In conducting our business, we face a number of risks that may interfere with our business objectives. Some of these risks relate to our operational processes, while others relate to our business environment. It is important to understand the nature of these risks and the impact they may have on our business, financial condition and results of operations. Some of the more relevant risks are described below, which may not be in order of likelihood or materiality. These risks are not the only ones we face. Some risks may not yet be known to us and certain risks that we do not currently believe to be material could become material in the future.
Risks related to the semiconductor industry
The semiconductor industry is highly cyclical.
We sell our products to the semiconductor manufacturing industry, which is subject to the industry's business cycles, of which the timing, duration and volatility are difficult to predict. The semiconductor industry has historically been cyclical.
Semiconductor manufacturers may contribute to the severity of downturn and upturn cycles by misinterpreting the conditions in the industry and over-investing or under-investing in semiconductor manufacturing capacity and equipment. In any event, the lag between changes in demand for semiconductor devices and changes in demand for our products by semiconductor manufacturers accentuates the intensity of these cycles in both expansion and contraction phases. We may not be able to respond in a timely and effective manner to these industry cycles in the expansion and contraction phases.
Industry downturns historically have been characterized by reduced demand for semiconductor devices and equipment, production over-capacity and a decline in average selling prices. During periods of declining demand, we must quickly and effectively reduce expenses. However, our ability to reduce expenses is limited by our need for continued investment in engineering, research and development and extensive ongoing customer service and support requirements. In addition, in a downturn, our ability to reduce inventories quickly is limited by the long lead time for production and delivery of some of our products, reduced sales, order cancellations and delays, and delays associated with reducing deliveries from our supplier pipeline. During an extended downturn, a portion of our inventory may have to be written down as excess or obsolete if it is not sold in a timely manner. Additionally, during a significant downturn, workforce reductions that we may seek to implement to reduce costs may be delayed due to labor laws and practices applicable in the various jurisdictions we operate.
Industry upturns have been characterized by fairly abrupt increases in demand for semiconductor devices and equipment and insufficient production capacity. During a period of increasing demand and rapid growth, we must be able to quickly increase manufacturing capacity to meet customer demand and hire and assimilate a sufficient number of additional qualified personnel, as well as to fund such an increase of manufacturing capacity. Our inability to quickly respond in times of increased demand, because of the effect, for example, of our ongoing programs to reduce expenses and regulate the rate of purchases from our suppliers, could harm our reputation and cause some of our existing or potential customers to place orders with our competitors rather than us.
Our industry, along with global financial markets and regions, have been in flux since 2008. In particular, financial turmoil in the Eurozone has in past years been unsettling, including the debt burden of certain nations and their ability to meet future obligations, euro currency stability, and the continued suitability of the euro as a single currency. These concerns could possibly result in the reintroduction of individual currencies or even the dissolution of the euro itself. If the euro ended, the contractual and legal consequences for holders of euro-denominated obligations cannot be predicted; however, these possible developments and fluid market perceptions could negatively affect the value of euro-denominated obligations and assets. These financial concerns in Europe, as well as the health of the overall global financial markets and an uncertain or a weaker or deteriorating global economy, could also adversely impact our business, financial condition and operating results, such as lower sales due to decreased capital purchases by our customers, financial instability or insolvency of suppliers and customers, and other such similar or related adverse effects.
Our industry is subject to rapid technological change and we may not be able to forecast or respond to commercial and technological trends in time to avoid competitive harm.
Our future success depends upon commercial acceptance of products incorporating new technologies we are developing, such as new plasma enhanced and atomic layer deposition processes, new epitaxy processes and new materials and chemistries. The semiconductor industry and the semiconductor equipment industry are subject to rapid technological change and frequent introductions of enhancements to existing products which can result in significant writedowns and impairment charges and costs. Technological changes have had, and will continue to have, a significant impact on our business. Our operating results and our ability to remain competitive are affected by our ability to accurately anticipate customer and market requirements and develop technologies and products to meet these requirements. Our success in developing, introducing and selling new and enhanced products depends upon a variety of factors, including, but not limited to:
- successful innovation of processes and equipment;
- accurate technology and product selection;
- timely and efficient completion of product design, development and qualification;
- timely and efficient implementation of manufacturing and assembly processes;
- successful product performance in the field;
- effective and timely product support and service; and
- effective product sales and marketing.
We may not be able to accurately forecast or respond to commercial and technical trends in the semiconductor industry or to the development of new technologies and products by our competitors. Our competitors may develop technologies and products that are more effective than ours or that may be more widely accepted. We may also experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. Significant delays can occur between a product’s introduction and the commencement of volume production of that product. Any of these events could materially and negatively impact our operating results and our ability to generate the return we intend to achieve on our investments in new products.
If we fail to adequately invest in research and development, we may be unable to compete effectively.
We have limited resources to allocate to research and development, and must allocate our resources among a wide variety of projects in our businesses. If we have insufficient cash flow from our businesses to support the necessary level of research and development, we will have to fund such expenditures by diminishing our cash balances, or utilizing our credit facilities or reducing our level of research and development expenses.
Because of intense competition in our industry and constant technological evolution, the consequences of failing to invest in strategic developments are significant. In order to enhance the benefits obtained from our research and development expenditures, we have contractual and other relationships with independent research institutes. If we fail to adequately invest in research and development or lose our ability to collaborate with these independent research entities, we may be unable to compete effectively in the Front-end and Back-end markets in which we operate.
We face intense competition from companies which have greater resources than we do, and potential competition from new companies entering the market in which we compete. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
We face intense competition in our operating segments of the semiconductor equipment industry from other established companies. Our primary competitors include Applied Materials, LAM Research Corporation, Tokyo Electron, Hitachi Kokusai, Wonik IPS and Jusung. A number of our competitors have substantially greater financial, technological, engineering, manufacturing, marketing and distribution resources, which may enable them to:
- better withstand periodic downturns in the semiconductor industry;
- compete more effectively on the basis of price, technology, service and support;
- more quickly develop enhancements to and new generations of products; and
- more effectively retain existing customers and attract new customers.
In addition, new companies may enter the markets in which we compete, further increasing competition in the semiconductor equipment industry.
We believe that our ability to compete successfully depends on a number of factors, including, without limitation:
- our success in developing new products and enhancements;
- performance of our products;
- quality of our products;
- ease of use of our products;
- reliability of our products;
- cost of ownership of our products;
- our ability to ship products in a timely manner;
- quality of the technical service we provide;
- timeliness of the services we provide;
- responses to changing market and economic conditions; and
- price of our products and our competitors’ products.
Some of these factors are outside our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share, and inability to generate cash flows that are sufficient to maintain or expand our development of new products.
Industry alliances may not select our equipment.
Our customers are entering into alliances or other forms of cooperation with one another to expedite the development of processes and other manufacturing technologies. One of the results of this cooperation may be the definition of a system or particular tool set for a certain function or a series of process steps that uses a specific set of manufacturing equipment. These decisions could work to our disadvantage if a competitor’s equipment becomes the standard equipment for such a function or process. Even if our equipment was previously used by a customer, that equipment may be displaced in current and future applications by the equipment standardized through such cooperation. These forms of cooperation may have a material adverse effect on our business, financial condition and results of operations.
Risks related to our business
Our customers face challenges in economic downturns and if they cannot meet their obligations to us our financial results will suffer.
We face increased payment and performance risk in economic downturns from our customers. If any of our customers become insolvent or commence bankruptcy or similar proceedings, our receivables from such customers may become uncollectable. In order to promote sales, we may be required to provide extended payment terms, financing arrangements or other modified sale terms for some customers, which will increase our sales expenses and further increase our exposure to customer credit risk, all in an environment of downward pressure on average selling prices. Even though we may be a secured creditor in these arrangements with rights in the underlying equipment, the equipment may have only limited valuefollowing a customer default, especially if activity in our markets remains at low levels, which may result in substantial write-downs upon any such default.
If we do not accurately evaluate our customers’ creditworthiness in connection with sales financing arrangements involving increased exposure to customer payment risk, our bad debt expense will increase. If we are too cautious in our sales practices because of this, we may lose sales. In either case, our results of operations and financial condition would be negatively affected.
We derive a significant percentage of our revenue from sales to a small number of large customers, and if we are not able to retain these customers, or if they reschedule, reduce or cancel orders, or fail to make payments, our revenues would be reduced and our financial results would suffer.
Our largest customers account for a significant percentage of our revenues. Our largest customer accounted for 26.7% of our net sales in 2014. Our ten largest customers accounted for 84.1% of our net sales in 2014. Sales to, and the relative importance of, these large customers have varied significantly from year to year and will continue to fluctuate in the future. These sales also may fluctuate significantly from quarter to quarter. We may not be able to retain our key customers or they may cancel purchase orders or reschedule or decrease their level of purchases from us, which would reduce our revenues and negatively affect our financial results, perhaps materially. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results.
We may need additional funds to finance our future growth and ongoing research and development activities. If we are unable to obtain such funds, we may not be able to expand our business as planned.
In the past, we have experienced capital constraints that adversely affected our operations and ability to compete. We may require additional capital to finance our future growth and fund our ongoing research and development activities. We have only limited ability to obtain funds from our investment in ASMPT and some limitations on our ability to reallocate funds among our internal businesses.
If we raise additional funds through the issuance of equity securities, the percentage ownership of our existing shareholders would be diluted. If we finance our capital requirements with debt, we may incur significant interest costs. Additional financing may not be available to us when needed or, if available, may not be available on terms acceptable to us, particularly in times of global or European financial crisis or uncertainty that may dramatically affect the availability of bank and other sources of debt financing.
If we are unable to raise needed additional funds, we may have to reduce the amount we spend on research and development, slow down our introduction of new products, reduce capital expenditures necessary to support future growth and/or take other measures to reduce expenses which could limit our growth and ability to compete.
Our products generally have long sales cycles and implementation periods, which increase our costs of obtaining orders and reduce the predictability of our earnings.
Our products are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. In addition, customers often require a significant number of product presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in the product’s performance and compatibility with the customer’s requirements to place an order. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. Accordingly, the sales cycles of our products often last for many months or even years, thereby requiring us to invest significant resources in attempting to complete sales.
Long sales cycles also subject us to other risks, including customers’ budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers’ purchase decisions. The time required for our customers to incorporate our products into their systems can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our earnings from operations.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights from challenges by third parties; claims or litigation regarding intellectual property rights could require us to incur significant costs.
Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights and confidential information. These agreements and measures may not be sufficient to protect our technology from third party infringement or to protect us from the claims of others. In addition, patents issued to us may be challenged, invalidated or circumvented, rights granted to us under patents may not provide competitive advantages to us, and third parties may assert that our products infringe their patents, copyrights or trade secrets. Third parties could also independently develop similar products or duplicate our products.
Intellectual property laws may not adequately support our proprietary rights or may change in an unfavorable manner. Patent rights may not be granted or construed as we expect, and key patents may expire, resulting in technology becoming available that may hurt our competitive position.
In addition, monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology. The laws of some countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the Netherlands and the United States and thus make the possibility of piracy of our technology and products more likely in such countries. If competitors are able to use our technology as their own, our ability to compete effectively could be harmed.
In past years, there has been substantial litigation regarding patent and other intellectual property rights in our semiconductor and related technology industries. In the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others.
Claims that our products infringe the proprietary rights of others would force us to defend ourselves and possibly our customers or suppliers against the alleged infringement. Such claims, if successful, could subject us to significant liability for damages and potentially invalidate our proprietary rights. Regardless of the outcome, patent infringement litigation is time-consuming and expensive to resolve, and diverts management time and attention.
Intellectual property litigation could force us to do one or more of the following, any one of which could severely harm our business with adverse financial consequences:
- forfeit proprietary rights;
- stop manufacturing or selling our products that incorporate the challenged intellectual property;
- obtain from the owner of the infringed intellectual property right a license to sell, produce, use, have sold, have produced or have used the relevant technology, which license may not be available on reasonable terms or at all or may involve significant royalty payments;
- pay damages, including potential treble damages and attorney’s fees in some circumstances; or
- redesign those products that use the challenged intellectual property.
We license the use of some patents from a competitor pursuant to a settlement agreement; if the agreement is terminated, our business could be adversely affected.
In October 1997, we entered into an agreement to settle mutual patent infringement litigation with Applied Materials, which was amended and restated in 1998, pursuant to which Applied Materials agreed to grant us a worldwide, non-exclusive and royalty-bearing license to use all of the litigated patents and certain additional patents that were not part of the litigation. In return we agreed to pay Applied Materials a settlement fee and to grant it a worldwide, non-exclusive and royalty-free license to use a number of our patents, including but not limited to, those patents which we were enforcing in the litigation. All licenses granted by Applied Materials to us expire at the end of the life of the underlying patents, which expire at various times through approximately 2016. Our obligation to pay certain royalties to Applied Materials generally continues until the expiration of the corresponding underlying patent to the extent we practice such a patent. In addition, the settlement agreement included covenants for limited periods during which the parties would not litigate the issue whether certain of our products infringe any of Applied Materials’ patents that were not licensed to us under the settlement agreement. These covenants, which lasted for different periods of time for different products, have expired. Upon the occurrence of an event of default or other specified events, including, among other things, our failure to pay royalties, a change of control of ASM International, and improper use of the licenses, Applied Materials may terminate the settlement agreement, including the licenses included in the agreement.
Additional litigation with Applied Materials regarding the operation of the settlement agreement or other matters could occur. Litigation with Applied Materials, which has greater financial resources than we do, could negatively impact our earnings and financial position.
Our net earnings could be negatively impacted by currency fluctuations.
Our assets, liabilities and operating expenses and those of our subsidiaries are to a large extent denominated in the currency of the country where each entity is established. Our financial statements, including our Consolidated Financial Statements, are expressed in euro. The translation exposures that result from the inclusion of financial statements of our subsidiaries and investments that are expressed in the currencies of the countries where the subsidiaries are located are not hedged. As a result, our assets, liabilities and operating expenses are exposed to fluctuations of various foreign currency exchange rates, most significantly to the HK$ following the remeasurement of the investment in ASMPT.
In addition, foreign currency fluctuations may affect the prices of our products. Prices for our products for sales to our customers throughout the world are currently denominated in various foreign currencies including, but not limited to, US dollar, euro, Japanese yen and Chinese yuan. If there is a significant devaluation of the currency in a specific country, the prices of our products will increase relative to that country’s currency, and could increase relative to prices of our competitors, and our products may be less competitive in that country. Also, we cannot be sure that our international customers will continue to be willing to place orders denominated in these currencies. If they do not, our revenue and earnings from operations could be subject to additional foreign exchange rate fluctuations.
Although we monitor our exposure to currency fluctuations, these fluctuations could negatively impact our financial position, net earnings and cash flow.
Substantially all of our equipment orders are subject to operating, performance, safety, economic specifications and other contractual obligations. We occasionally experience unforeseen difficulties in compliance with these criteria, which can result in increased design, installation and other costs and expenses.
Substantially all of our equipment sales are conditioned on our demonstration, and our customer’s acceptance, that the equipment meets specified operating and performance criteria, either before shipment or after installation in a customer’s facility. We occasionally experience difficulties demonstrating compliance with such terms, which can lead to unanticipated expenses for the performance of the contract or the redesign, modification and testing of the equipment and related software. To the extent this occurs in the future, our cost of goods sold and earnings from operations will be adversely affected. If we are not able to demonstrate compliance with the particular contract or the performance and operating specifications in respect of specific equipment, we may have to pay penalties to the customer, issue credit notes to the customer and/or take other remedial action, including payment of damages or adjusted pricing, any one of which could negatively affect our earnings from operations.
We are subject to various legal proceedings and claims, the outcomes of which are uncertain. If we fail to accurately evaluate the probability of loss or the amount of possible losses, an adverse outcome may materially and adversely affect our financial condition and results of operations.
We are party from time to time to various legal proceedings and claims generally incidental to our business including without limitation intellectual property and product liability claims. For each of these proceedings and claims, our management evaluates, based on the relevant facts and legal principles, the likelihood of an unfavorable outcome and whether the amount of the loss can be reasonably estimated, in connection with our determination of whether or not to record a charge to earnings. Significant subjective judgments are required in these evaluations, including judgments regarding the validity of asserted claims and the likely outcome of legal, arbitration and administrative proceedings. The outcome of these proceedings is subject to a number of factors beyond our control. In addition, estimates of the potential costs associated with legal, arbitration and administrative proceedings frequently cannot be subjected to any sensitivity analysis, as damage estimates or settlement offers by claimants may bear little or no relation to the eventual outcome. Finally, in any particular proceeding, even where we believe that we would ultimately prevail, we may agree to settle or to terminate a claim or proceeding where we believe that doing so, when taken together with other relevant commercial considerations, is more cost-effective than engaging in an expensive and protracted contest. If we do not accurately assess the probability of an unfavorable outcome or the range of possible loss, an unfavorable outcome could have a material adverse impact on our financial condition and results of operations.
If our products are found to be defective, we may be required to recall and/or replace them, which could be costly and result in a material adverse effect on our business, financial position and net earnings.
One or more of our products may be found to be defective after we have already shipped the products in volume, requiring a product replacement or recall. We may also be subject to product returns and product liability claims that could impose substantial costs and have a material and adverse effect on our business, financial position and net earnings.
We may not be able to recruit or retain qualified personnel or integrate qualified personnel into our organization. Consequently, we could experience reduced sales, delayed product development and diversion of management resources.
Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel, particularly during sustained economic upturns in the industry. Availability of qualified technical personnel varies from country to country, and may affect the operations of our subsidiaries in some parts of the world. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed. In particular, if our growth strategies are successful, we may not have sufficient personnel to manage that growth and may not be able to attract the personnel needed. We have agreements with some, but not all, key employees, restricting their ability to compete with us after their employment terminates. We do not maintain insurance to protect against the loss of key executives or employees. Our future growth and operating results will depend on:
- our ability to continue to broaden our senior management group;
- our ability to attract, hire and retain skilled employees; and
- the ability of our officers and key employees to continue to expand, train and manage our employee base.
We have in the past experienced intense competition for skilled personnel during market expansions and believe competition will be intense if the semiconductor market experiences a sustained expansion. Consequently, we generally attempt to minimize reductions in skilled personnel in reaction to industry downturns, which reduces our ability to lower costs by payroll reduction.
Because the costs to semiconductor manufacturers of switching from one semiconductor equipment supplier to another can be high, it may be more difficult to sell our products to customers having a competing installed base, which could limit our growth in sales and market share.
We believe that once a semiconductor manufacturer has selected a supplier’s equipment for a particular product line, that manufacturer generally continues to rely on that supplier for future equipment requirements, including new generations of similar products. Changing from one equipment supplier to another is expensive and requires a substantial investment of resources by the customer. Accordingly, it is difficult to achieve significant sales to a customer using another supplier’s equipment. Our inability to sell our products to potential customers who use another supplier’s equipment could adversely affect our ability to increase revenue and market share.
Our reliance on a limited number of suppliers and a single manufacturing facility could result in disruption of our operations.
We outsource a significant portion of the manufacturing of our business to a limited number of suppliers. If our suppliers were unable or unwilling to deliver products in a timely manner to us in the quantities we require for any reason – including but not limited to – capital constraints, natural disaster, labor unrest, capacity constraints, supply chain management problems or contractual disputes, we may be unable to fill customer orders on a timely basis, which could negatively affect our customer relationships and financial performance. Many of our suppliers face economic challenges in a depressed or difficult global economy, which increases our risk of disruption from a supplier’s failure to perform its obligations to us in a timely manner.
We have shifted much of our manufacturing and assembly to our Front-end Manufacturing Singapore ('FEMS') facility. If this facility experiences a manufacturing disruption for any reason – including but not limited to – natural disaster, labor unrest, capacity constraints, supply chain management problems or contractual disputes, our ability to timely meet our customers’ needs may be impaired, which would negatively affect our customer relationships and financial performance.
We operate worldwide; economic, political, military or other events in a country where we make significant sales or have significant operations could interfere with our success or operations there and harm our business.
We market and sell our products and services throughout the world. We have operating facilities in the Netherlands, the United States, Japan, Singapore, Malaysia and South Korea. Our operations are subject to risks inherent in doing business internationally, including, but not limited to:
- unexpected changes in regulatory or legal requirements or changes in one country in which we do business which are inconsistent with regulations in another country in which we do business;
- potentially adverse tax consequences;
- fluctuations in foreign currency exchange rates and foreign currency controls;
- political conditions and instability;
- economic conditions and instability;
- terrorist activities;
- human health emergencies, such as the outbreak of infectious diseases or viruses;
- tariffs and other trade barriers, including current and future import and export restrictions and compliance requirements, and freight rates;
- difficulty in staffing, coordinating and managing international operations;
- burden of complying with a wide variety of foreign laws and licensing requirements;
- differences in intellectual property right protection;
- differences in rights to enforce agreements;
- differences in commercial payment terms and practices; and
- business interruption and damage from natural disasters, such as earthquakes, tsunamis and floods.
These factors could increase our costs of doing business in a particular region or result in delays or cancellations of purchase orders or disrupt our supply chain, any of which could materially and adversely impact our business and operating results.
Environmental laws and regulations and operation of our equipment may expose us to liability and increase our costs.
Our operations are subject to many environmental laws and regulations wherever we operate, governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. To the extent such regulations or directives apply to our business throughout the world, these measures could adversely affect our manufacturing costs or product sales by forcing us or our suppliers to change production processes or use more costly or scarce materials. As with other companies engaged in similar activities, we face inherent risks of environmental liability in our current and historical manufacturing, R&D activities, and operations. Accordingly, costs and regulatory fines associated with such future environmental compliance or remediation obligations could adversely affect our business. We seek to mitigate these environmental and operational risks through preventative and protective safety and health practices, but there is no assurance that such measures will eliminate all such risks, which could result in significant adverse effects on our business, financial condition and operational results.
A significant disruption in our information technology systems could adversely affect our business.
Our internal information technology systems are a fundamental component of our business operations. In today's world, these systems are subject to compromise by aging other matters such as computer viruses, unauthorized access and general system failures or unforeseen difficulties. We focus on proactive measures to prevent and mitigate such risks; however, such incidents could compromise our systems, resulting in business disruption and theft of confidential information. In addition to potential negative business effects and financial impact, we may incur significant costs to remedy such issues and resultant damage.
Any acquisitions or investments we may make could disrupt our business and harm our financial condition.
We may consider from time to time additional investments in complementary businesses, products or technologies. We may not be able to successfully integrate these businesses, products, technologies or personnel that we might acquire in the future, and accordingly we may not realize the anticipated benefits from such acquisitions. In particular, our operation of acquired businesses involves numerous risks, including wbut not limited to:
- problems integrating the purchased operations, technologies or products;
- unanticipated costs and liabilities for which we are not able to obtain indemnification from the sellers;
- diversion of management’s attention from our core business;
- adverse effects on existing business relationships with customers;
- risks associated with entering markets in which we have no, or limited, prior experience;
- risks associated with installation, service and maintenance of equipment of which we have limited or no prior experience;
- limited technical documentation of the equipment developed in the acquired company; and
- potential loss of key employees, particularly those of the acquired organizations.
In addition, in the event of any future acquisitions of such businesses, products or technologies, we could:
- issue shares that would dilute our current shareholders’ percentage ownership;
- incur debt;
- assume liabilities;
- incur impairment expenses related to goodwill and other intangible assets; or
- incur substantial accounting write-offs.
Risks related to our minority interest in ASM Pacific Technology
A significant portion of our total assets is composed of our minority interest in ASMPT. Changes in ASMPT's market, business or results of operations may adversely impact our reported earnings and the trading price of our common shares.
Prior to March 2013, we owned approximately 52% of the outstanding equity of ASMPT, and the assets and operating results of ASMPT were reported by us on a consolidated basis. On March 15, 2013, we disposed of a 12% stake in ASMPT, which reduced our ownership to approximately 40% of the outstanding equity. As a result of this, ASMPT ceased to be a consolidated subsidiary as of that date and our pro rata interest in the net earnings of ASMPT is reported in our Consolidated statements of operations on the line, result from investments. See for further information Note 3 Divestment and Note 12 Investments and associates to the Consolidated financial statements.
The trading price of our shares may be adversely impacted by developments affecting ASMPT's business, results of operations or prospects. Although ASMPT operates in the same industry as ASM International, ASMPT addresses a different segment of the industry, which may involve different market dynamics and competitive factors from time to time, as well as different business risks unique to their operations. ASMPT is a public company traded on the Hong Kong Stock Exchange and further information is provided in their public reports.
The management of ASMPT may respond to market, business or other developments in a manner different than we would under similar circumstances, and in a manner that may not be in our best interests. Although we are the largest shareholder of ASMPT, we do not possess the right to control ASMPT. Accordingly, the value of our equity interest in ASMPT, and our pro rata share of ASMPT's net earnings reported in our Consolidated statements of operations on the line, result from investments could change materially due to factors outside of our control and unrelated to our business or markets, which could materially and adversely impact our net income and the trading price of our common shares.
Although we are a substantial shareholder, ASMPT is not obligated to pay dividends to us and may take actions or enter into transactions that are detrimental to us.
We currently own 39.75% of the outstanding common shares of ASMPT. In addition both members of our Management Board are also members of the ASMPT Board of Directors. However, these directors are under no obligation to take any actions as directors of ASMPT that are beneficial to us. Issues and conflicts of interest therefore may arise which might not be resolved in our best interest.
In addition, the directors of ASMPT are under no obligation to declare a payment of dividends to shareholders. As a shareholder of ASMPT, we cannot compel the payment or amount of dividends. With respect to the payment of dividends, the directors must consider the financial position of ASMPT after the dividend. Cash dividends received from ASMPT totaled €29.6 million, €10.3 million and €20.0 million in 2012, 2013, and 2014, respectively.
The directors of ASMPT owe their fiduciary duties to ASMPT and may approve transactions to which we are a party only if the transactions are commercially beneficial to ASMPT. Further, under the listing rules of the Hong Kong Stock Exchange, directors who are on the boards of both ASMPT and ASM International are not permitted to vote on a transaction involving both entities. This would disqualify all affiliates of ASM International who serve on the board of ASMPT from voting on any such transaction.
As a shareholder of ASMPT, we can vote our shares in accordance with our own interests. However, we may not be entitled to vote on transactions involving both us and ASMPT under the listing rules of the Hong Kong Stock Exchange and the Hong Kong Takeovers Code.
Risks related to an investment in our shares
Our founder, who is also Chairman of the Board of ASMPT, controlled as per December 31, 2014 approximately 18.02% of the voting power, which gives him significant influence over matters voted on by our shareholders, including the election of members of our Supervisory Board and Management Board, and makes it substantially more difficult for a shareholder group to remove or elect such members without his support.
Our founder, Arthur H. del Prado, controlled approximately 18.02% of the voting power of our outstanding common shares as of December 31, 2014. Accordingly, he has significant influence on the outcome of matters submitted to a shareholder vote, such as the election of the members of our Supervisory Board and Management Board. Persons nominated by the Supervisory Board for appointment by the shareholders to the Supervisory Board or Management Board at a general meeting of shareholders will be elected if they receive a majority of the votes cast at the meeting. Nominees to the Supervisory Board or Management Board who are not proposed by the Supervisory Board are appointed if they receive the affirmative vote of a majority of the votes cast at the meeting, provided such affirmative votes represent at least one third of our issued capital. Members of the Supervisory and Management Boards may be removed only by the affirmative vote of a majority of the votes cast at a meeting, and, unless such removal is recommended by the Supervisory Board, the affirmative votes must represent at least one third of our issued capital. This makes it difficult for a group of shareholders to remove or elect members of our Supervisory Board or Management Board without the support of our founder.
Our anti-takeover provisions may prevent a beneficial change of control.
The Company has granted to Stichting Continuïteit ASM International ('Stichting') – a non-membership organization – with a board composed of three members independent of ASMI, the right to acquire and vote our preferred shares. The objective of Stichting is to serve the interests of the Company. To that objective, Stichting may, among other things, acquire, own and vote our preferred shares in order to maintain our independence and/or continuity and/or identity. This may prevent a change of control from occurring that shareholders may otherwise support. On May 14, 2008, Stichting exercised this right in response to a perceived threat to our continuity and acquired shares of our preferred stock representing 29.9% of the total voting power of our outstanding capital shares at that time. These shares were retired in 2009 and a new right was issued to Stichting to acquire and vote preferred shares in certain situations in the future. For additional information regarding Stichting, see Item 7, Major shareholders and related party transactions.
The voting power of Stichting makes it more difficult for a shareholder or a group of shareholders to cause us to enter into a change of control transaction not supported by Stichting, even if such a transaction offers our shareholders an opportunity to sell their shares at a premium over the market price.
We must offer a possible change of control transaction to Applied Materials first.
Pursuant to our 1997 settlement agreement with Applied Materials, as amended and restated in 1998, if we desire to effect a change of control transaction, as defined in the settlement agreement which generally involves our operations and not our holdings in ASMPT, with a competitor of Applied Materials, we must first offer the change of control transaction to Applied Materials on the same terms as we would be willing to accept from that competitor pursuant to a bona fide arm’s length-offer made by that competitor.
Our stock price has fluctuated and may continue to fluctuate widely.
The market price of our common shares has fluctuated substantially in the past. Between January 1, 2014 and December 31, 2014, the sale price of our common shares, as reported on the Nasdaq Global Select Market, ranged from a low of US$32.06 to a high of US$44.17. The market price of our common shares will continue to be subject to significant fluctuations in the future in response to a variety of factors, including the risk factors discussed in this report and the following, but not limited to:
- future announcements concerning our business or that of our competitors or customers;
- the introduction of new products or changes in product pricing policies by us or our competitors;
- litigation regarding proprietary rights or other matters;
- changes in analysts’ earnings estimates and recommendations;
- developments in the financial markets;
- quarterly fluctuations in operating results;
- hedge fund and shareholder activist activities;
- general economic, political and market conditions, such as recessions or foreign currency fluctuations; and
- general conditions in the semiconductor- and semiconductor equipment industries.
In addition, public stock markets frequently experience substantial price and trading volume volatility, particularly in the high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common shares.
Our quarterly revenues and earnings from operations have varied significantly in the past and may vary in the future due to a number of factors, including, but not limited to:
- cyclicality and other economic conditions in the semiconductor industry;
- production capacity constraints:
- the timing of customer orders, cancellations and shipments;
- the length and variability of the sales cycle for our products;
- the introduction of new products and enhancements by us and our competitors;
- the emergence of new industry standards;
- product obsolescence;
- disruptions in sources of supply;
- our ability to time our expenditures in anticipation of future orders:
- our ability to fund our capital requirements;
- changes in our pricing and pricing by our suppliers and competitors;
- our product and revenue mix;
- seasonal fluctuations in demand for our products;
- foreign currency exchange rate fluctuations; e.g. appreciation of the euro versus the Japanese yen and US dollar, which would negatively affect the competitiveness of those manufacturing activities that are domiciled in countries whose currency is the euro; and
- economic conditions generally or in various geographic areas where we or our customers do business.
In addition we derive a substantial portion of our net sales from products that have a high average selling price and significant lead times between the initial order and delivery of the product. The timing and recognition of net sales from customer orders can cause significant fluctuations in our earnings from operations from quarter to quarter. Gross margins realized on product sales vary depending upon a variety of factors, including the mix of products sold during a particular period, negotiated selling prices, the timing of new product introductions and enhancement,s and manufacturing costs. A delay in a shipment near the end of a fiscal quarter or year, due, for example, to rescheduling or cancellations by customers or to unexpected manufacturing difficulties experienced by us, may cause sales in a particular period to fall significantly below our expectations and may materially adversely affect our earnings from operations for that period. Further, our need to continue expenditures for research and development, and engineering make it difficult for us to reduce expenses in a particular quarter even if our sales goals for that quarter are not met. Our inability to adjust spending quickly enough to compensate for any sales shortfall would magnify the adverse impact of a sales shortfall on our earnings from operations. In addition, announcements by us or our competitors of new products and technologies could cause customers to defer purchases of our existing systems, which could negatively impact our financial position and net earnings.
As a result of these factors, our revenues or earnings from operations may vary significantly from quarter to quarter. Any shortfall in revenues or earnings from operations from levels expected by securities analysts and investors could cause a decrease in the trading price of our common shares.
The significant risks currently considered relevant, potential consequences, and applicable mitigating actions can be outlined as follows:
|Risk||Potential Consequences||Mitigating Measures|
|Ability to respond to changes in product demand and technology change.||Financial loss due to decreased orders and/or reputation damage.||Appropriate investment in R&D initiatives to support both strategic objectives and customer requests.|
|Ability to attract and retain appropriately qualified and experienced personnel.||Reduced sales, delayed product development and diversion of management resources.||Robust talent management and succession planning tools.|
|Cyclical nature of the semiconductor market.||Financial loss due to reduced demand and fixed overheads during industry downturns. Abrupt increases in demand for semiconductor devices and insufficient production capacity during industry upturns.||Outsourcing generic manufacturing.|
|Dependence on small number of large customers.||Loss of a customer or significant reduction in demand could result in significant downturn in financial results.||Commitment to:|
|- delivering quality tools and equipment with robust quality assurance processes and controls in place;|
|- timely response to customer requests; and|
|- pro-actively working with customers to strengthen relationships and ensure as far as possible we meet expectations.|
|Failure to adequately protect our Intellectual Property (“IP”) and/or leakage of our IP.||Loss of competitive advantage could adversely impact demand and financial performance.||Robust governance framework and controls in place to establish maintain and protect our intellectual property rights. Control framework established to minimize as far as possible the risk of data leakage.|
|Failure to deliver product of sufficient quality or on time.||Financial loss due to penalties, rework and/or reduced future demand.||Commitment to:|
|- delivering quality tools and equipment with robust quality assurance processes and controls in place; and|
|- timely response to customer requests through 24/7.|
|IT security breaches including cyber attacks.||Reputation damage.||IT risk management framework.|
|Failure of contract manufacturer to deliver.||Financial loss due to penalties, rework and/or reduced future demand.||Effective disaster recovery plan in place for contract manufacturers.|
|Disruption of material supplies.||Loss of reputation and/or financial loss.||Effective disaster recovery plan to ensure continuity of material supplies.|
|Disruption of critical business processes through IT downtime.||Potential loss of reputation and/or financial loss.||Comprehensive IT disaster recovery plan based on detailed business impact analysis.|
|Safety, health and environment.||Incidents and accidents in the supply chain.||Effective global SHE organization and tracking, monitoring and evaluation of accidents.|
|Financial reporting is not complete or accurate.||Reputation damage and/or financial loss.||Finance Control Framework.|
|Non adherence to laws and regulations in respect of environment, labor and data privacy.||Reputation damage and/or financial loss.||Detailed policies, procedures and work instructions.|