Annual Report and Financial Statements
2019
Contents
2019 Performance Review
Governance Report
Chairman’s overview ................................................................4
Chief Executive’s overview ................................................6
Strategic Report
Business model .............................................................................8
Competitive advantage .........................................................9
Business units and processes ...................................11
Ethics and conduct .................................................................16
Our people ......................................................................................18
Communities and social review ...............................21
Environment, health and safety ...............................22
Risk management ....................................................................27
Financial review ..........................................................................38
Viability statement ...................................................................42
Directors’ Report .......................................................................51
Audit & Risk Committee Report ...............................53
Nominations Committee Report.............................55
Directors’ Remuneration Report .............................56
Directors’ biographies .........................................................72
Financial Report
Independent Auditors Report ....................................74
Financial Statements ............................................................82
Notes to the Financial Statements .......................92
Additional Information
Officers and advisors .......................................................144
Glossary ..........................................................................................145
Chairman’s overview
I am pleased to present
our 2019 annual report
and financial statements.
footprint and wide range of leading technologies leave
us well placed to adapt to these changing market
conditions.
I am delighted and
honoured, after two and
a half years on the Board,
to have taken over the
chairmanship of IQE
in April 2019. IQE is an
exciting and innovative
company and I am
committed to supporting
and championing a
culture of innovation,
growth and inclusion.
I am particularly proud of the response of all of the
staff and leadership of IQE in the extremely difficult
circumstances resulting from the COVID-19 pandemic.
The implementation of measures to keep our teams
working safely whilst keeping vital operations active,
to support our customers and partners, has been
achieved through the dedication of our teams and the
support of their families.
IQE is the world’s leading supplier of advanced
semiconductor material solutions that underpin and
will enable the 21st century economy. We innovate,
develop and manufacture compound semiconductor
wafers and complementary material technologies that
are at the heart of the digital revolution.
Our compound semiconductor technologies play
an increasingly important role in shaping the way
we live, work and spend our leisure time. Our
innovative materials will play a key role in enabling next
generation solutions in communications technology,
security, privacy and artificial intelligence. This includes
powering connected devices, healthcare solutions,
smart energy, autonomous vehicles, big data and ultra-
high-speed connectivity including 5G, and the latest
evolution of cloud and hyper-scale data centres.
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 higher speed, lower power
consumption, and more efficient RF capabilities; but
perhaps most importantly, compound semiconductors
lie at the heart of the expanding photonics industry.
During 2019 the global market for compound
semiconductors experienced significant disruption as
a result of the global geo-political situation, including
trade tensions between the US and China. However,
in the medium and long term, IQE’s broad geographic
IQE has established and has continued to maintain a
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 facial
recognition and authentication, where we command a
significant global market share.
In 2019, we completed the infrastructure phase of
our substantial capacity expansion. Our new ‘Mega
Foundry’ in Newport is a state-of-the-art facility
capitalising on 30 years of compound semiconductor
experience. The first batch of tools are now in
production, with space for a ten-fold expansion to
address the 3D sensing market which is forecast for
exceptional growth. We also increased our capacity
in Taiwan for advanced wireless products based on
GaAs (Gallium Arsenide) by 40% and consolidated
our Wireless GaN (Gallium Nitride) capacity in
Massachusetts. These Wireless expansions are key
enablers to grow market share as 5G networks,
infrastructures and solutions roll out globally.
IQE has a unique opportunity as a leading technology
manufacturer to ensure that our culture, practices and
procedures support minimal environmental impact.
We continue to strive for the highest standards in our
environmental practices. I am proud to say that our
new Newport facility is built to the highest technical
standards with energy saving features built in by
design.
Furthermore, we recognise the technologies we
develop and manufacture can have a huge positive
impact towards a sustainable world. The advanced
properties of materials like GaN are capable of
providing highly-efficient power switching for a wide
range of industrial and consumer uses. The use of
GaN in 5G networks has the potential to revolutionise
connectivity in rural areas, as well as the sustainable
use of power resources in urban areas. Our VCSEL-
based photonics provide greater security and
are likely to play a key role in the safety of future
autonomous vehicles. Our research and development
into lasers for environmental and health monitoring
has the potential to transform the way we all live.
As energy infrastructure transitions to renewables
and smart grids and as ultra high-speed, low latency
communication networks roll out, IQE has a real and
exciting opportunity to make a genuinely positive
difference to society and the environment.
4
IQE PLC | Report and Annual Accounts 2019 | Company No: 37457262019 Performance Review Board and management changes
Summary
Godfrey Ainsworth stepped down as Chairman and
Interim CFO in April 2019. I would like to take this
opportunity to thank Godfrey for his long service to
IQE. I am delighted to be taking over as Non-Executive
Chairman, having served on the Board since late 2016
as a Senior Independent Director.
A key milestone for IQE over the last year was the
appointment of Tim Pullen who joined IQE as Chief
Financial Officer in February 2019. Tim, whose
appointment was announced in October 2018, was
most recently Chief Financial Officer of ARM Limited, a
global semiconductor and software design company
owned by Softbank Group. His appointment as CFO
is strongly aligned with the aim of having a Board with
the appropriate balance of skills and expertise to steer
the Company through the next exciting phase in our
evolution.
In May 2019, Carol Chesney joined IQE as a Non-
Executive Director and Chair of the Audit Committee.
A Chartered Accountant, Carol is an experienced
Non-Executive Director, currently serving as a Non-
Executive Director and Chair of the Audit Committee
of Renishaw plc since October 2012, in addition to
serving as a Non-Executive Director and Chair of the
Audit Committees of Hunting PLC since April 2018 and
Biffa PLC since July 2018.
During the year, we also announced the formation
of the Executive Management Board. This evolution
of the senior management structure ensures we are
extremely well positioned and resourced to execute
our strategy and to make the changes necessary to
scale and adapt the business as we grow. This followed
the announcement of the retirement of Dr Howard
Williams who was a founding member of EPI in 1988
(which became IQE in 1999) and who was appointed to
the Board of IQE as Chief Operating Officer in 2004. Dr
Williams has been an integral part of the growth of IQE
and remains engaged with the Group on a part time
basis as a consultant advisor.
2019 was a year in which IQE’s financial performance
was adversely affected to a material extent by the
global geo-political environment. In 2020, the world
is dealing with the significant uncertainty created by
the spread of Coronavirus. However, I believe IQE is
well placed to adapt to rapidly changing global market
conditions and to withstand near term uncertainty.
IQE has a unique breadth and depth in compound
semiconductor material solutions, unrivalled
intellectual property and strength in a diverse global
manufacturing footprint. With the investments we have
made in new technologies and manufacturing capacity,
combined with recent evolutions in our Board and
Executive Management personnel, the company is well
placed to grow in the coming years.
I would like to thank my fellow Directors and all the
management and staff of IQE for their hard work in
the challenging circumstances of the past year as well
as their ongoing professionalism and dedication in
current uncertain times. I would also like to thank our
shareholders for their continued support and belief
that the IQE team will capitalise on the significant
market opportunities that will emerge following these
challenging years.
Phil Smith
Chairman, IQE Plc.
28 April 2020
5
IQE PLC | Report and Annual Accounts 2019 | Company No: 37457262019 Performance Review
Chief Executive’s overview
2019 in review
2019 proved to be a
very challenging year for
IQE, primarily due to the
considerable uncertainty
created by the changes
in the geo-political
landscape and the
ensuing effects on global
technology markets.
Of particular importance
to IQE was the impact
of trade disputes on
the market for smartphone handsets and volumes
ordered by IQE’s supply chains in the second half of
the year. These changes proved disruptive to short-
term sales volumes, materially impacting our revenues
and profitability in 2019.
Overall, IQE posted a 10% reduction in revenues
versus 2018 figures, which was in line with
semiconductor industry norms during the 2019
downturn in the semiconductor cycle. In IQE’s case,
this was predominantly the result of reductions in
revenue from two key customers, one in the Wireless
segment, with orders being impacted by changes in
global markets, and one in the Photonics segment
due to technical issues outside of IQE’s control. IQE
is confident it has not lost share with either of these
customers and remains very well positioned to partner
with them in future growth opportunities.
Growth in 3D Sensing (3DS) revenues was slower than
hoped as Android adoption of the technology was
limited to very high-end handsets which sell in lower
volumes. Additionally, there were no additional content
gains – where IQE could benefit from a greater number
of compound semiconductors being used in devices
as they become ever more technologically advanced –
in our existing major supply chain. However, broader
adoption by Android is still anticipated and IQE is
confident of maintaining its number one position and
benefiting from potential content gains in the existing
major supply chain in 2020 and beyond.
Despite the challenging market conditions in 2019, IQE
made significant business progress in the year. This
included:
The completion of the infrastructure phase
of a significant capacity expansion project,
including the go-live of production at our
Mega Foundry in Newport, South Wales, a
40% increase in capacity in Taiwan and the
centralisation of our US GaN capability in
Massachusetts following the New Jersey site
closure. Our investment in capacity expansion
is focussed on servicing a number of new and
emerging high-growth markets. By far the
largest single expansion has been our new epi
Mega Foundry in Newport which was initiated
by IQE in September 2017. The 30,000m2
building was acquired 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. The first ten tools have
been installed and nine are now production
ready with six of these in full mass production.
When fully occupied, the Newport facility will
have the capacity to house up to 100 high-
volume production tools.
The continuation of progress on Research and
Development programmes in 2019, including
Radio Frequency (RF) Filters and Switches, Long
Wavelength VCSELs, Distributed Feedback
(DFB) lasers and Quasi Photonic Crystals (QPC)
for wafer level optics using our Nano-Imprint
Lithography (NIL) technology. During the year
we enhanced our New Product Introduction
(NPI) process to strengthen governance for
bringing new technologies to market and
optimising returns on investment.
The formation of IQE’s Executive Management
Board which continues
to make good
progress in driving the Company’s approach
to
increasing profitability, with specific
responsibilities assigned for programs on
technology
operational
execution, new
introduction, revenue expansion
through
customer proximity and diversification, and
strong cost management.
During the second half of 2019, the management team
took steps to reduce costs and capital expenditure
following the completion of the infrastructure phase
of capacity expansion. We remain in a strong position
to grow revenues and profits in future periods, due to
the broad market opportunity we face and the high
operating leverage of the Group.
As we entered 2020 there were positive signs that
forecasts from our key customers and markets were
returning to growth. However, these positive signs are
tempered by the increasing uncertainty created by
the global spread of Coronavirus. At the time of this
report, our current production has been unaffected.
We also have a strong balance sheet with access to
material additional debt facilities should we need
them. This means we are well positioned to withstand
the current uncertainty and when this period is over,
we look forward to an exciting future.
As the multi-year 5G mega-replacement cycle gathers
6
IQE PLC | Report and Annual Accounts 2019 | Company No: 37457262019 Performance Review continue to work closely with both suppliers and
customers to manage our resilience against potential
disruption.
These are unprecedented times across the world.
During this challenging period, our primary objective
is to keep our staff and their families safe and well.
By focussing on this, by managing our business with
prudence and discipline and with the assurance of
access to sufficient debt facilities should we need
them, I am confident we can navigate potential
near-term challenges. Moreover, with our first-
class workforce, strong underlying demand for our
products and an exciting future product roadmap,
I am convinced we will emerge from this an even
stronger company, ready to tackle the future and the
opportunities it will present.
Dr Drew Nelson OBE
President and Chief Executive Officer, IQE Plc.
28 April 2020
pace, we anticipate strong growth for our business
in future years. 5G will provide a significant growth
driver for IQE in GaN technologies for mobile network
infrastructure and for GaAs technologies for mobile
handsets. Photonics will continue to grow with content
growth and higher levels of handset penetration,
for 3D sensing VCSEL based products. The rapidly
increasing data content of 5G backhaul and front
haul fibre optic networks and hyperscale datacentres
will drive demand for our DFB lasers and high-speed
detector products. In addition, increasing adoption of
Infrared technologies for sensing applications, in space
and defence, and in future adoption in consumer
devices for environmental and healthcare monitoring
will continue to strengthen our position in this market.
2020 outlook
After a challenging year in 2019, predominantly due to
the impact of geo-political tensions, further challenging
conditions are expected in 2020 due to the rapid
global spread of Coronavirus.
The impacts of the virus on people’s lives has already
been significant at the date of this report, with many
regions of the world in ‘stay at home’ lockdowns and
healthcare systems stretched to maximum capacity
and beyond. At IQE we are aware of the uncertainty
this creates and are working as proactive members of
the communities in which we operate, to help where
we can.
Despite the uncertain environment, trading for the first
quarter of 2020 was slightly above our expectations.
The smartphone handset market has seen the
launch of new models from several OEM’s and 5G
communications infrastructure deployments, are
showing signs of growth.
Whilst at the time of this report IQE’s business has
been largely unaffected by the spread of Coronavirus,
there remains a risk of a global economic downturn
which could in turn adversely affect near-term demand
for IQE’s products.
An economic downturn with an associated reduction
in business and consumer spending, could reduce
demand for smartphones. However, at a time
of social distancing and self-isolation, with many
thousands of people continuing to work at home,
demand for smartphone handsets may withstand
an economic downturn better than many other
sectors. Furthermore, the Group considers it likely
that Governments will pursue 5G infrastructure
deployments as part of economic stimulus packages
as they emerge from the health crisis. There is already
some evidence of this in Asia.
There also remains a risk of disruption to production
at IQE sites or at those of our customers or suppliers.
However, the Group’s operations are geographically
diversified across nine different sites in three
continents, significantly lessening the impact of
potential disruption at any single site. In addition, we
are classified as a critical manufacturing business
in many of the countries in which we operate. We
7
IQE PLC | Report and Annual Accounts 2019 | Company No: 37457262019 Performance Review Our business model
IQE’s core business is the design and manufacture of compound semiconductor wafers or “epiwafers”
using a process called epitaxy. IQE’s epiwafers are used in advanced electronic and photonic
components that provide the essential enabling technologies across a broad portfolio of today’s
high-tech products.
The importance of IQE’s world leading technologies is increasing, driven by the macro trends of 5G communications
and connected devices. These trends require the superior performance of compound semiconductor technologies
to operate at higher frequencies, higher power ranges and to emit and detect light. We believe the future demand
for compound semiconductors will underpin significant growth for IQE, enabling the company to deliver significant
shareholder value.
Delivering shareholder value
Research
& development
New products
Manufacturing
capacity
Customer
qualification
Mass
production
Expanding margins and cash generation
8
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Competitive advantage
IQE has established a strong leadership position in the compound semiconductor markets for
both Wireless and Photonics epiwafers. Our leadership is built around our unparalleled breadth of
intellectual property (IP). Our close collaboration with our customers ensures that our processes
are highly integrated and embedded within our supply chains.
New Product Introduction
IQE’s long-term success relies on enabling customers
through new, innovative products. In order to ensure
that the right products are developed and introduced,
IQE uses a rigorous phase-gate governance
framework. This framework ensures that all relevant
functional groups of the company such as our
Business Units, Technology, Operations, Finance and
Quality, contribute their expertise ensuring that New
Product Introduction is efficient and effective enabling
significant growth and return on investment.
Our customers value IQE’s focused innovation and
technical expertise through which we develop and
retain long-term relationships with all our major
customers. We believe that our broad product
portfolio, multi-site operations, extensive process
know-how, advanced materials patent portfolio,
superior quality, unit economics and deep customer
relationships represent a powerful competitive
advantage.
Research & Development
IQE is committed to technological leadership through
research and development. In addition to our
intellectual property portfolio and process know-
how, we add further value by offering innovative
new products and technologies that enhance our
customers’ competitive advantages.
Through both organic growth and acquisition, IQE
has established clear technology leadership which
continues to attract the brightest and best talent in our
industry.
IP Portfolio
IQE’s leadership as a materials solutions provider is
underpinned by a comprehensive IP portfolio born
out of 30 years of experience. IQE actively patents
its technology when appropriate and in accordance
with IP strategy. IQE’s patent portfolio focuses on
protecting the Group’s key Technology Platforms which
are applicable across a broad range of markets. The
portfolio consists of approximately 175 patents (both
granted and pending) but is expanding every year. Due
to the central importance of IP, IQE has a dedicated
Technology Group that manages the business’ rapidly
expanding IP portfolio.
9
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Global Manufacturing Capacity
IQE manufactures across three continents using both Metal Organic Chemical Vapour Disposition (MOCVD) and
Molecular Beam Epitaxy (MBE) technologies. This unique global footprint enables the Company to forge links with
academic institutions and research establishments worldwide and provides close proximity to our global customers,
while ensuring security of supply for these customers. In 2019 our geographical revenues were approximately 55%
from the US, 10% from Europe and 35% from Asia.
USA
Bethlehem, PA
Greensboro, NC
Spokane, WA
Taunton, MA
Asia
Taiwan
Singapore CSDC
EUROPE
Cardiff, UK CSC
Milton Keynes, UK
Newport, UK
10
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Key business units
The Group has established three external market facing business units within the organisation.
Each of our business units has a clear product, technology and customer focus and is supported
by a world-class technology group focussing on product introductions for new and emerging
technology markets. Our business units are:
Wireless
The wireless market covers electronic radio-frequency
(RF) devices that enable wireless communications.
Our markets include, but are not limited to, mobile
communications (smartphones), base stations, mobile
networks, WiFi, smart metering, satellite navigation,
and many other connected devices.
For the last two decades, 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.
Our products will play an increasingly important role in
enabling 5G systems and connected devices globally.
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 enticed consumers to
upgrade to the latest models. However, since 2013
the innovation cycle has slowed and handset market
growth has tailed off. According to industry analyst
IDC, overall smartphone shipments has stagnated
since 2016 with handset shipments in 2019 remaining
relatively flat year-on-year.
Whilst smartphone sales volumes may have stagnated,
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 to date been fabricated using a much
less sophisticated “sputtering” process. IQE’s cREOTM
process provides a unique opportunity to overcome
many of the challenges in producing single crystal AlN
wafers for 5G filter applications and we are engaged
with multiple customers with this potentially disruptive
high-performance solution.
Whilst the Wireless sector offers strong future growth
potential, due to the disrupted global supply chains
and consequent inventory run down in 2019, our
wireless sales declined 22.5% year-on-year. The sector
accounted for 48.5% of the Group’s sales in 2019.
Photonics
The photonics market covers applications that either
transmit or sense light (both visible and Infrared).
Photonics products made using IQE’s advanced
semiconductor materials enabling a wide range of
end markets in consumer, commercial and industrial
applications.
IQE is a world leader in photonics technologies with a
product and intellectual property portfolio including
Vertical Cavity Surface Emitting Lasers (“VCSEL”),
Indium Phosphide (InP) and Infrared products.
VCSELs are the key enabling technology behind a
number of high growth markets including 3D sensing
for face-recognition, data communications, data
centres, gesture-recognition, environmental and
health monitoring, cosmetics, illumination and heating
applications.
Optical communications and sensing applications
depend on the ability to emit or detect light and
11
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report emitters include laser and LED based devices. 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.
both technically and in developing commercial
relationships in the supply chain. The power switching
market alone is approximately 3-4 times the size of
the current wireless power amplifier chip market,
and represents an exciting future opportunity for our
business. IQE’s patented technology, cREOTM, provides
a potentially significant competitive advantage in this
space.
Silicon integration
The CMOS++ (“Compound Materials on Silicon”)
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:
processing high-speed wireless signals;
· are much more efficient at emitting and
· are much more efficient at emitting and
· operate at much higher speeds and
lower power consumption
sensing light; and
It is these advanced properties which underpin our
product portfolio in our Wireless and Photonics
Business Units.
Future semiconductor technology architectures
are showing some trends of moving 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 performance advantages of
compound semiconductors at a cost point nearer that
of silicon, whilst allowing the CS industry to utilise the
huge investment already made in large-scale silicon
chip manufacturing. As a result, this greatly increases
the available market for compound semiconductors
and the potential demand for epitaxy. IQE has
developed multiple routes to delivering this powerful
new hybrid. With the addition of cREOTM and other IP,
IQE is well placed to play a key role in this integration
over the medium to long term. IQE is involved in
multiple development programmes, which are
developing the core technologies from which future
new revenue streams are anticipated to emerge over
the coming years.
The CMOS++ Business Unit grew by 31% year on year
to £2.1m, accounting for 1.5% of the Group’s sales in
2019.
IQE is the market leader for outsourced VCSEL
materials, which has been achieved by virtue of its
technology leadership and track record for mass
market delivery. This includes the demonstration of
VCSELs with industry leading performance and yield for
production on diameters up to 150 mm. IQE has been
successful at enabling its customers to reduce the unit
cost of chips which will help to accelerate the adoption
of this technology.
Complementing the VCSEL business is a long-
established InP capability. Whilst 2019 saw a reduction
in sales of InP lasers due to technical issues at a
significant customer that were outside of IQE’s control,
future growth is anticipated for this technology driven
by the need for higher speed, higher capacity fibre
optic systems to address continuing growth in data
traffic.
In addition to VCSEL and InP applications that operate
in the near-infrared part of the electromagnetic
spectrum, short and mid-wave infrared applications
continue to show solid performance. This “Infrared”
photonics business is largely driven by safety,
security and defence applications that deploy indium
antimonide (InSb) and gallium antimonide (GaSb)
engineered materials to enable high resolution
infrared systems.
IQE is the undisputed global leader in the supply
of InSb and GaSb wafers for advanced Infrared
technology such as “see in the dark” defence
applications.
Our continued investment in the development of
photonics products includes the development of lasers
for environmental and health monitoring with exciting
growth opportunities in both industrial and consumer
markets. Overall revenues from the Photonics
Group increased year-on-year by 4.5% to £69.8m.
The proportion of sales generated from photonics
products accounted for 50% of the Group’s sales in
2019.
New and emerging technologies
IQE’s primary commercial activities currently fall into
the wireless and photonics business categories but
a number of emerging business opportunities relate
to energy/power applications and the integration of
compound semiconductors with silicon.
Energy/Power
Gallium Nitride on Silicon (GaN on Si) and Silicon
Carbide (GaN on SiC) material technologies are driving
a shift in the multi-billion dollar power switching
and LED markets. IQE has continued to push the
technology boundaries and is making solid progress
12
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Business processes
Customer qualification
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 demonstrate beyond
question that production processes are optimised,
reliable and repeatable with 100% accuracy. Any
failures at the start of the process can have a
catastrophic impact further along the supply chain and
as a result quality must be guaranteed.
Each of our advanced epitaxy tools has to be
“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. Any process or product
variations can have dramatic and costly implications
downstream. For each new product, it is necessary to
qualify raw materials, equipment and processes and
procedures, and each qualification process can take
many months to complete, with products being fully
tested across multiple platforms and downstream
processes.
Whilst there are significant IP barriers in being able
to produce advanced semiconductor 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. Additionally, 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 another major barrier to entry
for competitors.
Mass Production
As a materials specialist, IQE also offers its customers
the advantage of economies of scale. IQE has created
a competitive advantage through superior quality,
scale and a strategy of serving the entire market as a
materials solution provider. Achieving low-cost chip
production necessitates high quality wafers. Wafer
defects translate into lost capacity and low yields for
chip makers.
This is evident across the Company’s global footprint
and in particular at IQE’s recently constructed ‘Mega
Foundry’ in Newport and the expanded Wireless
facility in Taiwan, both of which have a significant ability
to scale. IQE is investing in these mass production
capabilities to meet increasing demands for compound
semiconductor epiwafers through:
to create manufacturing capacity;
· Investments in facilities and equipment
· Development of superior products
· Development programmes to introduce
through a commitment to R&D and NPI;
standardised systems and processes;
systems; and
· Introduction of advanced management
· Attraction and retention of the best
industry talent.
The outsource model drives significant financial
business value for IQE’s chip manufacturing customers
because of the superior unit economics generated
by IQE’s investments in mass production. As volumes
grow, IQE’s operational gearing affords significant
scope for margin expansion and cash generation.
Innovation: research, development and
intellectual property
Technology leadership lies at the heart of IQE’s strategy
and this is supported by a culture of innovation.
It is widely accepted that advanced materials are
needed to overcome fundamental challenges to the
semiconductor industry. IQE is ideally positioned to
meet these challenges.
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 the ‘go to’ place for advanced materials for both
current customers and new entrants.
IQE’s leadership as a materials solution provider is
underpinned by knowhow born out of 30 years of
experience. IQE also actively patents its technology
when appropriate and due to the central importance
of IP, IQE has a dedicated Technology Group that
manages the business’ rapidly expanding IP and patent
portfolio. 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.
To maintain its IP leadership position, IQE continues
to innovate through focused internal and external
research and development (R&D) programmes. These
programmes are funded through a combination of
internal cash generation, customer funding, and grant
funding. IQE’s R&D is geared towards next generation
applications as well as process improvements leading
to greater throughput, higher-quality products, better
manufacturing yields and increased production
uptime. IQE’s ability to support cutting edge R&D
through to high-volume manufacturing makes it the
premier choice as an advanced materials provider.
13
IQE PLC | Report and Annual Accounts 2019 | 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 venture
in the UK 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 CS Connected (csconnected.com), is the result
of collaboration 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.
In September 2017, IQE, Welsh and UK Governments
and the Cardiff Capital Region City Deal ratified the
development agreement for building the Group’s
Mega-Foundry in Newport, South Wales. This was
funded by the Cardiff Capital Region (CCR) Regional
Cabinet via a contribution of £37.9 million from the
CCR City Deal’s Wider Investment Fund which is repaid
by IQE over an eleven year lease, including an option to
purchase.
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.
During 2019, the Compound Semiconductor Centre
(CSC) won a number of contracts and awards to
participate in research and development programmes
for next generation applications that are expected to
lead to future volume manufacturing opportunities
for IQE and other partners in the growing Welsh
compound semiconductor cluster.
Projects announced during 2019 included the HEMAN
consortium that reported on developments in VCSEL
technologies for delivering cheaper, faster VCSEL
devices that will drive tomorrow’s sensing technologies.
The CSC joint venture also led the GANTT gallium
nitride power consortium awarded through ‘The road
to zero emission vehicles’ competition sponsored by
OLEV (the Office for Low Emission Vehicles).
Another significant programme in which CSC was
awarded a role in during 2019, was the £9.8m ESCAPE
project to create a complete end-to-end supply chain
for next generation Power Electronics, which is a key
component to be used in all electric vehicles. More
recently, CSC announced its participation in a UK
£36.7m UK government programme “Drive the Electric
Revolution” aimed at pushing the UK to net zero
carbon growth by 2050.
The collaborative environment fosters strong working
relationships to encourage sharing of knowledge and
ideas and the organisations involved are enthusiastic
about the future. CS Connected is open for business.
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
14
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report CoInnovate
IQE actively participates in major industry events and frequently chairs, hosts
and presents technical papers at international conferences. A product of IQE’s
open innovation programme “CoInnovate” was launched in 2016 and has
become a major event in the Welsh conference calendar. The conference is
organised by IQE and jointly sponsored by the Welsh Government, academic
partners as well as IQE and industrial partners including Airbus and General
Dynamics.
The next CoInnovate UK conference is scheduled for late 2020 following
last year’s event that attracted around 300 delegates from a mix of large
businesses, SMEs and academics.
In May 2019, CoInnovateCS was launched in the US and was co-located
with the industry-wide CS-Mantech conference. Following the success
of CoInnovateCS in 2019, the second US conference was planned to be
hosted alongside CS-Mantech in Tucson, Arizona in May 2020 but has been
postponed due to the global COVID-19 pandemic.
All conference plans are under constant review in light of the ongoing
pandemic.
More information can be found at the CoInnovate conference website
(www.coinnovate.co.uk) and the CoInnovateCS conference website
(www.coinnovatecs.com).
15
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Business ethics & conduct
We are committed to acting professionally, fairly
and with integrity in all our business dealings and
relationships. In our dealings with customers we strive
to:
· Be open and honest about our products
and services and communicate with
customers all appropriate information
they need to make informed decisions;
· Ensure 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; and
· 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
fair and reasonable methodologies;
operate to ethical business standards;
· Identifying and selecting suppliers using
· Identifying and using suppliers who
· Identifying and using local suppliers
· 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.
where possible;
16
In our relationships with employees and other
stakeholders
· Ensuring employment practices
throughout the Group are fair and in full
compliance with employment legislation;
national charities;
community activities;
· Working with and supporting local and
· Encouraging volunteer work in
· Supporting local academic
· Participating in voluntary business
establishments; and
advisory services via professional bodies.
We encourage everyone to report any behaviour which
may be in breach of the UK Corporate Governance
Code, is unethical or illegal. This is achieved by
fostering a culture of openness and accountability,
and by providing a clear procedure that enables any
individual to raise breaches of policy or malpractice
directly at the highest level.
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 ensuring 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 2019,
training modules focussed on key topics for anti-
bribery and corruption, conflicts of interest, corporate
responsibility and respect in the workplace.
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. We recognise that a large
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report
proportion of our innovations are linked to working
with our strategic supply chains which is why we invest
in long-term mutually beneficial relationships with our
key suppliers, in order to share capabilities and co-
innovate for growth.
We regularly evaluate and feedback the performance
of our key suppliers in order to maintain our
competitive advantage. Our three main criteria are
Quality, Competitiveness and Technology Leadership
and we firmly believe that having supply chain
partners that continually strive to drive continuous
improvement in these areas creates the differentiation
that IQE offers to its customers.
Confidentiality
Our business conduct policy emphasises the
essential need for confidentiality in all of our dealings.
Maintaining confidentiality is engrained in our culture.
Our policy and practice ensures that all staff fully
understand what constitutes confidential information
and restrict internal access on a need to know basis.
Information relating to third parties is not disclosed
without the third parties’ written consent.
Data protection
Closely linked to our policies on confidentiality is the
way that we treat personal data. IQE complies with
the requirements of data protection legislation and
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.
Human Rights and Modern Slavery
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. 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.
17
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Our people
Values
IQE’s strength lies in the expertise and diversity of our
workforce. Over the years we have been fortunate
to retain leading industry experts by being a market
leader and through successful acquisitions. As a result,
we recognise 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, valuing people and teamwork.
honestly and lawfully
· Integrity: We behave ethically, safely,
· Accountability: We work to clear and
mutually accepted responsibilities,
hands-on decision management and
decision making
· Excellence: We strive for excellence in
all we do with a focus on continuous
improvement
· Valuing People: We treat people with
respect and dignity; We communicate
with clarity and honesty; We provide
opportunities for people to reach their
potential
· Teamwork: We work collaboratively
towards common goals
policy, support this aim and are available online to all
employees.
IQE recognises that gender diversity remains an
ongoing issue for the semiconductor industry and the
gender diversity of IQE’s Board now stands at 16.6%
female with the appointment of Mrs Carol Chesney in
May 2019. For more information on how the Board
considered diversity in 2019 please see page 45.
Code of conduct
The day-to-day conduct requirements of IQE
employees and contractors is defined in our Business
Conduct Policy (“the Policy”) which sets out expected
standards in line with IQE’s values and business
principles. Upholding the Policy is the responsibility of
all IQE employees and staff are also required to ensure
that they comply with all relevant laws and regulations
of the countries in which we operate and do business.
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. In addition, the Policy sets out how employees
should report concerns or a breach, including
anonymously if they are not comfortable reporting to
their line manager or the HR Department directly.
All those working for or on behalf of IQE are required
to confirm that they have read and understood the
Policy, a copy of which is accessible to all employees.
Equality and diversity
IQE believes that all global employees should be free
from discrimination regardless of race, nationality,
gender, age, marital status, sexual orientation, disability
and religious or political beliefs. We pursue equality
of opportunity in all employment practices, policies
and procedures and are committed to creating a
work environment where everyone is treated with
dignity and respect. Our human resources policies,
including our employee handbook and Dignity at Work
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.
Quarterly Town Halls are held at each site to ensure
understanding of strategy, alignment of goals and
18
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report A new Learning Management System called ‘the Vault’
was also launched in 2019. Starting in the UK this
e-learning platform has now gained a global audience
and is available to all worldwide employees. There
are currently 71 courses in total on the Vault, and
30 e-courses that have been created in-house, in
addition to new resources and learning aids which are
regularly updated. Our training materials cover our
UK engineering suite, UK health and safety courses,
essential information and news about IQE as well as a
whole host of personal development and leadership
and management programmes. Engagement has been
high with over 2700 course completions to date.
Ultimately, the Vault will support our employees in
their development and will:
· transform how IQE trains through
embracing digital training methods and
agile learning;
· shape the company culture whilst
embracing technology to simplify and
create access for all to learn within an
agile work environment;
· provide new and innovative links with
learning materials from experts around
the world.
Taking training beyond IQE
In the UK we have secured funding from the Welsh
Assembly for our external training and forged links
with the Compound Semiconductor cluster. In
working collaboratively with the CS Cluster, local
training providers and higher education institutions, we
have instigated various opportunities and options for
both internal and external training. This relationship
allows us to share our best practice as well as provide
a variety of alternative training opportunities for IQE
staff.
As part of our STEM ambassador work we engage
with a number of local schools, colleges, universities,
science museums and careers fairs to actively promote
and encourage the take up of science, technology,
engineering and maths (STEM) subjects through these
initiatives.
We also welcome local academics to share in their
expertise as well as offer placement opportunities
for research and development where appropriate.
We hope to further develop this in the form of
apprenticeships during 2020, working in partnership
with local training providers and the CS Cluster to offer
further opportunities.
objectives and the cascade of important information.
These are critical forums for the engagement of our
staff. Information cascade is reinforced through regular
team meetings.
IQE’s annual Leadership Conference brings together
our global Leaders, Executive Management Board
and Non-Executive Directors. At this important event,
internal networks are forged and a critical appraisal is
made of the execution of our strategy. A key output
is the alignment of goals and objectives for the year
ahead.
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, Carol Chesney.
Learning and development
IQE recognises 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 their full personal
and professional potential and enjoy a rewarding and
fulfilling career at IQE. We are committed to promoting
an environment and culture that provides for agile
and life-long learning and IQE is building a world-class
engineering and leadership Academy with the following
aims:
· transform how we train our people,
embracing digital training methods and
agile learning;
· ensure our engineering and technical
staff have defined training pathways 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
with our Quality Management System
to ensure the effective management of
competence.
During 2019 IQE launched an Employee Competence
Framework and from that a Competence Management
System. These have been supplemented with an
updated Training and Development Policy, a new
formal Training and Assessment Process and various
new training and development forms, plans and logs.
Training processes are now communicated with other
departments and formalised via our document control
systems.
19
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Performance management
IQE aims to bring personal development “to life” and
promotes a culture of learning and development.
During 2019 we reviewed how our employees tracked
and managed their performance and starting from
2020 we have implemented a new performance
review process. We recognise the importance of our
employees setting personal objectives that support
the achievement of our organisational goals, and being
provided with fair, balanced and constructive feedback
in real-time.
A comprehensive online system called “Performance
Hub” was selected for implementation in early 2020 to
simplify and standardise the goal setting and tracking
process. The system allows an individual to align
their personal objectives with those of the company
to ensure there is an alignment of purpose with the
strategic goals of the business. Performance Hub will
also provide employees and managers with a platform
to share transparent and honest feedback on an
ongoing basis, further supporting the personal and
career development of IQE employees.
Employee wellbeing
At IQE the physical and mental health of our
employees is paramount and we routinely promote
wellbeing and provide wellness support to our staff.
We have a designated mental health first aid officer on
site and 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.
IQE operates 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. In 2020 wellbeing meetings are
being held monthly at IQE’s Newport site with the aim
that learnings can be shared with other IQE locations.
Remuneration
IQE follows a remuneration strategy to attract and
retain talented individuals. As well as competitive base
salaries, IQE operates an annual cash bonus plan and
long-term incentive share plan.
Senior employees participate in our bonus plan, which
is designed to reward high levels of performance.
The plan rewards the achievement of clearly defined
financial targets and personal objectives.
In addition to this formal award process, IQE operates
a ‘spot award’ programme which involved awards
being issued monthly to any employee who has gone
“above and beyond” their duties for the benefit of the
Company. They represent a means of providing timely
recognition and promoting a culture of excellence. In
2019 40 spot awards were awarded.
All of IQE’s global employees participate in a long-
term incentive share plan (“LTIP”). The plan ensures all
employees are incentivised and motivated to grow the
value of the Company over the medium to long term.
Performance based vesting criteria ensures the plan
creates value for shareholders. For more information
on how the LTIP operated in 2019 please see page 59.
20
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report
Communities and social review
Supporting our communities
Educational institutions
As a significant employer in many 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 employees in their efforts to give
something back to their communities.
The IQE social committee has been hard at work
and have organised a number of events, not only
to support employee wellbeing and engagement
but also to raise funds for local communities.
Individual employees have spent their time and
effort on personal fundraisers for the foundation or
chosen STEM charities, with our employees running,
climbing and swimming to make a difference to
their communities. 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.
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.
As part of our STEM ambassador work we engage
with a number of local schools, colleges, universities,
science museums and careers fairs to actively promote
and encourage the take up of science, technology,
engineering and maths (STEM) subjects through these
initiatives.
Corporate Social Responsibility
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.
21
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Environment, health
and safety
At IQE, the health and safety of our staff, partners and the communities in which we operate is
our number one priority. We have implemented safety systems, processes and procedures to
ensure we comply with legislation and minimise the risk of harm. IQE’s employees take an active
role in ensuring that their 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.
The Environment, Health & Safety (EHS) group has a
detailed ongoing continued professional development
plan including training and accreditation of competent
EHS professionals. These include Regional EHS
Managers and site-based EHS Managers, Engineers
and Coordinators (hereafter termed Site Safety
Appointed Persons (‘SSAP’)). 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 SSAP roles are directly responsible for localised
EHS program implementation and operations at each
IQE Site.
The Regional EHS Managers work directly and with
the relevant Site General Manager or SSAPs in order
to implement those best-practices identified from
strategic initiatives to:
· minimise risks of injury at work;
· ensure legislative compliance;
· assist in creating and monitoring safety
practices.
In addition, localised and specialist Safety Advisors,
with the appropriate expertise to support in specific
areas of activity, support in areas such as Local
Exhaust Ventilation (LEV) and Pressure Systems
legislation.
The EHS group continues to be actively involved
in industry-wide initiatives, working with industry
associations and proactively registering under
regulatory directives such as REACH and GHS-based
Hazard Communication. The group also monitors
global chemical control activities (e.g. RoHS, TSCA) to
ensure continued customer confidence and supply-
chain compliance.
Safety and Environmental Teams & Reporting
The EHS Group is organised to effectively promote and
increase the awareness of Safety and Environmental
issues, directives and legal obligations, advising each
group subsidiary 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 are an agenda item
at periodic site management meetings. Localised EHS
roles prepare regular site performance metrics for
dissemination at a 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 periodic
EHS Board Reports, demonstrating major trends in
EHS activities and comparisons with industry best-
practice and National Statistical averages.
22
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Regional Managers and the Director responsible for
EHS drive strategic initiatives, agreed at Board level,
through each organisation to promote Group best-
practice, thus ensuring conformance to global, regional
and local regulations and directives. Initiatives are
designed to fulfil the Group’s objectives of maintaining
at or beyond state-of-the-art EHS Management.
A full and comprehensive presentation of occupational
trends, accidents, safety and environmental incidents,
together with compliance with all regulatory
requirements, Group and local objectives are
published in the Annual EHS Report to the Board.
Health & Safety Policy Statement
IQE Senior Management are
committed to ensuring a high
level of health and safety
performance in all of its
activities and recognise effective
health and safety management
contributes to the overall
success of the business.
IQE’s policy for conducting its business in a safe and
healthy manner is embodied in its global Health &
Safety Policy Statement:
“The Company’s approach to health and safety will be
based on the identification, control, and, where possible,
elimination of risk to persons and the environment.
This policy provides a framework for the setting of
occupational health and safety and process safety
objectives by senior management, in consultation with
workers. These objectives are intended to ensure the
organisation’s continual improvement in health and safety
performance, striving to be incident and injury free.
IQE is committed to:
· Providing safe and healthy working
conditions for the prevention of work-
related injury and ill health;
· Ensuring health and safety
considerations are integrated into the
business planning and decision-making
processes;
· Fulfilling any legal and other
requirements, identifying and
implementing best practice wherever
practicable;
occupational health and safety risks;
· Eliminating hazards and reducing
· Providing all employees, contractors
and visitors with relevant information,
operational controls and regular training
on safety requirements to enable them
to conduct their activities safely;
· Providing a positive safety culture in
which every employee, contractor and
visitor feels free to speak up about non-
conformances or unsafe situations or any
other health and safety related issue;
· Consultation and participation of
workers, and their representatives, on
occupational safety and health and
process safety matters;
· Continual improvement of the
occupational health and safety
management system.
23
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Safety Performance 2019
As outlined on previous page, IQE closely monitors safety performance. In 2019, the UK and Singapore Sites
experienced no RIDDOR reportable injures or dangerous occurrences as well as no lost work or restricted activity
days. The US and Taiwan sites both report to OSHA bodies in their respective countries. No incidents were
experienced in Taiwan. The Massachusetts site experienced a single incident resulting in three OSHA recordable
events during 2019. For all incidents, an incident reporting system was used to document the investigation and root
cause as well as identify and implement corrective actions to prevent reoccurrence.
RIDDOR/OSHA Reportable/Recordable Accidents 2019
RIDDOR
Reportable
accidents
OSHA
Recordable
accidents
5
4
3
2
1
0
U
U
U
U
K
K
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Note: The UK sites report all minor accidents, not merely those reportable, and constitute minor cuts, slips etc. US
reports feature only OSHA 300 recordable incidents (c.f. RIDDOR in the UK).
IQE acknowledges receipt in October 2019 of a set of
citations from OSHA (Occupational Safety and Health
Administration) in the United States relating to an
inspection at the company’s Massachusetts facility.
This followed on from a single incident at the plant in
April 2019. IQE fully cooperated with OSHA throughout
its inspection and the majority of the issued citations
were successfully defended and subsequently
withdrawn. IQE worked with OSHA to fully resolve the
citations, and the installation of OSHA’s Process Safety
Management (PSM) program will be finalised during
2020.
The safety of all of our employees has always been
IQE’s highest priority and the company has consistently
maintained a robust workplace safety program and
state of the art safety technology. We are proud of our
strong safety record across our global manufacturing
operations and are confident that our safety processes
will continue to be strengthened through our
cooperation with OSHA.
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.
This includes reducing waste, recycling, restricting
unnecessary travel, saving water and reducing energy
usage.
24
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report
Environmental Policy Statement
Environmental Management
IQE senior management are
committed to ensuring a high level
of environmental performance
in all of its activities and
recognises effective environmental
management contributes to the
overall success of the business.
IQE’s policy for conducting business in an
environmentally responsible manner states that the
company will ensure that:
· We fully integrate environmental
considerations into the business planning
and decision-making processes;
· Compliance obligations are identified and
our operations must be conducted in
accordance with these obligations;
· We validate our fulfilment of compliance
obligations by means of documented
periodic review;
· We employ best practice to reduce the
environmental impact of our operations,
prevent pollution, minimise waste and
maximise the efficient use of energy and
resources to protect the environment;
minimise their environmental impacts;
· We will work with IQE supply chain to
· 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;
· Appropriate resources will be made
available to ensure this policy can be
implemented.
In addition, each of our sites will supplement this policy
to meet local requirements.
ISO 14001 is a global standard for environmental
management which was developed to help
organisations reduce their environmental impact.
It provides a framework for organisations to
demonstrate their commitment to preserving and
protecting the environment by:
environment, and
· Reducing harmful effects on the
· Providing evidence of continual
improvement of environmental
management
All of IQE’s continuously operating facilities have
successfully completed independent third-party
audits of our compliance with the ISO 14001:2015
standard. These audits were very successful with no
material deficiencies recorded. Our operating facilities
clearly demonstrate a commitment to environmental
compliance, reducing waste, recycling materials, energy
conservation and risk management where appropriate,
complementary to our commercial objectives of
reducing costs and improving operational efficiency.
Environmental Legislation Compliance
Compliance with environmental legislation is critical
to our global businesses and is assured through the
employment of appropriately qualified and competent
managers, reporting through to the Chief Operating
Officer. These managers have access to third-party
professional advisors as required.
IQE maintains membership of a number of
professional bodies which provide a good source of
reference and support, enabling it to keep up-to-date
with continually evolving legislation. This includes
regular updates from: British Safety Council, British
Standards Institution, Institute of Environmental
Management and Assessment in the UK, the US
National Safety Council, the US National Fire Protection
Agency and the US Federal Register.
As a Company trading on AIM, a market operated
by The London Stock Exchange plc, the Companies
Act 2006 (Strategic Report and Directors’ Reports)
Regulations 2013, relating to the disclosure of
greenhouse gas emissions and other environmental
matters, does not apply to IQE.
25
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report
Environmental Performance 2019
IQE closely monitors environmental compliance. In 2019, IQE experienced one minor external environmental incident
involving a bolt in a sump which caused an elevated lead level. Below is a detailed presentation of the environmental
near miss incidents and regulatory reportable incidents that were recorded at IQE’s global facilities. For all incidents,
an incident reporting system was used to document the investigation and root cause as well as identify and
implement corrective actions to prevent reoccurrence.
Environmental Incidents 2019
(Reportable and near-miss incidents)
Reportable
Near miss
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A Near Miss Incident is an accident or incident
that results in no injury, no property damage or
environmental release/spill, but has the potential
to cause harm or consequence. Near Miss incident
examples include trips/slips/falls with no resulting
injury, human error and false fire alarms (equipment
factor related). IQE treats Near Miss Incidents seriously
and has developed a reporting process for continuous
improvement activities in order to ensure that
hazards in the workplace are identified and to prevent
future occurrence. This is a 5D investigative process
comprising of an initial incident description, timing
and containment measures, a follow-up investigation,
an analysis of root-causes, listing of corrective and
preventative actions, any additional recommendations
and finally a close-out and sign-off process.
Global Chemical Control & Legislation
As a result of its commitment to global chemical
control legislation, since the end of 2019 IQE became
the REACH registrant for InP as a substance. Given the
low tonnage band (1-10 tonnes) manufactured, the
required REACH dossier was restricted to physical
& chemical, toxicological and eco-toxicological
properties only. InP, as a substance, is a very low
proportion of IQE’s product range, providing feedstock
for InP ingots and wafers produced by some of its
customers. IQE’s dominant business – the supply of
custom-designed mass-manufactured III-V epiwafers
– involves the supply of InP and GaAs epiwafers as
articles. Consequently, all IQE epiwafers are classified
as articles under REACH and CLP legislation, and are
shipped in a non-hazardous form.
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.
26
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report
Risk management
IQE employs risk management techniques to identify, evaluate and prioritize Health, Safety &
Environmental risks followed by application of resources to minimize, monitor, and control the
probability or impact of unfortunate events. IQE’s risks may be inherent to the business or come
from a variety of sources including engineering or administrative control failures, accidents,
incidents and/or natural causes.
IQE performs regular risk management evaluations at
its sites and identifies the highest potential risks and
opportunities. A summary of the mitigation, likelihood
and impact of the risks identified is included on pages
27-37.
The Executive Management Board 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.
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 Corporate
risk is the responsibility of the Board of Directors and
is a key focus of the Audit and Risk Committee.
The Board’s role in risk management includes:
· promoting a culture that emphasises
integrity at all levels of business
operations;
core processes of the business;
· embedding risk management within the
· approving appetite for risk;
· determining the principal risks;
· setting the overall policies for risk
· ensuring that the above are
communicated effectively across the
business.
management and control;
To provide a framework for the delivery the Group’s
strategy and plans, the Executive Management Board
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 Management Board for the
development and delivery of the detailed action plans
which underpin the Group’s Annual Business Plan.
Each Executive Management Board member 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.
Risk management within the business involves:
individual risks;
processes to mitigate the risks;
· identification and assessment of
· design of controls and operational
· testing of controls through internal
· conclusion on the effectiveness of the
control environment in place.
review and audits;
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.
27
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report 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.
In identifying risks, we analyse risks across four key areas:
· strategic risk;
· commercial risk;
· 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 are described below.
Principal Risk: HEALTH, SAFETY AND ENVIRONMENT
Business Risk
Mitigation:
Risk of harm from
materials
Risk of harm to
personnel
Risk of failure to
comply with H&S
legislation
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.
Operation under ISO14001. 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. Systems and processes at all sites are
externally assessed by BSI/BV – up to twice annually.
Likelihood:
Medium
(Unchanged)
Potential impact:
High
Effect:
Reputational
damage, business
interruption,
increase in costs,
loss of sales,
adversely affecting
profitability
28
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report
Principal Risk: BUSINESS INTERUPTION
Business Risk
Mitigation:
Risk of a natural
disaster, public
health emergency
or other
major incident
disrupting
production at
an IQE site or at
that of one of
IQE’s suppliers or
customers
Loss of key
production data
IQE operates multiple global manufacturing facilities, which
helps to mitigate against the impact of major incidents
or events on IQE. Similarly, many of our larger customers
have multi-site production to mitigate their risk.
Our active programme to dual source most of our critical
supplies mitigates an element of supplier risk. 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.
IQE maintains appropriate business interruption insurance
including for natural catastrophe. However, as is usual in
such policies, pandemic health emergencies are excluded
from cover.
IQE’s production data is appropriately stored and backed-
up with IT system recovery plans in place.
Likelihood:
High
(Increased)
Potential impact:
High
Effect:
Loss of production
volumes and
profitability
Coronavirus
At the time of preparing this report, there are
significant impacts globally around the outbreak of
the Coronavirus (CoV). The spread of the virus has
impacted the health of thousands of people worldwide
and has resulted in millions of people staying at home
in necessary lockdowns imposed by governments. It
is inevitable that Coronavirus will negatively impact
Global GDP and significantly affect macroeconomic
conditions in 2020.
IQE has implemented a Business Continuity sub-
committee to respond to this evolving situation. The
sub-committee is monitoring risk indicators and
external guidance and has formulated policies and
potential actions in readiness for different scenarios. It
is also ensuring regular and clear communications with
our staff and other stakeholders.
There are three key risks to IQE from the Coronavirus
pandemic being considered and constantly monitored
by the sub-committee.
Firstly, there is an increased risk to the health of our
staff during this period. The safety of our people
remains our primary objective. During the early phases
of the spread of the virus in 2020, we implemented
travel restrictions and enhanced health and safety
measures to reduce the risks. The approach of the
sub-committee has been to follow government advice
and guidance in all of the regions in which it operates.
As the virus continued to spread and governments
issued updated advice, the sub-committee acted swiftly
to communicate changes and implement appropriate
measures. Throughout this period, the Executive
Management Board are conducting enhanced levels of
communication with all staff. We will continue to take
appropriate measures to protect our people.
Secondly, there is an increased risk of business
disruption at any of IQE’s global sites or at one or
more of our suppliers or partners. IQE has continued
to operate during the pandemic and we have
implemented appropriate social distancing measures,
enhanced cleaning regimes and shift segregation
measures at all of our global sites where appropriate.
Only staff who are essential to production are working
on-site with all other staff working from home. In the
US, IQE is classified as a critical infrastructure supplier
in all four states in which we operate, enabling us
to continue operations during lockdown. In the UK,
the government classes manufacturing as a critical
part of the economy and there are no restrictions
being placed on it. Similarly, in Taiwan and Singapore,
governments are supportive of production continuing
during the pandemic. As at the date of this report,
there have been no suspensions to production due to
Coronavirus at any of our global sites and the Business
Continuity sub-committee continues to monitor the
situation and that of our suppliers and customers very
closely.
Thirdly, there is an increased risk of a fall in demand
for IQE’s products resulting from a global economic
downturn due to the pandemic. However, trading
for the first quarter of 2020 was slightly above our
expectations and there are no signs of a material
reduction in demand at the date of this report. The
Business Continuity sub-committee continues to
monitor markets and liaise with our customers closely.
29
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Likelihood:
Medium
(Increased)
Potential impact:
High
Effect:
Loss of sales
and reduction in
profitability
Principal Risk: INFLUENCE OF MARKET CONDITIONS
Business Risk
Mitigation:
Risk of product
obsolescence
due to changes in
end-markets
Global technological markets are dynamic and change
occurs at a fast pace. As new technologies are introduced,
mature technologies can become displaced and eventually
become obsolescent.
Risk of loss of
access to markets
resulting from
the geo-political
environment
Risk of downturn
in end markets
or general
macro-economic
weakness
IQE’s products appear in a wide variety of end-use
applications and are essential to the operation of devices
such as the smart phone.
As technologies evolve, IQE manages its product roadmap
to ensure it has a portfolio of current and future products
that will continue to enable many technological markets.
IQE’s R&D programme and NPI governance process are
designed to ensure the Company drives a return on
investment from product development and introduction.
IQE develops intellectual property locally across all of its
global manufacturing sites to underpin its ability to serve
markets globally. The Company complies with all relevant
export control legislation.
IQE is well positioned to adapt to changes in global
technology markets and the company has the ability to
leverage its global manufacturing footprint by qualifying
tools in multiple production locations worldwide.
IQE is working to diversify its products and customer base
to reduce the impact of changes in specific markets, as
evidenced by IQE’s development of 3DS products and
growth in Wireless products for infrastructure as well
as handsets. IQE’s Taiwan site expansion, which was
completed in Q2 2019, increased wireless capacity by 40%.
30
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Likelihood:
Medium
(Increased)
Potential impact:
Medium
Effect:
Reduction in sales
volumes and
profitability
Principal Risk: CUSTOMER CONCENTRATION
Business Risk
Mitigation:
Risk of loss of
share and/or
volume from a
major customer
IQE experienced a significant loss of volume from two key
customers in 2019; one in the Wireless market (GaAs Power
Amplifiers) and one in the photonics segment (InP lasers).
These two customers account for the majority of the
reduction in IQE’s revenues year on year.
The wireless sector is highly concentrated with the top
5 Radio Frequency (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.
Indeed, as Global markets changed in 2019, IQE
experienced an acceleration in customer diversification.
Whilst share was maintained with US RF Chip companies,
IQE is working to expand share with Taiwanese RF Chip
foundries.
Similarly, share with IQE’s major InP laser customer is
not lost and future revenue opportunities are possible.
In addition, customer diversification is possible with
an expanding market opportunity for InP lasers in Asia
becoming more evident. Here a change in business model,
with the development of generic full service Distributed
Feedback (DFB) lasers provides IQE with a diversification
opportunity.
As 3DS proliferates into Android handsets and even beyond
the handset, customer concentration in this segment will
also reduce.
IQE continues to enjoy steady growth in other Infrared
markets, notably the military market where IQE’s
technological expertise, customer-centricity and high
quality products ensure a strong market share. This
segment contains a number of different customers to the
other parts of IQE’s business.
IQE is also working to further diversify its product range
and customer diversification by bringing new products to
market, including long-wavelength VCSELs and RF Filters
and Switches.
31
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Likelihood:
Low
(Unchanged)
Potential impact:
High
Effect:
Financial liquidity
and reputational
damage
Principal Risk: FINANCIAL LIQUIDITY
Business Risk
Mitigation:
Risk of not
maintaining
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 and covenant compliance is
maintained.
At the 31 December 2019 year-end, the Group had net
debt of £16m (excluding lease liabilities).
In August 2019, the Group secured additional funding in
the form of a new £30m asset financing facility with HSBC,
maintaining the previously agreed £27m revolving credit
facility with HSBC as a committed line. This increased total
facilities to £57m.
IQE has a long-standing and trusted relationship with our
bankers HSBC who remain supportive of the Company.
We are in close ongoing dialogue regarding the evolving
effects of Coronavirus on supply chains and markets. In the
context of the Coronavirus pandemic, IQE management
have considered severe but plausible downside financial
forecasts and projections, prepared with significant
reductions to future forecast revenues. The Group has
discussed the Group’s severe but plausible downside
financial forecasts with the Bank in order to agree the
relaxation of certain banking covenants at 31 December
2020 and 30 June 2021 as a precautionary measure
designed to increase headroom and availability of cash
funding under the terms of the Group’s committed bank
facilities.
The Company is focussed on strong working capital
management and capital expenditure can flex to low
levels if prevailing market conditions are poor, aiding cash
preservation if required.
32
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Principal Risk: LEGAL COMPLIANCE
Business Risk
Mitigation:
Risk of failure
to comply with
applicable laws
and regulations
IQE is a global manufacturing business, operating in a
diverse range of jurisdictions around the world.
IQE continually informs and educates its staff on the
latest legislative and regulatory requirements including
export control, anti-bribery & corruption, data protection
and other matters. The Company’s values underpin the
operation of all staff with honesty and integrity and a zero
tolerance approach is taken to non-compliance with IQE’s
high ethical standards.
IQE complies with all relevant export control legislation
globally. The Company operates a system of internal
controls to ensure all transactions are classified
appropriately and that any required licenses are obtained
prior to shipping. The Company liaises closely with
customers to identify the ultimate consignee of shipments.
IQE engages a network of external advisors and expert
advisors to ensure it is aware of changes to the legal and
regulatory environment and that it responds effectively to
these.
Likelihood:
Medium
(Unchanged)
Potential impact:
Medium
Effect:
Financial loss
and reputational
damage
Principal Risk: LOSS OF INTELLECTUAL PROPERTY
Business Risk
Mitigation:
Likelihood:
Medium
Risk of
infringement of
IQE patents by
third parties
IQE operates in a competitive industry. In order to protect
its intellectual property IQE maintains strict confidentiality
controls and a system of non-disclosure agreements with
staff, customers and suppliers.
Risk of loss of
trade secrets to
third parties
Risk of claims
alleging IQE has
breached third
party intellectual
property rights
IQE protects its technology by strategically patenting in key
areas.
(Unchanged)
Where IQE becomes aware of potential infringement of
IQE’s IP by others, or receives a claim alleging infringement
on a third party’s IP, IQE will use appropriate legal
resources to defend its position and its intellectual
property portfolio. This is evidence in 2019 by the
successful outcome of an arbitration hearing related to an
infringement claim against IQE. Whilst the related Court
process is not complete, the arbitration outcome validates
IQE’s strategy of defending its intellectual property.
Potential impact:
Medium
Effect:
Financial losses,
reputational
damage
33
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Likelihood:
Medium
(Increased)
Potential impact:
High
Effect:
Loss of market
share, reduced
sales volumes and
profitability
Principal Risk: COMPETITION
Business Risk
Mitigation:
Risk of loss of
market share
Risk of loss
of share with
a significant
customer
Risk of excessive
price erosion
due to predatory
pricing from a
competitor
Risk of entry of a
new competitor
IQE has developed a leading market position through
development of technology, superior product quality
and investment in manufacturing capacity and customer
qualification. IQE’s competitive advantages are discussed
further on page 9. The risk of competition has increased
in 2019 due to two key factors. Firstly, the changing
geo-political environment, which has favoured certain
competitors in the short-term. Secondly, the attractiveness
of new markets such as 3DS to new entrants.
Despite the increase in risk, IQE continues to secure a
substantial share in the markets in which it operates and
remains well placed to adapt to changes in global markets.
IQE maintains 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 demonstrate
to our customers the advantages offered by IQE. We
also continue to invest in product development to ensure
competitive advantage.
IQE maintains an absolute focus on product quality, value
and customer service with technology leadership and
complimentary value added solutions that enhance our
customers’ competitiveness.
IQE provides superior unit economics to our Customers
through superior product quality and yields combined
with superior unit economics from our approach to mass
production.
In some cases, customers seek second source supply
arrangements to meet their own business continuity
planning policies, but our multiple site capabilities provide
suitable mitigation against this risk for some customers.
The qualification process represents a significant
investment for IQE and our Customers, both financially and
in time so once a product and relationship are established,
this becomes a significant barrier to entry for competitors.
Contractual commitments from customers are also used in
some cases to maintain share.
34
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Principal Risk: TECHNOLOGICAL CHANGE
Business Risk
Mitigation:
Risk of a
disruptive
technological
change that
surpasses
compound
semiconductors
IQE is at the leading edge of technological advancement.
Due to their inherent characteristics, compound
semiconductors have superior performance characteristics.
In order to minimise the risk of other technologies
surpassing compound semiconductors, IQE invests in
research and development and manages a New Product
Introduction (NPI) process to ensure it has a pipeline of
leading edge, commercially viable products and solutions.
Principal Risk: KEY PERSONNEL
Business Risk
Mitigation:
Risk of loss of key
personnel
Risk that IQE may
fail to attract the
best industry
talent
Risk of attrition in
skilled employees
Attraction of talented staff and the retention and
development of IQE’s workforce is 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. Of paramount importance
is keeping our people safe. IQE is committed to investing in
advanced safety systems in its facilities, in H&S training and
in maintaining robust safety policies and procedures.
In addition, IQE operates a highly effective quality
management system across all of its operations. This
system ensures that all key data and procedures are
fully documented, reflecting IQE’s “learning organisation”
philosophy.
IQE’s commitment to personal development is evidenced
by the implementation of the Training Academy in 2019.
For more information please see page 19.
IQE’s leadership communicates regularly with staff,
including at quarterly Town Halls.
IQE’s remuneration policy, including performance-based
bonus and long-term incentive share plan are also key to
retaining staff.
Likelihood:
Low
(Unchanged)
Potential impact:
High
Effect:
Reduction in
sales volume and
profitability
Likelihood:
Low
(Reduced)
Potential impact:
Medium
Effect:
Quality issues,
production issues,
increased costs of
operation
35
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Principal Risk: INFORMATION TECHNOLOGY
Business Risk
Mitigation:
Risk of loss of IT
network or service
Risk of loss of key
data, confidential
information
or intellectual
property
IQE has invested in appropriate cyber security defences
and employs a third-party specialist to monitor IQE’s
network. Cyber security mitigation plans in place to protect
key information assets.
All staff are required to complete highly effective cyber
security training and IT policies are in place to ensure staff
use assets appropriately.
A risk framework with plans for the management, mitigation
and resolution of device failures is in place.
Hardware and software systems have in-built resilience
including redundant elements. We continuously invest in
and improve IT resilience.
Data is appropriately stored and backed-up with IT system
recovery plans in place.
Likelihood:
Low
(Reduced)
Potential impact:
Medium
Effect:
Additional costs
and reputational
damage
IQE believes there will be two possible impacts on IQE’s
business from a financial perspective.
1.
IQE reports in GBP and earns the majority
of its revenues in USD, so is exposed to
exchange rate fluctuations which may be
amplified by Brexit.
2. Access to grant funded research and
development projects is likely to be adversely
affected by Brexit and there is some
uncertainty over the grant funding landscape
in the UK post-Brexit. This predominantly
affects IQE’s Compound Semiconductor
Centre (CSC) joint venture with Cardiff
University given the nature of its strategy to
bridge the gap between academic research
and mass production.
IQE does not foresee any scenarios where Brexit
will have a significant impact on the Group’s 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.
Tax compliance
In previous years IQE has disclosed Tax Compliance as
a principal risk. This risk has now been assessed, based
on current conditions, as having a low likelihood of
occurrence and a low potential impact. As such, it is no
longer considered a principal risk.
Brexit
The management team’s view continues to be that the
UK leaving the European Union (commonly referred
to as ‘Brexit’) will have no significant impact on IQE’s
business operations. In making this assessment the
following factors have been considered.
1. The Group operates and trades globally, with
Asia and the USA representing the Group’s
dominant markets.
2. The Group sources input materials from
various global suppliers, including dual-source
or multi-source arrangements for volume
items.
3. Safety stock holding of critical supply items
have been increased for UK operations to
mitigate potential customs delays.
4. The financial impact of World Trade
5.
Organisation tariffs has been evaluated as
being de minimis.
IQE Europe Limited and IQE Silicon
Compounds Limited applied for and have
been granted an OGEL (Open General Export
Licence) for exporting dual use goods to EU
member States.
36
IQE PLC | Report and Annual Accounts 2019 | 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.
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. 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 on
previous page.
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:
described further on pages 14 to 15;
· face-to-face meetings;
· attendance at industry conferences as
· regularly reading relevant publications,
· workers council, town hall and Employee
journals and reports;
Pensions and Benefits Governance
Committee (EPBGC) meetings as
described in this Strategic Report on
pages 18 to 19.
Throughout 2019, 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.
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.
Other examples of decisions and strategies that have
been affected by regard to stakeholders in 2019
include:
· 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;
· 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;
· 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.
In 2019, as in the previous year, 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.
37
IQE PLC | Report and Annual Accounts 2019 | 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 declined by 10.4% to £140.0m
(2018: £156.3m), primarily as a result of (i) a fall in
demand from a major Wireless customer due changes
in global technology markets resulting from a changing
geo-political context and (ii) a fall in demand from a
major Photonics customer due to technical matters
outside of IQE’s control.
Segmental information has been restated in the
financial statements to reflect changes in the Group’s
operating and reporting structure following the
establishment of an Executive Management Board
that has consolidated responsibility for the Group’s
primary markets and operating segments under
the leadership of an Executive VP, Global Business
Development, Wireless and Emerging Products and an
Executive VP, Global Business Development, Photonics
& Infrared. This change to the Group’s operating and
reporting structure has resulted in the consolidation
of the previously disclosed Infrared segment into
Photonics and the reclassification of certain revenues
and associated costs pertaining to a specific site, which
has shared production, between the Wireless and
Photonics segments.
Photonics represents the largest proportion of the
Group’s revenue accounting for 49.8% (2018: 42.7%)
of total wafer sales with Wireless representing 48.7%
(2018: 56.2%) and CMOSS++ representing 1.5% (2018:
1.1%) on a restated basis.
Photonics wafer revenues were up 4.4% to £69.8m
(2018: £66.8m) despite a significant loss of volume
from an Indium Phosphide customer that experienced
technical issues with an end customer that were
outside the Group’s control. Photonics demand,
especially for VCSEL and Infrared products continued
to grow in 2019. VSCEL revenues accounted for circa
50% of total Photonics revenues in 2019. Single digit
% growth was driven by demand from the Group’s
existing VCSEL supply chain and initial volumes from
Android supply chains. Infrared revenues accounted
for circa 30% of total Photonics revenues in 2019 with
growth rates consistent with historic growth being
driven primarily by defence applications.
Wireless wafer revenues were down 22.4% to £68.2m
(2018: £87.9m). The decline in Wireless revenue
reflects the global market changes related to the geo-
political landscape, including the impact of a significant
decline in volume from one of the Group’s major
GaAs Power amplifier customers, despite maintaining
the previous share of that customers business. GaAs
wafers account for circa 70% of Wireless revenues in
2019, with GaN wafers accounting for circa 30%.
Gross profit declined from £37.5m to £21.4m.
Adjusted gross profit, which excludes the charge for
share based payments, decreased from £36.8m to
£20.9m resulting in an adjusted gross margin decline
on wafer sales from 23.9% to 14.9%. The decline in
adjusted gross profit margin reflects under-utilisation
of assets in a period where revenue has declined and
additional manufacturing capacity has been installed at
the Group’s manufacturing sites in
Newport (UK), Hsinschu (Taiwan) and Massachusetts
(US).
Other income declined from £1.1m to £nil. The
decrease in other income relates to the net insurance
proceeds received in 2018 following the death of the
former Chief Financial Officer, Phillip Rasmussen. The
net insurance income was 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 £29.9m to £36.3m. Adjusted
38
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report The charge for taxation increased from £5.6m to
£10.2m reflecting increases in non-cash deferred tax
charges. Increased deferred tax charges principally
relate to the reversal of previously recognised
US deferred tax assets, deferred tax associated
with accelerated capital allowances in excess of
depreciation, reflecting the significant recent capital
investment in the business partially offset by the
recognition of deferred tax assets on current year
taxable losses in the UK. The largest component of
the deferred tax charge relates to the partial reversal
of previously recognised US deferred tax assets. A
forecast shift in the balance of the Group’s projected
manufacturing production and hence profits between
the US and rest of the world has resulted in lower
projected utilisation of US deferred tax assets in future
years resulting in the partial reversal of previously
recognised US deferred tax assets with a tax impact of
~£9.6m.
The tax charge on adjusted items of £1.8m and the
associated low effective tax rate principally reflects the
non-deductible nature of certain asset impairments,
the tax treatment of the equity accounted CSC loss
absorption and the impact of the effective tax rate
arising on the tax credit associated with the share-
based payment credit. The tax credit associated
with share-based payments principally reflects the
reduction in future 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.
Cash invested remained consistent with the prior
period at £42.1m (£42.4m) as the Group has
completed the infrastructure phase of its capacity
expansion programme. Capital expenditure has
remained broadly consistent at £31.9m (2018: £30.4m)
related to the investments in the new Mega Foundry
in Newport, focused on the 3D sensing market, the
expansion of the Group’s wireless (GaAs) capacity in
Taiwan and the consolidation of the Group’s wireless
GaN capacity in Massachusetts.
Investment has continued in technology and
intellectual property. Technology based development
expenditure totals £8.4m (2018: £10.4m).
Investment in capital and technology development has
partially been funded by debt. The Group’s net debt
position of £16.0m (2018: £20.8m net funds), excluding
lease liabilities arising on implementation of IFRS 16
compares to committed bank borrowing facilities of
£57.0m (2018: £nil).
SG&A, which excludes adjustments for share based
payments, amortisation of acquired intangibles,
restructuring costs, patent dispute legal costs and
certain non-current asset impairments increased from
£20.7m to £25.8m reflecting an increase in non-cash
amortisation charges, an increase in corporate costs
as the business primes itself for growth and exchange
rate movements.
Restructuring costs totalling £0.8m (2018: £3.3m)
relates to site-specific employee related restructuring
of £0.6m (2018: £nil) and additional costs of £0.2m
(2018: £3.3m) associated with the closure of the
Group’s manufacturing facility in New Jersey. Patent
dispute legal costs of £4.3m (2018: £1.3m) relate to a
confidential legal dispute. The associated arbitration
hearing ruled entirely in favour of IQE. In a related
Court process, in which the counterparty has stated
it is considering appealing the award, the case is not
yet fully resolved. This means that whilst IQE can
maintain its position that the eventual outcome will
not be adverse, any potential positive impacts cannot
currently be estimated. Non-current asset impairments
totalling £9.5m (2018: £nil) relates to the impairment
of certain intangible, right of use and non-current
financial assets detailed in note 5.
Operating profit decreased from £8.7m to a current
year loss of £18.8m. Reflecting the adjustments
noted above, adjusted operating profit decreased
from £16.0m to an operating loss of £4.7m. 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.18.8% to c.9.7%,
primarily reflecting declines in volume and associated
underutilisation of manufacturing capacity. The
decline in adjusted Photonics operating margins from
c.15.3% to c.1.9% primarily reflects increased non-cash
amortisation charges and increased cost associated
with the Group’s newly commissioned Newport
foundry where volumes continue to ramp.
Share of losses in joint ventures of £4.7m (2018:
£2.0m) reflects payments of £0.7m made on behalf of
the Group’s joint venture, CSDC, in the period prior to
its acquisition on 10 October 2019 and the application
of the loss absorption requirement of IAS28.38
resulting in a charge of £4.0m following reassessment
of the recoverability of the Group’s preference share
debt due from CSC to long term during the year (see
note 5).
The acquisition of CSDC was for a nominal cash
consideration of £5 and by taking control of the loss-
making operation, the Group is well placed to take
the necessary steps to restructure the operation
and pursue various Asian market sales opportunities
for MBE-based products to return the operation to
profitability.
Finance costs increased to £1.5m from income of
£0.1m in 2018 reflecting the Group’s utilisation of its
borrowing facilities to fund capital expansion and the
unwind of discounting associated with lease liabilities
following the implementation of IFRS 16 ‘Leases’.
39
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Sales (£M)
Operating profit (£M)
Sales (£M)
(before exceptional items
160
130
100
70
40
3.8
3.0
2.3
1.5
0.8
0.0
-0.8
-1.5
-2.3
-3.0
160
30
130
23
15
100
8
70
0
40
-8
53
3.8
3.0
35
2.3
1.5
18
0.8
0
0.0
-0.8
-18
-1.5
-2.3
-35
-3.0
-53
FY15
FY16
FY17
FY18
FY19
FY15
FY15
FY16
FY16
FY17
FY17
FY18
FY18
FY19
FY19
Adjusted Diluted EPS (pence)
Adjusted Diluted EPS (pence)
Leverage (£M)
Net debt
Deferred consideration
FY15
FY16
FY17
FY18
FY19
FY15
FY15
FY16
FY16
FY17
FY17
FY18
FY18
FY19
FY19
Operating profit (£M)
Cash from operations (£M)
Cash from operations (£M)
(before exceptional items
(before exceptional cash flows)
(before exceptional cash flows)
Cash from operations (£M)
(before exceptional cash flows)
40
30
40
23
30
30
15
20
20
8
0
10
10
-8
0
0
53
30
30
35
20
20
18
10
10
0
-18
0
0
-35
-10
-10
-53
-20
-20
40
30
20
10
0
30
20
10
0
-10
-20
FY15
FY15
FY15
FY16
FY17
FY16
FY16
FY17
FY17
FY18
FY19
FY18
FY18
FY19
FY19
FY15
FY16
FY17
FY18
FY19
Leverage (£M)
Gearing (%)
Gearing (%)
Net debt
Deferred consideration
Gearing (%)
FY15
FY15
FY15
FY16
FY16
FY16
FY17
FY17
FY17
FY18
FY18
FY18
FY19
FY19
FY19
FY15
FY16
FY17
FY18
FY19
KPI dashboard
Sales (£M)
Sales (£M)
£154.6m £156.3m
£140.0m
£132.7m
£114.0m
FY15
FY15
FY16
FY16
FY17
FY17
FY18
FY18
FY19
FY19
Operating profit (£M)
Cash from operations (£M)
(before exceptional items
(before exceptional cash flows)
Adjusted Diluted EPS (pence)
Adjusted Diluted EPS (pence)
£31.1m
£22.6m
£24.3m
£17.0m £16.5m
FY15
FY15
FY15
FY15
FY16
FY16
FY16
FY16
FY17
FY17
FY17
FY17
FY18
FY18
FY18
FY18
FY19
FY19
FY19
FY19
Leverage (£M)
Gearing (%)
£23.2m £39.5m
Net debt
Deferred consideration
£17.1m
£16.0m
-£45.6m -£20.8m
Sales (£M)
Operating profit (£M)
Operating profit (£M)
(before exceptional items
(before exceptional items
£26.5m
£22.1m
£19m
£16.0m
- £4.7m
FY15
FY15
FY15
FY16
FY16
FY16
FY17
FY17
FY17
FY18
FY18
FY18
FY19
FY19
FY19
Cash from operations (£M)
Adjusted Diluted EPS (pence)
(before exceptional cash flows)
Leverage (£M)
Leverage (£M)
3.38p
Net debt
Net debt
2.45p
2.89p
Deferred consideration
Deferred consideration
1.38p
-2.46p
FY15
FY15
FY16
FY16
FY17
FY17
FY18
FY18
FY19
FY19
FY15
FY15
FY16
FY16
FY17
FY17
FY18
FY18
FY19
FY19
Gearing (%)
22.1%
17.6%
-18.8%
-7.3%
5.7%
160
30
30
130
23
23
15
15
100
8
8
70
0
0
40
-8
-8
40
3.8
53
53
3.0
30
35
35
2.3
1.5
18
18
20
0.8
0.0
0
0
-0.8
10
-18
-18
-1.5
-2.3
0
-35
-35
-3.0
-53
-53
30
20
10
0
-10
-20
FY15
FY15
FY16
FY16
FY17
FY17
FY18
FY18
FY19
FY19
FY15
FY16
FY17
FY18
FY19
160
160
130
130
100
100
70
70
40
40
30
40
3.8
3.8
23
30
3.0
3.0
15
2.3
2.3
1.5
1.5
20
8
0.8
0.8
0.0
0.0
0
10
-0.8
-0.8
-1.5
-1.5
-8
0
-2.3
-2.3
-3.0
-3.0
53
30
35
20
18
10
0
0
-18
-35
-10
-53
-20
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.
40
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.
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Strategic Report Long-term
viability
statement
The Directors have considered the viability of the Group over
a three-year period to December 2022, taking account of the
Group’s current position and the potential impact of the principal
risks and uncertainties described in the Strategic Report on page
27.
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 2022 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.
Whilst there are emerging levels of uncertainty regarding the
impact of Coronavirus on the world economy, the Directors are
confident that the overall market in compound semiconductors
will continue to grow over the medium to long term. 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
secured additional funding in the form of a new £30m asset
financing facility with HSBC, maintaining the previously agreed
£27m revolving credit facility with HSBC as a committed line. This
increased total facilities to £57m.
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 2022.
This Strategic Report is approved by the Board of Directors and
signed on its behalf by:
Phil Smith
Chairman, IQE Plc.
28 April 2020
42
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Directors’ Report
The directors present their annual report and the audited consolidated financial statements for
the year ended 31 December 2019.
Dividends
The directors do not recommend the payment of a
dividend (2018: £nil).
Directors
The directors in office at 31 December 2019 and
throughout the year and their beneficial interests in
the company’s issued ordinary share capital and share
options are set out in the Remuneration Report on
page 56.
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.
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 on page 9.
Business review
A review of the Group’s trading during the year and
its position at the year-end is provided on pages 38
to 40. 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 27 to 37. The future outlook for the
Group is set out on page 42. 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.
43
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Substantial interests in shares
As at 31 March 2020 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:
Shareholder/beneficial owner
Invesco (OppenheimerFunds)
T Rowe Price International
Hargreaves Lansdown Asset Mgt
T Rowe Price
Dr Andrew W Nelson
Schroder Investment Mgt
Interactive Investor
AXA Investment Mgrs
Barclays Wealth
Source: EQUINITI Investor Analytics
IQE has not acquired any of its own shares during 2019.
Research and development
The Group incurred costs in respect of research
and development during the year of £9,280,000
(2018: £11,202,000) of which £8,123,000 (2018:
£10,559,000) has been capitalised in accordance
with IAS 38 (“Intangible assets”). The remaining
research and development costs totalling £1,157,000
(2018: £643,000) have been charged to the income
statement, net of grant funding of £nil (2018:
£617,000).
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 2019 was 58 days (2018: 82 days).
Employment policies
A review of the Group’s employment policies is
provided on page 18.
Principal risks and uncertainties
Details of the principal risks and uncertainties
impacting the Group have been included in the
Strategic Report on pages 27 to 37.
Shares
140,000,000
76,244,643
51,949,363
43,955,961
31,536,777
30,941,283
30,763,608
26,259,570
25,804,421
IC%
17.58
9.57
6.52
5.52
3.96
3.88
3.86
3.30
3.24
transactions are not permitted. The significant treasury
policies relate to Interest rates, foreign currency and
liquidity are detailed in note 22.
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:
Treasury
IQE operates a central treasury function, which acts in
accordance with specific board policies. Speculative
Phil Smith
Chairman, IQE Plc.
28 April 2020
44
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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 has applied 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.
This statement is structured according to the five
sections of the updated 2018 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.
IQE has identified the following main areas of non-
compliance with the new Code:
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 a potential change
to the Company’s Articles of Association
during 2020. Any change will be subject to
shareholder approval at the AGM following
a decision.t The Board 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
long-term sustainable
success.
the company’s
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.
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 2020 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.
Committee
Remuneration
has
The
responsibility
the policy
for determining
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.
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 sets out how the
Board has recently engaged with:
model;
success of the business;
· opportunities and risks to the future
· the sustainability of the Group’s business
· delivery of the Group’s strategy;
· its aims of creating shareholder value
and contributing to wider society.
IQE does not currently maintain a succession
for the Company Secretary or all
plan
management
immediately below Board
level, but IQE is working to develop such
All directors act with integrity, lead by example
and promote the desired culture of innovation,
collaboration, valuing people, integrity, accountability
and constant improvement. Workforce policies and
45
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
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. 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.
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 on
pages 27 to 37.
As required under its Terms of Reference and the
Code applicable to 31 December 2019, 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 on
page 18 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.
The Committee Chairs engage with shareholders
on significant matters related to their areas of
responsibility at AGMs and other shareholder meetings
as required.
The Head of Investor Relations also maintains the
Group’s IR website, which provides details of the
Group’s business including its strategy, technologies,
operations and products. The website 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 on 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.
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 page 37, 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
46
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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.
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
Mr Phil Smith took over the role of Non-Executive
Chairman on 1 April 2019 from Dr Godfrey Ainsworth
FCA who retired as Executive Chairman.
Executive Director Dr Howard Williams, Chief
Operations Officer, retired from the Board on 1 August
2019.
The Board comprises the Non-Executive Chairman, Mr
Phil Smith, the Executive President and Chief Executive
Officer, Dr Drew Nelson, the Executive Chief Financial
Officer, Mr Tim Pullen and three independent Non-
Executive Directors. Throughout the year ending 31
December 2019 and since, at least half of the Board,
excluding the Chairman, have been Non-Executive
Directors.
The Board is supported by an Executive Management
Board.
The Board considers that the four Non-Executive
Directors, Mr Phil Smith, Sir David Grant, Sir Derek
Jones and Mrs Carol Chesney 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. Mrs
Carol Chesney most recently joined the board as Non-
Executive Director on 14 May 2019. This followed the
appointment of Sir Derek Jones on 29 November 2017
and the appointment of Mr Phil Smith on 19 December
2016.
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.
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.
Tom Dale, General Counsel, was appointed as
Company Secretary of IQE plc with effect from
19 March 2020. Tom’s appointment follows the
resignation of Jason Howells who left the Company on
20 December 2019. Link Company Matters Limited,
a specialist company secretarial and corporate
administration services provider, was appointed as
Company Secretary during the transition period.
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. Examples of such items
include, but are not limited to:
results,
· the approval of interim and annual
· the approval of the annual budget,
· approval of acquisitions or disposals,
· approval of major items of capital
· approval of changes to corporate or
· financial issues, including changes
capital structure,
expenditure,
in accounting policy, the approval of
dividends, bank facilities and guarantees,
and
· the approval of significant contracts.
47
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
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, Sir David Grant,
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 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 2020, 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.
48
(b) Audit & Risk Committee
The Audit & Risk Committee consists of the
Non-Executive Directors, Sir Derek Jones,
Sir David Grant and Mrs Carol Chesney. The
Committee meets at least twice a year under
the chairmanship of Mrs Carol Chesney.
The Audit & Risk Committee’s main duties
are described on page 50. 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 2019 is included on pages
53 to 55.
(c) Remuneration Committee
The Remuneration Committee consists of the
Non-Executive Directors, Mr Phil Smith, Sir
Derek Jones, Sir David Grant and Mrs Carol
Chesney. 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 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 2019 as well as the
Company’s Remuneration Policy is included
on pages 56 to 71.
(d) Nominations Committee
The Nominations Committee consists of the
four Non-Executive Directors, namely Mr Phil
Smith, Sir Derek Jones, Mrs Carol Chesney and
is chaired by Sir David Grant.
The Board has delegated responsibility for
nominations to this Committee, which has
a prime role in appointing and removing
executive directors.
The Chief Executive attends meetings of the
Nomination Committee by invitation.
A report on the activity of the Nominations
Committee during 2019 is included on page
55.
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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 2019
is included in the Nominations Committee Report on
page 55
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.
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 on pages 72 to 73.
The Board is satisfied that the Audit & Risk Committee
has competence relevant to the sector in which the
company operates.
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 Sir
David Grant, Chair, Mr Phil Smith, Sir Derek Jones
and Mrs Carol Chesney, 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.
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
49
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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;
issues and judgements;
· reviewing significant financial reporting
· 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;
audit;
· necessity to establish dedicated internal
· 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;
auditor’s independence and objectivity;
· reviewing and monitoring the external
· 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
50
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 on page 53.
The Board and its Audit & Risk Committee’s recent
consideration of risk management and internal
controls is described further in the Strategic Report on
pages 27 to 37.
A statement regarding the Directors’ responsibility for
preparing the annual report is set out in the Board
Report on page 52.
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 27 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 on page 52.
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 56 to 71.
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 on page 58 of the Director’s Remuneration
Report.
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.
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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 72 to 73 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 2019 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 where they are a member is also shown below:
Number of meetings in 2019
Attendance
Executive:
Dr G H Ainsworth2
Dr A W Nelson
Dr H R Williams3
Mr Tim Pullen4
Non-Executive:
Mr P Smith5
Sir D Grant
Sir D Jones
Mrs Carol Chesney6
Board
Audit & Risk
Committee
Remuneration
Committee
Nominations
Committee1
10
4
8
6
6
10
10
9
5
4
N/A
N/A
N/A
N/A
2
4
4
3
2
N/A
N/A
N/A
N/A
2
2
2
0
0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A – Not a member of the Committee or not required to attend meetings.
1 There were no meetings of the Nominations Committee in 2019. Any decision requiring the Nominations Committee were made by the full
Board in 2019.
2 Dr Godfrey Ainsworth retired from the Board on 25 June 2019.
3 Dr Howard Williams retired from the Board on 1 August 2019.
4Tim Pullen was appointed to the Board on 4 February 2019 and attended all Board meetings after that date except for 3 December 2019
(see note 7.) Tim Pullen attended all the Audit Committee meetings but is not included in the table above as he is an attendee, rather than a
member of that committee.
5 Mr Phil Smith was a member of the Audit & Risk Committee before his appointment as Chairman on 25 June 2019.
6 Mrs Carol Chesney was appointed to the Board on 13 May 2019 and attended all Board and committee meetings after that date except for
the Board meeting on 3 December 2019 (see note 7.)
7 A Board meeting was held on 3 December but this comprised only three directors as it was approving the allotment of new employee
shares in IQE plc.
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.
51
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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.
Approved by the Board of Directors and signed on
behalf by:
Phil Smith
Chairman, IQE Plc.
28 April 2020
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. In preparing each of the
Group and parent Company financial statements, the
Directors are required to:
then apply them consistently;
· Select suitable accounting policies and
· Make judgements and estimates that are
· State whether they have been prepared
in accordance with IFRSs as adopted by
the EU;
reasonable, relevant and reliable;
· 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.
52
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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
impairment
which suggest any potential
of other
including the
valuation of development intangibles and the
capitalisation of development costs;
intangible assets
whether the presentation of the financial
the presentation
statements,
is
of adjusted performance measures,
appropriate and balanced;
including
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 2019 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.
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.
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
53
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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:
KPMG LLP
2019
£'000
2018
£'000
Fees payable to the company's auditor and its associates for the audit of parent company
and consolidated financial statements
185
156
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)
Ernst and Young (auditors of MBE Technology Pte & CSDC)
- Subsidiary company's audit
- Tax services
Total Ernst and Young (auditors of MBE Technology Pte & CSDC)
27
20
12
-
244
10
12
55
-
233
2019
£'000
2018
£'000
27
9
36
8
4
12
280
245
Total
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.
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.
54
Any system of internal control can only provide
reasonable, but not absolute, assurance against
material misstatement or loss, as it is designed to
manage rather than to eliminate the risk of failing to
achieve the business objectives of the Group.
The key procedures that the Directors have
established with a view to providing effective internal
control include the following:
and limits of authority;
· a clearly defined organisational structure
· 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;
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report cover; and
· where appropriate, taking out insurance
· 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.
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.
Nominations
Committee Report
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 Board continued to work on the recruitment of
an additional Non-Executive Director. This activity led
to the appointment of Mrs Carol Chesney on 14 May
2019. Mrs Chesney subsequently took over the Chair
of the Audit & Risk Committee, which had been chaired
by Sir Derek Jones since April 2018.
Dr Ainsworth retired from the Board on 25 June 2019.
Mr Phil Smith, former Chairman of Cisco who joined
the board in December 2016, became 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.
55
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance 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 2019 for which we will be seeking
shareholder approval at the Annual General Meeting in June 2020.
As an AIM-listed company, IQE is not required to submit a remuneration policy to a shareholder
vote. However, to align with best practice remuneration governance, we have voluntarily
decided to do so.
We appointed Mercer | Kepler to undertake a review of IQE’s remuneration arrangements
and this culminated in IQE’s remuneration policy for the years 2017 to 2020, 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. The report for 2018
remuneration was approved at the 2019 AGM with 99.16% voting in favour. This annual report
for 2019 remuneration will be put to a shareholder vote on a voluntary basis at the 2020 AGM.
Sir David Grant,
Remuneration Committee Chairman
28 April 2020
NOTE: This report includes audited and unaudited information, which is identified throughout
the report.
56
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
Directors’ Remuneration Policy
IQE aims to attract, retain and motivate high calibre executives, whilst recognising the need to be cost effective,
and to incentivise significant industry out-performance. The 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
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).
57
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
Function
Operation
Opportunity
Performance metrics
For Executive Directors, the
maximum annual bonus
opportunity will be 120%
of base salary (100% under
previous policy).
The bonus pays 0% at
Threshold and 50% at Target,
with straight-line vesting
between these levels and
Target and Maximum, and no
vesting below Threshold.
Any bonus earned over 100%
of base salary would be paid
in the form of stock grants.
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 up
to 100% of salary are
delivered in cash or in
the form of stock grants.
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
plan. Performance vs. targeted
levels will be measured at
budgeted FX rates.
Personal/strategic objectives will
represent no more than 30%
of the maximum opportunity
and will be set annually to
capture expected individual
contributions to IQE’s strategic
plan. The personal element
will be restricted to 15% of the
maximum opportunity in the
event the thresholds for two out
of the three relevant financial
measures are not met.
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. Any
adjustment would be carefully
considered and fully explained
in the Annual Report on
Remuneration.
Further details of the measures,
weightings and targets
applicable are provided on page
50 in the Annual Report on
Remuneration.
58
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
Function
Operation
Opportunity
Performance metrics
The LTIP provides for normal
awards of up to 150% of
salary (100% under the
previous policy, but with a 2x
multiplier linked to absolute
TSR).
In exceptional circumstances,
including but not limited to
recruitment, normal awards
may be made up to 200%
of salary (no change from
previous policy) to secure the
right individual.
Up to 25% of the LTIP will be
paid for achieving Threshold
performance, increasing on
a straight-line basis to full
vesting for achieving Stretch
performance.
Vesting of LTIP awards is subject
to achieving performance
conditions and continued
employment.
The 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.
If no entitlement has been
earned at the end of the
relevant performance period,
awards lapse.
The Remuneration Committee
has discretion to adjust
outcomes to ensure they fairly
reflect underlying performance.
The Remuneration Committee
also considers environmental,
social, governance and health
and safety criteria, to ensure
there is no reward for failure.
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 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.
Notes to the policy table
Performance measure selection and approach to target setting
The measures used under the annual bonus plan are selected annually to reflect IQE’s main objectives for the year
and reflect both financial performance (e.g. EBITDA, cashflow and revenue growth) and personal contributions to
delivering the strategic plan.
In terms of the performance conditions for the LTIP, the Remuneration Committee considers Fully Diluted Adjusted
Earnings per Share (‘EPS’) to be a key measure of IQE’s long-term bottom line performance, while Total Shareholder
Return (‘TSR’) is a measure which strongly aligns management and shareholder interests. Targets applying to the
bonus and new LTIP awards 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 receive awards under the LTIP.
Shareholding guidelines
The Remuneration Committee wishes to encourage Executive Directors to build up a significant shareholding in the
Company. Shareholding guidelines are therefore 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 level is 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 in the Annual Report on Remuneration on page
51.
59
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
Non-Executive Director remuneration
Non-Executive Director
Date of appointment letter
Sir David Grant
Phil Smith
Sir Derek Jones
Carol Chesney
1 September 2012
30 November 2016
1 December 2017
13 May 2019
Subject to re-election by shareholders, Non-Executive Directors are appointed by the full Board and retire by rotation
in accordance with the Company’s Articles of Association. The remuneration of Non-Executive Directors are matters
reserved for the full Board, subject to a limit of £150,000 per annum or such other figure as shareholders may
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.
Fee levels are reviewed annually,
with any adjustments effective
1 January in the year following
review.
n/a
It is expected that increases
to Non-Executive Director fee
levels will normally be in line with
salaried employees over the life
of this policy. However, in the
event 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.
Pay scenarios
The charts below provide an illustration of the potential future reward opportunities for the Executive Directors, and
the split between the different elements of remuneration under three different performance scenarios: ‘Minimum’,
‘On-target’ and ‘Stretch’.
Dr Andrew Nelson
Tim Pullen
£2,021k
£1,058k
£593k
£2.3m
£2.0m
£1.8m
£1.5m
£1.3m
£1.0m
£0.8m
£0.5m
£0.3m
£2.3m
£2.0m
£1.8m
£1.5m
£1.3m
£1.0m
£0.8m
£0.5m
£0.3m
£1,527k
£878k
£565k
Minimum On-Target
Stretch
Minimum On-Target
Stretch
Fixed Pay
Annual Bonus
LTIP
Starting Bonus
* LTIP value calculated based on market value of the options at the date of grant less the nominal grant price
60
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
The ‘Minimum’ scenario comprises fixed remuneration, i.e. base salary, pension, benefits and for Tim Pullen, his
starting bonus, 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 2020, while those for taxable benefits are based on the latest
single figure table for 2019. The ‘On-Target’ scenario reflects fixed remuneration on previous page, 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 (120% of salary) plus full vesting of the normal LTIP
of 150% of salary.
Approach to recruitment remuneration
External appointments
In the cases of hiring or appointing a new Executive Director from outside the Company, the Remuneration
Committee may make use of all the existing components of remuneration, as follows:
Component
Approach
Maximum annual
grant value
Base salary
Pension
Benefits
Annual Bonus
The base salaries of new appointees will be determined by reference
to relevant market data, experience and skills of the individual,
internal relativities and current basic salary. Where new appointees
have initial basic salaries set below market, any shortfall may be
managed with phased increases over multiple years subject to the
individual’s development in the role.
New appointees will receive pension contributions or an equivalent
cash supplement in line with existing policy.
New appointees will be eligible to receive benefits which may include
(but are not limited to) those outlined in the policy table.
The structure described in the policy table will apply to new appointees
with the relevant maximum being pro-rated to reflect the proportion
of employment over the year. Targets for the personal element will
be tailored to each executive.
LTIP
New appointees will be granted awards under the LTIP on the same
terms as other executives, as described in the policy table.
In line with normal
annual limit
Up to 200% of salary
on appointment;
in line with normal
annual limit
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
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 57.
61
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Service contracts and treatment for leavers and change of control
Executive
Date of service contract
Dr Godfrey Ainsworth1
16 June 2016
Dr Andrew Nelson
1 June 2016
Dr Howard Williams2
1 June 2016
Mr Tim Pullen
4 February 2019
1 Dr Godfrey Ainsworth retired from the Board on 25 June 2019
2 Dr Howard Williams retired from the Board on 01 August 2019
Executive Director service contracts, including arrangements for early termination, are carefully considered by the
Remuneration Committee. Each of the Executive Directors has a rolling service contract requiring 6 months’ notice of
termination on either side.
Such contracts contain no specific provision for compensation for loss of office, other than an obligation to pay for
any notice period waived by the Company, where pay refers to salary, benefits and pension only. Executive 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:
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 pro-rated 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
equivalent 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 in agreement with the Company or any other reason that the Committee determines in its absolute discretion.
External appointments
With the approval of the Board in each case, and subject to the overriding requirements of the Group, Executive
Directors may accept external appointments as Non-Executive Directors of other companies and retain any fees
received. None of the Executive Directors received any remuneration from external directorships during the year.
62
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Consideration of conditions elsewhere in the company
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
The Remuneration Committee maintains a regular dialogue with the Company’s major shareholders. Following the
2019 AGM, IQE Management consulted with shareholders regarding the concerns raised regarding the adoption of
the new all employee LTIP plan.
Annual Report on Remuneration
Remuneration Committee role, membership and
advice
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:
awards;
Executive Directors in 2019;
· determined annual bonuses payable to
· reviewed and approved vesting of LTIP
· reviewed and approved the Executive
· determined performance targets for
the Executive Directors’ 2019 annual
bonus and LTIP awards in line with the
Company’s strategic plan;
Directors’ salaries for 2019;
Report;
· drafted the Directors’ Remuneration
· considered benchmarking and advice
from independent remuneration
consultants, Mercer | 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 2019 by the
Remuneration Committee and attendance by the
individual Committee members at such meetings is set
out in the Board Report on page 51.
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.
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:
Officer;
· Dr Andrew Nelson, Chief Executive
· Tim Pullen, Chief Financial Officer;
· Representatives from Mercer | Kepler,
independent advisors to the Committee
No individuals are involved in decisions relating to their
own remuneration.
Mercer | Kepler provides independent advice
to the Remuneration Committee. Mercer |
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 Mercer |
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 £25,110 inclusive of VAT
were paid to Mercer | Kepler in respect of services
it provided to the Company in 2019. The Committee
considers that Mercer | 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.
63
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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 2019 and the prior year:
Dr Godfrey Ainsworth
Dr Andrew Nelson
Dr Howard Williams Mr Tim Pullen
2019
£’000
178
-
79
-
18
275
2018
£’000
264
-
238
-
26
528
2019
£’000
545
-
-
-
54
599
2018
£’000
526
-
105
2,999
53
3,683
2019
£’000
211
-
-
-
21
232
2018
£’000
353
-
70
2,009
35
2,467
2019
£’000
2018
£’000
351
169
-
-
33
553
-
-
-
-
-
-
Salary & benefits1
Starting bonus
Annual bonus
Long-term
incentive
Pension2
Total
1.
2.
Taxable benefits for 2019 consist of health cover, private medical insurance, life assurance, long-term disability insurance,
fuel and car repairs.
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 2018 and 31 December 2019
Annual Bonus
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 reflected 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 reflected strong performance in the development
of IQE’s new foundry in Newport South Wales, which
had 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, which he achieved:
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. As a result, he earned a bonus of 90% of
salary for 2018 and 90% of salary for the first quarter
of 2019.
Financial objectives in the bonus plan for 2019
(EBITDA and cashflow) were not met resulting in no
performance related bonus being awarded to Andrew
Nelson or Tim Pullen.
A starting bonus of £169,000 was paid to Mr Pullen
in 2019 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.
Long-term incentive plan
4,069,579 LTIP options awarded to Drew Nelson in
2017 were due to vest on 31 December 2019. The
performance criteria for these awards were not met
and these options have lapsed.
Percentage change in CEO remuneration
The table below shows the percentage change in CEO
remuneration from the prior year compared to the
average percentage change in remuneration for other
employees. The CEO’s annual remuneration includes
base salary, taxable benefits and annual bonus. The %
change in annual remuneration for other employees
is calculated using the increase in the earnings of all
employees who were employed in the UK throughout
2018 and 2019. 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 different local market
factors.
% change 2018-19
CEO
All UK employees
Base salary
Taxable benefits
Annual bonus
+3.6%
+3.6%
-100%
+2.5%
+2.5%
-100%
64
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Relative importance of spend on pay
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 2018 and 31 December 2019, along with the year-on-year percentage change.
2018
2019
2%
0%
10
9
8
7
6
5
4
3
2
1
n/a
Employee
Remuneration
Distribution to
shareholders
Investment in Capex,
R&D and intangibles
Review of past performance
The following graph charts the TSR of the Company and the FTSE AIM Index (to which IQE is a member) over the
period from 1 January 2015 to 31 December 2019. The table below details the Chief Executive’s “single figure”
remuneration over the same period.
Historical TSR performance (GBX)
IQE
AIM
800.00
600.00
400.00
100.00
0.00
2015
2016
2017
2018
2019
800.00
600.00
400.00
200.00
0.00
Historical CEO remuneration
2015
2016
2017
2018
2019
CEO single figure of remuneration (£000)
STI award as a % of maximum opportunity
851
0%
100%
100%
1,066
1,087
3,683
599
LTI award as a % of maximum opportunity
100%
n/a
n/a
20%
62%
0%
0%
65
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Scheme interests awarded in 2019 (audited information)
Executive director
Award type
Date of award
# shares
awarded
Face value
End of performance
period
Dr Andrew Nelson
Nil-cost option
01 January 2019
966,246
£618,397
31 December 2021
Mr Tim Pullen
Nil-cost option
04 February 2019
699,814
£506,665
31 December 2021
Mr Howard Williams
Nil-cost option
01 January 2019
647,292
£414,267
31 December 2021
The face value of shares was based on the share price at dates of award of 65.0p at 1 January 2019 and 73.4p at 4
February 2019, less the 1p nominal value exercise price.
Vesting of these awards is subject to EPS compound annual growth as illustrated below, where EPS is measured over
the period from 1 January 2019 to 31 December 2021.
50% of the awards for Andrew Nelson and Howard Williams also require absolute TSR growth over the 3-year
performance period to be 100% or more.
100%
y
r
a
l
a
S
%
25%
0%
2% 4% 6% 8%
10% 12% 14%
EPS Growth
Exit payments made in the year
No exit payments were paid to any Director during the year.
Payments to past Directors
Payments made to past Directors totalled £157,000 (2018: £nil) reflecting ongoing employee services received from
Dr Howard Williams and Dr Godfrey Ainsworth following their retirement from the board in 2019.
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 2019 and the prior year:
Sir David Grant
Phil Smith1
Sir Derek Jones
Mrs Carol Chesney2
NED fees
2019
£’000
2018
£’000
50
96
50
32
50
50
50
-
1. Mr Phil Smith was appointed Chairman of the Board on 25 June 2019 upon the Retirement of Dr Godfrey Ainsworth.
2. Mrs Carol Chesney was appointed to the Board as an independent Non-Executive Director on 13 May 2019
66
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
Implementation of remuneration policy for 2020
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 2019
Annual base salary at 1
January 2020
Percentage increase
£538,433
£360,698
£362,457
£538,433
n/a
£362,457
0%
n/a
0%
* Mr Pullen took up employment on 4 February 2019
Pension
Executive Directors are entitled to a pension
contribution of 10% of salary or equivalent cash
allowance. The typical employee pension contribution
is up to 10% of salary.
Annual bonus
For 2020, the Executive Directors will have the
opportunity to receive a cash bonus to be paid after
the announcement of full year results for 2020,
based on financial performance for the 2020 financial
year and agreed personal / strategic performance
measures.
Each measure has an on-target, threshold and stretch
target approved by the Board of Directors in at the
time of Budget approval. On-target performance will
equate to a 50% of base salary bonus payout. The
maximum bonus payout will be 120% of base salary
if all stretch targets are met. The range of outcomes
is therefore 0% to 120% inclusive. Any payout above
100% will be made in the form of a share grant,
calculated based on the average of the share price
on the three days preceding the date of the Annual
Results Announcement.
Performance of each of the components of the plan
will be calculated separately. However, if the threshold
is not met for two out of three financial measures then
there will be zero payout for financial performance.
Moreover, in the event of zero payout for financial
performance, the maximum payout for personal /
strategic measures will be restricted to 15% of the
maximum bonus amount.
A starting bonus of £156,000 will be paid to Mr
Pullen in 2020 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.
LTIP (audited information)
For 2020, normal LTIP awards of up to 150% of salary
may be made to Executive Directors, as outlined in
the Policy Table. 50% of these awards will vest on EPS
performance and 50% on relative TSR performance.
No award will vest below Threshold performance, and
vesting will increase on a straight-line basis between
Threshold and Stretch.
The EPS performance criterion will be based on
IQE plc’s Fully Diluted Adjusted Earnings per Share
achieved for the year ended 31 December 2022, as
shown in the audited annual accounts published in
March 2023. The relative Total Shareholder Return
(TSR) criterion will also be measured over the 3 years
ended 31 December 2022, versus the change in the
FTSE All Share Index over the same period. In order
to remove potential distortion from market volatility,
the three-month volume weighted average share price
and index level as at 31st December 2019 and as at 31st
December 2022 will be used in assessing performance.
EPS Element (50%)
· 12.5% of LTIP options exercisable if EPS
of 0.25 pence is achieved in the year
ended 31 December 2022
· 50% of LTIP options exercisable if EPS of
0.4 pence is achieved in the year ended
31 December 2022
· Percentage of exercisable LTIP options
will be interpolated if EPS is between 0.25
and 0.4 pence.
· No options will vest if EPS is less than
0.25 pence
TSR Element (50%)
· 12.5% of LTIP options exercisable if
relative TSR over the 3 years to 31
December 2022 is at 100% of the FTSE all
share index growth over the period.
· 50% of LTIP options exercisable if relative
over the 3 years to 31 December 2022
is at 130% of the FTSE all share index
growth over the period.
· Percentage of exercisable LTIP options
will be interpolated if TSR is between
100% and 130%.
· No options will vest if relative TSR is less
than 100% of the index value
67
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report The EPS and TSR elements will vest individually and not be dependent on each other. The EPS calculation will be
adjusted for any share placements or issuances made during the period.
Directors’ interests
A table setting out the beneficial interests of the Directors and their families in the share capital of the Company as at
31 December 2019 is set out below.
Since 31 December 2019 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 2019
Shares owned
outright as at 31
Dec 2019
Shareholding
requirement
% salary/fee
Current
shareholding
% salary/fee
Requirement
met?
Dr Andrew
Nelson
Dr Howard
Williams1
Tim Pullen2
Dr Godfrey
Ainsworth3
28,459,218
36,140,417
2,392,965
-
2,154,197
N/A
-
N/A
Sir David Grant
215,000
215,000
Phil Smith
Sir Derek Jones
Mrs Carol
Chesney
-
-
-
-
-
-
1 Dr Howard Williams resigned from the Board on 01 August 2019
2 Mr Tim Pullen was appointed on 4 February 2019
3 Dr Godfrey Ainsworth resigned from the Board on 25 June 2019
200%
200%
N/A
Yes
N/A
N/A
3,289%
N/A
0%
N/A
280%
-
-
-
Executive Directors are expected to build up a shareholding of 200% of salary within five years of appointment to the Board.
On 2 August 2019 Dr Drew Nelson entered into a sale and repurchase agreement with Equities First Holdings (“EFH”)
for 11,000,000 ordinary shares of 1 pence each in the Company (“EFH Sale Shares”), out of his total beneficial holding
(including persons closely associated) of 36,140,417 ordinary shares (the “Agreement”).
Under the terms of the Agreement, he is obligated to repurchase (and EFH is obligated to sell to Dr Nelson) all
these EFH Sale Shares at the end of a three year term, ending on 02 August 2022. The price at which he has sold
and is required to repurchase the EFH Sale Shares is 43.96 pence per share. The Agreement provides that he has
transferred all title and waives his voting rights in these EFH Sale Shares. However, under the terms of the agreement,
EFH is prohibited from short selling or voting the EFH Sale Shares during the term of the agreement. Furthermore,
EFH will pay Dr Nelson income that reflects any dividends as they arise from all of these EFH Sale Shares during the
entire period, as if Dr Nelson had continued to own all the EFH Sale Shares himself.
The monies raised will principally be used to satisfy income tax and NI obligations following the exercise of 7,681,199
share options by Dr Nelson, as announced on 29 April 2019. Under HMRC rules, income tax and National Insurance
becomes payable through PAYE directly upon the exercise of share options. Consequently, Directors often need
to immediately sell at least half of the exercised shares to cover this tax and NI liability. In the case of Dr Nelson, he
has elected to raise the tax and NI monies through these arrangements in order to retain all of the ordinary shares
resulting from the exercise of share options, thereby maximising his overall shareholding in the Company. The
remainder of the monies raised are intended to be used to fund future tax liabilities and NI due on the exercise of
share options if they arise, as well as fund further potential share purchases and cover any margin calls which may
occur under the Agreement. Dr Nelson used an identical share sale and repurchase agreement with EFH in October
2014, for the same purposes, which resulted in the repurchase of 18,000,000 ordinary shares by Dr Nelson from EFH
in September 2017.
68
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report 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
-
-
-
4,069,579
7,681,199
-
-
3,424,470
-
-
N/A
-
-
N/A
-
N/A
2019
Dr Andrew
Nelson
Dr Howard
Williams *
613,409
N/A
Tim Pullen
699,814
Dr Godfrey
Ainsworth
Sir David Grant
Phil Smith
Sir Derek Jones
Mrs Carol
Chesney
* The table above represents the position of Dr Williams’ share option up to 01 August 2019 when he resigned from the Board.
Dr Andrew Nelson exercised 7,681,199 share options on 24 April 2019 when the Group’s share price was £0.73. The
gain on exercise totalled £5,550,000.
Dr Howard Williams exercised 3,424,470 share options on 10 April 2019 at a share price of £0.68. The gain on
exercise totalled £2,259,000.
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
4,682,988
-
3,131,844
-
-
-
-
-
7,681,199
4,686,329
2,846,633
-
8,262,707
-
6,313,583
3,139,113
1,907,187
-
-
-
-
-*
-
-
N/A
2018
Dr Andrew
Nelson
Phillip
Rasmussen
Dr Howard
Williams
Tim Pullen
Dr Godfrey
Ainsworth
Sir David Grant
Phil Smith
Sir Derek Jones
*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.
69
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
Summary of shareholder voting at the 2019 AGM
Results of the vote on the remuneration report at the IQE’s AGM on 25 June 2019 are as below:
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Total votes cast (including withheld votes)
Total number of votes
% of votes cast
400,625,751
3,323,338
403,949,089
71,026
404,020,115
99.16%
0.82%
99.98%
0.02%
100%
2019 AGM LTIP resolution voting and proposed actions
At the AGM on 25 June 2019, 42.9 percent of
shareholders voted against the resolution to approve
the adoption of the 2019 IQE Long Term Incentive
Share Option Plan (“2019 LTIP”).
In line with Provision 4 of the UK Corporate
Governance Code 2018, announced in December 2019
an outline of the Company’s understanding of the
reasons behind the 2019 AGM LTIP resolution voting
result and the Remuneration Committee and Board
undertook to take the following actions as a result of
the vote.
The 2019 LTIP replaced the previous Executive Share
Option Scheme approved by shareholders at the AGM
in July 2009 and was intended as a simple renewal of
the existing rules, which had not been the subject of
any representations from shareholders since their
approval by shareholders in 2009. Accordingly, the
Remuneration Committee did not anticipate any
significant dissent and therefore did not seek to
engage shareholders in advance of submitting the plan
to an advisory vote at the 2019 AGM.
The Board was aware however that in advance of
this year’s AGM, Institutional Shareholder Services
(“ISS”) issued a report in which it recommended that
shareholders vote against the resolution to approve
the 2019 LTIP plan, citing two principal concerns:
That the dilution limits sought under the plan
exceeded the standard dilution limit expected
by institutional investors of 10% in 10 years for
all of the Company’s share schemes; and,
That the plan permits the vesting of outstanding
options to good leavers without a pro-rata
reduction to vesting based on performance
the vesting period
and
expired up to the time of the termination of
employment.
the portion of
Prior to and following the AGM, the Board engaged
with shareholders, emphasising that as a global
technology company with the majority of its operations
employing staff in Asia and the USA, share options
are considered an essential tool for the Company to
attract and retain the world-class talent required to
sustain and grow our business. The adoption of the
15% dilution limit in 10 years in 2009 was intended to
ensure that we would have sufficient flexibility to offer
competitive rewards to highly-sought after candidates
in critical roles throughout the entirety of the
organisation, as all IQE employees are offered share
options as part of their compensation packages.
Notwithstanding the above and that the 2019 LTIP
resolution was ultimately approved at the AGM, the
Board recognises that the significant vote against is an
indication of the strength of shareholder sentiment in
this area. The Board has therefore resolved to take
the following actions in response:
The Remuneration Committee will undertake
a review of the Directors’ Remuneration
Policy with a view to submitting a new Policy
to shareholders at the 2020 AGM. As part
of this review, the Remuneration Committee
has undertaken an exercise to understand
when IQE expects to be able to comply with
the standard 10% dilution limit. The result
demonstrated that, due to the number of
share options currently outstanding to all IQE
employees, a reduction to the 10% dilution
limit is not currently feasible. However, the
Board recognises the importance of moving to
a 10% dilution limit and is committed to doing
so over time; and,
The Board is taking steps to amend the LTIP
plan rules to align the leaver provisions for all
employees to those set out for the Executive
Directors. This language will make clear that
the maximum potential entitlement for a good
leaver will be a pro-rata vesting of outstanding
awards i.e. taking account of the time from
grant to the time of departure as a proportion
of the full vesting period.
70
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report
71
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Directors’ biographies
Phil Smith (63)
Non-executive Chairman
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 (72)
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. David was knighted in the 2016 Birthday Honours for services
to engineering, technology, and skills. Current directorships: Senior Independent
Director, Renishaw plc; Chair, National Physical Laboratory.
Sir Derek Jones KCB (67)
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. Currently, Sir
Derek is Chair of the Board of the public transport operator Keolis UK, Chair of the
Board of Keolis Amey Operations and Board member of Keolis Amey Cymru Ltd. Sir
Derek is also 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.
72
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Dr Drew Nelson OBE (65)
President and Chief Executive Officer
Dr Drew Nelson has over 30 years’ experience in the semiconductor industry in a
variety of research and managerial positions. Following a PhD in Semiconductor
Physics, he joined BT Research Laboratories in 1981, leading the group responsible
for the development of advanced optoelectronic devices for optical fibre
communications. He subsequently managed the technology transfer from BT to
Agilent for mass production. He co- founded EPI in 1988 (which became IQE in
1999) and was appointed Chief Executive Officer of IQE Plc in April 1999. Dr Nelson
has held several Non-Executive Directorship appointments, and served on several
Government and Industry bodies. He received an OBE in 2001 for services to the
Electronics Industry. He is currently a member of the High Level Group appointed
by the EC to oversee the implementation of Key Enabling Technologies (KETs)
throughout Europe. Current directorships 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.
Tim Pullen (42)
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 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 is also a Director of the Compound Semiconductor
Centre Limited.
Carol Chesney (57)
Non-executive Director, Chair of Audit Committee
Mrs. Chesney, FCA, is an experienced Non-executive Director, currently serving as
a Non-executive Director and Chair of the Audit Committee of Renishaw plc since
October 2012, in addition to currently serving as a Non-executive Director and Chair
of the Audit Committees of Hunting PLC since April 2018 and Biffa PLC since July
2018. Prior to this, Mrs. Chesney served as the Company Secretary of Halma PLC,
the FTSE 100 health, safety and environmental technology group, until 2018, having
also served as the Group Financial Controller. During her time at Halma PLC, Mrs.
Chesney’s role included corporate governance, legal compliance, equity incentives,
pensions, internal audit management, taxation, property, health and safety
compliance, environmental reporting and anti-bribery and corruption compliance.
Mrs. Chesney is a Fellow of the Institute of Chartered Accountants in England and
Wales, and qualified with Arthur Andersen in the UK.
73
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Governance Report Independent
Independent
auditor’s report
auditor’s report
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 2019 which comprise the consolidated
PLC (“the Company”) for the year ended 31
income statement, consolidated statement of
December 2019 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
2019 and of the Group’s loss for the year then
parent Company’s affairs as at 31 December
ended;
2019 and of the Group’s loss for the year then
ended;
— the Group financial statements have been
properly prepared in accordance with
— the Group financial statements have been
International Financial Reporting Standards as
properly prepared in accordance with
adopted by the European Union (IFRSs as
International Financial Reporting Standards as
adopted by the EU);
adopted by the European Union (IFRSs as
adopted by the EU);
— the parent Company financial statements have
been properly prepared in accordance with
— the parent Company financial statements have
IFRSs as adopted by the EU and as applied in
been properly prepared in accordance with
accordance with the provisions of the
IFRSs as adopted by the EU and as applied in
Companies Act 2006; and
accordance with the provisions of the
— the financial statements have been prepared in
Companies Act 2006; and
accordance with the requirements of the
— the financial statements have been prepared in
Companies Act 2006.
Basis for opinion
accordance with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
We conducted our audit in accordance with
(UK)”) and applicable law. Our responsibilities are
International Standards on Auditing (UK) (“ISAs
described below. We have fulfilled our ethical
(UK)”) and applicable law. Our responsibilities are
responsibilities under, and are independent of the
described below. We have fulfilled our ethical
Group in accordance with, UK ethical requirements
responsibilities under, and are independent of the
including FRC Ethical Standard as applied to listed
Group in accordance with, UK ethical requirements
entities. We believe that the audit evidence we
including FRC Ethical Standard as applied to listed
have obtained is a sufficient and appropriate basis
entities. We believe that the audit evidence we
for our opinion.
have obtained is a sufficient and appropriate basis
for our opinion.
Overview
Overview
Materiality:
group financial
Materiality:
statements as a whole
group financial
statements as a whole
Coverage
Coverage
£850k (2018:£660k)
£850k (2018:£660k)
0.6% of total revenues (2018:
3.8% of normalized group PBT)
0.6% of total revenues (2018:
3.8% of normalized group PBT)
96% (2018: 95%) of total group
revenues
96% (2018: 95%) of total group
revenues
Key audit matters
Key audit matters
Event driven risk New: Going concern - the
vs 2018
Event driven risk New: Going concern - the
vs 2018
▲
▲
◄►
◄►
◄►
◄►
◄►
◄►
◄►
◄►
◄►
◄►
impact of uncertainties
due to the global spread
of COVID-19
impact of uncertainties
due to the global spread
of COVID-19
The impact of
uncertainties due to the
The impact of
UK exiting the European
uncertainties due to the
Union on our audit
UK exiting the European
Union on our audit
Revenue recognition
Revenue recognition
Capitalisation of
Development costs
Capitalisation of
Development costs
Carrying value of
development intangibles
Carrying value of
not yet available for use
development intangibles
not yet available for use
Valuation of investments
in and recoverability of
receivables from
subsidiaries
Valuation of investments
in and recoverability of
receivables from
subsidiaries
Event driven risk
Event driven risk
Recurring risks
Recurring risks
Parent Company
only
Parent Company
only
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:
:
Going concern - the impact of
uncertainties due to the global
spread of COVID-19
Refer to note 2.2 (accounting policy
and financial disclosures).
The risk
Our response
Disclosure Quality
Our procedures included:
The financial statements explain how the
Board has formed a judgement that it is
appropriate to adopt the going concern
basis of preparation for the Group and
parent company.
That judgement is based on an evaluation
of the inherent risks to the Group’s and
Company’s business model, including
the impact of the Coronavirus, and how
those risks might affect the Group’s and
Company’s financial resources or ability
to continue operations over a period of at
least a year from the date of approval of
the financial statements.
As a result of the COVID-19 pandemic
(Coronavirus), uncertainty about the
immediate outlook for many companies
has increased sharply. The risk includes
the potential effect on customer
demand, the availability of debt and other
financing arrangements, the impact on
the wider supply chain, and, ultimately,
the potential of adversely affecting on
the Group’s and Company’s available
financial resources over this period.
The risk for our audit was whether or not
those risks were such that they
amounted to a material uncertainty that
may have cast significant doubt about
the ability to continue as a going concern.
Had they been such, then that fact would
have been required to have been
disclosed.
— Our Covid-19 knowledge: We considered
the directors’ assessment of Covid-19
related sources of risk for the Group’s
business and financial resources compared
with our own understanding of the risks. This
included assessing the Group as operating in
a critical industry with key worker status.
— Our sector experience: We critically
assessed the directors’ going concern
assessment, including the reasonableness of
the key assumptions used in the cash flow
forecasts and the level of downside
sensitivities applied using our industry
knowledge of Covid-19 risks.
— Sensitivity analysis: We considered
sensitivities over the level of available
financial resources indicated by the Group’s
financial forecasts, taking account of the
severe, but plausible adverse effects that
could arise from the identified risks
individually or collectively and the potential
impact on the Group’s borrowing covenants.
— Funding assessment: We obtained relevant
loan agreements, as revised, agreeing
facilities available to the Group and
recalculated covenant compliance and
headroom based on management’s latest
forecasts and those in severe but plausible
downside scenarios.
— Evaluating directors’ intent: We evaluated
the achievability of the actions the Directors
consider they would take to improve the
position should the risks materialise. This
included assessing the intent and ability of
the Directors to implement these actions in
the time frame required and that they were
entirely in the Directors’ control.
— Assessing transparency: We assessed the
completeness and accuracy of the matters
covered in the going concern disclosures by
comparing this to the key assumptions, key
sensitivities and mitigating actions
considered by the Directors.
2. Key audit matters: our assessment of risks of material misstatement (continued)
The risk
Our response
The impact of uncertainties due
to the UK exiting the European
Union on our audit
Refer to page 36 (principal risks)
Unprecedented levels of uncertainty
All audits assess and challenge the
reasonableness of estimates, in particular
as described in the carrying value 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 its
effects are subject to unprecedented
levels of uncertainty of consequences,
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
2019/2020 Revenues
Our procedures included:
(£140.0 million; 2018: £156.3
million)
Refer to note 2.20 (accounting
policy) and note 4 (financial
disclosures)
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 date.
— Control design: Assessing the design of
controls over the matching of sales
transactions to related orders and customer-
authorised delivery note or purchase order;
— Enquiry of customers: Obtained direct
confirmation of receivables balances held by
a sample of customers at the year-end date
to agree revenue associated with product
delivered into Supplier Managed Inventory;
— Test of details: Agreed a sample of sales
transactions around the year-end, based
upon their financial significance, to customer-
authorised despatch note or purchase order;
— Test of details: Agreed a sample of post
year-end credit notes, based upon their
financial significance, to original customer-
authorised despatch note or purchase order,
to assess revenue has not been overstated
at the year-end date;
2. Key audit matters: our assessment of risks of material misstatement (continued)
2. Key audit matters: our assessment of risks of material misstatement (continued)
The risk
Our response
Capitalisation of development
costs (Additions of £8.1million;
2018: £9.8 million)
Capitalisation of development
costs (Additions of £8.1million;
Refer to note 2.5 (accounting
2018: £9.8 million)
policy) and note 13 (financial
disclosures).
Refer to note 2.5 (accounting
policy) and note 13 (financial
disclosures).
Accounting Treatment
The risk
Capitalised development costs are
significant due to investment in areas
Accounting Treatment
including VCSEL, GaN, cREO and
Capitalised development costs are
Photonics.
significant due to investment in areas
The application of accounting standards
including VCSEL, GaN, cREO and
to determine whether the criteria for
Photonics.
capitalisation have been met is
The application of accounting standards
inherently subjective as this involves an
to determine whether the criteria for
assessment of the probability of future
capitalisation have been met is
outcomes, the time period that
inherently subjective as this involves an
constitutes the process development
assessment of the probability of future
phase and the identification of any costs
outcomes, the time period that
related to saleable product produced at
constitutes the process development
the same time, which should be
phase and the identification of any costs
excluded from capitalisation.
related to saleable product produced at
the same time, which should be
excluded from capitalisation.
Our procedures included:
Our response
— Our expertise: Critically assessed the costs
capitalised against the criteria of the relevant
Our procedures included:
accounting standard and our understanding
— Our expertise: Critically assessed the costs
of the progress of the Group’s projects,
capitalised against the criteria of the relevant
including assessing the technical feasibility
accounting standard and our understanding
of the asset;
of the progress of the Group’s projects,
— Personnel interviews: Held discussions
including assessing the technical feasibility
with the Group Technology Director, to and
of the asset;
challenge the feasibility of these projects
— Personnel interviews: Held discussions
and the likelihood of future economic
with the Group Technology Director, to and
benefit with reference to supporting
challenge the feasibility of these projects
documentation such as market analysis and
and the likelihood of future economic
customer correspondence.
benefit with reference to supporting
— Test of details: Agreed a sample of labour
documentation such as market analysis and
costs allocated to development projects to
customer correspondence.
supporting documentation, primarily
— Test of details: Agreed a sample of labour
timesheets and payroll records for relevant
costs allocated to development projects to
employees. Agreed a sample of material and
supporting documentation, primarily
overhead costs to supporting
timesheets and payroll records for relevant
documentation, including agreeing substrate
employees. Agreed a sample of material and
costs to purchase invoices and analysing
overhead costs to supporting
gas consumption;
documentation, including agreeing substrate
— Challenged assumptions: Challenged the
costs to purchase invoices and analysing
reasonableness of the assumptions applied
gas consumption;
in respect of the proportion of labour and
— Challenged assumptions: Challenged the
overhead costs capitalised with reference to
reasonableness of the assumptions applied
[We continue to perform procedures over [identify key audit matter]. However, following [explain why risk is less significant
the number of development runs performed
in respect of the proportion of labour and
this year], we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not
during the year compared to the total
overhead costs capitalised with reference to
separately identified in our report this year.]
number of all runs.
[We continue to perform procedures over [identify key audit matter]. However, following [explain why risk is less significant
the number of development runs performed
— Calculation reperformance: Re-performed
this year], we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not
during the year compared to the total
the group’s calculation of standard costs
separately identified in our report this year.]
number of all runs.
used in allocating costs throughout the year,
— Calculation reperformance: Re-performed
agreeing actual costs incurred to purchase
the group’s calculation of standard costs
invoices.
used in allocating costs throughout the year,
— Test of details: Agreed a sample of wafers
agreeing actual costs incurred to purchase
sold during the year, selected from sales
invoices.
records, back to production/development
— Test of details: Agreed a sample of wafers
run records to assess that the cost of sold
sold during the year, selected from sales
wafers has been expensed and not been
records, back to production/development
inappropriately capitalised.
run records to assess that the cost of sold
wafers has been expensed and not been
inappropriately capitalised.
2. Key audit matters: our assessment of risks of material misstatement (continued)
Carrying value of development
intangibles not yet available for
use (£12.8 million; 2018: £17.5
million)
Refer to note 2.7 (accounting
policy) and note 3.2 (financial
disclosures).
Parent Company: Valuation of
investments in and
recoverability of receivables
from subsidiaries (£221.4 million;
2018: £235.8m)
Refer to notes 2.9 and 2.27
(accounting policy) and notes 16
and 18 (financial disclosures).
The risk
Our response
Subjective valuation
Our procedures included:
The ability of an intangible asset to
generate sufficient future economic
benefits to recover its carrying amount
is determined to be subject to greater
uncertainty before the asset is available
for use rather than after it is available for
use, especially where there has been
limited development activity in the
period.
Value in use calculations are prepared
for development intangibles that are not
yet available for use at the balance sheet
date. These 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 for audit
planning purposes, we determined that
the value in use calculations had a high
degree of estimation uncertainty, with a
potential range of reasonable outcomes
greater than our materiality for the
financial statements as a whole. In
conducting our final audit work, we
reassessed the degree of estimation
uncertainty to be less than that
materiality.
The financial statements (note 3.2)
disclose the sensitivity estimated by the
Group.
— Challenge assumptions: We challenged
the Group’s assessment of the future
viability of development intangible assets
not yet available for use, assessing the key
assumptions in the value in use calculations
with reference to external evidence,
including customer correspondence for the
projects and/or external market analyst
reports in respect of the associated
technology.
— Benchmarking assumptions: We
compared the group’s assumptions to
externally derived data in relation to key
inputs such as growth rates and discount
rates;
— Sensitivity analysis: We performed
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
whether the group’s disclosures reflected
the risks inherent in the valuation of
development intangibles not yet available for
use.
Low risk, high value
Our procedures included:
The carrying amount of the parent
company’s investments in and
receivables from subsidiaries represents
95% (2018: 95%) 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.
Test of detail: We compared the carrying
amount of 100% of investments and
receivables with the relevant subsidiaries’
balance sheet to identify whether their net
assets, being an approximation of their
minimum recoverable amount, were in excess
of their carrying amount and assessing whether
those subsidiaries have historically been profit-
making.
Assessing subsidiary audits: Assessed the
work performed by the component team of
those subsidiaries and considering the results
of that work, on those subsidiaries’ profits and
net assets.
Comparing valuations: For the investments or
receivables where the carrying amount
exceeded the net asset value, we compared
the carrying amount with the expected value of
the business based on the subsidiaries forecast
profitability and cash flows.
3.Our application of materiality and an overview of thescope of our auditMateriality for the group financial statements as a wholewas set at £850k (2018: £660k), determined with referenceto a benchmark of group revenues of £140,015k (whichrepresents 0.61%). In 2018 materiality was set withreference to normalised group profit before tax of £17,242kof which it represented 3.8%.In 2019 we consider total revenue to be the mostappropriate benchmark as it provides a more stablemeasure in period of investment where the group has seena temporary dip in profits. The level of materiality reflectsthe size of the group.Materiality for the parent company financial statements as awhole was set at £300k (2018: £300k), as communicated bythe group audit team. This is lower than the materiality wewould otherwise have determined by reference to totalassets, and represents 0.13% (2018: 0.13%) of theCompany’s total assets.We agreed to report to the Audit Committee any corrected oruncorrected identified misstatements exceeding £42k (2018:£33k), in addition to other identified misstatements thatwarranted reporting on qualitative grounds.Of the group’s 15 ( 2018: 14) reporting components, wesubjected 8 (2018: 8) to full scope audits for group purposesand 2 (2018: 2) to specified risk-focused audit procedures.The latter were not individually financially significant enoughto require a full scope audit for group purposes, but didpresent specific individual risks that needed to be addressed.The components within the scope of our work accounted forthe percentages illustrated opposite.The remaining 2% (2018: 5%) of total group revenue, 4%(2018: 1%) of total group assets and 4% (2018: 1%) of lossbefore tax is represented by 3 (2018: 3) reportingcomponents, none of which individually represented morethan 2% (2018: 2%) of any of total group revenue, group lossbefore tax or total group assets. For these residualcomponents, we performed analysis at an aggregated grouplevel to re-examine our assessment that there were nosignificant risks of material misstatement within these.The Group team approved the component materialities,which ranged from £200k to £500k (2018: £300k to £500k),having regard to the mix of size and risk profile of the Groupacross the components.£850kWhole financialstatementsmateriality(2018: £660k)£500kRange of materiality at 13 components (£200kto £500k) (2018: £300k to £500k)£42kMisstatementsreportedto the audit committee (2018: £33k)RevenueGroup materialityRevenue£140,015k(2018: normalised group profit before tax of £17,242k)Group Materiality£850k(2018: £660k)811489798%(2018 95%)GrouprevenueGroup total assets 881187996%(2018 99%)Key: Full scope for group audit purposes 2019Specified risk-focused audit procedures 2019Full scope for group audit purposes 2018Specified risk-focused audit procedures 2018Residual components8212881196%Group Loss before tax 4. We have nothing to report on going concern
5. We have nothing to report on the other information in
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.
We identified going concern as a key audit matter (see
section 2 of this report). Based on the work described in our
response to that key audit matter, 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 2 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; or
— the related statement given as if the Listing Rules
applied set out on page 42 is materially consistent with
our audit knowledge.
We have nothing to report in these respects.
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.
Disclosures of emerging and 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 on page 42 that they have carried out a
robust assessment of the emerging and principal
risks facing the Group, including those that would
threaten its business model, future performance,
solvency and liquidity;
— the Principal Risks 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.
Under the terms of our engagement we are required to
review the Long-term viability statement as if the Listing
Rules applied. We have nothing to report in this respect.
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.
5. We have nothing to report on the other information in
7. Respective responsibilities
the Annual Report (continued)
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.
In addition to our audit of the financial statements, the
directors have engaged us to review their 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 the terms of our
engagement we are required to review the part of the
Corporate Governance Statement relating to the Company’s
compliance with the provisions of the UK Corporate
Governance Code specified for our review.
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 and the part of
the Directors’ Remuneration Report which we were
engaged to audit 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
52, 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 and terms of our engagement by the
Company. 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
28 April 2020
Five year financial
summary
2019
£’000
2018
£’000
2017
£’000
2016
£’000
2015
£’000
Revenue
140,015
156,291
154,553
132,707
114,024
Adjusted EBITDA (see below)
16,246
26,404
37,152
31,730
29,001
Operating (loss) / profit
(Loss) / profit after tax
· Adjusted*
· Reported
· Adjusted*
· Reported
Net cash flow from operations
Before adjustments (note 5)
Reported
Free cash flow**
(4,676)
16,040
(18,802)
8,660
(19,010)
11,229
(35,128)
1,189
16,530
8,948
16,982
16,988
Before exceptional cash flows
(25,445)
(26,045)
Reported
(33,027)
(26,039)
26,534
17,194
24,998
14,660
31,089
29,717
(2,945)
(4,317)
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
Net (debt)/cash excluding lease
liabilities***
(15,970)
20,807
45,612
(39,549)
(23,223)
Equity shareholders’ funds
266,593
305,730
287,950
184,666
142,299
Basic EPS – adjusted****
Basic EPS – unadjusted
Diluted EPS – adjusted****
Diluted EPS – unadjusted
(2.46p)
(4.51p)
(2.46p)
(4.51p)
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
* The adjusted performance measures for 2019 and 2018 are reconciled in note 5. The adjusted performance
measures for 2015-2017 are reconciled in those financial statements.
** Free cash flow is defined as net cash flow of £11,867,000 before financing £21,831,000 and net interest paid
(£671,000).
*** Net (debt)/cash is defined as borrowings less cash but excluding lease liabilities.
**** Adjusted EPS measures exclude the impact of certain non-cash charges and one-off or non-operational items
(see note 12).
82
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Five year financial summary (continued)
Adjusted EBITDA has been calculated as follows:
2019
£’000
2018
£’000
2017
£’000
2016
£’000
2015
£’000
(Loss)/profit after tax
Tax
Interest expense/(income)
Share based payments
(Profit)/Loss on disposal of PPE
Adjusted items
Depreciation of PPE
Depreciation of right of use asset
Amortisation of intangible assets
(35,128)
10,180
1,458
(771)
(245)
18,463
10,477
3,590
8,222
1,189
5,558
(87)
(1,044)
-
7,906
6,773
-
14,660
18,023
17,847
435
2,099
7,526
22
385
5,637
-
340
1,463
2,881
248
1,790
2,001
47
(5,187)
(1,962)
5,561
-
1,070
6,192
-
6,109
6,388
5,377
5,040
Adjusted EBITDA
16,246
26,404
37,152
31,730
29,001
83
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Consolidated income statement for the year ended 31 December 2019
Revenue
Cost of sales
Gross profit
Other income and expenses
Selling, general and administrative expenses
Impairment loss on financial assets
Profit on disposal of property, plant and equipment
Operating (loss) / profit
Finance (costs) / income
Share of losses of joint ventures accounted for using the equity
method
Adjusted (loss) / profit before income tax
Adjustments
(Loss) / Profit before income tax
Taxation
(Loss) / Profit for the year
(Loss) / Profit attributable to:
Equity shareholders
Non-controlling interest
Note
4
5
5
5
6
8
30
5
9
2019
£’000
140,015
(118,631)
21,384
-
(36,297)
(4,134)
245
(18,802)
(1,458)
(4,688)
(7,019)
(17,929)
(24,948)
(10,180)
(35,128)
(35,473)
345
(35,128)
(Loss) / earnings per share attributable to owners of the
parent during the year
Basic (loss) / earnings per share
Diluted (loss) / earnings per share
12
12
(4.51p)
(4.51p)
Adjusted basic and diluted (loss) / earnings per share are presented in note 12.
All items included in the (loss) / profit for the year relate to continuing operations.
2018
£’000
156,291
(118,840)
37,451
1,097
(29,888)
-
-
8,660
87
(2,000)
13,974
(7,227)
6,747
(5,558)
1,189
966
223
1,189
0.13p
0.12p
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 92 - 143 form an integral part of these consolidated financial statements.
84
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Consolidated statement of comprehensive income for the year ended 31 December 2019
(Loss) / profit for the year
Currency translation differences on foreign currency net investments*
Total comprehensive (expense) / income for the year
Total comprehensive (expense) / income attributable to:
Equity shareholders
Non-controlling interest
2019
£’000
(35,128)
(3,654)
(38,782)
(39,084)
302
(38,782)
2018
£’000
1,189
11,140
12,329
12,010
319
12,329
* Items that may subsequently be reclassified to profit or loss.
Items in the statement above are disclosed net of tax. The income tax relating to each component of other
comprehensive (expense) / income is disclosed in note 9.
The notes on pages 92 - 143 form an integral part of these consolidated financial statements.
85
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Consolidated balance sheet as at 31 December 2019
Non-current assets
Intangible assets
Fixed asset investments
Property, plant and equipment
Right of use assets
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
Bank borrowings
Lease liabilities
Provisions for other liabilities and charges
Total current liabilities
Non-current liabilities
Bank borrowings
Lease liabilities
Deferred tax liabilities
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
Exchange rate reserve
Other reserves
Non-controlling interest
Total equity
Note
2019
£’000
2018
£’000
13
16
14
15
10
18
17
18
19
20
20
21
20
20
10
21
23
118,456
121,775
75
75
136,482
124,445
39,355
5,679
-
-
13,244
7,937
300,047
267,476
30,668
33,065
8,800
72,533
35,709
38,015
20,807
94,531
372,580
362,007
(26,367)
(1,162)
(2,034)
(3,083)
-
(32,646)
(22,736)
(44,895)
(1,860)
-
(69,491)
(45,908)
(431)
-
-
(2,554)
(48,893)
-
-
-
(3,836)
(3,836)
(102,137)
(52,729)
270,443
309,278
7,961
152,385
63,826
27,502
14,919
7,767
151,147
99,299
31,113
16,404
266,593
305,730
3,850
3,548
270,443
309,278
The notes on pages 92 - 143 form an integral part of these consolidated financial statements. The financial
statements were authorised for issue by the board of directors approved on 28 April 2020 and were signed on its
behalf.
Mr T Pullen
Dr A W Nelson
86
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
Consolidated statement of changes in equity for the year ended 31 December 2019
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 2019
7,767
151,147
99,299
31,113
16,404
3,548
309,278
Comprehensive expense
(Loss) / profit for the year
Other comprehensive
expense for the year
Total comprehensive
expense for the year
Transactions with
owners
Share based payments
Tax relating to share
options
Proceeds from shares
issued
Total transactions with
owners
-
-
-
-
-
-
-
-
-
-
194
194
1,238
1,238
(35,473)
-
-
(3,611)
(35,473)
(3,611)
-
-
-
345
(43)
(35,128)
(3,654)
302
(38,782)
-
-
-
-
-
-
-
-
(641)
(124)
(720)
(1,485)
-
-
-
-
(641)
(124)
712
(53)
At 31 December 2019
7,961
152,385
63,826
27,502
14,919
3,850
270,443
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
-
966
-
-
-
-
-
11,044
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
Other reserves relates to share based payments.
The notes on pages 92 - 143 form an integral part of these consolidated financial statements.
87
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Consolidated cash flow statement for the year ended 31 December 2019
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
Proceeds from disposal of property, plant and
equipment
Acquisition of subsidiary, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Repayment of borrowings
Proceeds from borrowings
Payment of lease liabilities
Net cash generated from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange (losses)/gains on cash and cash equivalents
Cash and cash equivalents at 31 December
Note
5
26
27
27
27
2019
£’000
16,530
(7,582)
8,948
(671)
(151)
8,126
(31,864)
(1,806)
(8,427)
263
10
2018
£’000
16,982
6
16,988
(66)
(665)
16,257
(30,375)
(1,550)
(10,437)
-
-
(41,824)
(42,362)
712
(17,125)
41,895
(3,651)
21,831
(11,867)
20,807
(140)
8,800
813
-
-
-
813
(25,292)
45,612
487
20,807
The notes on pages 92 - 143 form an integral part of these consolidated financial statements.
88
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Parent company balance sheet for the year ended 31 December 2019
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Deferred tax assets
Trade and other receivables
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
Bank borrowings
Total current liabilities
Non-current liabilities
Bank borrowings
Total non-current liabilities
Total liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Retained earnings
Other reserves
Total equity
Note
13
14
16
10
18
18
19
20
20
23
2019
£’000
6,539
19
89,961
2,637
131,541
230,697
576
1,746
2,322
Restated*
2018
£’000
6,263
15
89,228
1,365
146,607
243,478
721
4,582
5,303
233,019
248,781
(18,982)
(20,706)
-
-
(18,982)
(20,706)
-
-
(18,982)
214,037
7,961
152,385
38,687
15,004
-
-
(20,706)
228,075
7,767
151,147
52,780
16,381
214,037
228,075
* The comparative financial information for the year ended 31 December 2018 has been restated. Details of the
restatement are set out in note 18.
The notes on pages 92 - 143 form an integral part of these financial statements.
The financial statements were authorised for issue by the board of directors approved on 28 April 2020 and were
signed on its behalf.
Mr T Pullen
Dr A W Nelson
89
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
Parent company statement of changes in equity for the year ended 31 December 2019
Share
capital
£’000
Share
premium
Retained
earnings
Other
reserves
£’000
£’000
£’000
Total
Equity
£’000
At 1 January 2019
7,767
151,147
52,780
16,381
228,075
Comprehensive expense
Loss 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
-
-
-
-
-
-
-
-
194
194
1,238
1,238
(14,093)
(14,093)
-
-
(14,093)
(14,093)
-
-
-
-
(641)
(16)
(720)
(1,377)
(641)
(16)
712
55
At 31 December 2019
7,961
152,385
38,687
15,004
214,037
Share
capital
£’000
Share
premium
Retained
earnings
Other
reserves
£’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
-
-
2,304
2,304
-
-
-
-
1,826
(209)
(1,046)
571
1,826
(209)
4,381
5,998
At 31 December 2018
7,767
151,147
52,780
16,381
228,075
Other reserves relate to share based payments.
The notes on pages 92 - 143 form an integral part of these financial statements.
90
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Parent company cash flow statement for the year ended 31 December 2019
Cash flows from operating activities
Cash outflow from operations
Interest received
Income tax paid
Net cash used in operating activities
Purchase of intangible assets
Purchase of property plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Proceeds from borrowings
Repayments of borrowings
Net cash generated from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
26
2019
£’000
(5,176)
2,496
-
2018
£’000
(30,332)
3,523
-
(2,680)
(26,809)
(778)
(18)
(796)
712
17,053
(17,125)
640
(2,836)
4,582
1,746
(685)
(18)
(703)
813
-
-
813
(26,699)
31,281
4,582
The notes on pages 92 - 143 form an integral part of these financial statements.
91
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Notes to the financial
statements for the year
ended 31 December 2019
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.
IQE plc is a public limited company incorporated in
the United Kingdom under the Companies Act 2006.
The Company is domiciled in the United Kingdom and
is quoted on the Alternative Investment Market (AIM).
The address of the Company’s 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 16 ‘Leases’.
2.1 Basis of preparation
The financial statements of IQE plc have been
prepared in accordance with International Financial
Reporting Standards (IFRS), 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 made a loss of £35,128,000 (2018:
£1,189,000 profit) and had a decrease in cash and
cash equivalents of £12,007,000 (2018: £24,805,000
decrease) for the year ended 31 December 2019.
The following matters have been considered by the
directors in determining the appropriateness of the
going concern basis of preparation in the financial
statements:
· On 24 January 2019, the Group agreed
a new £26,700,000 ($35,000,000)
three-year multi-currency revolving
credit facility from HSBC Bank plc. The
Group has complied with all covenants
associated with the facility.
· On 29 August 2019, the Group agreed a
new £30,000,000 five-year Asset Finance
Loan facility from HSBC Bank plc of which
£25,000,000 is drawn down at the date of
this report. The Group has complied with
all covenants associated with the facility.
· The Group generated cash from
operating activities of £8,126,000 (2018:
£16,257,000) and its financial forecasts
and projections for the period up to and
including 30 June 2021 show that the
Group is forecast to continue to comply
with its banking covenants and has
adequate cash resources to continue
operating for the foreseeable future.
· On 11 March 2020, the World Health
Organisation declared the outbreak of
a coronavirus (COVID-19) a pandemic.
The COVID-19 outbreak has created
significant uncertainty in global
economies and the markets in which
the Group operates which pose risks
to the Group’s continuity of business
operations, demand for its products and
its forecast future financial performance
given current world health and global
economic conditions.
Business Continuity Risk
The Executive Management Board has set up a
Business Continuity Subcommittee, chaired by
the Chief Financial Officer, to manage the Group’s
response to the outbreak of the coronavirus
pandemic.
The subcommittee is responsible for monitoring
risk indicators, external guidance and maintaining
regular communications with employees and other
stakeholders. The subcommittee has formulated
policies and potential actions in readiness for different
scenarios and is working closely with relevant business
functions within the Group to co-ordinate COVID-19
92
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report responses and on-going dialogue with customers and
suppliers to ensure that proactive steps are taken to
respond to any situation.
deployments as part of economic stimulus packages
as they emerge from the health crisis. There is already
some evidence of this in Asia.
Whilst the risk of disruption to supply chains and
of economic downturn is likely to remain for some
months, the effects on the Group’s markets are unclear
at the date of this report. Due to this, Management
and the Directors have considered severe but plausible
downside scenarios to the Group’s financial forecasts
and projections when considering going concern.
Severe but plausible downside financial forecasts
and projections have been prepared with significant
reductions to future forecast revenues, designed
to reflect severe downside scenarios associated
with COVID-19 disruption and demand risks, for a
15-month period to 30 June 2021. The severe but
plausible downside scenario, applied to the Group’s
current financial forecasts, which take account of
current trading and customer demand, assumes a
~1/3 reduction in revenue in H2 2020 and a ~1/4
reduction in H1 2021 partially offset by controllable
working capital and capital expenditure mitigations.
The downside scenario illustrates that the Group
is forecast to continue to comply with its banking
covenants, albeit with reduced covenant headroom,
and has adequate cash resources to continue
operating for the foreseeable future.
The Group has a long-standing and trusted
relationship with its bankers, HSBC Bank plc, who
remain supportive. The Group has maintained
close on-going dialogue with its bankers regarding
the evolving effects and risks of COVID-19 on the
business, including discussion of the Group’s severe
but plausible downside financial forecasts in order to
agree the relaxation of certain banking covenants at 31
December 2020 and 30 June 2021 as a precautionary
measure designed to increase covenant headroom
and availability of cash funding under the terms of
the Group’s committed bank facilities in the event of a
more extreme scenario.
The Group meets its day-to-day working capital and
other cash requirements through its bank facilities
and available cash. The Group’s severe but plausible
downside cash flow forecasts and projections, in
conjunction with increased covenant headroom
following formal relaxation of certain bank covenants
associated with the Group’s committed bank facilities
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.
The Group’s operations are geographically diversified.
Manufacturing operations are located at nine different
sites across three continents, significantly lessening the
impact of potential disruption at any single site.
The nature of the Group’s operations, as a critical
semiconductor technology supplier, also means that
the Group and its manufacturing sites are less likely
to be affected by ‘lockdown’ scenarios than other
businesses, something that has been evidenced by
our classification as a critical infrastructure provider in
the United States where the Department of Homeland
Security deems IQE to have a “special responsibility to
maintain (our) normal work schedule”, in the United
Kingdom where the Secretary of State, Department
for Business, Energy & Industrial Strategy has written
to the Group stating that ‘manufacturing is a critical
part of our economy and I would like to be clear that
there is no restriction on manufacturing continuing
under the current rules’ and in Taiwan and Singapore,
where National Government’s continue to support
manufacturing.
All manufacturing sites continue to remain operational
and production has not been affected by any
disruption at all of the Group’s global sites at the
date of this report. The Group has introduced social
distancing measures at its sites and has restricted the
numbers of people on site to the minimum essential
for production, with other staff working from home.
The Group dual or multi-sources key raw materials
(substrates, gases, consumables) wherever possible,
from a broad range of global suppliers, reducing the
likelihood of potential disruption to IQE production
from any single supplier. The Group continues to work
closely with both suppliers and customers to manage
inventory levels in order to create resilience against
potential disruption.
Market Conditions
Trading for the first quarter of 2020 was slightly above
expectations. The smartphone handset market has
seen the launch of new models from several OEM’s
and communications infrastructure related demand
linked to 5G deployment, particularly in Asia, shows
signs of growth. The Group is also experiencing growth
in sales of military infra-red products.
Despite current market conditions, there remains a
risk of a global economic downturn which could in
turn adversely affect global demand for Smartphones
and other electrical devices that incorporate the
Group’s products and/or delay the roll out of 5G
communications networks. Such scenarios would
adversely affect demand from IQE’s customers and
therefore the financial performance of the Group.
Conversely, at a time of social distancing and self-
isolation, with many thousands of people continuing to
work at home, demand for smartphone handsets may
withstand an economic downturn better than many
other sectors. Furthermore, the Group considers it
likely that Governments will pursue 5G infrastructure
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial 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 2019:
2015-2017 Cycle
· Annual improvements to IFRS Standards
· IFRS 16 ‘Leases’.
· 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 9 ‘Financial
Instruments’ which clarifies the treatment
of financial assets with prepayment
features with negative compensation.
· 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.
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 16 ‘Leases’ where the
impact of adoption of this new standard is set out in
note 2.30 to the financial statements.
(b) New standards, amendments and interpretations
issued but not effective and not adopted early
A number of new standards, amendments to
standards and interpretations which are set out below
are effective for annual periods beginning after 1
January 2020 and have not been applied in preparing
these consolidated financial statements.
· IFRS 17 ‘Insurance contracts’ which
establishes the principles for the
recognition, measurement, presentation
and disclosure of insurance contracts
and supersedes IFRS 4 ‘Insurance
Contracts’
· 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.
94
· Amendments to IFRS 3 ‘Business
Combinations’ which clarifies the
definition of a business.
· Amendments to IAS 1 ‘Presentation
of financial statements’ and IAS 8
‘Accounting policies, changes in
accounting estimates and errors’ which
are intended to make the definition of
material easier to understand.
· Amendments to references to the
‘Conceptual framework’ in IFRS
standards.
The Directors anticipate that none of the new
standards, amendments to standards and
interpretations are expected to have a significant effect
on the financial statements of the Group or parent
company.
2.4 Consolidation
The consolidated financial statements comprise the
results of IQE plc (the Company) and its subsidiary
undertakings, together with the Group’s share of the
results of its associates and joint ventures.
Subsidiaries
Subsidiaries are all entities over which the Group has
control. The Group controls an entity when the Group
is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to
affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on
which control is transferred to the Group and are de-
consolidated from the date that control ceases.
Inter-company transactions, balances and unrealised
gains or losses on transactions between Group
companies are eliminated and accounting policies of
subsidiaries have been changed where necessary to
ensure consistency with the policies adopted by the
Group.
Joint ventures
The Group applies IFRS 11 to all joint arrangements.
Under IFRS 11 investments in joint arrangements are
classified as either joint operations or joint ventures
depending on the contractual rights and obligations
of each investor. The nature of the Group’s joint
arrangements has been assessed and each joint
arrangement has been determined to be a joint
venture. 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
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report choice to recognise the gain in the comprehensive
income statement, subject to an assessment of
recoverability of value from the joint venture rather
than recognising the gain as deferred income in the
consolidated balance sheet.
When the Group’s share of losses in a joint venture
equals or exceeds its interests in the joint ventures
(which includes any long term interests that, in
substance, form part of the Group’s net investment
in the joint ventures), the Group does not recognise
further losses, unless it has incurred obligations
or made payments on behalf of the joint ventures.
Unrealised gains on transactions between the Group
and its joint ventures are eliminated to the extent of
the Group’s interest in the joint ventures. Unrealised
losses are also eliminated unless the transaction
provides evidence of an impairment of the asset
transferred. Accounting policies of the joint ventures
have been changed where necessary to ensure
consistency with the policies adopted by the Group.
Business combinations
The Group accounts for business combinations using
the acquisition method when control is transferred
to the Group. The consideration transferred in the
acquisition is generally measured at fair value, as
are the identifiable net assets acquired. Any goodwill
that arises is tested annually for impairment. Any
gain on bargain purchase is recognised in profit or
loss immediately. Transaction costs are expensed
as incurred, except if related to the issue of debt or
equity securities. The consideration transferred does
not include amounts related to the settlement of pre-
existing relationships. Such amounts are generally
recognised in profit or loss.
Where the fair values of acquired identifiable
assets, liabilities and contingent liabilities 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 identifiable assets, liabilities and
contingent liabilities 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.
Negative goodwill arising on an acquisition where
the fair value of identifiable assets, liabilities and
contingent liabilities exceeds the fair value of the
consideration is credited and recognised in the
consolidated income statement immediately.
b) Patents, trademarks and licences
Separately acquired patents, trademarks and licences
are shown at historical cost. Patents, trademarks
and licences acquired in a business combination are
recognised at fair value at the acquisition date. Patents,
trademarks and licences have a finite useful life and
are carried at cost less accumulated amortisation.
Amortisation is calculated using the straight-line
method to allocate the cost of the assets over their
estimated useful lives of 10 to 15 years. The carrying
value of patents, trademarks and licences is reviewed
for potential impairment 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:
complete;
use or sale;
· the product or process is intended for
· the development is technically feasible to
· there is an ability to use or sell the
· it can be demonstrated how the product
or process will generate probable future
economic benefits;
product or process;
· there are adequate technical, financial
and other resources to complete the
development; and
· the development expenditure can be
reliably measured.
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 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
in respect of completed projects is reviewed for
impairment if events or circumstances indicate a
potential impairment. Projects that remain under
development at the reporting date are reviewed
for impairment at least annually or more frequently
if events or circumstances indicate a potential
impairment. Any impairment identified is immediately
charged to the Consolidated Income Statement.
d) Software
Directly attributable costs incurred in the development
of bespoke software for the Group’s own use are
capitalised and amortised on a straight line basis over
the expected useful life of the software, which typically
range between 3 and 10 years.
The carrying value of capitalised software costs
is reviewed for potential impairment if events or
circumstances indicate a potential impairment. Any
impairment identified is immediately charged to
the Consolidated Income Statement. The costs of
maintaining internally developed software and annual
license fees paid to utilise third party software are
expensed as incurred.
e) Customer contracts recognised on acquisition
Customer contract intangible assets that 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.
The fair value of customer contracts 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 customer contract 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.
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
2019 which resulted in no material changes to asset
residual values and useful economic lives (2018: 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.
2.7 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 risk adjusted pre-tax discount rate. For the
purpose of assessing impairment, assets are grouped
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
at the lowest levels for which there are separately
identifiable cash flows.
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.
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.
2.12 Financial assets
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.
Classification of financial assets
On initial recognition, a financial asset is classified
as measured at amortised cost, fair value through
other comprehensive income – debt investment, fair
value through other comprehensive income – equity
investment or fair value through profit or loss.
The classification depends on the purpose for
which the financial assets were acquired and the
classification is determined at the date of initial
recognition. Financial assets are not reclassified
subsequent to their initial recognition unless the
Group changes its business model for managing
financial assets, in which case all affected financial
assets are reclassified on the first day of the reporting
period following the change in business model.
A financial asset is measured at amortised cost if it
meets both of the following conditions:
· it is held within a business model whose
objective is to hold assets to collect
contractual cash flows; and
· its contractual terms give rise to cash
flows that are solely payments of
principal and interest on the principal
amount outstanding
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 financial assets comprise trade and other
receivables (note 2.9), cash and cash equivalents (note
2.10), preference share debt instruments (note 2.11)
and contract assets (note 2.20).
Amortised cost and effective interest method
Financial assets are measured at amortised cost using
the effective interest method. The effective interest
rate is the rate that discounts estimated future cash
receipts excluding expected credit losses, through
the expected life of the debt instrument, or, where
appropriate, a shorter period, to the gross carrying
amount of the debt instrument on initial recognition.
The amortised cost of a financial asset is the amount
at which the financial asset is measured at initial
recognition minus the principal repayments, plus the
cumulative amortisation using the effective interest
method of any difference between that initial amount
and the maturity amount, adjusted for any loss
allowance. The gross carrying amount of a financial
asset is the amortised cost of a financial asset before
adjusting for any loss allowance. Interest income,
foreign exchange gains and losses and impairment
are recognised in profit or loss. Any gain or loss on
derecognition is recognised in profit or loss.
Impairment of financial assets
The Group recognises a loss allowance for expected
credit losses (‘ECL’) on trade receivables, contract
assets and investments in debt instruments that are
measured at amortised cost. The amount of expected
credit losses is updated at each reporting date to
reflect changes in credit risk since initial recognition of
the respective financial instrument.
The Group recognises lifetime ECL for trade
receivables and contract assets. The ECL on these
financial assets are estimated based on the Group’s
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report historical credit loss experience, adjusted for factors
that are specific to the debtors including observable
data such as changes in arrears or economic
conditions that provide an indication that a debtor is
experiencing significant financial difficulty, default or
delinquency in payment that correlate with defaults.
For preference share debt instruments, the Group
recognises lifetime ECL when there has been
a significant increase in credit risk since initial
recognition. However, if the credit risk on the financial
instrument has not increased significantly since initial
recognition, the Group measures the loss allowance
for that financial instrument at an amount equal to
twelve month ECL.
Lifetime ECL represents the expected credit losses
that will result from all possible default events over
the expected life of a financial instrument. In contrast,
12-month ECL represents the portion of lifetime ECL
that is expected to result from default events on a
financial instrument that are possible within 12 months
after the reporting date.
Credit impaired financial assets
At each reporting date, the Group assesses whether
financial assets carried at amortised cost are credit-
impaired. A financial asset is ‘credit-impaired’ when one
or more events that have a detrimental impact on the
estimated future cash flows of the financial asset have
occurred. The gross carrying amount of a financial
asset is written off (either partially or in full) to the
extent that there is no realistic prospect of recovery.
Significant increase in credit risk – Preference share
debt instruments
In assessing whether the credit risk on a financial
instrument has increased significantly since initial
recognition, the Group compares the risk of a default
occurring on the financial instrument at the reporting
date with the risk of a default occurring on the
financial instrument at the date of initial recognition.
In making this assessment, the Group considers
both quantitative and qualitative information that
is reasonable and supportable, including historical
experience and forward-looking information that is
available without undue cost or effort. Forward-looking
information considered includes the future prospects
of the joint venture entity in which the Group holds
its preference share debt, obtained primarily from
financial forecasts and projections prepared by
management of the joint venture entity as well as
consideration of various external sources of actual and
forecast economic information that relate to the joint
venture’s core operations.
In particular, the following information is considered
when assessing whether credit risk has increased
significantly since initial recognition:
· existing or forecast adverse changes
in business, financial or economic
conditions that are expected to cause a
significant decrease in the joint venture’s
ability to redeem the preference share
debt;
· existing or forecast adverse changes
in the joint venture’s business plan
and financial projections indicating a
significant extension to the period prior
to redemption of the preference share
debt;
· an actual or expected significant
deterioration in the operating results of
the joint venture;
· significant increases in credit risk on
other financial assets of the joint venture;
and
· an actual or expected significant adverse
change in the regulatory, political
or technological environment that
results in a significant decrease in the
joint venture’s ability to redeem the
preference share debt.
In the event that the credit risk assessment results in
a probable delay in forecast repayment of the debt
instrument compared to the original expectation the
Group considers that this represents a significant
increase in credit risk.
In circumstances where credit risk increases to the
point that it becomes highly probable that the debt
instrument will not become recoverable the Group
considers that this would represent a default event.
Measurement and recognition of expected credit
losses
The measurement of ECL is a function of the
probability of default, loss given default (i.e. the
magnitude of the loss if there is a default) and the
exposure at default. The assessment of the probability
of default and loss given default is based on historical
data adjusted by forward-looking information as
described above. Exposure at default is represented by
the gross carrying amount of the financial asset at the
reporting date.
ECL for financial assets is estimated as the difference
between all contractual cash flows that are due to the
Group in accordance with the contract and all the cash
flows that the Group expects to receive, discounted at
the original effective interest rate.
If the Group has measured the loss allowance for a
financial instrument at an amount equal to lifetime ECL
in the previous reporting period, but determines at the
current reporting date that the conditions for lifetime
ECL are no longer met, the Group measures the loss
allowance at an amount equal to 12-month ECL at the
current reporting date.
The Group recognises an impairment gain or loss in
profit or loss for financial assets with a corresponding
adjustment to the carrying amount in the consolidated
balance sheet.
2.13 Financial liabilities and equity
Classification as debt or equity
Debt and equity instruments are classified as either
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report financial liabilities or as equity in accordance with
the substance of the contractual arrangements and
the definitions of a financial liability and an equity
instrument.
Equity instruments
An equity instrument is any contract that evidences
a residual interest in the assets of the Group after
deducting all of its liabilities. Equity instruments issued
by the Group are recognised at the proceeds received,
net of direct issue costs.
Repurchase of the Company’s own equity instruments
is recognised and deducted directly in equity. No gain
or loss is recognised in profit or loss on the purchase,
sale, issue or cancellation of the Company’s own equity
instruments.
Financial liabilities
Financial liabilities are classified as measured at
amortised cost or fair value through profit and loss.
A financial liability is classified as fair value through
profit and loss if it is classified as held-for-trading,
it is a derivative or it is designated as such on initial
recognition. Financial liabilities at fair value through
profit and loss are measured at fair value and net
gains and losses, including any interest expense, are
recognised in profit or loss. Other financial liabilities
are measured at amortised cost using the effective
interest method.
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
lease liabilities in the consolidated 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 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.
2.18 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 relate to share based payment
transactions.
2.19 Provisions
Provisions 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.
2.20 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 with no alternative use 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.
99
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 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.
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.
2.21 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.
2.22 Finance income and finance costs
The Group’s finance income and finance cost include
interest income and interest expense.
Interest income or expense is recognised using the
effective interest method. The effective interest rate is
the rate that exactly discounts estimated future cash
payments or receipts through the expected life of
the financial instrument to the gross carrying amount
of the financial asset, or the amortised cost of the
financial liability.
In calculating interest income and expense, the
effective interest rate is applied to the gross carrying
amount of the asset (when the asset is not credit
impaired) or to the amortised cost of the liability.
However, for financial assets that have become credit
impaired subsequent to initial recognition, interest
income is calculated by applying the effective interest
rate to the amortised cost of the financial asset.
2.23 Pension costs
The Group operates defined contribution pension
schemes. A defined contribution plan is a pension
plan under which the Group pays fixed contributions
into a separate entity. Contributions are charged in
the Consolidated Income Statement as they become
payable in accordance with the rules of the scheme.
The Group has no further obligations once the
contributions have been made.
2.24 Share based payments
The Group operates a number of equity-settled share
based compensation plans under which the Group
receives services from employees as consideration
for equity instruments in IQE plc. The fair value of
the employee services received in exchange for the
grant of the options is recognised as an expense in
the consolidated income statement and as a credit
in other reserves in the consolidated statement
of changes in equity except for the social security
element of the award which is treated as cash settled
with the liability recognised in other taxation and
social security within trade and other payables in
the consolidated balance sheet. The total amount to
be expensed is determined by reference to the fair
value of the options granted including any market
performance conditions (for example, an entity’s share
price); excluding the impact of any service and non-
market performance vesting conditions (for example,
profitability, sales growth targets and remaining an
employee of the entity over a specified time period)
and including the impact of any non-vesting conditions
(for example, the requirement for employees to save
or hold shares for a specific period of time).
Non-market performance and service conditions
are included in assumptions about the number of
options that are expected to vest. The total expense is
recognised over the vesting period, which is the period
over which all of the specified vesting conditions are to
be satisfied. At the end of each reporting period, the
Group revises its estimates of the number of options
that are expected to vest based on the non-market
vesting conditions. It recognises the impact of the
revision to original estimates, if any, in the consolidated
income statement, with a corresponding adjustment to
equity.
When the options are exercised, the company issues
new shares. The proceeds received net of any directly
attributable transaction costs are credited to share
capital (nominal value) and the balance to share
premium. In the company’s own financial statements,
the grant of share options to the employees of
subsidiary undertakings is treated as a capital
contribution. Specifically, the fair value of employee
services received (measured at the date of grant) is
recognised over the vesting period as an increase
to investment in subsidiary undertakings, with a
corresponding credit to equity in the parent entity
financial statements.
The social security contributions payable in connection
with the grant of the share options is considered an
integral part of the grant itself, and the charge will be
treated as a cash-settled transaction.
100
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 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.
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 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. 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.
2.30 Change in accounting policy – IFRS 16 ‘Leases’
(a) Change in accounting policy – Overview
IFRS 16 ‘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’, IFRIC 4 ‘Determining
whether an arrangement contains a lease’, SIC-15
‘Operating leases – Incentives’ and SIC-17 ‘Evaluating
the substance of transactions involving the legal form
of a lease’ and is effective for annual periods beginning
on or after 1 January 2019.
(b) Change in accounting policy - IFRS 16 ‘Leases’ -
Transition
The Group currently leases a number of assets
principally relating to property, including its newly
constructed Newport facility as well as leasing
property, plant and equipment from its joint venture,
Compound Semiconductor Centre Limited.
The group has implemented the requirements of IFRS
16 ‘Leases’ from 1 January 2019 using the modified
retrospective approach, under which the cumulative
effect of initial application is recognised at 1 January
2019, and applied the following practical expedients on
a lease-by-lease basis to its portfolio of leases:
101
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report · Application of a single discount rate to
the portfolio of property and plant leases
that are deemed to have reasonably
similar characteristics;
· Adjustment on transition to the right
of use asset value associated with
the leased Singapore manufacturing
facility 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 with those leases accounted
for as short-term leases;
· Application of hindsight in applying the
new standard to determine the lease
term where lease contracts contain
options to extend or terminate the lease;
and
· Exclusion of any initial direct costs in the
measurement of the right of use asset.
(c) Change in accounting policy IFRS 16 ‘Leases’ -
Accounting policy
The Group assesses whether a contract is or contains
a lease, at inception of the contract. A contract is, or
contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of
time in exchange for consideration.
The Group recognises a right-of-use asset and a
corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for
short-term leases (defined as leases with a lease term
of 12 months or less), leases of low value assets (such
as small items of office furniture and equipment) and
leases with variable rentals not linked to a relevant
index (see note 3a). For these leases, the Group
recognises the lease payments as an operating
expense on a straight-line basis over the term of
the lease unless another systematic basis is more
representative of the time pattern in which economic
benefits from the leased assets are consumed.
Right-of-use assets and lease liabilities are recognised
at the lease commencement date. Right-of-use assets
are initially measured at cost, and subsequently
measured at cost less any accumulated depreciation
and impairment losses, adjusted for certain
remeasurements of the lease liability.
Right-of-use assets are depreciated over the shorter
period of lease term and useful life of the underlying
asset. If a lease transfers ownership of the underlying
asset or the cost of the right-of-use asset reflects that
the Group expects to exercise a purchase option,
the related right-of-use asset is depreciated over the
useful life of the underlying asset. The depreciation
starts at the commencement date of the lease.
The Group applies IAS 36 to determine whether
a right-of-use asset is impaired and accounts for
any identified impairment loss as described in the
‘Property, Plant and Equipment’ policy.
Right-of-use assets are presented as a separate line in
the consolidated statement of financial position.
The lease liability is initially measured at the present
value of the lease payments that are not paid at the
commencement date, discounted using the interest
rate implicit in the lease or, if that rate cannot be
readily determined, the Group’s incremental borrowing
rate.
The lease liability is subsequently measured by
increasing the carrying amount to reflect interest on
the lease liability (using the effective interest method)
and by reducing the carrying amount to reflect the
lease payments made.
The Group remeasures the lease liability (and makes
a corresponding adjustment to the related right-of-
use asset) when there is a change in future lease
payments. Changes in future lease payments can arise
from a change in an index or rate, a change in the
assessment of whether a purchase or extension option
is reasonably certain to be exercised or from a change
in assessment about whether a termination option is
reasonably certain not to be exercised.
The Group did not make any such adjustments during
the current year.
Variable rents that do not depend on an index or
rate are not included in the measurement of the
lease liability and the right-of-use asset. The related
payments are recognised as an expense in the period
in which the event or condition that triggers those
payments occurs and are included in the line “Cost of
sales” in profit or loss (see note 3a).
(d) Change in accounting policy – IFRS 16 ‘Leases’ -
Implementation impact
Implementation of IFRS 16 ‘Leases’ requires the Group
to recognise new right of use assets and lease liabilities
for certain operating leases that principally relate to
the Group’s manufacturing facilities. The nature of
expenses related to these leases has changed in the
twelve months ended 31 December 2019 because the
Group now recognises a depreciation charge for the
right of use assets and an interest expense on lease
liabilities. Previously, for non-variable lease expenses,
the Group recognised operating lease costs on a
straight-line basis over the lease term and recognised
assets and liabilities only to the extent that there was a
timing difference between actual lease payments and
the expense recognised.
The implementation of IFRS 16 at 1 January 2019
has had no impact on total net assets or cash. The
impact has been restated from the position disclosed
in the Group’s 30 June 2019 interim reporting to
reflect a reclassification of a previously disclosed
lease receivable of £2,233,000 to a right of use asset.
The reclassification has been required to reflect the
terms of a specific property sublease agreement and
102
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report has no impact on total net assets or cash. The impact
of implementation of IFRS 16 at 1 January 2019 is
summarised in the narrative and table set out on the
next page.
Non-Current Assets
· Increase in non-current assets of
£42,778k to reflect the recognition of
right of use lease assets (net of the
previously recognised Singapore onerous
lease of £5,256k);
· Decrease in property, plant and
equipment and corresponding increase
in right of use assets of £2,178k to
reflect the reclassification of previously
capitalised Newport foundry rent
free period costs during the asset
commissioning phase
Non-Current Liabilities
· Increase in non-current liabilities of
£48,115k to reflect the non-current
recognition of lease liabilities associated
with the right of use lease assets;
· Decrease in non-current provisions of
£3,836k to reflect reclassification of the
non-current element of the previously
recognised Singapore onerous lease to
right of use lease assets
Current Assets and Liabilities
· Increase in current liabilities of £2,097k
to reflect the recognition of lease
liabilities associated with the right of use
lease assets payable within one year;
· Decrease in provisions due within one
year of £1,420k to reflect reclassification
of the current element of the previously
recognised Singapore onerous lease to
right of use lease assets; and
· Decrease in trade and other payables
of £2,178k to reflect reclassification of
deferred Newport foundry rent-free
period costs to lease liabilities.
Reported
2018
Right of
use asset
Lease
liability
Working
capital
Onerous
lease
1 January
2019
£’000
£’000
£’000
£’000
-
-
-
Impact on the condensed
consolidated balance sheet
as at 1 January 2019
Intangible assets
Fixed asset investments
£’000
121,775
75
Property, plant & equipment
124,445
Right of use lease assets
-
48,034
Deferred tax assets
Financial assets
13,244
7,937
-
-
Non-current assets
267,476
48,034
Inventories
Trade and other receivables
Cash and cash equivalents
Current assets
Total assets
Trade and other payables
Current tax liabilities
Provisions
Lease liabilities
Current liabilities
Provisions
Lease liabilities
Non-current liabilities
Total liabilities
Net assets
35,709
38,015
20,807
94,531
362,007
(45,908)
(431)
(2,554)
-
(48,893)
(3,836)
-
(3,836)
(52,729)
309,278
-
-
-
-
48,034
-
-
-
-
-
-
-
-
-
48,034
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,097)
(2,097)
-
(45,937)
(45,937)
(48,034)
(48,034)
-
-
(2,178)
2,178
-
-
-
-
-
-
-
-
2,178
-
-
-
2,178
-
(2,178)
(2,178)
-
-
-
-
-
(5,256)
-
-
£’000
121,775
75
122,267
44,956
13,244
7,937
(5,256)
310,254
-
-
-
-
(5,256)
-
-
1,420
-
1,420
3,836
-
3,836
5,256
-
35,709
38,015
20,807
94,531
404,785
(43,730)
(431)
(1,134)
(2,097)
(47,392)
-
(48,115)
(48,115)
(95,507)
309,278
103
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
(e) Change in accounting policy – IFRS 16 ‘Leases’ – Implementation disclosure requirements
Incremental borrowing rate – weighted average
The present value of the lease liabilities applicable to the Group’s portfolio of property and plant leases has been
determined using a discount rate that represents the Group’s incremental rate of borrowing, assessed as 2.25% -
2.65% depending on the lease characteristics. The weighted average incremental rate of borrowing applied in the
calculation of lease liabilities on transition is 2.37%.
Difference between IAS 17 operating leases commitment and IFRS 16 lease liability on transition
Previously, the Group classified its portfolio of property and plant leases as operating leases under IAS 17. On
transition, for these leases, lease liabilities were measured at the present value of the remaining lease payments,
discounted at the Group’s incremental borrowing rate as at 1 January 2019.
Operating lease commitments at 31 December 2018 as disclosed
under IAS 17 in the Group’s consolidated financial statements
Discounted using the incremental borrowing rate at 1 January 2019
-
-
-
Extension options reasonably certain to be exercised
Recognition exemption for leases of low-value assets and
leases with less than 12 months term at transition
Adjustments relating to variable lease payments linked to
actual asset usage (note 3)
Lease liability recognised at 1 January 2019
1 January
2019
£’000
46,126
38,030
24,113
(202)
(11,729)
50,212
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 Venture - 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
of advanced compound semiconductor materials by
metalorganic vapour phase epitaxy (‘MOVPE’).
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 30).
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.
Joint Ventures – Right of use asset
The Group established CSC with its joint venture
partner as a centre of excellence for the development
and commercialisation of advanced compound
semiconductor wafer products.
On establishment of the joint venture, the Group
contributed assets 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, which contains rights attaching to the use
of the joint venture’s assets, meets the definition of a
lease. In the Group’s judgement, due to the variable
nature of the lease payments, which are directly linked
to the actual usage of the assets, the lease payments
104
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
have been excluded from the measurement of right of
use assets and lease liabilities with the variable lease
costs recognised in operating expenses in the income
statement as incurred.
Joint Venture – 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. This is on the basis
that these preference shares, redeemable at par,
contingent on the generation of cash by CSC, are not
deemed to be 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 is used to redeem the
preference share funding provided by the joint venture
partners, as envisaged in the CSC business plan
contained within the original Joint Venture Shareholder
Agreement and the latest forecasts prepared by CSC.
Upon transition to IFRS 9, the Group assessed that
this financial asset meets the requirements to be
measured at amortised cost in line with the treatment
previously adopted under IAS 39. The instrument is
held within a business model whose sole objective is
to collect the contractual cash flows. These cash flows,
in turn, represent solely payments of principal and
interest on the principal amount outstanding.
Joint Ventures - Significant increase in credit risk
associated with preference share debt
As explained in note 2, expected credit losses are
measured as an allowance equal to 12-month ECL for
stage 1 assets, or lifetime ECL for stage 2 or stage 3
assets. An asset moves to stage 2 when its credit risk
has increased significantly since initial recognition.
IFRS 9 does not define what constitutes a significant
increase in credit risk. In assessing whether the credit
risk of an asset has significantly increased, the Group
considers qualitative and quantitative reasonable and
supportable forward-looking information associated
with the forecast future financial performance and
cash generation of CSC. The Group has assessed
that the credit risk on the preference share debt has
increased significantly, based on the joint venture’s
latest forecast, which indicate that recovery of the debt
will be delayed compared to the original expectation.
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.
(b) Critical accounting estimates and key sources
of estimation uncertainty
3.1 Goodwill impairment testing
Following the assessment of the goodwill allocated
to the Wireless cash generating unit (‘CGU’); to
which goodwill of £59,317,000 (2018: £60,121,000)
is allocated, the directors consider the recoverable
amount of goodwill allocated to the Wireless CGU to
be most sensitive to the achievement of the Group’s
three-year internal forecasts. The three-year forecasts
comprise forecasts of revenue, material costs and site
manufacturing labour and overhead costs based on
current and anticipated market conditions that have
been considered and approved by the Board. Whilst
the Group is able to manage most of its Wireless CGU
costs, significant elements of the Wireless revenue
forecasts are inherently linked to global demand for
smartphones and the adoption of 5G technology
where uncertainty about both the timing and level of
growth remains which is a key sensitivity given current
market dynamics.
The sensitivity analysis in respect of the recoverable
amount of ‘Wireless’ goodwill is presented in note 13.
3.2 Intangible assets not yet available for use
Included in the intangible assets are development
cost assets not yet available for use of £12,824,000
(2018: £17,529,000) which have been reviewed for
impairment as at the reporting date.
The recoverable amount of each technology
development project has been determined based on
value in use calculations, using cash flow projections
in line with the expected useful economic life of
each asset. The value in use calculations are based
on management approved risk-adjusted cash flow
forecasts for each project and have been discounted
using a discount rate of 10%.
The key assumptions in these calculations are revenue
and gross profit margin for each project which are
based on assumptions about expected market size,
market penetration and customer demand which
are all inherently linked to the global demand for the
technology under development where the timing and
level of demand is subject to uncertainty.
The Group has carried out a sensitivity analysis on
the impairment tests of each of these projects, using
various reasonably possible scenarios.
No impairment would arise if the discount rate was
increased from 10% to 15%. Similarly, no impairment
would arise on any of these projects if the revenue or
the gross profit margin were reduced by 10% in each
year of the forecast period.
105
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 3.3 Useful economic lives of development cost
intangible assets
The periods of amortisation used for product and
process development cost assets require estimates
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 carrying value of development cost intangible
assets is £41,307,000 (2018: £41,819,000). The
amortisation charge for development cost intangible
assets in the current year is £6,360,000 (2018:
£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 £776,000 (2018: £747,000) to £7,136,000 (2018:
£5,449,000).
3.4 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.
No adjustments have been made to the assessed
useful economic lives or residual values of property,
plant and equipment in the current years.
The carrying value of property, plant and equipment
is £136,482,000 (2018: £124,445,000). 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 £10,477,000
(2018: £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 £359,000 (2018: £294,000) to £10,836,000 (2018:
£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 £389,000 (2018: £190,000) to
£10,866,000 (2018: £6,963,000).
3.5 Valuation of lease liabilities and right of use
assets
The application of IFRS 16 requires the Group to make
judgments and estimates that affect the valuation of
the lease liabilities and the valuation of right-of-use
assets that includes determining the contracts in
scope of IFRS 16, determining the contract term and
determining the interest rate used for discounting of
future cash flows.
The lease term determined by the Group generally
comprises the non-cancellable period of lease
contracts, periods covered by an option to extend the
lease if the Group is reasonably certain to exercise that
option and periods covered by an option to terminate
the lease if the Group is reasonably certain not to
exercise that option.
Exercise of extension options, principally existing in the
Group’s property leases are assumed to be reasonably
certain, except for the Group’s Newport facility where it
has been assumed that it is reasonably certain that the
Group will exercise its buy-out option at the end of the
initial lease term. The same term applied to the length
of the lease contract has been applied to the useful
economic life of right-of-use assets.
The present value of the lease payments applicable to
the Group’s portfolio of property and plant leases has
been determined using a discount rate that represents
the Group’s incremental rate of borrowing, assessed as
2.25% - 2.65% depending on the lease characteristics.
If the incremental rate of borrowing was decreased
by 0.10% the impact would be to increase the lease
liability by £252,000.
3.6 Calculation of loss allowance – Preference
share debt
The Group classifies its preference share financial
assets due from its joint venture, CSC, as debt
instruments.
The carrying value of the Group’s preference share
debt is £nil (2018: £7,937,000) after an expected
credit loss impairment of £4,134,000 (2018: £nil) and
absorption of the Group’s share of joint venture equity
accounted losses of £3,951,000 (2018: £nil) detailed in
note 5.
When measuring expected credit loss on the
preference share debt due from CSC the Group
uses reasonable and supportable forward-looking
information, which is primarily based on assumptions
about forecast future financial performance of CSC.
Loss given default is an estimate of the loss arising
on default. It is based on the difference between the
contractual cash flows due and those that the Group
expect to receive, considering cash flows from any
collateral.
Probability of default constitutes a key input in
measuring ECL. Probability of default is an estimate
of the likelihood of default over a given time horizon,
the calculation of which includes historical data,
assumptions and expectations of the future financial
performance of CSC.
The Group recognises lifetime ECL when there has
been a significant increase in credit risk since initial
recognition, a situation that has been determined in
the current year. The significant increase in credit risk
has been assessed following review of a combination
of factors, including CSC’s progress and achievement
against milestones set-out in its original business plan,
current cash flow forecasts for CSC and the capacity of
CSC to redeem the debt.
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
Lifetime ECL represents the expected credit losses
that will result from all possible default events over
the expected life of the debt instrument and is the
difference between the contractual cash flows due and
those that the Group expect to receive, considering
cash flows from any collateral.
At 31 December 2018, the Group recognised
deferred tax assets in relation to historical losses
at its operations in the United States of America.
Recognition of the deferred tax asset was based on
an assessment of future cash flow forecasts and the
associated profitability of the US operations.
Default events and associated probability of default is
assessed by reference to a range of scenarios based
principally on assumptions and expectations of the
future financial performance of CSC that have been
derived from CSC’s Board approved 2020 Budget and
CSC Management’s 2021 and 2022 financial forecasts
extrapolated over the repayment period.
Probability of default constitutes a key input in
measuring ECL. Probability of default is an estimate
of the likelihood of default over a given time horizon,
the calculation of which includes historical data,
assumptions and expectations of the future financial
performance of CSC.
If revenue growth in the 2020-2022 CSC Budget and
Management forecasts was restricted to zero lifetime
expected credit loss would increase from £4,134,000
to £8,085,000.
3.7 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.
Increased international trade tension affecting the
markets in which the Group operates has resulted in
a shift in the balance of future forecast manufacturing
and hence profits from the Group’s US operations
to its UK and Asian operations. This geographical
shift in manufacturing and profitability results in
lower forecast utilisation of US deferred tax assets
and has resulted in the partial reversal of previously
recognised US deferred tax assets with a tax impact
of £10,349,000. The Group has assessed the
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.
If shifts in manufacturing between the Group’s US and
UK and Asian operations resulted in a 10% greater
than forecast reduction in US profitability then US
deferred tax asset recognition would reduce by an
additional £891,000.
3.8 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
£1,938,000 (2018: £2,184,000) greater in 2019 if it
was assumed that all performance criteria for existing
awards would be met.
107
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 4. Segmental analysis
The Chief Operating Decision Maker is defined as the Executive Management Board. The Executive Management
Board consider that the Wireless, Photonics and CMOS++ markets are the Group’s primary reporting segments.
The Executive Management Board assess the performance of these operating segments based on their adjusted
operating profit.
Revenue
Wireless
Photonics
CMOS++
Revenue
Adjusted operating (loss) / profit
Wireless
Photonics
CMOS++
Central corporate costs
Adjusted operating (loss) / profit
Adjusted items (see note 5)
Operating (loss) / profit
Share of losses of joint venture accounted for using
the equity method
Finance (costs) / income
(Loss) / profit before tax
2019
£’000
68,166
69,758
2,091
Restated
2018
£’000
87,862
66,807
1,622
140,015
156,291
6,590
1,324
(1,304)
(11,286)
(4,676)
(14,126)
(18,802)
(4,688)
(1,458)
(24,948)
16,548
10,239
(1,295)
(9,452)
16,040
(7,380)
8,660
(2,000)
87
6,747
Segmental information has been restated to reflect changes in the Group’s operating and reporting structure
following the establishment of an Executive Management Board that has consolidated responsibility for the Group’s
primary markets and operating segments under the leadership of an Executive VP, Global Business Development,
Wireless and Emerging Products and an Executive VP, Global Business Development, Photonics & Infrared. This
change to the Group’s operating and reporting structure has resulted in the consolidation of the previously disclosed
Infrared segment into Photonics and the reclassification of certain revenues and associated costs pertaining to a
specific site, which has shared production, between the Wireless and Photonics segments.
Finance costs are not allocated to the segments because treasury is managed centrally.
Measures of total assets and liabilities for each reportable segment are not reported to the chief operating decision
maker and therefore have not been disclosed.
108
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report In the years set out below, certain customers accounted for greater than 10% of the Group’s total revenues:
Customer
Segment
2019
£’000
2019
% revenue
2018
£’000
2018
% revenue
Customer 1
Customer 2
Customer 3
Wireless
Wireless
Photonics
20,430
20,181
18,152
15%
14%
13%
33,806
22,727
16,438
22%
15%
11%
There are no customers in the CMOS++ segment that account for greater than 10% of the Group’s total revenue.
Geographical information
Revenue by location of customer
Americas
United States of America
Rest of Americas
2019
£’000
77,189
77,089
100
2018
£’000
96,101
95,851
250
Europe, Middle East & Africa (EMEA)
13,951
14,694
France
Germany
Israel
United Kingdom
Rest of EMEA
Asia Pacific
People’s Republic of China
Japan
Taiwan
Rest of Asia Pacific
Total revenue
Disaggregate information
Revenue by nature
Standard customer products
Bespoke customer products
Intellectual property licenses
Total revenue
785
5,525
2,537
2,242
2,862
48,875
4,356
1,570
37,656
5,293
323
6,692
3,106
2,850
1,723
45,496
4,033
1,686
32,802
6,975
140,015
156,291
2019
£’000
13,785
126,230
-
2018
£’000
13,125
143,166
-
140,015
156,291
Included within bespoke customer product revenue is revenue of £58,763,000 (2018: £72,971,000) that relates to
supplier managed inventory arrangements where billing occurs from the earlier of a specified contractual backstop
date following delivery or when the product is drawn from inventory by the customer.
109
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Non-current assets by location
By location
USA
Singapore
Taiwan
UK
Property, plant and equipment
Intangible assets
2019
£’000
49,501
7,156
21,383
58,442
2018
£’000
49,051
7,642
16,951
50,801
136,482
124,445
2019
£’000
82,075
9,980
4,819
21,582
118,456
2018
£’000
79,042
10,158
3,748
28,827
121,775
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.
2019
2018
Adjusted
Items
Reported
Results
Adjusted
Results
Adjusted
Items
Reported
Results
Adjusted
Results
140,015
(119,145)
20,870
-
-
514
514
-
140,015
156,291
(118,631)
(119,536)
21,384
36,755
-
-
(25,791)
(10,506)
(36,297)
(20,715)
-
245
(4,134)
-
(4,134)
245
(737)
(1,606)
(7,019)
(11,991)
(3,951)
148
(17,929)
1,811
(4,688)
(1,458)
(24,948)
(10,180)
-
-
16,040
(2,000)
(66)
13,974
(2,745)
-
696
696
1,097
(9,173)
-
-
(7,380)
-
153
(7,227)
(2,813)
156,291
(118,840)
37,451
1,097
(29,888)
-
-
8,660
(2,000)
87
6,747
(5,558)
(19,010)
(16,118)
(35,128)
11,229
(10,040)
1,189
Operating (loss)/profit
(4,676)
(14,126)
(18,802)
(All figures £’000s)
Revenue
Cost of sales
Gross profit
Other income
SG&A
Impairment loss on
financial assets
Profit on disposal of PPE
Share of JV losses
Finance costs
(Loss)/profit before tax
Taxation
(Loss)/profit for the
period
110
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report (All figures £’000s)
Share based payments
Amortisation of acquired
intangibles
Restructuring
Insurance income
Patent dispute legal fees
Impairment – intangibles
Impairment – ROU asset
Impairment – financial
assets
Share of JV losses –
financial asset
CSDC acquisition -
negative goodwill
Onerous property lease
Discounting
Total
Pre tax
Adjustment
Tax
Impact
Adjusted
Results
Pre tax
Adjustment
2019
771
(385)
(813)
-
(4,308)
(3,805)
(1,623)
(4,134)
(3,951)
171
-
148
(17,929)
133
81
164
-
775
685
-
-
-
-
-
(27)
1,811
904
1,044
(304)
(649)
-
(3,533)
(3,120)
(1,623)
(4,134)
(3,951)
171
-
121
(16,118)
(518)
(3,337)
1,097
(1,262)
-
-
-
-
-
(4,404)
153
(7,227)
Tax
Impact
(3,607)
109
701
(197)
227
-
-
-
-
-
-
(46)
2018
Adjusted
Results
(2,563)
(409)
(2,636)
900
(1,035)
-
-
-
-
-
(4,404)
107
(2,813)
(10,040)
The nature of the adjusted items is as follows:
· Share based payments – The credit (2018: credit) recorded in accordance with IFRS 2 ‘Share based
payment’ of which £514,000 (2018: £696,000 credit) has been classified within cost of sales in gross
profit and £257,000 (2018: £348,000 credit) has been classified as selling, general and administrative
expenses in operating profit. £1,331,000 of cash has been defrayed in the year (2018: £nil) in respect of
employer social security contributions following the exercise of unapproved employee share options.
· Amortisation of acquired intangibles - The charge of £385,000 (2018: £518,000) relates to the
amortisation of acquired intangibles arising in respect of fair value exercises associated with previous
corporate acquisitions that has been classified as selling, general and administrative expenses within
operating profit and is non-cash.
· Restructuring – The charge of £813,000 (2018: £3,337,000) relates to:
i. Site-specific restructuring and associated employee severance costs of £587,000 (2018: £nil). The
charge has been classified as selling, general and administrative expenses within operating profit and
represents a cash cost.
ii. 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 at a cost
of £226,000 (2018: £3,337,000). Cash costs defrayed in the year of £1,360,000 (2018: £nil)
comprise severance and reactor decommissioning costs with non-cash costs of £2,203,000
charged in 2018 relating to asset impairments. The charge has been classified as selling, general and
administrative expenses within operating loss.
· 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 £nil (2018: £1,037,000)
were netted off the gross insurance proceeds of £nil (2018: £2,134,000). The net insurance proceeds
were cash received in 2018 and have been classified as other income within operating loss.
· Patent dispute legal costs – The charge relates to legal fees incurred in respect of a patent dispute
defence. Costs of £4,308,000 (2018: £1,262,000), of which £4,304,000 has been defrayed in the year
(2018: £nil) have been classified within selling, general and administrative expenses within operating
profit.
· Impairment of intangibles – The non-cash charge of £3,805,000 (2018: £nil) relates to the impairment of
certain development costs, patent costs and software where the Group has taken the decision to either
discontinue using the asset or discontinue the relevant technology development activities (see note 13).
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
· Impairment of right of use asset – The non-cash charge of £1,623,000 (2018: £nil) relates to the
impairment of the right of use asset relating to space at the Singapore manufacturing site sub-let
by Compound Semiconductor Development Centre Limited, the Group’s former joint venture that
was acquired during the year (see note 15). The charge has been classified as selling, general and
administrative expenses within operating profit.
· Impairment of financial asset – The non-cash charge of £4,134,000 (2018: £nil) relates to the expected
credit loss associated with the Group’s preference share financial asset due from its joint venture,
Compound Semiconductor Centre Limited (see note 3.6).
· Share of joint venture losses (financial asset) - The factors that have led to recognising an impairment
loss relating to the preference share financial asset due from the joint venture, Compound
Semiconductor Centre Limited, have resulted in a considerable lengthening of the period over which
the asset is expected to be recovered. As a result, the group has reassessed the preference share
as a long-term interest in the joint venture on the basis that repayment is no longer expected in the
foreseeable future. As a long-term interest in an equity accounted investee, the group has applied
the loss absorption requirement in IAS 28.38 to the carrying amount of the preference share financial
asset, after the application of an expected credit loss as described above, and allocated a further share
of the joint venture’s losses to the preference share financial asset. This has resulted in a further write
down of the asset, to £nil, representing a charge of £3,951,000, over and above the expected credit loss
charge of £4,134,000, being recognised in profit or loss.
· CSDC acquisition negative goodwill – The non-cash credit of £171,000 (2018: £nil) relates to the negative
goodwill arising on the Group’s acquisition of its former joint venture, Compound Semiconductor
Centre Limited (see note 31). The credit has been classified as selling, general and administrative
expenses within operating profit.
· Discounting – This relates to the unwind of discounting on long term financial assets of £148,000 (2018:
£257,000) and the unwinding of discounting on long term liabilities of £nil (2018: £104,000). Discounting
is non-cash and has been classified as finance costs within profit before tax.
· Onerous property lease – The non-cash charge of £nil (2018: £4,404,000) related to an increase in the
provision for an onerous property lease that was originally made in 2014 following the restructuring of
the Group’s operations in Singapore. The increase in the provision made in 2018 for unused and unlet
space at the manufacturing site extended the provision to the end of the lease obligation in 2022. The
extension of the onerous lease provision resulted in a charge of £4,404,000 that was classified within
selling, general and administrative expenses within operating profit. Cash costs associated with the
annual rental for the unused and unlet space total £1,460,000 (2018: £1,539,000) are included within
payment of lease liabilities in the financing section of the cash flow statement.
The group has implemented the requirements of IFRS 16 ‘Leases’ from 1 January 2019 with the
Singapore property lease accounted for on balance sheet from this date. IFRS 16 ‘Leases’ has been
implemented using the modified retrospective approach applying the practical expedient that allows
on transition an adjustment to the value of the right of use asset by the amount of any previously
recognised onerous lease provision as an alternative to performing an impairment review. The adoption
of this practical expedient results in the reclassification of the lease provision as part of the net value of
the right of use asset in the Group’s balance sheet from 1 January 2019 (see note 2).
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
The cash impact of adjusted items in the consolidated cash flow statement represents the cash costs defrayed in
2019 in respect of restructuring, employer social security on employee share schemes and patent dispute legal costs
totalling £7,582,000.
Adjusted EBITDA (adjusted earnings before interest, tax, depreciation and amortisation) is calculated as follows:
(Loss)/profit attributable to equity shareholders
Non-controlling interest
Finance costs / (income)
Tax
Depreciation of property, plant and equipment
Depreciation of right of use assets
Amortisation of intangible fixed assets
Loss/(profit) on disposal of PPE
Share based payments
Adjusted Items
Restructuring
Insurance income
Patent dispute legal costs
Impairment of intangibles
Impairment of right of use asset
Impairment of financial asset
Share of joint venture losses (financial asset)
CSDC acquisition negative goodwill
Onerous property lease
Adjusted EBITDA
IFRS 16 impact on 2018
Adjusted EBITDA under IFRS 16
2019
£’000
(35,473)
345
1,458
10,180
10,477
3,590
8,222
(245)
(771)
18,463
813
-
4,308
3,805
1,623
4,134
3,951
(171)
-
16,246
-
16,246
2018
£’000
966
223
(87)
5,558
6,773
-
6,109
-
(1,044)
7,906
3,337
(1,097)
1,262
-
-
-
-
-
4,404
26,404
2,144
28,548
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IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 6. Operating (loss)/profit
The operating (loss)/profit is stated after charging/(crediting):
2019
£’000
2018
£’000
Depreciation of property, plant and equipment
10,477
6,773
Depreciation of right of use assets
Impairment of right of use asset
Amortisation of intangible assets
Impairment of intangible assets
Impairment of non-current financial assets
Services provided by auditors*
Operating lease rentals
Expenses relating to variable lease payments not included in the
measurement of the lease liability
Research and development
Exchange (gains) / losses
Share based payments
Cost of raw materials consumed
Profit on disposal of fixed assets
Adjusted items
3,590
1,623
8,222
3,805
4,134
243
-
6,656
1,157
(251)
(771)
62,044
(245)
4,950
-
-
6,109
-
-
232
8,799
-
26
77
(1,044)
68,250
-
7,906
‘Expenses relating to variable lease payments not included in the measurement of the lease liability’ principally
relate to 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 venture’s assets (note 3 and 32). In the comparative period the
variable lease payments were classified within ‘operating lease rentals’ prior to the implementation of IFRS 16 ‘Leases’
(see note 2.30)
*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
114
2019
£’000
34,568
3,696
1,553
(771)
39,046
2018
£’000
34,611
3,872
1,576
(1,044)
39,015
2019
Number
2018
Number
410
253
663
423
233
656
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 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 56 to 71 where the relevant disclosures have been highlighted as audited.
Following changes to the Group’s operating and reporting structure and the establishment of the Executive
Management Board on 1 August 2019 key management within the Group comprises members of the Executive
Management Board and Non-Executive Directors.
Compensation to key management following establishment of the Executive Management Board, including pensions
of £25,000, was £927,000 and the credit for share-based payments was £118,000.
Prior to the establishment of the Executive Management Board key management comprised Executive and Non-
Executive Directors, members of the Management Board and Business Unit Leaders. Compensation paid to key
management prior to the establishment of the Executive Management Board, including pensions of £111,000
(2018: £158,000 full year), was £2,593,000 (2018: £5,234,000 full year) and the credit for share-based payments was
£268,000 (2018: £2,292,000 full year credit).
8. Finance (costs) / income
Bank and other loans
Unwind of discounting on lease liabilities
Unwind of discount on long term balances
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
Total tax charge
2019
£’000
(670)
(936)
148
(1,458)
2019
£’000
882
882
9,298
9,298
10,180
2018
£’000
(66)
-
153
87
2018
£’000
880
880
4,678
4,678
5,558
The tax on the Group’s (loss)/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% (2018: 19.00%) as follows:
(Loss)/profit on ordinary activities before taxation
2019
£’000
(24,948)
2018
£’000
6,747
Tax charge at 19.00% thereon (2018: 19.00%)
4,740
(1,282)
Effects of:
Expenses not deductible for tax purposes
Overseas tax rate differences
Tax losses for which no deferred tax asset was recognised
Derecognition of previously recognised deferred tax assets
Share option schemes
Income not subject to tax
Pre-measurement of deferred tax – change in UK tax rate
Adjustments in respect of prior years
Total tax charge for the year
(2,802)
391
(2,221)
(10,641)
272
-
(80)
161
(668)
(800)
-
-
(3,607)
444
280
75
(10,180)
(5,558)
115
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
The current geo-political context affecting the markets in which IQE operates has resulted in a shift in the balance
of projected manufacturing production and hence profits between the US and rest of the world. As a result, lower
utilisation of US deferred tax assets is projected in coming years which has resulted in the partial reversal and de-
recognition of previously recognised US tax losses.
The share option schemes amount shown on previous page 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.
The Group’s results report certain financial measures after a number of adjusted items with a tax impact of
£1,811,000 credit (2018: £2,813,000 charge) as detailed in note 5.
Finance (No.2) Bill 2016, which was substantively enacted in September 2016, included legislation to reduce the
main rate of corporation tax from 20% to 19% from 1 April 2017 with a further reduction to 17% from 1 April 2020.
Accordingly, the closing UK deferred tax asset in the financial statements has been recognised in accordance with
the rate reductions enacted as part of the Finance (No.2) Bill 2016. The March 2020 Budget announced that a rate of
19% would continue to apply with effect from 1 April 2020, and this change was substantively enacted on 17 March
2020.
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.
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 to equity for the year
10. Deferred Taxation
Deferred tax
At 1 January
Income statement charge recognised in the year
Tax charge recognised directly in equity
Exchange differences
At 31 December
2019
£’000
(124)
(124)
2019
£’000
13,244
(9,298)
(124)
(3)
3,819
2018
£’000
(437)
(437)
2018
£’000
17,768
(4,678)
(437)
591
13,244
The current portion of the deferred tax asset is £1,782,000 (2018: £4,835,000) 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:
116
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Group
Deferred tax liabilities
At 1 January 2018
(Charge)/credited to income statement
Exchange differences
At 31 December 2018
Charged to income statement
Exchange differences
At 31 December 2019 before set-off
Set-off of tax
At 31 December 2019 after set-off
Deferred tax assets
At 1 January 2018
Credited/(charged) to income statement
Charged to equity
Exchange differences
At 31 December 2018
Credited/(charged) to income statement
Charged to equity
Exchange differences
At 31 December 2019 before set-off
Set-off of tax
At 31 December 2019 after set-off
Accelerated
Capital
Allowances
£’000
Intangibles
£’000
(6,782)
(2,218)
(330)
(9,330)
(1,619)
98
(10,851)
(4,501)
387
(21)
(4,135)
(913)
17
(5,031)
Tax
Losses
£’000
22,402
1,114
-
936
24,452
(5,637)
-
(114)
18,701
Other
£’000
6,649
(3,961)
(437)
6
2,257
(1,129)
(124)
(4)
1,000
Total
£’000
(11,283)
(1,831)
(351)
(13,465)
(2,532)
115
(15,882)
14,022
(1,860)
Total
£’000
29,051
(2,847)
(437)
942
26,709
(6,766)
(124)
(118)
19,701
(14,022)
5,679
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 £20,012,000 (2018: £473,000) in respect of losses
amounting to £90,682,000 (2018: £2,491,000) that can be carried forward against future taxable income. The
deferred tax asset can be recognised if sufficient profits from the same trade arise in future periods.
Tax losses in the UK totalling £57,520,000 (2018: £36,630,000) have no date of expiry. Tax losses acquired in
Singapore totalling £12,460,000 (2018: £nil) 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 £112,291,000 (2018:
£87,909,000) losses amounting to £5,615,000 and £5,165,000 expire in 2020 and 2021.
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 £418,000 (2018: £324,000) has been recognised within operating profit in relation to claims made under
the R&D Expenditure Credit Scheme (RDEC) in the UK.
117
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Company
Deferred tax assets
At 1 January 2018
Charged to income statement
Charged to equity
At 31 December 2018
Credited/(charged) to income statement
Charged to equity
At 31 December 2019
Tax
Losses
£’000
Share
Options
£’000
Other
Timing
Differences
£’000
-
-
-
-
2,546
-
2,546
5,220
(3,673)
(209)
1,338
(1,255)
(16)
67
32
(5)
-
27
(3)
-
24
Total
£’000
5,252
(3,678)
(209)
1,365
1,288
(16)
2,637
11. Dividends
No dividend has been paid or proposed in 2019 (2018: £nil).
12. (Loss) / Earnings per share
Basic (loss) / 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.
(Loss)/Profit attributable to ordinary shareholders
Adjustments to (loss)/profit after tax (note 5)
Adjusted (loss) / profit attributable to ordinary shareholders
Weighted average number of ordinary shares
Dilutive share options
Adjusted weighted average number of ordinary shares
Adjusted basic (loss) / earnings per share
Basic (loss) / earnings per share
Adjusted diluted (loss) / earnings per share
Diluted (loss) / earnings per share
2019
£’000
(35,473)
16,118
(19,355)
2019
Number
787,175,574
13,562,165
800,737,739
(2.46p)
(4.51p)
(2.46p)
(4.51p)
2018
£’000
966
10,040
11,006
2018
Number
761,750,145
37,072,892
798,823,037
1.44p
0.13p
1.38p
0.12p
118
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
13. Intangible assets
Group
Cost
Goodwill
£’000
Patents
£’000
Development
costs
£’000
Software
£’000
Customer
contracts
£’000
Total
£’000
At 1 January 2019
67,630
7,224
Additions
Foreign exchange
At 31 December 2019
-
(900)
66,730
726
(5)
7,945
Accumulated amortisation
and impairment
At 1 January 2019
Charge for the year
Impairment
Foreign exchange
At 31 December 2019
Net book value
-
-
-
-
-
69,411
8,123
(589)
76,945
27,592
6,360
1,955
(269)
439
286
656
(4)
1,377
35,638
7,775
1,080
(6)
8,849
2,618
1,192
1,194
(6)
4,998
7,828
159,868
-
(100)
7,728
9,929
(1,600)
168,197
7,444
38,093
384
-
(100)
7,728
8,222
3,805
(379)
49,741
At 31 December 2019
At 31 December 2018
66,730
67,630
6,568
6,785
41,307
41,819
3,851
5,157
-
384
118,456
121,775
Group
Cost
Goodwill
£’000
Patents
£’000
Development
costs
£’000
Software
£’000
Customer
contracts
£’000
Total
£’000
At 1 January 2018
Additions
Foreign exchange
At 31 December 2018
64,408
-
3,222
67,630
3,043
4,160
21
7,224
57,621
9,854
1,936
69,411
6,800
958
17
7,775
7,427
139,299
-
401
14,972
5,597
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
Customer contract intangible assets relate to customer contracts acquired as part of a business combination.
The amortisation charge of £8,222,000 (2018: £6,109,000) and the impairment charge of £3,805,000 (2018: £nil) have
been charged to selling, general and administrative expenses in the Consolidated Income Statement.
Development cost and patent cost impairment charges of £2,611,000 (2018: £nil) relate to a small number of
technology projects where the Group has taken the decision to discontinue the development and commercialisation
of the associated technology. The net book value of these development cost and patent assets has been impaired to
£nil.
119
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Software impairment charges of £1,194,000 (2018: £nil) principally relate to internally developed software that
following a decision made in the current year is no longer used as part of the Group’s manufacturing operations. The
net book value of this software has been impaired to £nil.
Impairment tests for goodwill
Cash Generating Units (‘CGUs) have been redefined and aligned with the Group’s segmental reporting to reflect
changes in the Group’s operating and reporting structure following the establishment of an Executive Management
Board that has consolidated responsibility for the Group’s primary markets and operating segments under the
leadership of an Executive VP, Global Business Development, Wireless and Emerging Products and an Executive VP,
Global Business Development, Photonics & Infrared.
Cash generating units previously defined as ‘III/V Expitaxy’ and ‘Substrates’ have been redefined as Wireless and
Photonics with no restatement or reallocation of goodwill between segments.
Goodwill is tested for impairment annually and whenever there is an indication of impairment at the level of the CGU
to which it is allocated. Multiple production facilities and production assets are included in a single CGU reflecting
that production can (and is) transferred between sites and production assets for different operating segments to suit
capacity planning and operational efficiency. Given the interdependency of facilities and production assets, goodwill
is tested for impairment by grouping operational sites and production assets into CGUs based on type of production.
This gives rise to the following allocation of goodwill:
Allocation of goodwill by CGU
Wireless
Photonics
Total Goodwill
2019
£’000
59,317
7,413
66,730
2018
£’000
60,121
7,509
67,630
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% (2018: 2%).
Value in use calculations are based on the Group’s approved 2020 budget and three-year forecast extrapolated to
year five using the estimated long-term growth rate.
In 2018 the Board approved 2019 budget was used for the first year of the value in use calculation 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. The discount factor applied in the value in use calculation in 2018 was 10%.
The key assumptions applied in the 2019 cash flow forecast are summarised below:
Year 1
%
Year 2
%
Year 3
%
Year 4
%
Year 5
%
Risk adjusted pre-tax discount rate
10
10
10
Photonics growth rate
Wireless growth rate
2020 Budget
3 Year Plan
3 Year Plan
2020 Budget
3 Year Plan
3 Year Plan
10
2%
2%
10
2%
2%
The recoverable amount of the Photonics CGU determined based on value in use calculations exceeds the carrying
amount of the associated goodwill and other intangible assets and property, plant and equipment allocated to the
CGU by greater than £250,000,000.
The recoverable amount of the Wireless CGU determined based on value in use calculations exceeds the carrying
amount of the associated goodwill and other intangible assets and property, plant and equipment allocated to the
CGU by greater than £140,000,000.
The Group has carried out a sensitivity analysis on the impairment tests of each cash-generating unit to which
goodwill has been allocated, using various reasonably possible scenarios.
No impairment would arise if the discount rate for the Photonics and Wireless CGU was increased from 10% to
15%.
No impairment would arise if the growth rate in each of the Photonics and Wireless CGU’s in the forecast period from
2021 to 2024 was restricted by 25%.
120
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Company
Cost
At 1 January 2019
Additions
At 31 December 2019
Accumulated amortisation
At 1 January 2019
Charge for the year
Impairment
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
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
Patents
Software
£’000
£’000
5,615
714
6,329
-
60
357
417
5,912
5,615
801
64
865
153
85
-
238
627
648
Patents
Software
£’000
£’000
1,599
4,016
5,615
-
-
-
5,615
1,599
564
237
801
87
66
153
648
477
Total
£’000
6,416
778
7,194
153
145
357
655
6,539
6,263
Total
£’000
2,163
4,253
6,416
87
66
153
6,263
2,076
121
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 14. Property, plant and equipment
Group
Cost
Land and
buildings
Short leasehold
improve-ments
Fixtures
and fittings
Plant and
machinery
£’000
£’000
£’000
£’000
Total
£’000
At 31 December 2018
11,496
34,953
6,687
195,170
248,306
Adjustments on adoption of IFRS
16 (note 2.30d)
At 1 January 2019
Additions
Disposals
Foreign exchange
At 31 December 2019
Accumulated depreciation
At 1 January 2019
Charge for the year
Disposals
Foreign exchange
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
-
11,496
7,832
-
(90)
19,238
3,968
695
-
(14)
4,649
14,589
7,528
-
-
(2,178)
(2,178)
34,953
5,494
(677)
(444)
6,687
5,194
(475)
(71)
192,992
246,128
7,174
(6,081)
(1,735)
25,694
(7,233)
(2,340)
39,326
11,335
192,350
262,249
19,204
1,517
(635)
(190)
19,896
19,430
15,749
4,544
606
(471)
(35)
4,644
6,691
2,143
96,145
7,659
(6,109)
(1,117)
96,578
95,772
99,025
123,861
10,477
(7,215)
(1,356)
125,767
136,482
124,445
Property, plant and equipment includes assets in the course of construction with a net carrying value of £14,086,000
(2018: £37,675,000) primarily relating to leasehold improvements, plant and equipment purchased for the Group’s
manufacturing site at Taunton, Massachusetts and buildings, plant and equipment purchased for the Group’s
manufacturing site at Hsinchu, Taiwan.
Cost
At 1 January 2018
Additions
Disposals
Foreign exchange
At 31 December 2018
Accumulated depreciation
At 1 January 2018
Charge for the year
Impairment
Foreign exchange
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Land and
buildings
Short leasehold
improve-ments
Fixtures
and fittings
Plant and
machinery
£’000
£’000
£’000
£’000
Total
£’000
8,731
2,495
-
270
11,496
3,728
195
-
45
3,968
7,528
5,003
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
17,376
3,999
84,217
109,320
965
-
863
495
-
50
5,118
1,651
5,159
6,773
1,651
6,117
19,204
4,544
96,145
123,861
15,749
14,736
2,143
1,636
99,025
124,445
69,425
90,800
122
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Company
Cost
At 1 January 2019
Additions
At 31 December 2019
Accumulated depreciation
At 1 January 2019
Charge for the year
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
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
Fixtures
and fittings
£’000
105
18
123
90
14
104
19
15
Fixtures
and fittings
£’000
87
18
105
77
13
90
15
10
123
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 15. Right of use assets
Group
Cost
At 1 January 2019
Additions
Foreign exchange
At 31 December 2019
Accumulated depreciation
At 1 January 2019
Charge for the year
Impairment
Foreign exchange
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
Land and
buildings
£’000
Plant and
machinery
£’000
49,826
346
(217)
49,955
5,256
4,153
1,623
(184)
10,848
39,107
-
386
-
(5)
381
-
134
-
(1)
133
248
-
Total
£’000
50,212
346
(222)
50,336
5,256
4,287
1,623
(185)
10,981
39,355
-
Depreciation of £697,000 has been capitalised as part of the construction and commissioning costs associated with
the Group’s Newport foundry.
The non-cash charge of £1,623,000 (2018: £nil) relates to the impairment of the right of use asset relating to space
at the Singapore manufacturing site sub-let by Compound Semiconductor Development Centre Limited, the Group’s
former joint venture that was acquired during the year. Following the acquisition the Group considers this to be a
separate cash generating unit and due to the time remaining on the lease and the loss making nature of the business
the right of use asset has been impaired (see note 31).
16. Investments
Group
Cost
At 1 January 2018 and 2019
At 31 December 2018 and 2019
Company
Cost
At 1 January 2019
Subsidiaries share based payments charge
At 31 December 2019
Provisions for impairment
At 1 January 2019
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
124
Equity investments
£’000
Investments
in subsidiaries
£’000
Other equity
investments
£’000
121,185
733
121,918
32,032
32,032
89,886
89,153
75
-
75
-
-
75
75
75
75
Total
£’000
121,260
733
121,993
32,032
32,032
89,961
89,228
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
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
Investments
in subsidiaries
£’000
Other equity
investments
£’000
Restated Total
£’000
120,118
1,067
121,185
32,032
-
32,032
89,153
88,086
75
-
75
-
-
-
75
75
120,193
1,067
121,260
32,032
-
32,032
89,228
88,161
Details of the company’s subsidiaries are set out in note 29.
Investments are reviewed for impairment trigger events annually. This review includes a qualitative assessment of the
business performance of each investment and a quantitative assessment of any potential impact on the carrying value
of each investment arising from the results of the Group’s value in use calculations prepared as part of the Group’s
goodwill impairment review. No impairment trigger events have been identified as part of the review in the current
year (2018: none).
Indicators that impairment losses might have reversed are assessed annually. No events indicating a reversal of
impairment losses have been identified as part of the review in the current year (2018: none).
Raw materials and consumables
Work-in-progress and finished goods
2019
£’000
23,767
6,901
30,668
2018
£’000
29,001
6,708
35,709
The directors are of the opinion that the replacement values of inventories are not materially different to the carrying
values stated above. These carrying values are stated net of impairment provisions of £8,960,000 (2018: £6,415,000).
£3,219,000 (2018: £1,419,000) of inventories were written down during 2019 and an expense recognised in the income
statement.
125
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 18. Trade and other receivables
Current
Trade receivables
Other receivables
Contract assets
Prepayments
Non-current
Amounts owed by group undertakings
Financial assets
2019
Group
£’000
20,499
4,624
4,883
3,059
33,065
2019
Company
£’000
-
339
-
237
576
2018
Group
£’000
18,615
5,280
12,173
1,947
38,015
2019
Group
£’000
-
-
-
2019
Company
£’000
131,541
-
131,541
2018
Group
£’000
-
7,937
7,937
Restated
2018
Company
£’000
-
583
-
138
721
Restated
2018
Company
£’000
146,607
-
146,607
Company current and non-current trade and other receivables has been restated in the comparative period to reflect
the reclassification of amounts owed by group undertakings from current assets to non-current assets as the receivable
was not expected to be collected within one year.
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 2018 contract assets have been transferred to receivables during 2019.
As at 31 December 2019, 83% (2018: 86%) of trade receivables were within terms. Of the other trade receivables, 81%
(2018: 89%) were less than 30 days past due. An allowance has been made for estimated irrecoverable amounts from
the sale of goods of £223,000 (2018: £224,000). 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.
Amounts owed by Group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5%
per annum (2018: 5% per annum).
Financial assets relate to £8,800,000 of Preferred ‘A’ shares (2018: £8,800,000) issued by the Compound Semiconductor
Centre Limited (‘CSC’), a joint venture between the Group and Cardiff University (see note 30 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,
· Repayable in proportion to the outstanding principle from surplus cash generated.
subject to CSC having available profits;
The carrying values of trade and other receivables and their estimated fair values are set out in note 22.
126
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
19. Trade and other payables
Current
Trade payables
Amounts owed by group undertakings
Other taxation and social security
Other payables
Accruals and deferred income
2019
Group
£’000
2019
Company
£’000
2018
Group
£’000
2018
Company
£’000
17,298
-
390
1,089
7,590
243
15,926
212
1,055
1,546
26,367
18,982
25,343
-
1,931
10,843
7,791
45,908
970
15,106
1,628
1,389
1,613
20,706
Accruals and deferred income include no contract liabilities (2018: £nil).
Amounts owed to group undertakings are unsecured and repayable on demand. Interest is charged at a rate of 5%
per annum (2018: 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 2019 or 31 December 2018.
20. Borrowings
Group
Non-current borrowings:
Bank borrowings
Lease liabilities
Current borrowings:
Bank borrowings
Lease liabilities
Total borrowings
Bank borrowings
Bank borrowings fall due for repayment as follows:
Within one year
Between one and five years
After five years
2019
£’000
22,736
44,895
67,631
2,034
3,083
5,117
72,748
2019
£’000
2,034
22,736
-
24,770
2018
£’000
-
-
-
-
-
-
-
2018
£’000
-
-
-
-
On 24 January 2019, the Company agreed a new £27,300,000 ($35,000,000) multi-currency revolving credit facility,
provided by HSBC Bank plc that 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.
127
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report On 29 August 2019, the Company agreed a new £30,000,000 asset finance facility, provided by HSBC Bank plc that
is secured over various plant and machinery assets. The facility has a five-year term and an interest rate margin of
1.65% per annum over base rate on any drawn balances.
Lease liabilities
Lease liabilities fall due for repayment as follows:
Within one year
Between one and five years
After five years
Lease liabilities principally relate to property (see note 2.30).
21. Provisions for other liabilities and charges
Group
Restructuring
Onerous
Lease
As at 31 December
Adjustments on adoption
of IFRS 16 (note 2.30d)
As at 1 January
Charged to the income
statement
Utilised during the year
Foreign exchange
As at 31 December
Current
Non-current
Total
£’000
1,134
£’000
5,256
-
(5,256)
1,134
-
(1,134)
-
-
-
-
-
-
-
Restructuring
Onerous
Lease
£’000
£’000
-
-
-
-
-
-
2019
£’000
3,083
14,688
30,207
47,978
2019
Total
£’000
6,390
(5,256)
1,134
Restructuring
£’000
-
-
-
Onerous
Lease
£’000
2,200
-
2,200
2018
£’000
-
-
-
-
2018
Total
£’000
2,200
-
2,200
-
1,091
4,404
5,495
(1,539)
(1,539)
-
43
191
(1,134)
-
-
2019
Total
£’000
-
-
-
1,134
5,256
Restructuring
Onerous
Lease
£’000
1,134
-
1,134
£’000
1,420
3,836
5,256
234
6,390
2018
Total
£’000
2,554
3,836
6,390
The restructuring provision related 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 comprised severance and reactor decommissioning costs and has been fully utilised in the
current year.
The onerous lease provision established for vacant space at the Group’s Singapore manufacturing site has been
treated as a transition adjustment on adoption of IFRS 16 ‘Leases’ to the right of use asset value associated with
the leased Singapore manufacturing facility. The right of use asset recognised in respect of the Singapore property
lease on adoption of IFRS 16 ‘Leases’ has been reduced by the amount of the previously recognised onerous lease
provision as an alternative to performing an impairment review (see note 2.30b).
128
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 22. 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
Amounts owed by group undertakings
Other receivables excluding prepayments
Financial Assets (Preference share receivables)
2019
Group
£’000
2019
Company
£’000
2018
Group
£’000
2018
Company
£’000
8,800
20,499
1,746
-
20,807
18,615
4,582
-
-
131,541
-
146,607
9,507
-
339
-
38,806
133,626
17,453
7,937
64,812
583
-
151,772
Included in other receivables are contract assets of £4,883,000 (2018: £12,173,000).
The Group is exposed to credit concentration risk with its three largest customers which represent 50% (2018: 63%)
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.
129
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Not past due
Past due 0-30
Past due more than 30
Gross
Provision
2019
£’000
17,193
2,859
670
20,722
2019
£’000
-
-
223
223
Net
2019
£’000
17,193
2,859
447
2018
£’000
16,163
2,387
289
20,499
18,839
2018
£’000
-
-
224
224
Net
2018
£’000
16,163
2,387
65
18,615
Gross
Provision
An allowance has been made for estimated irrecoverable amounts from the sale of goods of £223,000 (2018:
£224,000). 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 2019 a 1 cent
movement in the US dollar to Sterling rate would impact the net value of these instruments by £68,000 (2018:
£12,000).
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 undrawn facilities of £33,300,000 (2018: £1,000,000).
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:
Group
Analysis of contractual cash flow
maturities -
Other financial liabilities at
amortised cost
Carrying
amount
Contractual
Cash flows
Less
than 12
months
31 December 2019
Trade and other payables
Accruals
Bank borrowings
Lease liabilities
£’000
18,387
7,590
24,770
47,978
98,725
£’000
£’000
18,387
18,387
7,590
26,566
55,483
7,590
2,646
4,535
108,026
33,158
11,907
1 –2
Years
£’000
-
-
6,715
5,192
2–5
Years
£’000
-
-
17,205
13,345
30,550
5+
Years
£’000
-
-
-
32,411
32,411
Analysis of contractual cash flow
maturities -
Other financial liabilities at
amortised cost
31 December 2018
Trade and other payables
Accruals
Carrying
amount
Contractual
Cash flows
Less
than 12
months
£’000
36,186
7,791
43,977
£’000
£’000
36,186
36,186
7,791
7,791
43,977
43,977
1 – 2
Years
£’000
2 – 5
Years
£’000
5+
Years
£’000
-
-
-
-
-
-
Company
Other financial liabilities at amortised cost include trade payables of £243,000 (2018: £970,000) with contractual cash
flows of £243,000 (2018: £970,000) due within 12 months, amounts owed by group undertakings of £15,926,000
(2018: £15,106,000) with contractual cash flows of £16,720,000 (2018: £15,860,000) due within 12 months and
accruals of £1,546,000 (2018: £1,613,000) with contractual cash flows due within 12 months.
130
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 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.
Considering 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
2019 and 31 December 2018 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
£68,000 (2018: £13,000).
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 and from its bank borrowings. 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.
The Group’s bank borrowings consist of a variable rate
asset finance loan secured against the assets to which
it relates and a variable rate multi-currency revolving
credit facility secured against the assets of the Group.
The variable rate UK sterling £30,000,000 asset
finance facility, which has a principal outstanding of
£25,000,000 (2018: £nil) has a five-year term and an
interest rate margin of 1.65% per annum over base
rate on any drawn balances. The loan is repayable
by monthly instalment commencing on the first
anniversary of the facility.
The variable rate US dollar $35,000,000 (£27,300,000)
multi-currency revolving credit facility, which is
undrawn 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.
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 and
financial liabilities bearing variable rate interest was
100% (2018: 100%).
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 2019 would
impact annual interest income by approximately
£20,000 (2018: £40,000). A 50-basis point (0.5%)
movement in interest rates on the interest-bearing
liabilities held at 31 December 2019 would impact
annual interest costs by approximately £125,000
(2018: £nil).
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 adjusts 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 2019 was
£334,391,000 (2018: £288,471,000).
The Group monitors capital on the basis of a gearing
ratio. The gearing ratio is calculated as net debt divided
by total capital and was 19.1% at 31 December 2019
(2018: nil%).
All covenants in relation to the Group’s borrowing
facilities have been complied with during the year.
131
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Fair values
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are
as follows:
Cash and cash equivalents
Trade receivables
Other receivables
Contract assets
Financial Assets (Preference share receivables)
Trade and other payables
2019
Carrying
amount
£’000
2019
Fair
value
£’000
2018
Carrying
amount
£’000
8,800
20,499
4,624
4,883
-
(18,387)
20,419
8,800
20,499
4,624
4,883
3,951
(18,387)
24,370
20,807
18,615
5,280
12,173
7,937
(36,186)
28,626
2018
Fair
value
£’000
20,807
18,615
5,280
12,173
7,704
(36,186)
28,393
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 reference to assumptions about forecast future
financial performance of CSC and the associated level of expected credit losses.
23. Share capital
Group and Company
Allotted, called up and fully paid
2019
Number
of shares
2019
£’000
2018
Number
of shares
2018
£’000
Ordinary shares of 1p each
796,142,302
7,961
776,699,681
7,767
The movement in the number of ordinary shares during the year was:
At 1 January
Employee share schemes
Translucent equity consideration
At 31 December
2019
Number
776,699,681
19,442,621
-
796,142,302
2018
Number
756,050,549
16,386,876
4,262,256
776,699,681
132
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 19,442,621 ordinary shares (2018: 20,649,132 ordinary shares) were issued during the year as follows:
2019
Number
of shares
2019
Consideration
2018
Number
of shares
2018
Consideration
Employee share schemes
19,442,621
Nil to 50.3p
Translucent consideration
-
19,442,621
-
16,386,876
4,262,256
20,649,132
Nil to 50.3p
83.7p
The share premium arising from consideration received from employee share scheme exercises of £712,000 (2018:
£813,000) was £1,238,000 (2018: £1,694,000).
The share premium arising from the non-cash equity consideration paid to Translucent for the purchase of the
cREO(TM) technology and IP portfolio in 2018 was £3,526,000. This amount, along with the share capital value of
£42,623 was recognised as an intangible asset addition within patents (note 13).
24. Share based payments
The total amount credited to the income statement in 2019 in respect of share-based payments was £771,000 (2018:
£1,044,000 credited).
Long-term incentive plan
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 long-term incentive
awards over shares in the company to directors and employees of the Group.
Long-term incentive share awards are granted with contractual lives of between three and ten years with a fixed
exercise price of 1 penny equal to the nominal value of the ordinary share.
Directors
Long-term incentive awards become exercisable between three and ten years from the date of grant subject to
continued employment and achievement of performance conditions relating to growth in earnings per share and
total shareholder return targets over a three-year vesting period that cannot be extended. The Group has no legal or
constructive obligation to repurchase or settle the options in cash.
Details of the Directors long-term incentive plan are set out in the Remuneration Report.
Employees
Long-term incentive awards become exercisable between three and five years from the date of grant subject to
continued employment and the achievement of performance conditions relating to growth in earnings per share
targets over a three-year vesting period that cannot be extended. The Group has no legal or constructive obligation
to repurchase or settle the options in cash.
Long term incentive awards 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.
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 ten 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.
Share options are valued using the Black-Scholes option-pricing 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 share option.
133
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report The principal assumptions used in the calculation of the fair value of long-term incentive awards and share option
awards 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
2019
29.07
11.02
3
10
3
56%
0.9%
0%
2018
24.57p
7.40p
3
10
3
55%
0.9%
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 2019
was £3,096,000 (2018: £1,672,000).
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
2019
Number
of options
38,793,878
7,004,639
(18,105,303)
(7,053,740)
20,639,474
2019
Average exercise
price (pence)
11.02p
1.80p
3.85p
1.34p
17.41p
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
The weighted average share price at the date share options were exercised was 12.78p (2018: 87.35p).
As at 31 December 2019, the total number of long-term incentive awards and share options held by employees was
20,639,474 (2018: 38,793,878) as follows:
Option price pence/share
3.65p - 17.07p
Option period ending
31 December 2019
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
0.01p – 125.00p
At 31 December
134
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
31 December 2029
2019
Number
of options
-
1,298,090
6,463,146
1,172,884
3,307,266
2,352,226
282,500
1,337,102
745,000
1,302,908
2,378,352
2018
Number
of options
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
-
20,639,474
38,793,878
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
25. Parent company profit and loss
As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not
presented as part of these financial statements. The parent company’s loss for the financial year amounted to
£14,093,000 (2018: £2,304,000 profit).
26. Cash generated from operations
Group
(Loss)/Profit before tax
Finance costs
Depreciation of property, plant and equipment
Depreciation of right of use assets
Amortisation of intangible assets
Impairment of intangible assets
Impairment of property, plant & equipment
Impairment of right of use assets
Impairment of financial assets
Share of joint venture
Inventory write downs (note 17)
Profit on disposal of fixed assets
CSDC acquisition negative goodwill
Non-cash provision movements
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
(Loss)/Profit before tax
Finance income
Finance costs
Foreign exchange
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of intangible assets
Share based payments
Cash outflow from operations before changes in working capital
Decrease / (Increase) in trade and other receivables
(Decrease) / Increase in trade and other payables
Cash outflow from operations
2019
£’000
(24,948)
1,458
10,477
3,590
8,222
3,805
-
1,623
4,134
3,951
3,219
(245)
(171)
-
(771)
14,344
2,184
4,130
(11,710)
8,948
2019
£’000
(15,381)
(5,987)
362
979
14
145
357
(1,374)
(20,885)
18,390
(2,681)
(5,176)
2018
£’000
6,747
(87)
6,773
-
6,109
-
1,651
-
-
-
1,419
-
-
5,495
(1,044)
27,063
(2,806)
(4,032)
(3,237)
16,988
2018
£’000
5,982
(6,299)
-
(1,861)
13
66
-
(1,898)
(3,997)
(28,425)
2,090
(30,332)
135
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 27. 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 at 1 January
Adjustments on application of IFRS 16
Net (debt) / funds at 1 January
Net movement resulting from cash flows
Non-cash movements
Net cash at 31 December
2019
£’000
(11,867)
(41,895)
17,125
3,651
(32,986)
20,807
(50,212)
(29,405)
(32,986)
(1,557)
(63,948)
2018
£’000
(25,292)
-
-
-
(25,292)
45,612
-
45,612
(25,292)
487
20,807
Decrease in cash in the year includes £368,000 (2018: £66,000) of cash interest paid.
Non-cash movements include £1,238,000 (2018: £nil) of unwind of discounting on lease liabilities, £346,000 (2018:
£nil) of new lease liabilities and the impact of foreign exchange of £27,000 (2018: £487,000).
28. Analysis of net funds / (debt)
At 1
January
2019
£’000
Adjustments
on application
of IFRS 16
£’000
Cash
flow
£’000
Other
non-cash
movements
£’000
At 31
December
2019
£’000
Bank borrowings due after one year
Bank borrowings due within one year
Lease liabilities due after one year
Lease liabilities due within one year
Total borrowings
Cash and cash equivalents
Net funds / (debt)
-
-
-
-
-
20,807
20,807
-
-
(22,736)
(2,034)
(48,115)
-
(2,097)
3,651
(50,212)
(21,119)
-
(11,867)
-
-
3,220
(4,637)
(1,417)
(140)
(22,736)
(2,034)
(44,895)
(3,083)
(72,748)
8,800
(50,212)
(32,986)
(1,557)
(63,948)
Cash and cash equivalents at 31 December 2018 and 31 December 2019 comprised balances held in instant access
bank accounts and other short-term deposits with a maturity of less than 3 months.
Non-cash movements include £1,238,000 (2018: £nil) of unwind of discounting on lease liabilities, £346,000 (2018:
£nil) of new lease liabilities and the impact of foreign exchange of £27,000 (2018: £487,000).
The reclassification in lease liabilities due after one year and within one year principally relates to one property where
the lease liabilities become payable from Q3 2020.
136
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 29.
Subsidiary undertakings
Name of
company
IQE (Europe) Limited Ordinary shares
Class of
capital
of £1
Proportion
of shares
held
100%*
Activity
Manufacture of advanced
semiconductor materials
Country of
incorporation
UK
Registered
Office
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
IQE Inc
IQE KC LLC
Common stock
of $0.001
100%*
Manufacture of advanced
semiconductor materials
USA
119 Technology Drive,
Bethlehem, PA 18015, USA
Limited liability
company
100%*
Manufacture of advanced
semiconductor materials
USA
200 John Hancock Road,
Taunton, MA 02780, USA
IQE Taiwan ROC**
Ordinary shares
of NT$10
90%
Manufacture of advanced
semiconductor materials
Taiwan
IQE RF LLC
Limited liability
company
100%*
Manufacture of advanced
semiconductor materials
USA
No. 2-1, Li-Hsin Road
Hsinchu Science Park
Hsinchu 300, Taiwan
265 Davidson Avenue
Somerset, NJ 08873, USA
IQE Silicon
Compounds Limited
Ordinary shares
of £1
100%
Manufacture of silicon
epitaxy
UK
Pascal Close, St Mellons,
Cardiff CF3 0LW, UK
MBE Technology
Pte Ltd
Preferred
shares of S$1
Ordinary shares
of S$1
100%
100%
Manufacture of advanced
semiconductor materials
Singapore
30 Tampines industrial
Avenue 3 Singapore
528775
CSDC Private Limited Common stock
of $1 par value
100%*
Research, development
and Manufacture of
semiconductor materials
Singapore
30 Tampines industrial
Avenue 3 Singapore
528775
Wafer Technology
Limited
Ordinary shares
of £1
100%*
NanoGaN Limited
Galaxy Compound
Semiconductors Inc
Ordinary shares
of £0.001
100%
Common stock
of $0.00 par
value
100%*
Manufacture of
semiconductor
compounds and ultra high
purity materials
UK
Development of advanced
semiconductor materials
UK
Manufacture of
semiconductor
compounds and ultra high
purity materials
USA
EPI Holding Limited Ordinary shares
100%
Dormant holding company UK
KTC Wireless LLC
IQE USA Inc
IQE Solar LLC
IQE Properties Inc
of £1
Limited liability
company
Limited liability
company
Limited liability
company
Limited liability
company
100%
Dormant holding company USA
100%
Dormant holding company USA
100%*
Dormant company
USA
100%*
Property holding company USA
Wafer Technology
International Limited
Ordinary shares
of £1
100%
Dormant holding company UK
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 £27,893,000 (2018: £32,400,000), EBITDA of £6,538,000
(2018: £6,235,000) and net assets of £38,500,000 (2018: £35,480,000) 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 a statutory guarantee to these subsidiaries
in accordance with section 479C of the Companies Act 2006.
137
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 30. Joint Ventures
The Group holds investments in one joint venture as follows:
Name of
company
Compound
Semiconductor
Centre Limited
Class of capital
Common stock
of £1 par value
Proportion of
shares held
Activity
Country of
incorporation
Registered
Office
50%*
UK
Research,
development and
Manufacture of
semiconductor
materials
Pascal Close, St
Mellons, Cardiff
CF3 0LW, UK
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.
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 £1,482,000 (2018: £1,104,000).
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 on
the next page. No dividend has been received by the
Group from the CSC (2018: £nil).
* 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.
138
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Summary information for Compound Semiconductor Centre Limited
Summary income statement
Revenue
EBITDA
Loss from continuing operations
Loss for the period
Total comprehensive expense for the period
Summary balance sheet
Non-current assets
Current assets
Current Liabilities
Non-current Liabilities
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
2019
£’000
8,379
154
(6,070)
(6,070)
(6,070)
2019
£’000
24,696
308
(1,399)
(21,072)
2,533
2019
£’000
2,533
50%
1,266
2018
£’000
7,759
59
(5,796)
(5,796)
(5,796)
2018
£’000
30,034
592
(1,784)
(20,239)
8,603
2018
£’000
8,603
50%
4,302
Elimination of unrealised gains on transactions with CSC Ltd
(12,000)
(12,000)
Absorption of JV losses against long term JV preference share debt (note5)
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
Absorption of JV losses against long term JV preference share debt (note5)
Cumulative unrecognised losses carried forward
3,951
6,783
-
2019
£’000
(10,412)
-
(3,035)
3,951
(9,496)
-
7,698
-
2018
£’000
(7,566)
-
(2,846)*
-
(10,412)**
Comparative financial information has been adjusted to reflect the final audited 2018 CSC financial statements.
* Includes share of total comprehensive expense for the period £3,035,000 (2018: £2,898,000) and share of CSC
transactions with owners recognised directly in equity £nil (2018: £52,000).
** Includes £2,714,000 (2018: £2,714,000) prior period unrecognised unrealised gains on transactions with CSC.
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 established that CSDC was 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.
On 10 October 2019 the Group acquired the shareholdings of WIN and NTU in CSDC taking control of the business
and increasing its equity ownership to 100%. The Group’s investment in CSDC has been consolidated with CSDC
treated as a subsidiary from the date of acquisition of the third-party shareholdings (see note 31).
Summary financial information for CSDC up to the date of acquisition on 10 October 2019 is set out on the next
page.
139
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
Summary information for CSDC Private Ltd
Summary income statement
Revenue
LBITDA
Loss from continuing operations
Loss for the period
Total comprehensive expense for the period
Summary balance sheet
Non-current assets
Current assets
Current Liabilities
Non-current Liabilities
Deficit attributable to Joint ventures
Carrying value of equity interest CSDC Private Ltd
Net liabilities of CSDC Private Limited
Proportion of the Groups ownership interest
Groups share of net liabilities
Share of losses recognised in income statement
Cumulative unrecognised losses
Carrying amount of the Groups interest in the JV
Summary of cumulative unrecognised losses
Cumulative unrecognised losses brought forward
Unrecognised losses in the year
1 January to
10 October
2019
£’000
1 January to
10 October
2019
SG$’000
4,051
(1,970)
(1,974)
(1,974)
(1,974)
2018
£’000
4,428
(4,791)
(5,006)
(5,006)
2018
SG$’000
7,908
(8,556)
(8,939)
(8,939)
6,984
(3,396)
(3,404)
(3,404)
(3,404)
(5,006)
(8,939)
2018
£’000
-
2018
SG$’000
-
2,374
4,165
(1,236)
(2,169)
(9,944)
(17,446)
(8,806)
(15,450)
2018
£’000
2018
SG$’000
(8,806)
(15,450)
51%
51%
(4,491)
(7,880)
2,000
2,491
-
2018
£’000
(1,826)
(665)*
3,571
4,309
-
2018
SG$’000
(3,320)
(989)
Cumulative unrecognised losses carried forward
(2,491)
(4,309)
140
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
31. Acquisitions
On 10 October 2019, the Group acquired the 49% equity shareholdings of its joint venture partners in CSDC taking
control of the company and increasing its equity ownership to 100%.
The acquisition was for a nominal fee of USD$1 to WIN Semiconductors Corp and SGD$1 to each of the other five
third party shareholders, settled in cash.
CSDC was formed on 23 March 2015 as a joint venture between IQE’s Singaporean subsidiary MBE Technology
Pte Limited (51%), WIN Semiconductors Corp (25%), Nanyang Technological University (18%) and four individuals
of the NanYang University (6%). CSDC was established as a vehicle for the development and commercialisation of
compound semiconductor technologies for academic and industrial customers based on Molecular Beam Epitaxy
(MBE) technologies in Asia.
Since formation of CSDC, the landscape for compound semiconductors has changed significantly with increasing
localisation of Asian technology supply chains and significant opportunities emerging within the China 5G market. By
acquiring CSDC and taking control of the operation, the Group is best placed to:
· Take the necessary steps to restructure the operation which has been loss-making in the period
immediately prior to acquisition as a result of under-utilisation of assets and property lease obligations;
and
· Pursue Asian market sales opportunities for MBE-based products to return the operation to
profitability.
In the period, post-acquisition, CSDC has contributed a net loss of £184,000 to the consolidated net loss for the year.
Effect of acquisition
The acquisition had the following effect on the Group’s assets and liabilities:
Acquiree’s net assets at the acquisition date:
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Net identifiable assets and liabilities
Consideration paid
Cash consideration
Settlement of pre-existing relationships
Total consideration
Negative goodwill
Recognised values
on acquisition
£’000
462
1,579
10
(1,880)
171
-
-
-
171
The Group incurred no significant acquisition related costs.
Fair values for inventory, trade and other receivables and trade and other payables have been determined on a
provisional basis.
The Group and CSDC were parties to an IP licence and equipment lease agreement as well as an ordinary trading
relationship. At the acquisition date these pre-existing relationships were effectively settled as part of the acquisition.
The fair value of these items was determined to be negligible on the acquisition due to the short remaining
contractual term (less than 3 months), resulting in no changes to the fair value of consideration.
141
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report 32. Related party transactions
The Group incurred professional fees and expenses
during the year of £nil (2018: £31,250) payable to
Horton Corporate Finance. Dr G H H Ainsworth,
who was a director of IQE Plc during the year, is the
managing partner of Horton Corporate Finance.
The Group purchased services during the year from
Newport Wafer Fab Limited totalling £105,705 (2018:
£97,000). 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. On 10 October 2019 the Group
acquired the shareholdings of its joint venture partners
in CSDC taking control of the business and increasing
its equity ownership to 100% (see note 31).
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 period
prior to the acquisition of CSDC the Group sub-
let space at its manufacturing facility to CSDC for
£515,000 (2018: £565,000) at a rental cost per square
foot equivalent to the cost paid by the Group on the
head lease associated with the property.
Prior to the acquisition the Group also licensed
intellectual property and equipment to the joint
venture and recognising revenue of £nil (2018: £nil)
in the period and purchased advanced compound
semiconductor wafer products from CSDC for
£4,051,000 (2018: £4,429,000). Intellectual property
and equipment was licensed to CSDC and wafer
products were procured from CSDC at prices mutually
agreed by the Group, WIN and NTU.
During the period prior to acquisition payments of
£737,000 (2018: £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.
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 (2018: £115,000) and procured
certain administrative support services from the
Group for £235,000 (2018: £235,000). As part of the
administrative support services provided to CSC the
Group procured goods and services, recharged to CSC
at cost, totalling £3,468,000 (2018: £3,130,000).
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). Costs are charged by the CSC at a price that
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 £6,656,000
(2018: £6,655,000) in the year.
At 31 December 2019 an amount of £222,000 (2018:
£586,000 owed from) was owed from the CSC at year
end.
In the Groups year-end balance sheet ‘A’ Preference
Shares with a nominal value of £8,800,000 (2018:
£8,800,000) are included in financial assets at an
amortised cost of £3,951,000 (2018: £7,937,000) and
the Group has a shareholder loan of £239,000 (2018:
£237,000) due from CSC.
33. Commitments
The Group had capital commitments at 31 December
2019 of £nil (2018: £11,500,000) 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.
34. Post Balance Sheet Events
The World Health Organisation declared the
Coronavirus (COVID-19) outbreak to be a pandemic in
recognition of its rapid spread across the globe, with
142
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report over 150 countries now affected. Many governments
are taking increasingly stringent steps to help contain
or delay the spread of the virus. The Directors of the
Company have assessed the impact that COVID-19
may have on the ability of the Group to continue as
a going concern. The Group has determined that
the COVID-19 pandemic and its related impacts
are non-adjusting subsequent events. Accordingly,
the consolidated financial position and results of
operations as of and for the year ended 31 December
2019 have not been adjusted to reflect their impact.
143
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report Officers and advisers
IQE plc is a public limited company incorporated in England and Wales.
Directors
Mr P Smith BSc, Hon LLD, DUniv., CEng, FIET (Non-Executive Chairman)
Mr T N Pullen BA (Hons), ACA (Chief Financial Officer)
Dr A W Nelson OBE, BSc, Ph.D, FREng (President and Chief Executive Officer)
Carol Chesney (Non-executive Director, Chair of Audit Committee)
Sir David Grant CBE PhD FREng FLSW CEng FIET (Non-Executive Director)
Sir Derek Jones KCB (Non-executive Director)
Dr G H H Ainsworth - retired 25 June 2019
Dr H Williams - retired 30 August 2019
Registered office
Pascal Close, Cardiff, United Kingdom, CF3 0LW
Principal Bankers
HSBC Bank Plc
8 Canada Square, London, E14 5HQ
Auditors
KPMG LLP
66 Queen Square, Bristol, BS1 4BE
Nominated Advisers and Brokers
Peel Hunt LLP
Moor House, 120 London Wall, London EC2Y 5ET
Joint Brokers
Citigroup Global Markets Limited,
33 Canada Square, Canary Wharf, London E14 5LB
Registrars
Link Asset Services
The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU
Financial Advisors
Lazard & Co., Limited
50 Stratton Street, London W1J 8LL
Financial Public Relations
Headland Consultancy
Cannon Green, 1 Suffolk Lane, London EC4R 0AX
Investor Relations
Amy Barlow
Tel +44(0)29 2083 9400
investors@iqep.com
144
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report
Glossary of terms:
cREOTM ........... Crystalline Rare Earth Oxide
DFB ................. Distributed Feedback Laser
Epitaxy ........... See page 8
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
145
IQE PLC | Report and Annual Accounts 2019 | Company No: 3745726Financial Report