MANAGEMENT BOARD REPORT
We are an equipment supplier mainly to the semiconductor manufacturing industry. We design, manufacture, and sell equipment and services to our customers for the production of semiconductor devices, or integrated circuits. The semiconductor capital equipment market is composed of three major market segments: wafer processing equipment, assembly and packaging equipment, and test equipment. Through our Front-end business, we are active in the wafer processing segment. In addition, as per December 31, 2016, we have a 39.19% stake in ASM Pacific Technology (ASMPT), which is a leading supplier of assembly and packaging equipment to the semiconductor, LED, and electronics markets.
ASMI sells its products to the semiconductor manufacturing industry and, through its 39.19% stake in ASMPT, to the assembly industry, which is subject to sudden and extreme cyclical variations in product supply and demand. We conduct our Front-end business through wholly-owned subsidiaries, the most significant being ASM Front-End Manufacturing Singapore Pte Ltd (FEMS), located in Singapore, ASM Europe BV (ASM Europe), located in the Netherlands, ASM America, Inc (ASM America), located in the United States, ASM Japan KK (ASM Japan), located in Japan, and ASM Korea Ltd (ASM Korea), located in South Korea. The locations of our facilities allows us to interact closely with customers in the world’s major geographical market segments: Europe, North America, and Asia.
Our wafer processing business supplies equipment to the leading semiconductor manufacturers in the logic, foundry and memory markets, primarily for the deposition of thin films. The logic market is made up of manufacturers who create chips that are used to process data; the foundry market consists of businesses that operate semiconductor fabrication plants to manufacture the designs of other semiconductor companies; and the memory market covers manufacturers who make chips that store information either temporarily or permanently, such as Random Access Memory (RAM). We also supply equipment to leading manufacturers of analog semiconductor devices.
The principal markets that we address in wafer processing are selected segments of the deposition equipment market. The total deposition equipment market was estimated to be US$8.8 billion in 2016 (VLSI Research, January 2017). Within this market we focus on the following segments: vertical furnaces, epitaxy, PECVD, and atomic layer deposition (ALD). ALD is an advanced technology that deposits atomic layers one at a time on wafers. This process is used to create ultra-thin films of exceptional quality and flatness. Plasma is sometimes used to enhance the process further (plasma enhanced ALD, or PEALD) and enables the deposition at reduced process temperature.
A key driver in the semiconductor industry is the continuous demand for smaller, faster, and cheaper semiconductor components. Through technology advances in the manufacturing process, semiconductor manufacturers are continuously scaling chips to smaller dimensions. This enables more transistors to fit in the same physical space, thereby reducing the costs and increasing the speed and performance of a device. Another trend is towards vertical or 3D transistors. This trend also helps to keep the industry on track with Moore’s Law (processor speeds, or overall processing power for computers, will double every two years).
Advanced deposition techniques
The manufacture of ever-smaller and more complex devices requires more advanced and precise deposit techniques. ALD offers the precision needed to deposit ultra-thin and highly conformal films, even on challenging 3D surfaces. Our portfolio of ALD products is an enabling technology for our customers, helping them to manufacture semiconductor devices at smaller line widths with new materials and 3D architectures. Our technologies support our customers in their roadmap towards chips with a higher performance and reduced energy consumption, which in turn enable the introduction of new and more advanced products ranging from high-end servers to smartphones, wearable devices, and automotive electronics.
Our investment in ASM Pacific Technology represents the Back-end business. The Back-end operations are conducted through facilities in Hong Kong, the People's Republic of China, Singapore, Malaysia, and Germany. On March 15, 2013, we reduced our shareholding in ASMPT from 52% to around 40%. The sale of the 12% stake in ASMPT caused and required the deconsolidation of ASMPT. Since that date, our share of the net result of ASMPT is reported on the line share in income of investments in associates.
Our strategic objective is to realize profitable, sustainable growth by capitalizing on our innovative strength in deposition technologies and our strong relationships with key customers.
The key elements of our strategy are:
We are recognized for our technology leadership. We provide leading thin film deposition technologies that support our customers in staying on the curve of Moore’s Law. Our innovative strength is what differentiates us in the marketplace, creates growth opportunities for our employees, and continues to be the cornerstone of our strategy. Apart from our internal R&D efforts, we are continuously expanding and deepening our strategic cooperation with key customers, suppliers, chemical manufacturers, and research institutes such as imec. Our suppliers manufacture advanced components and assemblies to the tightest of tolerances and are required to adhere to our stringent design specifications, and quality systems. This approach enables us to remain innovative and swiftly meet the changing demands of our customers.
Leadership in deposition
We create value through our advanced thin film deposition technologies, which help leading semiconductor and technology industry partners to deliver the world of tomorrow through advanced chips. One of these technologies is ALD, which is established as a mainstream technology in high-volume manufacturing, supporting virtually all of the leading customers in the semiconductor industry. As a leader in this space, ALD has turned into a key growth driver for our business. We expect that the trends of continued scaling and evolution towards 3D device structures will further expand the number of applications for ALD. We aim to maintain our leading position in ALD by leveraging on our strong expertise and established customer relationships, and by developing new applications in deposition technologies to support our customers with increasingly complex device node transitions.
Our strategic objective is to realize profitable, sustainable growth by capitalizing on our innovative strength, operational excellence, and our leadership in ALD and other business segments we are active in.
While technology leadership remains crucial, we have a responsibility to our stakeholders to continue to focus on further improving the effectiveness of our organization and the efficiency of processes. We aim to provide our customers with dependable leading-edge products and services at a consistent quality level, providing the best cost of ownership. To help achieve this, we continue to optimize our manufacturing and global sourcing processes, including the migration to common product platforms. We are working with our suppliers to improve fundamental quality through statistical methods and process controls. Our employees are engaged in an improved product life cycle process and our Product Safety Council is focused on further improving product safety through fundamental design.
In addition to addressing the technology needs of our customers, we also focus on further increasing equipment throughput and equipment reliability, thereby lowering the cost per wafer of our wafer processing systems. Combined with our commitment to quality, we continuously strive to achieve industry-leading productivity. In addition, to enable further efficiencies in our manufacturing process, we exert significant effort on improving the level of standardization in our equipment portfolio by migrating to common platforms, sub-assemblies and components.
Our corporate responsibility outlook is supported by our vision of ZERO HARM! This means we strive to (i) prevent all injuries to our employees and our customers’ employees, (ii) reduce our environmental impact, and (iii) make positive contributions to society. We help create value for society through our technological innovations, and we try to meet the expectations of our stakeholders by engaging with them on the issues that matter to them.
We believe that our focus on sustainability not only creates value for our company, our stakeholders, and society, but also strengthens our brand and creates stronger relationships with our customers, employees, and investors. These strengthened relationships further drive our ability to innovate and bolster our product portfolio.
The broader semiconductor wafer fab equipment market showed a considerably solid performance with an estimated 10% year-over-year increase in 2016. Both the memory and the logic/foundry segments of the WFE market increased. Within memory capital spending in the DRAM segment dropped but this was offset by higher spending in the NAND flash segment. The single wafer ALD market, however, showed a contraction in 2016. Following strong double-digit growth in 2015, the single wafer ALD market dropped by more than 10% in 2016. Spending by logic and foundry customers increased strongly during the year, as customers started the ramp of the 10nm technology node. The increase in logic/foundry was, however, not enough to offset a considerable drop in the memory segment, which was still the key driver behind the growth in the single wafer ALD market in 2015. Within the memory market, both DRAM and NAND flash saw lower spending on single wafer ALD equipment.
Revenue impacted by contraction in single wafer ALD market
Our revenue dropped by 11% in 2016 which is mainly explained by the contraction in the single wafer ALD market during the year. After a moderation in the second half of 2015, sales remained stable at a quarterly level of around €140 million in the first quarters of 2016. In the fourth quarter of 2016, sales increased to €173 million. In terms of customer segments, for the year as a whole, sales were led by foundry, followed by logic. In 2015, sales were led by memory. In the first quarter of 2016, sales were still led by memory, building on the strength in 2015, but in the rest of the year, foundry and logic led the revenue stream.
The 11% drop in our total revenue in 2016 was mainly explained by lower ALD tool sales. While single wafer ALD demand went through a softer patch in 2016, our company made further progress, in cooperation with customers, to expand the number of ALD process steps and applications for the most advanced technology nodes. ALD is now firmly established as a key enabling technology. In logic, foundry, and memory, the leading customers have already ramped several technology generations based on our ALD equipment. Our ALD equipment is an enabling technology for spacer-defined multiple patterning and used by virtually all of the memory customers. In the logic and foundry sector, ALD is a core technology for high-k metal gate and advanced FinFET applications.
Broadening the customer base
In recent years, we have further broadened our customer base. While in 2015 our total revenue growth was to a large extent driven by an increased contribution from the top four to ten customers, in 2016 the contribution from the top three customers increased again, driven by logic/foundry. Following several years of steady growth in customer deployment and the development of new applications, ALD has turned into a key growth driver for our company. Despite a decrease in sales, our ALD product lines continued to accounted for clearly more than half of total equipment revenue in 2016.
For the year in total, our new bookings increased by 2% in 2016 to €622 million. The book-to-bill as measured by orders divided by sales increased from 0.9 in 2015 to 1.0 in 2016. After a moderation in the second half of 2015 bookings increased to a quarterly level of approximately €160 million in the first half of 2016. In the third quarter of 2016 bookings dropped to €123 million but finished the year strongly with a new record high of €177 million in the fourth quarter of 2016. Equipment bookings in 2016 for ASMI as a whole were led by the foundry segment, followed by logic and memory. Logic was the leading customer segment in the first quarter of 2016, and foundry in the rest of the year. We finished the year with an order backlog of €157 million, an increase of 23% compared to the end of 2015.
Gross profit margin
The gross profit margin was relatively steady at 44.2% in 2016 compared to 44.1% in 2015. In the first three quarters of 2016, the gross margin was stable at around the 44% level, and increased to almost 45% in the fourth quarter of the year. Most of the quarter-by-quarter fluctuations can be explained by changes in the sales mix. Gross margins were stable in 2016 despite the drop in revenue. This reflects the impact from the programs that have been implemented in the recent years to further improve the efficiency and flexibility of our manufacturing and supply chain operations. These measures included new outsourcing initiatives, a stronger focus on sourcing of complete subassemblies and the migration of a major part of our supply base to Asia. Over time, these measures have contributed to a reduction in the fixed costs part of total costs of goods sold.
Selling, general and administrative expenses, including restructuring expenses, dropped by 4% in 2016 and as a percentage of sales increased from 14% in 2015 to 15% in 2016. Research and development (R&D) expenses excluding impairment charges on capitalized development costs increased from 11% to 15% of sales. The impairment charges in 2015 were mainly related to the write-off of the remaining 450mm assets. The increase in R&D excluding impairment charges was the result of an increase in customer requests for new applications.
Operating profit decreased to €82.2 million from €111.1 million in 2015 and the operating profit margin decreased to 13.8% from 16.6%.
Results from investments
Results from investments, which primarily reflects our 39.19% shareholding in ASMPT, increased to €67.7 million from €44.2 million in 2015. These exclude the amortization of intangible assets related to ASMPT. ASMPT's revenue increased by 10% in 2016 in Hong Kong dollars, following a 9% decrease in 2015. In 2015, particularly in the second half of that year, the market for assembly and packaging equipment went through a downturn but in 2016 market conditions clearly improved. ASMPT still recorded a slight year-on-year decrease in revenue in the first half of 2016, but returned to strong double digit growth in the second half of the year. Assembly equipment showed a revenue increase of more than 20% in 2016. Apart from a recovery in the overall Back-end market, ASMPT’s growth was supported by strong developments in specific market segments such as equipment for CMOS image sensors and LED. For SMT Solutions revenue still dropped for the full year, although this business also returned to year-on-year growth in the second half of 2016. ASMPT increased the gross margin to 37.6%.
RESULTS OF OPERATIONS 2016 COMPARED TO 2015
The following table shows the operating performance for 2016, versus 2015:
|Gross profit margin %||44.1%||44.2%|
|Selling, general and administrative expenses||(94.7)||(91.1)||(4%)|
|Research and development expenses||(73.6)||(87.6)||19%|
|Impairment charges property, plant and equipment and other intangible assets||(16.2)||(3.6)||12.6|
|Operating margin %||16.6%||13.8%|
|Financing income / (expense)||24.8||15.0||(9.7)|
|Tax income / (expense)||5.4||(2.3)||(7.6)|
|Net earnings before share in income of investments in associates||141.2||95.0||(46.2)|
|Share in income of investments in associates||16.1||40.5||24.4|
|Net earnings per share, diluted||€2.50||€2.21||€(0.29)|
|Net earnings per share excluding effects from the sale of ASMPT shares||€2.93||€2.66||€(0.27)|
The following table shows certain Consolidated statement of profit or loss data as a percentage of net sales for our operations for 2015 and 2016:
|Cost of sales||(55.9%)||(55.8%)|
|Selling, general and administrative expenses||(14.1%)||(15.2%)|
|Research and development expenses||(11.5%)||(14.6%)|
|Earnings (loss) from operations||16.6%||13.8%|
|Net interest income (expense)||(0.1%)||0.3%|
|Foreign currency exchange gains (losses)||3.8%||2.2%|
|Share in income of investments in associates||2.4%||6.8%|
|Earnings (loss) before income taxes||22.7%||23.0%|
|Tax income / (expense)||0.8%||(0.4%)|
|Net earnings from operations||23.5%||22.7%|
The sales cycle from quotation to shipment for our Front-end equipment generally takes several months, depending on capacity utilization and the urgency of the order. Usually, acceptance is within one to three months after shipment. The sales cycle is longer for equipment that is installed at the customer’s site for evaluation prior to sale. The typical trial period ranges from six months to one year after installation.
Our sales are concentrated in the United States, Europe and Asia. The following table shows the geographic distribution of our net sales for 2015 and 2016:
|Year ended December 31,|
A substantial portion of our sales is for equipping new or upgraded fabrication plants where device manufacturers are installing complete fabrication equipment. As a result, our sales in this segment tend to be uneven across customers and financial periods. Sales to our ten largest customers accounted for 81.0% and 78.5% of net sales in 2015 and 2016, respectively. The composition of our ten largest Front-end customers changes from year to year. The largest customer accounted for more than 10% of Front-end net sales in 2015 and 2016, respectively.
Decrease in net sales
For the full year, net sales decreased by 11% in 2016 for the Front-end business. On a constant currency basis, our sales decreased by 14%.
The revenue in 2016 was led by tool sales in our ALD business. While ALD is now firmly established and a key enabling technology for logic, foundry and memory, it is still strongly impacted by the investment cycle of our customers. Following strong growth in the previous years, the single wafer ALD market showed a double digit contraction in 2016. This was mainly caused by lower demand in the memory sector. Although ALD is required for an increasing number of process steps and applications in logic and foundry as customers transition to the most advanced technology nodes, this could not offset the lower memory demand.
The following table shows the level of new orders for the full year 2016 and the backlog for the same period over 2015:
|YEAR ENDED DECEMBER 31,|
|(EUR million)||2015||2016||% Change|
|Backlog at the beginning of the year||176.1||127.8||(27%)|
|Backlog as per reporting date||127.8||156.7||23%|
|Book-to-bill ratio (new orders divided by net sales)||0.9||1.0|
The backlog includes orders for which purchase orders or letters of intent have been accepted, typically for up to one year. Historically, orders have been subject to cancellation or rescheduling by customers. In addition, orders have been subject to price negotiations and changes in specifications as a result of changes in customers’ requirements. Due to possible customer changes in delivery schedules and requirements, and to cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any subsequent period.
For the year in total, our new bookings increased by 2% in 2016 to €622 million. The book-to-bill as measured by orders divided by sales increased from 0.9 in 2015 to 1.0 in 2016. Equipment bookings in 2016 for ASMI as a whole were led by the foundry segment, followed by logic, and memory. We finished the year with an order backlog of €157 million, a 23% increase compared to the end of 2015.
Total gross profit developed as follows:
|YEAR ENDED DECEMBER 31,|
|Gross profit||Gross profit margin||Increase (decrease) percentage points|
Gross margin increased by ten basis points in 2016 to 44.2%. Throughout the year the margin was relatively stable at around the 44% level, with most of the quarter-by-quarter fluctuations explained by changes in the sales mix. Gross margins were stable in 2016 despite the drop in revenue. This reflects the impact from the programs that have been implemented in the last several years to further improve the efficiency and flexibility of our manufacturing and supply chain operations. These measures included new outsourcing initiatives, a stronger focus on sourcing of complete sub-assemblies and the migration of a larger part of our supply base to Asia. Over time, these measures have contributed to a reduction in the fixed costs part of total costs of goods sold.
Currency changes led to a 5% increase in gross profit compared to 2015.
Selling, general and administrative expenses
Total selling, general and administrative expenses developed as follows:
|YEAR ENDED DECEMBER 31,|
|(EUR million)||2015||2016||% Change|
Selling, general and administrative (SG&A) expenses decreased by 4% in 2016 compared to the previous year. As a percentage of sales, SG&A expenses were 15% in 2016 and 14% in 2015. SG&A included restructuring expenses of €3.1 million in 2016.
The impact of currency changes on SG&A expenses resulted in an increase of 1% year-over-year.
Research and development expenses
Total research and development (R&D) expenses, excluding impairment charges, increased by 19% in 2016 compared to the previous year, mainly driven by additional investments to fulfill customer requirements. As a percentage of sales, R&D expenses increased to 15% compared to 11% in 2015. Currency changes resulted in a 3% increase in R&D expenses year-over-year.
Total research and development expenses developed as follows:
|YEAR ENDED DECEMBER 31,|
|(EUR million)||2015||2016||% Change|
|Research and development expenses||95.3||101.5||7%|
|Capitalization of development expenses||(32.5)||(26.4)||(19%)|
|Research and development grants and credits||(1.0)||(0.8)||(14%)|
|Amortization of capitalized development expenses||11.8||13.3||13%|
|Impairment capitalized development expenses||16.2||3.6||n/a|
Impairment of capitalized development expenses related primarily to the development of new hardware that is now no longer as in-demand from customers, and purchased technology which became obsolete. Of the impairment charges for 2015, €13.4 million related to the impairment of capitalized development expenditures and other assets related to the 450mm technology, and €2.8 million related to the impairment of capitalized development expenses for other project. In 2016 impairments of capitalized development expenses related to a customer specific project.
Research and development investment
We continue to invest strongly in R&D. As part of our R&D activities, we are engaged in various development programs with customers and research institutes. These allow us to develop products that meet customer requirements and obtain access to new technology and expertise. The costs relating to prototypes and experimental models, which we may subsequently sell to customers, are charged to the cost of sales.
Our R&D operations in the Netherlands, Belgium, and the United States receive research and development grants and credits from various sources.
The operating result developed as follows:
|YEAR ENDED DECEMBER 31,|
|Before special items||129.0||90.7||(30%)|
|Including special items||111.1||82.2||(26%)|
Operating profit decreased to €82.2 million from €111.1 million in 2015, and the operating profit margin decreased to 13.8% from 16.6%.
Impairment charges in 2015 related to capitalized development expenditures and assets. In 2016, impairment
charges related to demo equipment and capitalized development expenditures.
Financing costs mainly reflect translation results. A substantial part of our cash position is denominated in US dollars.
Results from investments in associates
Results from investments, which primarily reflects our 39.19% shareholding in ASMPT, increased to €67.7 million from €44.2 million in 2015. These exclude the amortization of intangible assets related to ASMPT. ASMPT's revenue increased by 10% in 2016 in Hong Kong dollars, following a 9% decrease in 2015. In 2015 particularly in the second half of that year, the market for assembly and packaging equipment went through a downturn but in 2016 market conditions clearly improved. ASMPT still recorded a slight year-on-year decrease in revenue in the first half of 2016, but returned to strong double digit growth in the second half of the year. Assembly equipment showed a revenue increase of more than 20% in 2016. Apart from a recovery in the overall Back-end market, ASMPT’s growth was supported by strong developments in specific market segments such as equipment for CMOS image sensors and LED. For SMT Solutions revenue still dropped for the full year, although this business also returned to year-on-year growth in the second half of 2016. ASMPT increased the gross margin to 37.6%.
The amortization of the recognized intangible assets and the depreciation of the fair value adjustment for property, plant & equipment had a €27.2 million impact on net earnings in 2016 (2015: €27.2 million). For further information on ASMPT, see Note 6 to the Consolidated financial statements.
The income tax expense of €2.3 million (2015: €5.4 million benefit) reflects an effective tax rate of 1.7% (2015: 3.5% positive). The tax benefit in 2015 included €9 million in a one-off cash benefit due to tax refunds in South Korea from previous years related to higher tax exemptions than originally assumed and a €5 million one-off benefit resulting from the recognition of deferred tax assets on tax losses, incurred in the past, in the Netherlands. For further information on tax, see Note 20 to the Consolidated financial statements.
Net earnings developed as follows:
|YEAR ENDED DECEMBER 31,|
|Before special items||158.2||103.4||(54.8)|
|Investment in ASMPT (approximately 40%)||44.2||67.7||23.6|
|Amortization other intangible assets from purchase price allocation||(27.2)||(27.2)||(0.1)|
|Net result from operations||157.3||135.5||(21.8)|
The following table shows the cash flow statement:
|Net earnings from operations||157.3||135.5|
|Adjustments to cash from operating activities:|
|Depreciation, amortization and impairments||54.3||51.7|
|Share in income of investments in associates||(16.1)||(40.5)|
|Non-cash financing costs||(17.1)||(2.5)|
|Changes in other assets and liabilities:|
|Accounts payable and accrued expenses||(3,0)||7.0|
|Other assets and liabilities||(4.9)||(10.2)|
|Income tax paid||(9.2)||(7.4)|
|Net cash from operating activities||174.8||91.4|
|Capitalized development expenditure||(30.2)||(27.3)|
|Purchase of intangible assets||(7.2)||(7.0)|
|Dividend received from associates||42.9||22.1|
|Net cash used in investing activities||(28.6)||(38.0)|
|Purchase treasury shares||(79.1)||(97.0)|
|Debt issuance fees paid||–||(0.8)|
|Proceeds from shares issued||11.3||14.7|
|Dividend paid to shareholders ASMI||(37.2)||(42.7)|
|Net cash used in financing activities||(104.9)||(125.8)|
|Total net cash provided / (used)||41.3||(72.4)|
Statement of financial position
Working capital at December 31, 2016 was €157 million (2015: €114 million). Working capital consists of: inventories, accounts receivable, other current assets, accounts payable, provision for warranty and accrued expenses, and other payables. The number of outstanding days of working capital, measured against quarterly sales, increased from 69 days at December 31, 2015 to 82 days at December 31, 2016. This was mainly due to a different mix in sales during the last quarter of 2016, leading to high accounts receivables at the end of the year.
The following table lists the total number of employees, at the dates indicated, exclusive of temporary workers:
|- the Netherlands||146||141|
We had 1,670 employees as per December 31, 2016. The following table lists the number of employees per function:
|Research and development||420||447|
|Marketing and sales||253||252|
|Finance and administration||165||169|
Our Dutch operations, which employed 141 staff as per December 31, 2016, is subject to standardized industry bargaining under Dutch law, and is required to pay wages and meet conditions established as a result of negotiations between all Dutch employers in their industry and unions representing employees of those employers. As required by Dutch law, management in our Dutch facilities meet with a works council consisting of elected employee representatives to discuss working conditions and personnel policies, as well as to explain major corporate decisions and to solicit their advice on major issues.
The assembly and packaging segment, ASMPT, had 14,360 employees as per December 31, 2016 (December 31, 2015: 14,348).
Subsequent events were evaluated up to March 9, 2017, which is the issuance date of this Statutory annual report 2016. There are no subsequent events to report.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is affected by many factors, some of which are related to our ongoing operations while others are related to the semiconductor and semiconductor equipment industries, and to the economies of the countries in which we operate. Although our cash requirements fluctuate based on the timing and extent of these factors, we believe that cash generated by operations, together with the liquidity provided by our existing cash resources and our financing arrangements, will be sufficient to fund working capital, capital expenditures and other ongoing business requirements for at least the next twelve months.
On December 31, 2016, our principal sources of liquidity consisted of €378 million in cash and cash equivalents and €150 million in undrawn bank lines.
For the most part, our cash and cash equivalents are not guaranteed by any governmental agency. We place our cash and cash equivalents with high-quality financial institutions to limit our credit risk exposure.
We generated cash from operating activities of €91.4 million in 2016 (2015: €174.8 million). We invested €38.0 million (2015: €28.6 million), and used €125.8 million (2015: €104.9 million) in financing activities.
We were debt-free as of December 31, 2016.
In December 2016, we finalized the renewal of our current standby revolving credit facility. The security of the previous credit agreement has been released. The maturity date of the new credit commitment of €150 million is December 16, 2021 with an extension option for up to two years. As per December 31, 2016 this facility was undrawn.
The credit facility of €150 million includes two financial covenants:
- Minimum Consolidated tangible net worth; and
- Consolidated total net debt/total equity ratio.
These financial covenants are measured twice each year, on June 30 and December 31. We were in compliance with these financial covenants as per December 31, 2016.
The assembly and packaging segment of our business is organized in ASM Pacific Technology Ltd (ASMPT). Net cash of our 39.19%-owned associate was €262 million on December 31, 2016. The cash resources and borrowing capacity of ASMPT are not available to our wafer processing equipment segment.
Although certain directors of ASMI are directors of ASMPT, ASMPT is under no obligation to declare dividends to shareholders or enter into transactions that are beneficial to us. As a substantial shareholder, we can participate in the shareholders' approval of the payment of dividends, but cannot compel their payment or size. Cash dividends received from ASMPT during 2015 and 2016 were €42.9 million and €22.1 million, respectively.
The market value of our 39.19% investment ASMPT was approximately €1,608 million as per December 31, 2016.
We have developed forecasts and projections of cash flows and liquidity needs for the upcoming year. These take into account the current market conditions, reasonable possible changes in trading performance based on such conditions, and our ability to modify our cost structure as a result of changing economic conditions and sales levels. In the forecasts, we have also taken into account: the total cash balances amounting to €378 million on December 31, 2016; the ability to renew debt arrangements and to access additional indebtedness; and whether or not we will comply with our financial covenants. Based on this, we believe that our cash on hand at the end of 2016 is adequate to fund our operations, and our investments in capital expenditures and to fulfill our existing contractual obligations for the next twelve months.
CONTRACTUAL OBLIGATIONS, CONTINGENT LIABILITIES AND COMMITMENTS
We have contractual obligations, some of which are required to be recorded as liabilities in our Consolidated financial statements, including long- and short-term debt. Other contractual arrangements, such as operating lease commitments and purchase obligations, are not generally required to be recognized as liabilities on our Consolidated statement of financial position, but are required to be disclosed.
The following table summarizes our contractual obligations as per December 31, 2016, aggregated by type of contractual obligation:
|Total||Less than 1 year||1-3 years||3-5 years||More than 5 years|
|Income tax payable||2,467||2,467||–||–||–|
|Accrued expenses and other payables||48,694||48,694||–||–||–|
|Purchase commitments to suppliers||87,078||86,885||175||18||–|
|Capital expenditure and other commitments||10,556||9,569||987||–||–|
|Total contractual obligations||232,080||215,466||8,942||3,902||3,770|
We outsource a substantial portion of the manufacturing of our Front-end operations to certain suppliers. As our products are technologically complex, the lead times for purchases from our suppliers can vary and can be as long as nine months. Generally, contractual commitments are made for multiple modules or systems in order to reduce our purchase prices per module or system. For the majority of our purchase commitments, we have flexible delivery schedules depending on the market conditions, which allow us, to a certain extent, to delay delivery beyond originally planned delivery schedules.
We are exposed to market risks (including foreign exchange rate risk), credit risk, liquidity risk, and equity price risk. We may use forward exchange contracts to hedge foreign exchange risk. We do not enter into financial instrument transactions for trading or speculative purposes.
FOREIGN EXCHANGE RATE RISK
We conduct business in a number of foreign countries, with certain transactions denominated in currencies other than the functional currency of ASMI (euro) or one of our subsidiaries conducting the business. The purpose of our foreign currency management is to manage the effect of exchange rate fluctuations on revenues, costs, and cash flows, and assets and liabilities denominated in selected foreign currencies, in particular in US dollars.
The majority of revenues and costs of our wafer processing equipment segment are denominated in US dollars, Singapore dollars, Korean won and Japanese yen. Since foreign currency exposure on our trading positions is not significant, no forward exchange contracts are used. The effect of exchange rate fluctuations on revenues, costs, and cash flows, and assets and liabilities denominated in foreign currencies is reviewed periodically.
We may use forward exchange contracts to hedge foreign exchange risk of anticipated sales or purchase transactions in the normal course of business, which occur within the next twelve months, for which we have a firm commitment from a customer or to a supplier. The terms of these contracts are consistent with the timing of the transactions being hedged. The hedges related to forecasted transactions are designated and documented at the inception of the hedge as cash flow hedges, and are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income in Shareholders’ Equity, and is reclassified into earnings when the hedged transaction affects earnings. As per December 31, 2016, we had no foreign exchange contracts in place.
The majority of revenues and costs of our assembly and packaging segment are denominated in Hong Kong dollars, Chinese yuan, and US dollars. The functional currency of our assembly and packaging segment (Hong Kong dollar) is linked to the US dollar.
As we did not use forward exchange contracts, no unrealized gains were included in accumulated other comprehensive income as per December 31, 2016.
Furthermore, we may manage the currency exposure of certain receivables and payables using derivative instruments, such as forward exchange contracts (fair value hedges) and currency swaps, and non-derivative instruments, such as debt borrowings in foreign currencies. The gains or losses on these instruments provide an offset to the gains or losses recorded on receivables and payables denominated in foreign currencies. The derivative instruments are recorded at fair value and changes in fair value are recorded in earnings under foreign currency exchange gains (losses) in the Consolidated statement of profit or loss. Receivables and payables denominated in foreign currencies are recorded at the exchange rate at the balance sheet date, and gains and losses as a result of changes in exchange rates are recorded in earnings under foreign currency exchange gains (losses) in the Consolidated Statement of profit or loss.
To the extent that foreign currency fluctuations affect the value of our investments in our foreign affiliates, they are not hedged. The cumulative effect of these fluctuations is separately reported in Consolidated Shareholders’ Equity. For the year ended December 31, 2016, we recorded a favorable movement of €41 million (year-end December 31, 2015: €137 million). See Note 11 to our Consolidated financial statements.
The following tables analyze our sensitivity to a hypothetical 10% strengthening and 10% weakening of the US dollar, Singapore dollar, Hong Kong dollar, Korean won or Japanese yen against the euro as per December 31, 2015 and December 31, 2016.
A positive amount indicates an increase in equity. Recognized in equity is the revaluation effect of subsidiaries denominated in US dollars, Singapore dollars, Hong Kong dollars, Korean won, and Japanese yen.
|Impact on equity|
|10% increase of US dollar versus euro||11,109||13,135|
|10% decrease of US dollar versus euro||(11,109)||(13,135)|
|10% increase of Singapore dollar versus euro||9,925||11,927|
|10% decrease of Singapore dollar versus euro||(9,925)||(11,927)|
|10% increase of Hong Kong dollar versus euro||118,085||123,575|
|10% decrease of Hong Kong dollar versus euro||(118,085)||(123,575)|
|10% increase of Korean won versus euro||12,123||10,416|
|10% decrease of Korean won versus euro||(12,123)||(10,416)|
|10% increase of Japanese yen versus euro||8,211||9,134|
|10% decrease of Japanese yen versus euro||(8,211)||(9,134)|
A hypothetical 10% strengthening or 10% weakening of any other currency against the euro as per December 31, 2015 and December 31, 2016 would not result in a material impact on equity.
The following table analyzes our sensitivity to a hypothetical 10% strengthening and 10% weakening of the US dollar, Hong Kong dollar, Korean won, and Japanese yen against the euro at average exchange rates for 2015 and 2016. A positive amount indicates an increase in net earnings.
|Impact on net earnings|
|10% increase of US dollar versus euro||640||1,739|
|10% decrease of US dollar versus euro||(640)||(1,739)|
|10% increase of Singapore dollar versus euro||1,580||1,870|
|10% decrease of Singapore dollar versus euro||(1,580)||(1,870)|
|10% increase of Hong Kong dollar versus euro||1,700||4,049|
|10% decrease of Hong Kong dollar versus euro||(1,700)||(4,049)|
|10% increase of Korean won versus euro||3,509||1,413|
|10% decrease of Korean won versus euro||(3,509)||(1,413)|
|10% increase of Japanese yen versus euro||344||577|
|10% decrease of Japanese yen versus euro||(344)||(577)|
A hypothetical 10% strengthening or 10% weakening of any other currency against the euro at average exchange rates for 2015 and 2016 would not result in a material impact on net earnings.
We are not exposed to interest rate risk through our borrowing activities. We do not enter into financial instrument transactions for trading or speculative purposes or to manage interest rate exposure. As per December 31, 2016, the company is debt-free.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and derivative instruments. These instruments contain a risk of counterparties failing to discharge their obligations. We monitor credit risk and manage credit risk exposure by type of financial instrument by assessing the creditworthiness of counterparties. We do not anticipate nonperformance by counterparties given their high creditworthiness.
Our customers are semiconductor device manufacturers located throughout the world. We perform ongoing credit evaluations of our customers' financial condition. We take additional measures to mitigate credit risk when considered appropriate by means of down payments or letters of credit. We generally do not require collateral or other security to support financial instruments with credit risk.
Concentrations of credit risk (whether on- or off-balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.
Small number of large clients
We derive a significant percentage of our revenue from a small number of large customers. Our three largest customers accounted each for more than 7.5% of net sales in 2016. The ten largest customers accounted for approximately 78.5% of net sales in 2016 (2015: 81.0%). Sales to these large customers also may fluctuate significantly from time to time depending on the timing and level of purchases by these customers. Significant orders from such customers may expose us to a concentration of credit risk and difficulties in collecting amounts due, which could harm our financial results. At December 31, 2016, one customer accounted for 30.0% of total accounts receivable.
We invest our cash and cash equivalents in short-term deposits and derivative instruments with high-rated financial institutions. We only enter into transactions with a limited number of major financial institutions that have high credit ratings, and we closely monitor the creditworthiness of our counterparties. Concentration risk is mitigated by not limiting the exposure to a single counter party.
The maximum credit exposure is equal to the carrying values of cash and cash equivalent, and accounts receivable.
EQUITY PRICE RISK
The ASMPT investment is accounted for under the equity method on a go-forward basis. Equity method investments are tested for prolonged decline in value. The determination of whether an investment is impaired is made at the individual security level in each reporting period.
If the fair value of an investment is less than its carrying value at the balance sheet date, we determine whether the impairment is temporary or prolonged. The amount per share recognized on December 31, 2016 under equity accounting amounts to HKD63.14, whereas the level 1 fair value per share (being the market price of a share on the Hong Kong Stock Exchange) was HKD82.15 on December 31, 2016. Management concluded that based on quantitative analysis, no impairment of our share in ASMPT existed as of December 31, 2016.