Solid performance delivers growth in revenues, profits and cash flow

15 September 2015

Cardiff, UK. 15 September 2015: 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 unaudited half year results for the six months to 30 June 2015.

FINANCIAL HIGHLIGHTS

• Solid financial performance in line with expectations and July trading update
• 2% revenue growth translated into 5% EPS growth
• 13% Increase in operating cash generation delivered further reduction in net debt, down 12%
• Deferred consideration down 19% representing organic funding of previous acquisitions

OPERATIONAL HIGHLIGHTS

• Increasing revenue diversity, with non-wireless revenues accounting for 24% of Group sales (H1 2014: 21%)
• Photonics revenues up 28% y-o-y to £7.4m
  • Acquisition of exclusive license and option agreement with Translucent for ‘cREO™’ technology announced separately today
  • Initial deployment of advanced solar wafers (CPV) for pilot systems
  • Stable wireless market, although some movement of expected Q2 sales into Q3 due to customer specific issue (non-epi)
  • Continued progress in new product development, notably in GaN technology for RF and power applications
  • Announced Joint Venture with Cardiff University to accelerate product development

Dr Drew Nelson, IQE Chief Executive, said:

“This was a solid start to the year, in which we delivered continued improvement in our financial results and further reduced our borrowings.

IQE’s revenues continue to diversify as its photonics sales grow rapidly.  The growth in the photonics business follows on from strong engagement by IQE in its customers’ product development programmes over the past few years.  The increasing number and quality of customer product development programmes is a positive lead indicator which is providing a high level of confidence over the growth outlook for photonics.

Other non-wireless businesses continue to make good progress.  Notably, advanced solar (CPV) achieved a major milestone with initial sales into field deployments, and the technical progress made with GaN technologies, is advancing the group towards initial sales into the RF and power markets in the next 12 to 18 months. 

The wireless business has delivered a stable performance despite disruption at one customer site (unrelated to epi wafers) which pushed Q2 demand into Q3.   Whilst we remain vigilant to the macroeconomic risks, our customer forecasts continue to reflect a normal second half weighting of demand.  IQE’s Board remains confident in achieving its full year expectations”

* Note : the Directors believe that the adjusted measures provide a more useful comparison of business trends and performance.  Adjusted measures exclude exceptional items, share based payments and non-cash acquisition accounting charges.  A reconciliation of the adjusted measures to the statutory measures are included in note 5.

Contacts:

IQE plc +44 (0) 29 2083 9400

Drew Nelson

Phil Rasmussen

Chris Meadows

Canaccord Genuity + 44 (0) 20 7523 8000

Simon Bridges

Cameron Duncan

Peel Hunt +44 (0) 20 7418 8900

Richard Kauffer

Broker Profile +44 (0) 020 3763 3400

Simon Courtenay

Harry Rippon

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, 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, 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.

INTERIM RESULTS 2015

1. GROUP OVERVIEW

IQE is the global leader in the design and manufacture of advanced semiconductor materials (compound semiconductor wafers).

The materials that we make are used by major global chip companies to produce the chips that enable a wide range of high-tech applications. The unique properties of these materials enable a diverse range of markets including wireless communications, advanced solar power (CPV), high resolution infrared systems, high efficiency LED lighting, efficient power switching and a range of consumer and industrial applications using advanced photonic lasers and detectors.

Beyond this, we are also working with leading silicon chip companies and on a number of major government funded programmes to develop the next generation of technology which will combine the scale and maturity of the silicon industry with the advanced properties of compound semiconductors.

Approximately 75% of our sales are into the wireless communications market.  Although subject to short term inventory cycles, this market  continues to enjoy demonstrably sustainable long term growth driven by the proliferation of wireless communication devices, and the requirement for more compound semiconductor chips per device as wireless communication becomes increasingly complex.  The wireless revolution still has a long way to run, so these factors will continue to drive the demand for compound semiconductors for many years to come.

We have an unparalleled breadth of technology, economies of scale, and a broad customer base.  Our market leadership and competitive advantages enable us to provide a unique service that is second to none and the barriers to entry favours IQE’s business proposition and market positioning.

We have continued to make good progress in our other business units, which will both accelerate organic growth and diversify our revenue streams as these opportunities transition from development and pilot production into high volume manufacture.

Our photonics business unit enables a diverse range of end applications, from data communications and advanced optical-fibres, to consumer and industrial applications. This business unit is being propelled by our technology leadership in advance lasers (VCSELs), and has already begun the transition from development and pilot revenues into high volume manufacturing following a number of key contract wins during the last twelve months. The groundwork has been set for significant progress in this business unit for the remainder of this year and into 2016.

Advanced solar (CPV) is a highly disruptive renewable energy technology which continues to gain traction.   Advances in cell and system efficiency are accelerating the adoption of CPV for utility scale energy generation, which is widely expected to become a $200m market for compound semiconductor materials in the next 2 to 5 years.  Having successfully hit all of our major technical and operational milestones we are fully prepared for high volume manufacturing and poised for the ramp as our products complete full end customer qualification and a robust supply chain becomes established.

Our infrared business unit continues to deliver robust performance for a range of industrial and defence applications, whilst our Gallium Nitride (GaN) materials, including GaN on Silicon, have achieved a number of key technical and commercial milestones which is moving us toward new product launches in the high volume, high growth, power control and LED markets.

Technology leadership is an essential business need in the fast moving semiconductor industry sector, to ensure that we maintain and improve our competitive advantage by offering our customers the highest level of expertise in the widest range of leading edge technologies. We have been highly successful in building long term relationships with our customers and through collaboration, have a demonstrable track record in helping our customers translate research, development and innovation into commercially sustainable and profitable products and services.

Building on our reputation for innovation, IQE announced in August 2015 the formation of the Compound Semiconductor Centre, a joint venture with Cardiff University that further enhances and helps to future-proof IQE’s technology portfolio by opening a host of new opportunities in new and emerging 21^st century applications.

2. RESULTS

First half revenues have increased by 2% to £53.2m (H1 2014: £52.0m). Wireless revenues were £40.5m (H1 2014: £41.3m) impacted, in part, by some temporary production disruption suffered by one customer. The photonics business has continued to enjoy strong and sustainable revenue growth with revenues of £7.4m, up 28% (H1 2014: £5.8m).

Adjusted operating profit has increased by 5% from £6.4m to £6.7m driven by revenue growth and the group’s high operational gearing.  Adjusted gross margin has remained broadly consistent at 24.2% (H1 2014: 24.5%). Adjusted SG&A reduced from £6.4m to £6.2m.

The adjusted retained profit attributable to ordinary shareholders (see note 6) increased from £5.8m to £6.1m, giving a rise in adjusted fully diluted EPS from 0.86p to 0.90p. After exceptional charges, the reported retained profit attributable to ordinary shareholders increased from a loss of £5.9m to a profit of £4.4m, representing an increase in reported basic EPS from a loss of 0.92p per share to a profit of 0.67p per share.

In H1 2015 adjustments to profit are non-cash items relating to acquisition accounting, share based payments and the related tax effects. In the prior period, adjusted items included exceptional charges relating to restructuring and re-organisation and a reassessment of expected future wafer volumes which drive the deferred consideration payable on the RFMD transaction (see note 5).

Net cash generated from operating activities increased from £2.0m to £3.5m mainly due to the improved profitability and the elimination of exceptional cash costs which in 2014 were incurred in respect of restructuring.

Net debt of £31.1m was £4.4m lower than 30 June 2014 (£35.5) and £0.2m lower than 31 December 2014 (£31.3m). During the first half the Group extended its revolving credit facility with the Groups bankers. The revolving credit facility is now committed until 16^th May 2018

Deferred consideration has reduced to £17.9m, £4.2m lower than 30 June 2014 (£22.1m) and £2.7m lower than 31 December 2014 (£20.6m).

The group has approximately £145m of accumulated tax losses, which represents a potential reduction in future tax payable of up to £39m. The adjusted effective tax rate of -6.7% remains broadly consistent with the prior period (H1 2014: -7.1%) and reflects the anticipated rate for the full year, recognition of additional tax losses and other anticipated deferred tax movements. The reported effective tax rate of -15.4% (H1 2014: -154.2%) has reduced significantly primarily due to the deferred tax impact in H1 2014 of the exceptional release of deferred consideration.

3. VISION AND STRATEGY

Our Vision

The advanced properties of compound semiconductors will secure their position at the heart of mainstream electronic applications in the 21^st century.  These materials already enable ground-breaking technologies such as wireless communications, the internet (through both wireless and optical fibre), and the solid state lighting revolution.  Moreover, compound semiconductors have reached an inflection point where they are coming of age. With the advances in technology that have already been achieved, these materials are being adopted in a wide range of new applications including advanced solar power (CPV), lighting (ultra-high brightness LEDs), efficient power switching (GaN), a range of consumer and industrial photonic applications, breakthroughs in medicine and photobiology,  and ultimately, next generation microprocessors.  These are very significant market opportunities which in a few short years will transform the demand for compound semiconductor materials.

Our vision is to grow our global leading business position in compound semiconductor technologies for the 21^st century.

Our Goal

Our goal is to use our technology leadership and scale to deliver the performance, cost points and security of supply required for mass market adoption.

Over the past few years we have been the driving force shaping the compound semiconductor materials supply chain.

We have established ourselves as the leading global outsource materials provider to the wireless, photonics and antimony based infrared markets.  Our goal is to extend our leadership in existing markets and to replicate this success in our emerging markets: advanced solar power (CPV), power switching and LED, and ultimately CMOS++.

Our Strategy

Over our 25 year history we have built a compelling set of competitive advantages: technology leadership by virtue of a unique depth and breadth of intellectual property, cost leadership through unparalleled economies of scale, and a unique multi-site capability offering security of supply to our customers.  Combined with our proven track record for high volume production, we have developed a powerful platform for delivering sustainable long-term growth.

Our strategy to achieve leadership in our chosen markets is to use our competitive advantages to deliver excellence to our customers for our mutual success.

The formation of the Compound Semiconductor Centre announced in August 2015 is an integral part of our strategy to become and remain a dominant player in new and emerging 21^st century technologies by becoming closely embedded in our customers’ designs and in so doing, ensure the long term success of our business.

4. MARKETS AND PRODUCTS

Market overview

Our key end markets are Wireless, Photonics (incorporating advanced CPV solar, high resolution infrared sensing and imaging and opto-electronics), Electronics (advanced technologies), and the emerging opportunities of power switching and LED lighting.

In the long-term, these are sustainable, high growth markets, which are being driven by a number of common themes:

• high-speed connectivity;
• the exponential growth of personal consumer devices for enhanced lifestyle;
• sustainable clean energy generation and the efficient use of energy; and
• safety and security.

Each of these “mega-trends” involves a wave of technology upgrades driven by economic, environmental, consumer and regulatory pressures. Most important is that each of these technology areas are enabled by compound semiconductors. We have established dedicated business units within the Group to focus on these specific end markets.

Wireless

Compound semiconductors lie at the heart of the wireless communication systems.  It is the advanced properties of these materials that have enabled the wireless revolution to date and will continue to drive future innovation.

Wireless currently accounts for approximately 75% of our group revenues. IQE is the clear market leader with an estimated global market share of more than 50%. Overall, this market has enjoyed several years of strong and sustainable growth driven by both the proliferation of wireless communication; and by the need for more high performance compound semiconductors to power the increasing needs and complexities in wireless communications.

Without doubt, future wireless generations will rely more heavily on compound semiconductor technologies. Next generation devices with advanced WiFi, 4G, 5G capabilities and beyond, will require increasing use of compound semiconductors. Indeed, the anticipated explosive growth in the volume and complexity of data traffic will not be possible without compound semiconductor technology.

The market for mobile handsets is highly competitive, with product innovation driving significant swings in market share between the leading handset manufacturers.  As with all consumer products, handset sales are affected by global macro-economic trends that can have an impact on take-up and upgrade rates for new models which consequently impact the supply associated chains.

The handset innovation war continues to rage as OEMs battle to capture the imagination of consumers with phones, tablets, and wearable technologies. However, the wireless story is more far reaching than this, as can be seen from the innovation, investment and excitement surrounding the “internet of things”, which will result in our lives and the world around us becoming more and more wirelessly connected over the coming years.

From our experience, it is unquestionable that wireless communication, in whatever form it takes, is set to continue to enjoy a long term growth trend and become increasingly complex as data traffic grows exponentially and the need for bandwidth and speed become paramount. This is excellent news for IQE because we make the fundamental building blocks for all of these technologies.

Photonics

Key segments within photonics include a broad range of opto-electronic products spanning a wide range of consumer and industrial applications, infrared sensing and imaging as well as advanced solar (CPV) applications:

Opto-electronics

This segment relates to a wide range of consumer and industrial applications spanning a number of high growth applications including fibre-optic data communications, optical interconnectors (such as USBs), printing, cosmetics, laser projection, gesture recognition and industrial heating.  We are the technology leader in this space, and the leading global outsource supplier in an industry sector which is transitioning from vertical integration and embracing the compound semiconductor outsource model pioneered by IQE.  This change is being largely being driven by an advanced laser technology called VCSEL (Vertical Cavity Surface Emitting Laser). We have been supporting a number of customers with their product development over the last couple of years, which are now transitioning into pilot and high volume production.

High resolution infrared

We are market leader in the supply of indium antimonide and gallium antimonide materials used in high resolution infrared systems, with an estimated market share of approximately 80%.  Production is currently concentrated in defence related applications, but is expected to rapidly transition into industrial and commercial use for thermal imaging, safety, security and energy monitoring applications.

Advanced Solar

Advanced solar cells based on compound semiconductors represent a highly disruptive technology in the energy market, particularly in the form of Concentrator PhotoVoltaics (CPV). This technology is distinct from silicon solar panels, which are familiar to most people, and are a common sight on UK rooftops.  As a material, silicon is inherently inefficient at converting sunlight into electricity, typically achieving efficiencies of less than 20%. Nevertheless, a large market has been created for silicon solar panels by virtue of government subsidy.   In contrast, compound semiconductors are highly efficient, currently exceeding 44% efficiency and with a route map to exceed 50% over the next few years.  Higher efficiency clearly translates into lower cost energy generation, which is why this technology is widely forecast to achieve rapid growth, now that pilot installations have proven their reliability. In light of this, industry analysts are typically forecasting that CPV will be approximately a one gigawatt market in the next 2 to 5 years. This equates to a materials market in the order of $200m.

The higher efficiencies and robustness offered by compound semiconductor materials are also important attributes for use in space applications and ultimately for low light level areas such as indoor use.

Power switching

The distribution of electricity from the point of generation to the point of consumption necessitates switching between AC and DC, and in switching between high and low voltages.  The dominant switching technology is based on silicon. It is estimated that more that 10% of all electricity generated is ultimately lost as a result of the inherent limitations in the properties of silicon. Gallium nitride (GaN) is a compound semiconductor material solution that offers far superior performance with the potential to eliminate up to 90% of these conversion losses.  Industry analysts forecast that the market for power materials will reach $2.6B by 2020.

The importance of GaN in terms of its high voltage and high power applications has received widespread attention worldwide, not least of all amongst government agencies, generating significant activity globally in the development and investment within the semiconductor industry, with products at an early stage of adoption. IQE has built on its leadership in GaN wireless to develop material for this market. This includes participating in a number of government funded initiatives including a significant US government funded programme to develop GaN on silicon power switching technology for grid applications. IQE’s materials development is at an advanced stage, with initial product launches expected over the coming months.

In Europe, GaN will be one of the key enabling technologies to be further developed and commercialised through the Compound Semiconductor Centre announced in July 2015.

LED lighting

Lighting accounts for approximately 20% of global energy consumption and has been identified as a key target for reducing carbon emmisions. Consequently, incandescent lighting is being phased out across the planet in response to climate change concerns. LED lighting is widely considered as the only credible solution for future commercial and residential lighting, and has been predicted by Hans van Wijngaarde of Philips to account for 90% of the general lighting market by 2020.

LED lighting is based on GaN technology. Advances in GaN materials technology will play a critical role in advancing the cost-performance of LED lighting and the acceleration of mass adoption. As with our development in power switching, we are at an advanced stage of development with initial product launches expected shortly.

In addition to significant energy savings offered by LED lighting, the technology opens up a wide range of possibilities in terms of tuneable lighting that matches human circadian rhythms, as well as offering the opportunity to integrate lighting applications through the Internet of Things (IoT).

Advanced technologies

The ever-increasing demand for higher speed and improved performance from today’s electronic devices is ushering in a new era of semiconductor materials that combine the scale of the silicon industry, which has been the base semiconductor material for the last half century, with the power and performance of compound semiconductors that have emerged as true 21st century materials.

IQE is a leading player in the development of highly advanced technologies for combining the power of compound semiconductors with lower cost and established silicon wafers and has also developed a new range of engineered substrates such as germanium-on-insulator (GeOI), germanium-on-silicon (GeOsi), and silicon-on-sapphire (SOS) for next-generation microprocessors, ultra-high speed/density flash memory and MEMs devices.

IQE is at the forefront of advanced compound semiconductor on silicon (CS on Si) development, working with some of the industry’s biggest names and on major government funded programmes. Key customers continue to indicate that initial product launches are anticipated on the 2016-2018 timeframe.

5. CURRENT TRADING AND OUTLOOK

The Directors remain vigilant to the macroeconomic risks, with our Customer forecasts continuing to reflect a normal second half weighting of demand.  IQE’s Board remains confident in achieving its full year expectations.

Dr Drew Nelson, CEO

Independent review report to IQE plc

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2015, which comprises the consolidated income statement, consolidated statement of comprehensive income/(expense), consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors’ responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules for Companies which require that the financial information must be presented and prepared in a form consistent with that which will be adopted in the company’s annual financial statements.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

The maintenance and integrity of the IQE plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the AIM Rules for Companies and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2015 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules for Companies.

PricewaterhouseCoopers LLP

Chartered Accountants

Bristol

15 September 2015

Adjusted basic and diluted earnings per share is presented in Note 6.

* This may be subsequently reclassified to the income statement when it becomes realised.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

1 BASIS OF PREPARATION

These interim results have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS") and interpretations in issue at 30 June 2015.

The interim results were approved by the Board of Directors and the Audit Committee on 15 September 2015. The interim results do not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 and have not been audited.  Comparative figures in the interim results for the year ended 31 December 2014 have been taken from the published audited statutory financial statements.   All other periods presented are unaudited. Statutory accounts for the year ended 31 December 2014 were approved by the Board of Directors on 24 March 2015 and were delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

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).

As permitted these interim results for the half‐year ended 30 June 2015 have been prepared in accordance with UK AIM rules and the IAS 34, ‘Interim financial reporting’ as adopted by the European Union. These interim financial results should be read in conjunction with the annual financial statements for the year ended 31 December 2014, which have been prepared in accordance with IFRSs as adopted by the European Union. The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2014, as described in those annual financial statements.

The financial information contained in these interim results has been reviewed by the Company’s auditor in accordance with ISRE 2410 however this does not constitute an audit.

Having considered the Group’s forecasts the Directors have formed a judgment that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the condensed consolidated financial information.

2 ACCOUNTING POLICIES

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2014, as described in those financial statements on pages 54 to 59.

Recent accounting developments

The following standards, amendments and interpretations have been issued by the International Accounting Standards Board (IASB) or by the International Financial Reporting Interpretations Committee (IFRIC) and have been endorsed by the EU.

In preparing the condensed consolidated half-yearly financial information the Group has adopted the following Standards, amendments and interpretations which are effective for 2015 and will be adopted for the year ended 31 December 2015:

• Annual Improvements cycle 2010-2012.
• Annual Improvements cycle 2011-2013.

The adoption of these standards and amendments has not had a material impact on the interim financial information.

The following standards, amendments and interpretations to existing standards issued but not yet effective in 2015 have not been early adopted:

• Amendment to IAS 19 - Employee benefits
• IFRS 9 - Financial instruments
• IFRS 14 – Regulatory deferral accounts
• IFRS 15 – Revenue from customer contracts
• Amendment to IFRS 11,'Joint arrangements' on acquisition of an interest in a joint operation
• Amendment to IAS 16 ,'Property, plant and equipment' and IAS 38,'Intangible assets', on depreciation and amortisation
• Amendments to IAS 16, 'Property, plant and equipment' and IAS 41, 'Agriculture' on bearer plants
• Amendments to IAS 27, 'Separate financial statements' on equity accounting
• Amendments to IFRS 10, 'Consolidated financial statements' and IAS 28,'Investments in associates and joint ventures' on sale or contribution of assets
• Amendments to IFRS 10, 'Consolidated financial statements' and IAS 28,'Investments in associates and joint ventures' on applying the consolidation exemption
• Annual improvements (2014)
• Amendments to IAS 1,'Presentation of financial statements' disclosure initiative

Financial Instruments

The carrying value of cash, trade and other receivables, trade and other payables and borrowings also represent their estimated fair values. There are no material differences between carrying value and fair value at 30 June 2015.

Within Trade and other payables is deferred consideration of £8.1m (2014: 10.7m) being the best estimate of the amount that will be settled through contractually agreed price discounts over the next year. Long term deferred consideration balances are discounted at 2.5%.

Additional disclosure of the basis of measurement and policies in respect of financial instruments are described on pages 77 to 80 of our 2014 Annual Report and remain unchanged at 30 June 2015.

Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2014, with the exception of changes in estimates that are required in determining the provision for income taxes.

Impairment

No Impairment charges have been recognised in the period to 30 June 2015. In the prior year as part of IQE’s global reorganisation plan, IQE recognised provisions for fixed asset impairments of £4.9m. The impairment review was conducted in accordance with IAS 36. A provision was recognised to write the carrying value of assets down to recoverable amount which is the higher of fair value less cost to sell and value in use. Where the recoverable amount was based on value in use the cash flows were discounted at a pre-tax discount rate of 11%.

3 PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties impacting the Group are described on pages 33 to 34 of our 2014 Annual Report and remain unchanged at 30 June 2015.

They include: competition, technological change, supply chain, retention of key employees, Interest rate risk, credit risk currency risk, liquidity risk and capital risk.

4. SEGMENTAL INFORMATION

5 ADJUSTED PROFIT MEASURES

The group’s results are reported after a number of imputed non-cash charges and non-recurring items.  Therefore, we have provided additional information to aid an understanding of the group’s performance.

The adjustments above in H1 2015 are non-cash items relating to acquisition accounting and share based payments.

The deferred tax credit of £0.2m (2014: £3.9m charge) reflects the net deferred tax impact associated with these items.

The adjustments which are classified within gross margin are £0.7m (2014: £1.0m) of the share based payment charge. During 2014 further adjustments of £3.1m of the cash costs of restructuring and a £1.4m inventory provision were also recognised within gross margin.

As previously reported, through 2013 and 2014 the group was engaged in restructuring and reorganising its global operations.   This necessitated incurring certain cash costs and creating provisions for asset impairments and future lease costs. No further restructuring costs have been incurred in H1 2015.

During 2014 of the £16.1m of costs relating to restructuring and reorganisation, £4.8m were cash costs. The asset and lease provisions recorded during 2014 primarily related to the group setting aside its Singapore facility and certain equipment for use by a new joint venture called the Compound Semiconductor Development Centre (“CSDC”).  The CSDC has been established to accelerate the development of compound semiconductor technology in Singapore, and to provide an effective incubator for bringing new innovations to market. In return, IQE will be the production partner for the high volume manufacturing that emerges from this incubator.  The asset impairments related to equipment (£4.9m) and inventories (£1.4m), and the provision for onerous leases (£6.7m).  There were no further provisions relating to restructuring in H1 2015. These provisions are accounting estimates based on judgements, accordingly, the actual amounts may differ from these estimates.

Also during 2014 the Group generated a non-cash profit of £9.9m arising from a reduction in the estimated remaining deferred consideration (settled via trade discount) in respect of a previous acquisition. This was classified within other income and expenses in the consolidated income statement.

*Exceptional items impacting EBITDA include the following items: impairment of assets/investments, provision for onerous lease, wireless business unit re-organisation costs and the release of contingent deferred consideration.

Basic earnings/(loss) per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares during the period.

Diluted earnings/(loss) 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 period. 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.

As part of the re-organisation and rationalisation of the Group’s facilities the Group ceased its manufacturing activities in Singapore and established the Compound Semiconductor Development Centre. The provision above represents the onerous lease obligation in respect of the Singapore property. This is expected to be utilised over the next four years. The provision has been discounted using a risk free rate of 2.5%.

In the period to the 30 June 2015, 1,799,123 (H1 2014: 831,038) ordinary shares were issued to satisfy employee share schemes.

11 POST BALANCE SHEET EVENTS

On 9 July 2015 the group entered into a joint venture with Cardiff University to create the Compound Semiconductor Centre Limited (“CSC”). The CSC’s aim is to lead the development and commercialization of Compound Semiconductor technologies in Europe.

The CSC is jointly owned and jointly controlled by IQE plc and Cardiff University.  To establish the CSC, IQE contributed equipment with a market value of £12m, which was matched by a £12m cash contribution from Cardiff University. IQE will also license certain intellectual property (IP) to the CSC. The CSC has been established from 1 August 2015, which will create a non-cash exceptional gain of approximately £4.7m in IQE’s full year financial statements due to the difference between the book value and market value of the equipment contributed by IQE.  Also, on that date, IQE will receive and recognise revenue of £2m relating to the IP license.

On 15 September 2015, an exclusive license and option agreement to acquire Translucent’s unique ‘cREO™’ technology.  Under this new agreement, IQE will pay Silex Ststems USD 1.5 million within six months in consideration of the licence and option agreement, which will include the transfer of a range of manufacturing and characterisation equipment from Translucent to IQE and also includes the exclusive services of two key engineers for 12 months in order to transfer the cREO™ technology to IQE.

The agreement also includes an exclusive option for IQE to acquire the cREO technology and IP portfolio for a consideration of USD 5 million within 6 months of exercise of the option, plus a long term Royalty agreement of 3% of epi products sold using the cREO technology transferred, or 6% of cREO templates sold using the cREO technology transferrred.