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FINANCIAL PERFORMANCE

MANAGEMENT BOARD REPORT

INTRODUCTION

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, 2015, we have a 39.55% 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 39.55% stake in ASMPT, to the assembly industry, which is subject to sudden, 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 Genitech Korea Ltd (ASM Genitech), located in South Korea. The location 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$8.3 billion in 2015 (VLSI Research, January 2016). 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 may enable the deposition at reduced process temperature.

MOORE'S LAW

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 the 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 enables the introduction of new and more advanced products ranging from high-end servers to smartphones, wearable devices and automotive electronics.

BACK-END OPERATIONS

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.

STRATEGY

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. The key elements of our strategy include:

Innovative strength

We have always been recognized for our technology leadership. Today, we provide leading technologies that support our customers in staying on the curve of Moore’s Law. Our innovative strength is what differentiates us in the marketplace 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, chemicals manufacturers and research institutes such as imec. We also expand our patent portfolio.

Leadership in ALD

ALD technologies have been established as mainstream technologies in high-volume manufacturing supporting virtually all of the leading customers in the semiconductor industry. As the 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 to support our customers with increasingly complex device node transitions.

Operational excellence

While technology leadership remains crucial, we 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.

Responsibility

We believe that being a responsible company creates value for our company, our stakeholders and society, which is why we have integrated Corporate responsibility (CR) into our strategic goals. Our goal is to manage all aspects of our business responsibly to meet or exceed stakeholder expectations, while holding our suppliers to the same high standards that we set for ourselves. This will enable us to continue to help improve the quality of people’s lives.

OPERATIONS

Following a strong increase in 2014, the semiconductor equipment market was relatively stable in 2015. Gartner estimated that the Wafer Fab Equipment market decreased marginally by 0.5% in 2015. While spending in the Foundry and Logic segments moderated in the course of the year, the Memory segment was again the key driver behind industry equipment spending. Leading-edge equipment continued to represent the largest part of global equipment spending in 2015.

Record revenue

Following a strong order intake in the latter part of 2014 and the first part of 2015, revenue increased to new record heights in the first half of 2015 at €162 million in the first quarter and €201 million in the second quarter. While still higher year-over-year revenue decreased sequentially in the second half, due to lower spending levels in the Logic/Foundry and DRAM customer segment. For the full year, net sales increased by 23% to a new record high for the wafer processing equipment business. On a constant currency basis our sales increased by 14% year-on-year. For the third consecutive year we have grown our sales by solid double digits and for the fourth time in five years we have outperformed the broader equipment market.

The revenue growth in 2015 was again led by increased tool sales in our ALD business. Momentum in the ALD market during the year remained strong. ALD is required for an increasing number of process steps and applications as customers transition to 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 has become a mainstream technology for high-k metal gate applications.

Broadening the customer base

In recent years, we have further broadened our customer base. In 2015 our total revenue growth was to a large extent driven by an increased contribution from the top four to 10 customers. In combination with the expanded client base, we have also achieved a more balanced customer mix over the years, including a substantially stronger presence in the Memory sector. This allowed our company to benefit again in 2015 from healthy levels of equipment spending by Memory customers. 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. Our ALD product lines accounted for clearly more than half of total equipment revenue in 2015.

For the year in total, our new bookings increased by 1% in 2015 to €608 million. The book-to-bill as measured by orders divided by sales decreased from 1.1 in 2014 to 0.9 in 2015. Equipment bookings in 2015 for ASMI as a whole were led by the Memory segment, followed by Foundry and Logic. Unlike 2014, bookings in 2015 were first-half loaded. We finished the year with an order backlog of €128 million, a 27% decrease compared to the end of 2014.

Gross margin

The gross margin increased by 100 basis points in 2015 to 44.1%. 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. Apart from positive mix effects during the year, we also benefited from ongoing efficiency improvements. The improvement in gross margin in 2015 followed on strong increases already achieved in 2013 and 2014. Starting in 2013, we began executing a number of programs to further increase the efficiency and flexibility of our manufacturing operations and supply chain. Measures included new outsourcing initiatives, a stronger focus on the sourcing of complete sub-assemblies and the migration of a larger part of our supply base to Asia.

Expenses

Selling, general and administrative expenses as a percentage of sales dropped from 15% in 2014 to 14% in 2015. Research and development (R&D) expenses excluding impairment charges on capitalized development costs remained stable at 11% of sales. The impairment charges were related to the write-off of the remaining 450mm assets for an amount of €13 million and for an amount of €3 million for other development projects. The total investment in R&D – including capitalized R&D – increased substantially during 2015 and was in response to an increase in customer requests for new applications.

Operating profit

Operating profit increased from €93.4 million in 2014 to €111.1 million in 2015. Excluding the aforementioned impairment charges, the operating margin increased from 17.3% to 19.0%.

Results from investments

Results from investments, which primarily reflects our shareholding of 39.55% in ASMPT, dropped from €61.9 million to €44.2 million. These exclude the amortization of intangible assets related to ASMPT. Following a strong improvement in 2014, the contribution by ASMPT fell in 2015 as the company was impacted by the slowdown of the assembly and packaging equipment market during the year. ASMPT’s revenue dropped by 9% in 2015 in Hong Kong dollar. After a strong start of the year, momentum slowed in the second quarter. In the third quarter, the assembly and packaging equipment market weakened substantially, followed by some recovery in demand conditions in the fourth quarter. Despite the revenue decrease, ASMPT slightly increased gross margins during the year, driven by strong improvements in SMT Solutions and reduced volatility in the assembly and packaging equipment margin. In assembly and packaging equipment, revenue dropped by 15% in 2015, even though ASMPT achieved positive growth in a number of products such as flip-chip bonders and CMOS Image Sensor equipment. In SMT Solutions (Surface Mount Technology) revenue decreased slightly by 2% and ASMPT overtook the position as the global top supplier in this market.

OPERATIONS UPDATE

RESULTS OF OPERATIONS 2015 COMPARED TO 2014

Results

The following table shows the operating performance for 2015, versus 2014:

(EUR million)20142015Change
New orders602.1608.41%
Backlog176.1127.8(27%)
Book-to-bill1.10.9
Net sales545.6669.623%
Gross profit235.3295.526%
Gross profit margin %43.1%44.1%
Selling, general and administrative expenses(80.6)(94.7)18%
Research and development expenses(60.4)(73.6)22%
Impairment charges property, plant and equipment and other intangible assets(0.9)(16.2)n/a
Operating result93.4111.119%
Operating margin %17.1%16.6%
Financing income /(expense)24.824.8
Income tax(19.4)5.424.8
Net earnings before share in income of investments in associates98.8141.342.5
Share in income of investments in associates39.416.1(23.3)
Result from discontinued operations3.2(3.2)
Net earnings141.4157.316.0
Net earnings per share, diluted€2.20€2.50€0.30
Net earnings per share excluding effects from the sale of ASMPT shares€2.49€2.93€0.44

As a result of the sale on March 15, 2013 of a 12% share in ASMPT, ASMI lost control over ASMPT. Following the cease of control, ASMPT was presented as a discontinued operation. Consequently, the historic net results of ASMPT as well as the gain on the sale of the ASMPT share and the remeasurement gain are presented in the consolidated statement of income on the line results from discontinued operations. From the date ASMI lost control, the investment in ASMPT has been accounted for under the equity method and the related results are presented under results from investments and associates.

The following table shows certain consolidated statement of profit or loss data as a percentage of net sales for our continued operations for 2014 and 2015:

 (in %)20142015
Net sales100.0%100.0%
Cost of sales(56.9%)(55.9%)
Gross profit43.1%44.1%
Selling, general and administrative expenses(14.8%)(14.1%)
Research and development expenses(11.1%)(11.0%)
Impairment charges(0.2%)(2.4%)
Earnings (loss) from operations17.1%16.6%
Net interest income (expense)(0.3%)(0.1%)
Foreign currency exchange gains (losses)4.8%3.8%
Share in income of investments in associates7.2%2.4%
Earnings (loss) before income taxes28.9%22.7%
Income tax income / (expense)(3.6%)0.8%
Net earnings (loss) from continuing operations25.3%23.5%
Net earnings from discontinued operations0.6%0.0%
Net earnings from operations25.9%23.5%

Net sales

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 sales from continuing operations for 2014 and 2015:

 Year ended December 31,
 (EUR million)20142015
United States€177.032.4%€123.918.5%
Europe94.517.3%99.314.8%
Taiwan81.114.9%106.815.9%
Japan62.511.5%179.626.8%
South Korea93.617.2%109.916.4%
China24.64.5%38.35.7%
Other12.32.3%11.81.8%
€545.6100.0%€669.6100.0%

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 84% and 81% of net sales in 2014 and 2015, respectively. The composition of our ten largest Front-end customers changes from year to year. The three largest customers from these ten accounted each for more than 10% of Front-end net sales in 2014 and 2015, respectively.

Increase in net sales

For the full year, net sales increased by 23% in 2015 to a new record high for the front-end business. On a constant currency basis, our sales increased by 14%. For the third consecutive year we have grown our sales by solid double digits and for the fourth time in five years we have outperformed the broader equipment market.

The revenue growth in 2015 was again led by increased tool sales in our ALD business. Momentum in the ALD market during the year remained strong. ALD is required for an increasing number of process steps and applications as customers transition to 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 has become a mainstream technology for high-k metal gate applications.

The following table shows the level of new orders for full year 2015 and the backlog for the same period over 2014:

Full Year
(EUR million)20142015% Change
Backlog at the beginning of the year114.8176.153%
New orders602.1608.41%
Net sales(545.6)(669.6)23%
FX-effect4.812.9
Backlog as per reporting date176.1127.8(27%)
Book-to-bill ratio (new orders divided by net sales)1.10.9

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 cancellation 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 1% in 2015 to €608 million. The book-to-bill as measured by orders divided by sales decreased from 1.1 in 2014 to 0.9 in 2015. Equipment bookings in 2015 for ASMI as a whole were led by the Memory segment, followed by Foundry, and Logic. Unlike the previous year, bookings in 2015 were first-half loaded. We finished the year with an order backlog of €128 million, a 27% decrease compared to the end of 2014.

Gross profit

Total gross profit developed as follows:

Full year
Gross profitGross profit marginIncrease (decrease) percentage points
(EUR million)2014201520142015
Front-end235.3295.543.1%44.1%100 ppt

Gross margin increased by 100 basis points in 2015 to 44.1%. 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. Apart from positive mix effects during the year, we also benefited from ongoing efficiency improvements. The improvement in gross margin in 2015 followed on strong increases already achieved in 2013 and 2014. Starting in 2013, we have executed a number of programs to further increase the efficiency and flexibility of our manufacturing operations and supply chain. Measures included new outsourcing initiatives, a stronger focus on the sourcing of complete sub-assemblies and the migration of a larger part of our supply base to Asia.

Currency changes led to an 8% increase in gross profit compared to 2014.

Selling, general and administrative expenses

Total selling, general and administrative expenses developed as follows:

Full year
(EUR million)20142015% Change
Front-end80.694.717%

Selling, general and administrative (SG&A) expenses increased by 17% in 2015 compared to the previous year. As a percentage of sales, SG&A expenses were 14% in 2015 and 15% in 2014. SG&A included restructuring expenses of €1.7 million in 2015.

The impact of currency changes on SG&A expenses resulted in an increase of 7% year-over-year.

Research and development expenses

Total research and development (R&D) expenses, excluding impairment charges, increased by 22% in 2015 compared to the previous year, driven by additional investments to fulfill customer requirements. As a percentage of sales, R&D expenses remained stable at 11% compared to 2014. Currency changes resulted in an 11% increase in R&D expenses year-over-year.

Total research and development expenses developed as follows:

Full year
(EUR million)20142015% Change
Front-end:
Research and development expenses50.462.825%
Research and development grants and credits(0.9)(1.0)11%
Amortization of capitalized development expenses10.911.88%
60.473.622%
Impairment research and development related assets0.916.2n/a
Total61.389.746%

Impairment of capitalized development expenses related primarily to the development of new hardware that is now no longer as from customers, and purchased technology which became obsolete. Of the impairment charges for 2015, €13.4 million relate to the impairment of capitalized development expenditures and other assets related to the 450mm technology. Of the impairment charges for 2015, €2.8 million relate to the impairment of capitalized development expenses for other projects.

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 and the United States receive research and development grants and credits from various sources.

Operating result

The operating result developed as follows:

Full year
(EUR million)20142015Change
Front-end:
Before special items94.4129.037%
Impairment charges(0.9)(16.2)
Restructuring expenses(0.1)(1.7)
Including special items93.4111.119%

Operating profit increased to €111.1 million from €93.4 million in 2014. Excluding the previously mentioned impairment charges, the operating margin increased to 19.3% from 17.3%.

Financing costs

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 39.55% shareholding in ASMPT, dropped to €44.2 million from €61.9 million in 2014. These exclude the amortization of intangible assets related to ASMPT. Following a strong improvement in 2014, the contribution by ASMPT fell in 2015 as the company was impacted by the slowdown of the assembly and packaging equipment market during the year. ASMPT’s revenue dropped by 9% in 2015 in Hong Kong dollars. After a strong start of the year, momentum slowed in the second quarter. In the third quarter, the assembly and packaging equipment market weakened substantially, followed by some recovery in demand conditions in the fourth quarter. Despite the revenue decrease, ASMPT slightly increased gross margins during the year, driven by strong improvement in SMT Solutions and reduced volatility in the assembly and packaging equipment margin. In assembly and packaging equipment, revenue dropped by 15% in 2015, even though ASMPT achieved positive growth in a number of products such as flip-chip bonders and CMOS Image Sensor equipment. In SMT Solutions (Surface Mount Technology) revenue decreased slightly by 2% and ASMPT became the global top supplier in this market.

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 2015 (2014: €22.5 million). For further information on the divestment of ASMPT, see Note 6 to the Consolidated financial statements.

Income tax

The income tax benefit of €5.4 million (2014: €19.4 million expense) reflects an effective tax rate of 3.5% negative (2014: 12.3%). The tax benefit includes €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

Net earnings developed as follows:

Full year
(EUR million)20142015Change
Front-end:
Before special items99.5156.857.4
Impairment charges(0.9)(14.8)(13.9)
Restructuring expenses(0.1)(1.7)(1.6)
Total98.5140.341.8
Back-end:
Investment in ASMPT (approximately 40%)62.244.2(18.0)
Amortization other intangible assets from purchase price allocation(22.5)(27.2)(4.7)
Total39.717.0(22.7)
Net result from continuing operations138.2157.319.1
Unrealized remeasurement gain on the remaining approximately 40% of ASMPT shares3.2(3.2)
Net result from discontinued operations3.2(3.2)
Net result from operations141.4157.315.9
Cash flow

The following table shows the cash flow statement:

(EUR million)20142015
Net earnings from continuing operations138.2157.3
Adjustments to cash from operating activities:
Depreciation, amortization and impairments33.054.3
Income tax19.4(5.4)
Share in income of investments in associates(39.4)(16.1)
Share-based compensation7.58.2
Non cash financing costs(22.3)(17.1)
Changes in other assets and liabilities:
Accounts receivable6.8(2.8)
Inventories(20.0)13.4
Accounts payable and accrued expenses21.0(3.0)
Other assets and liabilities(7.5)(4.9)
Income tax paid(11.8)(9.2)
Net cash provided (used) by operating activities124.7174.8
Capital expenditures(30.6)(33.6)
Capitalized development expenditure(14.3)(30.2)
Purchase of intangible assets(1.5)(7.2)
Dividend received from investments20.042.9
Other0.4(0.5)
Net cash provided (used) in investing activities from continuing operations(26.2)(28.6)
Purchase treasury shares(29.3)(79.1)
Debt issuance fees paid(1.4)
Proceeds from shares issued4.811.3
Dividend paid and capital repaid to shareholders ASMI(31.8)(37.2)
Net cash provided (used) in financing activities from continuing operations(57.8)(104.9)
Total net cash provided40.841.3
Statement of financial position

Working capital at December 31, 2015 was €114 million (2014: €112 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, decreased from 78 days at December 31, 2014 to 69 days on December 31, 2015.

Employees

The following tables list the total number of employees and the number of employees in our front-end business, at the dates indicated, exclusive of temporary workers:

December 31,
Geographic location20142015
Europe:
- the Netherlands140146
- EMEA171168
United States600516
Japan186209
South Korea123148
Singapore325318
Asia, other9092
Total1,6351,597

We had 1,598 employees as per December 31, 2015. The following table lists the number of employees per function:

December 31,
Function20142015
Research and development365420
Manufacturing286283
Marketing and sales303253
Customer service517476
Finance and administration164165
Total1,6351,597

Our Dutch operations, which employed 146 as per December 31, 2015, 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 14,348 employees as per December 31, 2015 (December 31, 2014: 15,946).

Subsequent events

Subsequent events were evaluated up to April 13, 2016, which is the issuance date of this Statutory annual Report 2015. There are no subsequent events to report.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

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, 2015, our principal sources of liquidity consisted of €447 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.

CASH FLOW

We generated cash from operating activities of €174.8 million in 2015 (2014: €124.7 million). We invested €28.6 million (2014: €26.2 million), and used €104.9 million (2014: €57.8 million) to finance operations.

DEBT

We were debt-free as of December 31, 2015.

In December 2013, we finalized the extension of our current standby revolving credit facility. The maturity date of the credit commitment of €150 million was extended to December 31, 2018. As per December 31, 2015, this facility was undrawn. Once the facility is used, this usage is secured by a portion of our shareholding in ASMPT or accounts receivable.

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 June 30, 2015 and December 31, 2015.

See notes 10, 15 and 16 to our Consolidated financial statements for more on our funding, treasury policies and our long-term debt.

ASMPT

The assembly and packaging segment of our business is organized in ASM Pacific Technology Ltd. Net cash of our 39.55%-owned associate was €239 million on December 31, 2015. The cash resources and borrowing capacity of ASMPT are not available to our wafer processing equipment segment.

Although certain directors of ASMPT are directors of ASMI, 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 2014 and 2015 were €20.0 million and €42.9 million, respectively.

The market value of our 39.55% investment ASMPT was approximately €1,155 million as per December 31, 2015.

OUTLOOK

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 €447 million on December 31, 2015; 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 2015 is adequate to fund our operations, 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 and other obligations as per December 31, 2015, aggregated by type of contractual obligation:

TotalLess than 1 year1-3 years3-5 yearsMore than 5 years
Accounts payable54,44154,441
Income tax payable6,8416,841
Accrued expenses and other payables44,79144,791
Operating leases21,5776,0528,9175,3001,308
Pension liabilities6,2073781,3231,1713,335
Purchase obligations:
Purchase commitments to suppliers53,98553,985
Capital expenditure and other commitments1,0681,068
Total contractual obligations188,910167,55610,2406,4714,643

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.

MARKET RISK

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.

Forward contracts

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, 2015 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, 2015.

Derivative instruments

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, 2015, we recorded a favorable movement of €137 million (year-ended December 31, 2014: €146 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, 2014 and December 31, 2015. This analysis includes foreign currency-denominated monetary items and adjusts their translation at year end for a 10% increase and 10% decrease of the US dollar, Singapore dollar, Hong Kong dollar, Korean won or Japanese yen against the euro.

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.

Currency impact on equity(EUR thousand)20142015
10% increase of US dollar versus euro9,38111,109
10% decrease of US dollar versus euro(9,381)(11,109)
10% increase of Singapore dollar versus euro7,9679,925
10% decrease of Singapore dollar versus euro(7,967)(9,925)
10% increase of Hong Kong dollar versus euro109,211118,085
10% decrease of Hong Kong dollar versus euro(109,211)(118,085)
10% increase of Korean won versus euro8,16312,123
10% decrease of Korean won versus euro(8,163)(12,123)
10% increase of Japanese yen versus euro6,9258,211
10% decrease of Japanese yen versus euro(6,925)(8,211)

A hypothetical 10% strengthening or 10% weakening of any other currency against the euro as per December 31, 2014 and December 31, 2015 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 2014 and 2015. A positive amount indicates an increase in net earnings.

Currency impact on equity(EUR thousand)20142015
10% increase of US dollar versus euro520640
10% decrease of US dollar versus euro(520)(640)
10% increase of Singapore dollar versus euro1,2331,580
10% decrease of Singapore dollar versus euro(1,233)(1,580)
10% increase of Hong Kong dollar versus euro3,9691,700
10% decrease of Hong Kong dollar versus euro(3,969)(1,700)
10% increase of Korean won versus euro1,5523,509
10% decrease of Korean won versus euro(1,552)(3,509)
10% increase of Japanese yen versus euro1,125344
10% decrease of Japanese yen versus euro(1,125)(344)

A hypothetical 10% strengthening or 10% weakening of any other currency against the euro at average exchange rates for 2014 and 2015 would not result in a material impact on net earnings.

INTEREST RISK

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, 2015 the company is debt-free.

CREDIT RISK

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 10% of net sales in 2015 and 2014. The ten largest customers accounted for approximately 81.0% of net sales in 2015 (2014: 84.1%). 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, 2015, one customer accounted for 20.5% 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 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, 2015 under equity accounting amounts to HK$62.27, whereas the level 1 fair value per share (being the market price of a share on the Hong Kong Stock Exchange) was HK$60.90 on December 31, 2015. Management concluded that based on quantitative analysis, no impairment of our share in ASMPT existed as of December 31, 2015.