NOTE 13. 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 149 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 has ended on May 31, 2018. A negotiation agreement was reached in February 2019 but no new collective bargaining agreement was effective yet. 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, 2018 of 97.6% (December 31, 2017: 101.6%) 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 2018 the contribution percentage was 25.35%. 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 minus the employee contribution.
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, 2018. 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 (asset) of the plan developed as follows:
| Defined benefit obligations | | 10,167 | | 10,502 |
| Fair value of plan assets | | 9,781 | | 10,726 |
| Net liability (asset) for defined benefit plans | | 386 | | (224) |
The changes in defined benefit obligations and fair value of plan assets are as follows:
| Defined benefit obligations | | | | |
| Balance January 1 | | 11,403 | | 10,167 |
| Current service cost | | 747 | | 735 |
| Interest on obligation | | 52 | | 50 |
| Remeasurement result | | (147) | | (262) |
| Benefits paid | | (926) | | (914) |
| Foreign currency translation effect | | (962) | | 726 |
| Balance December 31 | | 10,167 | | 10,502 |
| | | | |
| Fair value of plan assets | | | | |
| Balance January 1 | | 9,985 | | 9,781 |
| Interest income | | 48 | | 51 |
| Return on plan assets | | 454 | | (8) |
| Company contribution | | 1,102 | | 1,098 |
| Benefits paid | | (926) | | (914) |
| Foreign currency translation effect | | (882) | | 718 |
| Balance December 31 | | 9,781 | | 10,726 |
The defined benefit cost consists of the following:
| Current service cost | | 747 | | 735 |
| Net interest costs | | 4 | | (1) |
| Net defined benefit cost | | 751 | | 734 |
| | | | |
| Reclassification to remeasurement | | 866 | | – |
| Remeasurement on net defined benefit for the year | | (602) | | (254) |
| Remeasurement on net defined benefit | | 264 | | (254) |
| | | | |
| Total defined benefit cost | | 1,015 | | 480 |
The assumptions in calculating the actuarial present value of benefit obligations and net periodic benefit cost are as follows:
| Discount rate for defined benefit obligations | | 0.50% | | 0.50% |
| Discount rate for defined benefit cost | | 0.50% | | 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:
| Cash and cash equivalent | | 95 | | 1% | | 149 | | 1% |
| Equity instruments | | 1,827 | | 19% | | 1,879 | | 18% |
| Debt instruments | | 1,029 | | 11% | | 1,007 | | 9% |
| Assets held by insurance company | | 6,830 | | 69% | | 7,691 | | 72% |
| Total | | 9,781 | | 100% | | 10,726 | | 100% |
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 €1,101 to the defined benefit plan in 2018 (€1,096 in 2017). The Company expects to pay benefits for years subsequent to December 31, 2018 as follows:
| 2019 | | 489 |
| 2020 | | 323 |
| 2021 | | 377 |
| 2022 | | 808 |
| 2023 | | 765 |
| Aggregate for the years 2024-2028 | | 3,971 |
| Total | | 6,733 |
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 28, 2018, 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 2019 AGM to allow the continued application of the long-term incentive (LTI) plans beyond November 28, 2019.
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.
Capital repayment
On August 10, 2018, ASMI distributed €4.00 per common share to its shareholders through a tax efficient repayment of capital. The ex-date of the distribution was August 7, 2018. This capital repayment was previously approved by the 2018 AGM. The Management Board of ASMI and the Supervisory Board of ASMI decided to apply a theoretical adjustment ratio of 0.91821713 to the outstanding options and restricted shares granted to employees including members of the Management Board.
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:
| Balance January 1, 2017 | | 1,295,132 | | 21.63 | | 999 | | 16.62 |
| | | | | | | | |
| Options forfeited | | – | | – | | – | | – |
| Options expired | | (2,179) | | 21.13 | | – | | – |
| Options exercised | | (626,444) | | 21.14 | | (999) | | 16.62 |
| Balance December 31, 2017 | | 666,509 | | 22.09 | | – | | – |
| | | | | | | | |
| Adjustment following capital repayment | | 53,455 | | – | | – | | – |
| Options forfeited | | – | | – | | – | | – |
| Options expired | | (8,037) | | 18.96 | | – | | – |
| Options exercised | | (260,757) | | 18.70 | | – | | – |
| Balance December 31, 2018 | | 451,170 | | 21.48 | | – | | – |
The total intrinsic value of options exercised was €4,817 for the year ended December 31, 2018 (2017: €13,292). In 2018 treasury shares have been sold for the exercise of 258,688 options.
On December 31, 2018, options outstanding and options exercisable classified by range of exercise prices are:
| Euro plans | | | | In years | | In EUR | | | | In EUR |
| €1.00-15.00 | | – | | – | | – | | – | | – |
| €15.01-20.00 | | – | | – | | – | | – | | – |
| €20.01-25.00 | | 451,170 | | 1.6 | | 21.48 | | 451,170 | | 21.48 |
| €1.00-25.00 | | 451,170 | | 1.6 | | 21.48 | | 451,170 | | 21.48 |
At December 31, 2018, the aggregate intrinsic value of all options outstanding and exercisable under these plans is €16,332.
Under these plans, no more options to purchase shares can be issued. Under the various stock option plans a total of 451,170 options to purchase common stock were outstanding at December 31, 2018, 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: the 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.
| Balance January 1, 2017 | | 29,645 | | 307,505 | | | | |
| Shares granted, employees | | – | | 149,197 | | Unconditional | | €52.29 |
| Shares granted, Management Board | | 17,413 | | – | | Conditional | | €51.75 |
| Shares vested | | – | | (118,317) | | | | |
| Shares forfeited | | – | | (31,850) | | | | |
| Balance December 31, 2017 | | 47,058 | | 306,535 | | | | |
| Adjustment following capital repayment | | 5,312 | | 28,582 | | | | |
| Shares granted, employees | | – | | 174,951 | | Unconditional | | €49.90 |
| Shares granted, Management Board | | 25,573 | | – | | Conditional | | €49.78 |
| Shares granted, Management Board | | 2,274 | | – | | Unconditional | | €43.21 |
| Shares vested | | (15,268) | | (147,523) | | | | |
| Shares forfeited | | – | | (21,357) | | | | |
| Balance December 31, 2018 | | 64,949 | | 341,188 | | | | |
In 2018, treasury shares were sold for the vesting of 162,791 restricted shares.
Options outstanding
The following table is a summary of changes in options outstanding under the 2014 long-term incentive plan.
| Balance January 1, 2015 | | – | | | | |
| Options granted, April 24, 2015 | | 42,659 | | 44.24 | | €17.33 |
| Balance December 31, 2015 | | 42,659 | | | | |
| Options granted, April 22, 2016 | | 62,555 | | 37.09 | | €12.64 |
| Balance December 31, 2016 | | 105,214 | | | | |
| Options granted, April 21, 2017 | | 24,963 | | 51.55 | | €14.57 |
| Balance December 31, 2017 | | 130,177 | | | | |
| Adjustment following capital repayment | | 11,593 | | – | | – |
| Balance December 31, 2018 | | 141,770 | | | | |
The cost relating to stock options is measured at fair value on the grant date. The fair value for the stock options granted in 2018 was determined using the Black-Scholes option valuation model with the following weighted average assumptions:
| Expected life (years) | | 7 |
| Risk-free interest rate | | 1.05% |
| Dividend yield | | 1.80% |
| Expected volatility | | 30.47% |
| Exercise price | | €57.25 |
| Fair value per grant date | | €14.90 |
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, 2018, the aggregate intrinsic value of all options outstanding under the 2014 long-term incentive plan is €5,132.
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 €4,817 for 2018 (2017: €7,801).
