IQE PLC Iqe Plc : Response To Shadowfall Report

 
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                [phone] 
Canaccord Genuity 
 Simon Bridges 
 Henry Fitzgerald-O'Connor 
 Richard Andrews             + 44 (0) 20 7523 8000 
Peel Hunt 
 Edward Knight 
 Nick Prowting                [phone] 
FTI Consulting 
 Matt Dixon 
 Rob Mindell 
 Harry Staight                [phone] 
 
 
 
   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)

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