Financial instruments include:
| December 31, | ||||
| 2016 | 2017 | |||
| Financial assets: | ||||
| Cash and cash equivalents | 378,157 | 836,461 | ||
| Accounts receivable | 137,020 | 163,135 | ||
| Financial liabilities: | ||||
| Accounts payable | 60,910 | 79,349 | ||
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable equal their fair values because of the short-term nature of these instruments.
Gains or losses related to financial instruments are as follows:
| 2016 | 2017 | |||
| Interest income | 3,095 | 1,683 | ||
| Interest expense | (1,096) | (1,799) | ||
| Result from foreign currency exchange | 13,032 | (30,546) | ||
| Addition to allowance for doubtful accounts receivable | (52) | – |
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASMI uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities.
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
There were no transfers between levels during the years ended December 31, 2017 and December 31, 2016.
ASMI is exposed to a number of risk factors: market risks (including foreign exchange risk), credit risk, liquidity risk and equity price risk. The Company may use forward exchange contracts to hedge its foreign exchange risk. The Company does not enter into financial instrument transactions for trading or speculative purposes.
ASMI and its subsidiaries conduct business in a number of foreign countries, with certain transactions denominated in currencies other than the functional currency of the Company (Euro) or one of its subsidiaries conducting the business. The purpose of the Company's foreign currency management is to manage the effect of exchange rate fluctuations on income, expenses, cash flows and assets and liabilities denominated in selected foreign currencies, in particular denominated in US dollars.
We may use forward exchange contracts to hedge our 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 on a quarterly basis. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (loss) net of taxes in equity, and is reclassified into earnings when the hedged transaction affects earnings.
Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized in earnings. We record all derivatives, including forward exchange contracts, on the statement of financial position at fair value in accrued expenses and payables. Should contracts extend beyond one year, these are classified as long-term.
Furthermore, we might 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.
We do not use forward exchange contracts for trading or speculative purposes. Financial assets and financial liabilities are recognized on the Company's Consolidated statement of financial position when the Company becomes a party to the contractual provisions of the instrument.
To the extent that exchange rate fluctuations impact the value of the Company’s investments in its foreign subsidiaries, they are not hedged. The cumulative effect of these fluctuations is separately reported in consolidated equity. Reference is made to Note 11.
Per December 31, 2016 and December 31, 2017, there were no forward exchange contracts outstanding.
The following table analyzes the Company’s sensitivity to a hypothetical 10% strengthening and 10% weakening of the US dollar, Singapore dollar, Korean won and Japanese yen against the euro as of December 31, 2016 and December 31, 2017. This analysis includes foreign currency-denominated monetary items and adjusts their translation at year end for a 10% increase and 10% decrease against the euro.
| Impact on financial instruments | ||||
| (EUR thousand) | 2016 | 2017 | ||
| 10% increase of US dollar versus euro | 36,166 | 35,843 | ||
| 10% decrease of US dollar versus euro | (36,166) | (35,843) | ||
| 10% increase of Singapore dollar versus euro | 276 | (400) | ||
| 10% decrease of Singapore dollar versus euro | (276) | 400 | ||
| 10% increase of Korean won versus euro | 1,409 | 2,760 | ||
| 10% decrease of Korean won versus euro | (1,409) | (2,760) | ||
| 10% increase of Japanese yen versus euro | 676 | 737 | ||
| 10% decrease of Japanese yen versus euro | (676) | (737) | ||
A hypothetical 10% strengthening or 10% weakening of any other currency against the euro as of December 31, 2016 and December 31, 2017, would not result in a material impact on net earnings.
We are exposed to interest rate risk through our cash deposits. The Company does not enter into financial instrument transactions for trading or speculative purposes or to manage interest rate exposure. As per December 31, 2017, the Company had no debt and was not exposed to interest rate risk on borrowings.
Financial instruments that potentially subject the Company 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 non-performance 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.
We derive a significant percentage of our revenue from a small number of large customers. The ten largest customers accounted for approximately 83.1% of net sales in 2017 (2016: 78.5%). Included in net sales are revenues of approximately €437 million (2016: €279 million) to customers contributing more than 10% of total net sales. 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 the Company to a concentration of credit risk and difficulties in collecting amounts due, which could harm the Company’s financial results.
We invest our cash and cash equivalents in short-term deposits, money market funds 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.
Our policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
Our liquidity needs are affected by many factors, some of which are based on the normal on-going operations of the business, and others that relate to the uncertainties of the global economy and the semiconductor industry. Although our cash requirements fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with our principal sources of liquidity are sufficient to satisfy our current requirements, including our expected capital expenditures in 2018.
We intend to return cash to our shareholders on a regular basis in the form of dividend payments and, subject to our actual and anticipated liquidity requirements and other relevant factors, share buybacks.
The following table summarizes the Company’s contractual and other obligations as at December 31, 2017.
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||
| Accounts payable | 79,349 | 79,349 | – | – | – | |||||
| Income tax payable | 6,575 | 6,575 | – | – | – | |||||
| Accrued expenses and other payables | 58,954 | 58,954 | – | – | – | |||||
| Operating leases | 19,065 | 6,892 | 7,271 | 3,542 | 1,360 | |||||
| Pension liabilities | 5,729 | 820 | 671 | 1,108 | 3,130 | |||||
| Purchase obligations: | ||||||||||
| Purchase commitments to suppliers | 111,627 | 107,793 | 3,790 | 27 | 17 | |||||
| Capital expenditure and other commitments | 33,774 | 32,100 | 1,544 | 130 | – | |||||
| Total contractual obligations | 315,073 | 292,483 | 13,276 | 4,807 | 4,507 |
Total short-term lines of credit amounted to €150,000 at December 31, 2017. The amount outstanding at December 31, 2017 was nil and the undrawn portion totaled €150,000. The standby revolving credit facility of €150,000 with a consortium of banks will be available through December 16, 2021.
For the majority of purchase commitments, the Company has flexible delivery schedules depending on the market conditions, which allows the Company, to a certain extent, to delay delivery beyond originally planned delivery schedules.
The shares of ASMPT, our 25.18% equity investment, are listed on the Hong Kong Stock Exchange. If the fair value of an investment is less than its carrying value at the balance sheet date, the Company determines whether the impairment is temporary or prolonged. The amount per share recognized as per December 31, 2017 under equity accounting amounts to HK$66.47, whereas the level 1 fair value per share (being the market price of a share on the Hong Kong Stock Exchange) was HK$108.90. Management concluded that, based on quantitative analysis no impairment of its share in ASMPT existed as per December 31, 2017.
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