2020 Full Year Results
25/03/2021 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20210325:nGNEbl4N1p&default-theme=true
IQE plc
(“IQE” or the “Group”)
2020 FULL YEAR RESULTS
Cardiff, UK
25 March 2021
Record revenue of £178m underpinned by the start of the 5G mega-cycle
IQE plc (AIM: IQE), the leading supplier of advanced wafer products and
material solutions to the semiconductor industry, announces its full year
results for the year ended 31 December 2020.
2020 Financials
FY 2020 £’m* FY 2019 £’m* Change (%)
Revenue 178.0 140.0 27.1
Adjusted EBITDA 30.1 16.2 85.8
Operating loss (5.5) (18.8)
Adjusted operating profit/loss 5.4 (4.7)
Reported loss after tax (2.9) (35.1)
Adjusted diluted EPS(p) 0.29p (2.46p)
Net cash generated from operations 35.5 8.9 298.9
Adjusted cash flow from operations 36.3 16.5 120.0
Capital investment (PP&E) 5.0 31.9 (84.3)
Net cash/(debt)** 1.9 (16.0)
* All figures £’m excluding adjusted diluted EPS.
** Net (debt) / funds excludes IFRS16 lease liabilities.
Adjusted Measures: The Directors believe that the adjusted measures provide a
more useful comparison of business trends and performance. Adjusted measures
exclude certain non-cash items, non-operational items and significant
infrequent items that would distort period on period comparability. The
following highlights of the full year results is based on these adjusted
profit measures, unless otherwise stated.
Financial Summary
* Record revenue performance of £178.0m (FY 2019: £140.0m) representing 27%
YoY revenue growth driven by the start of the 5G mega-cycle * Wireless
revenue of £94.2m (FY 2019: £68.2m) representing 38% YoY growth, driven by
5G infrastructure deployments in Asia, in particular GaN on SiC for mMIMO base
stations and 5G handset market penetration, where there has been an increase
in GaAs content versus 4G phones
* Photonics revenue of £81.6m (FY 2019: £69.8m) representing 17% YoY growth,
driven by continued growth in 3D Sensing and other advanced sensing
applications, in particular epiwafers for Direct Time-of-Flight (DToF) camera
modules that are enabling augmented reality
* Foreign exchange headwind of £0.5m (constant currency USD revenue growth of
27.5% YoY)
* Net cashflow from operations of £35.5m (FY 2019: £8.9m) resulting from the
strong trading performance, capital spending controls and working capital
management, leading to a net cash position (excluding lease liabilities) of
£1.9m as at 31 December 2020 (FY 2019: net debt of £16m)
* Increase in profitability with an adjusted operating profit of £5.4m (FY
2019: £(4.7m) loss) as a result of revenue growth and the benefits of high
operational gearing
* Reported operating loss of £(5.5)m (FY 2019: £(18.8)m) as a result of
exceptional impairment charges and legal costs reported at the half year,
offset by the proceeds from the settlement of a legal dispute resolved in
IQE’s favour
* Capital expenditure reduced to £5.0m on PP&E (FY 2019: £31.9m) following
the completion of the infrastructure phase of the Group’s capacity expansion
in 2018 and 2019
Strategic and Operational Highlights
* Business continuity maintained at all global sites during the COVID-19
pandemic with no interruptions to production
* Consolidation of US MBE manufacturing activities at North Carolina site by
2024, with transition underway
* Acquisition of the 10% minority interest in IQE’s Taiwanese subsidiary,
subject to an ongoing statutory Court process regarding valuation
* Settlement in IQE’s favour in a multifaceted intellectual property legal
dispute, resulting in $2.5m cash being received in February 2021
* Three new Aixtron G4 tools ordered in Q1 2021 to support volume growth for
Wireless GaAs in Taiwan
* Strong progress in new product development including IQepiMo™ template
technology for RF Filters, IQGeVCSEL 150™ technology for 6” VCSELs on
Germanium (Ge), a critical step in the pathway to 8” VCSEL technology, and
post year end IQDN-VCSEL™ technology for advanced sensing applications at
longer wavelengths on 150 mm GaAs substrates
* The search for a new CEO who will lead IQE during the next phase of its
growth is ongoing. The appointment of a new CEO will facilitate Drew
Nelson’s transition to becoming a board member with the title of President.
Dr Drew Nelson, Chief Executive Officer of IQE, said:
“2020 was a year unlike any other and I’d like to extend my thanks to all
of our staff who have shown their commitment and resilience in rising to the
challenges we faced. Despite the global uncertainty that we encountered, the
strength and diversification of our business enabled us to deliver record
revenues of £178m, representing a 27% year-on-year increase.
At the same time, we have made positive progress against our strategy and
recorded strong growth across our Wireless and Photonics divisions, despite
the external pressures.
This progress, combined with the return to a cash positive position and the
range of unique materials solutions for high performance devices in our
development pipeline, ensures we are well placed to maintain our leadership
position as the 5G mega-cycle gathers pace in the coming years”.
Current trading and H1 2021 outlook
After a consistently strong year in 2020 across IQE’s broad portfolio of
products, trading has continued positively in 2021. In particular, revenues
for Wireless GaAs epiwafers are strong as a result of continued 5G handset
market penetration and increased GaAs content. In addition, demand for 3D
sensing, advanced sensing applications and communications products continues
to remain positive.
IQE is well positioned for further 5G related GaN on SiC growth over the
multi-year replacement cycle. In the first half of FY21, revenues of GaN on
SiC are expected to be lower than in H1 FY20 amid lower market estimates for
mMIMO deployment in Asia. Beyond the near term, the opportunities for this and
other GaN on Si technologies are very strong as global roll outs of 5G gather
pace.
The Group is experiencing a foreign exchange headwind in FY 21 on a reported
basis, as the Group’s revenues are predominantly earned in USD but are
reported in GBP.
The Group expects revenue and Adjusted EBITDA in the first half of 2021 to be
similar to H1 FY20 on a constant currency basis.
Capital expenditure on PP&E for FY21 is expected to be in the range of £20m
to £30m as the Group resumes investment in capacity for specific growth
platforms, including three new reactors for Taiwan to underpin further growth
in FY22. Capitalisation of development costs are expected to be in the range
of £7m to £10m for the full year as the Group continues to invest in future
products to meet anticipated growing demand for compound semiconductors driven
by the macro trends of 5G and connected devices.
Contacts:
IQE plc
+44 (0) 29 2083 9400
Drew Nelson
Tim Pullen
Amy Barlow
Peel Hunt LLP (Nomad and Joint Broker)
+44 (0) 20 7418 8900
Edward Knight
Paul Gillam
Nick Prowting
Citigroup Global Markets Limited (Joint Broker)
+44 (0) 20 7986 4000
Christopher Wren
Peter Catterall
Headland Consultancy (Financial PR)
Andy Rivett-Carnac: +44 (0) 7968 997 365
Chloe Francklin: +44 (0)78 3497 4624
Glossary
GaAs Gallium Arsenide
GaN Gallium Nitride
mMIMO Massive MIMO (Multiple-Input, Multiple Output)
SiC Silicon Carbide
VCSEL Vertical Cavity Surface Emitting Laser
ABOUT IQE
http://iqep.com
IQE is the leading global supplier of advanced compound semiconductor wafers
and materials solutions that enable a diverse range of applications across:
* handset devices
* global telecoms infrastructure
* connected devices
* 3D sensing
As a scaled global epitaxy wafer manufacturer, IQE is uniquely positioned in a
market which has high barriers to entry. IQE supplies the whole market and is
agnostic as to the winners and losers at chip and OEM level. By leveraging the
Group’s intellectual property portfolio including know-how and patents, it
produces epitaxy wafers of superior quality, yield and unit economics.
IQE is headquartered in Cardiff UK, with c. 650 employees across nine
manufacturing locations in the UK, US, Taiwan and Singapore, and is listed on
the AIM Stock Exchange in London.
Financial Review
The Group reports financial performance in accordance with International
Financial Reporting Standards adopted by the European Union (‘IFRS’) and
provides disclosure of additional alternative non IFRS GAAP performance
measures to provide further understanding of financial performance. Details of
the alternative performance measures used by the Group including a
reconciliation to reported IFRS GAAP performance measures is set out in note 5
to the financial statements.
On 11 March 2020, the World Health Organisation declared the outbreak of a
coronavirus (COVID-19) a pandemic. The COVID-19 outbreak created uncertainty
in global economies and posed a number of initial risks and uncertainties in
the markets in which the Group operates although ultimately these have not
adversely impacted financial performance during the year with strong global
growth trends in compound semiconductor markets continuing and the Group
experiencing little or no disruption to its manufacturing operations as a
result of the pandemic.
The Group’s trading has remained resilient throughout the year with
significant growth experienced in a number of markets that has resulted in the
delivery of record revenue of £178.0m (2019: £140.0m) with strong growth
experienced in each of the Group’s primary business segments.
The Group’s Wireless business segment represents the largest proportion of
the Group’s revenue accounting for 52.9% (2019: 48.7%) of total wafer sales
with Photonics representing 45.8% (2019: 49.8%) and CMOSS++ representing 1.2%
(2019: 1.5%).
Wireless wafer revenues increased 38.2% to £94.2m (2019: £68.2m). The
increase in Wireless revenue primarily reflects increased demand for GaAs
wafers for 5G handset power amplifiers fuelled by growing end market demand
for ‘5G ready’ smartphones, increased demand for GaN on SiC wafers for 5G
infrastructure related to initial deployments of 5G base stations and demand
for high performance GaN on SiC wafers for advanced RF applications.
Photonics wafer revenues were up 17.0% to £81.6m (2019: £69.8m) with the
Group experiencing consistently high demand for GaAs VCSEL wafers for 3D
sensing applications throughout the year and continuing strong demand for high
performance GaSb wafers for advanced sensing applications.
Gross profit increased from £21.4m to £33.2m. The increase in gross profit
reflects a combination of higher trading volumes and an improvement in overall
gross profit margin percentage to 18.6% (2019: 15.3%) as the Group has
benefited from greater capacity utilisation in the current year. Adjusted
gross profit, which excludes the charge for share based payments, increased
from £20.9m to £33.3m with a gross margin improvement from 14.9% to 18.7%.
Selling, general and administrative (‘SG&A’) expenses decreased from
£36.3m to £34.7m. Adjusted SG&A, which excludes adjustments for share
based payments, restructuring costs, patent dispute legal costs and certain
non-current asset impairments increased from £25.8m to £27.8m primarily
reflecting an increase in investment in corporate functions and employee
headcount as the Group continues to grow.
Restructuring costs totalling £0.16m (2019: £0.81m) relate to employee
retention bonuses associated with the announced closure of the Group’s
manufacturing facility in Pennsylvania (US). Restructuring costs in 2019
related to site-specific employee related restructuring and final costs
associated with the closure of the Group’s manufacturing facility in New
Jersey (US).
Patent dispute income of £1.7m (2019: £4.3m cost) relates to a settlement
agreement associated with legal costs incurred by the Group that has been
negotiated with the plaintiff following the previously announced arbitration
panel ruling in favour of the Group. Patent dispute income also includes
insurance income received from the Group’s insurers in relation to relevant
costs incurred as part of the dispute partially offset by actual legal costs
incurred during the period.
Impairment of intangibles of £6.5m (2019: £3.8m) relates to the write-down
in value of the Group’s non-filter related cREO™ patent and development
costs following the refocus of resource and investment into cREO™ filter
related development activities. The onerous contract provision of £1.8m
(2019: £nil), which is linked to the commercial applications of the cREO™
technology and represents the cost of minimum guaranteed future royalty
payments related to the historical acquisition of the technology from
Translucent Inc. that are payable in the period prior to the expected
commercial exploitation of the cREO™ filter technology.
Operating loss improved from £18.8m in 2019 to a current year loss of £5.5m.
Reflecting the adjustments noted above, adjusted operating loss of £4.7m in
2019 improved significantly in 2020 with a return to profitability and an
adjusted operating profit of £5.4m. The segmental analysis in note 3 reflects
the adjusted operating margins for the primary segments (before central
corporate support costs). Wireless adjusted operating margins and photonics
operating margins improved from 9.7% and 1.9% in 2019 to 12.1% and 11.1% in
2020, primarily reflecting increases in volume and increased utilisation of
manufacturing capacity.
The credit of £3.8m (2019: £4.7m charge) associated with the Group’s share
of losses in its joint venture, Compound Semiconductor Centre Limited,
reflects the reversal of previously recognised losses as part of the
application of the loss absorption requirement of IAS28.38 following an equal
and opposite increase in the level of impairment loss associated with the
Group’s preference share debt due from CSC. The loss absorption credit of
£3.8m recorded in ‘share of losses in joint venture’ and the increased
impairment charge of £3.8m relating to the preference share financial asset
recorded as an ‘impairment loss on financial assets’ has no net impact on
the Group’s loss for the year.
Finance costs increased to £2.2m from £1.5m in 2019 reflecting a combination
of the Group’s utilisation of its bank borrowing facilities and the unwind
of discounting associated with lease liabilities.
The tax credit of £1.0m (2019: £10.2m charge) reflects an effective tax rate
of ~25% with the credit principally arising as a result of the recognition of
deferred tax assets for certain current year UK trading losses. The tax charge
of £10.2m in 2019 primarily reflected increased deferred tax charges relating
to the partial reversal of previously recognised US deferred tax assets. A
forecast shift in the balance of the Group’s projected manufacturing
production, a position that remains unchanged in the current year, resulted in
a shift in forecast profits between the US and rest of the world. The forecast
shift in manufacturing and profitability in the US has restricted the
Group’s ability to recognise deferred tax assets for historical US trading
losses and in 2019 resulted in the partial reversal of previously recognised
US deferred tax assets with a tax impact of ~£9.6m. The effective tax rate of
21% (2019: 10%) applicable to the tax charge of £1.5m (2019: £1.8m) on
adjusted items is reflective of applicable statutory tax rates.
The reduction in the loss for the year to £2.9m (2019: £35.1m) reflects a
combination of significant growth in the wireless and photonics business
segments, improved profitability within both business segments and a reduction
in the impact of adjusted non-cash and other non-operational items which at an
adjusted level, has resulted in a return to profitability, with an adjusted
profit for the year of £2.7m (2019: £19.0m loss).
Basic and diluted loss per share has improved from a loss per share of 4.51p
to a loss of 0.41p in the current year with adjusted basic earnings per share
of 0.29p (2019: 2.46p loss) and adjusted diluted earnings per share of 0.29p
(2019: 2.46p loss) reflecting the Group’s return to profitability at the
adjusted profit level.
Cash generated from operating activities increased significantly in the year
to £33.3m (2019: £8.1m) reflecting the Group’s positive underlying trading
performance and careful management of working capital. This increase in cash
generation combined with a reduction in capital expenditure and technology
development costs has reduced cash expenditure on investing activities from
£41.8m to £11.8m and resulted in a significant strengthening in the
Group’s balance sheet position with a full year net funds position of £1.9m
(excluding lease liabilities) compared to a net debt position of £156.0m
(excluding lease liabilities) in 2019.
Cash expenditure as part of investing activities includes £1.4m of cash cost
associated with the acquisition of the minority interest in the Group’s
Taiwanese subsidiary, IQE Taiwan ROC. On 5 October 2020, the group acquired
the remaining 9.82% of issued shares held by third party minority shareholders
in its subsidiary, IQE Taiwan ROC, taking its equity ownership from 90.18% to
100.00%. The acquisition was affected using a statutory share swap arrangement
under Taiwan’s Business Mergers and Acquisition Law with the final total
consideration payable to be determined by the Taiwan Court. Consideration paid
to date consists of £1.4m which has been settled via the issuance of
2,606,689 ordinary shares in IQE plc and cash consideration of £1.4m which
for a minority of selling shareholders is subject to adjustment dependent upon
a price determined by the Taiwan Court.
Equity shareholder funds totals £260.4m (2019: £270.4m) with the movement
from 2019 primarily reflecting the loss for the year, the impact of the
acquisition of the Taiwanese minority interest and adverse foreign exchange
differences arising on the retranslation of net investments in overseas
subsidiaries.
Financial Summary
2020 £’000 2019 £’000
Revenue 178,016 140,015
Adjusted EBITDA (see below) 30,101 16,246
Operating (loss) / profit
· Adjusted* 5,386 (4,676)
· Reported (5,517) (18,802)
(Loss) / profit after tax
· Adjusted* 2,702 (19,010)
· Reported (2,893) (35,128)
Net cash flow from operations
Before adjustments (note 4) 36,324 16,530
Reported 35,457 8,948
Free cash flow**
Before exceptional cash flows 23,566 (25,445)
Reported 22,699 (33,027)
Net (debt)/cash excluding lease liabilities*** 1,923 (15,970)
Equity shareholders’ funds 260,435 266,593
Basic EPS – adjusted**** 0.29p (2.46p)
Basic EPS – unadjusted (0.41p) (4.51p)
Diluted EPS – adjusted**** 0.29p (2.46p)
Diluted EPS – unadjusted (0.41p) (4.51p)
Consolidated income statement for the year ended 31 December 2020
2020 £’000 2019 £’000
Revenue 178,016 140,015
Cost of sales (144,866) (118,631)
Gross profit 33,150 21,384
Selling, general and administrative expenses (34,697) (36,297)
Impairment loss on financial assets (3,788) (4,134)
Profit on disposal of property, plant and equipment (182) 245
Operating loss (5,517) (18,802)
Finance costs (2,165) (1,458)
Reversal / share of losses of joint ventures accounted for using the equity method 3,788 (4,688)
Adjusted profit / (loss) before income tax 3,221 (7,019)
Adjustments (7,115) (17,929)
Loss before income tax (3,894) (24,948)
Taxation 1,001 (10,180)
Loss for the year (2,893) (35,128)
Loss attributable to:
Equity shareholders (3,271) (35,473)
Non-controlling interest 378 345
(2,893) (35,128)
Loss per share attributable to owners of the parent during the year
Basic loss per share (0.41p) (4.51p)
Diluted loss earnings per share (0.41p) (4.51p)
Adjusted basic and diluted loss per share are presented in note 5.
All items included in the loss for the year relate to continuing operations.
Non-controlling interest relates to minority shareholder interests in the
Group’s subsidiary, IQE Taiwan ROC, prior to the acquisition of the minority
shareholding on 5 October 2020.
Consolidated statement of comprehensive income for the year ended 31 December
2020
2020 £’000 2019 £’000
Loss for the year (2,893) (35,128)
Exchange differences on translation of foreign operations* (6,104) (3,654)
Total comprehensive expense for the year (8,997) (38,782)
Total comprehensive expense attributable to:
Equity shareholders (9,482) (39,084)
Non-controlling interest 485 302
(8,997) (38,782)
* Items that may be subsequently be reclassified to profit or loss.
Items in the statement above are disclosed net of tax.
Consolidated balance sheet as at 31 December
2020
2020 £’000 2019 £’000
Non-current assets
Intangible assets 105,772 118,456
Fixed asset investments - 75
Property, plant and equipment 126,229 136,482
Right of use assets 37,339 39,355
Deferred tax assets 7,821 5,679
Other financial assets - -
Total non-current assets 277,161 300,047
Current assets
Inventories 30,887 30,668
Trade and other receivables 38,575 33,065
Cash and cash equivalents 24,663 8,800
Total current assets 94,125 72,533
Total assets 371,286 372,580
Current liabilities
Trade and other payables (35,605) (26,367)
Current tax liabilities (1,426) (1,162)
Bank borrowings (6,201) (2,034)
Lease liabilities (4,798) (3,083)
Provisions for other liabilities and charges (515) -
Total current liabilities (48,545) (32,646)
Non-current liabilities
Bank borrowings (16,539) (22,736)
Lease liabilities (42,226) (44,895)
Deferred tax liabilities (2,054) (1,860)
Provisions for other liabilities and charges (1,487) -
Total non-current liabilities (62,306) (69,491)
Total liabilities (110,851) (102,137)
Net assets 260,435 270,443
Equity attributable to the shareholders of the parent
Share capital 8,004 7,961
Share premium 154,185 152,385
Retained earnings 62,089 63,826
Exchange rate reserve 21,291 27,502
Other reserves 14,866 14,919
260,435 266,593
Non-controlling interest - 3,850
Total equity 260,435 270,443
Consolidated statement of changes in equity for the year ended 31 December
2020
Share capital Share premium Retained earnings Exchange Rate reserve Other reserves Non-controlling interests Total equity
£’000 £’000 £’000 £’000 £’000 £’000 £’000
At 1 January 2020 7,961 152,385 63,826 27,502 14,919 3,850 270,443
Comprehensive expense
(Loss) / profit for the year - - (3,271) - - 378 (2,893)
Other comprehensive expense for the year - - - (6,211) - 107 (6,104)
Total comprehensive expense for the year - - (3,271) (6,211) - 485 (8,997)
Transactions with owners
Share based payments - - - - 55 - 55
Tax relating to share options - - - - 57 - 57
Proceeds from shares issued 17 388 - - (165) - 240
Acquisition of non-controlling interest 26 1,412 1,534 - - (4,335) (1,363)
Total transactions with owners 43 1,800 1,534 - (53) (4,335) (1,011)
At 31 December 2020 8,004 154,185 62,089 21,291 14,866 - 260,435
Share capital Share premium Retained earnings Exchange rate reserve Other reserves Non-controlling interests Total equity
£’000 £’000 £’000 £’000 £’000 £’000 £’000
At 1 January 2019 7,767 151,147 99,299 31,113 16,404 3,548 309,278
Comprehensive expense
(Loss) / profit for the year - - (35,473) - - 345 (35,128)
Other comprehensive expense for the year - - - (3,611) - (43) (3,654)
Total comprehensive expense for the year - - (35,473) (3,611) - 302 (38,782)
Transactions with owners
Share based payments - - - - (641) - (641)
Tax relating to share options - - - - (124) - (124)
Proceeds from shares issued 194 1,238 - - (720) - 712
Total transactions with owners 194 1,238 - - (1,485) - (53)
At 31 December 2019 7,961 152,385 63,826 27,502 14,919 3,850 270,443
Other reserves relates to share based payments.
Consolidated cash flow statement for the year ended 31 December 2020
2020 £’000 2019 £’000
Cash flows from operating activities
Adjusted cash inflow from operations 36,324 16,530
Cash impact of adjustments (867) (7,582)
Cash generated from operations 35,457 8,948
Net interest paid (1,142) (671)
Income tax paid (993) (151)
Net cash generated from operating activities 33,322 8,126
Cash flows from investing activities
Purchase of property, plant and equipment (4,993) (31,864)
Purchase of intangible assets (731) (1,806)
Capitalised development expenditure (4,678) (8,427)
Proceeds from disposal of property, plant and equipment - 263
Acquisition of minority interest (1,363) -
Acquisition of subsidiary, net of cash acquired - 10
Net cash used in investing activities (11,765) (41,824)
Cash flows from financing activities
Proceeds from issuance of ordinary shares 240 712
Proceeds from borrowings 5,000 41,895
Repayment of borrowings (7,030) (17,125)
Payment of lease liabilities (3,764) (3,651)
Net cash (used) / generated from financing activities (5,554) 21,831
Net increase / (decrease) in cash and cash equivalents 16,003 (11,867)
Cash and cash equivalents at 1 January 8,800 20,807
Exchange losses on cash and cash equivalents (140) (140)
Cash and cash equivalents at 31 December 24,663 8,800
Notes to the financial statements for the year ended 31 December 2020
1. General information
IQE plc (‘the company’) and its subsidiaries (together ‘the Group’)
develop, manufacture and sell advanced semiconductor materials. The Group has
manufacturing facilities in Europe, United States of America and Asia and
sells to customers located globally.
IQE plc is a public limited company incorporated in the United Kingdom under
the Companies Act 2006. The Company is domiciled in the United Kingdom and is
quoted on the Alternative Investment Market (AIM). The address of the
Company’s registered office is Pascal Close, St Mellons, Cardiff, CF3 0LW.
1. Basis of preparation and significant accounting policies
2.1 Basis of preparation
The financial information set out in the announcement does not constitute the
Group's statutory accounts for the year ended 31 December 2020 or 31 December
2019. Statutory accounts for 2019 have been delivered to the registrar of
companies, and those for 2020 will be delivered in due course. The auditor has
reported on those accounts and their report was (i) unqualified, (ii) did not
include references to any matters to which the auditors drew attention by way
of emphasis without qualifying their report and (iii) did not contain
statements under section 498 (2) or (3) of the Companies Act 2006.
The financial statements have been prepared and approved by the directors in
accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006 (“Adopted IFRSs”). The financial
statements have been prepared under the historical cost convention except
where fair value measurement is required by IFRS the accounting policies have
been consistently applied to all years presented.
2.2 Going concern
The Group made a loss of £2,893,000 (2019: £35,128,000 loss) but had an
increase in cash and cash equivalents of £15,863,000 (2019: £12,007,000
decrease) for the year ended 31 December 2020.
On 11 March 2020, the World Health Organisation declared the outbreak of a
coronavirus (COVID-19) a pandemic. The COVID-19 outbreak continues to create
uncertainty in global economies and the markets in which the Group operates
which pose risks to the Group’s continuity of business operations, demand
for its products and its forecast future financial performance given current
world health and global economic conditions. The following matters have been
considered by the directors in determining the appropriateness of the going
concern basis of preparation in the financial statements:
* The Group’s operations are geographically diversified. Manufacturing
operations are located at ten different sites across three continents,
significantly lessening the impact of potential disruption at any single site
as a result of the ongoing Coronavirus pandemic. All manufacturing sites
continue to remain operational and production has not been affected by any
disruption at any of the Group’s global sites.
* The Group dual or multi-sources key raw materials (substrates, gases, spares
and consumables) wherever possible, from a broad range of global suppliers,
reducing the likelihood of potential disruption to production from any single
supplier. The Group works closely with suppliers and customers to manage
inventory levels in order to create supply chain resilience against potential
disruption. All manufacturing sites continue to remain operational and
production has not been affected by any supply chain disruption.
* The Group’s trading has remained resilient throughout the year with
significant growth experienced in a number of markets that has resulted in the
delivery of record revenue of £178,016,000 (2019: £140,015,000) and an
increase in adjusted profit before tax to £3,221,000 (2019: £7,019,000
loss).
* Net debt (excluding lease liabilities) has significantly reduced with the
group ending the financial year in a net funds (excluding lease liabilities)
position of £1,923,000 (2019: £15,970,000 net debt) as a result of a
combination of increased cash generated from operations and a reduction in
capital expenditure following the completion of the infrastructure phase of
the Group’s expansion in Massachusetts USA, Hsinchu Taiwan and at its
Newport Foundry in South Wales. Net funds (excluding lease liabilities)
consists of £24,663,000 (2019: £8,800,000) of cash net of bank loans of
£22,740,000 (2019: £24,770,000) repayable over a period to 29 August 2024.
* On 24 January 2019, the Group agreed a £25,735,000 ($35,000,000) three-year
multi-currency revolving credit facility from HSBC Bank plc which is undrawn.
The Group has complied with all covenants associated with the facility.
* On 29 August 2019, the Group agreed a £30,000,000 five-year Asset Finance
Loan facility from HSBC Bank of which £25,000,000 has been drawn. The Group
has complied with all covenants associated with the facility.
* On 10 December 2020, the Group agreed the extension of the relaxation of
certain banking covenants applicable at 31 December 2020 and 30 June 2021 to
include 31 December 2021 as an on-going precautionary measure designed to
increase covenant headroom and availability of cash funding under the terms of
the Group’s committed bank facilities.
* The Group generated cash from operating activities of £33,322,000 (2019:
£8,126,000) and its financial forecasts for the period up to and including 31
December 2022 show that the Group is forecast to continue to comply with its
banking covenants and has adequate cash resources to continue operating for
the foreseeable future.
* The Group’s trading has remained resilient throughout the year with
significant growth experienced in a number of markets with record revenue of
£178,016,000 (2019: £140,015,000) and strong growth delivered in each of the
Group’s primary business segments. Wireless and Photonics growth drivers,
which include increased demand for GaAs wafers for 5G smartphone power
amplifiers, GaN on SiC wafers for 5G infrastructure and advanced RF
applications, VCSEL wafers for 3D sensing applications and GaSb wafers for
infrared applications, continue to remain strong and trading in Q1 2021
remains favourable with positive momentum continuing across the Group’s
Wireless and Photonics business units.
* The Group’s severe but plausible downside financial forecasts have been
prepared with significant reductions to future forecast revenues, designed to
reflect severe downside scenarios associated with demand risks, for a 24-month
period to 31 December 2022. The severe but plausible downside scenario,
applied to the Group’s financial forecasts, which take account of current
trading and customer demand, assumes a 10% reduction in 2021 revenue and a 22%
reduction in 2022 revenue partially offset by mitigations within the control
of the company, including deferred investment in employee related costs across
the forecast period and certain capital expenditure mitigations in 2022. The
severe but plausible downside scenario illustrates that the Group is forecast
to continue to comply with its banking covenants but would require either the
extension, or refinancing of its current revolving credit facility from HSBC
Bank plc on expiry in January 2022. The severe but plausible downside scenario
illustrates that a facility of ~£9,000,000, significantly below the Group’s
current committed facility of £25,735,000 could be required in 2022. The
Group has a long-standing and trusted relationship with its bankers, HSBC Bank
plc, who remain supportive and who have, at the date of this report, extended
formal credit approved heads of terms for a one-year extension of the
Group’s £25,735,000 ($35,000,000) revolving credit facility until January
2023. The credit approved heads of terms include banking covenants consistent
with the covenant arrangements applicable until expiry of the existing
facility. On this basis, the directors believe that the group has, or will
have access, to adequate cash resources to continue operating for the
foreseeable future even in a severe but plausible downside scenario.
The Group meets its day-to-day working capital and other cash requirements
through its bank facilities and available cash. The Group’s cash flow
forecasts and projections, in conjunction with the level of assessed covenant
headroom on the Group’s committed bank facilities show that the Group and
the Company have adequate cash resources to continue operating and to meet its
liabilities as they fall due for the assessed period to 31 December 2022, such
that the directors consider it appropriate to adopt the going concern basis of
accounting in preparing the consolidated financial statement.
1. Changes in accounting policy and disclosures
2. New standards, amendments and interpretations.
The following new standards, amendments and interpretations have been adopted
by the Group for the first time for the financial year beginning on 1 January
2020:
* Amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial
Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial
Instruments: Disclosures’ to provide certain reliefs, including in relation
to hedge accounting, arising from issues related to interest rate benchmark
reform.
* Amendments to IFRS 3 ‘Business Combinations’ which clarifies the
definition of a business.
* Amendments to IAS 1 ‘Presentation of financial statements’ and IAS 8
‘Accounting policies, changes in accounting estimates and errors’ which
are intended to make the definition of material easier to understand.
* Amendments to references to the ‘Conceptual framework’ in IFRS
standards.
The adoption of these standards, amendments and interpretations has not had a
material impact on the financial statements of the Group or parent company.
(b) New standards, amendments and interpretations issued but not effective and
not adopted early
A number of new standards, amendments to standards and interpretations which
are set out below are effective for annual periods beginning after 1 January
2020 and have not been applied in preparing these consolidated financial
statements.
* Amendment to IFRS 3 ‘Business combinations’ to update references to the
Conceptual Framework for Financial Reporting without changing the accounting
requirements for business combinations.
* Amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial
Instruments: Recognition and Measurement’, IFRS 7 ‘Financial Instruments:
Disclosures, IFRS 4 ‘Insurance Contracts’, IFRS 16 ‘Leases’ related to
interest rate benchmark reform (phase two) and the issues that arise from the
implementation of the reforms, including the replacement of one benchmark with
an alternative one.
* Amendment to IFRS 16 ‘Leases’ which provides an optional practical
expedient for lessees from assessing whether a rent concession related to
COVID-19 is a lease modification.
* IFRS 17 ‘Insurance contracts’ which establishes the principles for the
recognition, measurement, presentation and disclosure of insurance contracts
and supersedes IFRS 4 ‘Insurance Contracts’
* Amendments to IAS 1 ‘Presentation of financial statements’ on
classification of liabilities which is intended to clarify that liabilities
are classified as either current or non-current depending upon the rights that
exist at the end of the reporting period.
* Amendments to IAS 16 ‘Property, plant and equipment’ to prohibit the
deduction from cost of property, plant and equipment amounts received from
selling items produced while preparing the asset for its intended use with any
such sales and related cost recognised in profit or loss.
* Amendments to IAS 37 ‘Provisions, contingent liabilities and contingent
assets’ to specify which costs a company includes when assessing whether a
contract will be loss making.
* Annual improvements to make minor amendments to IFRS 1 ‘First-time
adoption of IFRS’, IFRS 9 ‘Financial Instruments’, IAS 41
‘Agriculture’ and amendments to the illustrative examples accompanying
IFRS 16 ‘Leases’.
The Directors anticipate that at the time of this report none of the new
standards, amendments to standards and interpretations are expected to have a
material effect on the financial statements of the Group or parent company.
3. Segmental analysis
3.1 Description of segments and principal activities
The Chief Operating Decision Maker is defined as the Executive Management
Board. The Executive Management Board, consisting of the Chief Executive
Officer, Chief Financial Officer, Chief Operations Officer, Chief Technology
Officer, Executive VP Global Business Development, Wireless and Emerging
Products and Executive VP Global Business Development, Photonics & Infrared
consider the group’s performance from a product perspective and have
identified three primary reportable segments:
* Wireless – this part of the business manufactures and sells compound
semiconductor material for the wireless market which includes radio frequency
devices that enable wireless communications.
* Photonics – this part of the business manufactures and sells compound
semiconductor material for the photonics market which includes applications
that either transmit or sense light, both visible and infrared.
* CMOSS++ - this part of the business manufactures and sells advanced
semiconductor materials related to silicon which include the combination of
the advanced properties of compound semiconductors with those of lower cost of
silicon technologies.
The Executive Management Board primarily use revenue and a measure of adjusted
operating profit to assess the performance of the operating segments. Measures
of total assets and liabilities for each reportable segment are not reported
to the Executive Management Board and therefore have not been disclosed.
2020 2019
Revenue £’000 £’000
Wireless 94,193 68,166
Photonics 81,627 69,758
CMOS++ 2,196 2,091
Revenue 178,016 140,015
Adjusted operating profit / (loss)
Wireless 11,393 6,590
Photonics 9,080 1,324
CMOS++ (714) (1,304)
Central corporate costs (14,373) (11,286)
Adjusted operating profit / (loss) 5,386 (4,676)
Adjusted items (see note 4) (10,903) (14,126)
Operating loss (5,517) (18,802)
Reversal / share of losses of joint venture accounted for using the equity method 3,788 (4,688)
Finance costs (2,165) (1,458)
Loss before tax (3,894) (24,948)
4. Adjusted profit measures
The Group’s results report certain financial measures after a number of
adjusted items that are not defined or recognised under IFRS including
adjusted operating profit, adjusted profit before income tax and adjusted
earnings per share. The Directors believe that the adjusted profit measures
provide a more useful comparison of business trends and performance and allow
management and other stakeholders to better compare the performance of the
Group between the current and prior year, excluding the effects of certain
non-cash charges, non-operational items and significant infrequent items that
would distort period on period comparability. The Group uses these adjusted
profit measures for internal planning, budgeting, reporting and assessment of
the performance of the business.
The tables below show the adjustments made to arrive at the adjusted profit
measures and the impact on the Group’s reported financial performance.
2020 2019
Adjusted Results £’000 Adjusted Items £’000 Reported Results £’000 Adjusted Results £’000 Adjusted Items £’000 Reported Results £’000
Revenue 178,016 - 178,016 140,015 - 140,015
Cost of sales (144,689) (177) (144,866) (119,145) 514 (118,631)
Gross profit 33,327 (177) 33,150 20,870 514 21,384
Other income - - - - - -
SG&A (27,759) (6,938) (34,697) (25,791) (10,506) (36,297)
Impairment loss on financial assets - (3,788) (3,788) - (4,134) (4,134)
Profit on disposal of PPE (182) - (182) 245 - 245
Operating profit / (loss) 5,386 (10,903) (5,517) (4,676) (14,126) (18,802)
Reversal / share of JV losses - 3,788 3,788 (737) (3,951) (4,688)
Finance costs (2,165) - (2,165) (1,606) 148 (1,458)
Profit / (loss) before tax 3,221 (7,115) (3,894) (7,019) (17,929) (24,948)
Taxation (519) 1,520 1,001 (11,991) 1,811 (10,180)
Profit / (loss) for the period 2,702 (5,595) (2,893) (19,010) (16,118) (35,128)
2020 2019
Pre-tax Adjustment £’000 Tax Impact £’000 Adjusted Results £’000 Pre-tax Adjustment £’000 Tax Impact £’000 Adjusted Results £’000
Share based payments (265) 210 (55) 771 133 904
Amortisation of acquired intangibles - - - (385) 81 (304)
Restructuring (162) 39 (123) (813) 164 (649)
Patent dispute legal fees 1,689 (321) 1,368 (4,308) 775 (3,533)
Impairment – intangibles (6,537) 1,242 (5,295) (3,805) 685 (3,120)
Onerous contract (1,840) 350 (1,490) - - -
Impairment – ROU asset - - - (1,623) - (1,623)
Impairment – financial assets (3,788) - (3,788) (4,134) - (4,134)
Share of JV losses – financial asset 3,788 - 3,788 (3,951) - (3,951)
CSDC acquisition - negative goodwill - - - 171 - 171
Discounting - - - 148 (27) 121
Total (7,115) 1,520 (5,595) (17,929) 1,811 (16,118)
The nature of the adjusted items is as follows:
* Share based payments – The charge (2019: credit) recorded in accordance
with IFRS 2 ‘Share based payment’ of which £177,000 (2019: £514,000
credit) has been classified within cost of sales in gross profit and £88,000
(2019: £257,000 credit) has been classified as selling, general and
administrative expenses in operating profit. £nil cash has been defrayed in
the year (2019: £1,331,000) in respect of employer social security
contributions following the exercise of unapproved employee share options.
* Amortisation of acquired intangibles - The charge of £nil (2019: £385,000)
relates to the amortisation of acquired intangibles arising in respect of fair
value exercises associated with previous corporate acquisitions and has been
classified as selling, general and administrative expenses within operating
profit and is non-cash.
* Restructuring – The charge of £162,000 relates to employee retention
bonus costs relating to the announced closure of the Group’s manufacturing
facility in Pennsylvania, USA. The charge was classified as selling, general
and administrative expenses within operating loss. Cash costs defrayed in the
year total £nil.
The 2019 charge of £813,000 relates to the closure of the Group’s
manufacturing facility in New Jersey, USA at a cost of £226,000 and
site-specific restructuring and employee severance costs of £587,000. The
charge was classified as selling, general and administrative expenses within
operating loss. Cash costs of £1,947,000 related to severance and reactor
decommissioning costs of £1,360,000 associated with the closure of the New
Jersey site and cash costs of £587,000 associated with site specific employee
severance costs.
* Patent dispute legal costs – The credit relates to a settlement agreement
of £1,825,000 (US$2,500,000) associated with legal costs incurred by the
Group that has been negotiated with the plaintiff following an arbitration
panel ruling in favour of the Group on 17 January 2020. The settlement has
been cash received in the post balance sheet period. The credit also includes
an increase in insurance income of £410,000 (2019: £nil) following final
settlement with the Group’s insurers partially offset by legal costs
incurred during the year of £546,000 (2019: £4,308,000). Cash cost, net of
the full insurance receipt of £740,000 ($1,000,000) total £867,000 as a
result of the payment of current and prior period legal costs during the year
of £1,607,000 (2019: £4,304,000).
* Impairment of intangibles – The non-cash charge of £6,537,000 (2019:
£3,805,000) relates to the impairment of the Group’s non-filter related
cREO™ patent and development costs resulting from a lack of current intent
to continue relevant development activities following the refocus of resource
and investment into cREO™ filter related development activities. The
non-cash charge in 2019 related to the impairment of certain development
costs, patent costs and software where the Group took the decision to either
discontinue using the asset or discontinue the relevant technology development
activities.
* Onerous contract – The onerous contract provision of £1,840,000 (2019:
£nil) is non-cash in the current period and represents the cost of minimum
guaranteed future royalty payments associated with the use of cREO™
technology acquired from Translucent Inc.
* Impairment of right of use asset – The non-cash charge of £nil (2019:
£1,623,000) relates to the impairment of the right of use asset relating to
space at the Singapore manufacturing site sub-let by Compound Semiconductor
Development Centre Limited, the Group’s former joint venture that was
acquired during 2019. The charge was classified as selling, general and
administrative expenses within operating loss.
* Impairment of financial asset – The non-cash charge of £3,788,000 (2019:
£4,134,000) relates to the increase in the expected credit loss associated
with the Group’s preference share financial asset due from its joint
venture, CSC.
* Reversal / share of joint venture losses (financial asset) - The Group
treats its preference share financial assets due from its joint venture, CSC,
as a long-term interest in an equity accounted investee and is required to
apply the loss absorption requirements of IAS 28.38 to the carrying amount of
the preference share financial asset, after the application of any expected
credit losses as described above and in note 3.8. Application of the loss
absorption requirements following the increase in expected credit losses has
resulted in the reversal of the Group’s share of previously allocated joint
venture losses to the preference share financial asset resulting in a non-cash
credit of £3,788,000 (2019: £3,951,000 charge) which has been recognised
within ‘share of losses of joint ventures accounted for using the equity
method’ in the Consolidated Income Statement.
* CSDC acquisition negative goodwill – The non-cash credit of £nil (2019:
£171,000) relates to the negative goodwill arising on the Group’s
acquisition of its former joint venture, Compound Semiconductor Centre Limited
(see note 31). The credit was classified as selling, general and
administrative expenses within operating loss.
* Discounting – This relates to the unwind of discounting on long term
financial assets of £nil (2019: £148,000). Discounting is non-cash and has
been classified as finance costs within profit before tax.
The cash impact of adjusted items in the consolidated cash flow statement
represents the cash costs defrayed in 2020 in respect of patent dispute legal
costs, net of insurance income received in respect of patent legal costs
totalling £867,000.
Adjusted EBITDA (adjusted earnings before interest, tax, depreciation and
amortisation) is calculated as follows:
2020 £’000 2019 £’000
Loss attributable to equity shareholders (3,271) (35,473)
Non-controlling interest 378 345
Finance costs 2,165 1,458
Tax (1,001) 10,180
Depreciation of property, plant and equipment 12,983 10,477
Depreciation of right of use assets 3,681 3,590
Amortisation of intangible fixed assets 7,869 8,222
Loss/(profit) on disposal of PPE 182 (245)
Share based payments 265 (771)
Adjusted Items 6,850 18,463
Restructuring 162 813
Patent dispute settlement and legal costs (1,689) 4,308
Impairment of intangibles 6,537 3,805
Onerous contract provision 1,840 -
Impairment of right of use asset - 1,623
Impairment of financial asset 3,788 4,134
Share of joint venture losses (financial asset) (3,788) 3,951
CSDC acquisition negative goodwill - (171)
Adjusted EBITDA 30,101 16,246
5. Loss per share
Basic loss per share is calculated by dividing the loss attributable to
ordinary shareholders by the weighted average number of ordinary shares in
issue during the year.
Diluted loss per share is calculated by dividing the loss attributable to
ordinary shareholders by the weighted average number of shares and the
dilutive effect of ‘in the money’ share options in issue. Share options
are classified as ‘in the money’ if their exercise price is lower than the
average share price for the year. As required by IAS 33, this calculation
assumes that the proceeds receivable from the exercise of ‘in the money’
options would be used to purchase shares in the open market in order to reduce
the number of new shares that would need to be issued.
The directors also present an adjusted earnings per share measure which
eliminates certain adjusted items in order to provide a more meaningful
measure of underlying profit. The adjustments are detailed in note 4.
2020 £’000 2019 £’000
Loss attributable to ordinary shareholders (3,271) (35,473)
Adjustments to loss after tax (note 4) 5,595 16,118
Adjusted profit / (loss) attributable to ordinary shareholders 2,324 (19,355)
2020 Number 2019 Number
Weighted average number of ordinary shares 797,228,579 787,175,574
Dilutive share options 11,395,298 13,562,165
Adjusted weighted average number of ordinary shares 808,623,877 800,737,739
Adjusted basic loss per share 0.29p (2.46p)
Basic loss per share (0.41p) (4.51p)
Adjusted diluted loss per share 0.29p (2.46p)
Diluted loss per share (0.41p) (4.51p)
6. Cash generated from operations
Group 2020 £’000 2019 £’000
Loss before tax (3,894) (24,948)
Finance costs 2,165 1,458
Depreciation of property, plant and equipment 12,983 10,477
Depreciation of right of use assets 3,681 3,590
Amortisation of intangible assets 7,869 8,222
Impairment of intangible assets 6,537 3,805
Impairment of right of use assets - 1,623
Impairment of financial assets 3,788 4,134
Share of joint venture (3,788) 3,951
Inventory write downs (note 17) 3,025 3,219
Loss / (profit) on disposal of fixed assets 182 (245)
CSDC acquisition negative goodwill - (171)
Non-cash provision movements 2,002 -
Share based payments 265 (771)
Cash inflow from operations before changes in working capital 34,815 14,344
(Increase) / decrease in inventories (4,128) 2,184
(Increase) / decrease in trade and other receivables (7,151) 4,130
Increase / (decrease) in trade and other payables 11,921 (11,710)
Cash inflow from operations 35,457 8,948