ANNUAL REPORT 2017
EXPLORE OUR PERSPECTIVES

NOTE 12. EMPLOYEE BENEFITS

PENSION PLANS

The Company has retirement plans covering substantially all employees. The principal plans are defined contribution plans, except for the plans of the Company's operations in the Netherlands and Japan.

Multi-employer plan

There are 141 eligible employees in the Netherlands. These employees participate in a multi-employer union plan (Pensioenfonds van de Metalektro PME) determined in accordance with the collective bargaining agreements effective for the industry in which we operate. This current collective bargaining agreement ends on May 31, 2018. This multi-employer union plan, accounted for as a defined contribution plan, covers approximately 1,300 companies and approximately 145,000 contributing members. Our contribution to the multi-employer union plan was less than five percent of the total contribution to the plan. The plan monitors its risks on a global basis, not by participating company or employee, and is subject to regulation by Dutch governmental authorities. By law (the Dutch Pension Act), a multi-employer union plan must be monitored against specific criteria, including the coverage ratio of the plan's assets to its obligations. As of January 1, 2015, new pension legislation has been enacted. This legislation results in amongst others, an increase of legally required coverage levels. The coverage percentage is calculated by dividing the funds capital by the total sum of pension liabilities and is based on actual market interest rates. The coverage ratio as per December 31, 2017 of 101.6% (December 31, 2016: 96.2%) is calculated giving consideration to the pension legislation and is below the legally required level. We have however no obligation to pay off any deficits the pension fund may incur, nor do we have any claim to any potential surpluses.

Every company participating in the PME contributes a premium calculated as a percentage of its total pensionable salaries, with each company subject to the same contribution rate. The premium can fluctuate yearly based on the coverage ratio of the multi-employer union plan, for 2017 the contribution percentage was 22.9%. The pension rights of each employee are based upon the employee's average salary during employment.

Our net periodic pension cost for this multi-employer union plan for any period is the amount of the required employer contribution for that period.

Defined benefit plan

The Company's employees in Japan participate in a defined benefit plan. The Company makes contributions to defined benefit plans in Japan that provide pension benefits for employees upon retirement. These are average-pay plans, based on the employees' years of service and compensation near retirement.

The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out on December 31, 2017. The present value of the defined benefit obligation and the related current service cost and past service cost were measured using the projected unit credit method. Significant actuarial assumptions for the determination of the defined obligation are discount rate, future general salary increases and future pension increases.

The net liability of the plan developed as follows:

 December 31,
 20162017
Defined benefit obligations11,40310,167
Fair value of plan assets9,9859,781
Net liability for defined benefit plans1,418386

The changes in defined benefit obligations and fair value of plan assets are as follows:

 December 31,
 20162017
Defined benefit obligations
Balance January 19,80011,403
Current service cost702747
Interest on obligation8452
Remeasurement result736(147)
Benefits paid(497)(926)
Foreign currency translation effect578(962)
Balance December 3111,40310,167
Fair value of plan assets
Balance January 18,6309,985
Interest income8048
Return on plan assets(211)454
Company contribution1,4731,102
Benefits paid(497)(926)
Foreign currency translation effect510(882)
Balance December 319,9859,781

The defined benefit cost consists of the following:

 December 31,
 20162017
Current service cost702747
Net interest costs44
Net defined benefit cost706751
Reclassification to remeasurement866
Remeasurement on net defined benefit for the year(602)
Remeasurement on net defined benefit264
Total defined benefit cost7061,015

The assumptions in calculating the actuarial present value of benefit obligations and net periodic benefit cost are as follows:

 20162017
Discount rate for defined benefit obligations0.50%0.50%
Discount rate for defined benefit cost0.80%0.50%

Assumptions regarding life expectancy are based on mortality tables published in 2014 by the Ministry of Health, Labour and Welfare of Japan.

The main risk on the pension plan relates to the discount rate. The defined benefit obligation is sensitive to a change in discount rates, a relative change of the discount rate of 25 basis points would have resulted in a change in the defined benefit obligation of 2.7%.

The allocation of plan assets is as follows:

 December 31,
 20162017
Cash and cash equivalent801%951%
Equity Instruments1,72317%1,82719%
Debt instruments95010%1,02911%
Assets held by insurance company7,23272%6,83069%
Total9,985100%9,781100%

The investment strategy is determined based on an asset-liability study in consultation with investment advisors and within the boundaries given by the regulatory bodies for pension funds.

Equity instruments consist primarily of publicly traded Japanese companies and common collective funds. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded (level 1). Common collective funds are valued at the published price (level 1) per share multiplied by the number of shares held as of the measurement date. Debt instruments consists of government bonds and are valued at the closing prices in the active markets for identical assets (level 1). Assets held by insurance company consist of bonds and loans, government securities and common collective funds. Corporate and government securities are valued by third-party pricing sources (level 2). Common collective funds are valued at the net asset value per share (level 2) multiplied by the number of shares held as of the measurement date.

The plan assets do not include any of the Company's shares.

Retirement plan costs

ASMI contributed €1,102 to the defined benefit plan in 2017 (€1,473 in 2016). The Company expects to pay benefits for years subsequent to December 31, 2017 as follows:

Expected contribution defined benefit plan
2018820
2019366
2020305
2021355
2022753
Aggregate for the years 2023-20273,130
Total5,729

The Company does not provide for any significant post-retirement benefits other than pensions.

MANAGEMENT BOARD AND EMPLOYEE AND LONG-TERM INCENTIVE PLAN

The Company has adopted various share plans (e.g. stock option plans, a restricted share plan and a performance share plan) and has entered into share agreements with the Management Board and various employees. Under the stock option plans, the Management Board and employees may purchase per the vesting date a specific number of shares of the Company's common stock at a certain price. Options are priced at market value in euros or US dollars on the date of grant. Under the restricted share plan, employees receive per the vesting date a specific number of shares of the Company's common stock. Under the performance share plan, the Management Board receives per the vesting date, and provided the performance criteria have been met, a specific number of shares of the Company's common stock.

Authority to issue options and shares

By resolution of the Annual General Meeting of Shareholders (AGM) of May 22, 2017, the formal authority to issue options and shares was allocated to the Management Board subject to the approval of the Supervisory Board. This authority is valid for 18 months and needs to be refreshed by the 2018 AGM to allow the continued application of the long-term incentive (LTI) plans beyond November 22, 2018.

The ASMI 2014 long-term incentive plan for employees (ELTI) is principally administered by the Management Board and the ASMI 2014 Long-Term Incentive Plan for members of the Management Board (MLTI) is principally administered by the Supervisory Board. This complies with applicable corporate governance standards. However, the Supervisory Board has no power to represent the Company. For external purposes the Management Board remains the competent body under both LTI plans. The LTI plans envisage that the Supervisory Board, or in the case of the ELTI the Management Board with the approval of the Supervisory Board, will determine the number of options and shares to be granted to the Management Board members and to employees.

2011 Long-Term Incentive Plan

In 2011 a stock option plan was adopted. In this plan to limit potential dilution, the amount of outstanding (vested and non-vested) options granted to the Management Board and to other employees will not exceed 7.5% of the issued ordinary share capital of ASMI. The stock option plan 2011 consists of two sub-plans: the ASMI stock option plan for employees (ESOP) and the ASMI stock option for members of the Management Board (MSOP).

For employees and existing Management Board members the grant date for all options granted is December 31 of the relevant year. In each of these situations, the three-year vesting period starts at the grant date. The exercise price in euros of all options issued under the ESOP and the MSOP is determined on the basis of the market value of the ASMI shares at (i.e. immediately prior to) the grant date.

The exercise period is four years starting at the third anniversary of the grant date.

The following table is a summary of changes in options outstanding under the 2011 and previous long-term incentive plan:

Euro-plansUS dollar-plans
Number of optionsWeighted average exercise price in €Number of optionsWeighted average exercise price in US$
Balance January 1, 20162,012,71021.0922,20919.91
Options forfeited(74,492)23.73(4,717)29.69
Options expired(4,128)22.93
Options exercised(638,958)19.70(16,493)17.31
Balance December 31, 20161,295,13221.6399916.62
Options forfeited
Options expired(2,179)21.13
Options exercised(626,444)21.14(999)16.62
Balance December 31, 2017666,50922.09

The total intrinsic value of options exercised was €13,293 for the year ended December 31, 2017 (2016: €12,882). In 2017 treasury shares have been sold for the exercise of 626,939 options.

On December 31, 2017, options outstanding and options exercisable classified by range of exercise prices are:

 Options outstandingOptions exercisable
Range of exercise pricesNumber outstandingWeighted average remaining contractual lifeWeighted average exercise priceNumber exercisableWeighted average exercise price
Euro plansIn yearsIn EURIn EUR
€1.00-15.00
€15.01-20.00195,3461.018.93195,34618.93
€20.01-25.00471,1632.623.40471,16323.40
€1.00-25.00666,5092.122.09666,50922.09

At December 31, 2017, the aggregate intrinsic value of all options outstanding and exercisable under these plans is €37,571.

Under these plans, no more options to purchase shares can be issued. Under the various stock option plans a total of 666,509 options to purchase common stock were outstanding at December 31, 2017, expiring at various dates through 2020.

2014 Long-Term Incentive Plan

In 2014 a new long-term incentive plan was adopted. In the new plan to limit potential dilution, the amount of outstanding (vested and non-vested) options and shares granted to the Management Board and to other employees will not exceed 5% of the issued ordinary share capital of ASMI. The new long-term incentive plan 2014 consists of two sub-plans: ELTI and the MLTI.

Options and performance shares are issued to Management Board members and restricted shares are issued to employees once per annum on the date following the publication of the first-quarter results of the relevant year. Possible grant to newly-hired employees can be issued once a quarter, on the date following the publication of the financial results of the relevant quarter. The number of options and shares outstanding under the long-term incentive plans or under any other plan or arrangement in aggregate may never exceed 5% of ASMI's share capital. In accordance with the ASMI remuneration policy, an exception is made for a transition period of four years, during which the dilution may exceed 5% but will not exceed 7.5%.

Performance and restricted shares outstanding

The following table is a summary of changes in performance shares and restricted shares outstanding under the 2014 long-term incentive plan.

Number of performance sharesNumber of restricted sharesStatusFair value at grant date (weighted average)
Balance January 1, 201612,994166,337
Shares granted, employees206,726Unconditional€35.36
Shares granted, Management Board16,651Conditional€34.67
Shares vested(55,041)
Shares forfeited(10,517)
Balance December 31, 201629,645307,505
Shares granted, employees149,197Unconditional€52.29
Shares granted, Management Board17,413Conditional€51.75
Shares vested(118,317)
Shares forfeited(31,850)
Balance December 31, 201747,058306,535

In 2017, treasury shares were sold for the vesting of 118,317 restricted shares.

Options outstanding

The following table is a summary of changes in options outstanding under the 2014 long-term incentive plan.

Number of optionsExercise price in €Fair value at grant date
Balance January 1, 2015
Options granted, April 24, 201542,65944.24€17.33
Balance December 31, 201542,659
Options granted, April 22, 201662,55537.09€12.64
Balance December 31, 2016105,214
Options granted, April 21, 201724,96351.55€14.57
Balance December 31, 2017130,177

The cost relating to stock options is measured at fair value on the grant date. The fair value for the stock options granted in 2017 was determined using the Black-Scholes option valuation model with the following weighted average assumptions:

 2017
Expected life (years)7
Risk-free interest rate1.36%
Dividend yield1.86%
Expected volatility32.58%
Exercise price€51.55
Fair value per grant date€14.57

The expected volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over the last seven years.

At December 31, 2017, the aggregate intrinsic value of all options outstanding under the 2014 long-term incentive plan is €7,338.

Share-based payments expenses

The grant date fair value of the stock options, the restricted shares and the performance shares is expensed on a straight-line basis over the vesting period, based on the Company's estimate of stock options, restricted shares and performance shares that will eventually vest. The impact of the true up of the estimates is recognized in the Consolidated statement of profit or loss in the period in which the revision is determined. We recorded compensation expenses of €7,801 for 2017 (2016: €8,387).