IQE PLC Iqe Plc : Response To Shadowfall Report
February 05 2018 - 1:00AM
UK Regulatory
TIDMIQE
5 February 2018
IQE plc
("IQE" or the "Company")
Response to ShadowFall report
IQE plc (AIM: IQE) notes the report published by ShadowFall Capital &
Research LLP ("ShadowFall"), which was disseminated to the public on 2
February 2018.
The allegations contained within the report are without merit and
provide a misleading analysis of the Company's financial position. The
central thesis of this report is a fundamental misrepresentation of the
profit and cash generation of IQE, especially with respect to the
Company's joint venture agreements.
IQE would like to directly address the key themes in the report, correct
any misinformation that might arise from the report's inaccuracies and
assure shareholders that IQE holds itself to the highest standards of
corporate governance, transparency and integrity.
It is also important to note that ShadowFall states that it holds a
short position in IQE and so will duly profit from any near-term
reduction in IQE's share price, caused by the allegations in the report.
ShadowFall made no attempt to review its report with IQE prior to its
publication.
The purpose of IQE's joint ventures
The joint ventures in Singapore and Cardiff form an important part of
IQE's strategy to be at the leading edge of compound semiconductor
innovation, through collaboration with leading universities and supply
chain partners.
These joint ventures have independent third-party shareholders and are
governed by standalone boards, separate management teams and joint
venture agreements that establish governance procedures and decision
making. As a member of the joint ventures, IQE participates in these
boards, but does not have control. These joint ventures are
independently audited.
The creation of the joint venture in Cardiff was the first cornerstone
entity in the development of a globally recognised UK compound
semiconductor cluster (CS Connected), which is seeking to create and
sustain over 2,000 high skilled, well paid manufacturing jobs for the
local and UK economy. This is already making a significant impact in the
local economy, including saving 500 jobs in Newport Wafer Fab Ltd, which
had been scheduled for closure by its previous owner, the creation of a
UK Government funded Compound Semiconductor Applications Catapult, and a
number of major technology development programmes between Cardiff
University, the joint venture, IQE and a number of major OEMs in South
Wales.
Transactions with joint ventures
IQE's trade with these joint ventures is clearly reported in the notes
to its annual reports and financial statements. The nature of this trade
is IQE sub-contracting certain external customer contracts through these
joint ventures. By acting as an anchor customer, IQE is providing the
joint ventures with initial business to limit their start up losses in
their early years of operation.
By agreement with its joint venture partners, these transactions are
undertaken at cost, and hence this does not impact IQE's cost of
production or increase its profits. The joint ventures have subsequently
been successful with new business wins, some of which have been
contracted directly with new customers in 2017 with no direct
involvement of IQE.
License income from IQE intellectual property
License income from joint ventures has been reported in detail by the
Company in regulatory announcements and in its annual reports and
financial statements. In these reports, IQE has made it clear that
license income from joint ventures was front-loaded, reflecting the
creation of their initial capability to serve commercial contracts. As
noted in its most recent trading update, IQE's license income from joint
ventures will be less than GBP2 million in 2017.
Profit & loss of joint ventures
The only profits that IQE has earned from the joint ventures is a book
profit on the initial contribution on fixed assets in the setup of the
Cardiff joint venture, and through the licensing of its intellectual
property to both joint ventures.
In the case of the Cardiff joint venture (CSC), the consideration for
intellectual property licensing has been a combination of cash and
receivable long-term loans. Both sources of consideration have been
clearly stated in IQE's annual reports and financial statements. The
revenue that the joint venture generates from IQE meets the cash cost of
the joint venture's operation, at no financial gain or loss to IQE. The
EBITDA loss of the joint venture in 2016 was GBP0.7 million,
representing the cost of its own management, business development, and
administration. The joint venture also has non-cash charges for
amortisation of its intellectual property license and a depreciation of
assets which gives a net loss of GBP4.4 million. This has been detailed
in IQE's annual reports & financial statements. The ShadowFall report
implies that IQE has used the joint venture to "hide" costs of IQE's own
business, which is inaccurate.
In the case of the Singapore joint venture (CSDC), to support this
business through its start up years, IQE has licensed intellectual
property and leased surplus Molecular Beam Epitaxy ("MBE") capacity to
the joint venture on a contingent basis, namely these charges only
become payable by the joint venture to IQE to the extent that the joint
venture generates surplus cash in each year. As required by
International Financial Reporting Standards ("IFRS"), the joint venture
fully reflects these costs in its own accounts, whereas IQE only
accounts for this as income when it has been received in cash. Excluding
these contingent charges, the Singapore joint venture generated cash of
approximately GBP2 million from its operations in 2016, and hence paid
approximately GBP2 million of license income to IQE in that year.
Asset valuation
In order to reduce overall set up costs, IQE contributed certain fixed
assets to the Cardiff joint venture in return for its equity stake. This
was undertaken at market value, as determined by an independent
professional valuer mutually agreed by the joint venture partners.
Cardiff University match funded this value in cash in return for its
equity stake in the joint venture. Similarly, the valuation of the
intellectual property was validated by an independent accounting firm in
a report to the joint venture board.
EBITDA and free cash generation
The difference between IQE's EBITDA and its free cash generation can be
readily identified from IQE's annual reports and financial statements,
namely (a) investment in R&D and capital expenditure and (b) an
acquisition in 2012 which was paid for through an earnout, as detailed
below.
In 2012, IQE acquired the MBE epi-wafer manufacturing unit of RF Micro
Devices ("RFMD"), with the acquisition consideration being settled
through a trade discount on sales by IQE to RFMD for a fixed period of 4
years. In accordance with IFRS, this discount was classified as part of
working capital. This was described in the Company's annual reports and
financial statements and detailed in the notes to the cash flow
statement. Had the Company financed this acquisition through debt or
equity finance, the payment to acquire this business would have been
excluded from the calculation of the free cash generation. As previously
reported, this discount period ended in 2016. IQE now fully owns the
acquired facility in North Carolina (original cost $110 million) and
RFMD (now Qorvo) remains a key customer for IQE.
Outlook
As stated in the Company's pre-close statement on 20 December 2017, the
Company re-iterates that it expects full year revenue to be ahead of
market expectations, and to be not less than GBP150 million for the year
ending 31 December 2017. Wafer sales are on track to deliver strong
double-digit growth in 2017 and to continue to diversify, while annual
growth in Photonics is also expected to achieve triple-digit growth. The
Company remains confident in its outlook for 2018 and beyond. The Group
is scheduled to report its full year results for 2017 on 20 March 2018,
and will provide forward looking guidance at that time.
Contacts:
IQE plc
Drew Nelson
Phil Rasmussen
Chris Meadows +44 (0) 29 2083 9400
Canaccord Genuity
Simon Bridges
Henry Fitzgerald-O'Connor
Richard Andrews + 44 (0) 20 7523 8000
Peel Hunt
Edward Knight
Nick Prowting +44 (0) 20 7418 8900
FTI Consulting
Matt Dixon
Rob Mindell
Harry Staight +44 (0) 20 3727 1000
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: IQE plc via Globenewswire
http://www.iqep.com
(END) Dow Jones Newswires
February 05, 2018 02:00 ET (07:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Iqe (LSE:IQE)
Historical Stock Chart
From Apr 2024 to May 2024
Iqe (LSE:IQE)
Historical Stock Chart
From May 2023 to May 2024