Market risk disclosure
We are exposed to market risks (including foreign exchange rate risk and interest rate risk), credit risk and liquidity 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 ASM International ('euro') or one of our subsidiaries conducting the business. The purpose of the Company’s 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 denominated in US dollars.
The majority of revenues and costs of our Front-end segment are denominated in Singapore dollars and US dollars. Since foreign currency exposure 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 periodically reviewed.
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 12 months, for which it has 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.
The majority of revenues and costs of our Back-end segment are denominated in Hong Kong dollars, Korean won, Chinese yuan and US dollars. The functional currency of our Back-end segment (Hong Kong dollar) is linked to the US dollar. In March 2013, we sold a 12% stake, we now own approximately 40% of ASMPT. Accordingly from March 15, 2013, we do no longer consolidate ASMPT's results of operations in ours. Instead, our proportionate share of ASMPT’s earnings is reflected as a separate line-item called 'results from investments' in our Consolidated statements of operations. Also we are no longer able to consolidate the assets and liabilities of ASMPT and reflect the net investment in ASMPT in the line-item investments in our Consolidated balance sheet. The effect of exchange rate fluctuations on results from investments and investments denominated in foreign currencies is periodically reviewed.
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, if any, including forward exchange contracts, on the balance sheet at fair value in other current assets or accrued expenses.
As we did not use forward exchange contracts no unrealized gains were included in accumulated other comprehensive income as of December 31, 2014.
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 and 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 and loss.
We do not use forward exchange contracts for trading or speculative purposes.
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, 2013, we recorded an unfavorable movement of €89.0 million. For the year ended December 31, 2014, we recorded a favorable movement of €146.7 million. See Note 16 to our Consolidated financial statements, which is incorporated herein by reference.
As per December 31, 2014 the Company is debt free and has no foreign exchange contracts in place.
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 of December 31, 2013 and December 31, 2014. 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.
|Impact on equity|
|10% increase of US dollar versus euro||7,741||9,381|
|10% decrease of US dollar versus euro||(7,741)||(9,381)|
|10% increase of Singapore dollar versus euro||6,155||7,967|
|10% decrease of Singapore dollar versus euro||(6,155)||(7,967)|
|10% increase of Hong Kong dollar versus euro||94,369||109,211|
|10% decrease of Hong Kong dollar versus euro||(94,369)||(109,211)|
|10% increase of Korean won versus euro||5,855||8,163|
|10% decrease of Korean won versus euro||(5,855)||(8,163)|
|10% increase of Japanese yen versus euro||5,870||6,925|
|10% decrease of Japanese yen versus euro||(5,870)||(6,925)|
A hypothetical 10% strengthening or 10% weakening of any other currency against the euro as of December 31, 2013 and December 31, 2014 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 the years 2013 and 2014. A positive amount indicates an increase in net earnings.
|Impact on net earnings|
|10% increase of US dollar versus euro||534||520|
|10% decrease of US dollar versus euro||(534)||(520)|
|10% increase of Singapore dollar versus euro||671||1,233|
|10% decrease of Singapore dollar versus euro||(671)||(1,233)|
|10% increase of Hong Kong dollar versus euro||101,025||3,969|
|10% decrease of Hong Kong dollar versus euro||(101,025)||(3,969)|
|10% increase of Korean won versus euro||2,071||1,552|
|10% decrease of Korean won versus euro||(2,071)||(1,552)|
|10% increase of Japanese yen versus euro||553||1,125|
|10% decrease of Japanese yen versus euro||(553)||(1,125)|
The significant possible impact on net earnings for the year 2013, results from the realized and unrealized gain following the sale of the 12% stake in ASMPT. A hypothetical 10% strengthening or 10% weakening of any other currency against the euro at average exchange rates for the years 2013 and 2014 would not result in a material impact on net earnings.
The Company is debt free as per December 31, 2014 and is not exposed to interest rate risk through borrowing activities. The Company does not enter into financial instrument transactions for trading or speculative purposes or to manage interest rate exposure.
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. 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.
Our customers are semiconductor device manufacturers located throughout the world. 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.
The Company derives a significant percentage of its revenue from a small number of large customers. The largest customer accounted for approximately 26.7% of net sales in 2014 (2013: 28.3%) and the ten largest customers accounted for approximately 84.1% of net sales in 2014 (2013: 85.6%). 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. Per December 31, 2014 one customer accounted for 20.1% of the outstanding balance in accounts receivable (2013: 28.1%).
We place our cash and cash equivalent and derivative instruments with high quality financial institutions to limit the amount of credit risk exposure.
The maximum credit exposure is equal to the carrying values of cash and cash equivalent and accounts receivable.