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Operations update

Results of operations 2014 compared to 2013

Results

As a result of the sale on March 15, 2013 of a 12% share in ASMPT, ASMI lost control over ASMPT, the Back-end segment. 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 (see Note 3 to the consolidated annual accounts).

The following table shows the operating performance for the year 2014, compared to the year 2013 :

(EUR million)20132014Change
New orders479.6602.126%
Backlog114.8176.153%
Book-to-bill1.11.1
Net sales452.0545.621%
Gross profit176.2235.334%
Gross profit margin %39.0%43.1%
Selling, general and administrative expenses(61.6)(80.0)30%
Research and development expenses(58.1)(60.4)4%
Impairment charges property, plant and equipment and other intangible assets(8.6)(0.9)n/a
Amortization other intangible assets(0.5)(0.5)-%
Restructuring expenses(2.5)(0.1)n/a
Operating result44.993.448.5
Operating margin %9.9%17.1%
Financing income /(costs)(10.2)24.835.0
Income tax(8.9)(19.4)(10.5)
Net earnings before results from investments25.898.873.0
Result from investments(368.3)39.4407.7
Result from discontinued operations1,402.63.2(1,399.4)
Net earnings1,060.1141.3(918.8)
Net earnings allocated to the shareholders of the Company1,062.7141.3(921.4)
Net earnings per share, diluted€16.55€2.20€(14.35)
Net earnings per share excluding remeasurement gain, realized gain on sale of ASMPT shares, amortization, impairment and fair value adjustments€0.71€2.49€1.78

The following table shows certain consolidated statement of operations data as a percentage of net sales for our continued operations for the years 2013 and 2014:

 20132014
Net sales100.0%100.0%
Cost of sales(61.0%)(56.9%)
Gross profit39.0%43.1%
Selling, general and administrative expenses(13.6%)(14.7%)
Research and development expenses(12.8%)(11.1%)
Amortization of other intangible assets(0.1%)(0.1%)
Impairment charges(1.9%)(0.2%)
Restructuring expenses(0.5%)-%
Earnings (loss) from operations9.9%17.1%
Net interest income (expense)(0.3%)(0.3%)
Foreign currency exchange gains (losses)(2.0%)4.8%
Result from investments(81.5%)7.2%
Earnings (loss) before income taxes(73.8%)28.9%
Income tax income / (expense)(2.0%)(3.6%)
Net earnings (loss) from continuing operations(75.8%)25.3%
Net earnings from discontinued operations310.3%0.6%
Net earnings from operations234.5%25.9%
Allocation of net earnings (loss)
Shareholders of the parent235.1%25.9%
Minority interest(0.6%)-%

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 which 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 the years 2013 and 2014:

 Year ended December 31,
 (EUR million)20132014
United States€131.229.0%€177.032.4%
Europe73.116.2%94.517.3%
Taiwan78.217.3%81.114.9%
Japan33.87.5%62.511.5%
South Korea110.624.5%93.617.2%
China20.04.4%24.64.5%
Other5.11.1%12.32.3%
€452.0100%€545.6100%

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 85.6% and 84.1% of net sales in 2013 and 2014, respectively. The composition of our ten largest Front-end customers changes from year to year. The largest customer from these ten accounted for 28.3% and 26.7% of Front-end net sales in 2013 and 2014, respectively.

Building on the strong momentum in the second half of 2013, revenue increased to new record high in the first half of the year for our Front-end business. While still higher year over year, revenue in the second half decreased sequentially, as some of customers were absorbing the investments that they had made in earlier quarters. Nevertheless, underlying demand remained healthy, particularly in the Memory segment, as reflected by our bookings that were even higher in the second half compared to the already strong levels achieved in the first half of the year. For the year in total our new bookings increased by 26% in 2014. We finished the year with an order backlog of €176 million, a 53% increase compared to the end of 2013. The impact of currency changes on net sales compared to prior year was a decrease of 1%.

The following table shows the level of new orders for the full year 2014 and the backlog for the same period of 2013:

Full Year
(EUR million)20132014% Change
Backlog at the beginning of the year91.7114.825%
New orders479.6602.126%
Net sales(452.0)(545.6)21%
FX-effect(4.4)4.8
Backlog as per reporting date114.8176.153%
Book-to-bill ratio (new orders divided by net sales)1.11.1

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.

Gross profit

Total gross profit developed as follows:

Full year
Gross profitGross profit marginIncrease (decrease) percentage points
(EUR million)2013201420132014
Front-end (continuing operations)176.2235.339.0%43.1%4.1ppt

The comparable gross profit for the full year 2014 increased with 34%. Gross profit margin increased by 410 basis points in 2014. This follows on a strong increase of 500 basis points in 2013. The improvement in 2013 was driven by the increase in sales and continued high levels of utilization. Next to the solid development in revenue the improvement in 2014 also reflected execution of our gross margin improvement measures. In 2013, we started a number of programs to further increase the efficiency and flexibility of our manufacturing operations and supply chain, from which we saw the benefits in 2014. 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. On a quarterly basis, differences in gross margins were mainly impacted by changes in the sales mix.

The impact of currency changes on gross profit compared to prior year was a decrease of 2%.

Selling, general and administrative expenses

Selling, general and administrative ('SG&A') expenses from continuing operations for the year 2014 increased with 15% compared to the previous year. As a percentage of sales SG&A was 14.7%. For the comparable period of 2013 this was 15.3%. The impact of currency changes on SG&A expenses was a decrease of 4% year-over-year.

Total selling, general and administrative expenses developed as follows:

Full year
(EUR million)20132014% Change
Front-end (continuing operations)69.380.015%

Research and development expenses

Total research and development expenses from continuing operations for the year, 2014 increased with 6% compared to the previous year. As a percentage of sales research and development expenses were 10%. For the comparable period of 2013 this was 12%. The impact of currency changes on research and development expenses was flat year-over-year.

Total research and development expenses developed as follows:

Full year
(EUR million)20132014% Change
Front-end (continuing operations)
Research and development expenses41.450.422%
Research and development grants and credits(1.0)(0.9)(10%)
Amortization of capitalized development expenses10.010.99%
Total50.360.420%
Impairment capitalized development expenses7.80.9

Impairment of capitalized development expenses primarily related to development of new hardware for which the customers demand has shifted out in time, and purchased technology which became obsolete.

We continue to invest strongly in research and development. As part of our research and development activities, we are engaged in various development programs with customers and research institutes these allow us to develop products that meet customer requirements and to 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 research and development operations in the Netherlands and the United States receive research and development grants and credits from various sources.

Restructuring expenses

In the fourth quarter of 2012 we started a cost reduction program in our Front-end operation. We reduced the manufacturing organization in Singapore and our product management organization in Europe and the US by more than 100 full time equivalent positions. Related to these actions €0.9 million, €2.5 million and €0.1 million restructuring expenses were recorded in 2012, 2013 and 2014 respectively.

Operating result

Total operating result developed as follows:

Full year
(EUR million)20132014Change
Front-end (continuing operations)
Before special items47.493.546.1
Restructuring expenses(2.5)(0.1)2.4
Including special items44.993.448.5

Financing costs

Financing costs mainly reflect translation results. A substantial part of ASMI's cash position is denominated in US dollar.

Results from investments and associates

Results from investments contributed €39.4 million, primarily reflecting our 40% shareholding in ASMPT. Excluding a net book profit of €1 billion in 2013 on the sale of 12% of the ASMPT shares and the effects of purchase price allocation, results from investment increased from €23.7 million for prior year to €61.2 million for 2014 which includes a provision for a tax settlement of ASMPT in Hong Kong for the period 2001-2010 with an impact of €9 million.

ASMPT showed a strong recovery in results in 2014, with revenue increasing by 31%. Next to an overall recovery in market conditions, ASMPT benefited from new products addressing the advanced packaging segment, share gains in the SMT equipment market and the acquisition of DEK. On the back of the rise in revenue and improving margins, ASMPT increased net profits almost threefold during the year.

The amortization of the recognized intangible assets and the depreciation of the fair value adjustment for property, plant & equipment negatively impacted net earnings for the year 2014 with €22.5 million (2013 for the period March 16 - December 31: €16.9 million). The fair value adjustments for inventories and tax related issues had a non-recurring negative impact on net earnings in 2013 of €39.8 million.

For further information on the divestment of ASMPT see Note 3 and 12 to the Consolidated financial statements.

Income tax expense

Income tax expenses of €19.4 million (2013: €8.9 million) reflect a effective tax rate of 16.4% excluding the net results on investments. For further information on tax see Note 23 on the Consolidated financial statements.

Net earnings

Net earnings developed as follows:

Full year
(EUR million)20132014Change
Front-end
Before special items28.398.670.3
Restructuring expenses(2.5)(0.1)2.4
Total25.898.572.7
Back-end
As from March 16, 2013 approximately 40% investment in ASMPT24.162.238.1
Amortization other intangible assets and fair value changes from purchase price allocation(56.7)(22.5)34.2
Impairment loss(335.8)335.8
Total(368.4)39.7408.1
Net result from continuing operations(342.6)138.2480.8
Net result ASMPT prior to March 15, 2013 (52%)(2.8)2.8
Realized gain on the sale of 11.88% of the ASMPT shares252.4(252.4)
Unrealized remeasurement gain including amortization and impairment on the remaining 40% of the ASMPT shares1,155.63.2(1,152.4)
Net result from discontinued operations1,405.23.2(1,402.0)
Net result from operations1,062.6141.3(921.4)

Cash flow

The following table shows the cash flow statement on a comparable basis. The ASMPT numbers have been deconsolidated:

Continuing operations
(EUR million)20132014
Net earnings from continuing operations(342.5)138.2
Adjustments to cash from operating activities
Depreciation, amortization and impairments38.433.0
Income tax6.17.6
Result from investments368.3(39.4)
Other adjustments4.0(14.8)
Changes in other assets and liabilities
Accounts receivable(26.5)6.8
Inventories7.7(20.0)
Accounts payable and accrued expenses12.721.0
Other assets and liabilities(2.6)(7.5)
Net cash provided (used) by operating activities from continuing operations65.6124.7
Net cash provided (used) by operating activities from discontinued operations0.9
Net cash provided (used) by operating activities from operations66.5124.7
Capital expenditures(10.8)(45.0)
Net purchase of intangible assets(18.2)(1.5)
Other3.80.4
Net cash provided (used) in investing activities from continuing operations(25.2)(46.1)
Net cash provided (used) in investing activities from discontinued operations291.9
Net cash provided (used) in investing activities from operations266.7(46.1)
Purchase treasury shares(29.3)
Debt issuance fees paid(1.4)
Proceeds from shares issued5.84.8
Dividend paid and capital repaid to shareholders ASMI(301.2)(31.8)
Dividend received from investments10.220.0
Net cash provided (used) in financing activities from continuing operations(285.2)(37.9)
Net cash provided (used) in financing activities from discontinued operations(21.9)
Net cash provided (used) in financing activities from operations(307.1)(37.9)

Balance sheet

Net working capital, consisting of accounts receivable, inventories, other current assets, accounts payable, accrued expenses, advance payments from customers and deferred revenue was €108 million the same level as per December 31, 2013. On a currency comparable level net working capital would have been €106 million. The number of outstanding days of working capital, measured against quarterly sales, increased from 77 days at December 31, 2013 to 78 days on December 31, 2014. Inventories include approximately €30 million of finished goods, already shipped to customers which will be recognized as revenue in future quarters. At the end of the third quarter this amount was €8 million.

Employees

As of December 31, 2014, we had 1,635 employees, including 365 employees primarily involved in research and development activities, 286 in manufacturing 303 in marketing and sales, 517 in customer service and 163 in finance and administration.

The following table lists the total number of our employees and the number of our employees in our Front-end abusiness at the dates indicated, exclusive of temporary workers:

December 31,
Geographic Location20132014
Europe
- The Netherlands139140
- EMEA163171
United States533600
Japan174186
Asia, other494538
Total1,5031,635

The Back-end segment, ASMPT, employed 14,400 persons as of December 31, 2013 and 15,946 persons as of December 31, 2014.

Our Dutch operations, which employed 144 persons as of March 13, 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. Additionally, management personnel in the Dutch facilities meet as required by Dutch law with a works council consisting of elected representatives of the employees to discuss working conditions and personnel policies as well as to explain major corporate decisions and to solicit their advice on major issues.

Many of our employees are highly skilled, and our continued success will depend in part upon our ability to continue to attract and retain these employees, who are in great demand. We believe that our employee relations are good.

Subsequent events

Subsequent events were evaluated up to April 9, 2015, which is the issuance date of this Annual report 2014. There are no subsequent events to report.

Welcome to our 2014 Corporate reporting site

ASMI has a dual listing on Nasdaq (North America) and Euronext (the Netherlands). Our full 2014 Annual report is prepared in accordance with International Financial Reporting Standards ('IFRS'), as endorsed by the European Union and can be viewed online conveniently. We also file the Annual report on Form 20-F with the US Securities and Exchange Commission, which is available as a PDF. All our 2014 reports can be downloaded quickly and easily.

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STATUTORY
ANNUAL REPORT 2014

Our Statutory annual report provides a comprehensive overview of company developments in 2014. It has been prepared in accordance with International Financial Reporting Standards ('IFRS') as endorsed by the European Union.

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ANNUAL REPORT ON
FORM 20-F 2014

Form 20-F 2014, which is compiled based on US GAAP, has been filed with the Securities and Exchange Commission. It may contain information additional to the Statutory annual report.

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CR REPORT
2014

Our goal is to create better products and add value to the company, our stakeholders and society at large in a responsible, sustainable manner. Our CS report covers all aspects of our efforts to manage our business responsibly.

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REMUNERATION
REPORT 2014

The Remuneration report 2014 provides a breakdown
of our Management Board and Supervisory Board remuneration.

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RECONCILIATION
US GAAP-IFRS 2014

With dual listing in North America and the Netherlands, we report in US GAAP and IFRS. This document outlines the main differences for ASMI relating to US GAAP and IFRS.

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