IQE Regulatory News (IQE)

20 Mar 2006 07:01

IQE PLC20 March 2006 For Immediate Release 20 March 2006 IQE plc Preliminary Results for the Year Ended 31 December 2005 "2005 major turning point" IQE plc (the Group), the leading global supplier of customised wafer productsand outsourced wafer services to the semiconductor industry, is pleased toannounce its Group Preliminary Results for the year ended 31 December 2005. KEY POINTS • Full year revenues up 36.1% at £20.890m (2004: £15.344m). Revenues in US dollar terms up 36.5% at $38.103m (2004: $27.907m) • Wafer volumes increased by 6.4% to approximately 149,000 units (2004: 140,000 units) whilst total wafer area shipped increased by 142% to 2.552m sq.inches (2004: 1.054m sq.inches) • Gross profit of £1.201m including exceptional credits of £1.737m (2004: gross loss £3.813m including exceptional items of £nil.) • Operating loss of £4.019m including exceptional credits of £1.737m (2004: operating loss £10.351m including exceptional credits of £0.171m.) • EBITDA loss, as calculated in the Consolidated Profit and Loss Account excluding exceptional non cash credits, reduced by 48.3% to £4.197m (2004: £8.111m) as a result of increased revenues, tight cost control, cost reduction measures and continued improvements in operational efficiencies • EBITDA improvement of £3.914m on revenue increase of £5.546m demonstrates the high level of operational leverage of the Group's business model • EBITDA breakeven achieved in last six weeks of 2005. Current annualised EBITDA breakeven revenue level at approximately £29.000m • Net cash outflow from operating activities reduced by 44.3% at £5.062m (2004: £9.097m) and closing year end cash at £6.245m (2004: £9.923m) • All markets for the Group's products now strengthening, with the wireless marketplace particularly strong • Major outsourcing contracts performing above expectations, the largest expected to contribute revenues of approximately $15.000m in 2006 • Announcement in January 2006 of an additional major full outsourcing contract worth approximately $10.000m over five years. This contract is a direct result of accelerated qualification programs carried out during H2/ 2005 as are other similar contracts that are in negotiation. • Advanced R&D contracts expected to be worth over $2.000m in 2006 have also been secured since the year end • Excellent prospects for further significant increases in revenues in 2006 supported by strong sequential revenue growth already achieved in Q1/ 2006 Commenting on the results, Dr Drew Nelson, President and CEO, said "As expected, 2005 has proved to be a major turning point for the Group. Weachieved a very significant increase in revenues compared with 2004 and thereturn to profitability is clearly in sight. We believe the Group is wellpositioned to take advantage of the strongly improving market conditions, andhas the ability to offer both technical capabilities and competitive pricingacross its diverse range of advances materials and technology platforms. We lookforward to 2006 and beyond with growing optimism." Contacts: IQE plc :Drew Nelson +44 (0)2920-839400Stuart Hall +44 (0)2920-839400Chris Meadows +44 (0)2920-839400 Buchanan Communications :Tim Thompson/Nicola Cronk +44 (0)2074-665000 PRELIMINARY RESULTS 2006 1. INTRODUCTION The Group is widely recognised in its market sector as a world leading outsourcesupplier of advanced wafer products and wafer foundry services to thesemiconductor industry. The diverse range of materials produced by each of theGroup's four divisions forms the enabling technology for many leading-edgeconsumer, communication and computing applications including mobile phones,satellite navigation devices, personal computers, telecommunication networks,LED technologies, PDAs, Optical storage (CD/DVD) systems, laser based componentsand devices, and a wide variety of automotive, aerospace, industrial and medicalapplications. The Group's large investment in state-of-the-art manufacturing tools andfacilities over the last few years, coupled with its unique concentration ofworld-class expertise and experience in semiconductor materials, make it theonly supplier worldwide able to provide a full range of advanced epi-waferproducts using all three leading technology platforms (MOVPE, MBE and CVD) aswell as providing a variety of advanced substrates. In addition, the Groupoffers unique and innovative tailor made outsourcing solutions to each customeron an individual basis, enabling considerable commercial benefits to be realisedby each customer. This in turn makes the Group an ideal outsource partner to theindustry. Market conditions for semiconductor products improved considerably over the lasttwelve months and virtually all of the markets addressed by the Group's productsare showing considerable strength. This is particularly true of the wirelessmarketplace, where handset sales grew by over 21% in 2005 to 817m units andother wireless technologies such as WiFi, Wireless LAN and WiMax began toincrease significantly. Optoelectronic markets for consumer and industrialapplications also grew strongly, and this trend is set to continue throughout2006 and beyond on the back of further exciting product launches such as thelaser-based optical mouse, high resolution photocopiers and printers coupledwith significant growth in optical communication markets. 2. OVERVIEW Sales revenues increased strongly during 2005 to £20.890m (2004: £15.344m). Anumber of contracts and qualifications come to fruition, including the majoroutsource deal that was secured in November 2004, and further outsourcecontracts have been secured, including a recently announced full outsource dealfor IQE Silicon worth $10.000m over 5 years which will improve revenuevisibility. Several others are in various stages of negotiation. Some of thesecontract wins are a direct result of accelerated qualification progams that werecarried out during the second half of the year. A variety of smaller productdevelopment opportunities were also secured, notably one with a major globalintegrated circuit (IC) manufacturer for advanced materials for future potentialIC applications which has since been renewed for 2006 based on substantialprogress in 2005. These contracts are expected to be worth at least $2.000m in2006. Other product qualifications continue to gather pace, with more and moresuccessful product lines achieving approved status with customers in NorthAmerica and the Far East. Wafer shipments increased by 6.4% in 2005 to 149,000 units (2004: 140,000 units)but, more importantly, wafer area shipped increased by 147% to a record 2.552msq.inches (2004: 1.054m sq.inches) because of a shift to larger wafer diameters.Revenue growth was achieved at a capacity utilisation of less than 30% comparedwith an EBITDA breakeven capacity utilisation of approximately 35%. Averageselling prices remained reasonably stable in each of the Group's divisionsduring the year, reflecting a more balanced supply/demand and exchange rateenvironment, which is expected to continue during 2006. Excellent progress was also made in improving operational efficiencies duringthe year, and supply chain and internal cost reduction focus continued to beardown on the cost base, although some costs such as energy increases wereunavoidable. Following a comprehensive annual re-assessment of the estimated remaining usefullife of fixed assets, the expected remaining economic lives of items of plantand equipment at 31 December 2005 have been extended from an average three yearsto an average eight years, which has the effect of reducing the depreciationcharge by £0.650m. The annualised cash breakeven revenue run rate at the end of the year wasapproximately £29.000m, around half the level of only two years ago. The Grouprecorded a significant reduction in both EBITDA and post tax loss on the basisof those revenue increases and cost reductions. In particular, the improvementof £3.914m in EBITDA on a revenue increase of £5.546m clearly demonstrates thevery significant operational gearing of the Group's business model. 3. RESULTS The Group's operating results are detailed in the Consolidated Profit and LossAccount and Consolidated Cash Flow Statements. H2/2005 sales were £11.225m (H1/2005: £9.665m), which represented a 16.1%increase compared with H1/2005 and was mainly due to increased wafer shipmentsand a more advantageous dollar exchange rate in the second half. Revenues forthe full year were £20.890m (2004: £15.344m), which represented a 36.1% increasecompared with last year. The average exchange rate for 2005 was marginally worsethan the average rate for last year at USD 1.8240/GBP (2004: USD 1.8188/GBP). The Group achieved a gross profit in H2/2005 of £1.661m after exceptionalcredits of £1.737m (H1/2005: gross loss £0.460m after exceptional items of£nil). The gross profit for the full year was £1.201m after exceptional creditsof £1.737m (2004: gross loss £3.813m after exceptional items of £nil). Increasedrevenues and improved efficiencies were the main reasons for the improvement inthe Group's gross margin performance. The exceptional credit of £1.737m relatesto the write back of a trade accrual which the Directors no longer consider isrequired. H2/2005 research and development costs were £0.285m (H1/2005: £0.215m). Researchand development costs for the full year were £0.500m (2004: £0.835m), whichrepresented 2.4% of sales (2004: 5.4% of sales). All research and developmentcosts were focussed on only the most essential and cost effective programs andwere expensed in the period. Savings were made in respect of selling, general and administration costs,comprising distribution costs and other administrative expenses. Although H2/2005 selling, general and administration costs were 5.7% up on H1/2005 at£2.426m (H1/2005: £2.294m), full year costs were reduced by 17.2% to £4.720m(2004: £5.703m). Mainly as a result of incurring some one off rapid qualification costs inrespect of two customers in order to secure orders for 2006, H2/2005 EBITDA losswas greater than H1/2005 at £2.295m (H1/2005: EBITDA loss £1.902m) despite therevenue increase. EBITDA loss for the year was £4.197m (2004: EBITDA loss£8.111m). Cash management continued to be a priority for the Group throughout the periodwith the focus firmly concentrated on reducing operating costs and carefullymanaging working capital, which comprises stocks, debtors and creditors. Mainlyas a result of a 36.1% increase in revenues compared with 2004, working capitalincreased during the year by £0.758m (2004: increase £0.756m) as shown in theReconciliation of Operating Loss to Net Cash Outflow from Operating Activities.The operating cash outflow for H2/2005 was £1.174m less than H1/2005 at £1.944m(H1/2005: outflow £3.118m) and the operating cash outflow for the full year was£5.062m (2004: outflow £9.097). Capital expenditure continued to be restricted to essential items only andtotalled £0.570m in H2/2005 (H1/2005: £0.289m). Loan and lease repayments in H2/2005 totalled £0.191m (H1/2005: £0.717m). Shortly before the year end, the Groupborrowed £3.000m from its bankers which increased total borrowings at the yearend to £5.385m (2004: £3.160m). As a result, gross cash on hand exiting 2005 was£6.245m (2004: £9.923m) and net cash was £0.860m (2004: £6.763m). The Group alsohas access to an overdraft facility from its bankers of £2.000m for workingcapital purposes which has not yet been drawn down. 4. OPERATIONS IQE Inc IQE Inc, which specialises in wireless materials, entered 2005 with a largeorder book resulting from the major outsourcing contract win towards the end of2004. This was initially expected to be worth between $10.000m and $12.000m perannum, but production demand increased steadily throughout the year and showsevery sign of continuing to ramp up through 2006 and beyond with an estimatedvalue in 2006 of $15.000m. A number of other customers and contracts haveincreased their production demands on the company as evidenced by a 220%increase in wafer area shipped to a total of 1.150m sq.inches during 2005.Overall, the wireless marketplace continued to strengthen during the year andindications from virtually all major accounts point to a buoyant year ahead aswireless technology continues to permeate an increasing number of applications,such as WiFi, Wireless LAN and WiMax. IQE (Europe) Limited IQE Europe, which specialises in opto-electronic materials, developed a numberof exciting opportunities during 2005. Driven by a range of new applicationsfrom laser-based optical mouse products to holographic systems, the companyachieved a 38% increase in shipments to .047m sq.inches. The optical storage,laser printing, industrial and short range communications markets all continueto grow and steady increases were achieved throughout 2005. This trend is set tocontinue in 2006. Coupled with an increasing fibre optics market, we expect thiscompany to continue to show significant progress during 2006. IQE Silicon Compounds Limited IQE Silicon maintains a high profile in the semiconductor world for its awardwinning strained silicon product. The widespread adoption of this technology islikely to occur over the next couple of years according to the InternationalTechnology Roadmap for Semiconductors (ITRS). In addition, the company is makingmajor strides in servicing the needs of a number of tier one wafer fabs in termsof standard silicon and SiGe epitaxy as demonstrated by the recent announcementof a five year outsourcing contract win worth approximately $10.000m. Furtherevidence of the company's growth is demonstrated by a 105% increase in shipmentsto 1.340m sq.inches during 2005. Wafer Technology Limited The substrate marketplace continued to strengthen during 2005 as demand forcompound semiconductor wafers increased and the company ended the year with itsstrongest order book for over three years. A number of technical developments,including improved surface finishes on key products and the development ofimproved quality, high margin products for infra-red sensing applications,helped the company to exit 2005 on a positive note which we anticipate willstrengthen further during 2006. 5. TRADING PROSPECTS The Group enters 2006 with its largest order book for several years as a resultof strong market conditions, the diversification of the Group's product rangesand the capacity and cost base to offer customers a comprehensive and highlycost effective wafer outsource service. This has resulted in significant marketshare gains and the acquisition of several major outsource accounts, providingsignificantly improved visibility of revenues. The powerful operational gearingof the Group's business model should result in strong profitability growth asrevenues continue to increase. The Group continues to win advanced R&D contracts, thereby setting the scene forfurther growth in the future. As additional qualifications and contract wins areachieved, improved capacity utilisation will help drive substantial shareholderreturns over the coming years. We have made a good start to the new year andexpect to achieve strong sequential revenue growth in Q1/2006 which weanticipate will continue throughout the year and beyond. The Board remainsoptimistic about the Group's prospects for a return to sustained ongoing cashgeneration within the coming year and substantial profit growth in subsequentyears. Dr Drew Nelson, OBE, FREng, D EngPresident and Chief ExecutiveIQE plc 20th March 2006 PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005CONSOLIDATED PROFIT AND LOSSACCOUNT 6 months 6 months 6 months 12 months 12 to to to to months to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Note Unaudited Unaudited Unaudited Unaudited Audited Turnover fromContinuingOperations 11,225 9,665 7,316 20,890 15,344 Cost of Sales(includingexceptionalitems) (9,564) (10,125) (9,201) (19,689) (19,157) GrossProfit/(Loss) 1,661 (460) (1,885) 1,201 (3,813)GrossProfit/(Loss)% 14.8 (4.8) (25.8) 5.7 (24.9) Operating Expenses : Distribution Expenses (668) (870) (794) (1,538) (1,399) Administrative Expenses : Research /Development (285) (215) (354) (500) (835) Other Administrative 1,2 (1,758) (1,424) (1,700) (3,182) (4,304) Expenses (including exceptional items) Administrative (2,043) (1,639) (2,054) (3,681) (5,139) Expenses Operating Expenses (2,711) (2,509) (2,848) (5,219) (6,538) Operating LossfromContinuingOperations (1,050) (2,968) (4,732) (4,019) (10,351) Operating Loss% fromContinuingOperations (9.4) (30.7) (64.7) (19.2) (67.5) InterestReceived/(Paid) (21) 57 135 35 246 Loss onOrdinaryActivitiesbeforeTaxation (1,072) (2,912) (4,597) (3,983) (10,104) Loss % (9.5) (30.1) (62.8) (19.1) (65.9) CurrentTaxation 0 (0) 0 (0) (0)DeferredTaxation 0 (0) 0 (0) (0) Retained Lossfor the Period (1,072) (2,912) (4,597) (3,983) (10,104) Basic LossPence perShare 3 (0.34) (0.92) (1.46) (1.26) (3.20)Diluted LossPence perShare 3 (0.34) (0.92) (1.46) (1.26) (3.20) PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)CONSOLIDATED PROFIT AND LOSSACCOUNT 6 months 6 months 6 months 12 months 12 to to to to months to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Note Unaudited Unaudited Unaudited Unaudited Audited Earnings before Interest, Taxes, Depreciation and Amortisation(EBITDA) have been calculated as follows: Retained Lossfor the Period (1,072) (2,912) (4,597) (3,983) (10,104) Interest(Received)/Paid 21 (57) (135) (35) (246) Current andDeferredTaxation (0) 0 (0) 0 0 Depreciation 492 1,067 1,221 1,559 2,240 ExceptionalItems with NoCash Impact (1,737) 0 0 (1,737) 0 Goodwill (0) 0 (0) 0 0 EarningsbeforeInterest/Taxes/DepreciationandAmortisation (2,295) (1,902) (3,511) (4,197) (8,111) Note : Exceptional Items with cash impact of £nil (2004: £171,000 credit) have notbeen adjusted in the above table. PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)TOTAL RECOGNISED GAINS AND LOSSES AND MOVEMENT INSHAREHOLDERS' FUNDS 6 months 6 months 6 months 12 months 12 to to to to months to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Audited TOTAL RECOGNISED LOSSES Loss for thePeriod (1,072) (2,912) (4,597) (3,983) (10,104) Currency TranslationDifferences on Foreign Currency Net Investments 214 134 (125) 348 (168) TotalRecognisedLossesRelating tothe Period (858) (2,778) (4,722) (3,635) (10,272) MOVEMENT IN SHAREHOLDERS' FUNDS Opening Balance 13,136 15,891 20,560 15,891 26,042 Shares Issuednet of IssueCosts 44 22 53 66 121 ForeignExchangeTranslationDifferences 214 134 (125) 348 (168) LossAttributableto Members ofthe Group (1,072) (2,912) (4,597) (3,983) (10,104) Closing Balance 12,322 13,136 15,891 12,322 15,891 PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)CONSOLIDATED BALANCE SHEET As At As At As At As At As At 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004(All figures GBP000s) Unaudited Unaudited Audited Unaudited Audited Fixed Assets 8,816 8,588 9,204 8,816 9,204 Current Assets : Stocks 4,312 4,191 3,433 4,312 3,433 Debtors 3,404 3,388 2,604 3,404 2,604 Cash at Bank and in 4 6,245 5,928 9,923 6,245 9,923 Hand Total Current Assets 13,961 13,507 15,959 13,961 15,959 CreditorsFalling Duewithin OneYear (6,355) (6,433) (6,470) (6,355) (6,470) Net CurrentAssets 7,606 7,074 9,490 7,606 9,490 Total Assetsless CurrentLiabilities 16,422 15,662 18,693 16,422 18,693 Creditors Falling Due aftermore than One Year : Deferred Income (199) (218) (308) (199) (308) Long Term Borrowings (3,646) (2,042) (2,150) (3,646) (2,150) Total Creditors (3,845) (2,260) (2,458) (3,845) (2,458) Falling Due after more than One Year Provision forLiabilitiesand Charges (255) (266) (344) (255) (344) Net Assets 12,322 13,136 15,891 12,322 15,891 Capital and Reserves : Called-up Share 3,163 3,159 3,157 3,163 3,157 Capital Share Premium 157,263 157,216 157,188 157,263 157,188 Shares to be Issued 209 216 225 209 225 Investment in Own (13) (13) (14) (13) (14) Shares Merger Reserve (605) (605) (605) (605) (605) Profit and Loss (147,235) (146,163) (143,251) (147,235) (143,251) Account Exchange Rate Reserve (460) (674) (808) (460) (808) Total EquityShareholders'Funds 12,322 13,136 15,891 12,322 15,891 Approved by the Directors of IQE plc on 19 March 2006 PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)CONSOLIDATED CASH FLOWSTATEMENT 6 months 6 months 6 months 12 months 12 to to to to months to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Audited Net CashOutflow fromOperatingActivities (1,944) (3,118) (4,456) (5,062) (9,097) Returns on Investment andServicing of Finance : Interest Received (21) 57 135 35 246 Taxation : UK and US corporation taxes 0 0 (0) 0 0 Capital Expenditure : Payments to Acquire Fixed Assets (570) (289) (215) (859) (348) Proceeds from Sale of Fixed Assets 0 0 0 0 0 Net CashOutflow beforeManagement ofLiquidResources andFinancing (2,536) (3,350) (4,536) (5,885) (9,199) Management ofLiquidResources 70 4,137 5,065 4,207 11,986 (2,466) 787 529 (1,678) 2,787Financing : Issues of Ordinary Share Capital 44 22 53 66 121 Loans Received/ (Repaid) 2,859 (116) (157) 2,743 (359) Leases Repaid (50) (551) (991) (601) (2,378) Net Cash Inflow/ (Outflow) from 2,853 (645) (1,095) 2,208 (2,616) Financing Increase/ (Decrease) inCash 387 142 (566) 530 171 PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES 6 months 6 months 6 months 12 months 12 months to to to to to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Audited Operating Loss (1,050) (2,968) (4,732) (4,019) (10,351) Depreciationof FixedAssets 492 1,067 1,221 1,559 2,240 Loss on Saleof FixedAssets 1 0 17 1 17 Movement inStocks (121) (759) 545 (880) 31 Movement inDebtors (16) (784) (248) (800) (165) Movement inCreditors 506 416 (789) 922 (622) ExceptionalItems (1,737) (0) (392) (1,737) (171) GovernmentGrantsReleased (19) (389) (78) (409) (78) GovernmentGrantsReceived 0 300 0 300 0 Net CashOutflow fromOperatingActivities (1,944) (3,118) (4,456) (5,062) (9,097) PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NETFUNDS 6 months 6 months 6 months 12 months 12 months to to to to to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Unaudited Unaudited Unaudited Unaudited Audited Increase/(Decrease) in Cash 387 142 (566) 530 171 Management ofLiquidResources (70) (4,137) (5,065) (4,207) (11,986)Loans Repaid 141 116 157 257 359Leases Repaid 50 551 991 601 2,378 Change in NetFundsResulting fromCash Flows 508 (3,328) (4,483) (2,819) (9,078) New Loans (3,000) (0) (0) (3,000) (0) Movement inNet Funds (2,492) (3,328) (4,483) (5,819) (9,078) Opening NetFunds 3,387 6,763 11,206 6,763 15,776 ExchangeDifferences (35) (48) 39 (84) 64 Net Funds 860 3,387 6,763 860 6,763 PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)ANALYSIS OF NET FUNDS As At As At As At As At As At 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 (All figures GBP000s) Unaudited Unaudited Audited Unaudited Audited Cash at Bankand in Hand 1,638 1,251 1,109 1,638 1,109 Cash at BankAccessiblebetween Oneand Seven Days 4,607 4,677 8,814 4,607 8,814 Total Cash atBank and inHand 6,245 5,928 9,923 6,245 9,923 Loans Dueafter morethan One Year (3,646) (2,042) (2,150) (3,646) (2,150) Loans Duewithin OneYear (1,739) (449) (409) (1,739) (409) HP/FinanceLeases Dueafter morethan One Year 0 0 0 0 0 HP/FinanceLeases Duewithin OneYear 0 (50) (601) 0 (601) TotalBorrowings (5,385) (2,541) (3,160) (5,385) (3,160) Net Funds 860 3,387 6,763 860 6,763 PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)NOTES TO THE PRELIMINARY ANNOUNCEMENT 1 ACCOUNTING POLICIES Basis of preparation The preliminary financial information has been prepared on the basis of the material accounting policies set out in the 2004 Annual Report and Accounts. The preliminary financial information was approved by the Board of Directors and Audit Committee on 19 March 2006. The financial information set out above does not constitute statutory accounts within the meaning of the Companies Act 1985. Comparative figures in the financial statements for the year ended 31 December 2004 have been taken from the Group's audited statutory accounts on which Deloitte & Touche LLP expressed an unqualified opinion. The results for the six months to 31 December 2005, 30 June 2005 and 31 December 2004 are unaudited. The preliminary results statement will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 20 March 2006. Copies will be available to members of the public upon application to the Company Secretary at Pascal Close, Cypress Drive, St Mellons, Cardiff CF3 0EG. Accounting convention The financial information is prepared under the historical cost convention and in accordance with applicable UK accounting standards, which have been applied on a consistent basis during the period under review. Basis of consolidation The financial information consolidates the financial statements of the Company and all of its subsidiaries. The acquisition of EPI Holdings Limited and IQE Inc (formerly Quantum Epitaxial Designs Inc) by IQE plc, a new holding Company established for that purpose, on 16 May 1999 has been accounted for under merger accounting whereby the financial information is disclosed as if the companies had always been part of the Group. The acquisition of IQE (Europe) Limited (formerly Epitaxial Products International Limited) and its subsidiary Epitaxial Products Inc by EPI Holdings Limited, a new Company established for that purpose, on 27 March 1996 and the acquisition of Wafer Technology International Limited and its subsidiary Wafer Technology Limited on 22 November 2000 have been accounted for under acquisition accounting, whereby these companies became part of the Group on the date of acquisition. Turnover Turnover represents amounts receivable for goods and services provided in the normal course of business net of value added tax and other sales related taxes. Turnover is recognised on despatch of goods. Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation and provision for impairment. Cost comprises all costs that are directly attributable to bringing the asset into working condition for its intended use, as defined by Financial Reporting Standard Number 15. Depreciation has been calculated so as to write down the cost of assets to their residual values over the following estimated useful economic lives. No depreciation is provided on land or assets yet to be brought into use. Freehold buildings 25 years Short leasehold improvements 5/27 years Plant and machinery 5/15 years Fixtures and fittings 4/5 years PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)NOTES TO THE PRELIMINARY ANNOUNCEMENT (cont.) Following a comprehensive annual re-assessment of the estimate remaining useful life of fixed assets, the expected remaining useful economic lives of items of plant and equipment at 31 December 2005 have been extended from an average of three years to eight years, which has had the effect of reducing the depreciation charge by £650,000. Stocks Stocks are stated at the lower of cost and net realisable value. Research and development Research and development expenditure is fully written off when incurred. Foreign currencies Transactions in foreign currencies during the period are recorded at the rates ruling at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated into sterling at the rates ruling at the balance sheet date. All exchange differences are taken to the profit and loss account. The balance sheets of IQE Inc are translated into sterling at the closing rates of exchange for the period, while the profit and loss accounts are translated into sterling at the average rates of exchange for the period. The resulting translation differences are taken directly to reserves. Pension costs The Group operates defined contribution pension schemes. Contributions are charged in the profit and loss account as they become payable in accordance with the rules of the schemes. Government grants Government grants receivable in connection with expenditure on tangible fixed assets are accounted for as deferred income, which is credited to the profit and loss account by instalments over the expected useful economic life of the related assets on a basis consistent with the depreciation policy. Revenue grants for the reimbursement of costs incurred are deducted from the costs to which they related, in the period in which the costs are incurred. Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Group's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)NOTES TO THE PRELIMINARY ANNOUNCEMENT (cont.) Leases Assets held under finance leases and hire purchase contracts are capitalised at their fair value on inception of the leases and depreciated over the shorter of the period of the lease and the estimated useful economic lives of the assets. The finance charges are allocated over the period of the lease in proportion to the capital amount outstanding and are charged to the profit and loss account. Operating lease rentals are charged to the profit and loss account in equal amounts over the lease term. Provision is made at the balance sheet date for the present value of future rentals under operating leases on vacated properties. Financial instruments The only derivative instruments utilised by the Group are forward exchange contracts. The Group does not enter into speculative derivative contracts. Forward exchange contracts are used for hedging purposes to alter the risk profile of an existing underlying exposure of the Group in line with the Group's risk management policies. 2 EXCEPTIONAL ITEMS 6 months 6 months 6 months 12 months 12 to to to to months to 31 Dec 30 Jun 31 Dec 31 Dec 31 Dec 2005 2005 2004 2005 2004 Unaudited Unaudited Unaudited Unaudited Audited GBP000s GBP000s GBP000s GBP000s GBP000s Exceptional items comprise : Charged in cost of sales : Trade accrual (1,737) 0 0 (1,737) 0 Charged in other administrative expenses : Restructuring costs 0 0 6 0 227 Onerous lease provisions 0 0 (398) 0 (398) Exceptional items (1,737) 0 (392) (1,737) (171) The exceptional credit in H2/2005 of £1,737,000 relates to the release of a trade accrual which the Directors no longer consider is required. The exceptional credit in H2/2004 of £398,000 relates to the release of an onerous lease provision in respect of a previously vacant property at Wafer Technology Limited. PRELIMINARY RESULTS FOR 12 MONTHS TO 31 DECEMBER 2005 (cont.)NOTES TO THE PRELIMINARY ANNOUNCEMENT (cont.) 3 LOSS PER SHARE 6 months to 6 months to 6 months to 12 months to 12 months to 31 Dec 2005 30 Jun 2005 31 Dec 2004 31 Dec 2005 31 Dec 2004 Unaudited Unaudited Unaudited Unaudited Audited Retained Loss (1,072) (2,912) (4,597) (3,983) (10,104) GBP000s Goodwill amortisation and impairment 0 (0) 0 (0) (0) Retained Loss GBP000s (1,072) (2,912) (4,597) (3,983) (10,104) Weighted Average Number of Ordinary Shares 315,976,014 315,813,351 315,466,318 315,976,014 315,466,318 Diluted Share Options 3,580,904 5,735,597 4,538,582 3,580,904 4,538,582 Adjusted Weighted Average Number of Ordinary Shares 319,556,918 321,548,948 320,004,900 319,556,918 320,004,900 Basic Loss Pence per Share (0.34) (0.92) (1.46) (1.26) (3.20) Diluted Loss Pence per Share (0.34) (0.92) (1.46) (1.26) (3.20) Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares during the period. Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all dilutive potential ordinary shares. FRS 22 requires the presentation of diluted LPS when a company could be called upon to issue shares that would decrease net profit or increase net loss per share. For a loss-making company with outstanding share options and warrants, net loss per share would only be increased by the exercise of the out of the money options and warrants. Since it seems inappropriate to assume that option holders would act irrationally, no adjustment has been made to diluted LPS for out of the money share options and warrants. 4 CASH AT BANK AND IN HAND Cash at bank at 31 December 2005 includes £1,391,000 (31 December 2004: £1,212,000) which has been placed on an interest bearing US dollar escrow account. The funds are intended to be used to purchase equipment from the counter party to the escrow account during 2006. This information is provided by RNS The company news service from the London Stock Exchange