2018 Annual Report and Financial Statements
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Annual report and financial statements 2018 Contents Overview of 2018 Directors’ Report 02 - Chairman’s overview 48 - Directors’ report Strategic Report Governance 04 - Epitaxy 50 - Governance 07 - Breadth of Technology 64 - Remuneration Statements 11 - Our Business 80 - Directors’ Biographies 14 - Research, development and Innovation 82 - Officers and Advisers 18 - Our People 24 - Environment, Health & Safety Financial Statements 28 - Principal Risks and Uncertainties 88 - Financial Statements 40 - Operational Review 98 - Notes to the Financial Statements 43 - Financial Review Chairman’s overview I am pleased to present our 2018 annual report and financial statements. IQE is the world’s leading supplier of advanced semiconductor materials solutions that enable global innovation. We develop and manufacture compound semiconductor wafers and complementary materials technologies that are at the heart of the digital electronic revolution. Overview of 2018 Our compound semiconductor technology plays an increasingly important role in shaping the way we live, work and spend our leisure time. We are playing a key role in developing and bringing to market, a range of new, world leading technologies that will see our materials embedded across a very large range of new and emerging applications including 5G communications, next generation smartphones and tablets, hyperscale datacentres, global internet connectivity via low earth orbit satellites and UAVs, advanced healthcare including wearable sensors, defence and aerospace and in electrically powered and driverless vehicles. IQE is a global technology leader operating in a of sensing applications where we have made a dynamic and competitive market. Our compound considerable investment during 2018 in engaging with semiconductor materials offer significant performance more than 25 VCSEL chip companies underscoring advantages and functionality over silicon-based IQE’s exceptional leadership position in the emerging semiconductors in terms of speed, power and light. VCSEL supply chains based on our technical excellence, our proven ability to ramp and commitment to install During 2018 our wireless materials continued to production capacity. We will bring additional photonics enjoy a large market share for the power-amplifier capacity into production with the first phase of ten new modules in mobile devices, including smartphones production tools at the Newport epi foundry during the and tablets. Market share for our photonic materials first half of 2019. We are in final design stage with more also significantly increased in mobile devices across than twelve photonics customers who are at various a number of sensing applications including proximity stages of active qualification of this new facility. sensing, structured light and time-of-flight cameras, particularly for 3D sensing for facial recognition During the year, IQE announced the exercise of an applications. exclusive option to acquire the cREO™ IP portfolio from Translucent, Inc, technology. The Group also completed IQE established and maintained a highly significant a key production qualification milestone for its technological and process advantage in the high- proprietary NanoImprint Lithography (NIL) Technology volume manufacture of large diameter (150mm) for Distributed Feedback (DFB) lasers and the renewal wafers for vertical cavity surface emitting laser (VCSEL) of a major contract with a Tier 1 wireless customer. products that form the heart of a rapidly growing trend for optical sensing applications, such as face ID, where we command a significant global market share of these Board changes fast-growing sensing markets. The untimely and tragic death in April 2018 of Our 2018 revenues were achieved with a similar Phil Rasmussen, IQE’s Chief Financial Officer, was manufacturing capacity compared with 2017, and a devastating blow for his family and to everyone ahead of additional investment in new capacity coming who knew and worked with him. Phil had held the online. Our significant two-year investment program role of CFO for more than ten years and he made across our global operations will be complete by the an immeasurable contribution to the growth and end of the first-half of 2019 with the commissioning development of the business during that time. We of our new mega epi foundry in Newport, Wales, UK, are supporting his wife Elissa in the formation which is dedicated to photonics applications. Our of a charitable foundation in his name with the expansion program also includes the installation of aim of providing scholarships for students from additional wireless capacity in Taiwan, expansion of disadvantaged backgrounds in South Wales to study at our gallium nitride (GaN) capacity in Massachusetts University. and additional capacity for our infrared production in Milton Keynes. Tim Pullen joined IQE as Chief Financial Officer on 4th February 2019. Tim, whose appointment was Whilst face recognition represents the first application announced on 15th October 2018, was most recently for advanced 3D sensing and is being adopted across Chief Financial Officer of ARM Limited, a global many leading mobile device OEMs, the opportunities semiconductor and software design company owned for the technology extend far beyond basic security by Softbank Group. Tim’s appointment as CFO is applications into areas such as augmented reality, strongly aligned with the aim of having a Board with machine vision and LiDAR. It is across this range the appropriate balance of skills and expertise to steer 2 IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726 the Company through the next exciting phase in its evolution. To this end, I am also delighted to confirm that Phil Smith, the former CEO and Chairman of Cisco, who joined the Board in December 2016 will take up the position of Non-Executive Chairman on my retirement before our AGM on 25 June 2019. Summary I remain very excited about the growth prospects for Overview of 2018 our industry, and IQE’s positioning to take advantage of this growth. Whilst a substantial inventory correction in the first half of 2018 followed by the sudden disruption in November of a significant supply chain severely reduced the short-term demand for VCSEL wafers which materially impacted our full year revenues and profitability, I firmly believe that the position and prospects of IQE will not be defined by our 2018 financial performance. We look forward to enjoying the benefit from the significant investment programmes that we will complete this year. I would like to thank my fellow Directors and all the management and staff of IQE for the achievements of the past year in preparing the Group to take full advantage of the exciting market and technological opportunities that lay ahead. The skills, experience and talent of our people is at the very heart of our business. My sincere thanks go out for the hard work and professional expertise of the whole IQE team for their commitment and dedication; they continue to be the foundation of our achievements. Finally, as always, I would like to thank you, my fellow shareholders, for your support. I trust that you share our excitement about the role we are destined to play in what promises to be an exciting future for IQE and for our industry. Dr Godfrey H H Ainsworth Executive Chairman, IQE plc. 20 March 2019 IQE PLC | Report and Annual Accounts 2018 | Company No: 3745726 3 Strategic report Strategic Report IQE’s core business is the design and manufacture of compound semiconductor wafers or “epiwafers” using a process called epitaxy. Epitaxy 101 small amounts of different impurities and that by placing together two pieces of material with different Epitaxy is the process of growing structures in a impurities, an electrical current could be controlled by specific crystalline orientation on top of another allowing it to flow in one direction but not the other. crystalline layer or substrate, where the orientation is determined by the underlying crystal. The semiconductor age is born It was in 1947 that William Shockley, John Bardeen and Walter Brattain, working at Bell Labs, built the World’s first transistor using the element germanium. The word epitaxy derives from the Greek prefix epi meaning “upon” and taxis meaning During the two decades that followed, the ability to “arrangement” or “order.” The atoms in an control electrical currents using semiconductors epitaxial layer have a specific registry relative allowed engineers to develop a range of new electronic to the underlying crystal. technologies. The evolution of silicon Whilst germanium is a very efficient semiconductor The elements material, the ready availability of silicon made for The periodic table, first published in 1869 by Dmitri a compelling low-cost alternative and hence a new Mendeleev, shows the 118 currently known chemical industry was born that has, for the last five-decades, elements arranged in eight groups according to their transformed our lives in so many ways. properties. Silicon has been the backbone of the electronics Of particular interest in electronics and photonics is revolution from the 1960s, largely by virtue of the fact that the elements up to and including those continuous miniaturisation which has led to an in group III are in general, known as metals and tend exponential increase in technological performance - a to be good conductors of electricity, whilst those from concept notably observed by one of the founders of group V and above are generally non-metals and tend