequences of
decisions, matters affecting the Company’s employees
and other stakeholder relationships, and the need to
act fairly between members of the Company.
In 2018, IQE has maintained very active dialogue with
a wide range of customers and suppliers and also
major end-use OEMs. Guidance from end customers
on future volume and technical requirements for
photonics applications has driven investment decisions
on capacity and also on metrology requirements critical
to maintaining position as supplier of choice for major
consumer applications.
Recognising that companies are run for the benefit of
their shareholders, but that the long-term success of
a business is dependent on maintaining relationships
with stakeholders, the Board continuously reviews
which relationships support the generation and
preservation of value in the Company. These
relationships include those with customers, suppliers,
employees, academic and research institutions,
industrial partners and public bodies.
Engagement with our Wireless customers’ customers is
more limited due to the preference of our customers
for us to act through them, not around them.
Nevertheless, we actively monitor our customers’
customers via their public data releases, analysts’
reports and applicable conferences. Feedback from
all sources is carefully weighted, verified and evaluated
internally with cross-referencing to other IQE Business
Units with like customers and markets.
The key relationships are those that are
essential to achieving IQE’s vision and strategy:
• IQE’s vision is to maintain and grow our
established position as the leading global
provider of advanced semiconductor
materials – the global “go to” compound
semiconductor materials specialist;
• to realise this vision requires the ability
to deliver “enabling technology”, which
meets the performance and price points
needed for adoption, and which can be
delivered reliably, on-time, every-time
with the ability to scale rapidly;
and to the effectiveness of its business model as
described in this Strategic Report above.
The Directors have directly engaged with these key
stakeholders or through senior representatives of the
Group - including those responsible for procurement,
planning, operations and quality who interact with
their counterparts at other organisations - who report
directly to the Directors with a view to understanding
the relevant issues through a number of methods.
These methods include:
• face-to-face meetings;
• attendance at industry conferences as
described further at page 15;
• regularly reading relevant publications,
journals and reports;
• workers council, town hall and Employee
Pensions and Benefits Governance
Committee (EPBGC) meetings as
described in this Strategic Report at page
28.
Other examples of decisions and strategies
that have been affected by regard to
stakeholders in 2018 include:
• considering the interests of shareholders
and employees in the closure of IQE’s site
in New Jersey, USA;
• consideration of culture as the basis of
decision making within the business has
underpinned the decision to undertake
the process of revisiting our vision and
strategy, redefining our values and
creating an overarching brand for our
people strategy as described further at
page 20;
• decisions concerning financial capital
allocation, including investment in R&D
and manufacturing capacity to ensure
an ability to generate and preserve value
over the longer term;
• consideration of employee benefits which
have resulted in the establishment of the
EPBGC and a change of pension provider;
• entering into a sub-lease of space at
IQE’s new Newport site to the Compound
Semiconductor Applications Catapult
with consideration to the Catapult’s
business plan and strategy, to the
Cardiff Capital Region City Deal (the
superior landlord at the Newport site)
and also the considerations relevant
the local population, Welsh Government
and UK Government for the growth
of an industry cluster in the region as
described further at page 13;
• working with various industry bodies
in the region to support a bid to the
Strength in Places fund led by UK
Research and Innovation to support the
growth of a compound semiconductors
cluster in the South Wales region.
38
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report In 2018, IQE’s Directors have also considered the need
to act fairly between members of the Company when
explaining to those of IQE’s major shareholders that
are loaning their stock the difficulty that such loaning
of stock creates for the Company. The Board has also
considered queries regarding customer concentration
and the competitive landscape that were raised by
shareholders at roadshows. For example, at a Capital
Markets Days held in London on 21 September 2018,
the Directors noted that shareholders were pleased
by IQE’s explanation of the competitive landscape for
VCSELs and that investors would like to receive such
detail and explanation for non-VCSEL markets. They
have sought to act upon this feedback in developing
investor presentations since then. These matters
are also considered further in the Principal Risks and
Uncertainties section of this Strategic Report at page
34 and more generally, the information gathered
through stakeholder engagement is fed into IQE’s risk
management processes.
39
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Operational review
2018 represented a year of transformation, consolidation and preparation to
position our business to maximise the opportunities ahead.
Transformation
From turnkey manufacturer to value added
innovator
IQE has a clearly demonstrable track-record in
successfully developing and commercialising
advanced semiconductor materials that enable
everyday innovations across a wide range of digital
electronic devices including new and emerging mobile
communications devices.
Our technology leadership and comprehensive product
portfolio coupled with our reputation for quality of
service and excellence in manufacturing are testament
to IQE’s position and consequently, our ability to
provide excellent long-term shareholder value.
There is little doubt that our products will continue to
transform the way we live, work, travel and spend our
leisure-time, but IQE has also transformed the way it
adds value to its customers.
During its formative years, IQE’s expertise was
focussed on process innovation which transformed
the Company into the world leader in the provision of
specialised outsourcing services to the semiconductor
industry. Under this model, our customers owned the
product intellectual property whilst IQE owned the
process know-how in how to achieve the customers’
specifications to exacting standards in a manufacturing
environment.
In recent years, IQE has been adding greater value that
is increasingly being embedded within our customers’
products. Our innovation in materials science has
enabled us to offer unique solutions that enhance our
customers’ products and our expertise ensures early
engagement in new product development processes.
The added value not only provides IQE with unique IP
across a broad product portfolio, but further integrates
our products and services deep within the supply
chain, creating significant barriers to entry to our
competitors.
Consolidation
Focus on high growth opportunities for cash-
generation
The IQE Group has established its global leadership
position through a combination of organic growth and
acquisitions which has resulted in a geographically
diverse manufacturing base.
Our product portfolio also spans a number of key
markets which is reflected across a number of market-
focussed business units.
Our multiple manufacturing facilities around the
world have served the Group well by providing
continuous manufacturing capabilities and de-risking
our customers supply chains, giving IQE a unique
competitive advantage. Our facilities, which all operate
24/7, also allow us to service our customers’ needs at a
regional level.
Transferring manufacturing operations between
manufacturing sites involves complex and lengthy
qualification processes but once fully established, the
multiple-site manufacturing capabilities cannot be
matched by our competitors and become effective
barriers to entry.
40
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report parking that will also support future expansion.
When fully occupied, the Newport facility will have the
capacity to house up to 100 high-volume production
tools comprising a mixture of platforms (MOCVD and
MBE). To put this into perspective, prior to the start
of the current expansion plan, the Group operated
around 100 legacy tools across its entire global
facilities, so the expansion when completed will create
almost three times the manufacturing capacity taking
into account the increased productivity of the new
high-volume tools.
The initial phase of construction at the Newport facility
is dedicated to photonics for a diverse range of sensor
applications.
In addition to the new flagship facility in Newport,
our expansion program also includes the installation
of additional wireless capacity in Hsinchu (Taiwan),
expansion of our gallium nitride (GaN) capacity
in Taunton (Massachusetts) as well as additional
capacity for our gallium antimonide (GaSb) and indium
antimonide (InSB) infrared production lines in Milton
Keynes.
2018 to January 2019 also saw the completion of the
migration of production of GaN from our Somerset,
New Jersey facility to our Taunton Massachusetts site,
a process requiring complex process and customer re-
qualifications whilst maintaining consistency of supply
to our customer base. The transfer was completed with
the closure of the New Jersey facility expected to result
in annual operating savings of $4M per annum from
2019.
A further consolidation during 2018 was the relocation
of research and development activities from Bath, UK
to our facility in Cardiff, Wales, UK.
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.
The operation of manufacturing facilities across
different jurisdictions also allows targeted deployment
of new and emerging technologies that could
be subject to import/export restrictions in some
territories, allowing the Group to engage in a wide
range of technological areas.
During the last two-years, great efforts have been
made to consolidate our research, development
and manufacturing activities enabling the transfer of
technologies and processes which in turn have led to
the closure of our activities in Bath, UK and Somerset,
New Jersey with activities being transferred to other
IQE facilities whilst maintaining consistency of supply
with our customer base.
In terms of our markets, we are also focussing on
our three primary sectors of wireless (connectivity,
5G), photonics (sensors, optical communications) and
infrared (high-end imaging, healthcare technologies).
The remaining three sectors of power (power
control and switching), solar (space PV, concentrated
PhotoVoltaics/CPV) and CMOS++ (advanced, next
generation Compound Semicoductor on Silicon
technologies) will be combined under an “emerging
technologies” umbrella to provide a focus on next-
generation applications, and allow an efficient route to
market.
Preparation
Stepping up a gear
The last two years have seen unprecedented
progress in the Group’s expansion of its high-
volume manufacturing capacity and capabilities. Our
investment in capacity expansion is clearly focussed on
servicing a number of new and emerging high-growth
markets.
By far the largest single expansion has been at our new
epi mega-foundry in Newport, Wales, UK which was
initiated by IQE in September 2017.
The 30,000m2 building was originally constructed by
the Welsh Government in 1998 to serve as a silicon
technology packaging and test centre for a major global
semiconductor company as part of a programme to
attract inward investment into the UK. The inward
investment project was never completed and the
building remained unoccupied until it was acquired
in September 2017 by the Cardiff Capital Region and
subsequently leased by IQE.
Since taking on the lease of the building as an empty
shell, IQE has completed the first phase of construction
of cleanrooms and services for up to 20 MOCVD tools,
of which, the first 10 tools have been installed and are
in various stages of commissioning and qualification.
In addition to the internal cleanrooms and supporting
services, the initial construction phase has included
external facilities for deliveries, storage, access and car
41
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report OUTLOOK
GLOSSARY OF TERMS
cREOTM ..................... Crystalline Rare Earth Oxide
DFB .............................. Distributed Feedback Laser
Epitaxy ..................... See page 4
GaAs ........................... Gallium arsenide
GaSb .......................... Gallium antimonide
GaN ............................. Gallium Nitride
InP................................. Indium phosphide
InSb ............................. Indium antimonide
MBE ............................. Molecular Beam Epitaxy
MOCVD ................... Metal Organic Chemical Vapour Deposition
NIL ................................ Nano Imprint Lithography
PQC ............................. Photonic Quasi Crystals
RF ................................... Radio Frequency
VCSEL ........................ Vertical Cavity Surface Emitting Laser
Year of opportunity
The Group’s technology and market leadership,
coupled with its strong pipeline of high growth
opportunities positions it uniquely to capitalize on its
high-growth potential and deliver margin expansion,
improving cash generation, increasing ROI and
EPS growth in the coming years built on the firm
foundations of technology and market leadership
combined with a growing pipeline of high growth
opportunities.
We fully expect the VCSEL wafer ramp to return
during 2019 with an existing major customer along
with additional demand from other qualified chip
manufacturers for new entrant OEMs in the fast-
developing 3D sensing VCSEL market.
The Group’s investment in expanding GaN capacity in
its facility in Taunton, Massachussets provides a strong
position for the upcoming wide ranging 5G deployment
of GaN solutions. This investment will be completed by
H1 2019.
The Group has also committed approximately £15m
to additional wireless capacity at its plant in Hsinchu,
Taiwan. This project will complete in H1 2019,
increasing capacity at the plant by 40%. With this
investment the Company will be able to avoid the costs
of converting and reconverting reactors from Wireless
to Photonics and back again which have totalled
approximately £3m in the last two years in costs and
lost opportunity and provide additional capacity for the
continued growth of the Group’s wireless business.
These investments will enable the Group to better
balance its production capabilities, provide capacity
to fulfil market growth expectations and reduce costs,
improving efficiency to underpin margin expansion.
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 KPIs are highlighted on page 45 of this Strategic
Report.
42
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report
Financial review
The Group reports financial performance in
accordance with International Financial Reporting
Standards adopted by the European Union (‘IFRS’)
and provides disclosure of additional alternative non
IFRS GAAP performance measures to provide further
understanding of financial performance. Details of
the alternative performance measures used by the
Group including a reconciliation to reported IFRS GAAP
performance measures is set out in note 5 to the
financial statements.
Consolidated revenues were up 1% to £156.3m (2017:
£154.6m) which has been achieved with a similar
manufacturing capacity compared to 2017, without the
recognition of any license income (2017: £1.9m) and
against a currency headwind of 4%.
Wireless continues to represent the largest proportion
of the Group’s revenue accounting for 63% (2017: 60%)
of total wafer sales with Photonics representing 28%
(2017: 31%), Infrared representing 8% (2017: 8%) and
CMOSS++ representing 1% (2017: 1%).
Wireless wafer revenues were up 7% to £97.8m
(2017: £91.7m). Wireless demand, especially for
GaN products, has been strong throughout the year
and additional capacity has been made available to
address GaAs demand, including the replenishment of
inventory channels in the first half of the year that were
depleted during 2017 as manufacturing capacity was
switched to photonics.
Photonics wafer revenues were down 8% to £43.8m
(2017: £47.7m). Photonics demand, especially for
VCSEL products was adversely impacted in the first
half of the year as excess inventory in the downstream
supply chain took longer than expected to be
consumed whilst the sudden decline in short term
demand for VCSEL wafers in the final quarter of the
year also adversely impact sales and volumes. Despite
the decline in revenue year on year the Group has
made significant progress to strengthen its position
in the VSCEL market with more than 25 engagements
with VCSEL chip companies at varying stages of product
development, qualification and production.
Infrared wafer revenues were up 10% to £13.1m (2017:
£12.0m). Infrared demand, especially for defence
applications has remained strong whilst successful
progress continues to be made in broadening
customer engagements into product development for
mass market consumer applications where continued
growth opportunities exist.
Gross profit declined from £38.8m to £37.5m. Adjusted
gross profit, which excludes the charge for share
based payments, decreased from £43.8m to £36.8m.
Excluding license income, which has a 100% margin,
the adjusted gross margin on wafer sales declined from
27.5% to 23.5% reflecting a shift in mix from higher
margin photonics sales to lower margin wireless sales.
Other income increased from £nil to £1.1m. The
increase in other income relates to the net insurance
proceeds received following the death of the Chief
Financial Officer, Phillip Rasmussen, and the income
has been excluded from the adjusted profit measures
in 2018 as the income did not relate to underlying
trading.
Selling, general and administrative (‘SG&A’) expenses
increased from £21.6m to £29.9m. Adjusted SG&A,
which excludes charges for share based payments,
amortisation of acquired intangibles, restructuring
costs, onerous property leases and patent dispute
legal costs increased from £17.3m to £20.7m reflecting
investment for growth alongside the Group’s capital
expansion programme.
Restructuring costs totalling £3.3m relate to the closure
of the Group’s manufacturing facility in New Jersey, USA
and the associated transfer of the trade and assets to
the Group’s manufacturing facility in Massachusetts
as part of the Group’s consolidation and expansion
of GaN capacity at the Massachusetts site. The
consolidation of GaN capacity at the Massachusetts site
is expected to deliver annual cost savings of c.£3.0m.
Onerous property lease costs totalling £4.4m relate
to the extension of the onerous lease at the Group’s
Singapore manufacturing facility to the end of the lease
in 2022 whilst legal costs relate to costs incurred in
respect of a patent dispute defence.
43
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Operating profit decreased from £17.2m to £8.7m.
Reflecting the adjustments noted above, adjusted
operating profit decreased from £26.5m to £16.0m.
The segmental analysis in note 4 reflects the adjusted
operating margins for the primary segments (before
central corporate support costs). Wireless adjusted
operating margins declined from c.15% to c.12%,
partially reflecting costs associated with switching
capacity from Photonics to Wireless during the year.
The decline in adjusted Photonics operating margins
from c.38% to c.26% reflects the decline in volume and
a focus on lower margin customer development work
as the Group has sought to strengthen its position in
the VCSEL market by engaging with all the major VCSEL
chip companies. Infrared margins have remain robust
at c.26% (2017: 27%) as the segment continues to
grow.
Share of losses in joint ventures (2018: £2.0m, 2017:
£nil) reflects payments made on behalf of the Group’s
joint venture, CSDC, during a period when CSDC
has required funding following a significant (£6.0m)
reduction in revenues in 2018 which has coincided with
increased investment in new customer engagements.
New engagements include twelve Chinese customers
for fifteen separate product qualifications which CSDC
expects to ramp into mass production.
Finance costs decreased from £2.1m to £0.1m of
income following the equity fund raising in 2017
and the subsequent repayment of the Group’s bank
borrowings. Adjusted finance costs, which exclude
imputed interest associated with the discounting, are
negligible at £0.1m (2017: £2.0m).
The charge for taxation increased from £0.4m
to £5.6m. Adjusted tax, which excludes the tax
affect associated with the alternative performance
measure adjustments was £2.7m (2017: credit
£0.4m) at an effective underlying tax rate of 17%. The
adjusted tax charge reflects deferred tax associated
with accelerated capital allowances in excess of
depreciation, reflecting the on-going significant capital
investment in the business partially offset by the
recognition of certain US tax losses. The tax charge
on adjusted items of £2.8m and the associated high
effective tax rate principally reflects the impact of
the effective tax rate on the share based payment
charge. The effective tax rate on the share based
payment charge reflects a deferred tax charge in
relation to a reduction in future corporation tax
deductions associated with the decrease in share
price and a reduction in the number of options where
performance criteria are expected to be achieved. The
cash payment of taxes decreased from £5.8m to £0.7m
due to the settlement in 2017 of US taxes relating to
prior years. 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 increased from £28.2m in 2017 to
£42.4m in 2018 as the Group has continued with
a significant investment program across its global
operations. Capital expenditure has increased from
£11.3m to £30.4m as the Group has focused on
capacity expansion with the construction of a new
mega epi foundry in Newport, which will be dedicated
to photonics applications, installation of additional
wireless capacity in Hsinchu, expansion of GaN
capacity in Massachusetts and additional capacity for
infrared production in Milton Keynes. Investment has
continued in technology and intellectual property with
cash expenditure totalling £12.0m (2017: £16.9m) and
share based payments for the purchase of the cREO
technology and intellectual property portfolio totalling
£3.5m (2017:£nil).
44
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report KPIs (Dashboard)
Revenue
£132.7m
£154.6m
£156.3m
Adjusted operating profit
Net Cash flow from operations before
£26.5m
£22.1m
adjustments
£31.1m
£112.0m
£114.0m
£17.6m
£19.0m
£16.0m
£19.6m
£22.6m
£24.3m
£17.0m
FY14
FY15
FY16
FY17
FY18
FY14
FY15
FY16
FY17
FY18
FY14
FY15
FY16
FY17
FY18
Adjusted Diluted EPS
Leverage
Gearing
3.38p
2.89p
2.24p
2,45p
£31.3m
£23.2m
£39.5m
1.63p
£20.6m
£17.1m
£154.6m
£156.3m
30.6%
22.1%
17.6%
FY14
FY15
FY16
FY17
FY18
(£20.8m)
(£45.6m)
(7.3%)
(18.8%)
FY14
FY15
FY16
FY17
FY18
FY14
FY15
FY16
FY17
FY18
Deferred consideration
Net Debt /cash
45
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Going concern
After making enquiries and considering the available
resources, the financial forecasts together with
available cash and committed borrowing facilities to
enable them to consider the future prospects of the
Group, 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 2021,
taking account of the Group’s current position and the
potential impact of the principal risks and uncertainties
described in the Strategic Report at page 28.
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 2021 is an appropriate period
over which to provide its viability statement as it
reflects a 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.
As explained above, the market in compound
semiconductors is growing and there is little doubt
that it will continue to do so for the foreseeable future.
To ensure IQE continues to be well positioned to
exploit this growing market in the longer-term, IQE
has developed a technology roadmap and continues
to invest in research and development. We have also
made strategic investments to provide additional
manufacturing capacity at sites in the UK, US and Asia
and space for further expansion at our site in Newport,
South Wales. Further, we have recently agreed a
three-year $35m multi-currency revolving credit facility
provided by HSBC to ensure IQE has plenty of liquidity
to make strategic investments as may be required to
exploit opportunities that arise.
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 2021.
This Strategic Report is approved by the Board of
Directors and signed on its behalf by:
Dr Godfrey H H Ainsworth
Executive Chairman, IQE plc
20 March 2019
46
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Strategic Report Directors’ Report
The directors present their annual report and the audited consolidated financial
statements for the year ended 31 December 2018.
In accordance with section 414C(11) of the Companies Act, the Company has chosen to include in the Company’s
Strategic Report, certain information which would otherwise be required by Schedule 7 of the ‘Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations 2008’ to be contained in the Director’s Report.
Cross references to such information in the Strategic Report are included below.
Dividends
The directors do not recommend the payment of a
dividend (2017: £nil).
Directors
The directors in office at 31 December 2018 and
throughout the year and their beneficial interests in
the company’s issued ordinary share capital and share
options are set out in the remuneration report on
pages 77 to 78.
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:
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.
Those branches of the Group outside of the United
Kingdom are described in the Strategic Report at page
8.
Business review
A review of the Group’s trading during the year and its
position at the year-end is provided on pages 43 to 45
and 54 to 56. The review includes key performance
indicators as detailed in the Five Year Financial
Summary. The principal risks and uncertainties facing
the Group are set out on pages 28 to 37. The future
outlook for the Group is set out on pages 46. Details
of any important events and likely future developments
affecting the Company and subsidiaries since the end
of the financial year are also included in the Strategic
Report.
48
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Directors Report Shareholder / Beneficial owner
Shares
% IC
OppenheimerFunds
124,659,406
16.03
T Rowe Price International
Hargreaves Lansdown Asset Mgt
T Rowe Price
Schroder Investment Mgt
Interactive Investor
Barclays Wealth
Dr Andrew W Nelson
71,687,223
53,820,842
34,631,685
33,341,562
31,293,638
31,269,975
28,459,218
9.22
6.92
4.45
4.29
4.02
4.02
3.66
Source: EQUINITI Investor Analytics
IQE has not acquired any of its own shares during 2018.
Research and development
The Group incurred costs in respect of research and development during
the year of £11,202,000 (2017: £17,011,000) of which £10,559,000 (2017:
£15,434,000) has been capitalised in accordance with IAS 38 (“Intangible assets”).
The remaining research and development costs totaling £643,000 (2017:
£1,577,000) have been charged to the income statement, net of grant funding of
£617,000 (2017: £1,507,000).
Payment terms
The Group seeks to agree favourable credit terms with its suppliers where
possible, and adhere to the agreed terms. The Group’s average number of days’
purchases outstanding in respect of trade creditors at 31 December 2018 was
82 days (2017: 90 days).
Employment policies
A review of the Group’s employment policies is provided on pages 18 to 22.
Principal risks and uncertainties
Details of the principal risks and uncertainties impacting the Group have been
included in the Strategic Report on pages 28 to 37.
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.
Provision of information to auditors
As 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.
Approved by the Board of Directors and signed on behalf by:
Dr Godfrey H H Ainsworth
Executive Chairman, IQE plc
20 March 2019
49
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Directors Report Governance
Statement of Compliance with the UK Corporate Governance Code
The Board of Directors believes in high standards of corporate governance and is accountable to shareholders for
the Group’s performance in this area. Furthermore, IQE is a company trading on AIM, a market operated by The
London Stock Exchange plc, and since September 2018, the AIM rules expressly require companies to recognise and
apply a corporate governance code of practice.
For many years, the Board of Directors has chosen to
apply the UK Corporate Governance Code (the “Code”)
and to provide corporate governance disclosures
similar to those that would be required of a premium-
listed company. The Group continued to apply the
April 2016 edition of the Code during 2018 and shall
apply the 2018 edition of the Code in respect of its
financial year ending 31 December 2019. Each edition
of the Code is available on the website of the Financial
Reporting Council (FRC) at: www.frc.org.uk.
Disclosure requirements arising from changes to
the Code will not take effect until 31 December 2019
annual reports. However, in order to help investors
and stakeholders understand the progress being made
by the Board to implement some of the changes, this
statement addresses the additional requirements set
out in the new Code. This statement is also structured
according to the five sections of the updated Code,
namely: Board Leadership and Company Purpose;
Division of Responsibilities; Composition, Succession
& Evaluation; Audit, Risk and Internal Control; and
Remuneration.
The Company is a smaller company for the purposes of
the Code, and as such, certain provisions of the Code
either do not apply to the Company or are judged to
be disproportionate or less relevant in its case. Where
the Company does not comply with any specific code
provision then this is highlighted and explained in this
statement below.
50
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance • The performance of the Directors is
assessed on an ongoing basis. For
example, the Chief Executive reviews
the performance of the Executive
Directors on a periodic basis and reports
to the Remuneration Committee at
least annually. However, IQE has not
carried out a formal and rigorous
annual evaluation of the performance
of the Board, its Committees, Chair
and individual Directors to the extent
as required by the Code. It is intended
that a formal review process will be
implemented during 2019 and thereafter,
but that this will probably not require
external facilitation. Companies outside
the FTSE 350 such as IQE are encouraged,
but not required, to consider the use of
externally facilitated board evaluations.
• The Remuneration Committee has
responsibility for determining the
policy and setting remuneration for the
Executive Directors and the Chairman.
It also has responsibility to recommend
and monitor the level and structure of
remuneration for senior management.
However, the Remuneration Committee
does not currently determine the policy
and set the remuneration for senior
management and the Company Secretary
as required by the Code.
IQE has identified the following main areas of
non- compliance with the new Code:
• Whilst the Board is satisfied that IQE’s
Chairman, Dr Godfrey Ainsworth, has
continued to demonstrate objective
judgement throughout his tenure, he is
not deemed independent by virtue of his
length of service and because, following
the tragic death of IQE’s Chief Financial
Officer, Phillip Rasmussen, he became
Executive Chairman and Interim CFO in
April 2018. Mr Phil Smith, who joined
the IQE Board in December 2016, will be
independent as defined by Provision 10
of the new Code when he becomes Non-
Executive Chairman on the retirement of
Dr Ainsworth in 2019.
• The Company’s Articles of Association
do not provide that Directors are subject
to annual re-election as prescribed by
the new Code. The Board has previously
considered the FRC’s guidance to
companies outside the FTSE 350 to
consider the annual re-election of all
Directors, and considered that this
would be overly burdensome for the
nature of the Group. Now that the
new Code removes the exemption
for small companies, the Board will
give due consideration to this when
considering matters to be put to a vote
by shareholders at the next AGM. It
will also consider the requirement of
the new Code to set out in the papers
accompanying the resolution to elect
each Director the specific reasons why
their contribution is, and continues to be,
important to the company’s long-term
sustainable success.
• IQE does not currently maintain a
succession plan for the company
secretary or all management immediately
below Board level, but IQE is working
to develop such plans based on merit
and objective criteria (including the
promotion of diversity of gender, social
and ethnic backgrounds, cognitive and
personal strengths) as required by the
new Code. As part of its consideration
of developed succession plans, the
Nominations Committee will consider
the linkage of its diversity objectives
with company strategy and the gender
balance of those in senior management
and their direct reports.
51
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Board Leadership and Company Purpose
The Group is headed by an effective and
entrepreneurial Board that is collectively responsible
for the long-term sustainable success of the Group,
generating value for shareholders and contributing to
wider society.
The Strategic Report on pages 4 to 46 sets out
how the Board has recently engaged with:
• opportunities and risks to the future
success of the business;
• the sustainability of the Group’s business
model;
• delivery of the Group’s strategy;
• its aims of creating shareholder value
and contributing to wider society.
All directors act with integrity, lead by example
and promote the desired culture of innovation,
collaboration, valuing people, integrity, accountability
and constant improvement. As explained at pages
18 to 22 of the Strategic Report, workforce policies
and procedures - including in relation to investing in
and rewarding its workforce - are consistent with the
company’s culture and values and support its long
term sustainable success. As described on page 22}
of the Strategic Report, the Board actively engages
with the workforce including through its Employee
Benefits and Pensions Governance Committee,
Workers Counsels and ‘town hall’ meetings. Through
this activity and engagement, the Board is satisfied
that the Group’s purpose, values and strategy (set
out in the Strategic Report) are aligned with a culture
of innovation, collaboration, valuing people, integrity,
accountability and constant improvement. The Board
has also inputted to IQE’s culture review project ‘EPIC’
(described at page 20 and 21 of the Strategic Report)
and will provide ongoing governance as that project
progresses from its review of the defined values to its
‘values in action’ strategy.
Through its budget processes and consideration of
strategic projects, each of which include presentations
to the Board from leaders of business units and
functions, the Board establishes the Group’s objectives,
ensures that necessary resources are in place to meet
those objectives and measures performance against
those objectives. These are complimented by the
Audit & Risk Committee’s responsibility to consider
risk management as set out in the Strategic Report at
pages 20 to 27.
As required under its Terms of Reference and the Code
applicable to 31 December 2018, the Audit and Risk
Committee recently reviewed and refreshed a policy
on whistleblowing that is applicable across the Group’s
global operations. This sets out the means by which
the workforce should raise concerns and how they may
do so in confidence and if they wish, anonymously.
Further information is provided at page 20 of the
Strategic Report. Pursuant to the requirements of the
new Code, moving forward, the full Board shall not
only consider reports arising from its operation, but
will also routinely review the arrangements in place for
the proportionate and independent investigation and
follow-up action as set out in the whistleblowing policy.
The Board regards regular communications with
shareholders as one of its key responsibilities. The
Chief Financial Officer, Chief Executive Officer and
Chairman meet 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 aligned and well
understood.
The Chief Executive Officer and Chairman keep
the Board fully informed of any significant matters
discussed with shareholders and of shareholders’
views. Furthermore, all members of the Board receive
copies of any analysts’ reports of which the Company is
made aware.
The Company employs an Investor Relations Manager
who supports the Directors 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 Committee Chairs engage with shareholders
on significant matters related to their areas of
responsibility at AGMs and other shareholder meetings
as required.
The Investor Relations Manager also maintains the
Group’s website, which provides details of the Group’s
business including its strategy, technologies, operations
and products. The website has a separate investor
relations section that provides news about the Group,
share price information, and financial reports including
the annual and interim reports. Hard copies of annual
reports are also available by request. The website can
be found at www.iqep.com.
The Company will advise shareholders attending the
AGM of the number of proxy votes lodged in respect
of each resolution, split between ‘For’, ‘Against’, ‘at the
Chairman’s discretion’ and ‘abstentions’. These are
advised after the resolutions have been dealt with
on a show of hands, providing that a poll has not
been called for or is required. In accordance with the
recommendations of the new Code, when announcing
results of votes where 20% or more have been cast
against the board recommendations for a resolution,
the Company will explain what actions it intends to
take to consult shareholders in order to understand
the reasons behind the result. An update on the views
received from shareholders and actions taken will
then be published no later than six months after the
shareholder meeting. A final summary on what impact
the feedback has had on the decisions the board has
taken and any actions or resolutions now proposed
will be included in the annual report and if applicable,
in the explanatory notes to the resolutions at the next
shareholder meeting.
52
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance The Chairman is available to meet with major
institutional shareholders as needed throughout the
year to consult on corporate governance matters
and performance against the strategy. The Senior
Independent Director is also available to consult on
governance matters and to provide an independent
view of the position and prospects of the Group.
The Non-Executive Directors, having considered the
Code, are of the view that this approach to shareholder
communication remains appropriate for the Group.
However, should shareholders have concerns
which they feel cannot be resolved through normal
shareholder meetings, the Senior Independent Director
and the remaining Non-Executive Directors may be
contacted through the Company Secretary.
As described further in the Section 172(1) Statement
on pages 38 and 39, the interests of the company’s
other key stakeholders have also been considered
in recent Board discussions and has influenced the
Board’s decision-making. The Board continuously
reviews the effectiveness of its engagement with
stakeholders and the mechanisms that facilitate such
engagement.
Under Article 117 of IQE Plc’s Articles of Association,
if a Director or a person closely connected to them
has an interest in a transaction or arrangement of the
Company, such Director is required to declare such
interest in accordance with Company Law. Save in
certain defined circumstances described in Article 118,
a Director should not be counted for quorum or voting
purposes in respect of any transaction or arrangement
where they have an interest. The Directors give due
consideration to any circumstances in which a potential
conflict of interest may arise or may be perceived
to arise, including in connection with significant
shareholdings and ensure that the influence of third
parties does not compromise or override independent
judgement. For example, in the context of discussions
concerning IQE’s joint venture with Cardiff University in
2018, Sir Derek Jones noted he has provided services
to Cardiff University. Upon the raising of this, there
was no concern amongst the Directors that there was a
conflict of interest.
Where Directors have any concerns about the
operation of the Board or the management of the
company that cannot be resolved, their concerns
are recorded in the minutes of Board Meetings. On
resignation, a Non-Executive director should provide a
written statement to the Chairman for circulation to the
Board, if they have any such concerns.
Division of Responsibilities
The Board comprises the Executive Chairman, Dr
Godfrey Ainsworth, the President and Chief Executive
Officer, Dr Drew Nelson, two other Executive Directors
and three independent Non-Executive Directors.
Throughout the year ending 31 December 2018
and since, at least half of the Board, excluding the
Chairman, have been Non-Executive Directors.
The Board considers that the three Non-Executive
Directors, 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. Sir Derek Jones most recently
joined the board as Non-Executive Director on 29
November 2017. This followed the appointment of Mr
Phil Smith on 19 December 2016.
As explained further in the Nominations Committee
Report at page 63, the Board intends to appoint an
additional independent Non-Executive Director during
2019. Such an appointment will ensure that, after Mr
Phil Smith becomes Chairman on the retirement of Dr
Ainsworth, half of the Board, excluding the Chair, will be
non-executive directors whom the Board considers to
be independent.
The Board recognises the special position and role of
the Chairman under the Code, and it 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. The Chief Executive
manages the Group and has the prime role, with
the assistance of the Board, of developing and
implementing business strategy.
The Board meets regularly through the year - at
least six times and additionally on an ad hoc basis
as is required to discharge its duties effectively. It 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. The number of meetings of the Board,
Committees and individual attendance by Directors is
set out in the annual report each year (see page 58.
Under the direction of the Chairman, the Company
Secretary facilitates good information flows within
the Board and its Committees and between senior
management and Non-Executive Directors. The
Company Secretary is also responsible for advising
the Board through the Chairman on all governance
matters. 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. Pursuant to Article 134 of IQE Plc’s Articles of
Association, both the appointment and removal of the
Company Secretary is a matter for the whole board.
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.
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, reports and accounts and certain strategic
and management issues.
53
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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.
The Non-Executive Directors scrutinise and hold
to account the performance of management
and individual executive directors against agreed
performance objectives. To facilitate this, the Chairman
and Senior Independent Director ensure that meetings
of Non-Executive Directors without the Executive
Directors present are held. These include meetings
of the Nominations, Remuneration and Audit & Risk
Committees as described further below.
One of the roles of the Non-Executive Directors is to
undertake detailed examination and discussion of
the strategies proposed by the Executive Directors
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 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 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.
The Non-Executive Directors have not formally
met without the Chairman present to appraise the
Chairman’s performance. However, this was not
specifically required under the Code as applicable in
the year ending 31 December 2018. Furthermore, the
Non-Executive Directors do not consider that a formal
appraisal is required given the Chairman is due to
retire in 2019.
When making new appointments, the Board takes
into account other demands on Directors’ time and
significant appointments are required to be disclosed
with an indication of the time involved. Pursuant to the
new Code, since 1 January 2019, additional external
appointments should not be undertaken without prior
approval of the Board, with the reasons for permitting
significant appointments explained in the annual
report. No full time Executive Director has more than
one non-executive directorship in a FTSE 100 company
or other significant appointment.
The Board has four sub committees, the Executive
Committee, the Remuneration Committee, the
Nominations Committee and the Audit & Risk
Committee. The Board has delegated special
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 & Risk Committee
The Audit & Risk Committee consists of the
Non-Executive Directors, Sir Derek Jones, Mr
Phil Smith and Sir David Grant. The Committee
meets at least twice a year under the
chairmanship of Sir Derek Jones.
The Audit & Risk Committee’s main duties
are described on page 56. They 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
& Risk 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.
A report on the activity of the Audit & Risk
Committee during 2018 is included on pages
60 to 62.
(c) Remuneration Committee
The Remuneration Committee consists of
the three non-executive directors. Mr Phil
Smith and Sir Derek Jones, who 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 is responsible for setting
salaries, incentives and other benefit arrangements
54
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Pursuant to its Terms of Reference (available from
the Company Secretary and at www.iqep.com),
the Nominations Committee is required to give full
consideration to succession planning for Directors and
other senior executives in the course of its work, taking
into account the challenges and opportunities facing
the company, and the skills and expertise needed on
the Board in the future.
The Nominations Committee meets regularly during
the year and is instrumental in determining the
requirement and process for the identification
and subsequent appointment of Directors. 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 terms and conditions of appointment of
the Non-Executive Directors are available for inspection
upon request to the Company Secretary.
The Nominations Committee is responsible for the
Board’s policy on diversity. The Board recognises the
benefits of diversity. Diversity of gender, social and
ethnic backgrounds, cognitive and personal strengths,
skills, international and industry experience and
knowledge 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.
IQE and its Nominations Committee do not usually use
open advertising and/or an external search consultancy
for the appointment of the Chair and Non-Executive
Directors, but does so when appropriate and in such
event will include a statement about any connection it
has with Company or individual Directors in the annual
report.
An account of the activities of the Nominations
Committee during the year ending 31 December 2018
is included in the Nominations Committee Report at
page 63.
By way of induction to the Group, new Directors
meet with the existing members of the Board,
senior managers and business function leaders as
appropriate and at least annually all Directors receive
presentations from senior managers and business
function leaders and receive professional independent
training and advice as necessary from time to time at
the Company’s expense.
of Executive Directors. It scrutinises the performance
of individual Executive Directors against agreed
performance objectives.
A report on the activity of the Remuneration
Committee during 2018 as well as the Company’s
Remuneration Policy is included on pages 63 to 78.
(d) Nominations Committee
The Nominations Committee consists of the three
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, which has a prime role in appointing
and removing executive directors.
The Chairman and Chief Executive attend meetings of
the Nomination Committee by invitation.
A report on the activity of the Nominations Committee
during 2018 is included on page 63.
Terms of reference for the Remuneration Committee,
Nominations Committee and Audit & Risk Committee
are available from the Company Secretary or on the
corporate website (www.iqep.com).
Composition, Succession and Evaluation
Rules concerning the appointment and replacement
of Directors and Secretaries of the Company are
contained in the Articles of Association (“Articles”).
Amendments to the Articles must be approved by a
special resolution of the 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 Articles provide that the Company Secretary shall
be appointed by the Directors for such term, at such
remuneration and upon such conditions as they may
think fit and any Company Secretary so appointed
may be removed by them. If thought fit, two or
more persons may be appointed as joint company
secretaries or an assistant or deputy company
secretary may be appointed by the Directors. Any
person so appointed by the Directors may also be
removed by the Directors.
The Nominations Committee (which consists of the
three Non-Executive Directors) reviews the Board
structure, leads the process for Board appointments
and makes recommendations to the Board, including
on succession planning. Due consideration is given to
the length of service of the Board as a whole and the
need to ensure its membership is regularly refreshed.
All Directors are appointed by the Board following a
formal, rigorous and transparent selection process
and recommendation by the Nominations Committee.
Board appointments are made on merit, against
criteria identified by the Nominations Committee
having regard to the benefits of diversity on the Board,
including gender.
55
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Audit, Risk and Internal Control
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 & Risk 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 accords with the
Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting.
The Audit & Risk Committee consists of the three
independent Non-Executive Directors named above,
whose biographies are included at pages 80 and
81. The Board is satisfied that the Audit Committee
has competence relevant to the sector in which the
company operates. The Nominations Committee is
working to recruit an additional Non-Executive Director
with recent and relevant financial experience who will
take over the Chair of the Audit & Risk Committee,
which has been chaired by Sir Derek Jones since April
2018 when Dr Ainsworth became Executive Chairman
and Interim CFO immediately following the death of
Philip Rasmussen and resigned his Chairmanship of the
Committee.
The main responsibilities of the Audit & Risk
Committee are as follows:
• reviewing the effectiveness of the
Company’s financial reporting, internal
control policies and procedures for the
identification, assessment and reporting
of risk;
• reviewing significant financial reporting
issues and judgements;
• monitoring the integrity of the
Company’s financial statements and any
formal announcements relating to the
company’s financial performance;
• 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;
• conducting the tender process and
making recommendations to the board,
about the appointment, reappointment
and removal of the external auditor, and
approving the remuneration and terms
of engagement of the external auditor;
• reviewing and monitoring the external
auditor’s independence and objectivity;
• reviewing the effectiveness of the
external audit process, taking into
consideration relevant UK professional
and regulatory requirements;
• developing and implementing policy
on the engagement of the external
auditor to supply non-audit services,
ensuring there is prior approval of non-
audit services, considering the impact
this may have on independence, taking
into account the relevant regulations
and ethical guidance in this regard,
and reporting to the board on any
improvement or action required; and
• reporting to the board on how it has
discharged its responsibilities.
56
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance The Audit & Risk Committee meets regularly during
the year. The meetings are also attended by 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 & Risk Committee to discuss issues with the
external auditors without management being present.
The Board reviews the effectiveness of the Group’s
risk management and internal controls on a
continuing basis and has recently extended the
Terms of Reference of the Audit Committee so that
the Committee now has extended oversight for such
matters. Terms of reference for the Audit & Risk
Committee are available from the Company Secretary
or on the corporate website (www.iqep.com).
The Work of the Audit & Risk Committee is set out in
the Audit & Risk Committee Report below on pages
60 to 62. The Board and its Audit & Risk Committee’s
recent consideration of risk management and internal
controls is described further in the Strategic Report at
page 62.
A statement regarding the Director’s responsibility for
preparing the annual report is set out in the Board
Report below on pages 58 and 59.
The Board’s robust assessment of the Company’s
emerging and principal risks and a description of the
procedures it has in place to identify and manage risks
is set out in the Strategic Report on pages 26 to 37.
The Board’s most recent considerations of the
adoption of the going concern basis of accounting and
its assessment of the long term viability of the business
are set in the Strategic Report at page 46.
Remuneration
The Group’s policy and practices on Directors’
remuneration and the activities of the Remuneration
Committee are described in the Director’s
Remuneration Report on pages 63 to 78.
The Executive Directors have responsibility for
determining the remuneration of senior management
and the company secretary in accordance with policies
developed through consultation with the Group’s
Human Resources advisors and Remuneration
Committee. As with all employees, senior management
are eligible to receive share option awards and to an
annual bonus (each subject to personal as well as
Group financial performance). Further information in
relation to IQE’s Bonus Plan and Share Option Plan are
provided at pages 72 to 78.
Directors exercise independent judgement and
discretion when authorising remuneration outcomes,
taking account of Company and individual performance
as well as wider circumstances. Directors do not
participate in decisions concerning their own
remuneration.
57
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Board Report
Contribution of the Directors
The Board’s goal is to ensure that its membership and the membership of its committees should have the
appropriate combination of skills, experience and knowledge (including experience and knowledge of IQE’s business).
Biographies of the Directors are set out on pages 80 to 81 and on IQE’s website (www.iqep.com). These show the
range of business and financial experience upon which the Board is able to call and why each director’s contribution
is and continues to be important to the company’s long-term sustainable success.
The number of meetings held during 2018 by the Board, the Audit & Risk 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 2018
Attendance
Executive
Dr A W Nelson
Mr P J Rasmussen1
Dr H R Williams
Dr G H H Ainsworth2
Non-Executive
Sir D Grant
Mr P Smith
Sir D Jones
Board
Audit & Risk
Committee
Remuneration
Committee
Nominations
Committee
10
10
3
10
10
10
9
10
4
3
2
N/A
N/A
N/A
1
4
3
4
N/A
N/A
N/A
1
3
3
3
N/A
N/A
N/A
N/A
2
2
2
1 Philip Rasmussen was an Executive Director during the year until his death on 1 April 2018.
2 Dr Godfrey Ainsworth resigned from Committees when he became an Executive Director on 2 April 2018.
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.
Statement of Directors’ responsibilities in respect of the financial statements
The Directors are responsible for preparing the Annual Report 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. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial
statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs
as adopted by the EU) and applicable law and they have elected to prepare the parent Company financial statements
on the same basis.
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.
58
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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.
The Directors have decided to prepare voluntarily a
Directors’ Remuneration Report in accordance with
Schedule 8 to The Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations
2008 made under the Companies Act 2006, as if
those requirements applied to the company. The
Directors have also decided to prepare voluntarily a
Corporate Governance Statement as if the company
were required to comply with the Listing Rules and
the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority in relation to those
matters.
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.
We consider the annual report and accounts, taken
as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to
assess the Group’s position and performance, business
model and strategy.
Sir David Grant CBE
Signed on behalf of the Board
20 March 2019
59
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Audit & Risk Committee Report
An annual rolling agenda is used to ensure that all
matters within the Audit & Risk Committee’s Terms of
Reference are appropriately covered during the year.
The Committee considers that it has discharged its
responsibilities as set out in its Terms of Reference to
the extent appropriate during the year.
Through consideration of reports from, and
meetings with, management and the external
auditors, the Committee has reviewed and
determined the following:
• judgemental areas and whether revenue
recognition and the provisioning policies
have been applied consistently and the
level of provisions remains appropriate;
• whether the expected future cash flows
of the Group support the carrying value
of goodwill, and whether there are
any triggering events which suggest
any potential impairment of other
intangible assets including the valuation
of development intangibles and the
capitalisation of development costs;
• whether the presentation of the financial
statements, including the presentation
of adjusted performance measures, is
appropriate and balanced;
• whether the accounting for joint ventures
and any related disclosure in the financial
statements are appropriate.
Through consideration of reports by independent
tax specialists assessing the Group tax affairs in the
UK, the US, Taiwan and Singapore as appropriate,
and consideration of reports by and meetings
with management assessing current and deferred
tax accounting, the Committee has reviewed and
determined whether the provision for tax liabilities, and
the current and deferred tax accounting is appropriate.
The Committee has reviewed the resources available
to the Group, taking account of the Group’s trading
and cashflow forecast together with available funding
headroom to assess the appropriateness of the going
concern assumption.
At the request of the Board, the Committee also
considered whether the 2018 annual report was fair,
balanced and understandable and whether it provided
the necessary information for shareholders to assess
the Group’s performance, business model and strategy.
Matters the Committee considered in the
financial year ending 31 December 2018 also
included:
• accounting in respect of joint ventures;
• requests for information from and
responses to the Financial Reporting
Council (FRC) from July 2018 concerning
joint ventures, revenue recognition,
share based payments, capitalisation
of intangibles, impairment losses in the
parent company accounts and directors’
shareholdings, further to which the FRC
concluded that no changes to accounting
treatment in any of the areas noted
above is necessary, although the FRC
requested certain enhanced disclosure
which IQE has provided in its 2018
financial statements to assist investors in
their understanding1;
• change of tax advisors - Baker Tilly was
appointed to provide US federal and
state tax services following a competitive
tender process;
• the establishment of an Employees
Pensions & Benefits Governance
Committee ‘EPBGC’ with members who
were chosen by IQE staff to represent
the interests of the staff in all decisions
concerning employee benefits.
1The FRC notes that its review is based on IQE’s 2017 annual report
and accounts and does not benefit from detailed knowledge of our
business or an understanding of the underlying transactions entered
into. It is, however, conducted by staff of the FRC who have and
understanding of the relevant legal and accounting framework. The
FRC supports continuous improvement in the quality of corporate
reporting and recognises that those with more detailed knowledge of
our business, including the Audit Committee and auditors, may have
recommendations for future improvement, consideration of which the
FRC encourages. The FRC provides no assurance that the 2017 report
and accounts are correct in all material respects; the FRC’s role is not
to verify the information provided but to consider compliance with
reporting requirements. The FRC, its officers, employees and agents
accept no liability for reliance on them by the Company or any third
party, including but not limited to investors and shareholders.
External Auditors
The Audit & Risk 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 2017, the Audit & Risk Committee completed
a review of its external auditors and, further to the
recommendation of the Audit & Risk Committee,
the Board appointed KPMG LLP (“KPMG”) as its
new auditor in December 2017. KPMG replaced
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,
60
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance which confirmed that there were no matters which needed to be brought to the attention of the Company’s
members, creditors or directors.
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 any 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 & Risk Committee and the Senior Independent Director. The provision of external
audit and tax compliance are separated where possible. Tax advice is provided by independent advisors including
KPMG, EY, Mazars, Baker Tilly and Bevan & Buckland. The policy also establishes guidelines for the recruitment of
employees or former employees of the external auditor.
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 assoicates 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 PricewaterhouseCoopers LLP (Group auditors to December 2017)
2018
£'000
2017
£'000
-
-
-
-
-
-
-
-
11
5
-
16
2018
£'000
KPMG LLP (group auditors from December 2017)
Fees payable to the company's auditor and its assoicates 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)
*Includes fees payable for services engaged prior to the appointment as group auditors of £84,000
10
12
55
-
233
232
156
2017
£'000
120
10
-
104 *
-
234
Ernst and Young (auditors or MBE Technology Pte Limited)
- Subsidiary company's audit
- Tax services
Total Ernst and Young (auditors or MBE Technology Pte Limited)
Total
2018
£'000
8
4
12
2017
£'000
8
8
16
245
232
266
250
The Audit & Risk 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 auditors’ assessment of the key
risks and their intended areas of focus. This is agreed with the Committee to ensure that the scope and coverage of
audit work is appropriate. IQE’s management also provide the Committee with feedback on the effectiveness of the
audit and the quality of the audit firm and lead audit partner.
In addition, the Group’s auditors are required to make a formal report to the Audit & Risk Committee annually on
the safeguards that are in place to maintain their independence and the internal safeguards in place to ensure their
objectivity.
A resolution to reappoint KPMG will be proposed at the forthcoming Annual General Meeting.
61
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Not Peer
Reviewed
Internal Audit & Controls
The Audit & Risk Committee has reviewed the
effectiveness of the Group’s system of internal controls
and risk management activities bi-annually as part of
the half year and full year public reporting.
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.
This process remained in operation for the year under
review and as part of that process, management report
any material exceptions to the Audit & Risk Committee.
The Group does not have an independent internal
audit function, however the Group operates internal
audit on an ad hoc peer review basis, with a scope of
evaluating and testing the Group’s financial control
procedures. The Committee considers that this
remains appropriate for the size and geographical
spread of the Group.
In completing its review of the effectiveness of the
Group’s system of internal controls the Audit &
Risk Committee has taken account of any material
developments up to the date of the signing of the most
recent financial statements. In addition, recognition
is given to the external audit findings, which help to
inform the Audit & Risk Committee’s views of areas of
increased risk.
The key procedures that the Directors have
established with a view to providing effective
internal control include the following:
• a clearly defined organisational structure
and limits of authority;
• corporate policies and procedures for
financial reporting and control, project
appraisal, human resources, quality
control, health and safety, information
security and corporate governance;
• the preparation of annual budgets
and regular forecasts which require
approval from both the Group Executive
Committee and the Board;
• the monitoring of performance against
budget and forecasts and the reporting
of any variances in a timely manner to
the Board;
• regular review and self-assessment of
the risks to which the Group is exposed,
taking steps to monitor and mitigate
these wherever possible;
• where appropriate, taking out insurance
cover;
• approval by the Audit & Risk 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.
62
Directors’ Remuneration Report
Remuneration Committee 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 2018
for which we will be seeking shareholder approval at
the Annual General Meeting on 25 June 2019. 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. The report for 2017
remuneration was approved at the 2018 AGM with
99.94% voting in favour. This annual report for 2018
remuneration will be put to a shareholder vote on a
voluntary basis at the 2019 AGM.
Sir David Grant
20 March 2019
Remuneration Committee Chairman
NOTE: This report includes audited and unaudited
information, which is identified throughout the report.
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
Not Peer
Reviewed
Nominations Committee Report
Directors’ Remuneration Report
Remuneration Committee 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 2018
for which we will be seeking shareholder approval at
the Annual General Meeting on 25 June 2019. 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. The report for 2017
remuneration was approved at the 2018 AGM with
99.94% voting in favour. This annual report for 2018
remuneration will be put to a shareholder vote on a
voluntary basis at the 2019 AGM.
Sir David Grant
Remuneration Committee Chairman
20 March 2019
NOTE: This report includes audited and unaudited
information, which is identified throughout the report.
Following the tragic death of Mr Phillip Rasmussen ACA,
the Group’s CFO in April 2018, the Board appointed Dr
Godfrey Ainsworth FCA, to act as Executive Chairman
and Interim CFO of the Group. Dr Ainsworth previously
performed the role of Chairman in a Non-Executive
capacity.
In 2018, with the direction of the Nominations
Committee, IQE conducted a tender exercise for the
engagement of head-hunters to assist the Board in
recruiting a replacement permanent CFO. The Board
appointed Odgers Berndston head-hunters in May
2018 and actively engaged with them to complete a
preliminary evaluation and provide a list of potential
candidates with the necessary skills and experience.
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 four candidates for interview
by the Nominations Committee. Odgers Berndston
has no other connection with the Company and is an
independent provider of services to the Company.
The recruitment process was completed on 15 October
2018 when the Company announced the appointment
of Mr Timothy Neil Pullen as Chief Financial Officer. Mr
Pullen took up his employment on 4 February 2019.
The Nominations Committee is working to recruit
an additional Non-Executive Director who will take
over the Chair of the Audit & Risk Committee, which
has been chaired by Sir Derek Jones since April 2018
when Dr Ainsworth became an Executive Director and
resigned his Chairmanship of the Committee.
Dr Ainsworth has indicated to the Board that he will
seek to retire on or before the next AGM on 25 June
2019. Mr Phil Smith, former Chairman of Cisco who
joined the board in December 2016, will become Non-
Executive Chairman on the retirement of Dr Ainsworth.
The Nominations Committee is also exploring
options for the establishment of an advisory board of
experienced and independent individuals to meet twice
a year and feedback their advice to the IQE Board, as is
quite common for technology businesses.
63
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
Remuneration Statements
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 Remuneration 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 Remuneration
Committee deems
appropriate in the
circumstances.
n/a
Any base salary increases
are applied in line with
the outcome of the
Remuneration 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
Remuneration 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.
n/a
n/a
Benefits may vary according
to role and individual
circumstances. Eligibility
to benefits and the cost
of benefits are reviewed
periodically.
The Remuneration
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).
64
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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 Remuneration
Committee considers
appropriate.
Performance is assessed on an
annual basis against financial and
personal / strategic objectives set
at the start of each year.
Financial measures will be weighted
appropriately each year according
to business priorities, and will
represent no less than 70% of the
annual bonus. Performance vs.
targeted levels will be measured at
budgeted FX rates.
Personal/strategic objectives will
represent no more than 30%
of the bonus and will be set
annually to capture expected
individual contributions to IQE’s
strategic plan. The personal
element shall not pay out unless
financial performance is at least at
Threshold.
The Remuneration 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
Remuneration Committee may
consider measures outside of the
bonus framework to ensure there
is no reward for failure.
Further details of the measures,
weightings and targets applicable
are provided on pages 68 to 78.
65
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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.
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 Remuneration
Committee considers
appropriate.
Vesting of LTIP awards is subject to
achieving performance conditions
and continued employment.
The Remuneration 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 2019, the normal performance
condition for the award will
continue to be based on EPS
growth from 6% to 12% p.a. over
3 years. To further reinforce
IQE’s ambitious growth strategy,
awards can be doubled if absolute
TSR growth over the 3-year
performance period is 100% or
more.
If no entitlement has been
earned at the end of the relevant
performance period, awards lapse.
The Remuneration Committee
has discretion to adjust the EPS
outcome to ensure it fairly reflects
underlying performance. The
Remuneration Committee also
considers environmental, social,
governance and health and safety
criteria, to ensure there is no
reward for failure.
Details of the targets to be used in
future LTIP grants are included on
page 73.
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 Remuneration
Committee considers EPS to be a key measure of IQE’s long-term bottom line performance. TSR is a measure which
strongly aligns management and shareholder interests.
Targets applying to the bonus and LTIP are reviewed annually, based on a number of internal and external reference
points. Performance targets are intended to be stretching and achievable, and reflect IQE’s strategic priorities and its
market opportunities.
Remuneration policy for other employees
All employees are eligible to participate in a discretionary annual bonus and share option plan. Only executive
directors participated in the Group’s LTIP during 2018.
Shareholding guidelines
The Remuneration 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.
50% of any shares vesting (post-tax) under the new LTIP are required to be held until the relevant shareholding
levels are achieved. 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 at page 77 .All
Executive Directors as at 31 December 2018 held shares equivalent to a number in excess of 200% of salary at that
time.
66
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
Non-Executive Director remuneration (unaudited)
Non-Executive Director
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
*Following the death of IQE’s CFO, Phil Rasmussen, IQE’s Non-Executive Chairman, Dr
Godfrey Ainsworth, became Executive Chairman on 2 April April 2018 and signed a
Director’s Service Agreement dated 6 June 2018, which replaced this appointment letter.
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 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.
Details of the policy on fees paid to the Company’s Non-Executive Directors are set out in the table below:
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 Non-Executive
Directors or group of Non-
Executive Directors 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.
67
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
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’, ‘Stretch’ and ‘Maximum’.
Dr Andrew Nelson
Dr Howard Williams
Tim Pullen
£2.3m
£2.0m
£1.8m
£1.5m
£1.3m
£1.0m
£0.8m
£0.5m
£0.3m
£1,760k
£1,446k
£941k
£593k
£2.3m
£2.0m
£1.8m
£1.5m
£1.3m
£1.0m
£0.8m
£0.5m
£0.3m
£1,179k
£969k
£631k
£393k
£1,886k
£1,431k
£2.3m
£2.0m
£1.8m
£1.5m
£1.3m
£1.0m
£0.8m
£0.5m
£0.3m
£924k
£644k
Minimum
On-Target
Stretch
Maximum
Minimum
On-Target
Stretch
Maximum
Minimum
On-Target
Stretch
Maximum
Fixed Pay
Annual Bonus
LTIP
Fixed Pay
Annual Bonus
LTIP
Fixed Pay
Starting Bonus
Annual Bonus
LTIP
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 2019, while those for taxable benefits are based on the single figure table for 2018.
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 ‘Stretch’ 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 ‘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
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.
Annual Bonus
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 appoint-
ment; normally 100% of salary
thereafter
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 Remuneration 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
Remuneration 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 Remuneration Committee may
68
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
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. The Remuneration Committee will take advice
from independent remuneration consultants on the structure and award package for a new Executive Director.
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 67.
Service contracts and treatment for leavers and change of control (unaudited)
Executive
Date of service contract
Phillip Rasmussen*
7 January 2007
Dr Andrew Nelson
1 June 2016
Dr Howard Williams
1 June 2016
Dr Godfrey H H Ainsworth
4 June 2018
*ceased on the death of Mr Rasmussen on 1 April 2018
Executive Director service contracts, including arrangements for early termination, are carefully considered by the
Remuneration Committee. Save in respect of Dr Godfrey Ainsworth, each of the Executive Directors has a rolling
service contract requiring 6 months’ notice of termination on either side. Following the death of IQE’s Chief Financial
Officer on 1 April 2018, IQE’s Chairman, Dr Ainsworth agreed a contract with the Company for his appointment to
Executive Chairman and Interim Chief Financial Officer with 3 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 Directors’
service contracts are available to view at the Company’s registered office.
When considering exit payments, the Remuneration 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
Remuneration Committee’s discretion:
69
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Not Peer Reviewed
Not Peer
Reviewed
Reason for leaving
Calculation of vesting / payment
Annual bonus
Resignation
No annual bonus payable.
‘Good leaver’1
Change of control
Cash bonuses will typically be paid to the extent that performance objectives have been
met. Any resulting bonus will typically be prorated for time worked. The Remuneration
Committee retains discretion to vary this treatment in individual circumstances.
LTIP
Resignation
Outstanding awards lapse
‘Good leaver’1 and
change of control
The Committee determines whether and to what extent outstanding awards vest based
on the extent to which performance conditions have been achieved and the proportion
of the vesting period worked. The Remuneration Committee retains discretion to vary
this treatment in individual circumstances.
The determination of vesting will be made as soon as reasonably practical following the
end of the performance period or such earlier date as the Remuneration 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 equiv-
alent awards in the acquirer where appropriate.
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.
As announced on 1 May 2018, the remuneration committee approved the accelerated vesting of 8,262,707 options
in addition to the 2,211,444 options vested but unexercised by the late Mr Phillip Rasmussen. These options were
exercised in 2018 by the Executrix to his estate subsequent to a transfer of the options to her. The annual bonus in
respect of the performance period from 1 January 2017 to 31 December 2017 was also transferred to the Executrix
of the estate.
External appointments (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 whilst an Executive
Director of IQE.
Consideration of conditions elsewhere in the company (unaudited)
When making decisions on changes to Executive Director remuneration, the Remuneration Committee considers
changes to pay and conditions across the Group. To this end, the HR Manager provides the Remuneration
Committee with a summary of the proposed level of average increase for employees prior to the annual salary
review. For Executive Directors, the Remuneration Committee does not formally consult with employees on the
executive remuneration policy and implementation.
Consideration of shareholder views (unaudited)
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 Remuneration 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.
70
Annual Report on Remuneration
Remuneration Committee role, membership and
advice (unaudited)
The primary role of the Remuneration Committee
is to determine and agree with the Board fair and
reasonable remuneration arrangements for the
Chairman and Executive Directors.
The main activities of the Remuneration
Committee during the year were as follows:
• determined annual bonuses payable to
Executive Directors in 2018;
• reviewed and approved vesting of LTIP
awards;
• reviewed and approved the Executive
Directors’ salaries for 2018;
• 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;
• agreed remuneration arrangements
(having taken advice from independent
remuneration consultants, Kepler) for
the Chairman’s appointment as an
Executive Director following the tragic
death of IQE’s Chief Financial Officer, Phil
Rasmussen on 1 April 2018;
• considered benchmarking and advice
from independent remuneration
consultants, Kepler, and approved the
remuneration of Tim Pullen, who joined
IQE into the role of Chief Financial Officer
on 4 February 2019.
The Remuneration Committee’s Terms of Reference
are set out on the Company’s website at www.iqep.
com.
During the year, the Remuneration Committee
comprised all of the Non-Executive Directors.
The number of meetings held during 2018 by the
Remuneration Committee and attendance by the
individual Committee members at such meetings is set
out in the Board Report on page 58.
The Board undertakes an annual evaluation of the
Remuneration Committee’s performance to ensure
its continued ability to independently and objectively
review Executive Director remuneration at the Group.
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Not Peer Reviewed
Not Peer
Reviewed
The following individuals may be invited
to attend meetings of the Remuneration
Committee on certain occasion to provide
advice and to help the Remuneration
Committee to make informed decisions:
• Dr Andrew Nelson, Chief Executive
Officer;
• Mr Jason Howells, In-House Lawyer,
Company Secretary and Secretary to the
Remuneration Committee;
• Representatives from Kepler, a brand of
Mercer Ltd, independent advisors to the
Committee.
No individuals are involved in decisions relating to their
own remuneration.
Kepler, a brand of Mercer, provides independent
advice to the Remuneration 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 Directors
Remuneration Report, as well as other ad-hoc advice
on remuneration. Fees of £15,350 exclusive of VAT
were paid to Kepler in respect of services it provided to
the Company in 2018. The Committee considers 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.
Annual Report on Remuneration
Remuneration Committee role, membership and
advice (unaudited)
The primary role of the Remuneration Committee
is to determine and agree with the Board fair and
reasonable remuneration arrangements for the
Chairman and Executive Directors.
The main activities of the Remuneration
Committee during the year were as follows:
• determined annual bonuses payable to
Executive Directors in 2018;
• reviewed and approved vesting of LTIP
awards;
• reviewed and approved the Executive
Directors’ salaries for 2018;
• 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;
• agreed remuneration arrangements
(having taken advice from independent
remuneration consultants, Kepler) for
the Chairman’s appointment as an
Executive Director following the tragic
death of IQE’s Chief Financial Officer, Phil
Rasmussen on 1 April 2018;
• considered benchmarking and advice
from independent remuneration
consultants, Kepler, and approved the
remuneration of Tim Pullen, who joined
IQE into the role of Chief Financial Officer
on 4 February 2019.
The Remuneration Committee’s Terms of Reference
are set out on the Company’s website at www.iqep.
com.
During the year, the Remuneration Committee
comprised all of the Non-Executive Directors.
The number of meetings held during 2018 by the
Remuneration Committee and attendance by the
individual Committee members at such meetings is set
out in the Board Report on page 58.
The Board undertakes an annual evaluation of the
Remuneration Committee’s performance to ensure
its continued ability to independently and objectively
review Executive Director remuneration at the Group.
71
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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 Executive Director for the year
ended 31 December 2018 and the prior year:
Dr Andrew
Nelson
Dr Howard
Williams
Dr Godfrey
Ainsworth1
Mr Philip
Rasmussen2
2018
£’000
2017
£’000
525
1
105
2,999
515
6
515
-
2018
£’000
352
1
70
2,009
53
51
35
3,683
1,087
2,467
2017
£’000
2018
£’000
2017
£’000
345
1
345
-
34
725
264
-
238
-
26
528
-
-
-
-
-
-
2018
£’000
88
-
-
-
9
97
2017
£’000
345
4
345
-
34
728
Salary
Benefits3
Annual bonus4
Long-term
incentive5
Pension6
Total
1.
2.
3.
4.
5.
Dr Godfrey Ainsworth became an Executive Director on 2 April 2018. This figure of executive remuneration excludes fees as a Non-
Executive Director up to 31 March 2018 of £31,000, detailed later in this Directors’ Remuneration Report.
Philip Rasmussen was an Executive Director during the year until his death on 1 April 2018.
Taxable benefits for 2018 consist of health cover, private medical insurance, life assurance, long-term disability insurance, fuel and car
repairs.
Details are included below in “Incentive outcomes for years ending 31 December 2017 and 31 December 2018”.
As announced on 1 May 2018, the Board approved the accelerated vesting of 8,262,707 options in addition to the 2,211,444 options that
were vested but unexercised by the late Phillip Rasmussen. These options were transferred to the Executrix of the estate. 12,579,262 LTIP
options awarded to Drew Nelson and Howard Williams were due to vest on 31 December 2018 in relation to the award in 2016 of which
the performance criteria for 7,825,442 were achieved and therefore have vested. The remaining 4,753,820 awards have lapsed. The face
value of options vesting in the year was based on the share price at the date of vesting of 65p less the nominal value exercise price of 1p.
6.
Executive Directors are entitled to participate in a defined contribution scheme, in relation to which the Company contributes 10% of salary
or equivalent cash allowance.
Incentive outcomes for years ending 31 December 2017 and 31 December 2018 (unaudited)
Annual Bonus
In 2017 financial objectives were met in full such that the maximum bonus of 100% of salary was awarded to each of
the Executive Directors.
Financial objectives (EBITDA and cashflow measures) were not met in 2018, however the Committee exercised
modest discretion to ensure fairness for shareholders and participants and to avoid unintended outcomes. As such,
20% of salary was awarded to Drew Nelson and Howard Williams for strong cash management and achievement of
personal objectives. This reflects the tight control of cash flow during the year despite difficult trading conditions and
significant capital expenditure (increasing headroom significantly with the agreement of $35m RCF facility with HSBC).
It also reflects strong performance on the development of IQE’s new foundry in Newport South Wales, which has
progressed from an empty building to production within 15 months. Further, it has been made in recognition of the
substantial strategic progress made by the Group in a significantly challenging year following the death of CFO, Phillip
Rasmussen. Godfrey Ainsworth, who took on the CFO role at short notice, was excluded from the long-term incentive
but given a bonus opportunity structured largely around specific individual objectives: providing support to the Board
and the wider leadership team at a very difficult time, contributing to an important recruitment process for a new
CFO, assistance to the CEO in investor relations activities and acting as interim CFO pending the appointment of Mr
Pullen, which he achieved. As a result, he earned a bonus of 90% of salary.
72
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Long-term incentive plan
As announced on 1 May 2018, the Board approved the accelerated vesting of 8,262,707 options in addition to the
2,211,444 options that were vested but unexercised by the late Phillip Rasmussen. These options were transferred
to the Executrix of Mr Rasmussen’s estate.
12,579,262 LTIP options awarded to Drew Nelson and Howard Williams in 2016 were due to vest on 31 December
2018 of which the performance criteria for 7,825,442 were achieved and therefore have vested. The remaining
4,753,820 awards have lapsed.
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 2017 and 2018. 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.
Base salary
Taxable benefits
Annual bonus
% change 2017-18
CEO
+2.5%
-83%
-80%
All UK employees
+2.5%
+3.0%
+0%
Relative importance of spend on pay (unaudited)
The graph below shows shareholder distributions (i.e. dividends and share buybacks), total employee pay
expenditure and investment in capital expenditure, research & development and intangibles for the financial years
ended 31 December 2017 and 31 December 2018, along with the percentage change.
£50.0m
£45.0m
£40.0m
£35.0m
£30.0m
£25.0m
£20.0m
£15.0m
£10.0m
£5.0m
(14%)
50%
n/a
Employee
Renumeration
Distribution to
shareholders
Investment in Capex,
R&D and intangibles
2018
2019
73
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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 2014 to 31 December 2018. The table below details the Chief Executive’s “single figure”
remuneration over the same period.
Historical TSR performance
Historical CEO remuneration
CEO single figure of remuneration (£000)
STI award as a % of maximum opportunity
LTI award as a % of maximum opportunity
2014
2015
889
0%
83%
851
0%
100%
2016
1,066
100%
n/a
2017
1,087
100%
n/a
2018
3,683
20%
62%
Scheme interests awarded in 2018 (audited information)
Executive director
Award type
Date of award
# shares
awarded
Face value
End of performance
period
Dr Andrew Nelson
Nil-cost option
07 January 2018
462,846
£651,224
31 December 2020
Phillip Rasmussen
Nil-cost option
07 January 2018
310,062
£436,257
31 December 2020*
Dr Howard Williams
Nil-cost option
07 January 2018
310,062
£436,257
31 December 2020
* As announced on 1 May 2018, the Remuneration Committee approved the accelerated vesting of these options, which were exercised in 2018 by
the Executrix to Mr Rasmussen’s estate subsequent to a transfer of the options to her.
The face value of shares was based on the share price at date of award of 140.7p less the 1p nominal value exercise
price.
Vesting of these awards is subject to EPS growth as illustrated below, where EPS is measured over the period from 1
January 2018 to 31 December 2020.
1
0.75
0.5
l
y
r
a
a
S
%
0.25
0
74
-
2%
4%
6% 8%
10% 12% 14%
EPS Growth
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
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.
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 2018 and the prior year:
NED fees
2018
£’000
2017
£’000
31
50
50
50
125
50
50
4
Dr Godfrey Ainsworth1
Sir David Grant
Phil Smith
Sir Derek Jones2
1.
2.
Non-Executive Director fees to 31 March 2018 prior to his appointment as Executive Chairman on the death of Phillip Rasmussen on 1 April 2018
Sir Derek Jones was appointed to the Board as an independent Non-Executive Director on 29 November 2017
Implementation of remuneration policy for 2019 (unaudited)
Base salary
The Remuneration Committee approved the following base salary increases, in line with the average increase for all
UK employees:
Executive Director
Dr Andrew Nelson
Dr Howard Williams
Tim Pullen*
Annual base salary at
1 January 2018
Annual base salary at
1 January 2019
Percentage increase
£525,300
£351,900
n/a
£538,433
£360,698
£362,457
2.5%
2.5%
n/a
* Mr Pullen took up employment on 4 February 2019 and this represents his salary on appointment
The Board reviewed the Chairman’s salary since his appointment to the position of Executive Chairman and Interim
CFO on 2 April 2018 and decided to increase it by 2.5% effective 1 January 2019.
Pension
Executive Directors are entitled to a pension contribution of 10% of salary or equivalent cash allowance.
Annual bonus (unaudited)
For 2019 the Remuneration Committee approved the following annual bonus opportunities for Executive Directors,
as outlined in the Policy Table. The Remuneration Committee considers annual bonus targets for 2019 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.
An annual bonus of £225,000 will be paid to Mr Pullen in 2019 and a further £100,000 in 2020, both paid quarterly in
arrears in compensation for awards forfeited when he left his previous employment. These bonuses are subject to a
two-year clawback in certain circumstances if Mr Pullen leaves the employment of the Company before the end of the
Clawback Period.
75
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance LTIP (audited information)
For 2019, 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.
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
Threshold
Stretch
Compound annual growth rate in EPS from 1 January 2019 to 31 Dec 2021
3-year EPS growth
% of normal maximum
+6%
+12%
25%
100%
For truly exceptional absolute TSR growth, at or above 100% growth over the three-year performance period, the
level of vesting under the normal award will be subject to a 2x multiplier.
In accordance with the discretion available for recruitment, Mr Pullen was granted a 2019 LTIP award of 150% of
salary for 2019 rather than the normal 100%.
Non-Executive Director Fees (Unaudited)
Non-Executive Directors will continue to receive a fee of £50,000 per annum 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 2018 is set out below.
Since 31 December 2018 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 2018
Shares owned
outright as at
31 Dec 2018
Shareholding
requirement
% salary/fee
Current
shareholding
% salary/fee
Requirement
met?
Dr Andrew Nelson
28,459,218
28,459,218
Phillip Rasmussen
1,573,357
-
Dr Howard Williams
2,392,965
2,392,965
Tim Pullen*
-
-
Dr Godfrey Ainsworth
2,154,197
2,154,197
200%
200%
200%
Sir David Grant
215,000
215,000
N/A
Phil Smith
Sir Derek Jones
-
-
-
-
3,524%
N/A
442%
0%
707%
280%
-
-
Yes
N/A
Yes
N/A
*Tim Pullen was appointed on 4 February 2019. Executive Directors are expected to build up a shareholding of 200% of salary within five years of
appointment to the Board.
76
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 2018
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
Dr Andrew Nelson
4,682,988
Phillip Rasmussen
-
Dr Howard Williams
3,131,844
Tim Pullen
-
-
-
-
-
7,681,199
4,686,329
2,846,633
-
8,262,707
-
6,313,583
3,139,113
1,907,187
-
-
-
-
-*
-
-
Dr Godfrey Ainsworth
Sir David Grant
Phil Smith
Sir Derek Jones
N/A
*As announced on 1 May 2018, the Board approved the accelerated vesting of 8,262,707 options in addition to the 2,211,444 options that were
vested but unexercised by the late Phillip Rasmussen. These options were transferred to the Executrix of Mr Rasmussen’s estate and subsequently
exercised.
2017
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
Dr Andrew Nelson
11,753,104
Phillip Rasmussen
7,952,645
Dr Howard Williams
7,868,082
-
-
-
2,994,870
2,211,444
3,174,470
-
-
-
-
-
-
-
-
-
Dr Godfrey Ainsworth
Sir David Grant
Phil Smith
Sir Derek Jones
N/A
Summary of shareholder voting at the 2018 AGM (unaudited)
Results of the vote on the remuneration report at the IQE’s AGM on 4 June 2018 are as below:
Total number of votes
% of votes cast
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Total votes cast (including withheld votes)
311,504,183
151,416
311,655,599
6,095,295
317,750,894
98.03%
0.048%
98.08%
1.92%
100%
77
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Directors’ biographies
Dr Godfrey H H Ainsworth FCA (63)
Executive Chairman
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
Phil Smith (61)
Senior Independent Director
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
Non-Executive Chairman in February 2002.
He was appointed Executive Chairman and
Interim CFO in April 2018 following the death
in service of Mr Phillip Rasmussen. Current
directorships outside of the IQE Group:
Compound Semiconductor Centre Limited
(joint venture between IQE and Cardiff
University).
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: Be The
Business (Productivity Council), Streeva Ltd,
Tech Partnership Degrees.
Sir David Grant CBE (71)
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, NPL.
Sir Derek Jones KCB (66)
Non-executive Director, Chairman of the Audit & Risk Committee
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.
78
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Dr Drew Nelson OBE (64)
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,
Tim Pullen (41)
Chief Financial Officer
Tim Pullen, who joined the Board of IQE
Plc on 4 February 2019, was most recently
Chief Financial Officer of ARM Limited, a
global semiconductor and software design
company owned by Softbank Group. During
his time at ARM, Mr Pullen was focused
on executing the investment strategy and
scaling the company’s finance and business
capabilities. Prior to this, Mr Pullen was
Finance Director at O2 / Telefonica UK, where
he held a variety of senior financial positions
including responsibility for Technology
Operations, B2B and Digital segments and
Finance Operations. In connection with his
time at O2, Mr. Pullen also held roles as a
Dr Howard Williams (64)
Chief Operations Officer
and served on several Government and
Industry bodies. He received an OBE in 2001
for services to the Electronics Industry. He
is currently a member of the High Level
Group appointed by the EC to oversee the
implementation of Key Enabling Technologies
(KETs) throughout Europe. Current
directorships outside of the IQE Group:
Compound Semiconductor Centre Limited
(joint venture between IQE and Cardiff
University), Neptune 6 Limited, Llansannor
Management Consultants Ltd, Llansannor
House Holdings Limited, Oyster Innovations
Limited, Truelux Group Limited.
Non-Executive Director of Tesco Mobile, O2’s
joint venture with Tesco Mobile and was a
Director of Cornerstone Telecommunications
Infrastructure Limited, O2’s network sharing
joint venture with Vodafone. Before his time
at O2, Mr. Pullen held various senior finance
roles at Serco Group plc, a leading British
provider of outsourcing services, including
the BPO Division in UK & Europe, the Global
Technology business and in Business
Transformation. Mr Pullen is a Chartered
Accountant and qualified with Ernst & Young.
Tim Pullen does not currently hold any
directorships outside of the IQE Group.
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 (33)
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.
79
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance 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 (Executive Chairman)
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)
Sir Derek Jones KCB (Non-executive Director)
Dr A W Nelson OBE, BSc, Ph.D, FREng (President and Chief Executive Officer)
Mr T N Pullen BA (Hons), ACA (Chief Financial Officer)
Dr H R Williams BSc, Ph.D, CEng, MIMechE, MCIBSE (Operations Director)
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
15 Canada Square, London, E14 5GL
Nominated advisers and brokers
Canaccord Genuity Limited
88 Wood Street, London, EC2V 7QR
Broker
Peel Hunt LLP
Moor House, 120 London Wall, London EC2Y 5ET
Registrars
Link Asset Services
The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU
Financial Advisors
Lazard & Co., Limited
50 Stratton Street, London W1J 8LL
Investor relations
Chris Meadows
Tel +44(0)29 2083 9400
investors@iqep.com
80
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance
81
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Governance Independent
Independent
auditor’s report
auditor’s report
Overview
Overview
Materiality:
group financial
statements as a
whole
Materiality:
group financial
statements as a
whole
Coverage
Coverage
Recurring
risks
Recurring
risks
£660k (2017: £940k)
£660k (2017: £940k)
3.8% (2017: 4.1%) of normalised
group profit before tax
3.8% (2017: 4.1%) of normalised
group profit before tax
99% (2017: 97%) of group profit
before tax
99% (2017: 97%) of group profit
before tax
vs 2017
Risks of material misstatement
Risks of material misstatement
Revenue recognition
vs 2017
◄►
Revenue recognition
Valuation of development
intangibles
Valuation of development
intangibles
Capitalisation of development
costs
◄►
◄►
Capitalisation of development
costs
The impact of uncertainties
due to the UK exiting the
European Union on our audit
The impact of uncertainties
due to the UK exiting the
European Union on our audit
Valuation of investments in
subsidiaries
◄►
NEW
◄►
◄►
◄►
NEW
Valuation of investments in
subsidiaries
◄►
Event driven
risk
Event driven
risk
Parent
Company
only
Parent
Company
only
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 2018 which comprise the consolidated
plc (“the Company”) for the year ended 31
income statement, consolidated statement of
December 2018 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
2018 and of the Group’s profit for the year then
parent Company’s affairs as at 31 December
ended;
2018 and of the Group’s profit for the year then
ended;
— the group financial statements have been
properly prepared in accordance with
International Financial Reporting Standards as
— the group financial statements have been
adopted by the European Union (IFRSs as
properly prepared in accordance with
adopted by the EU);
International Financial Reporting Standards as
adopted by the European Union (IFRSs as
— the parent Company financial statements have
adopted by the EU);
been properly prepared in accordance with
IFRSs as adopted by the EU and as applied in
accordance with the provisions of the
Companies Act 2006; and
— the parent Company financial statements have
been properly prepared in accordance with
IFRSs as adopted by the EU and as applied in
— the financial statements have been prepared in
accordance with the provisions of the
accordance with the requirements of the
Companies Act 2006; and
Companies Act 2006.
— the financial statements have been prepared in
Basis for opinion
Basis for opinion
accordance with the requirements of the
Companies Act 2006.
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. Our responsibilities are
We conducted our audit in accordance with
described below. We have fulfilled our ethical
International Standards on Auditing (UK) (“ISAs
responsibilities under, and are independent of the
(UK)”) and applicable law. Our responsibilities are
Group in accordance with, UK ethical requirements
described below. We have fulfilled our ethical
including the FRC Ethical Standard as applied to
listed entities. We believe that the audit evidence
responsibilities under, and are independent of the
we have obtained is a sufficient and appropriate
Group in accordance with, UK ethical requirements
basis for our opinion.
including the FRC Ethical Standard as applied to
listed entities. We believe that the audit evidence
we have obtained is a sufficient and appropriate
basis for our opinion.
2. Key audit matters: including 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 were as follows:
The risk
Our response
The impact of
uncertainties due to
the UK exiting the
European Union on our
audit
Refer to page 28
(principal risks), page 98
(accounting policy) and
page 98 (financial
disclosures).
Unprecedented levels of uncertainty
All audits assess and challenge the
reasonableness of estimates, in particular
as described in valuation of development
intangibles and capitalisation of
development costs below, and related
disclosures and the appropriateness of
the going concern basis of preparation of
the financial statements. All of these
depend on assessments of the future
economic environment and the group’s
future prospects and performance.
Brexit is one of the most significant
economic events for the UK and at the
date of this report its effects are subject
to unprecedented levels of uncertainty of
outcomes, with the full range of possible
effects unknown.
We developed a standardised firm-wide approach to the
consideration of the uncertainties arising from Brexit in
planning and performing our audits. Our procedures
included:
— Our Brexit knowledge: We considered the
directors’ assessment of Brexit-related sources of
risk for the group’s business and financial resources
compared with our own understanding of the risks.
We considered the directors’ plans to take action to
mitigate the risks.
— Sensitivity analysis: When addressing valuation of
development intangibles and capitalisation of
development costs and other areas that depend on
forecasts, we compared the directors’ analysis to our
assessment of the full range of reasonably possible
scenarios resulting from Brexit uncertainty and,
where forecast cash flows are required to be
discounted, considered adjustments to discount
rates for the level of remaining uncertainty.
— Assessing transparency: As well as assessing
individual disclosures as part of our procedures on
valuation of development intangibles and
capitalisation of development costs, we considered
all of the Brexit related disclosures together,
including those in the strategic report, comparing the
overall picture against our understanding of the risks.
However, no audit should be expected to predict the
unknowable factors or all possible future implications for
a company and this is particularly the case in relation to
Brexit.
Revenue recognition
2018/2019 sales
Our procedures included:
Refer to note 2.21
(accounting policy).
Pressures on achieving internal and
external expectations of results increase
the risk of fraudulent revenue
recognition, in particular the recognition
of sales around the year end in the
correct.
In addition, 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.
— Control design: Assessing the design of controls
over the matching of sales invoices to related orders
and customer-authorised delivery notes.
— Enquiry of customers: Obtaining direct confirmation
of contract asset balances held by a sample of
customers to determine the level of uninvoiced
product held by each at the year-end.
— Test of details: Vouching a sample of billings and
accruals around the year-end, based upon their
financial significance, to customer-authorised
delivery notes.
— Historical comparison: Assessing 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.
2. Key audit matters: our assessment of risks of material misstatement (continued)
Carrying value of
development
intangibles (£41.8
million; 2017: £35.5m)
Refer to note 2.5
(accounting policy) and
note 13 (financial
disclosures).
The risk
Our response
Subjective valuation
Our procedures included:
Value in use calculations, prepared when
there are indicators of impairment, are
subjective due to the inherent uncertainty
involved in forecasting and discounting
future cash flows.
The effect of these matters is that, as
part of our risk assessment, we
determined that the value in use of
development intangibles has a high
degree of estimation uncertainty, with a
potential range of reasonable outcomes
greater than our materiality for the
financial statements as a whole.
— Control design: We tested the design of controls
over the forecasts prepared for the development
intangibles, including approval and challenge of those
forecasts by the directors.
— Historical comparisons: Comparing budgets for the
prior year(s) with actual results and understanding
the reasons for the variances.
— Benchmarking assumptions: Comparing the
group’s assumptions to externally derived data in
relation to key inputs such as growth rates and
discount rates.
— Sensitivity analysis: Performing sensitivity analysis
on the assumptions noted above.
— Personnel interviews: We held discussions with the
Group Technology Director to corroborate our
understanding of the future uses and opportunities
for the development assets.
— Assessing transparency: Assessing the adequacy of
the Group’s disclosures in respect of the
development intangibles.
We continue to perform procedures over valuation of goodwill. However, following further consideration of the amount of
headroom, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not
separately identified in our report this year.
Capitalisation of
development costs
(£9.8 million; 2017:
£15.4m)
Refer to note 2.5
(accounting policy) and
note 13 (financial
disclosures).
Accounting treatment
Our procedures included:
Capitalised development costs are
significant due to investment in areas
including VCSEL, GaN, cREO and
Photonics.
The application of accounting standards
to determine whether the criteria for
capitalisation have been met is inherently
subjective as this involves an assessment
of the probability of future outcomes, the
time period that constitutes the process
development phase and the identification
of any costs related to saleable wafer
product produced at the same time,
which should be excluded from
capitalisation.
.
— Our expertise: We critically assessed the costs
capitalised against the criteria of the relevant
accounting standard and our understanding of the
progress of the Group’s projects, including assessing
the technical feasibility of the asset.
— Test of details: Vouching a sample of labour costs
allocated to development projects to supporting
documentation, primarily timesheets and payroll
records for relevant employees. Vouched a sample
of material and overhead costs to supporting
documentation, including vouching substrate costs to
purchase invoices and analysing gas consumption.
— Challenged assumptions: Challenging 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-performing the
group’s calculation of standard costs used in
allocating costs throughout the year, using actual
costs incurred and critically assessed any differences
arising.
— Test of details: Vouching 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, we recalculated the
capitalised cost to ensure all costs in respect of
those delivered had been appropriately expensed.
— Test of details: Vouching 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.
2.Key audit matters: our assessment of risks of material misstatement (continued) The risk Our response Parent Company: Valuation of investments in subsidiaries (£89.2 million; 2017: £88.1m) Refer to note 2.27 (accounting policy) and note 15 (financial disclosures). Low risk, high value The carrying amount of the parent company’s investments in subsidiaries represents 36% (2017: 37%) of the company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit. Our procedures included: —Control design: We tested the design of controls over the forecasts prepared for the subsidiaries, including approval and challenge of those forecasts by the directors. —Benchmarking assumptions: Challenging the assumptions used in the cash flows included in the budgets based on our knowledge of the Group and the markets in which the subsidiaries operate. —Historical comparisons: Assessing the reasonableness of the budgets by considering the historical accuracy of the previous forecasts. —Our sector experience: Evaluating the current level of trading, including identifying any indications of a downturn in activity, by examining the post year end management accounts and considering our knowledge of the Group and the market. 3.Our application of materiality and an overview of the scope of our audit Materiality for the group financial statements as a whole was set at £660k (2017: £940k), determined with reference to a benchmark of group profit before tax, normalised to exclude the impact of the costs relating to the onerous lease charge, site closure costs, legal fees, insurance income, and the accelerated share-based payment charges (being £0.6m of the total) as disclosed in note 5, of £17,242k, of which it represents 3.8% (2017: 4.1%). Materiality for the parent company financial statements as a whole was set at £300k (2017: £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% (2017: 0.13%) of the Company’s total assets. We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £33k (2017: £50k), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the group’s 13 (2017: 13) reporting components, we subjected 8 (2017: 8) to full scope audits for group Profit before tax, normalised £17,242k (2017: £22,447k) Profit before tax, normalised Group materiality Group revenue 14 18 Group Materiality £660k (2017: £940k) £660k (2017: £940k) Whole financial statements materiality £500k Range of materiality at 13 components (£300k-£500k) (2017: £300k-£500k) £33k (2017: £50k) Misstatements reported to the audit committee Group profit before tax 7 3 purposes and 2 (2017: 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 95% 99% needed to be addressed. The components within the scope of our work accounted for the percentages illustrated opposite. The remaining 5% (2017: 2%) of total group revenue, 1% (2017: 3%) of group profit before tax and 1% (2017: 1%) of total group assets is represented by 3 (2017: 2) reporting components, none of which individually represented more than 2% (2017: 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. 80 81 Group total assets 11 11 99% 88 88 Key 94 92 Full scope for group audit purposes 2018 Specified risk-focused audit procedures 2018 Full scope for group audit purposes 2017 Specified risk-focused audit procedures 2017 As these were risks that could potentially cast significant
doubt on the Group’s and the Company's ability to
continue as a going concern, we considered sensitivities
over the level of available financial resources indicated by
the Group’s financial forecasts taking account of
reasonably possible (but not unrealistic) adverse effects
that could arise from these risks individually and
collectively and evaluated the achievability of the actions
the Directors consider they would take to improve the
position should the risks materialise. We also considered
less predictable but realistic second order impacts, such
as the shorter-term impact of customs delays on import
and export of materials.
Based on this work, we are required to report to you if
we have anything material to add or draw attention to in
relation to the directors’ statement in Note 1 to the
financial statements on the use of the going concern
basis of accounting with no material uncertainties that
may cast significant doubt over the Group and
Company’s 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, and we did
not identify going concern as a key audit matter.
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.
3. Our application of materiality and an overview of the
scope of our audit (continued)
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 performed procedures on
the items excluded from normalised group profit before
tax. 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, 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 an assessment 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
The Directors have prepared the financial statements on
the going concern basis as they do not intend to liquidate
the Company or the Group or to cease their operations,
and as they have concluded that the Company’s and the
Group’s financial position means that this is realistic.
They have also concluded that there are no material
uncertainties that could have cast significant doubt over
their ability to continue as a going concern for at least a
year from the date of approval of the financial statements
(“the going concern period”).
Our responsibility is to conclude on the appropriateness
of the Directors’ conclusions and, had there been a
material uncertainty related to going concern, to make
reference to that in this audit report. However, as we
cannot predict all future events or conditions and as
subsequent events may result in outcomes that are
inconsistent with judgements that were reasonable at
the time they were made, the absence of reference to a
material uncertainty in this auditor's report is not a
guarantee that the Group and the Company will continue
in operation.
In our evaluation of the Directors’ conclusions, we
considered the inherent risks to the Group’s and
Company’s business model and analysed how those
risks might affect the Group’s and Company’s financial
resources or ability to continue operations over the going
concern period. The risks that we considered most likely
to adversely affect the Group’s and Company’s available
financial resources over this period were :
— The impact of World Trade Organisation tariffs being
applied to imports and exports of materials; and
— The impact of reduced availability of research funding.
5. We have nothing to report on the other information in
7. Respective responsibilities
the Annual Report (continued)
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
— the directors’ confirmation within the long-term viability
statement that they have carried out a robust
assessment of the principal risks facing the Group,
including those that would threaten its business model,
future performance, solvency and liquidity;
— the principal risks and uncertainties disclosures
describing these risks and explaining how they are
being managed and mitigated; and
— the directors’ explanation in the long-term viability
statement of how they have assessed the prospects of
the Group, over what period they have done so and why
they considered that period to be appropriate, and their
statement as to whether they have a reasonable
expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the
period of their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
Our work is limited to assessing these matters in the
context of only the knowledge acquired during our financial
statements audit. As we cannot predict all future events or
conditions and as subsequent events may result in
outcomes that are inconsistent with judgments that were
reasonable at the time they were made, the absence of
anything to report on these statements is not a guarantee
as to the Group’s and Company’s longer-term viability.
Corporate governance disclosures
We are required to report to you if:
— we have identified material inconsistencies between the
knowledge we acquired during our financial statements
audit and the directors’ statement that they consider
that the annual report and financial statements taken as
a whole is fair, balanced and understandable and
provides the information necessary for shareholders to
assess the Group’s position and performance, business
model and strategy; or
— the section of the annual report describing the work of
the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
We have nothing to report in these respects.
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.
Directors’ responsibilities
As explained more fully in their statement set out on page
[50], the directors are responsible for: the preparation of the
financial statements including being satisfied that they give
a true and fair view; 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; assessing the Group and
parent Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and using 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.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue our opinion in an auditor’s report. Reasonable
assurance is a high level of assurance, but does not
guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
8. The purpose of our audit work and to whom we owe
our responsibilities
This report is made solely to the Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the
Company’s members, as a body, for our audit work, for this
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 2019
Five year financial
summary
2018
£’000
Restated
2017
£’000
2016
£’000
2015
£’000
2014
£’000
Revenue
156,291
154,553
132,707
114,024
112,011
Adjusted EBITDA (see below)
26,404
37,152
31,730
29,001
27,009
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)
16,040
8,660
11,229
1,189
16,982
16,988
(26,045)
(26,039)
20,807
26,534
17,194
24,998
14,660
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
(39,549)
(23,223)
(31,251)
Equity shareholders’ funds
305,730
287,950
184,666
142,299
117,851
Basic EPS – adjusted***
Basic EPS – unadjusted
Diluted EPS – adjusted***
Diluted EPS – unadjusted
1.44p
0.13p
1.38p
0.12p
3.61p
2.11p
3.38p
1.98p
3.06p
2.66p
2.89p
2.52p
2.53p
2.65p
2.45p
2.56p
2.32p
0.06p
2.24p
0.06p
Comparative information has been restated for 2017 as detailed in note 2.30. The information for 2014-2016 has not been restated
for the change to accounting standards.
* The adjusted performance measures for 2017 and 2018 are reconciled in note 5. The adjusted performance measures for 2014-
2016 are reconciled in those financial statements.
** Free cash flow is defined as net cash flow (£25,292,000) before acquisitions (£nil), financing (£813,000) and net interest paid
(£66,000).
*** Adjusted EPS measures exclude share based payments, exceptional items, acquisition accounting amortisation and the impact
of discounting and any associated tax impact of the adjustment (see note 12).
88
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Five year financial
summary (continued)
Adjusted EBITDA has been calculated as follows:
Profit after tax
Tax
Interest (income)/expense
Share based payments
Profit & Loss on disposal
Adjusted items
Depreciation
Amortisation of intangible assets
2018
£’000
1,189
5,558
(87)
(1,044)
-
7,906
6,773
6,109
Restated
2017
£’000
2016
£’000
2015
£’000
14,660
18,023
17,847
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
2014
£’000
791
4,452
1,924
1,458
15
7,877
6,590
3,902
Adjusted EBITDA
26,404
37,152
31,730
29,001
27,009
89
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Consolidated income statement for the year ended 31 December 2018
Revenue
Cost of sales
Gross profit
Other income and expenses
Selling, general and administrative expenses
Loss on disposal of property, plant and equipment
Operating profit
Finance income / (costs)
Share of losses of joint ventures accounted for using the
equity method
Adjusted profit before income tax
Adjustments
Profit before income tax
Taxation
Profit for the year
Profit attributable to:
Equity shareholders
Non-controlling interest
Note
4
5
5
6
8
29
5
9
2018
£’000
Restated
2017
£’000
156,291
154,553
(118,840)
(115,755)
37,451
1,097
38,798
-
(29,888)
(21,582)
-
8,660
87
(2,000)
13,974
(7,227)
6,747
(5,558)
1,189
966
223
1,189
(22)
17,194
(2,099)
-
24,515
(9,420)
15,095
(435)
14,660
14,560
100
14,660
Earnings per share attributable to owners of the parent
during the year
Basic earnings per share
Diluted earnings per share
12
12
0.13p
0.12p
2.11p
1.98p
Adjusted basic and diluted earnings per share are 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 notes on pages 98 to 144 form an integral part of these consolidated financial statements.
90
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Consolidated statement of comprehensive income for the year ended 31 December 2018
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
2018
£’000
1,189
11,140
12,329
12,010
319
12,329
Restated
2017
£’000
14,660
(10,948)
3,712
3,640
72
3,712
* Items that may be 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 notes on pages 98 to 144 form an integral part of these consolidated financial statements.
91
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Consolidated balance sheet as at 31 December 2018
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
2018
£’000
Restated
2017
£’000
13
15
14
10
17
16
17
18
19
20
19
20
22
121,775
108,513
75
124,445
13,244
7,937
75
90,800
17,768
7,680
267,476
224,836
35,709
38,015
20,807
94,531
362,007
33,044
33,269
45,612
111,925
336,761
(45,908)
(43,172)
(431)
-
(2,554)
(48,893)
-
(3,836)
(3,836)
(210)
-
(1,534)
(44,916)
-
(666)
(666)
(52,729)
(45,582)
309,278
291,179
7,767
151,147
99,299
47,517
7,560
145,927
98,333
36,130
305,730
287,950
3,548
3,229
309,278
291,179
The notes on pages 98 to 144 form an integral part of these consolidated financial statements.
The financial statements on pages 108 to 165 were authorised for issue by the board of directors approved on 19
March 2019 and were signed on its behalf.
Dr G H H Ainsworth
Dr A W Nelson
92
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
Consolidated statement of changes in equity for the year ended 31 December 2018
Share
capital
Share
premium
Retained
earnings
Exchange
rate
reserve
Other
reserves
Non-
controlling
interests
Total
equity
£’000
£’000
£’000
£’000
£’000
£’000
£’000
At 1 January 2018
7,560
145,927
98,333
20,069
16,061
3,229 291,179
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
-
-
-
-
-
-
-
-
-
-
207
207
5,220
5,220
966
-
-
11,044
966
11,044
-
-
-
223
96
1,189
11,140
319
12,329
-
-
-
-
-
-
-
-
1,826
(437)
(1,046)
343
-
-
-
-
1,826
(437)
4,381
5,770
At 31 December 2018
7,767
151,147
99,299
31,113
16,404
3,548 309,278
Share
capital
Share
premium
Retained
earnings
Exchange
rate
reserve
Other
reserves
Non-
controlling
interests
Total
equity
£’000
£’000
£’000
£’000
£’000
£’000
£’000
6,755
51,081
83,773
30,989
12,263
3,157 188,018
-
-
-
-
-
-
-
-
-
-
805
805
94,846
94,846
14,560
-
-
(10,920)
14,560
(10,920)
-
-
-
100
14,660
(28)
(10,948)
72
3,712
-
-
-
-
-
-
-
-
3,854
683
(739)
3,798
-
-
-
-
3,854
683
94,912
99,449
7,560
145,927
98,333
20,069
16,061
3,229 291,179
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
At 31 December 2017 -
restated
The notes on pages 98 to 144 form an integral part of these consolidated financial statements.
93
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Consolidated cash flow statement for the year ended 31 December 2018
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
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 (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange gains / (losses) on cash and cash equivalents
Cash and cash equivalents at 31 December
Note
5
25
26
26
27
27
2018
£’000
16,982
6
16,988
(66)
(665)
16,257
2017
£’000
31,089
(1,372)
29,717
(2,125)
(5,844)
21,748
(30,375)
(11,260)
(1,550)
(2,419)
(10,437)
(14,511)
(42,362)
(28,190)
813
-
-
813
(25,292)
45,612
487
20,807
94,912
27,864
(75,430)
47,346
40,904
4,957
(249)
45,612
The notes on pages 98 to 144 form an integral part of these consolidated financial statements.
94
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Parent company balance sheet for the year ended 31 December 2018
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
2018
£’000
6,263
15
89,228
1,365
96,871
147,328
4,582
151,910
248,781
2017
£’000
2,076
10
88,161
5,252
95,499
114,229
31,281
145,510
241,009
(20,706)
(21,236)
-
-
(20,706)
(21,236)
-
-
-
-
(20,706)
228,075
(21,236)
219,773
7,767
151,147
52,780
16,381
7,560
145,927
50,476
15,810
228,075
219,773
The notes on pages 98 to 144 form an integral part of these financial statements.
The financial statements on pages 90 to 144 were authorised for issue by the board of directors approved on 19
March 2019 and were signed on its behalf.
Dr G H H Ainsworth
Dr A W Nelson
95
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Parent company statement of changes in equity for the year ended 31 December 2018
Share
capital
Share
premium
Retained
earnings
Other
reserves
£’000
£’000
£’000
£’000
Total
Equity
£’000
At 1 January 2018
7,560
145,927
50,476
15,810
219,773
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
-
-
-
-
-
-
-
-
207
207
5,220
5,220
2,304
2,304
-
-
-
-
-
-
1,826
(209)
(1,046)
571
2,304
2,304
1,826
(209)
4,381
5,998
At 31 December 2018
7,767
151,147
52,780
16,381
228,075
Share
capital
£’000
Share
premium
Retained
earnings
Other
reserves
£’000
£’000
£’000
Total
Equity
£’000
At 1 January 2017
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
At 31 December 2017
7,560
145,927
50,476
15,810
219,773
The notes on pages 98 to 144 form an integral part of these financial statements.
96
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Parent company cash flow statement for the year ended 31 December 2018
Cash flows from operating activities
Cash outflow from operations
Interest received/(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)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
25
2018
£’000
2017
£’000
(30,332)
3,523
-
(21,785)
(1,846)
-
(26,809)
(23,631)
(685)
(18)
(703)
813
-
-
813
(26,699)
31,281
4,582
(375)
(11)
(386)
94,913
27,194
(65,781)
56,326
32,309
(1,028)
31,281
The notes on pages 98 to 144 form an integral part of these financial statements.
97
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Notes to the financial
statements for the year
ended 31 December 2018
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, except for
the impact of the implementation of IFRS 15 ‘Revenue
from contracts with customers’.
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 (see
Strategic Report).
2.3 Changes in accounting policy and disclosures
(a) New standards, amendments and interpretations.
The following new standards, amendments and
interpretations have been adopted by the Group for the
first time for the financial year beginning on 1 January
2018:
• Annual improvements 2014 – 2016 cycle
• Amendment to IFRS 2, ‘Share based payments’
which clarifies the classification and measurement
of certain share based payment transactions
•
IFRS 9 ‘Financial instruments’
•
IFRS 15 ‘Revenue from contracts with customers’
• Amendments to IAS 40, ‘Investment Property’ which
clarifies that transfers to, or from, investment
property can only be made if there has been a
change in use that is supported by evidence
Interpretation 22 ‘Foreign Currency Transactions
and Advance Consideration’ which clarifies how to
determine the date of transaction for the exchange
rate to be used on initial recognition of a related
asset, expense or income where an entity pays
or receives consideration in advance for foreign
currency-denominated contracts.
•
The adoption of these standards, amendments and
interpretations has not had a material impact on the
financial statements of the Group or parent company,
except for the adoption of IFRS 15 ‘Revenue from
contracts with customers’ where the impact of adoption
of this new standard is set out in note 2.30 to the
financial statements.
IFRS 16 ‘Leases’
IFRS 17 ‘Insurance contracts’
(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
2019 and have not been applied in preparing these
consolidated financial statements.
•
•
• Amendments to IAS 19 ‘Employee Benefits’ which
clarifies the accounting for defined benefit plan
amendments, curtailments and settlements.
• Amendment to IAS 28 ‘Investments in associates
and joint ventures’ which clarifies the accounting
for long-term interests in an associate or joint
venture, which in substance form part of the net
investment in the associate or joint venture, but to
which equity accounting is not applied
• Amendments to IFRS 10 ‘Consolidated financial
statements’ and IAS 28 ‘Investments in associates
and joint ventures’ which clarifies the accounting
treatment for sales or contribution of assets
between an investor and its associates or joint
ventures.
98
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements •
Interpretation 23 ‘Uncertainty over Income Tax
Treatments’ which explains how to recognise and
measure deferred and current income tax assets
and liabilities where there is uncertainty over a tax
treatment.
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.
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’.
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 relating to property, including the newly
constructed Newport facility as well as leasing property,
plant and equipment from its joint venture, Compound
Semiconductor Centre (note 3a) under operating
leases.
The adoption of IFRS 16 will have a significant impact
on the financial statements as the standard will require
operating leases to be accounted for through the
recognition of a right of use asset and a corresponding
lease liability where certain criteria are met. In adopting
the new standard the Group will adopt IFRS16 using
the modified retrospective approach and apply the
following practical expedients on a lease-by-lease basis
to its portfolio of leases:
• Application of a single discount rate to the
portfolio of property and plant leases that are
deemed to have reasonably similar characteristics;
• Adjustment to the asset associated with the leased
Singapore manufacturing facility on transition by
the amount of the previously recognised onerous
lease provision as an alternative to performing an
impairment review;
• Application of recognition and measurement
exemptions for all leases where the lease term
ends within 12 months or fewer of the date of
initial application and account for those leases as
short-term leases;
• Application of hindsight in applying the new
standard to determine the lease term where lease
contracts contains option to extend or terminate
the lease; and
• Exclusion of any initial direct costs in the
measurement of the right of use asset.
The impact on adoption of IFRS16 at 1 January 2019
will be to increase non-current assets by £45,954k (net
of the previously recognised Singapore onerous lease
of £5,256k) for the recognition of a right of use asset
and increase liabilities by £51,110k for the recognition
of a lease liability.
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.
99
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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 that
result from new information that existed at the date
of acquisition, which if known at the time would have
resulted in a different amount being recognised 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
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 but 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
100
for potential impairment if events or circumstances
indicate a potential impairment. Any impairment
identified is immediately charged to the Consolidated
Income Statement.
c) Development costs
Expenditure incurred that is directly attributable to
the development of new or substantially improved
products or processes is recognised as an intangible
asset when the following criteria are met:
•
•
the product 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 development has been released
into production.
The carrying value of capitalised development costs
is reviewed for potential impairment 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 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.
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
e) Other intangibles recognised on acquisition
Other intangible assets which form part of the
identifiable net assets of an acquired business are
recognised at their fair value and amortised on a
systematic basis over their useful economic life which is
up to 7 years.
This includes customer contracts, the fair value of
which has been evaluated using the multi period
excess earnings method “MEEM”. The MEEM model
valuation was cross checked to the cost of product
development and qualification to which the contract
relates.
The carrying value of other intangible assets is
reviewed for potential impairment 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 is stated at cost less
accumulated depreciation and any provision for
impairment. Cost comprises all costs that are directly
attributable to bringing the asset into working condition
for its intended use. Depreciation is calculated to write
down the cost of property, plant and equipment to its
residual value 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 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.
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 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
and company balance sheets bank overdrafts are
presented within cash and cash equivalents as Group
treasury arrangements are pooled by territory.
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
2018 which resulted in no material changes to asset
residual values and useful economic lives (2017: no
material changes). The carrying value of property, plant
and equipment is reviewed for potential impairment
if events or circumstances indicate a potential
impairment. Any impairment identified is immediately
charged to the Consolidated Income Statement.
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 on the
basis that the financial asset is held with the objective
of collecting the contractual cash flows and the
contractual terms of the instrument give rise to cash
flows that are solely payments of principal and interest
on the principal amount outstanding.
101
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
2.12 Financial assets
The Group classifies its financial assets at amortised
cost. The classification depends on the purpose
for which the financial assets were acquired and
the classification is determined at the date of initial
recognition. Amortised cost financial assets 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 amortised cost financial assets 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.
Financial assets are measured at amortised cost
using the effective interest method. Amortised cost is
reduced by impairment losses. 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 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.
2.15 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 and other reserves
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.
Other reserves relates to share based payment
transactions (see note 2.24).
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.
102
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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.
2.21 Revenue recognition
Revenue represents the transaction price specified
in a contract with a customer for goods, services and
intellectual property licenses provided in the ordinary
course of business net of value added and other sales
related taxes.
Standard Customer Products
Revenue is recognised when the goods are delivered
and have been accepted by customers at their
premises. For contracts that permit the customer to
return an item, revenue is recognised to the extent that
it is highly probable that a significant reversal in the
amount of revenue recognised will not occur.
The amount of revenue recognised is adjusted for
expected returns, which are estimated based on
historical data for each specific type of product with a
refund liability recognised as part of trade receivables.
The Group reviews its estimate of expected returns at
each reporting date and updates the amounts of any
liability accordingly.
A receivable is recognised when the goods are
delivered, since this is the point in time that the
consideration is unconditional because only the
passage of time is required before the payment is due.
Bespoke Customer Products
Revenue is recognised for bespoke customer products
where the Group has a guaranteed contractual right
to payment on an over time basis prior to the delivery
of goods to the customers’ premises using the cost to
cost method.
The amount of revenue recognised is adjusted for
expected returns, which are estimated based on
historical data for each specific type of product with a
refund liability recognised as part of trade receivables.
The Group reviews its estimate of expected returns at
each reporting date and updates the amounts of any
liability accordingly.
The Group operates supplier managed inventory
arrangements for certain global customers where the
Group is responsible for ensuring that contractually
agreed levels of inventory are maintained at specified
locations. The Group has a guaranteed contractual
right to payment for the bespoke customer products
manufactured under these arrangements with revenue
recognised on an over time basis using the cost to cost
method.
Contract assets are recognised for bespoke customer
products prior to billing, which typically occurs when
the goods are delivered to the customer or for supplier
managed inventory arrangements from the earlier of a
specified backstop date following delivery or when the
product is drawn from inventory by the customer.
Intellectual Property Licenses
Intellectual property license income relates to the sale
of finite and perpetual period licenses.
Revenue is recognised for intellectual property
licenses with a right to use over a finite period when
control of the license is transferred to the customer
in accordance with the terms of the relevant licensing
agreement and collection of the resulting receivable is
reasonably assured.
Revenue is recognised for perpetual intellectual
property licenses with a right to use 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.
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).
103
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
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 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.
2.27 Investment in subsidiaries
Investments in subsidiaries are held at cost of
investment less provision for impairment in the parent
company financial statements.
2.28 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.
2.29 Alternative performance measures
Alternative performance measures are disclosed
separately in the financial statements after a number
of adjusted exceptional, non-cash, one-off or non-
operational items where it is deemed necessary by the
Directors to do so to provide further understanding of
the financial performance of the Group. Adjusted items
are material items of income or expense that have
been shown separately due to the significance of their
nature or amount. The tax impact of adjusted items is
calculated applying the relevant enacted tax rate for
each adjusted item. Details of the adjusted items are
included in note 5.
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.
2.26 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.
104
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 2.30 Change in accounting policy - IFRS 15
‘Revenue from contracts with customers’
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
and is effective for annual periods beginning on or after
1 January 2018.
The Group has adopted IFRS 15 ‘Revenue from
contracts with customers’ using the retrospective
method with the practical expedient for completed
contracts. The comparative financial information
contained in the financial statements for the twelve
months ended 31 December 2017 has been restated.
Implementation of IFRS 15, ‘Revenue from contracts
with customers’ has resulted in changes in the
recognition of revenue in circumstances where the
Group produces bespoke customer products with
a guaranteed contractual right to payment. In these
situations revenue is recognised on an over time
basis earlier in the manufacturing process than was
historically the case where revenue was typically
recognised on delivery and acceptance of the goods by
the customer.
The comparative financial information as at and for
the twelve months ended 31 December 2017 has
been restated to reflect the impact of this change in
accounting policy. Brought forward retained earnings at
1 January 2017 in the balance sheet and statement of
changes in equity have been restated by £191,000 and
brought forward other reserves at 1 January 2017 in
the balance sheet and statement of changes in equity
have been restated for the impact of foreign exchange
by £4,000. Revenue in the income statement for the
twelve month period has been restated to include a net
credit of £73,000 and cost of sales has been restated
to include an additional net credit of £102,000 with an
associated reduction in inventory of £663,000, increase
in contract assets of £1,029,000 and foreign exchange
impact in other reserves of £4,000 recorded in the
balance sheet.
The adjustment has increased net assets at 31 December 2017 by £366,000 and is summarised in the tables below.
Impact on the condensed consolidated
Income statement for the 12 months ended
31 December 2017
Reported
Opening
IFRS 15
Closing IFRS
15
Restated
31-Dec
31-Dec
31-Dec
31-Dec
Revenue
Cost of sales
Gross profit
Operating profit
Profit before tax
Income tax expense
Profit for the period
2017
£’000
154,480
(115,857)
38,623
17,019
14,920
(435)
14,485
2017
£’000
(956)
765
(191)
(191)
(191)
-
(191)
2017
£’000
1,029
(663)
366
366
366
-
366
2017
£’000
154,553
(115,755)
38,798
17,194
15,095
(435)
14,660
105
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
Impact on the condensed consolidated
balance sheet as at 31 December 2017
Reported
Opening
IFRS 15
Closing
IFRS 15
Restated
31-Dec
31-Dec
31-Dec
31-Dec
Non-current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Retained earnings at 1 January
Profit for the period
Retained earnings at 31 December
Other reserves
Total equity
2017
£’000
224,836
33,707
32,240
45,612
336,395
(44,916)
(666)
(45,582)
290,813
83,582
14,385
97,967
192,846
290,813
2017
£’000
2017
£’000
2017
£’000
-
-
-
-
-
-
-
-
-
191
(191)
-
-
-
-
224,836
(663)
1,029
-
33,044
33,269
45,612
366
336,761
-
-
-
(44,916)
(666)
(45,582)
366
291,179
-
366
366
83,773
14,560
98,333
-
192,846
366
291,179
Impact on the opening condensed
consolidated balance sheet as at 31
December 2016
Restated
Reported
Closing IFRS 15
Restated
31-Dec
2016
£’000
214,043
28,498
30,868
4,957
278,366
(51,522)
(39,021)
(90,543)
187,823
65,723
17,859
83,582
104,241
187,823
31-Dec
2016
£’000
-
(778)
973
-
195
-
-
-
195
-
191
191
4
195
31-Dec
2016
£’000
214,043
27,720
31,841
4,957
278,561
(51,522)
(39,021)
(90,543)
188,018
65,723
18,050
83,773
104,245
188,018
Non-current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Retained earnings at 1 January
Profit for the period
Retained earnings at 31 December
Other reserves
Total equity
-
106
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
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.
Compound Semiconductor Centre Limited (‘CSC’)
On 9 July 2015 the Group entered into a joint venture
agreement with Cardiff University to create the CSC in
the United Kingdom. The commercial purpose of the
CSC is the research, development and manufacture
by MOVPE of advanced compound semiconductor
materials.
The manufacturing and technical capability of the CSC
was established with the Group contributing fixed
assets, transferring employees (including the current
Managing Director of the CSC) and licensing intellectual
property with Cardiff University contributing cash.
The Group also entered into an agreement with CSC
that conveyed to the Group the right to use the CSC’s
assets, establishing the Group as the CSC’s cornerstone
customer during the early stages of the development
of the CSC’s business (see Note 29).
The Shareholder Agreement establishes that the CSC
is jointly controlled by the shareholders. Key decisions,
defined as part of contractually agreed Board reserved
matters, require approval from directors representing
each joint venture partner who have equal Board
representation and voting rights.
The Group does not control the CSC such that its 50%
equity investment in the joint venture is accounted
for using the equity method in accordance with the
accounting policies set out in note 2.
Compound Semiconductor Development Centre Private
Limited (‘CSDC’)
On 23 March 2015 the Group entered into a joint
venture agreement with WIN Semiconductors Corp
(‘WIN’) and Nangyang Technological University and four
representatives of the University (‘NTU’) to create the
CSDC in Singapore. The commercial purpose of the
CSDC is the research, development and manufacture
by MBE of advanced compound semiconductor
materials.
The manufacturing and technical capability of the
CSDC was established with the Group transferring
employees (including the current Managing Director of
the CSDC) and licensing the use of intellectual property
and plant and equipment. NTU contributed technical
expertise whilst WIN, via the contractual agreements
entered into by the parties committed to minimum
purchase guarantees, establishing WIN as the CSDC’s
cornerstone customer during the early stages of the
development of the CSDC’s business (see Note 29).
The Shareholder Agreement establishes that the CSDC
is jointly controlled by the shareholders. Key decisions,
defined as part of contractually agreed Board reserved
matters, require approval from directors representing
each joint venture partner who have equal Board
representation and voting rights.
The Group does not control the CSDC such that its 51%
equity investment in the joint venture is accounted
for using the equity method in accordance with the
accounting policies set out in note 2.
Joint Ventures – Classification of preference share
debt
The Group classifies its preference share financial
assets due from the CSC as debt instruments rather
than treating the preference shares as part of the
Group’s net investment in the CSC on the basis that the
preference share funding that has been provided is not
deemed to be long term in nature or tantamount to
equity.
Preference share funding was provided to the CSC
by the joint venture partners to accelerate the
development and growth of the CSC’s business. The
contractual arrangements between the joint venture
partners and the CSC require that any surplus cash
generated by the CSC as the business develops is used
to redeem the preference share funding provided
by the joint venture partners, something that the
CSC business plan contained within the Joint Venture
Shareholder Agreement forecasts.
Joint Ventures – Right of use asset
The Group established the CSC 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 ‘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 consideration of the lease term which is not
for the major part of the expected useful economic life
of the assets and the present value of the minimum
107
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements lease payments which does not represent substantially
all of the fair value of the assets. On this basis the
Group has concluded that it has an operating lease.
annual basis or if events or circumstances provide an
indication that the carrying value may no longer be
recoverable from future estimated cash flows.
(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.
The carrying value of the preference share debt due
from CSC has been reviewed for impairment based
upon a combination of the progress and milestones
that CSC has achieved against its original business plan,
current cash flow forecasts and the capacity for CSC
to redeem the debt. In light of the progress that CSC
has made against its original business plan, current
cash flow forecasts and the assessed ability of CSC to
redeem shareholder preference debt the Board has
concluded that the amortised cost carrying value of the
preference share debt is not impaired.
No adjustments have been made to the assessed
useful economic lives or residual values of property,
plant and equipment in the current year with the
exception of certain property, plant and equipment
that has been impaired as a result of the decision to
close the Group’s manufacturing site in New Jersey,
USA (see note 5).
Differences between estimated useful economic lives
and residual values of property, plant and equipment
and actual results may have a material impact on the
amount of the carrying values of the property, plant
and equipment and future rates of depreciation.
The depreciation charge for property, plant and
equipment in the current year was £6,773,000. If useful
economic lives of the Group’s significant epitaxial
reactors, included within plant and machinery was
reduced by 1 year across the whole portfolio of assets
the impact on current year depreciation would be
to increase the charge by £294,000 to £7,067,000.
If residual values of the reactors were decreased by
10% across the whole portfolio of assets the impact
on current year depreciation would be to increase the
charge by £190,000 to £6,963,000.
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 £4,702,000. 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
£747,000 to £5,449,000.
3.3 Impairment of preference share debt
The Group classifies its preference share financial
assets as debt instruments.
The carrying value of the preference share financial
assets are subject to review for impairment on an
The CSC Board approved 2019 budget and CSC
management’s 2020 forecast have been used for the
first two years of the impairment review. Growth rates
assumed in the original business plan, adjusted to
reflect the stage of development of CSC’s business
have been used for years three to five with a long term
growth rate of 2% and a discount rate of 10% applied.
If growth rates were restricted to the long term rate
from year three no impairment would arise.
3.4 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 (£34,139,000) and
United States of America (£87,910,000) 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 (note
13).
If growth rates in the cash flow forecasts were
restricted to the long term growth rate from year three
onwards no impairment of deferred tax assets in either
the United Kingdom or United States of America would
arise.
3.5 Onerous lease provision
A provision for onerous leases was made in 2014
following the restructuring of the Group’s operations in
Singapore. The provision for unused and unlet space
at the manufacturing site has been reassessed in the
current year and extended to the end of the lease
obligation in 2022.
The extension of the onerous lease provision to
the end of the lease obligation has resulted in the
Group incurring an additional exceptional charge of
£4,404,000 in the current year (see note 5).
108
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 3.6 Share based payments
Share based payment charges associated with long
term incentive plans are calculated taking account
of an assessment of the achievability of relevant
performance conditions. The share based payment
charge for long term incentive awards would be
£2,184,000 greater in 2018 if it was assumed that all
performance criteria for existing awards would be met.
3.7 Adjustments to Profit
Alternative performance measures are disclosed
separately in the financial statements after a number
of adjusted exceptional, non-cash, one-off or non-
operational items where it is deemed necessary by the
Director’s to do so to provide further understanding of
the financial performance of the Group. Details of the
adjusted items are included in note 5.
109
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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 sales to joint ventures
Total Revenue
Adjusted operating profit
Wireless
Photonics
Infra-Red
CMOS++
Central corporate costs
Segment adjusted operating profit
Profit from license income from sales to joint
ventures
Adjusted operating profit
Adjusted items (see note 5)
Operating profit
Share of losses of joint venture accounted for using
the equity method
Finance income / (costs)
Profit before tax
2018
£’000
97,754
43,819
13,096
1,622
Restated
2017
£’000
91,666
47,676
11,955
1,382
156,291
152,679
-
1,874
156,291
154,553
11,896
11,495
3,396
(1,295)
(9,452)
16,040
13,736
18,355
3,259
(1,677)
(9,013)
24,660
-
1,874
16,040
26,534
(7,380)
8,660
(2,000)
87
6,747
(9,340)
17,194
-
(2,099)
15,095
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30.
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.
110
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements In the years set out below, certain customers accounted for greater than 10% of the Group’s total revenues:
Customer
Segment
2018
£’000
2018
% revenue
Restated
2017
£’000
Restated
2017
% revenue
Customer 1
Customer 2
Customer 3
Wireless
Wireless
Photonics
33,806
22,727
16,438
22%
15%
11%
27,441
23,702
23,410
18%
15%
15%
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
Revenue by location of customer
Americas
United States of America
Rest of Americas
2018
£’000
96,101
95,851
250
Restated
2017
£’000
95,107
95,044
63
Europe, Middle East & Africa (EMEA)
14,694
14,332
France
Germany
Israel
United Kingdom
Rest of EMEA
Asia Pacific
People’s Republic of China
Japan
Taiwan
Rest of Asia Pacific
Total revenue
323
6,692
3,106
2,850
1,723
45,496
4,033
1,686
32,802
6,975
498
6,697
1,843
2,570
2,724
45,114
1,246
5,057
31,400
7,411
156,291
154,553
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30.
Non-current assets by location
By location
USA
Singapore
Taiwan
UK
Property, plant and equipment
Intangible assets
2018
£’000
49,051
7,642
16,951
50,801
124,445
2017
£’000
50,025
7,704
13,100
19,971
90,800
2018
£’000
79,042
10,158
3,748
28,827
121,775
2017
£’000
73,528
9,761
2,579
22,645
108,513
111
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 5. Adjusted profit measures
The Group’s results report certain financial measures after a number of adjusted items that are not defined or
recognised under IFRS including adjusted operating profit, adjusted profit before income tax and adjusted earnings
per share. The Directors believe that the adjusted profit measures provide a more useful comparison of business
trends and performance and allow management and other stakeholders to better compare the performance of the
Group between the current and prior year, excluding the effects of certain non-cash charges and one-off or non-
operational items. The Group uses these adjusted profit measures for internal planning, budgeting, reporting and
assessment of the performance of the business.
The tables below show the adjustments made to arrive at the adjusted profit measures and the impact on the
Group’s reported financial performance.
(All figures £’000s)
Adjusted
Results
Adjusted
Items
2018
Reported
Results
Restated
Adjusted
Results
Adjusted
Items
Restated
2017
Reported
Results
Revenue
Cost of sales
Gross profit
Other income
SG&A
Profit on disposal of PPE
Operating profit
Share of JV losses
Finance costs
Profit before tax
Taxation
Profit for the period
156,291
(119,536)
36,755
-
(20,715)
-
16,040
(2,000)
(66)
13,974
(2,745)
11,229
-
696
696
1,097
(9,173)
-
(7,380)
-
153
(7,227)
(2,813)
(10,040)
156,291
154,553
-
154,553
(118,840)
(110,738)
37,451
1,097
43,815
-
(5,017)
(5,017)
-
(115,755)
38,798
-
(29,888)
(17,259)
(4,323)
(21,582)
-
8,660
(2,000)
87
6,747
(5,558)
1,189
(22)
-
(22)
26,534
(9,340)
17,194
-
(2,019)
24,515
483
-
(80)
(9,420)
(918)
24,998
(10,338)
-
(2,099)
15,095
(435)
14,660
(All figures £’000s)
Pre tax
Adjustment
Tax
Impact
2018
Adjusted
Results
Pre tax
Adjustment
Tax
Impact
2017
Adjusted
Results
Share based payments
1,044
(3,607)
(2,563)
(7,526)
5,439
(2,087)
Amortisation of acquired
intangibles
Restructuring
Insurance income
Patent dispute legal fees
Onerous property lease
Discounting
Non cash rent charge
Change in US tax rate
(518)
(3,337)
1,097
(1,262)
(4,404)
153
-
-
109
701
(197)
227
-
(46)
-
-
(409)
(2,636)
900
(1,035)
(4,404)
107
-
-
(1,429)
563
(866)
-
-
-
-
(80)
(385)
-
-
-
-
14
69
-
-
-
-
(66)
(316)
-
(7,003)
(7,003)
Total
(7,227)
(2,813)
(10,040)
(9,420)
(918)
(10,338)
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30.
The nature of the adjusted items is as follows:
• Share based payments – The credit (2017: charge) recorded in accordance with IFRS 2 ‘Share based payment’,
of which £696k (2017: £5,017k charge) has been classified within cost of sales in gross profit and £348k (2017:
£2,509k charge) has been classified as selling, general and administrative expenses in operating profit. The
charge is non-cash.
• Amortisation of acquired intangibles – The amortisation of customer contract intangible assets which arose in
respect of fair value exercises associated with previous acquisitions. The charge of £518k (2017: £1,429k) has
been classified as selling, general and administrative expenses within operating profit and is non-cash.
112
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements • Restructuring – The charge relates to the closure of the Group’s manufacturing facility in New Jersey, USA and
the transfer of the associated trade and assets to the Group’s manufacturing facility in Massachusetts, USA.
Cash costs, none of which have has been defrayed in 2018 total £1,134k and comprise severance and reactor
decommissioning costs with non-cash costs of £2,203k relating to asset impairments. The charge has been
classified as selling, general and administrative expenses within operating profit.
Insurance income – The income relates to insurance proceeds received following the death of the Chief Financial
Officer, Phillip Rasmussen, in April 2018. Obligations payable to Phillip Rasmussen’s estate and fees associated
with the recruitment of Phillip Rasmussen’s successor totalling £1,037k (2017: £nil), of which £589k has been
defrayed in 2018 have been netted off the gross insurance proceeds of £2,134k (2017: £nil). The net insurance
proceeds have been classified as other income within operating profit.
•
• Patent dispute legal costs – The charge relates to legal fees incurred in respect of a patent dispute defence.
Costs of £1,262k (2017: £nil), of which none has been defrayed in 2018 have been classified within selling,
general and administrative expenses within operating profit.
• Onerous property lease - A provision for an onerous property lease was made in 2014 following the restructuring
of the Group’s operations in Singapore. The provision for unused and unlet space at the manufacturing site has
been reassessed in the current year and extended to the end of the lease obligation in 2022.The extension of
the onerous lease provision has resulted in a charge of £4,404k which has been classified within selling, general
and administrative expenses within operating profit. Cash costs associated with the annual rental for the unused
and unlet space total £1,539k.
• Discounting – This relates to the unwind of discounting on long term financial assets of £257k (2017: £235k) and
the unwinding of discounting on long term liabilities of £104k (2017: £155k). Discounting is non-cash and has
been classified as finance costs within profit before tax.
• Non-cash property rent charge – The charge associated with rent free periods on leased property (New foundry
in Newport) classified as selling, general and administrative expenses within operating profit in the prior period
(2017: £385k) has been included as part of the on-going commissioning cost of the foundry in 2018. The charge
is non cash.
• Change in US tax rate – This refers to a deferred tax charge of £nil (2017: £7,003k) 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.
The cash impact of adjusted items in the consolidated cash flow statement represents the cash costs defrayed in
2018 in respect of net insurance proceeds (£1,545k income) and the annual rental associated with the onerous
property lease provision (£1,539k payment).
Adjusted EBITDA (adjusted earnings before interest, tax, depreciation and amortisation) has been calculated as
follows:
2018
£’000
Restated
2017
£’000
Profit attributable to equity shareholders
966
14,560
Non-controlling interest
Finance (income) / costs
Tax
Depreciation of property, plant and equipment
Amortisation of intangible fixed assets
Loss on disposal of fixed assets
Share based payments
Adjusted Items
Restructuring
Insurance income
Patent dispute legal costs
Onerous property lease
Non cash property lease charge
Adjusted EBITDA
223
(87)
5,558
6,773
6,109
-
(1,044)
7,906
3,337
(1,097)
1,262
4,404
-
26,404
100
2,099
435
5,637
6,388
22
7,526
385
-
-
-
-
385
37,152
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30.
113
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 6. Operating profit
The operating profit is stated after charging/(crediting):
Depreciation of property, plant and equipment
Amortisation of intangible assets
Services provided by auditors*
Operating lease rentals
Research and development
Exchange (losses) / gains
Share based payments
Cost of raw materials consumed
Loss on disposal of fixed assets
Adjusted items
2018
£’000
2017
£’000
6,773
6,109
232
8,799
26
(77)
(1,044)
68,250
-
7,906
5,637
6,388
247
8,715
69
1,434
7,526
64,116
22
385
Operating lease rentals includes the variable cash costs of production based on usage that are payable to the
Group’s joint venture, CSC, associated with the Group’s right of use of the joint ventures assets (note 3 and 30).
*A schedule of services provided by the Group’s auditors and related fees is disclosed in the Corporate Governance
Report.
7. Employee costs
Employee costs (including directors’ remuneration)
Wages and salaries
Social security costs
Other pension costs
Share based payments
Average number of employees (including directors)
Manufacturing
Selling, general and administrative
2018
£’000
34,611
3,872
1,576
(1,044)
39,015
2017
£’000
32,783
3,621
1,286
7,526
45,216
2018
2017
Number
Number
423
233
656
400
191
591
Directors’ emoluments, 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 pages 64 to 78 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 £158,000
(2017: £253,000), was £5,234,000 (2017: £4,997,000) and the credit for share-based payments was £2,292,000 (2017:
£5,792,000 charge).
114
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 8. Finance income / (costs)
Bank and other loans
Unwind of discount on long term balances
2018
£’000
(66)
153
87
2017
£’000
(2,019)
(80)
(2,099)
115
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 9. Taxation
Income tax expense
Current tax on profits for the year
Total current tax charge
Origination and reversal of temporary differences
Total deferred tax charge/(credit)
Total tax charge
2018
£’000
880
880
4,678
4,678
5,558
2017
£’000
505
505
(70)
(70)
435
The tax on the Group’s profit before tax differs from the theoretical amount that would arise from applying the
standard rate of corporation tax in the UK of 19.00% (2017: 19.25%) as follows:
2018
£’000
Restated
2017
£’000
Profit on ordinary activities before taxation
6,747
15,095
Tax charge at 19.00% thereon (2017: 19.25%)
(1,282)
(2,906)
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
Share option schemes
Other deferred tax movements
Income not subject to tax
Pre-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
(668)
(800)
-
-
(3,607)
75
444
280
-
(5,558)
(1,063)
309
3,957
1,250
5,439
(11)
-
(407)
(7,003)
(435)
The share option schemes amount shown above represents the change in the expected tax impact on the exercise
of options, principally reflecting the reduction in future corporation tax deductions associated with the decrease in
share price and a reduction in the number of options where performance criteria are expected to be achieved.
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.
No further amendments to the main rate of corporation tax were announced as part of Finance (No.2) Bill 2017
or Finance (No.2) Bill 2018. Accordingly, the closing UK deferred tax asset in the financial statements has been
recognised in accordance with the rate reductions enacted as part of the Finance (No.2) Bill 2016.
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 in 2017 and 2018. 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.
116
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
Amounts recognised directly in equity
Aggregate current and deferred tax arising in the period and not
recognised in net profit or loss or other comprehensive income but
directly debited or credited to equity:
Deferred tax: Share options
Total tax (charge) / credit to equity for the year
10. Deferred Taxation
Deferred tax asset
At 1 January
Income statement (charge)/credit recognised in the year
Tax (charge)/credit relating to components of other comprehensive
income
Exchange differences
At 31 December
2018
£’000
(437)
(437)
2018
£’000
17,768
(4,678)
(437)
591
13,244
2017
£’000
683
683
2017
£’000
18,181
70
683
(1,166)
17,768
The current portion of the deferred tax asset is £4,835,000 (2017: £5,000,000) 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 2017
Credited to income statement
Exchange differences
At 31 December 2017
Credited/(charged) to income statement
Exchange differences
At 31 December 2018
Deferred tax assets
At 1 January 2017
Credited/(charged) to income statement
Credited to equity
Exchange differences
At 31 December 2017
Credited/(charged) to income statement
Charged to equity
Exchange differences
At 31 December 2018
Accelerated
Capital
Allowances
£’000
Intangibles
£’000
(10,693)
3,228
683
(6,782)
(2,218)
(330)
(9,330)
Tax
Losses
£’000
33,410
(8,933)
-
(2,075)
22,402
1,114
-
936
24,452
(7,848)
3,098
249
(4,501)
387
(21)
(4,135)
Other
£’000
3,312
2,677
683
(23)
6,649
(3,961)
(437)
6
2,257
Total
£’000
(18,541)
6,326
932
(11,283)
(1,831)
(351)
(13,465)
Total
£’000
36,722
(6,256)
683
(2,098)
29,051
(2,847)
(437)
942
26,709
117
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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 £473,000 (2017: £505,000) in respect of losses
amounting to £2,491,000 (2017: £2,805,000) 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 in the UK totalling £36,630,000 (2017: £32,931,000) have no date of expiry. Tax losses 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
£87,909,000 (2017: £79,493,000) losses amounting to £1,000 and £6,931,000 expire in 2019 and 2020.
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.
A credit of £324,000 (2017: £487,000) has been recognised within operating profit in relation to claims made under
the R&D Expenditure Credit Scheme (RDEC) in the UK.
Company
Deferred tax assets
At 1 January 2017
Credited to income statement
Credited to equity
At 31 December 2017
Credited to income statement
Credited to equity
At 31 December 2018
11. Dividends
Tax
Losses
£’000
Share
Options
£’000
Other
Timing
Differences
£’000
-
-
-
-
-
-
-
-
4,974
246
5,220
(3,673)
(209)
1,338
-
32
-
32
(5)
-
27
Total
£’000
-
5,006
246
5,252
(3,678)
(209)
1,365
No dividend has been paid or proposed in 2018 (2017: £nil).
118
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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
2018
£’000
966
10,040
11,006
2018
Number
Restated
2017
£’000
14,560
10,338
24,898
2017
Number
Weighted average number of ordinary shares
Dilutive share options
761,750,145
689,537,776
37,072,892
47,142,160
Adjusted weighted average number of ordinary shares
798,823,037
736,679,936
Adjusted basic earnings per share
Basic earnings per share
Adjusted diluted earnings per share
Diluted earnings per share
1.44p
0.13p
1.38p
0.12p
3.61p
2.11p
3.38p
1.98p
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30.
119
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
13. Intangible assets
Group
Cost
At 1 January 2018
Additions
Foreign exchange
At 31 December 2018
Goodwill
£’000
Patents
£’000
Development
costs
£’000
Software
£’000
Customer
contracts
£’000
Total
£’000
64,408
-
3,222
67,630
3,043
4,160
21
7,224
57,621
6,800
7,427
139,299
9,854
1,936
958
17
-
14,972
401
5,597
69,411
7,775
7,828
159,868
Accumulated amortisation and impairment
At 1 January 2018
Charge for the year
Foreign exchange
At 31 December 2018
Net book value
-
-
-
-
340
95
4
439
22,083
1,812
6,551
30,786
4,702
807
794
12
518
375
6,109
1,198
27,592
2,618
7,444
38,093
At 31 December 2018
At 31 December 2017
67,630
64,408
6,785
2,703
41,819
35,538
5,157
4,988
384
876
121,775
108,513
Group
Cost
Goodwill
£’000
Patents
£’000
Development
costs
£’000
Software
£’000
Customer
contracts
£’000
Total
£’000
At 1 January 2017
69,574
2,195
Additions
Reclassified to
investments
-
-
Foreign exchange
At 31 December 2017
(5,166)
64,408
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)
8,129
130,062
-
-
17,856
(75)
(702)
(8,544)
7,427
139,299
5,684
1,429
(562)
26,090
6,388
(1,692)
1,812
6,551
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
108,513
2,445
103,972
Customer contract intangible assets relate to customer contracts acquired as part of a business combination.
120
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements The amortisation charge of £6,109,000 (2017: £6,388,000) has been charged to selling, general and administrative
expenses in the Consolidated Income Statement.
Impairment tests for goodwill
Goodwill is tested for impairment annually and whenever there is an indication of impairment at the level of the
cash-generating unit (CGU) or group of CGUs to which it is allocated. Multiple production facilities are included in a
single CGU reflecting that production can (and is) transferred between sites for different operating segments to suit
capacity planning and operational efficiency. Given the interdependency of facilities, goodwill is therefore tested for
impairment by grouping operational sites into a CGU or CGUs based on type of production. This gives rise to the
following allocation of goodwill:
Allocation of goodwill by CGU
III/V Epitaxy
Substrates
Total Goodwill
2018
£’000
60,121
7,509
67,630
2017
£’000
57,284
7,124
64,408
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 based upon a long term growth rate of 2% (2017: 2%). The
discount rate used is based on a common risk profile across the Group.
The Board approved 2019 budget has been used for the first year of the forecast with the mid-point of the guidance
published in 2018 used as the growth rate for each of the Group’s operating segments in years two to five. In 2017
the Board approved 2018 budget was used for the first year of the forecast with EBITDA growth of 10% per annum
assumed in years two to five. The discount factor applied to the forecast in 2017 was 10%.
The key assumptions applied in the 2018 cash flow forecast are summarised below:
Year 1
%
Year 2
%
Year 3
%
Year 4
%
Year 5
%
Pre-tax weighted average
cost of capital discount rate
10
10
10
10
10
Photonics growth rate
2019 Budget
Wireless growth rate
Infrared growth rate
2019 Budget
2019 Budget
50
3.0
10.0
50
3.0
10.0
50
3.0
10.0
50
3.0
10.0
The recoverable amount of the III/V Epitaxy CGU determined based on value in use cash flow projections exceeds the
carrying amount of the associated goodwill by greater than £1bn.
The recoverable amount of the Substrate CGU determined on a value in use basis exceeds the carrying amount of
the associated goodwill by greater than £70m.
No impairment would arise if the discount rate for the III/V Epitaxy or Substrate CGU was increased from 10% to 15%.
No impairment would arise if the growth rate in each operating segment in the forecast period after 2019 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 growth rate in each operating segment in the forecast period after 2019 for both the III/V Epitaxy and
Substrates CGU’s was restricted to zero.
121
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Patents
Software
£’000
£’000
1,599
4,016
5,615
-
-
-
5,615
1,599
564
237
801
87
66
153
648
477
Patents
Software
£’000
£’000
1,372
227
1,599
-
-
-
1,599
1,372
416
148
564
40
47
87
477
376
Total
£’000
2,163
4,253
6,416
87
66
153
6,263
2,076
Total
£’000
1,788
375
2,163
40
47
87
2,076
1,748
Company
Cost
At 1 January 2018
Additions
At 31 December 2018
Accumulated amortisation
At 1 January 2018
Charge for the year
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
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
122
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 14. Property, plant and equipment
Group
Cost
At 1 January 2018
Additions
Disposals
Foreign exchange
Land and
buildings
Short leasehold
improvEments
Fixtures
and fittings
Plant and
machinery
£’000
£’000
£’000
£’000
Total
£’000
8,731
2,495
-
270
32,112
5,635
153,642
200,120
914
-
1,927
34,953
701
-
351
34,752
38,862
-
-
6,776
9,324
6,687
195,170
248,306
At 31 December 2018
11,496
Accumulated depreciation
At 1 January 2018
Charge for the year
Impairment
Foreign exchange
3,728
17,376
3,999
84,217
109,320
195
-
45
965
-
863
495
-
50
5,118
1,651
5,159
6,773
1,651
6,117
At 31 December 2018
3,968
19,204
4,544
96,145
123,861
Net book value
At 31 December 2018
At 31 December 2017
7,528
5,003
15,749
14,736
2,143
1,636
99,025
124,445
69,425
90,800
Property, plant and equipment includes assets in the course of construction with a net carrying value of £37,675,000
(2017: £9,989,000) primarily relating to leasehold improvements, plant and equipment purchased for the Group’s
manufacturing site at Newport, United Kingdom and buildings, plant and equipment purchased for the Group’s
manufacturing site at Hsinchu, Taiwan.
Land and
buildings
Short leasehold
improvements
Fixtures
and fittings
Plant and
machinery
£’000
£’000
£’000
£’000
Total
£’000
34,400
5,437
149,022
197,541
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
8,682
321
-
(272)
8,731
3,610
182
-
(64)
70
-
(2,358)
32,112
17,774
547
-
(945)
At 31 December 2017
3,728
17,376
Net book value
At 31 December 2017
At 31 December 2016
5,003
5,072
14,736
16,626
367
-
(169)
5,635
3,817
335
-
(153)
3,999
1,636
1,620
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
123
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Company
Cost
At 1 January 2018
Additions
At 31 December 2018
Accumulated depreciation
At 1 January 2018
Charge for the year
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
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
15. Investments
Group
Cost
At 1 January 2018
At 31 December 2018
Group
Cost
At 1 January 2017
Reclassified from intangible assets
At 31 December 2017
Fixtures and fittings
£’000
87
18
105
77
13
90
15
10
Fixtures and fittings
£’000
76
11
87
71
6
77
10
5
Equity investments
£’000
75
75
Equity investments
£’000
-
75
75
The reclassification in 2017 relates to the reclassification of the investment in Seren Photonics Limited.
124
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Company
Cost
At 1 January 2018
Subsidiaries share based payments charge
At 31 December 2018
Provisions for impairment
At 1 January 2018
Reversal of impairment
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Company
Cost
At 1 January 2017
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
Investments in
subsidiaries
£’000
Other equity
investments
£’000
120,118
1,067
121,185
32,032
-
32,032
89,153
88,086
75
-
75
-
-
-
75
75
Investments in
subsidiaries
£’000
Other equity
investments
£’000
119,997
121
120,118
71,514
(39,482)
32,032
88,086
48,483
75
-
75
-
-
-
75
75
Total
£’000
120,193
1,067
121,260
32,032
-
32,032
89,228
88,161
Restated
Total
£’000
120,072
121
120,193
71,514
(39,482)
32,032
88,161
48,558
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 were reversed in 2017 based upon actual and forecast performance of the underlying
trading businesses. The recoverable amount of each investment was 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 was used for the first year of the forecast. The cash flow projections were consistent with the
cash flow projections used for the goodwill impairment review performed in 2017.
125
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
16. Inventories
Raw materials and consumables
Work-in-progress and finished goods
2018
£’000
29,001
6,708
35,709
Restated
2017
£’000
25,067
7,977
33,044
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30
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 £6,415,000 (2017: £6,273,000).
£1,419,000 (2017: £440,000) of inventories were written down during 2018 and an expense recognised in the income
statement.
17. Trade and other receivables
Current
2018
Group
£’000
2018
Company
£’000
Restated
2017
2017
Group
£’000
Company
£’000
Trade receivables
18,615
-
18,440
-
Amounts owed by group undertakings
-
146,607
-
114,138
Other receivables
Contract assets
Prepayments
Non-current
Financial assets
5,280
12,173
1,947
38,015
2018
Group
£’000
7,937
583
-
138
3,712
8,346
2,771
-
-
91
147,328
33,269
114,229
2018
Company
£’000
-
2017
Group
£’000
7,680
2017
Company
£’000
-
The comparative financial information for the year ended 31 December 2017 has been restated. Details of the
restatement are set out in note 2.30.
Contract assets relate to bespoke manufactured customer products where the Group has a guaranteed contractual
right of payment. Contract assets are transferred to receivables at the point that manufactured products are
delivered to customers, except for supplier managed inventory arrangements where contract assets are transferred
to receivables from the earlier of a specified contractual date following delivery or when the product is drawn from
inventory by the customer. All contract assets at 31 December 2017 have been transferred to receivables during
2018.
As at 31 December 2018, 86% (2017: 80%) of trade receivables were within terms. Of the other trade receivables,
89% (2017: 69%) were less than 30 days past due. An allowance has been made for estimated irrecoverable
amounts from the sale of goods of £224,000 (2017: £222,000). This allowance has been determined by reference to
past default experience.
Trade receivables are with established customers. We monitor customer D&B credit ratings and have had no
material defaults in the past. None of our receivables are with customers where we have had any history of default.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable as set out
above. In terms of trade receivables, the terms of sale provide that the Group has recourse to the products sold in
the event of non-payment by a customer.
126
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Amounts owed by Group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5%
per annum (2017: 5% per annum).
Financial assets relate to £8,800,000 of Preferred ‘A’ shares (2017: £8,800,000) 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.
18. Trade and other payables
Current
2018
Group
£’000
2018
Company
£’000
2017
Group
£’000
2017
Company
£’000
Trade payables
25,343
970
23,554
Amounts owed by group undertakings
-
15,106
Other taxation and social security
Other payables
Accruals and deferred income
1,931
10,843
7,791
45,908
1,628
1,389
1,613
-
4,778
5,580
9,260
20,706
43,172
1,139
14,351
4,151
-
1,595
21,236
Accruals and deferred income includes no contract liabilities (2017: £nil)
Amounts owed to group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5%
per annum (2017: 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 2018 or 31 December 2017.
127
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 19. Borrowings
Group and company
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
2018
£’000
2017
£’000
-
-
-
-
-
-
-
-
-
-
2018
£’000
2017
£’000
-
-
-
-
-
-
-
-
On 24 January 2019, the Company agreed a new £27,300,000 ($35,000,000) multi-currency revolving credit facility,
provided by HSBC which is secured over the assets of IQE plc and certain subsidiary companies. The facility has a
three-year term and an interest rate margin of between 1.45 and 1.95 per cent per annum over LIBOR on any drawn
balances.
128
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 20. Provisions for other liabilities and charges
Group
Restructuring
Onerous
Lease
As at 1 January
Charged to the income
statement
Utilised during the year
Foreign exchange
As at 31 December
Group
Current
Non-current
Total
£’000
-
1,091
-
43
1,134
Restructuring
£’000
1,134
-
1,134
£’000
2,200
4,404
(1,539)
191
5,256
Onerous
Lease
£’000
1,420
3,836
5,256
2018
Total
£’000
2,200
5,495
(1,539)
234
6,390
2018
Total
£’000
2,554
3,836
6,390
Onerous
Lease
£’000
3,588
-
(1,372)
(16)
2,200
Onerous
Lease
£’000
1,534
666
2,200
2017
Total
£’000
3,588
-
(1,372)
(16)
2,200
2017
Total
£’000
1,534
666
2,200
During 2014, 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 provision
for unused and unlet space at the manufacturing site has been reassessed in the current year and extended to the
end of the lease obligation in 2022 given the low level of interest from external parties to sublet the residual unused
space. The onerous lease provision is expected to be utilised over the period to 2022 and has been discounted using
a risk free rate of 2.5%.
The restructuring provision relates to costs associated with the closure of the Group’s manufacturing facility in New
Jersey, USA and the transfer of the trade and assets to the Group’s manufacturing facility in Massachusetts, USA. The
provision principally comprises severance and reactor decommissioning costs and is expected to be utilised during
2019.
129
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 21. Financial Instruments
Financial instruments by category
Trade and other receivables (excluding prepayments) and cash and cash equivalents are classified as financial assets
at amortised cost. Borrowings and trade and other payables are classified as 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 with the exception of the preference share instruments which are
classified as level 3.
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 is the carrying value of each class of financial asset as set
out below. In terms of trade receivables, the terms of sale provide that the Group has recourse to the products sold
in the event of non-payment by a customer.
Assets as per balance sheet
Carrying amount
Cash and cash equivalents
Trade receivables
2018
Group
£’000
2018
Company
£’000
Restated
2017
2017
Group
£’000
Company
£’000
20,807
18,615
4,582
-
45,612
18,440
31,281
-
Amounts owed by group undertakings
-
146,607
-
114,138
Other receivables excluding prepayments
Financial Assets (Preference share receivables)
17,453
7,937
64,812
583
-
151,772
12,058
7,680
83,790
-
-
145,419
Included in other receivables are contract assets of £12,173,000 (2017: £8,346,000).
130
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
The Group is exposed to credit concentration risk with its three largest customers which represent 63% (2017: 64%)
of outstanding trade receivables and contract asset 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
Provision
2018
£’000
16,163
2,387
289
18,839
2018
£’000
-
-
224
224
Net
2018
£’000
2017
£’000
16,163
15,012
2,387
65
2,513
1,137
18,615
18,662
2017
£’000
-
-
222
222
Net
2017
£’000
15,012
2,513
915
18,440
Gross
Provision
An allowance has been made for estimated irrecoverable amounts from the sale of goods of £224,000 (2017:
£222,000). This allowance has been determined on an expected credit loss basis 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 contract assets are primarily denominated in US dollars, as are trade payables (note 18) limiting the exposure
of the Group to movements in foreign exchange rates. Based on the balances held at 31 December 2018 a 1 cent
movement in the US dollar to Sterling rate would impact the net value of these instruments by £12,000 (2017:
£13,000).
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 (2017: £1.0m).
The following shows the contractual maturities of financial liabilities, including interest payments, where applicable
and excluding the impact of netting agreements on an undiscounted basis:
Analysis of contractual cash flow maturities -
Other financial liabilities at amortised cost
Carrying
amount
Contractual
Cash flows
Less
than 12
months
1 –2
Years
2–5
Years
5+
Years
31 December 2018
Trade and other payables
£’000
36,186
36,186
£’000
£’000
£’000
£’000
£’000
36,186
36,186
36,186
36,186
-
-
-
-
-
-
Analysis of contractual cash flow maturities -
Other financial liabilities at amortised cost
Carrying
amount
Contractual
Cash flows
Less
than 12
months
1 – 2
Years
2 – 5
Years
5+
Years
31 December 2017
Trade and other payables
£’000
29,134
29,134
£’000
£’000
£’000
£’000
£’000
29,134
29,134
29,134
29,134
-
-
-
-
-
-
131
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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 four 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 2018 and 31
December 2017 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 £13,000 (2017: £8,000).
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 2017. 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 2017 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 1 January 2017 bore interest of 5%
and was repayable by monthly instalment prior to full repayment of the outstanding balance in 2017.
The US Dollar acquisition facility, which had a principal outstanding of £6.5m at 1 January 2017 bore interest of
between 2.5% to 2.95% over LIBOR and was repayable by quarterly instalments prior to full repayment of the
outstanding balance in 2017.
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 prior to full repayment of the outstanding balance in 2017.
The UK Sterling capital expenditure facility, which had a principal outstanding of £5.0m at 1 January 2017 bore
interest at 1.90% over the bank of England base rate and was repayable by monthly instalment prior to full
repayment of the outstanding balance in 2017.
The UK asset lending facility, which was drawn down during 2017 bore interest at 1.7% per annum over LIBOR and
was repayable by monthly instalment prior to full repayment of the outstanding balance in 2017.
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% (2017: 100%). The Group had nil (2017: nil) interest bearing financial liabilities at 31 December 2018.
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 2018 would impact annual interest
132
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements income by approximately £40,000. At 31 December 2017 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 December 2017
would have impacted the annual interest charge prior to the redemption of the bank borrowings by approximately
£230,000.
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 2018 was £290,471,000 (2017: £245,567,000).
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 2018 the gearing ratio
was nil% (2017: nil%).
All covenants in relation to the Group’s borrowing facilities were complied with prior to the repayment of the
borrowings during the prior year.
Fair values
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are
as follows:
2018
Carrying
amount
£’000
20,807
18,615
5,280
12,173
7,937
2018
Fair
value
£’000
20,807
18,615
5,280
12,173
7,704
Restated
2017
Carrying
amount
£’000
45,612
18,440
3,712
8,346
7,680
Cash and cash equivalents
Trade receivables
Other receivables
Contract assets
Financial Assets (Preference share receivables)
Trade and other payables
(36,186)
(36,186)
(29,134)
28,626
28,393
54,656
Restated
2017
Fair
value
£’000
45,612
18,440
3,712
8,346
7,680
(29,134)
54,656
Basis for determining fair value
The following summarises the significant methods and assumptions used in estimating the fair values of financial
instruments reflected in the table above.
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 contract assets
Trade receivables, other receivables and contract assets 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 was calculated by discounting the expected cash flows.
133
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 22. Share capital
Group and Company
Allotted, called up and fully paid
2018
Number
of shares
2018
£’000
2017
Number
of shares
2017
£’000
Ordinary shares of 1p each
776,699,681
7,767
756,050,549
7,560
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
2018
Number
2017
Number
756,050,549
675,506,061
16,386,876
12,602,907
4,262,256
-
-
67,941,581
776,699,681
756,050,549
20,649,132 ordinary shares (2017: 80,544,488 ordinary shares) were issued during the year as follows:
Equity share placing
Employee share schemes
Translucent consideration
2018
Number
of shares
-
16,386,876
4,262,256
20,649,132
2018
Consideration
-
Nil to 50.3p
83.7p
2017
Number
of shares
67,941,581
12,602,907
-
80,544,488
2017
Consideration
1.40p
Nil to 50.3p
-
The share premium arising from consideration received from employee share scheme exercises of £813,000 (2017:
£2,541,029) was £1,694,000 (2017: £2,415,000). The share premium arising from the non-cash equity consideration
paid to Translucent for the purchase of the cREO(TM) technology and IP portfolio was £3,526,000 (2017: £nil). This
amount, along with the share capital value of £42,623 has been recognised as an intangible asset addition within
patents (note 13). The share premium arising from the equity share placing consideration received in 2017 of
£95,118,000 was £94,439,000. Costs associated with the share placing totalling £2,006,366 were debited to share
premium.
23. Share based payments
The total amount credited to the income statement in 2018 in respect of share based payments was £1,044,000
(2017: £7,526,000 charge). Included within the share based payments credit is a £2,315,000 (2017: £5,668,000
charge) credit 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 pages 63 to 78.
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.
134
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 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
2018
24.57p
7.40p
3
10
3
55%
0.9%
0%
2017
24.56p
8.93p
3
10
3
56%
1.20%
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 2018
was £1,672,000 (2017: £3,998,000).
The movements on long term incentive awards and share options during the year were as follows:
At 1 January
Granted
Exercised
Cancelled/lapsed
At 31 December
2018
Number
of options
57,351,945
1,642,968
(15,376,590)
(4,824,445)
38,793,878
2018
Average exercise
price (pence)
7.29p
35.78p
4.73p
1.29p
11.02p
2017
Number
of options
60,557,376
10,382,654
(11,468,580)
(2,119,505)
57,351,945
2017
Average exercise
price (pence)
9.42
6.42
15.68
18.63
7.29
The weighted average share price at the date share options were exercised was 87.35p (2017: 94.50p).
10,474,151 long term incentive awards were exercised during the year (2017: Nil). As at 31 December 2018, the total
number of long term incentive awards and share options held by employees was 38,793,878 2017: 57,351,945) as
follows:
Option price pence/share
Option period ending
2018
Number of options
2017
Number of options
16.10p - 16.10p
3.65p - 17.07p
0.01p – 45.58p
9.15p – 50.25p
0.01p – 28.17p
0.01p – 27.75p
0.01p – 23.83p
18.42p – 25.17p
0.01p – 37.92p
0.01p – 169.50p
0.01p – 143.30p
At 31 December
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
31 December 2028
-
3,017,694
770,625
2,484,306
3,898,940
7,132,690
2,843,851
322,500
9,379,249
7,641,116
1,302,907
38,793,878
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
135
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
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
£2,304,000 (2017: £40,387,000).
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
Impairment of property, plant & equipment
Non-cash provision movements
Non cash rent charges on rent free periods on leased property
Share based payments
Cash inflow from operations before changes in working capital
Increase in inventories
Increase in trade and other receivables
(Decrease) / increase in trade and other payables
Cash inflow from operations
Company
Profit before tax
Finance income
Finance costs
Foreign exchange
Depreciation
Amortisation
Reversal of impairment
Share based payments
Cash (outflow)/inflow from operations before changes in working capital
2018
£’000
6,747
(87)
6,773
6,109
-
1,651
5,495
-
(1,044)
25,644
(1,387)
(4,032)
(3,237)
16,988
2018
£’000
5,982
(6,299)
-
(1,861)
13
66
-
(1,898)
(3,997)
Restated
2017
£’000
15,095
2,099
5,637
6,388
22
-
-
385
7,526
37,152
(6,506)
(6,822)
5,893
29,717
2017
£’000
35,381
(5,246)
1,846
(2,498)
6
47
(39,482)
6,921
(3,025)
Increase in trade and other receivables
Increase / (decrease) in trade and other payables
Cash outflow from operations
(28,425)
(13,024)
2,090
(5,736)
(30,332)
(21,785)
136
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 26. Reconciliation of net cash flow to movement in net funds / (debt)
(Decrease)/increase in cash in the year
Increase in borrowings
Repayment of borrowings
Repayment of leases
Net movement resulting from cash flows
Net funds/ (debt) at 1 January
Net movement resulting from cash flows
Non-cash movements
Net cash at 31 December
27. Analysis of net funds
Bank borrowings due after one year
Bank borrowings due within one year
Total borrowings
Cash and cash equivalents
Net funds
2018
£’000
(25,292)
-
-
-
(25,292)
45,612
(25,292)
487
20,807
2017
£’000
40,904
(27,864)
68,697
6,733
88,470
(39,549)
88,470
(3,309)
45,612
At 1
January
2018
£’000
-
-
-
Cash
flow
£’000
-
-
-
45,612
45,612
(25,292)
(25,292)
Other
non-cash
movements
£’000
At 31
December
2018
£’000
-
-
-
487
487
-
-
-
20,807
20,807
Cash and cash equivalents at 31 December 2017 and 31 December 2018 comprised balances held in instant access
bank accounts and other short term deposits with a maturity of less than 3 months.
137
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements Activity
Country of
incorporation
Registered
Office
28. Subsidiary undertakings
Name of company
Class of
capital
IQE (Europe) Limited Ordinary
shares of
£1
Proportion
of shares
held
100%*
IQE Inc
IQE KC LLC
IQE Taiwan ROC**
IQE RF LLC
IQE Silicon
Compounds Limited
MBE Technology Pte
Ltd
Wafer Technology
Limited
NanoGaN Limited
Galaxy Compound
Semiconductors Inc
Common
stock of
$0.001
Limited
liability
company
Ordinary
shares of
NT$10
Limited
liability
company
Ordinary
shares of
£1
Preferred
shares of
S$1
Ordinary
shares of
S$1
Ordinary
shares of
£1
Ordinary
shares of
£0.001
Common
stock of
$0.00 par
value
EPI Holding Limited Ordinary
shares of
£1
KTC Wireless LLC
IQE USA Inc
IQE Solar LLC
IQE Properties Inc
Wafer Technology
International Limited
Limited
liability
company
Limited
liability
company
Limited
liability
company
Limited
liability
company
Ordinary
shares of
£1
Manufacture of advanced
semiconductor materials
UK
Manufacture of advanced
semiconductor materials
USA
Manufacture of advanced
semiconductor materials
USA
Manufacture of advanced
semiconductor materials
Taiwan
100%*
100%*
90%
100%*
Manufacture of advanced
semiconductor materials
USA
100%
100%
100%
100%*
100%
100%*
100%
100%
100%
Manufacture of silicon
epitaxy
UK
Manufacture of advanced
semiconductor materials
Singapore
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
UK
USA
UK
USA
USA
100%*
Dormant company
USA
100%*
100%
Property holding
company
Dormant holding
company
USA
UK
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 of £32,400,000 (2017: £28,844,000), EBITDA of £6,235,000
138
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
(2017: £4,302,000) and net assets of £35,480,000 (2017: £32,290,000) 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.
29. Joint Ventures
The Group holds investments in two joint ventures as follows:
Class of capital
Proportion of
shares held
Activity
Country of
incorporation
Registered
Office
Name of
company
Compound
Semiconductor
Centre Limited.
Common stock
of £1 par value
50%*
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
CSDC Private
Limited.
Common stock
of $1 par value
51%*
* Indirect holdings
Compound Semiconductor Centre Limited (‘CSC’)
On 9 July 2015 the Group entered into a joint venture agreement with Cardiff University to create the CSC in the
United Kingdom. The shareholder agreement establishes that the CSC is jointly controlled by the shareholders who
have an equal share of the voting rights such that the Group’s investment in the joint venture is accounted for using
the equity method in accordance with the accounting policies set out in note 2 and note 3.
The commercial purpose of the CSC is the research, development and manufacture by metal organic vapour phase
epitaxy (‘MOVPE’) of advanced compound semiconductor materials in Europe.
The business was set-up by the joint venture partners to provide a bridge between early stage research and high
volume manufacturing and was established in a manner to provide the CSC with the capability to deliver specialist
compound semiconductor product development, prototyping and early stage manufacturing services to academic
and industrial customers from its own compound semiconductor foundry.
On the formation of the joint venture the Group contributed fixed assets, independently valued at £12,000,000,
transferred employees and licensed intellectual property to establish the CSC’s manufacturing and technical
capability whilst at the same time entering into an agreement with CSC that conveys to the Group the right to use
the assets of the CSC for a minimum five year period following formation of the joint venture (see note 3a). Cardiff
University contributed cash.
The intellectual property license relates to technical know-how and is licensed to the CSC under the terms of a
perpetual licence that can only be terminated in a limited number of circumstances, none of which currently apply as
the CSC is not in breach of the license agreement. The Group has no obligation to enhance or develop the licensed
intellectual property. The licence fee of £20,000,000, mutually agreed by the Group and Cardiff University was
recognised as license income in accordance with the Group’s revenue recognition policy for perpetual licenses (see
note 2) in 2015 and 2016 when the intellectual property was transferred to the CSC.
The contractual right granted by the CSC to the Group to use its assets provides the Group with access to
manufacturing capacity and de-risks the initial establishment of the CSC as the Group operates as a cornerstone
customer during the early stages of the development of the CSC’s business when it is required to fund running costs
associated with its foundry whilst developing its business and own independent revenue streams.
Costs associated with the right to use the assets of the CSC are charged to the Group at a mutually agreed price by
the Group and Cardiff University. The price reflects the Group’s right to use the assets and is variable based on the
CSC’s cash cost of production (including direct labour, materials and other foundry costs) providing the CSC with a
low cost, low risk route to build its business whilst covering its manufacturing related operating costs.
139
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements The arrangements between the joint venture parties, structured in the first five years to provide the Group with
its required level of manufacturing capacity and to provide the CSC with sufficient flexibility to develop its business
envisaged that reliance on the Group as the cornerstone customer will reduce. The CSC continues to achieve key
business milestones, including the development of its own independent commercial customer relationships and
funded collaborative research and development projects which has resulted in its reliance on the Group reducing
as these independent relationships and revenue streams continue to increase in number and value with external
revenue totalling £1,104,000 (2017: £302,000).
The CSC’s financial year end is 31 December which is co-terminus with the Group and has been used to prepare the
consolidated Group financial statements and the summary CSC financial information set out below. No dividend has
been received by the Group from the CSC (2017: £nil).
Summary information for Compound Semiconductor Centre Limited
Summary income statement
Revenue
EBITDA / (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
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
2018
£’000
7,759
60
(5,944)
(5,944)
(5,944)
2018
£’000
30,034
592
(1,784)
(20,387)
8,455
2018
£’000
8,455
50%
4,228
(12,000)
7,772
-
2018
£’000
(7,566)
-
(2,920)*
(10,486)**
2017
£’000
6,369
(478)
(6,287)
(6,287)
(6,287)
2017
£’000
34,268
413
(1,013)
(19,371)
14,297
2017
£’000
14,297
50%
7,148
(12,000)
4,852
-
2017
£’000
(4,423)
-
(3,143)
(7,566)**
The comparative financial information has been adjusted to reflect the final signed 31 December 2017 statutory
financial statement position for CSC.
* Includes share of total comprehensive expense for the period (£2,972,000) and share of CSC transactions with
owners recognised directly in equity (£52,000).
** Includes £2,714,000 (2017: £2,714,000) prior period unrecognised unrealised gains on transactions with CSC.
140
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
Compound Semiconductor Development Centre Private Limited (‘CSDC’)
On 23 March 2015 the Group entered into a joint venture agreement with an existing customer, WIN Semiconductors
Corp (‘WIN’) and Nangyang Technological University and four representatives of the University (‘NTU’) to create the
CSDC in Singapore. The shareholder agreement establishes that CSDC is jointly controlled by the shareholders with
the Group’s investment in the joint venture accounted for using the equity method in accordance with the accounting
policies set out in note 2 and note 3.
The commercial purpose of the CSDC is the research, development and manufacture by molecular beam epitaxy
(‘MBE’) of advanced compound semiconductor materials in Asia.
The business was set-up by the joint venture partners to develop intellectual property associated with advanced
compound semiconductor materials, provide product development, prototyping and early stage manufacturing
services to academic and industrial customers and provide manufacturing services to shareholders and other non-
shareholder customers.
On the formation of the joint venture the Group transferred employees and licensed the use of certain intellectual
property and equipment to establish the CSDC’s manufacturing and technical capability whilst at the same
time entered into a manufacturing agreement with the CSDC that contained minimum expenditure and pricing
commitments consistent with purchase and pricing commitments made by WIN under the terms of its manufacturing
agreement with the Group. NTU contributed technical expertise governed by a formal framework collaboration
agreement with the CSDC.
The contractual arrangements entered into by the joint venture partners provide NTU with a route to commercialise
intellectual property and provides WIN with access to manufacturing capacity in a manner that de-risks the initial
establishment of the CSDC as WIN operates as the cornerstone customer during the early stages of the CSDC’s
business development.
The Group licenses its intellectual property and plant and equipment under finite period licenses. The licenses
provided the CSDC with the option to extend the initial license period, an option which was exercised in the current
year. License fees are mutually agreed by the joint venture partners with license revenue recognised as income on an
accruals basis in accordance with the Group’s revenue recognition policy (see note 2).
The arrangements between the joint venture parties, structured to provide the CSDC with sufficient flexibility to
develop its business, envisaged that reliance on WIN as the ultimate cornerstone customer, via the back to back
minimum purchase guarantee commitments between the Group and CSDC and the Group and WIN, would reduce.
During the year the Group made payments on behalf of CSDC, totalling £2.0m, during a period when CSDC has
required funding following a significant reduction in revenues which has coincided with increased investment in new
customer engagements as CSDC continued to develop its business working with twelve new Chinese customers
across a range of product qualifications.
The CSDC’s financial year end is 31 December which is co-terminus with the Group and has been used to prepare the
consolidated Group financial statements and the summary CSDC financial information set out below. No dividend has
been received by the Group from the CSDC (2017: £nil).
141
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
Summary information for CSDC Private Ltd
Summary income statement
Revenue
LBITDA
Loss from continuing operations
Loss for the period
2018
£’000
4,428
(4,791)
(5,006)
(5,006)
2018
SG$’000
7,908
(8,556)
(8,939)
(8,939)
2017
£’000
10,373
(1,469)
(1,431)
(1,431)
2017
SG$’000
18,199
(2,577)
(2,511)
(2,511)
Total comprehensive expense for the period
(5,006)
(8,939)
(1,431)
(2,511)
Summary balance sheet
Non-current assets
Current assets
Current Liabilities
Non-current Liabilities
2018
£’000
2018
SG$’000
-
-
2,374
4,165
(1,236)
(2,169)
(9,944)
(17,446)
2017
£’000
-
2,854
(1,646)
(4,789)
2017
SG$’000
-
5,189
(2,993)
(8,707)
Deficit attributable to Joint venturers
(8,806)
(15,450)
(3,581)
(6,511)
Carrying value of equity interest CSDC Private Ltd
2018
£’000
2018
SG$’000
2017
£’000
2017
SG$’000
Net liabilities of CSDC Private Limited
(8,806)
(15,450)
(3,581)
(6,511)
Proportion of the Groups ownership interest
51%
51%
51%
51%
Groups share of net liabilities
(4,491)
(7,880)
(1,826)
(3,320)
Share of losses recognised in income statement
Cumulative unrecognised losses
Carrying amount of the Groups interest in the JV
2,000
2,491
-
3,571
4,309
-
-
-
1,826
3,320
-
-
Summary of cumulative unrecognised losses
2018
£’000
2018
SG$’000
2017
£’000
2017
SG$’000
Cumulative unrecognised losses brought forward
(1,826)
(3,320)
(1,096)
Unrecognised losses in the year
(665)*
(989)
(730)
(2,010)
(1,310)
Cumulative unrecognised losses carried forward
(2,491)
(4,309)
(1,826)
(3,320)
* Includes foreign exchange loss of £110,000 associated with retranslation of opening net liabilities at the closing
year end exchange rate.
The comparative financial information has been adjusted to reflect the final signed 31 December 2017 statutory
financial statement position for CSDC.
142
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements
30. Related party transactions
The Group incurred professional fees and expenses during the year of £31,250 (2017: £125,000) payable to Horton
Corporate Finance and £nil (2017: £35,420) 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 2017
was also a director of Fishstone Limited. An amount of £nil (2017: £37,500) was outstanding to these parties at the
year-end.
At 31 December 2017 IQE plc held a fixed asset investment in Seren Photonics Limited represented by 69 “B”
ordinary shares at a cost of £50,000 (2017: £50,000) and £25,000 (2017: £25,000) Convertible Loan Stock. During
2018 Seren Photonics Limited underwent a capital reconstruction. At 31 December 2018 IQE plc holds a fixed asset
investment in Seren Photonics Limited at a cost of £75,000 (2017: £75,000) represented by 791 A ordinary shares.
Dr G H H Ainsworth is a Director of IQE plc and was a director of Seren Photonics Limited until his resignation from
the Board in 2018. During the year the Group did not trade with Seren Photonics Limited and as at the 31 December
2018 no balances were receivable from or payable to Seren Photonics Limited.
The Group purchased services during the year from Newport Wafer Fab Limited totalling £97,000 (2017: £nil).
Newport Wafer Fab Limited is wholly owned by Neptune 6 Limited. Dr AW Nelson is a director of Neptune 6 Limited
and in conjunction with his close family Dr AW Nelson owns a controlling interest in Neptune 6 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 £565,000 (2017: £672,000) 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 £nil (2017: £1,874,000) and purchased advanced compound semiconductor wafer products from CSDC for
£4,429,000 (2017: £10,373,000). Intellectual property and equipment is licensed to CSDC and wafer products are
procured from CSDC at prices mutually agreed by the Group, WIN and NTU.
During the year payments of £2,000,000 have been made on behalf of CSDC which in accordance with the Group’s
accounting policy (see note 2.4) has been recognised in the income statement as the Group’s share of losses in CSDC
exceeds the carrying value of its investment.
An amount of £nil was due from (2017: £25,575 due from) CSDC Private Limited at 31 December 2018.
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 (2017:
£115,000) and procured certain administrative support services from the Group for £235,000 (2017: £235,000). As
part of the administrative support services provided to CSC the Group procured goods and services, recharged to
CSC at cost, totalling £3,130,000 (2017: £4,497,000).
CSC granted the Group the right to use its assets following its formation for a minimum five year period. Costs
associated with the right to use the CSC’s assets are treated by the Group as operating lease costs (see note 3a) and
are charged by the CSC at a price which reflects the CSC’s cash cost of production (including direct labour, materials
and site costs) but excludes any related depreciation or amortisation of the CSC’s property, plant and equipment and
intangible assets respectively under the terms of the joint venture agreement between the parties. Costs associated
with the right to use the CSC’s assets totalled £6,655,000 (2017: £6,050,165) in the year.
143
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements During 2017 the Group received a short term loan of £600,000 from CSC which was fully repaid in 2017. At 31
December 2018 an amount of £586,000 (2017: £104,646 owed to) was owed from the CSC at year end.
During 2017 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 (2017: £8,800,000) are included in financial assets at an
amortised cost of £7,937,000 (2017: £7,680,000) and the Group has a shareholder loan of £237,000 (2017: £234,000)
due from CSC.
31. Operating lease commitments
The Group was committed at 31 December 2018 and 31 December 2017 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
2018
£’000
10,741
17,261
18,124
46,126
2017
£’000
8,770
21,588
8,184
38,542
Operating leases relate to various building, equipment and vehicle leases and includes the committed variable cash
costs of production based on assessed usage that are payable to the Group’s joint venture, CSC, associated with the
Group’s right of use of the joint ventures assets (note 3 and 30).
32. Commitments
The Group had capital commitments at 31 December 2018 of £11,500,000 (2017: £5,875,000) primarily relating to
plant and equipment purchased for the Group’s manufacturing site at Newport, United Kingdom, its manufacturing
site at Hsinchu, Taiwan and its manufacturing site in Massachusetts, United States of America.
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IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements 145
IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726Finance Statements