IQE plc : IQE plc : Full Year 2012 Results Group transformed by three strategic transactions - well positioned to exploit leading position in growing markets IQE plc (AIM: IQE, "IQE" or the "Group"), the leading global supplier of advanced wafer products and wafer services to the semiconductor industry, announces its final results for the year ended 31 December 2012. Financial highlights oRevenues up 17% to £88.0m (2011: £75.3m) oRecord second half performance +H2 sales up 45% to £53.7m (2011 H2: £37.0m) oH2 EBITDA up 56% to £12.2m (2011 H2: £7.8m) EBITDA up 18% to £16.4m (2011: £14.0m) oAdjusted^* pre-tax profit up 5% to £8.6m from £8.2m (reported £6.1m) oAdjusted^* EPS of 1.59p (2011: 1.86p) and basic EPS of 1.16p (2011: 1.62p) oCAPEX of £13.1m (2011: £17.4m) marks completion of two year capacity expansion programme oProforma^* cash generated from operating activities of £13.2m, up 27% (down 54% to £4.1m on a statutory basis) * Adjustments to profits and EPS reflect non-cash charges for share based payments, non-cash acquisition related charges and exceptional items (see note 3). Proforma cash generation reflects presentation had the acquisition been cash settled as detailed in the financial review. Operational highlights oCompleted three strategic transactions involving Solar Junction Corporation ("Solar Junction"), RF Micro Devices epitaxy division ("RFMD") and the epiwafer manufacturing business of Kopin Corporation ("Kopin Wireless") since beginning of 2012: oProvide commanding platform for continued strong growth oSignificantly reduce market risk and short term volatility oStrengthen leading position in manufacture and supply of advanced compound semiconductors oProvide further economies of scale and opportunities for cost savings oExcellent progress on qualification programmes: oIn production with five customers on advanced wireless BiHEMT products oPhotonics (optoelectronics) business transitioning into volume production o2012 CPV solar milestones achieved on schedule; qualifications on track for production revenues in H2 2013 oCompleted two-year major capacity expansion programme oExpanded product portfolio to benefit from wider global adoption of compound semiconductor technologies Dr Drew Nelson, IQE Chief Executive, said: "IQE has been transformed over the last 14 months. "Three major transactions, the completion of our capacity expansion programme and the achievement of a number of significant qualifications in both wireless and photonics (optoelectronics) have laid the foundations for accelerated growth in 2013 and beyond. "Financially, our record second half performance in 2012 has provided a glimpse of what's to come. Furthermore, the strengthening of our risk mitigation strategy reduces the potential for short-term customer demand volatility. "The road ahead has never been clearer. The advanced properties of compound semiconductors are central to addressing the challenges and performance expectations facing the electronics industry. This is a matter of fundamental physics as the next wave of growth for the electronics industry will be enabled by combining the properties of advanced compound semiconductors with the cost advantages of silicon. This is already beginning to happen and will accelerate in the next few years. "As IQE is at the forefront of this trend, we are increasingly confident that the Group is well positioned for strong growth in 2013 and beyond. "Therefore our focus now is on delivery. The current financial year has started well, in line with the Board's expectations, with the momentum seen in the second half of 2012 continuing." Contacts: IQE plc +44 (0) 29 2083 9400 Drew Nelson Phil Rasmussen Chris Meadows Espirito Santo Investment Bank + 44 (0) 20 7456 9191 Richard Crawley James Staveley Canaccord Genuity + 44 (0) 20 7050 6500 Simon Bridges Cameron Duncan College Hill +44 (0) 20 7457 2020 Adrian Duffield Kay Larsen Note to Editors IQE is the leading global supplier of advanced semiconductor wafers with products that cover a diverse range of applications, supported by an innovative outsourced foundry services portfolio that allows the Group to provide a 'one stop shop' for the wafer needs of the world's leading semiconductor manufacturers. IQE uses advanced crystal growth technology (epitaxy) to manufacture and supply bespoke semiconductor wafers ('epiwafers') to the major chip manufacturing companies, who then use these wafers to make the chips which form the key components of virtually all high technology systems. IQE is unique in being able to supply wafers using all of the leading crystal growth technology platforms. IQE's products are found in many leading-edge consumer, communication, computing and industrial applications, including a complete range of wafer products for the wireless industry, such as mobile handsets and wireless infrastructure, Wi-Fi, WiMAX, base stations, GPS, and satellite communications; and optical communications. The Group also manufactures advanced optoelectronic and photonic components such as semiconductor lasers, vertical cavity surface emitting lasers (VCSELs) and optical sensors for a wide range of applications including optical storage (CD, DVD, BluRay), thermal imaging, leading-edge medical products, pico-projection, finger navigation ultra-high brightness LEDs, and high efficiency concentrated photovoltaic (CPV) solar cells. The manufacturers of these chips are increasingly seeking to outsource wafer production to specialist foundries such as IQE in order to reduce overall wafer costs and accelerate time to market. IQE also provides bespoke R&D services to deliver customised materials for specific applications and offers specialist technical staff to manufacture to specification either at its own facilities or on the customer's own sites. The Group is also able to leverage its global purchasing volumes to reduce the cost of raw materials. In this way, IQE's outsourced services, provide compelling benefits in terms of flexibility and predictability of cost, thereby significantly reducing operating risk. IQE operates a number of manufacturing and R&D facilities across Europe, Asia and the USA. The Group also delivers its products and services through regional sales offices located in major economic centres worldwide. Strategic overview IQE is the global leader in the design and production of advanced compound semiconductor materials. Compound semiconductors deliver levels of performance in wireless communications, photonics (light applications) and high speed processing, which traditional silicon semiconductors cannot deliver. It reflects the fundamental properties of the advanced materials used. Compound semiconductors Compound semiconductors lie at the heart of several major advances in technology that have transformed the way we live, including: ofibre optic technology which has revolutionized telecommunications and spawned the internet; owireless communication and the smartphone revolution; oLEDs for lighting; and osensor technology. This shift in technology has only just begun. It will continue at an increasing pace, driven by a small number of macro level trends: ohigh-speed connectivity; osustainable clean energy generation and the efficient use of energy; othe explosion of personal consumer devices for enhanced lifestyle; and othe increased sophistication and performance of security related systems. This is already evident in the emergence of multiple new markets for compound semiconductors as more is demanded from technology. From solar power, power switching and lighting to gesture recognition, laser projection, and optical interconnects (USB), and even to microprocessors, the level of investment in technologies which rely on compound semiconductors continues to advance rapidly. IQE's position and opportunity The semiconductor industry is passing through an inflection point and by virtue of the technology leadership that IQE has built over its 25 year history, the Group is uniquely positioned to lead the revolution that is taking place. IQE's vision is to be the global number one provider of advanced semiconductor materials. The strategy is to use technology leadership and scale to deliver the performance, cost points and security of supply required for mass market adoption of its products. The Group is delivering on this strategy. IQE has established a clear leadership position in wireless communications, with an estimated market share of between 50-60 %. This is reflected in the sales trend. With the exception of the fall-out from the global economic collapse in 2009, the Group has grown sales and EBITDA every year since 2004, representing a compound annual growth in sales of 24.4% over eight years. The Group made strong strategic progress since the beginning of 2012, including: · successful completion of three highly strategic deals which have strengthened the Group's technology leadership and scale, whilst reducing risk through the diversification of markets and customers · delivered strong operational performance including: o Successful conclusion of its major capacity expansion programme; o Achieved all 2012 milestones for CPV solar, and remain on track for volume production in the second half of 2013 as originally planned; and o Completed multiple qualifications in wireless and photonics (optoelectronics). · delivery of a record second half financial performance. Current trading and outlook IQE is now the clear technology and market leader in the supply of wafers to the wireless market, with an estimated 50% to 60% share. The benefit of the three key deals will increasingly be reflected in the Group's performance going forward. The Group is also beginning to see the rewards of its investment programme in advanced wireless technology over the last two years and is in initial production with a number of chip companies on advanced BiHEMT technology. As anticipated, the Group's photonics (optoelectronics) business is transitioning towards high volume applications. IQE has started to ship advanced VCSEL materials for optical communications applications, including data centre applications. The Group remains on track to transition to production for a range of other applications, including solar power (CPV), in the second half of 2013. IQE continues to develop new products at the leading edge of technology such as compound semiconductors on silicon integrated circuits, which in due course will revolutionise the electronics marketplace. The focus in 2013 is on delivery. IQE will access the significant efficiencies and synergies that the three deals bring to the Group and leverage the investment in product qualifications in order to deliver strong organic growth in its core markets. The current financial year has started well, in line with the Board's expectations, with the momentum seen in the second half of 2012 continuing. Overall IQE is well positioned to deliver strong growth in the current year and beyond, based on its premier position to supply its advanced technologies in growing global markets. Strategic transactions During the last 14 months the Group has completed three strategic transactions in order to provide a significantly enhanced platform for growth and to significantly reduce operational risk. IQE is now the leading global supplier of advanced semiconductor wafers, using crystal growth technology (epitaxy) to manufacture and supply bespoke semiconductor wafers ('epiwafers') to major global chip manufacturing companies. The strategic value of the RFMD acquisition was clearly demonstrated in the last quarter of 2012. It protected the Group from further swings in market share between chip companies. In particular, higher than anticipated volumes with RFMD mitigated the impact of a destocking elsewhere, which was similar to that experienced a year earlier. The acquisition of Kopin Wireless at the beginning of the current financial year has brought with it a significant share of business with Skyworks Solutions, which has filled the gap in the risk mitigation strategy. Solar Junction investment and exclusive supply agreement In February 2012, IQE announced an investment in, and an exclusive wafer supply agreement with the leading edge Concentrated PhotoVoltaic (CPV) cell developer and manufacturer Solar Junction Corporation. The investment significantly accelerated IQE's strategy to become a leading global supplier of CPV wafers for the solar power markets. The deal confirmed IQE as Solar Junction's strategic and exclusive epitaxy partner, a move that has enabled Solar Junction to benefit from IQE's strong materials intellectual property and expertise in high volume epiwafer manufacturing. IQE secured a partnership for developing CPV technology with Solar Junction with exclusive access to the company's ongoing extensive R&D programme. Following the deal, IQE owns a 9% share of Solar Junction. RF Micro Devices epitaxy division acquisition and exclusive supply agreement In June 2012, IQE acquired the entire in-house MBE epiwafer manufacturing unit of RFMD, a global leader in the design and manufacture of high performance RF components and compound semiconductor technologies. The deal also included a long-term wafer supply agreement for exclusive provision of all of RFMD's MBE wafers and for provision of a majority of RFMD's MOCVD wafer requirements. The acquisition included a fully furnished epi manufacturing plant, a fully fitted clean room of over 90,000 sq.ft, 16 MBE manufacturing systems and equipment, all housed in a 135,000 sq.ft. stand-alone building in Greensboro, North Carolina. The 16 operational MBE tools will be partly deployed towards servicing anticipated future CPV solar demand, creating a powerful position in CPV market growth. The deal involved no upfront cash outlay for the transfer of assets, resulting in no IQE shareholder dilution. In exchange for the transfer of assets, the parties entered into a long-term wafer supply agreement with a minimum purchase commitment of $55m over the first two years. IQE will supply all MBE wafer requirements and a majority of RFMD's MOCVD wafer requirements under a discounted pricing arrangement. Kopin Wireless acquisition In January 2013, IQE acquired the compound semiconductor epiwafer manufacturing business of Kopin Corporation for total consideration of $75 million in cash of which $15 million is payable in cash on the third anniversary of completion. The acquired wireless division is the leading global manufacturer of heterojunction bipolar transistor (HBT) materials that are used in power amplifiers, a key wireless component in mobile devices. These are produced using Metal Organic Chemical Vapour Deposition (MOCVD) epitaxial wafer technology. The acquisition of Kopin Wireless builds on IQE's strategic developments in 2012 to further extend IQE's leadership in wireless industry supply and deliver a market leading position in MOCVD HBTs. The transaction was a notable part of IQE's risk mitigation strategy, adding Skyworks as a major customer and increasing IQE's wireless market share. Skyworks' current contract with Kopin Wireless runs until the end of 2013 and guarantees a significant proportion of Skyworks' business. Additionally, the move extends IQE's global manufacturing footprint with the addition of a Taiwan manufacturing facility, providing a strong position to access the growing Asian semiconductor market. Integration of acquisitions IQE has successfully and seamlessly integrated newly acquired businesses into the Group over a number of years. This was further demonstrated in the second half of 2012, with the successful integration of the RFMD business. Post-acquisition this unit has seamlessly and successfully met significant levels of customer demand over and above expectations. Work on integrating the former Kopin Wireless operations in North America and Taiwan is progressing on schedule. The newly expanded global footprint and the increase in the scale of the Group's wireless business is expected to yield significant cost synergies from 2014 onwards of at least £7m per annum. Financial review The Group enjoyed a very strong second half and delivered record full year sales and EBITDA despite the poor first quarter. Revenues grew 17% year on year from £75.3m to £88.0m driven by increased sales volumes. The acquisition contributed £20m to sales. Group EBITDA was up 18% to £16.4m (2011: £14.0m). As anticipated, sales and profits were much more heavily skewed to the second half than normal, reflecting the impact of the destocking in the first quarter and the benefit of the RFMD acquisition on trading in H2. Sales and EBITDA in the second half were £53.7m (2011 H2: £37.0m) and £12.2m (2011 H2: £7.9m) respectively. Gross profit increased to £18.5m from £18.2m. Whilst contribution margins have remained stable, the benefit of the sales growth has been partly offset by higher depreciation and the overhead associated with the facility acquired from RFMD. Selling, general and administration expenses increased by £0.7m to £11.5m (2011: £10.8m). This increase largely reflects one-off costs of £0.6m related to the three transactions. Adjusted operating profit, before the one-off £0.6m transaction costs, increased from £7.4m to £7.6m. Interest cost of £0.9m (2011: £0.5m) included £0.3m of notional interest relating to the discounting of long term balances arising on acquisition (2011: £nil). Adjusted pre-tax profit was up 5% to £8.6m from £8.2m. Adjusted pretax profit excludes non-cash financing charges relating to discounting of long term acquisition balances (£0.3m), exceptional charges of (£0.6m) charges relating to the amortisation of intangibles arising on acquisition (£0.3m) and share based payments (£1.4m). Reported pretax profit was £6.1m (2011: £6.9m). The income tax credit of £0.5m was lower than the £1.5m tax credit in 2011, which included a £1.0m non-cash deferred tax credit. Tax receipts of £0.5m in 2012 relate to R&D tax credits (2011: £0.5m). The Group has sufficient tax losses available to shield future tax payable of up to £31.2m. Adjusted earnings per share were 1.59p (2011: 1.86p). Basic earnings per share were 1.16p (2011: 1.62p). Adjusted (see note 3) retained profit was £9.1m (2011: £9.7m), including a £4m contribution from the acquisition. Reported retained profit was £6.6m (2011: 8.4m). The Board will not be recommending the payment of a dividend. Cash generated from operating activities was £4.8m (2011: £10.3m). Cash generated from operating activities assuming cash settlement of acquisition of £13.2m (see below). Deferred consideration paid of £7.0m (2011: £1.1m) primarily related to the final balances for the Galaxy acquisition in 2010. In addition, the Group invested £3.2m for a 9% equity stake in Solar Junction. Capital expenditure of £11.6m (2011: £15.5m) marked the completion of a major multi-year capital expansion programme. Capital expenditure will now return to maintenance levels. Investment in product development of £4.0m (2011: £3.7m) primarily reflects investment in new products to access new and emerging markets. Proceeds from new equity issued was £11.4m (2011: £0.6m). This primarily reflects the issue of £10.5m of new equity to finance the investment in Solar Junction and related expenditures. Net debt, was in line with the Board's expectations at the end of December 2012 was £15.5m (2011: £3.9m). Acquisition As detailed in note 6, the purchase agreement provided that the consideration for the acquisition is settled via a contractually agreed price discount on product sales to the vendor until 2016. Accordingly, the total consideration payable is entirely contingent on future sales, and has been estimated at £54.6 million based on the expected future volumes and price discounts. The revenue on these product sales is recognised at their full market value but billed net of the contractual discount, hence the operating cash flow is inherently lower than the operating profit during the discount period. The value of the discount in 2012 was £8.4m (2011 : nil). If the purchase agreement had provided for the sales to be billed and settled at full market value, and for the purchase consideration to be paid to the vendor in cash ("Gross basis"), then the operating cash generated from the trade would have been reported at the higher value, and the purchase consideration paid would have been classified as an investing activity. Assuming no other changes to the terms of trade (including volumes, timing and pricing) then under the Gross basis there would be no impact on the Consolidated Balance Sheet or Income Statement, however the cash flow presentation would have been impacted as follows: £'000 As currently reported Impact Gross basis Net cash generated from operating 4,777 8,379 13,156 activities Net cash used in investing (26,159) (8,379) (34,538) activities Operating review Productive capacity The Group's capacity expansion programme implemented in 2011 and 2012 has been completed on time and on budget. IQE now has the spare capacity and multi-site supply to provide its customers with confidence in its ability to meet their growth needs and surges in demand. The Group's capabilities have been further strengthened by the spare capacity that came with the acquisitions of the RFMD business and Kopin Wireless businesses in June 2012 and January 2013. Process innovation As part of the Group's constant improvement strategy, IQE has demonstrated process innovation to increase production efficiencies, resulting in both throughput and quality improvements. These technology improvement programmes will be rolled out across the customer base over time, providing both capacity and margin benefits. Equipment upgrades Maintaining the fleet of high specification production tools at a state-of-the-art standard is a key part of the Group's strategy to push technology boundaries in parallel with achieving cost down targets. IQE has made continued progress during 2012 in its programme of tool maintenance and upgrades. The Group continues to innovate its planned maintenance cycles, and is actively engaged in a tool upgrade programme to maintain its competitive edge. Best practice sharing IQE has been particularly successful in this regard, with an impressive cross fertilization of technologies, know-how and ideas across the Group. This has been recognized by the Group's customers who see the collaboration of the world leading material scientists as a compelling benefit and competitive advantage of IQE as the technology leader in the industry. CPV milestones The Group achieved all the 2012 milestones set out at the time of the Solar Junction investment in February 2012. Two dedicated tools have been installed and commissioned, and the process transfer completed. IQE is now engaged with end customer qualifications and anticipates revenues to commence in the second half of 2013 as originally planned. Qualifications The successful qualification of IQE's BiHEMT technology is a particularly good example of the Group's qualification capabilities. IQE is now qualified and in production with five wireless chip companies for this very advanced wireless material. IQE expects sales of these products to move from strength to strength as the industry seeks to address the increasing demands of 4G communication. In the optoelectronics market, IQE is seeing the transition of several R&D programmes into production, particularly with VCSEL technology and fiber optic communications. Specifically, it is now in production with multiple customers for data centre applications. The pipeline remains full with qualifications in progress for multiple new applications including advanced silicon for wireless applications, advanced VCSELs for active optical cables, gesture recognition, finger navigation and a variety of other consumer and industrial applications. Markets IQE's markets are driven by the advanced properties of compound semiconductors: othe wireless market - reflecting their superior wireless communication properties; othe photonics market - reflecting their ability to efficiently emit and detect light; and oelectronics - reflecting that they operate at much higher speeds and with lower power consumption Wireless The wireless market, which accounted for 79% of the Group's sales in 2012 (2011: 73%), covers electronic devices that communicate wirelessly. This includes, but is not limited to, mobile phones, smartphones, mobile networks, wifi, smart metering, satellite navigation, and a plethora of other connected devices. The wireless communications market has grown rapidly in recent years, reflecting the increasing adoption of wireless technology, coupled with the need for an increased compound semiconductor content to support greater sophistication of mobile devices. More than 1.75 billion mobile handsets were sold in 2012, of which over 670 million were smartphones that carry significantly more compound semiconductor materials. Smartphone shipments are expected to show further growth in the coming years, driven by new features, apps, social networking, entertainment and location based services. High-speed connectivity and added functionality drive the requirement for the advanced properties offered by compound semiconductor epiwafers. The global roll-out of wireless broadband networks such as 4G/LTE devices increasingly rely on higher levels of compound semiconductor content. Shipments of smartphone devices represented 38% of total handset shipments in 2012 compared with 32% in 2011. Globally, smartphone penetration is estimated to represent only 18% of the total handset market in terms of subscribers, indicating significant growth potential. Future drivers for smartphone sales include near field communications for contactless payments, and augmented reality for enhanced location based services. The migration to new wifi standards is another major driver for RF components. The introduction of small "base stations" in the form of picocells and femtocells will drive demand for more wireless chips. In addition, the new 802.11ac wifi standard will operate at 5GHz rather than the 2.6GHz currently used. The higher frequency, which will greatly increase the range and reliability of wifi networks, will further raise the demand for compound semiconductor based RF devices. Wireless chip companies are expected to show around 15% CAGR over the coming years. This growth will be driven by the need for more radio frequency functionality and greater complexity in wireless circuitry but will be partly mitigated by improved efficiencies and a drive towards reduced component footprints. Photonics (optoelectronics) The photonics market accounted for 20% of the Group's sales in 2012 (2011: 25%), and relates to applications which involve the emission or detection of light. IQE segments the photonics market into: emitters and detectors, Infrared, Solar (CPV), and Lighting (LEDs). Emitters and detectors This encompasses a wide range of applications including optical interconnects, laser projectors, optical storage, cosmetic applications, gesture recognition and finger navigation: oOptical interconnects Higher data transfer rates demanded within data centres as well as consumer applications such as high-definition imaging and video streaming, require high-speed data transfer rates for faster communications between devices. Optical interconnects offer significantly higher-speed data transfers over much longer distances than their copper counterparts and are certain to replace existing cable standards such as USB and HDMI, as these traditional cables struggle to meet the increasing demands for data transfer. This is a mass market opportunity, where demand for USB cables alone is around three billion units a year. Compound semiconductor technology that enables optical interconnects include Vertical Cavity Surface Emitting Lasers (VCSELs). VCSELs are an advanced laser technology geared to mass production and low cost. IQE is the market and technology leader for VCSEL products, with world record data speeds in excess of 40GBs already demonstrated. oLaser projectors Conventional projection technologies utilise incandescent or halogen lamps as their light sources. Such devices are power hungry, physically bulky, have relatively short lifetimes and require focusing optics which can limit the image quality and flexibility. The emergence of lasers in each of the primary colours (red, green and blue) enables a low cost, high quality laser projection solution which can be miniaturized and does not require focusing optics. This technology is called pico projection. Early pico projector technologies utilise LEDs for the light source but the next generation of devices will incorporate miniature laser projection units. oOptical storage The commercialization of IQE's gallium nitride (GaN) photonic technology will also provide the Group with access to the rapidly growing market for high-speed, high-density optical storage (Blu-ray). Industry analysts predict growth rates in this market of c. 55-60%. oCosmetic applications There are exciting new applications of compound semiconductor technology in the billion dollar cosmetics market. IQE is working with a number of customers to develop advanced laser technology for cosmetic applications such as laser hair removal, wrinkle treatment, skin rejuvenation, acne and psoriasis treatments. oGesture recognition Gesture recognition represents the ability of electronic devices to recognise hand and body gestures and movements in order to control any device. The advanced properties of compound semiconductor epiwafers are a key component in gesture recognition devices which made their debut with the launch of Microsoft's Kinect gaming console. The potential applications for this technology extend far beyond gaming, from medical applications, disability aids, remote controls, to sign language recognition, and more. It has far reaching implications for how humans will interface with technology in the near future. oFinger navigation Finger navigation is closely coupled with gesture recognition in terms of how humans will interface with machines in the future. After their emergence via RIM's Blackberry devices, the use of lasers and optical sensors for precise control of miniature track-pads is also likely to penetrate areas such as remote control units, cameras and other consumer devices over the coming years. Infrared (sensor technology) IQE is the clear market leader in advanced compound semiconductor products for use in a range of infrared and heat sensing applications. The sensitivity of current heat sensors enable a monochrome image so that applications such as night vision devices can only see in tones of green and black. The new antimonide materials allow greater sensitivity so that different shades and colours can be distinguished, effectively producing full colour night vision images. The improved sensitivity is useful for search and rescue operations and the full colour night vision capability has major military potential in terms of enabling effective identification of personnel and equipment in low or zero visibility conditions. IQE is actively engaged in a number of collaborative programmes along with leading industry players and government agencies in the development and supply of infrared materials based on antimonide materials. Solar (CPV) Solar cells utilising compound semiconductors (called CPV or Concentrated PhotoVoltaics) provide by far the most efficient solution by using multiple layers of finely tuned materials to absorb sunlight across a wider range of wavelengths. As a result, the efficiency of this material is already in excess of 44%, with a roadmap to increase this to well beyond 50%. This compares with 12% to 18% efficiency from silicon solar panels, while thin film technology is typically around 10% to 15% efficient. There is very little scope to improve the efficiency of these technologies due to the fundamental properties of the materials used. A further advantage of compound semiconductors is their tolerance of higher temperatures. This means the cost of CPV systems is also reduced by using lenses which intensify sunlight and thereby reduce the amount of semiconductor required. CPV has now reached price parity with fossil fuels and other alternative energy sources in high sunlight regions. It is considered to be at an inflection point, with industry analysts forecasting 175% compound annual growth rates for CPV installations, which are expected to grow to over 1.0GW of generating capacity by 2015, representing an epiwafer market opportunity of over $200m. Solar Junction holds the world record for solar cell efficiency at 44.5%. IQE's investment in Solar Junction also gives the Group exclusive long-term manufacturing rights over its IP, which includes a technology roadmap to design solar cells with efficiencies in excess of 50%. Solid state lighting (LEDs) LEDs are in the process of completely revolutionising the lighting market and by 2020 it is estimated that over 95% of all artificial light will be LED based. LEDs are high performance, low cost, green alternatives to incandescent light bulbs. Global concerns about climate change and the Earth's dwindling natural resources continues to be a priority for governments worldwide. Significant new policies and legislation continue to be introduced to promote the use of renewable and highly efficient energy devices. Already, many countries have introduced wide-ranging legislation to progressively ban incandescent lighting with 2012 being a key milestone for eradicating this form of lighting altogether. Alternative low energy lighting is unpopular because of perceptions of low quality lighting and on-going issues with heavy metal content including mercury. Solid state lighting is widely viewed as the only credible solution to replace the incandescent light bulb. Efficient energy consumption will remain a key driver in the development and adoption of this technology, but the critical success factor is reducing cost and improving the ambience of these units. High quality gallium nitride provides the route map to achieving this, which will revolutionise residential and commercial lighting around the planet over the coming years. Electronics The electronics market combines the advanced properties of compound semiconductors with the low cost of silicon. IQE segments the electronics market into power control and advanced materials. Power control Gallium nitride (GaN) is a compound semiconductor that offers a diverse range of RF, photonic and electronic properties. Of particular interest is the material's ability to cope with high voltages, high temperatures and high power which makes it an ideal candidate for power control systems. These are growing in demand, driven by alternative energy sources such as solar, wind and wave power, and also the adoption of electrically driven transportation. It is estimated that more than 10% of all electricity is ultimately lost due to conversion inefficiencies, as energy is switched from generation, to grid, and through to consumption. The scale of this loss exceeds the world's entire supply of renewable energy generation. The power transformers used in electronic devices, such as laptop power supplies, provide a vivid example of this phenomenon by the virtue of the heat energy they generate as electricity is lost. GaN offers performance and efficiency which are orders of magnitude better than the silicon technology which dominates power switching technology today. Indeed, this technology has the potential to eliminate up to 90% of the energy lost through switching. Advanced materials IQE has developed a powerful range of advanced, engineered wafers such as germanium-on-insulator (GeOI), germanium-on-silicon (GeOSi) and silicon-on-sapphire (SOS), which offer a high performance and low cost solution for next generation microprocessors, ultra-high speed/high density flash memory and MEMS devices such as motion sensors. IQE has established a powerful position in these advanced technologies, working with some of the biggest names in the industry, which is reflected in a number of joint patents awarded in conjunction with Intel for the production of compound semiconductor materials on silicon substrates. IQE believes the combination of high performance compound semiconductors for both its optical properties and ultra-high speed capabilities is an inevitable technology shift in the coming years. The intellectual property that the Group is developing in this field has the potential to revolutionise the semiconductor world and in so doing create significant long-term value to IQE stakeholders. The wireless communications market has grown rapidly in recent years reflecting the increasing adoption of wireless technology, coupled with the need for an increased compound semiconductor content to support the greater sophistication of mobile devices. Dr Drew Nelson OBE President & Chief Executive Officer 20 March 2013 Consolidated income statement for the year ended 31 December 2012 H2 2012 H2 2011 2012 2011 Note £'000 £'000 £'000 £'000 unaudited unaudited audited audited Revenue 2 53,685 37,014 87,961 75,318 Cost of sales (40,687) (27,249) (69,491) (57,142) Gross profit 12,998 9,765 18,470 18,176 Selling, general and administrative (6,175) (5,400) (11,456) (10,803) expenses Operating profit before exceptional 7,221 4,365 7,584 7,373 items Exceptional items (398) - (570) - Operating profit 2 6,823 4,365 7,014 7,373 Finance costs (604) (289) (886) (481) Profit before tax 6,219 4,076 6,128 6,892 Tax 310 1,266 503 1,551 Profit for the year attributable to 6,529 5,342 6,631 8,443 equity shareholders Adjusted earnings per share 3 1.46p 1.15p 1.59p 1.86p Basic earnings per share 3 1.14p 1.02p 1.16p 1.62p Adjusted diluted earnings per share 3 1.39p 1.09p 1.51p 1.74p Diluted earnings per share 3 1.08p 0.96p 1.10p 1.51p EBITDA (Earnings before interest, taxes, depreciation, amortisation, share based payments and exceptional items.) is calculated as follows: 2012 2011 £'000 £'000 Profit attributable to equity shareholders 6,631 8,443 Taxes (503) (1,551) Share based payments 1,360 1,284 Exceptional items 570 - Net finance costs 886 481 Depreciation of tangible fixed assets 5,998 4,175 Amortisation of intangible fixed assets 1,495 1,123 EBITDA 16,437 13,955 Consolidated statement of comprehensive income for the year ended 31 December 2012 2012 2011 £'000 £'000 audited audited Profit for the year 6,631 8,443 Currency translation differences on foreign currency net (2,497) 432 investments Foreign exchange hedges - (598) Total comprehensive income for the year 4,134 8,277 Consolidated statement of changes in equity for the year ended 31 December 2012 Share Share Retained Exchange Other Total capital premium earnings rate reserves equity reserve £'000 £'000 £'000 £'000 £'000 £'000 audited audited audited audited audited audited Balance at 1 January 5,251 22,122 36,118 5,272 3,987 72,750 2012 Comprehensive income Profit for the year - - 6,631 - - 6,631 Foreign exchange - - - (2,497) - (2,497) translation differences Total comprehensive - - 6,631 (2,497) - 4,134 income Transactions with owners Employee share option - - - - 1,360 1,360 scheme Issues of ordinary 631 11,323 - - - 11,954 shares Total transactions 631 11,323 - - 1,360 13,314 with owners Balance at 31 December 5,882 33,445 42,749 2,775 5,347 90,198 2012 Balance at 1 January 2011 5,153 21,237 28,019 4,840 3,025 62,274 Comprehensive income Profit for the year - - 8,443 - - 8,443 Foreign exchange translation - - - 432 - 432 differences Foreign exchange hedges - - - - (598) (598) Total comprehensive income - - 8,443 432 (598) 8,277 Transactions with owners Employee share option scheme - - (344) - 1,284 940 Other issues of ordinary shares 98 885 - - 276 1,259 Total transactions with owners 98 885 (344) - 1,560 2,199 Balance at 31 December 2011 5,251 22,122 36,118 5,272 3,987 72,750 Consolidated balance sheet as at 31 December 2012 Note 2012 2011 £'000 £'000 audited audited Non-current assets: Intangible assets 54,165 32,706 Property, plant and equipment 62,320 37,348 Investments 3,205 - Deferred tax asset 14,549 1,876 Total non-current assets 134,239 71,930 Current assets: Inventories 18,351 15,122 Trade and other receivables 19,186 14,338 Cash and cash equivalents 5 2,773 3,233 Total current assets 40,310 32,693 Total assets 174,549 104,623 Current liabilities: Borrowings 5 (2,428) (49) Trade and other payables (31,709) (23,157) Total current liabilities (34,137) (23,206) Non-current liabilities: Borrowings 5 (15,828) (7,105) Other payables (34,386) (1,562) Total non-current liabilities (50,214) (8,667) Total liabilities (84,351) (31,873) Net assets 90,198 72,750 Shareholders' equity: Share capital 5,882 5,251 Share premium 33,445 22,122 Retained earnings 42,749 36,118 Other reserves 8,122 9,259 Total equity 90,198 72,750 Consolidated cash flow statement for the year ended 31 December 2012 Note 2012 2011 £'000 £'000 audited audited Cash flows from operating activities: Cash inflow from operations 4 4,109 10,823 Net interest paid (616) (515) Income tax received 1,284 13 Net cash generated from operating activities 4,777 10,321 Cash flows from investing activities: Acquisition of subsidiaries (7,043) (1,134) Investment in Solar Junction Corporation (3,205) - Development expenditure (4,042) (3,666) Investment in other intangible fixed assets (307) (328) Purchase of property, plant and equipment (11,562) (15,517) Proceeds from sale of property, plant and equipment - 90 Net cash used in investing activities (26,159) (20,555) Cash flows from financing activities: Issues of ordinary share capital 11,445 616 Loans and leases repaid (1,383) (6,933) Loans and leases received 10,877 7,267 Net cash generated from financing activities 20,939 950 Net decrease in cash and cash equivalents (443) (9,284) Cash and cash equivalents at 1 January 3,233 12,507 Exchange gains on cash and cash equivalents (17) 10 Cash and cash equivalents at 31 December 5 2,773 3,233 NOTES TO THE RESULTS 1. Basis of preparation These results have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and interpretations in issue at 31 December 2012. The preliminary results were approved by the Board of Directors and the Audit Committee on 19 March 2013. These results do not constitute statutory accounts within the meaning of the Companies Act 2006. All figures are taken from the 2012 audited annual accounts unless denoted as 'unaudited'. Comparative figures in the results for the year ended 31 December 2011 have been taken from the 2011 audited annual accounts. These results will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 20 March 2013. Copies will be available to members of the public upon application to the Finance Director at Pascal Close, Cardiff, CF3 0LW. 2. Segmental analysis The Group considers its three key market areas of wireless, photonics and electronics to be its primary reporting segments, based on the reports reviewed by the board of directors that are used to make strategic decisions. Revenues by business segment : 2012 2011 £'000 £'000 audited audited Wireless 68,962 55,156 Photonics 18,049 18,551 Electronics 950 1,611 Total revenue 87,961 75,318 EBITDA by business segment : Wireless 12,929 10,718 Photonics 3,732 3,409 Electronics (224) (172) Total EBITDA 16,437 13,955 Operating profit/(loss) by business segment : Wireless 5,610 5,864 Photonics 1,940 2,057 Electronics (536) (548) Total operating profit 7,014 7,373 3. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of shares and 'in the money' share options in issue. Share options are classified as 'in the money' if their exercise price is lower than the average share price for the year. As required by IAS 33, this calculation assumes that the proceeds receivable from the exercise of 'in the money' options would be used to purchase shares in the open market in order to reduce the number of new shares that would need to be issued. The directors also present an adjusted earnings per share measure which eliminates certain non-cash items in order to provide a more meaningful underlying profit measure. Specifically, the non-cash accounting charges eliminated are: ofinancing charges relating to discounting of long term acquisition balances; oamortisation of intangibles arising on acquisition; oshare based payments; and oexceptional items. 2012 2011 £'000 £'000 audited audited Profit attributable to ordinary shareholders 6,631 8,443 Exceptional items 570 Discounting of long term acquisition related balances 269 - Amortisation of acquired intangibles 258 - Share based payments 1,360 1,284 Adjusted profit attributable to ordinary shareholders 9,088 9,727 2012 2011 Number Number Weighted average number of ordinary shares 571,972,538 522,386,930 Dilutive share options 29,715,164 37,008,723 Adjusted weighted average number of ordinary shares 601,687,701 559,395,653 Adjusted earnings per share 1.59p 1.86p Earnings per share 1.16p 1.62p Adjusted diluted earnings per share 1.51p 1.74p Diluted earnings per share 1.10p 1.51p 4. Cash generated from operations 2012 2011 The Group £'000 £'000 audited audited Operating profit 7,014 7,373 Depreciation of property, plant and equipment 5,998 4,175 Amortisation of intangible assets 1,495 1,123 Gain on sale of property, plant and equipment - (68) Contingent deferred consideration (settled through contractual (8,379) - discounts) Share based payments 1,360 1,284 Cash inflow from operations before changes in working capital 7,488 13,887 Increase in inventories (3,030) (3,087) (Increase)/decrease in trade and other receivables (5,924) 2,033 Increase/(decrease) in trade and other payables 5,575 (2,010) Cash inflow from operations 4,109 10,823 5. Analysis of net funds/debt At 1 Cash Other At 31 January flow non-cash December 2012 £'000 movements 2012 £'000 audited £'000 £'000 audited audited audited Cash and cash equivalents 3,233 (443) (17) 2,773 Loans due after one year (7,087) (7,855) 848 (14,094) Loans due within one year - (1,687) - (1,687) Finance leases due after one year (18) 18 (1,734) (1,734) Finance leases due within one year (49) 30 (722) (741) Total borrowings (7,154) (9,494) (1,608) (18,256) Net debt (3,921) (9,937) (1,625) (15,483) Cash and cash equivalents at 31 December 2012 comprised balances held in instant access bank accounts. Non-cash movements include the drawdown of a finance lease and foreign exchange movements on US dollar borrowings. 6. Business combination On 11 June 2012 the Group acquired the in-house epitaxy operation of RFMD, a leading wireless chip manufacturer. Under the terms of this trade and assets deal, the Group acquired the leasehold production facility, the production equipment and related inventories; assumed employment of the workforce; and entered into a long term supply contract. The consideration for the acquisition is being settled entirely via a contractually agreed price discount on future product sales to the vendor until 2016. The comparison of book value to fair value is summarised as follows: Fair value Book value Adjustment Fair value £'000 £'000 £'000 audited audited audited Intangible assets - 3,116 3,116 Property plant and equipment 17,400 2,600 20,000 Inventory 1,001 - 1,001 Deferred tax asset - 13,187 13,187 Goodwill - 18,287 18,287 Total contingent deferred consideration 18,401 37,190 55,591 The fair value of the intangible assets represents the estimated fair value of the supply contract, and has been assessed based on an imputed royalty stream to recover the estimated cost of product development and qualifications to which the contract relates. The fair value of the property plant and equipment has been estimated on a depreciated replacement cost basis, using internal and external cost data. Inventory has been recognised at the lower of cost and net realisable value. Deferred tax has been recognised in respect of temporary timing differences between the accounting and tax treatments for the assets and liabilities recognised. Goodwill reflects items not separately recognisable under IFRS, and largely reflects financial and operational synergies of the enlarged group including improved economies of scale and equipment utilisation. The fair value of the consideration has been estimated based on expected future sales volumes and price discounts. Sales are recorded at their fair value, but billed at the contractually agreed discounted rate. The discount on each sales transaction is accounted for as a reduction in the contingent deferred consideration balance. As a guide to the sensitivity of this estimate, if actual volumes were 5% lower than the estimated future volumes then the total consideration would reduce by approximately £2.8m. The fair values for intangibles assets and consideration are provisional fair values, and as long term balances have been discounted at discount rate of 1%. Acquisition related costs of £0.1m have been charged to administration expenses in the consolidated income statement for the year ended 31 December 2012. Prior to acquisition this business was part of a larger internal manufacturing process, and therefore a separate trading account is not available. Post acquisition this business unit contributed revenue of £20m, and profit after tax of £4m to the Consolidated Income Statement. Management believes that it would be impracticable to extrapolate a trading result for a full year 2012 due to the impact of changes in inventory levels in the supply chain. 7. Post balance sheet event On 15 January 2013, IQE plc completed the acquisition of the Kopin Wireless, the compound semiconductor epiwafer manufacturing business of Kopin Corporation ("Kopin"), a NASDAQ listed entity. The consideration for the acquisition was $75m, of which $60m was paid in cash on completion, and $15m falls payable in January 2016. The assets acquired were the trade and assets of Kopin Wireless' US domiciled business, which operates from a long leasehold premises located in Massachusetts USA; and its 90% equity stake in its Taiwanese subsidiary (KTC), which operates from a freehold premises in Hsinchu Taiwan. This acquisition brings a number of strategic advantages to IQE, including : oa HBT business to complement IQE's existing pHEMT business; ogreater customer diversity to help mitigate against the impact of changes in market share between customers; oexpands IQE's Asian footprint, providing improved access to the growing Asian market; oimproved economies of scale; and oproviding access to significant expected cost synergies. The upfront consideration of $60 million was part financed by $40 million of acquisition finance provided by HSBC. The balance was financed from the proceeds of a placing of 56,900,961 new ordinary shares at 29.00p. The deferred consideration of $15 million will be settled through future cash generation. ------------------------------------------------------------------------------ This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients. The owner of this announcement warrants that: (i) the releases contained herein are protected by copyright and other applicable laws; and (ii) they are solely responsible for the content, accuracy and originality of the information contained therein. Source: IQE plc via Thomson Reuters ONE HUG#1686571
IQE plc : IQE plc : Full Year 2012 Results
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