ASM International N.V. 20-F 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2006
Date of event requiring this shell company report
For the transition period from to
Commission File Number: 0-13355
ASM INTERNATIONAL N.V.
(Exact name of Registrant as specified in its charter)
(jurisdiction of incorporation or organization)
Jan van Eycklaan 10, 3723 BC Bilthoven, the Netherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act: Common Shares, par value 0.04
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report: 53,828,745 common shares; no preferred shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this annual report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x
TABLE OF CONTENTS
As used in this report, the terms we, us, our, ASMI, and ASM International mean ASM International N.V. and its subsidiaries, unless the context indicates another meaning, and the term common shares means our common shares, par value 0.04 per share. Since we are a Netherlands company, the par value of our common shares is expressed in euros (). The terms United States and U.S. refer to the United States of America.
Item 3. Key Information
A. Selected consolidated financial data.
You should read the following selected financial data in conjunction with Item 5 Operating and Financial Review and Prospects and Item 18 Financial Statements.
The selected consolidated financial data presented below as of and for the years ended December 31, 2005 and 2006 have been derived from our audited Consolidated Financial Statements included in Item 18. The selected Consolidated Balance Sheet data presented below as of December 31, 2002, 2003 and 2004 have been derived from our audited Consolidated Financial Statements which are not included in this report. The selected Consolidated Statements of Operations data presented below for the years ended December 31, 2002 and 2003 have been derived from our audited Consolidated Financial Statements which are not included in this report. The selected Consolidated Statement of Operations data presented below for the year ended December 31, 2004 have been derived from our audited Consolidated Statement of Operations as included in this report.
Fixed charges consist of interest expense, including interest expense related to operating leases. The interest expense related to operating leases is calculated as one-third of rental expenses, which is considered representative of the interest factor. Not included in fixed charges are the losses for the early extinguishment of convertible subordinated notes of 1.2 million and 0.3 million which have been recorded as interest expense in our Consolidated Statements of Operations for the years 2004 and 2005 respectively.
Exchange Rate Information
The following table sets forth, for each period indicated, specified information regarding the U.S. dollar per euro exchange rates based on the noon buying rate in New York City for cable transfers payable in euros as certified for customs purposes by the Federal Reserve Bank of New York, which is often referred to as the noon buying rate. On March 5, 2007, the noon buying rate was 1.3094 U.S dollars per euro.
U.S. Dollar per Euro Exchange Rate
B. Capitalization and indebtedness.
C. Reasons for the offer and use of proceeds.
D. Risk factors.
Some of the information in this report constitutes forward-looking statements within the meaning of the United States federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements regarding future expenditures, sufficiency of cash generated from operations, maintenance of majority interest in ASM Pacific Technology Ltd. (ASM Pacific Technology), business strategy, product development, product acceptance, market penetration, market demand, return on investment in new products, product shipment dates and outlooks. These statements may be found under Item 5 Operating and Financial Review and Prospects and elsewhere in this report. Forward-looking statements typically are identified by use of terms such as may, could, should, project, believe, anticipate, expect, plan, estimate, forecast, potential, intend, continue and similar words, although some forward-looking statements are expressed differently. You should be aware that these statements involve risks and uncertainties and our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the matters discussed in Item 4 Information on the Company and the following discussion of risks. The risks described are not the only ones facing ASMI. Some risks are not yet known and some that we do not currently believe to be material could later become material. Each of these risks could materially affect our business, revenues, income, assets, liquidity and capital resources. All statements are made as of the date of this report, and we assume no obligation and do not intend to update or revise any forward-looking statements to reflect future developments or circumstances.
RISKS RELATED TO OUR INDUSTRY
Our business could be adversely affected by the cyclical nature of the semiconductor industry.
We sell our products to the semiconductor industry, which is subject to sudden, extreme, cyclical variations in product supply and demand. The timing, length and severity of these cycles are difficult to predict. In the period 2001-2003, the semiconductor industry experienced a cyclical downturn characterized by reduced demand for products, lower average selling prices, reduced investment in semiconductor capital equipment and other factors all of which resulted in lower sales and earnings for our business. This downturn lasted longer than past cycles and, although conditions in the semiconductor equipment market improved, the market remains volatile and hard to predict. Semiconductor manufacturers may contribute to the severity of these 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 timely and effectively to these industry cycles.
Downturns in the semiconductor industry often occur in connection with, or anticipation of, maturing product cycles and declines in general economic conditions. Industry downturns have been characterized by reduced demand for semiconductor devices and equipment, production over-capacity and a decline in average selling prices. During a period of declining demand, we must be able to quickly and effectively reduce expenses and motivate and retain key employees. Our ability to reduce expenses in response to any downturn in the semiconductor industry is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements. In addition, the long lead time for production and delivery of some of our products creates a risk that we may incur expenditures or purchase inventories for products that we cannot sell. During periods of extended downturn, a portion of our inventory may have to be written down if it is not sold in a timely manner.
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. Our inability to quickly respond in times of increased demand could harm our reputation and cause some of our existing or potential customers to place orders with our competitors rather than us.
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, rapid thermal processes, dielectric deposition processes of materials with lower k-values, and low temperature epitaxy processes of silicon based materials. 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 write-downs 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, without limitation:
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. In addition, we may incur substantial unanticipated costs to ensure the functionality, reliability and quality of our current and future products. If our products are unreliable or do not meet our customers expectations, then we may experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable, and/or additional service and warranty expense. We have experienced delays from time to time in the introduction of, and some technical and manufacturing difficulties with, some of our systems and enhancements. 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 products introduction and the commencement of volume production of that product. Any of these events could negatively impact 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 front-end and back-end businesses. In 2006, we invested 88.1 million in research and development, or 10.0% of our net sales, of which 58.6 million was invested in our front-end business. In 2006 and prior years, we received substantial cash dividends from our majority-owned subsidiary, ASM Pacific Technology, some of which we utilized to support our front-end research and
development expenses. During 2006, we stated our commitment that for at least the next three years we would not use cash dividends from ASM Pacific Technology to support our front-end business. See Item 5. Operating and Financial Review and ProspectsManagements Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources. If we have insufficient cash flow from our front-end 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 reduce our level of research and development expenses.
Because of intense competition in our industry, the cost of failing to invest in strategic developments is high. 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 both the front-end and back-end segments of the semiconductor equipment industry from other established companies. Our primary competitors in the front-end business include Applied Materials, Novellus Systems, Tokyo Electron, Kokusai, and Aviza. Our primary competitors in the back-end business include Kulicke & Soffa, ESEC, Shinkawa, Apic Yamada, BE Semiconductor Industries, Towa, Shinko and Mitsui. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to:
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:
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.
RISKS RELATED TO OUR BUSINESS
Our quarterly revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decrease in the price of our common shares.
Our quarterly revenues and operating results have varied significantly in the past and may vary in the future due to a number of factors, including, without limitation:
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 operating results 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 enhancements 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 operating results 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 operating results. 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 earnings and our financial position.
As a result of these factors, our operating results may vary significantly from quarter to quarter. Any shortfall in revenues or net income from levels expected by securities analysts and investors could cause a decrease in the trading price of our common shares.
Our products generally have long sales cycles and implementation periods, which increase our costs in 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 products performance and compatibility with the customers 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. The sales cycles of our products often last for many months or even years. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue.
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 operating results.
Any acquisitions or investments we may make in the future 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 without limitation:
In addition, in the event of any future acquisitions of such businesses, products or technologies, we could:
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 have specific commercial terms and are conditioned on our demonstration, and our customers acceptance, that the equipment meets specified operating and performance criteria, either before shipment or after installation in a customers facility. We occasionally experience difficulties in adhering to and demonstrating compliance with such terms and other contractual obligations, 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 operating income 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 operating income.
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, 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 11.4% and our ten largest customers accounted for 33.9% of our net sales in 2006. 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. 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 severe capital constraints that adversely affected our operations and ability to compete, particularly in our front-end business. During 2006, we stated our commitment that for at
least the next three years we would not use cash dividends from our majority-owned subsidiary, ASM Pacific Technology, which represents our back-end business, to support our front-end business. See Item 5. Operating and Financial Review and ProspectsManagements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. We may require additional capital to finance our future growth and fund our ongoing research and development activities beyond 2007 particularly with regard to our front-end business. Our capital requirements depend on many factors, including acceptance of and demand for our products, and the extent to which we invest in new technology and research and development projects.
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.
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.
We could be harmed by the loss of key management.
The success of our operations depends in significant part upon the experience of our management team. We do not have employment agreements with some members of our management team and we do not maintain key man life insurance policies. The unexpected loss of services from our key executives and the transition process with new management could harm or cause difficulties in our business, prospects, financial condition and results of operations.
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. Although we have agreements with some, but not all, 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:
We have in the past experienced intense competition for skilled personnel during market expansions and believe competition will again 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.
Although we currently are a majority shareholder of ASM Pacific Technology, we may not be able to maintain our majority interest, which, if other circumstances are such that we do not control ASM Pacific Technology, would prevent us from consolidating its results of operations with ours. This event would have a significant negative effect on our consolidated net earnings from operations.
We derive a significant portion of our net sales, earnings from operations and net earnings from the consolidation of the results of operations of ASM Pacific Technology (whose shares are listed on The Stock Exchange of Hong Kong Limited (the Hong Kong Stock Exchange)) in our results. If we do not maintain our majority interest in ASM Pacific Technology, and if other circumstances are such that we do not control it through other means, we would no longer be able to consolidate its results of operations in ours. Any such determination of whether we could continue to consolidate would be based on whether we still have a
controlling financial interest within the meaning of United States generally accepted accounting principles. If we were to become unable to consolidate the results of operations of ASM Pacific Technology with our results, the results of operations of ASM Pacific Technology would no longer be included in our earnings from operations. Instead, our proportionate share of ASM Pacific Technologys earnings would be reflected as a separate line-item called share of results from investments in our Consolidated Statements of Operations. We would no longer be able to consolidate the assets and liabilities of ASM Pacific Technology and would have to reflect the net investment in ASM Pacific Technology in the line-item investments in our Consolidated Balance Sheet. This event would have a significant negative effect on our consolidated earnings from operations, although our net earnings would be reduced only to the extent of the reduction of our ownership interest in ASM Pacific Technology.
ASM Pacific Technology has an employee share incentive program pursuant to which it can issue up to an aggregate of 5.0% of its total issued shares, excluding shares subscribed for or purchased under the program, to directors and employees. When ASM Pacific Technology issues shares pursuant to this program, our ownership interest is diluted. If the current maximum amount of shares is issued under this program, our ownership interest would continue to be above 50.0%. However, our interest could further be diluted if ASM Pacific Technology issues additional equity. Any such decision by ASM Pacific Technology to issue additional shares requires the approval of shareholders in general meeting in accordance with the listing rules of the Hong Kong Stock Exchange, which in effect is subject to our approval. Although we could purchase shares of ASM Pacific Technology if necessary to maintain our majority interest, we may be unable to do so if we do not have sufficient financial resources at that time.
Although we are a majority shareholder, ASM Pacific Technology is not obligated to pay dividends to us and may take actions or enter into transactions that are detrimental to us.
ASM Pacific Technology is a Cayman Islands limited liability company that is based in Hong Kong and listed on the Hong Kong Stock Exchange. As of December 31, 2006, we owned 53.35% of ASM Pacific Technology through our wholly-owned subsidiary, Advanced Semiconductor Materials (Netherlands Antilles) N.V., a Netherlands Antilles company, and the remaining 46.65% was owned by the public.
Three of the ten directors of ASM Pacific Technology are affiliates of ASM International. However, they are under no obligation to take any actions 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 ASM Pacific Technology are under no obligation to declare a payment of dividends to shareholders. As a shareholder of ASM Pacific Technology, we cannot compel the payment or amount of dividends. With respect to the payment of dividends, the directors must consider the financial position of ASM Pacific Technology after the dividend. Cash dividends received from ASM Pacific Technology totaled 40.4 million, 37.0 million and 59.0 million, in 2004, 2005 and 2006, respectively. In the past, we have used these dividends in our front-end business. In November 2006, we announced our commitment that for at least the next three years we would not use these cash dividends to support our front-end business, but instead would use such dividends to retire outstanding convertible debt, repurchase our common shares, or pay dividends on our common shares or purchase shares of ASM Pacific Technology. See Item 5. Operating and Financial Review and ProspectsManagements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.
The directors of ASM Pacific Technology owe their fiduciary duties to ASM Pacific Technology, and may approve transactions to which we are a party only if the transactions are commercially beneficial to ASM Pacific Technology. Further, under the listing rules of the Hong Kong Stock Exchange, directors who are on the boards of both ASM Pacific Technology and ASM International are not permitted to vote on a transaction involving both entities. This would disqualify all of the three affiliates of ASM International who currently serve on the board of ASM Pacific Technology from voting on any such transaction.
As a shareholder of ASM Pacific Technology, 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 ASM Pacific Technology under the listing rules of the Hong Kong Stock Exchange and the Hong Kong Takeovers Code. In particular, under the Hong Kong Takeovers Code we would be excluded from voting on a takeover transaction requiring shareholders approval if we are interested in such transaction.
Our reliance on a limited number of suppliers could result in disruption of our operations.
We outsource a substantial portion of the manufacturing of our front-end business to a limited number of suppliers. We are in the process of developing additional internal and external sources of supply for these manufacturing processes in the future, including an additional front-end supply source in Singapore. If our suppliers were unable or unwilling to deliver products to us in the quantities we require for any reason,
including 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 financial performance and customer relationships.
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 suppliers 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 suppliers equipment. Our inability to sell our products to potential customers who use another suppliers equipment could adversely affect our ability to increase revenue and market share.
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, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third party infringements, 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.
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 these countries. If competitors are able to use our technology as their own, our ability to compete effectively could be harmed.
In recent years, there has been substantial litigation regarding patent and other intellectual property rights in semiconductor-related industries. Unrelated to our 1997 settlement with Applied Materials, discussed below, we entered into a settlement agreement with Applied Materials in August 2004 dismissing all claims and counter-claims over certain patent infringement proceedings in the United States without prejudice and without payment of any kind by any party and without licensing any patents. In addition, in April 2003, we and our subsidiary, ASM America entered into a binding memorandum of understanding regarding the settlement of mutual patent infringement claims between ASM America and Genus. In the future, additional 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 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:
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 expire at the end of the life of the underlying patents which expire at various times through 2014. Our obligation to pay certain royalties to Applied Materials continues until the expiration of the corresponding underlying patent. In addition, the settlement agreement included covenants for limited periods during which the parties would not litigate the issue of 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 other matters or the operation of the settlement agreement itself could occur. Litigation with Applied Materials, which has greater financial resources than we do, could negatively impact our earnings and financial position.
We must offer a possible change of control transaction to Applied Materials first.
Pursuant to our 1997 settlement agreement with Applied Materials, one of our competitors, as amended and restated in 1998, if we desire to effect a change of control transaction, as defined in the settlement agreement, 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 arms-length offer made by that competitor.
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. A substantial portion of our manufacturing employees and operations are in the Peoples Republic of China and the success of our business depends on our operations there. In addition, we have manufacturing facilities in the Netherlands, the United States, Japan, Hong Kong, Singapore, Malaysia and South Korea. Our operations are subject to risks inherent in doing business internationally, including, without limitation:
To the extent that such disruptions slow the global economy or, more particularly, result in delays or cancellations of purchase orders, our business and results of operations could be materially and adversely affected.
Our operational results 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 euros. The translation exposures that result from the inclusion of financial statements of our subsidiaries that are expressed in the currencies of the countries where the subsidiaries are located are not hedged. As a result, our operational results are exposed to fluctuations of various foreign currency exchange rates. These net translation exposures are taken into account in determining Shareholders Equity.
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, U.S. 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 countrys currency 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 operating results could be subject to additional foreign exchange rate fluctuations.
Although we monitor our exposure to currency fluctuations, these fluctuations could negatively impact our earnings, cash flow and financial position.
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 condition and results of operations.
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 condition and results of operations.
Environmental laws and regulations 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. As with other companies engaged in similar activities, we face inherent risks of environmental liability in our current and historical manufacturing activities. Costs associated with future environmental compliance or remediation obligations could adversely affect our business.
In February 2003, the European Commission published a directive on waste electrical and electronic equipment (WEEE), which has been implemented in the Netherlands. In principle, the rules result in take-back obligations of manufacturers and/or the responsibility of manufacturers for the financing of the collection, recovery and disposal of electrical and electronic equipment by requiring that European Union Member States adopt appropriate measures to minimize WEEE disposal and achieve high levels of collection and separation of WEEE. As of August 13, 2005 producers of WEEE must provide for the financing of the collection, treatment, recovery and environmentally sound disposal of WEEE. Another directive of the European Commission (Directive 2002/95/EC) provides for a ban on the use of lead and some flame retardants in manufacturing electronic components. To the extent these and other regulations on other countries apply to our business in Europe and elsewhere 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 materials.
Members of our Supervisory Board and Management Board control approximately 22.1% of our voting power which gives them 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 the support of members of Supervisory Board and Management Board.
Our Chairman and Chief Executive Officer controlled approximately 21.3% of the voting power of our outstanding common shares as of December 31, 2006, and the members of our Supervisory Board and
Management Board as a group controlled approximately 22.1% of the voting power of our outstanding common shares as of that date. Accordingly, these persons have 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 more than half our outstanding 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 more than half 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 the Supervisory Board and Management Board.
Our anti-takeover provisions may prevent a beneficial change of control.
Our shareholders have granted to Stichting Continuïteit ASM International (Stichting), a non-membership organization with a board composed of our President and Chief Executive Officer, the Chairman of our Supervisory Board and three independent members, the right to acquire and vote our preferred shares to maintain the continuity of our company. Toward that objective, Stichting will evaluate, when called for, whether a takeover offer is in our best interest, and may, if it determines that such action is appropriate, acquire preferred shares with voting power equal to 50.0% of the voting power of the outstanding common shares. This is likely to be sufficient to enable it to prevent a change of control from occurring. For additional information regarding Stichting, see Item 7. Major Shareholders and Related Party Transactions.
These provisions may prevent us from entering into a change of control transaction that may otherwise offer our shareholders an opportunity to sell shares at a premium over the market price.
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, 2006 and December 31, 2006, the sales price of our common shares, as reported on the NASDAQ Global Select Market, ranged from a low of US$ 13.65 to a high of US$ 21.50. 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, without limitation:
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.
Compliance with Internal Controls Evaluations and Attestation Requirements.
We are subject to United States securities laws, including the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted by the U.S. Securities and Exchange Commission pursuant to the Act. Under Section 404 of the Sarbanes-Oxley Act and the related regulations, we are required to perform an evaluation of our internal controls over financial reporting and submit a management report on such controls, beginning with the year ended December 31, 2006 and annually thereafter. In addition, we are required to have our independent auditor publicly attest to such annual evaluation, beginning with the year ending December 31, 2007.
If we fail to maintain effective internal controls over financial reporting, if we do not timely evaluate the effectiveness of internal controls over financial reporting, or if our independent auditor could not timely attest to our evaluation, we could be subject to regulatory scrutiny and decreased public confidence in our internal controls, which may adversely affect the market price of our common shares.
Item 4. Information on the Company
The information in this Item 4 should be read in conjunction with the risks discussed under Item 3.D Risk Factors.
A. History and development of the Company.
ASM International N.V. was incorporated on March 4, 1968 as a Netherlands naamloze vennootschap, or public limited liability company, and was previously known as Advanced Semiconductor Materials International N.V. Our principal executive offices are located at Jan van Eycklaan 10, 3723 BC Bilthoven, the Netherlands. Our telephone number at that location is +31 30 229 84 11. Our authorized agent in the United States is our subsidiary, ASM America Inc., a Delaware corporation, located at 3440 East University Drive, Phoenix, Arizona 85034.
B. Business overview.
As a semiconductor capital equipment supplier, we design, manufacture and sell production systems and services to our customers for the production of semiconductor devices, or integrated circuits. The semiconductor capital equipment market is composed of three major market segments: wafer processing equipment, assembly and packaging equipment, and test equipment. ASMI is mainly active in the wafer processing and assembly and packaging market segments. The wafer processing segment is referred to as front-end. Assembly and packaging is referred to as back-end.
Front-end production systems perform processes on round slices of silicon, called a wafer. During these processes, thin films, or layers, of various materials are grown or deposited onto the wafer, or an existing thin film on a wafer undergoes modification, such as a temperature treatment, or local etching. These films form numerous individual and separable circuits on the wafer, called dies or chips. After probing and selecting these individual circuits for correct performance, the dies on the processed wafer are separated, with each die of the same wafer containing the same circuitry. Back-end production systems then assemble and connect one or more of these known good diesor sometimes several different known good dies from different wafers, each supplying a different functionalityin a single package, to form a complex semiconductor device that will perform calculations, store data and interface with its environment.
Our front-end operations are conducted through wholly-owned subsidiaries, the most significant being ASM Europe B.V. (ASM Europe), located in the Netherlands, ASM America, Inc. (ASM America), located in the United States, ASM Japan K.K. (ASM Japan), located in Japan, and ASM Front-End Manufacturing Singapore (FEMS), located in Singapore.
Our back-end operations are conducted through our majority-owned subsidiary, ASM Pacific Technology Ltd. (ASM Pacific Technology), with principal operations in Hong Kong, the Peoples Republic of China, Singapore, and Malaysia. At December 31, 2006, we owned 53.35% of the outstanding equity of ASM Pacific Technology.
The location of our front-end facilities allows us to interact closely with customers in the world's major front-end geographic market segments: Europe, North America, and Asia. We address a part of the deposition and related tools market segment, defined by VLSI Research1. Our front-end segment accounted for 49.4% of our net sales in 2005 and 46.7% of our net sales in 2006.
Our back-end facilities are in close proximity to where most customer assembly and packaging operations are located. We address parts of the bonding equipment and packaging equipment segments, defined by VLSI Research2. We also manufacture and sell lead-frames. Our back-end segment accounted for 50.6% of our net sales in 2005 and 53.3% of our net sales in 2006.
Industry Background and Major Business Trends
Semiconductor devices are the key enablers of the electronic age. Each semiconductor device can hold many individual components, most of which are transistors. For over 30 years now, the average number of components per integrated semiconductor device, at the optimum cost-per-component, has been increased by a factor of two, every 18 to 24 months. This trend is generally referred to as Moores law, after Gordon Moore, one of the founders of Intel. Increases in complexity, along with simultaneous reductions in the cost-per-component, have mainly been achieved by reducing the size of individual transistors, so that a larger number of transistors fit within a given size die. Today, transistors less than 100nm (one billionth of a meter) long are manufactured in high volume, and several billion transistors can be manufactured on a single die.
A second development decreases the cost per device by increasing the size of the wafer (the silicon substrate upon which semiconductors are built), so that more devices can be produced within one production cycle. Today, most of the newly installed semiconductor device fabrication capacity employs 300mm wafers, with each wafer typically holding between a few dozen to several thousand individual circuits. The simultaneous increase in the complexity of devices, and the substantial decrease in cost-per-component has supported an over US$ 1 trillion electronics industry, and behind that, a semiconductor industry of approximately US$ 250 billion (Semiconductor Industry Association, Feb. 2, 20073). The semiconductor industry in turn, is supported by the US$ 42 billion (Gartner, Dec 20, 20064) semiconductor capital equipment industry which supplies the needed production systems and services.
The yield, or the fraction of chips (known good dies) on a wafer that operate according to specifications, is usually one of the most important variables that influences the performance of the integrated device manufacturers. Large initial investments are needed to build an automated production line in an ultra-clean environment in order to achieve high yield. The capital equipment in this production line is increasingly becoming an important determinant for the yield of the factory.
Parallel to the above-mentioned trends of transistor scaling and larger wafer size, another trend is beginning to emerge on the die level: heterogeneous integration. While the components on a chip that perform calculation and storage can undergo scaling, other components, such as inductors, capacitors, sensors, micromechanical, photonic, or micro-fluidic devices, do not scale as easily as do transistors and some capacitors. Yet, in order to make devices with these components small and cost-effective enough, they will eventually also have to be integrated into the same semiconductor device. Although several functions can be integrated on a single die, as in a system on a chip (SoC), for economical reasons this is usually limited to the components that scale with Moores law (more Moore), and use the same base material (silicon). For components that do not scale, or components that use a different base material it is not always practical or economically feasible to place them on the same die. In that case, integration of several dies, sometimes coming from different supply lines, in a single package to form a system in a package (SiP) is the alternative solution that provides the desired functionality. This trend is sometimes referred to as more than Moore.
The trends outlined above are the drivers of the broad semiconductor roadmap which semiconductor equipment companies track in developing new production systems and process technologies. These new systems and technologies must be developed well ahead of volume demand for the semiconductor devices they make. As a result, there is a large lead time between the investment in a new technology, and its commercial success. With the combination of a long lead time and the short product life-cycles comes the inherent difficulty of matching supply and demand, which results in the high volatility associated with the semiconductor industry. In this highly cyclical industry, the front-end and back-end market segments have historically reacted differently to market forces. We believe, therefore, that operating in both segments works in our favor to reduce the impact of business cycles on our operations.
Our strategic objective is to realize profitable, sustainable growth by capitalizing on our technological innovations, manufacturing infrastructure and sales and support offices located close to our global customers. We intend to enhance our market position by providing customers with the advanced, cost-effective, and reliable products they need, along with excellence in customer service and support. The key elements of our strategy include:
Background of Semiconductor Manufacturing Processes
The process of manufacturing an integrated semiconductor, from raw material to finished device, includes the segments front-end and back-end. We participate in both of these segments.
Front-end Manufacturing Process
The front-end manufacturing process, or wafer processing, can be divided in three distinct parts: wafer manufacturing, transistor formation, known as front-end of the line (FEOL) processing, and interconnect formation, known as back-end of the line (BEOL). We develop and sell technology, develop and manufacture equipment, and provide services used by semiconductor device manufacturers in each of these sections of front-end manufacturing.
In the wafer manufacturing process a large single crystal of very pure silicon is grown from molten silicon. The crystal is then sliced into a large number of thin slices, or wafers, of single crystalline silicon. These slices are polished to an atomic level flatness before the next steps are executed. For advanced applications, some layers are deposited on the wafer for later use, by either epitaxy or diffusion/oxidation (described below). Epitaxial wafers are even flatter and contain fewer defects at the surface than polished wafers. Some wafers are made with an embedded electrically insulating layer, such as silicon oxide, just below a very thin top layer of pure silicon. These special wafers are called Silicon-on Insulator or SOI wafers and are used for some of the most advanced microprocessors. The finished wafers, still without pattern on them, are shipped to the integrated device manufacturers and foundries for further processing.
During FEOL and BEOL wafer processing, multiple thin films of either electrically insulating material, also called dielectrics, or conductive material are modified, grown, or deposited on a silicon wafer. First, several material processing cycles are used in the FEOL to build the basic transistor and other components such as capacitors and resistors. Second, several processing cycles are used in the BEOL to build additional components such as capacitors, inductors and resistors, and to electrically connect the large amount of transistors and components. Patterning of deposited layers with lithography and etching (described below) creates the transistors, other components and connecting wires, which together make up the integrated circuit. Each integrated circuit is on a single chip or a die on the wafer. A finished wafer may contain a few dozen to several thousand individual dies. Front-end processes are performed either one wafer at a time in single wafer processing systems or many wafers at a time in batch processing systems. Multiple processes are repeated on each layer as the wafer is processed.
The number and precise order of the process steps vary depending upon the complexity and design of the integrated circuit. The performance of the circuit is determined in part by the various electrical characteristics of the materials used in the layers of the circuit and the wafer. Simple circuits may have as few as ten layers, while complex circuits may have more than one hundred layers. The front-end manufacturing process is capital intensive, requiring multiple units of several different production systems. Many different but complementary methods are used to modify, grow, or deposit materials on the wafers. ASMI is predominantly active in developing and manufacturing the equipment used by semiconductor device manufacturers in the deposition processes, i.e., those steps that involve the creation of insulating, conducting and semi-conducting layers on the wafer surface.
The front-end manufacturing process is complete when all of the layers have been deposited and patterned on the wafer. As a last step, the correct electrical functioning of the integrated circuits on each die is confirmed by probing. Non-functioning circuits are marked so they can be eliminated before the back-end
processing. The introduction of even trace levels of foreign particles or material can make a circuit, or even an entire wafer, unusable. To reduce the level of foreign particles or material, front-end processing is performed in clean rooms with ultra low particle and contamination levels. Once the front-end processing is complete, the entire wafer with multiple, functioning, integrated circuits is shipped to the back-end facility where it is separated into dies, which are then bonded to a suitable substrate or leadframe, packaged, and tested before final shipment of the semiconductor device to the end customer. Back-end processes do not require the same level of contaminant control. These processes are performed in facilities that differ from facilities in which front-end processes are performed.
The following is an alphabetical list of the principal front-end process technologies used by semiconductor device manufacturers:
Back-end Manufacturing Process
When the wafer with confirmed working integrated circuits is received in the back-end facility, wafers are first cut (diced) into individual dies or chips by a dicing saw or sometimes a laser. The dies are then
separated and a single die is (or for an advanced device several different dies are) picked and attached to a leadframe or other substrate by a bonding process. The leadframe or substrate provides the interface between the electrical circuit on the die and the system in which the die is incorporated. Leadframes are produced by stamping a pattern through a strip of copper or iron-nickel alloy. For high precision (and fast turnaround purposes) leadframes are produced by an etching process to achieve a shorter time to market. Stamped frames are typically used for very high volumes on mature designs. In order to allow a wire to be easily attached to its surface, the leadframes are plated with a thin layer of silver or a stacked layer of nickel, palladium, and gold on appropriate places. The electrical connection of the electrical circuit to the leadframe is made by wire bonding. As few as one or as many a thousand or more separate wires are each connected between a terminal connection point on the die and a lead on the leadframe, through which the device is able to communicate with the printed circuit board. Leadframes and wire bonding are by far the most common technology in use today.
After this assembly and wire bonding interconnection process, the dies are encapsulated to protect them from environmental influences. The encapsulation process employs high-grade epoxy molding compounds (EMC), automated molding systems, and tooling to enclose the die and wires. The molding compound forms a hard casing around the die and wires after it is cured. For production efficiency during assembly most leadframes consist of many parts arranged in rows and columns. Each individual part is moved through the multiple assembly process steps connected to other identical parts. After the molding process is completed, the parts are separated from this array in a series of processes referred to as trim, form, and singulation. Here too, high precision tooling and automation are employed to precisely cut away portions of the substrate or leadframe so that the packaged unit is freed from the rest. These singulated units will then move through inspection, electrical test, marking and packing to prepare the tested and finished devices for shipment to the customer.
Another method used for chips with high pin count and speed is flip chip. The flip chip process eliminates the need for die and wire bonding. Instead, it involves populating the electrical interconnect points on a chip with small solder balls made of low melting point materials, a process called bumping. The substrate is designed such that it has an identical pattern to that of the device. The device is then flipped onto the substrate with precise alignment and the bonding process is completed by the application of heat, force, ultrasonic vibration, or a combination of the three. Wafer level packaging (WLP) is another emerging technique that places all the protective layers, interconnections and interconnection points directly on the surface of the wafer, such that completely packaged devices are made at wafer level. After probing and dicing, the die can be separated and may be directly attached to printed circuit boards.
The following is an alphabetical list of the principal back-end processes used by semiconductor manufacturers:
Important Technology Trends for our Business
The continuous demand for smaller, faster and cheaper semiconductor components drives the technology advances in the semiconductor manufacturing process. As the transistors in an integrated circuit become smaller, the cost-per-component decreases. Fortuitously, at the same time the operating speed of
the transistor increases. Thus the minimum size of a single transistor in an integrated circuit is an extremely important parameter. This minimum size can be characterized by the so-called half-pitch, which is about equal to the smallest line width in the device. Today, we support our high volume production systems for leading-edge semiconductor devices with a half-pitch as small as 90 to 65 nanometers (one nanometer is one billionth of a meter). At ASMI, and in close cooperation with our customers, we are qualifying and testing new critical process equipment for line widths at or below 45nm. Simultaneously, we are developing new 32nm technologies in our laboratories. Today, most of the newly installed semiconductor device fabrication capacity employs 300mm wafers. Accordingly, our system and process development and sales effort is concentrated in 300mm equipment.
In developing faster and smaller devices, our front-end customers major technology requirements are:
Technological developments in the front-end process have resulted in new requirements for the back-end manufacturing process. The ability to place millions of transistors onto a thumbnail-size device with vastly increased functionality has created the first major trend: the need for more input/output terminals in the same or smaller space. The challenge for back-end equipment suppliers is to connect this increasing number of terminals in a package that sometimes is barely larger than the chip. Wire bonding has been at the forefront of this transition, but for integrated circuits with very high terminal count, the industry has developed ball grid array (BGA) and flip chip packaging that use the entire surface of a die, and not just the perimeter.
A second major trend in the back-end market segment is driven by the strong growth in demand for hand held devices. There is an ongoing need to build ever smaller and more complex packages at lower cost for this market. Individual dies must be packaged in areas that are just slightly larger than the individual dies they contain. These chip scale packages minimize the amount of space occupied by the end product on the circuit board.
A third major trend relates to the industry demand for a much higher level of integration, but still at lower cost and optimized yield. This has resulted in a requirement to place multiple dies into the same package. The assembly of a combination of known good dies in a package can lead to higher yield than the combination of the same functionality blocks on a single chip. Such a System-in-Package (SiP) is more than a simple collection of multiple dies: SiP products are fully functional systems or sub-systems. Moreover, devices from different supply chains, with sometimes entirely different feature sizes or technologies can be integrated this way. Dies can be placed next to and/or on top of each other, using stacked die bonding techniques and sometimes mixing flip chip and wire bonding techniques in the same package. It appears that in the near future an increasing fraction of the value of the device will be in the package, at the cost of the fraction that is on the wafer.
ASMIs Response to Technology Trends
ASMI develops and manufactures wafer processing systems and new thin film materials that enable our customers to produce devices that consume less power, are faster, show less variability, are more reliable and are able to store more electrical charge. In order to meet our customers needs, we have developed, and are still developing many new materials. For example, in the FEOL, high-k dielectrics and novel metal electrodes can reduce the power consumption of a device, thereby enhancing battery life. This same class of materials can also lead to larger charge storage in a smaller capacitor, critical for memories and RF circuits. Another example of new materials in the FEOL is our silicon germanium (SiGe) epitaxial material that can increase the switching speed of the transistors and the circuit in which they are embedded by engineering the strain, and resulting amplification of the transistor. This can be done without negatively affecting the power these transistors consume. This same class of epitaxial material is also used in wafer manufacturing, where low defect density silicon on insulator (SOI), and strained SOI substrates are being developed for use in very advanced microprocessors. SOI decreases power consumption, and strained SOI, like strained silicon, enhances the switching speed of transistors.
In the BEOL or interconnect process, a continued demand to improve the speed at which signals travel through thin copper wires has lead to the development of a full suite of low-k materials. These low-k materials can decrease the amount of delay in signal propagation, resulting in, for example, faster microprocessors. ASMI has been one of the leaders in successfully introducing all these new materials in the market.
We have also developed and sold new processes and wafer processing equipment to reduce the variability of the devices our customers make. ASMIs proprietary RTA process, based on conduction rather than radiation heating, can decrease variability in individual transistors in a circuit, and also on a wafer, thereby significantly enhancing top-speed bin yield of microprocessors. In addition, in order to aid repeatable lithography and etch of very narrow lines and small, but tall capacitors, we have developed plasma-polymerization processes and thin film materials that can both reduce line roughness and increase the yield of dynamic random access memories (DRAM).
For our back-end customers, leadframe and wire bond technology continues to offer the most flexible method of connecting the die to the printed circuit board. Increasing pressure on the number of input/output (I/O) terminals per unit area of silicon continues to drive down the distance between two adjacent interconnect points or pads, reducing the bond pad pitch and allowable wire diameter. The increasing I/O requirement has also resulted in the use of several rows of these pads on a single die. Production is now ongoing with a bond pad pitch of 37 microns. Wire bonding must not only address decreasing wire diameters and pitch, but also address the throughput to reduce the overall cost of the device. Future wire bonding platforms will be able to operate in an environment that requires the bond pad pitch to be at 25 microns. The increasing row count will require better control of the wire shapes to maintain signal integrity at high communication speeds. All of this must be achieved with the highest possible speed and reliability. In addition, semiconductor manufacturers are looking to automation and integration of back-end equipment as ways to reduce costs and increase productivity. We expect bond pad pitches smaller than about 20 micron to lead to performance issue with respect to the amount of current that can be pushed through a wire at the low voltages used today.
Increasing pressure on the level of integration and reduction in size of handheld or mobile devices has given rise to several alternative assembly and bonding techniques and materials, such as ceramic packages, flip chips and several chip-scale packaging methods. Stacked die packages, in which more than one die is stacked on top of another, to form a single device will play a major role in heterogeneous integration. These dies will, however, still be connected to the substrate or leadframe by conventional methods such as wire bonding. We are responding to the need of stacked die packages by developing better wire bonding techniques, for example, by controlling the shape of the wire loop. We are currently developing methods of working with insulated wires, which will allow for more crossed connections in a device.
The table below indicates the major market segments of the semiconductor equipment industry. The principal market segments in which we participate are underlined.
Front-end Segment Products
ASMIs front-end segment products come from a number of product platforms, with each platform designed to host and enable specified process technologies. The products in each product platform are linked through common technology elements of the platform, for example a common in-system software framework, common critical components, similar logistics (batch or single wafer processing), or a similar wafer processing environment (wet or dry). The following table lists our principal product platforms for the front-end market, the main process technology that they enable, and the semiconductor device manufacturing application for which the products from that platform are used.
Description of our Front-end Segments Product Platforms
The Advance 400 is ASMIs Vertical Furnace, batch processing platform. Products built on this product platform are used for diffusion, oxidation, (LP)CVD and ALD. The product platform is used in many manufacturing steps, from the production of silicon wafers to the final anneal in interconnect. The A400 is a system for 150 and 200mm wafers, while the A412 is a 300mm Vertical Furnace. The A412 can also be used as a bridge tool for 200mm wafers. The A412 systems feature two reactors above a rotating carousel, a dual-boat concept, and a wide range of process applications with load sizes up to 150 wafers in a single run. In this series, ASMI also offers the A412 SmartBatch, featuring a flexible load size of 1 to 50 wafers, and the A4ALD, for atomic layer deposition of dielectrics, targeted mainly for DRAM capacitor applications and other high volume, low variability and operating cost applications.
The Levitor is our single-wafer RTP platform. The Levitors conductive heating technology is radically different from competing radiative systems with lamps. In the Levitor, the wafer floats on a very thin cushion of gas between two coated graphite blocks maintained at the desired process temperature. The result is very precise wafer heating, which is independent from the emissivity, or color, of the wafer. The Levitor 4300 is configurable for rapid thermal anneal of either 200 or 300mm wafers in high-volume semiconductor manufacturing. Two reactors can be integrated into one system for optimum cost and production efficiency. The Levitor can perform most RTA processes, including low temperature nickel-silicide and cobalt-silicide anneals and high temperature, ultra-short spike activation anneals. Low temperature copper anneal for BEOL interconnect application is currently in development. The Levitor is designed to participate in all manufacturing applications, and is currently installed in FEOL logic and memory manufacturing.
The Epsilon is our platform for single wafer epitaxy. The Epsilon product platform offers a wide range of epitaxy products and materials for many applications, ranging from high temperature silicon used in silicon starting material manufacturing, to low temperature, selective or non-selective silicon germanium (SiGe) and silicon germanium carbon (SiGeC) used in bipolar devices. More recently, low temperature selective SiGe, silicon carbon (SiC) and pure silicon processes for recessed and raised source-drain applications have been developed on this platform. The Epsilon 2000 is a single wafer, single reactor system for 150mm and 200mm wafers. The Epsilon 3000 was the first epitaxy system that was used for 300mm production of recessed source/drains with selective silicon-germanium. Our newest systems, the Epsilon 3200 and Epsilon 3220, for a single and a dual reactor system respectively, feature several productivity enhancements. We expect that the continued demands from our customers to increase device speed and reduce power consumption will drive an increased use of advanced epitaxial layers in the device, particularly when deviations from planar CMOS occur.
The Polygon is our single wafer atomic layer deposition platform. It features a six-sided central vacuum handler, capable of hosting up to four reactors. One or more Pulsar 3000 modules, the latest generation of the industrys first ALD reactor, or Emerald modules with PEALD technology, can also be integrated into the system platform. Products built on this product platform are currently being used in ALD high-k gate dielectrics for FEOL logic, (embedded) DRAM capacitor dielectrics for SoC, barrier layers for non-volatile memories, magnetic head gap fill, and MIM capacitor applications for SoC. Products can be configured for either 200mm or 300mm wafer processing. Processes for some applications, mainly those related to SoC, will in the future be offered on the Eagle product platform.
The Eagle is our single-wafer plasma processing platform. The basic Eagle 10 systems for 200mm, and the Eagle 12 systems for 300mm systems each have two reactors, and are utilized in high volume manufacturing for PECVD of insulators (such as silicon oxide, silicon nitride, silicon oxi-nitride) mainly for interconnect applications. Plasma polymerization processes released on the Eagle and Dragon product platform include a full series of Aurora low-k dielectrics for interconnect applications, and Nano Carbon Polymer (NCP), a hard mask layer for deep UV lithography to improve formation of deep and small structures for FEOL memory. The Eagle 10 TRIDENT (200mm) and Eagle 12 Rapidfire (300mm) systems feature three reactors for larger productivity. From this same product platform also the Dragon and the Stellar product lines have been launched in 2003 and 2006, respectively. The Dragon 2300 is a dual reactor PECVD system that is configured for high wafer throughput. The Dragon has what we consider to be the smallest footprint of any high volume, 300mm PECVD production tool. The Stellar 2300 is a dual reactor ALD or PEALD system, intended mainly for the SoC capacitor market.
Description of our Front-end Segments Process Technology Platforms
Depending on application, a process technology can be used in more than one product platform. ALCVD, for example, is enabled on both ASMIs single wafer and batch product platforms. This gives us the ability to provide a single wafer tool for a certain application when short development cycle times are needed initially, then switch to a batch tool for efficiencies in high volume production, sometimes using the same chemistry. Process technologies that are intended for use across multiple product platforms are called a process technology platform. The technologies in a process technology platform share a common knowledge base and patent portfolio.
ALCVD: Atomic Layer Deposition and Plasma Enhanced Atomic Layer Deposition
ALCVD is one of the newest technologies to deposit ultra-thin films of exceptional flatness and uniformity. This technology was brought into ASMI in 1999 with the acquisition of ASM Microchemistry, who first developed the thermal ALD technology. PEALD is an extension of this original ALD technology that uses plasma, which was brought into ASMI in 2001 through a partnership with Genitech and a subsequent acquisition in 2004. Collectively ASM refers to it these two technologies as its ALCVD process technology platform. The current process development effort is focused mainly on providing new, higher quality, dielectric materials with higher throughput. Several dielectric processes are released on our Polygon, Eagle and Advance 400 product platforms. A relatively smaller effort is directed towards the process development for conductors. A TiN (a special high temperature resistant conductor) process is released on our Advance 400 product platform. We have hundreds of issued patents that relate to this process technology platform. In addition, ALCVD, Atomic Layer CVD, and PEALD are our trademarks. We expect that the trends of continued scaling, and evolution towards three dimensional device structures plays into the strength of our ALCVD process technology.
CVD and LPCVD: novel chemistries and New Technology
On our CVD process technology platform we have developed processes with new chemistries (under the trademark Silcore) that enable the deposition of silicon and silicon containing materials at low temperatures. Collectively the necessary system hardware and software is called New Technology (NT). Processes are released on our Epsilon product platform for non-selective epitaxy and single wafer LPCVD, and on our Advance 400 product platform for silicon nitride spacer applications. We are continuing to develop potential applications of NT with our supplier partner Voltaix, and our research partner IMEC. Our strategy for the CVD process technology platform as a whole is to continue to qualify new chemistries developed by, and with, our chemical suppliers for all of our product platforms, in advance of the development of our customers needs. We have about 10 issued patents related to special LPCVD process chemistries, including NT.
Back-end Segment Products
The following table lists our principal products for back-end market, the main technologies that they enable, and the semiconductor device manufacturing application for which the products are used.
Die Bonding and Die Sorting Products
We manufacture several die bonding models as well as die sorting equipment to address various markets including semiconductor and optoelectronic devices. The latest epoxy die bonder platform for 300mm wafers continues the path undertaken by ASMI to provide customers with the highest quality and best cost/performance systems on the market. With its capability of handling up to 300mm wafers, fully automatic operation, epoxy writer, pre and post bond inspection and wafer mapping, this platform is able to provide customers with exceptional operational results. Variations on this platform have been developed to address the requirements of the growing stacked die market. The ability to handle silicon devices down to 50 microns in thickness is a key feature for the future.
Packaged device performance is continually pushed to higher levels. In critical applications, devices are increasingly utilizing flip chip interconnect methods to provide higher levels of electrical performance. Our flip chip platform provides high speed flip chip die bonding for IC applications. Variations of this platform have evolved to provide for the use of ultrasonics, heat force or the combination of these to affect the process. There continues to be a very large market in which the die and wafer sizes are relatively small, under 30 mils square. A mil is 1/1000 of an inch. Many of these devices are attached directly to printed circuit boards (Chip on Board, COB) or very large arrays. Therefore, many different handling methods are required. We have several systems addressing the various form factors represented in the market.
Optoelectronics represent a separate but very large category of the small die business. This segment requires both high speed and high precision manipulation of very small devices. While there is a need for the die attach process many of these devices are assembled in arrays where their brightness and color must match. We have developed several platforms for sorting these devices and segregating them according to the customers requirements. The power device market continues to grow. These devices have unique thermal and electrical requirements that must be met by the die attach process. We have a new platform that addresses the use of soft solder in a special atmosphere that facilitates this special process. Machines may be configured to operate stand-alone or connected to epoxy curing ovens and wire bonders.
Wire Bonding Products
The Eagle60 gold wire bonder was introduced in 2002. This was the successor to our award-winning AB339 Eagle generation bonder. Platform evolution continued with the deployment of the Eagle60 and Eagle60 AP gold wire bonders. Both of these platforms continued to extend the productivity of the process as well as exceed the industry roadmaps for required bond pad pitch. Additional features on the Eagle60 AP allow it to deal with the complex wire geometries and extreme height variations that are prevalent in the stacked die packages being built today. The productivity envelope was enlarged with the introduction of our latest dual head platform, the TwinEagle. This tool provides all the capabilities of our standard Eagle60 but with a much smaller footprint. We also extended our product portfolio in the wedge bonder area with newer, faster, more flexible systems to address the consumer products market that focuses on cost effective solutions. The expansion of the flip chip process has also provided us with opportunities to expand on our wire bonder technology to provide platforms capable of applying gold or copper stud bumps on wafers up to 300mm in diameter.
Our auto molding product line continues to build on the success of our earlier automated multi-plunger molding systems. The IDEALmold serves the industry segment that requires very high throughput with production flexibility. The recent shift in lot sizes and package variability also required a new platform. We have met this requirement with our Osprey single strip-fed partial molding system. With this platform, the emphasis is on quick material and package conversions for low volume. We have incorporated many of the proven features from our wire bonding platforms into this new system. It either operates as a single process tool or links to our award winning wire bonders.
Post Encapsulation Products
Ball placement systems have seen a very strong growth as the ball grid array (BGA) package types continue to expand. These are the mainstream packages for microprocessors and other high performance chips found in computer systems today. Our early work in this area has allowed us to offer ball placement systems and integrated process solutions to the major providers of such components. As the number of package variants continues to increase along with the leadframe unit density our post encapsulation products (PEP) have also evolved. The variation requires systems that are more flexible and faster to convert. The increased density has reduced the need for press speed but increased the emphasis on precision. The decrease in package thickness has dictated a change in the tooling methodology to provide more support throughout the trim, form, and singulation processes. Significant changes have been made in
design to migrate to turret handling and offloading for small packages. These changes allow the incorporation of faster handling across more processes in a smaller footprint than the conventional linear approach. Significant inroads have been made in the incorporation of test heads into these lines so that units emerge ready to ship.
The IDEALine integrates back-end assembly, packaging, and test handling equipment. Such lines can be fully controlled by computers minimizing operator intervention and providing better quality through more stringent process recipe control. We believe we are the only manufacturer of back-end equipment capable of offering such an extensive integrated line using our own equipment. These lines integrate serial process steps with mechanical and software linkages. Offered in a modular format, customers may integrate some or all of the following processes that we supply: die bonding and inspection, epoxy curing, wire bonding and inspection, encapsulation, post mold curing and trimming and forming. In addition, we work with third party suppliers to offer various additional processes.
Intellectual Property and Trademarks
Because of the rapid technological advances in the microelectronics field, we believe that our products will be subject to continuing change and enhancement. Accordingly, we believe that our success will depend upon the technical competence and creative ability of our personnel and the ownership of, and the ability to enforce our intellectual property rights.
We own and license patents that cover some of the key technologies, features and operations of our major front-end products and are registered in the principal countries where semiconductor devices or equipment are manufactured or sold. The acquisitions of NuTool and Genitech in 2004 resulted in an expansion of our patent portfolio in the areas of ECD, ECMD, ECMP, ALD, PEALD and metal organic CVD. In December 2006, we sold substantially all of the ASM NuTool patent portfolio to a third party, with granting of a license to ASM in the field of packaging technology. The following table shows the number of patents for which we made an initial filing during the indicated year and the number of patents in force by us at the end of the indicated year.
We have entered into worldwide, non-exclusive, non-transferable and non-assignable licenses with Applied Materials for patents related to epitaxy and some chemicals used to deposit insulating layers for PECVD. We pay Applied Materials a royalty on sales of equipment that use the patented technology. A number of the licensed patents have already expired. The remaining royalty bearing patents expire at various times through 2012. Upon expiration of the patents, the technology may be used royalty-free by the public, including us.
In 2005, we started to actively license out intellectual property in our ALCVD process technology platform in non-competing markets. Non-exclusive, restricted field of use license agreements were entered into with Veeco Instruments and Oxford Instrument Plasma Technology. In addition to generating revenue, licensing is expected to accelerate market acceptance of our ALCVD technology. Although the licensing revenue is still modest today, we expect this revenue to increase once the market addressed by these licensees comes to further development and maturity. We will continue to seek other licensees for this important process technology platform in complementary markets.
In the back-end market, companies generally compete based on their cumulative expertise in applying well known technologies to improve productivity and cost-efficiency. As a result, we have historically filed fewer patents related to our back-end operations. Due to increasing pressure on new technology development in the back-end market, and the increasing fractional value of the package in the device, we expect the back-end patent intensity to increase over the following years. Wherever deemed necessary, ASM Pacific Technology will file for protection of its innovations.
ASM, the ASM International logo, A600 UHV, Advance, Aurora, Carbonspeed, Coppermine, Dragon, Eagle, Epsilon, Levitor, Polygon, Pulsar, Rapidfire, and Silcore are our registered trademarks. A400, A412, A4ALD, ALCVD, Atomic Layer CVD, CarbonPLUS, Eagle TRIDENT, EmerALD, New Technology, PEALD, Pore Builder, SiGePLUS, SmartBatch, Stellar and Superfill CVD are our trademarks, and The Process of Innovation is our service mark.
AB500B, DRYLUB, EQUIPMANAGER, IDEALine, IDEALsystem, IDEALab, IDEALNet, PGS, SMARTWALK, and SOFTEC are registered trademarks of ASM Pacific Technology Ltd. Eagle60, Harrier, Hummingbird, IDEALmold, Osprey, and TwinEagle are trademarks of ASM Pacific Technology.
There has been substantial litigation regarding patent and other intellectual property rights in semiconductor-related industries. At present, we are not involved in any litigation which we believe is likely to have a material adverse effect on our financial position. In the future, additional litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend ASMI against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any such litigation could result in substantial cost and diversion of effort by us, which could have a material adverse effect on our business, financial condition, and operating results. Adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could have a material adverse effect on our business, financial condition and operating results.
Research and Development
We believe that our future success depends to a large extent upon our ability to develop new products and add improved features to existing products. Accordingly, our global product development policies and local activities are for the most part directed toward expanding and improving present product lines to incorporate technology advances and reduce product cost, while simultaneously developing new products that can penetrate new markets. These activities require the application of physics, chemistry, materials science, electrical engineering, precision mechanical engineering, software engineering, and system engineering.
Our net research and development expenses were 80.8 million, 89.9 million and 88.1 million in 2004, 2005 and 2006, respectively. We expect to continue investing significant resources in research and development in order to enhance our product offerings. Our research and development activities are chiefly conducted in the principal semiconductor markets of the world, which enables us to draw on innovative and technical capabilities on an international basis. Each geographic center provides expertise for specific products and/or technologies. This approach, combined with the interactions between the individual centers, permits efficient allocation of technical resources and customer interaction during development.
As part of our research and development activities, we are engaged in various formal and informal arrangements with customers and institutes. We currently are engaged in joint development programs with
customers for 300mm applications of our Eagle, Polygon, Epsilon, Levitor and Advance A412 products. As part of these efforts, we may sell new products to customers at a significantly reduced margin, and invest significant resources in the joint development and subsequent product qualification. We sometimes also cooperate with other semiconductor capital equipment suppliers in complementary fields, in order to gain knowledge on the performance of our own processes, in cooperation with other processes. In addition to cooperating with customers and other capital equipment suppliers, we also enter into research projects with technical universities, particularly in the Netherlands, Japan, and Finland.
We participate also in publicly funded programs, mainly in Europe, to develop the production technology for semiconductor devices with line widths of 45 and 32nm and below. Among our current cooperative efforts are projects awarded under the Information Society Technologies (IST) sixth framework program. We participate in several roadmap discussions for the follow-on seventh framework program. We are a partner in several developmental programs in the Eureka initiative by MEDEA+, Micro Electronics Development for European Applications. At the end of 2006, we participate in a MEDEA+ program with the Crolles alliance, an R&D alliance between STMicroelectronics, Freescale and Philips, targeting a multitude of process solutions for the 45nm generation. We are also involved with our strategic partner, Soitec, in a MEDEA+ program for the development of strained SOI, a next generation advanced starting material. Mr. Arthur H. del Prado, our President and Chief Executive Officer, is a member of the board of MEDEA+.
As part of these projects, we may sell our equipment to customers who will use grants or research loans to acquire these products or we may receive grants or research loans directly. We have received such loans in the past from the government of the Netherlands, of which 3.1 million was outstanding at December 31, 2006, including accrued interest. These loans have to be repaid only from the sales proceeds, during an agreed upon time period, of the products developed with this assistance at repayment rates of up to 100% of the amounts of the loans. This amount has not been recognized as a liability in the Consolidated Balance Sheet since we have not recognized sales of products to which the loan is related.
In October 2004, we commenced a strategic partnership with the Interuniversity MicroElectronics Center (IMEC) in Belgium for their 300mm 45nm and 32nm FEOL technology development program. ASMIs Epsilon, Advance 400 Series, Levitor and Polygon based products are involved in this partnership. In September 2005 we complemented this FEOL partnership with a partnership in BEOL for advanced on-chip interconnect which will utilize ASMIs Eagle based products. IMEC has attracted most of the top ten integrated device manufacturers to participate in their development programs, usually with on-site personnel. This gives ASMI the opportunity to work in these programs together with multiple customers and IMEC on a single site. In addition, we can investigate, both jointly and independently, the integration of individual process steps in process modules and electrically active devices. Some of these partnerships are scheduled to extend until the middle of 2010, while others are scheduled to extend until the end of 2007 and 2008. ASM has been partnering with IMEC since 1990.
Manufacturing and Suppliers
Our manufacturing operations consist of the fabrication and assembly of various critical components, product assembly, quality control and testing.
In the second half of 2004, in order to reduce manufacturing costs in our front-end operations we established FEMS, a manufacturing facility in Singapore, to manufacture certain generic subsystems and subassemblies for our Vertical Furnaces that we previously outsourced. At the end of 2006, most generic subassemblies for 300mm Vertical Furnaces and 200mm Epitaxy systems were manufactured in this facility, as well as a number of generic subassemblies for the 200mm Vertical Furnaces. We also work closely with our suppliers to achieve mutual cost reduction through joint design efforts.
Our back-end operations are vertically integrated to insure quality production of component parts where the quality of subassemblers does not otherwise meet our standards. The manufacturing activities in Hong Kong and Singapore consist primarily of assembling and testing components and subassemblies manufactured at our main manufacturing facilities in the People's Republic of China and Malaysia.
Marketing and Sales
We market and sell our products with the objective of developing and maintaining an ongoing, highly interactive service and support relationship with our customers. Our marketing strategy includes advertising and participating in various industry trade shows. We provide prospective customers with extensive process and product data, provide opportunities for tests on demonstration equipment and, if required, install evaluation equipment at the customer's site. Once equipment has been installed, we support our customers with, among other things, extensive training, on-site service, spare parts and process support. All of this is
further supported by in-house development to enhance the productive life of existing equipment. We make hardware improvements available in the form of retrofit kits as well as joint development of new applications with our customers. We encourage our engineers to submit technical papers to relevant magazines and to give lectures in symposia.
Because of the significant investment required to purchase our systems and their highly technical nature, the sales process is complex, requiring interaction with several levels of a customer's organization and extensive technical exchanges, product demonstrations and commercial negotiations. As a result, the full sales cycle can be as long as 12 to 18 months for sales of front-end equipment and three to six months for sales of back-end equipment. Purchase decisions are generally made at a high level within a customer's organization, and the sales process involves broad participation across our organization, from senior executive management to the engineers who designed the product.
Our sales process usually starts with high-level introduction meetings. Early in the process we also meet with operational personnel to discuss the intended uses of our equipment, technical requirements, solutions, and the overall production process of the customer. Demonstrations and evaluation of test results take time. Once we agree upon the technology elements of the sale, the process continues with price and delivery negotiations and, when completed successfully, with the issuance by the customer of a letter of intent to secure a slot in the manufacturing and assembly planning schedule, followed by a purchase order.
To market our products, we operate demonstration and training centers where customers can examine our equipment in operation and can, if desired, process their wafers or individual dies for further in-house evaluation. Customers are also trained to properly use purchased equipment.
Each of our major product lines has a dedicated product manager, responsible for positioning the product in the market, developing it over time and evaluating its relative performance compared to the competition. Each product manager sets priorities in terms of technical development and sales support.
To execute the sales and service functions, we have established a direct, integrated sales force for front-end products reporting on a geographical basis to the managers in charge of Europe, North America, South Korea, Taiwan, Peoples Republic of China, Southeast Asia and Japan. At the end of 2006, our front-end segment had 160 employees fully dedicated to sales and marketing, representing 8.6% of total front-end segment staff. Dedicated support and sales forces are maintained for our various geographic units, enabling us to serve our global customers with an equally global organization. Each of our geographic front-end units is responsible for sales of all of our front-end products in its region. We believe the integration of our sales force promotes cross selling of front-end products.
In addition to the sales activities undertaken at the principal offices of our various manufacturing units, we have sales offices located in Europe (in the United Kingdom, France, Ireland, Italy and Germany), in the United States (in California, Texas and Pennsylvania), in Israel, and in Japan (in Tokyo and Osaka).
We use independent sales agents in Malaysia and Taiwan for front-end products.
Sales of back-end equipment and materials are provided by our principal offices in Hong Kong and Singapore, through direct sales offices in the Peoples Republic of China, Taiwan, the Philippines, Malaysia, Thailand, Japan, Europe and North America, and through sales representatives in South Korea and some parts of the United States. At the end of 2006, there were 270 staff members employed in sales and marketing of back-end products, representing 3.0% of total back-end staff.
We sell our products predominantly to manufacturers of semiconductor devices and manufacturers of silicon wafers. Our customers include most of the leading semiconductor and wafer manufacturers. Our customers vary from independent semiconductor manufacturers that design, manufacture, and sell their products on the open market, to large electronic systems companies that design and manufacture semiconductor devices for their own use, to semiconductor manufacturers, known as foundries, that manufacture devices on assignment of other companies, including fabless companies that design chips but do not have wafer processing factories.
Our largest customer accounted for approximately 10.9%, 17.2% and 11.4% of our net sales in 2004, 2005 and 2006, respectively. Our ten largest customers accounted for approximately 36.5%, 43.7% and 33.9% of our net sales in 2004, 2005 and 2006, respectively. Historically, a significant percentage of our net sales in each year has been attributable to a limited number of customers; however, the largest customers for our products may vary from year to year depending upon, among other things, a customer's budget for capital expenditures, timing of new fabrication facilities and new product introductions.
The following table shows the distribution of net sales, by segment and geographic destination of the product:
We provide responsive customer technical assistance to support our marketing and sales. Technical assistance is becoming an increasingly important factor in our business as most of our equipment is used in critical phases of semiconductor manufacturing. Field engineers install the systems, perform preventive maintenance and repair services, and are available for assistance in solving customer problems. Our global presence permits us to provide these functions in proximity to our customers. We also maintain local spare part supply centers to facilitate quick support.
We provide maintenance during the product warranty period, usually one to two years, and thereafter perform maintenance pursuant to individual orders issued by the customer. In addition to providing ongoing service, our customer service operations are responsible for customer training programs, spare parts sales and technical publications. In appropriate circumstances, we will send technical personnel to customer locations to support the customer for extended periods of time in order to optimize the use of the equipment for the customers specific processes. For our front-end operations, where the availability of field support is particularly important for a sale, there are approximately 600 support staff employees, or 32.3% of total front-end segment staff at December 31, 2006.
The semiconductor equipment industry is intensely competitive, and is fragmented among companies of varying size, each with a limited number of products serving a particular segment of the semiconductor process. Technical specifications of the individual products are an important competitive factor, especially concerning capabilities for manufacturing of new generations of semiconductor devices. As each product category encompasses a specific blend of different technologies, our competitive position from a technology standpoint may vary within each category. Customers are evaluating manufacturing equipment based on a mixture of technical performance and cost of ownership over the life of the product. Main competitive factors include overall product performance, yield, reliability, maintainability, service, support and price. We believe that we are competitive with respect to each of these factors, and that our products are cost effective.
As the variety and complexity of available machinery increases, some semiconductor manufacturers are attempting to limit their suppliers. In addition, semiconductor manufacturers are located throughout the
world, and expect their equipment suppliers to have offices worldwide to meet their supply and service needs. Semiconductor equipment manufacturers with a more limited local presence are finding it increasingly difficult to compete in an increasingly global industry.
Our primary competitors in the front-end market are from the United States and Japan. Our primary competitors in the back-end market are from the United States, Europe and Japan. In each of our product lines, we compete primarily with two or three companies which vary from small to large firms in terms of the size of their net sales and range of products. Our primary competitors in the front-end market include Applied Materials, Novellus Systems, Tokyo Electron, Kokusai, and Aviza. Our primary competitors in the back-end market include Kulicke & Soffa, ESEC, Shinkawa, Apic Yamada, BE Semiconductor Industries, Towa, Shinko and Mitsui.
C. Organizational structure.
The following chart presents the jurisdiction of incorporation of our significant subsidiaries and our percentage of ownership interest in those subsidiaries as of March 5, 2007:
D. Property, plant and equipment.
To develop and manufacture products to local specifications and to market and service products more effectively in the worldwide semiconductor market, our front-end facilities are located in the Netherlands, the United States, Japan and Singapore and our back-end facilities are located in Hong Kong, the People's Republic of China, Singapore and Malaysia. Our principal facilities are summarized below:
Our principal facilities in the Netherlands, the United States, Finland, Hong Kong, the Peoples Republic of China, Singapore and Malaysia are subject to leases expiring at various times from 2007 to 2029. Some facilities we own are subject to mortgages. We believe that our facilities are maintained in good operating condition and are adequate for our present level of operations.
Item 5. Operating and Financial Review and Prospects
Managements Discussion and Analysis of Financial Condition and Results of Operations
We design, manufacture and sell equipment and systems used to produce semiconductor devices, or integrated circuits. Our production equipment and systems are used by both the front-end and back-end segments of the semiconductor market. Front-end equipment performs various fabrication processes in which multiple thin films of electrically insulating or conductive material are grown or deposited onto a round slice of silicon, called a wafer. Back-end equipment separates these processed wafers into numerous individual dies, each containing the circuitry of a single semiconductor device, and assembles packages and tests the dies in order to create semiconductor devices. We conduct our front-end business, which accounted for 46.7% of our net sales in 2006, through our principal facilities in the Netherlands, the United States, Japan and Singapore. We conduct our back-end business, which accounted for 53.3% of our net sales in 2006, through our principal facilities in Hong Kong, the Peoples Republic of China, Singapore and
Malaysia. Our back-end operations are conducted through our 53.35% majority-owned subsidiary, ASM Pacific Technology.
We sell our products worldwide to the semiconductor industry, which is subject to sudden and extreme cyclical variations in product supply and demand. In the period 2001 - 2003, the semiconductor industry experienced a severe cyclical downturn characterized by overcapacity and reduced demand for products, lower average selling prices across certain product lines, reduced investments in semiconductor capital equipment and other factors, all of which led to lower sales and earnings for our business, in particular for capacity-driven purchases.
To improve our margins in our front-end segment, we established a manufacturing facility in Singapore to manufacture certain generic subsystems and subassemblies for our Vertical Furnaces that we previously outsourced. This facility was launched in the third quarter of 2004 and is expected to further improve cost-effectiveness, strengthen our gross profit margin and mitigate the impact of foreign currency transaction results. At the end of 2006, most generic subassemblies for 300mm Vertical Furnaces and 200mm Epitaxy systems were manufactured in this facility, as well as a number of generic subassemblies for the 200mm Vertical Furnaces. We intend eventually to manufacture generic systems and parts for all of our front-end products in our manufacturing base in Singapore.
In our back-end segment we continued to benefit from our cost advantage due to the location of our manufacturing facilities and our high vertical integration allowing us to adjust labor costs quickly in volatile market conditions.
The transitions in the industry to new processes and materials requires equipment providers to develop sometimes entirely new sets of tools and processes and continue to present us with an opportunity to displace existing suppliers to major semiconductor manufacturers. We believe that we are well positioned and that our firm commitment to research and development, our readiness in new technologies and design-in wins at top-tier customers provide us with a broad basis for substantial long-term market share gains. We have participated fully in the transition to 300mm wafers, as evidenced by the large portion of sales volume of 300mm products.
Our front-end sales are concentrated in the United States, Europe, Japan and Southeast Asia and our back-end sales are concentrated in Southeast Asia.
The following table shows the geographic distribution of our front-end and back-end sales for the years 2004, 2005 and 2006:
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. The acceptance period after installation may be as short as four to five weeks. However, if customers are unfamiliar with our equipment or are receiving new product models, the acceptance period may take as long as several months. The sales cycle is longer for equipment which is installed at the customers site for evaluation prior to sale. The typical trial period ranges from six months to one year after installation.
The sales cycle for back-end products is typically shorter than for front-end products. Generally, the majority of our back-end equipment is built in standard configurations. We build back-end products that are approximately 85% complete in anticipation of customer orders. Upon receipt of a customers order and specifications, the remaining 15% of the manufacturing is completed. This allows us to complete the assembly of our equipment in a short period of time. We therefore require between two to six weeks for final manufacturing, testing, crating, and shipment of our back-end equipment. Our back-end customers acceptance periods generally are shorter than those for front-end equipment. We provide installation, training and technical support to our customers with local staff in all of our major markets.
A substantial portion of our front-end sales is for equipping new or upgraded fabrication plants where device manufacturers are installing complete fabrication equipment. As a result our front-end sales tend to be uneven across customers and financial periods. Sales to our ten largest front-end customers accounted for 57.3%, 67.6% and 60.5% of front-end net sales in 2004, 2005 and 2006, respectively. The composition of our ten largest front-end customers changes from year to year. The largest front-end customer accounted for 23.0%, 32.9% and 22.7% of front-end net sales in 2004, 2005 and 2006, respectively.
Back-end sales per customer tend to be more level over time than front-end sales, because back-end operations can be scaled up in smaller increments at existing facilities. Sales to our ten largest back-end customers accounted for 39.5%, 40.0% and 28.2% of back-end net sales in 2004, 2005 and 2006, respectively. Because our back-end customers needs are more level over time, the composition of our ten largest customers is more stable from year to year than in the front-end. Our largest back-end customer accounted for 10.3%, 7.9% and 4.4% of back-end net sales in 2004, 2005 and 2006, respectively.
Research and Development
We continue to invest in research and development at a high level. As part of our research and development activities, we are engaged in various development programs with customers and research institutes that allow us to develop products that meet customer requirements and to obtain access to new technology and expertise. Research and development costs are expensed as incurred. We charge to cost of sales the costs relating to prototype and experimental models, which we may subsequently sell to customers.
For a further discussion of research and development expenses see Item 4.B Business OverviewResearch and Development and Results of Operations, below.
Our research and development operations in the Netherlands, Germany and the United States receive research and development grants and credits from various sources. The research and development grant received from governmental sources in the Netherlands is contingently repayable to the extent we recognize sales of products to which the credit is related within an agreed upon time period. We do not recognize a liability on our Consolidated Balance Sheet in respect of this credit until we recognize sales of products to which the credit is related, within the agreed upon time period and is then charged to cost of sales when such sales are recorded. The repayment amounts to 4.0% of the realized sales of these products. Interest on the contingent repayments is accrued at an interest rate of 6.05% per annum. The contingent repayment, including accrued interest, was 3.2 million at December 31, 2005 and 3.1 million at December 31, 2006. This amount has not been recognized as a liability in the Consolidated Balance Sheet since we have not recognized sales of products to which the credit is related. In 2004, 2005 and 2006 we accounted for repayments with respect to these credits of 0.3 million, 0.2 million and 0.2 million respectively.
Due to continued negative cash flows and the expected future returns on the invested capital employed, we decided in 2005 to reduce our 100% subsidiary ASM NuTool to a small operation, focusing on process and intellectual property development with the intention of licensing these technologies in the future. In December 2006, we sold substantially all of the ASM NuTool patent portfolio to a third party. This caused ASM NuTool to be accounted for retroactively as discontinued operations in our Consolidated Financial Statements, in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. See Note 2 to our Consolidated Financial Statements, which is incorporated herein by reference.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). We apply the going concern basis in preparing our Consolidated Financial Statements. Historical cost is used as the measurement basis unless otherwise indicated. The preparation of these Consolidated Financial Statements requires us to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition. We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; sellers price to buyer is fixed or determinable; and collectibility is reasonably assured.
Our revenue includes revenue from contractual arrangements consisting of multiple deliverables, such as equipment and installation. The revenue from the undelivered element of the arrangement is deferred at fair value until delivery of the element.
In general, we recognize revenue from sales of equipment upon shipment of equipment, only if testing at the factory has proven that the equipment has met substantially all of the customers criteria and specifications. The outcome of the test is signed-off by the customer (factory acceptance). Instead of signing-off, the customer may choose to provide a waiver, e.g. with respect to repeat orders.
We recognize revenue from installation of equipment upon completion of installation at the customers site. At the time of shipment, we defer that portion of the sales price related to the fair value of installation. The fair value of the installation process is measured based upon the per-hour amounts charged by third parties for similar installation services. Installation is completed when testing at the customers site has proven that the equipment has met all of the customers criteria and specifications. The completion of installation is signed-off by the customer (final acceptance). At December 31, 2005 and December 31, 2006 we have deferred revenues from fair value of installations in the amount of 9.9 million and 13.7 million respectively.
Our sales frequently involve complex equipment, which may include customer-specific criteria, sales to new customers or equipment with new technology. For each sale, the decision whether to recognize revenue is, in addition to shipment and factory acceptance, based on the contractual agreement with a customer, the experience with a particular customer, the technology and the number of similarly configured equipment previously delivered. Instead of recognizing revenue, we could decide to defer revenue recognition until completion of installation at the customers site and obtaining final acceptance from the customer. At December 31, 2005 we had no deferred revenue from sales of equipment. At December 31, 2006 we have deferred revenues from sales of equipment in the amount 1.5 million.
We provide training and technical support service to customers. Revenue related to such services is recognized when the service is rendered. Revenue from the sale of spare parts and materials is recognized when the goods are shipped.
Valuation of Goodwill. We perform an annual impairment test at December 31 of each year or if events or changes in circumstances indicate that the carrying amount of goodwill exceeds its fair value. Our impairment test and the determination of the fair value is based on a discounted future cash flow approach that uses our estimates of future revenues, driven by assumed market growth and estimated costs as well as appropriate discount rates. These estimates are consistent with the plans and estimated costs we use to manage the underlying business. For the year ended December 31, 2004 we did not record an impairment charge as a result of our tests performed. For the years ended December 31, 2005 and December 31, 2006, we recorded impairment charges of 31.0 million and 11.4 million with respect to goodwill resulting from the acquisition of ASM NuTool. The calculation of the fair value involves certain management judgments and was based on our best estimates and projections at the time of our review, and the value may be different if other assumptions are used. In future periods we may be required to record an impairment loss based on the impairment test performed, which may significantly affect our result of operations at that time.
Valuation of Long-Lived Assets. Long-lived assets and certain recognized intangible assets (except those not being amortized) are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, we estimate the future undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. In 2004 we did not record an impairment charge. In 2005 we recorded an impairment charge of 5.4 million related to the reduction of ASM NuTool and the consolidation of platforms used in our Capacitor Product group. In 2006 we recorded an impairment charge of 0.3 million related to the discontinuation of ASM NuTool. Our cash flow estimates used include certain management judgments and were based on our best estimates and projections at the time of our review, and may be different if other assumptions are used. In future periods, however, we may be required to record impairment losses, which may significantly affect our results of operations at that time.
Valuation of Inventory. Inventories are valued at the lower of cost or market value. We regularly evaluate the value of our inventory of components and raw materials, work in progress and finished goods, based on a combination of factors including the following: forecasted sales, historical usage, product end of life cycle, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. We record write downs for inventory based on the above factors and take into account worldwide quantities and demand into our analysis. In the year ended December 31, 2006 we have charged 7.7 million to cost of sales as a result of our analysis of the value of inventory. At December 31, 2006 our valuation allowance for inventory obsolescence and lower market value amounted to 28.1 million, which is 12.5% of our total inventory. If circumstances related to our inventories change, our estimate of the values of inventories could materially change. At December 31, 2006, an increase of our overall estimate for obsolescence and lower market value by 10% of our total inventory balance would result in an additional charge to cost of sales of 22.5 million.
Warranty. We provide maintenance on our systems during the warranty period, usually one to two years. The estimated costs of warranty include the cost of labor, material and related overhead necessary to repair a system during the warranty period. The estimated costs are accrued for in a provision for warranty upon recognition of the system sale and are estimated based on historical warranty costs incurred and estimated future warranty costs related to current sales. We update these estimated warranty costs periodically. Actual warranty costs are charged against the warranty provision. The actual warranty costs may differ from estimated warranty costs, as a result of which we adjust our provision for warranty accordingly. Future warranty costs may exceed our estimates, which could result in an increase of our cost of sales.
Income Taxes. We currently have significant deferred tax assets, which resulted primarily from operating losses incurred in prior years as well as other temporary differences. We have established a valuation allowance to reflect the likelihood of the realization of deferred tax assets. Based on available evidence, we regularly evaluate whether it is more likely than not that the deferred tax assets will not be realized. This evaluation includes our judgment on the future profitability and our ability to generate taxable income, changes in market conditions and other factors. At December 31, 2006, we believe that there is insufficient evidence to substantiate recognition of substantially all net deferred tax assets with respect to net operating loss carry forwards, and we have established a valuation allowance in the amount of 104 million. Future changes in facts and circumstances, if any, may result in a change of the valuation allowance to these deferred tax asset balances which may significantly influence our results of operations at that time. If our evaluation of the realization of deferred tax assets would indicate that an additional 10% of the net deferred tax assets as of December 31, 2006 is not realizable, this would result in an additional valuation allowance and an income tax expense of 0.5 million.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. Tax contingencies mainly relate to transfer pricing positions, operational activities in countries where we are not tax registered, tax deductible costs and personnel related taxes. In December 2006, the Hong Kong Inland Revenue Department has issued an enquiry letter to the Companys subsidiary ASMPT with an attempt to investigate the ASMPT Groups tax affairs and other details. Settlement of tax uncertainties in a manner inconsistent with the Companys expectations could have a material impact on the Companys earnings, financial position and cash flows.
Results of Operations
The following table shows certain Consolidated Statement of Operations data as a percentage of net sales for our front-end and back-end segments for the years 2004, 2005 and 2006:
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net sales The following table shows net sales of our front-end and back-end segments and the percentage change between the years 2005 and 2006:
In 2006, net sales of wafer processing equipment (front-end segment) represented 46.7% of total net sales. Net sales of assembly and packaging equipment and materials (back-end segment) represented 53.3% of total net sales in 2006.
In the second half of 2006, net sales in the front-end segment increased by 3% compared to the first half of 2006, while net sales in the back-end segment for the second half of 2006 decreased 4% compared to the first half of 2006. In total, net sales decreased by 1% compared to the first half of 2006.
The weakening of the US dollar and US dollar related currencies against the euro in 2006 as compared to 2005 impacted sales negatively by 0.4%.
Gross Profit Margin. The following table shows our gross profit and gross profit margin for front-end and back-end segments and the percentage point increase or decrease in gross profit as a percentage of net sales between the years 2005 and 2006:
The gross profit margin of our front-end segment increased steadily in 2006. Increased manufacturing of generic subassemblies and components by ASM Front-End Manufacturing Singapore (FEMS) contributed to this development. At the end of 2006, most generic subassemblies for 300mm Vertical Furnaces and 200mm Epitaxy systems were manufactured in this facility, as well as a number of generic subassemblies for the 200mm Vertical Furnaces. FEMS is expected to further lower our manufacturing costs and mitigate the impact of foreign currency transaction results on our margins. Focus on other cost reduction programs as well as the growing maturity and sales volume of our Vertical Furnace product group contributed positively to the increased gross profit margin in our Front-end segment. The gross profit margin of our front-end segment in 2005 included one-time charges of 2.6 million related to the consolidation of platforms used in our Capacitor Product group, which impacted the gross profit margin by 0.7 percentage points.
Although the gross profit margin of our back-end segment decreased 2.6% in the second half of 2006 as compared to the first half of 2006 due in part to higher copper prices, the gross profit margin in 2006 remained at a level similar to 2005.
Selling, General and Administrative Expenses. The following table shows selling, general and administrative expenses for our front-end and back-end segments and the percentage change between the years 2005 and 2006:
The increase from 2005 is, besides general price increases, due to increased sales and marketing activity, demo activity, increased expenditures in preparing to meet the requirements under section 404 of the Sarbanes-Oxley Act, and corporate expenses related to discussions with shareholders. In addition, the adoption of Statement of Financial Accounting Standards No. 123R Share-Based Payment, effective January 1, 2006, required us to recognize costs of employee stock options of 1.4 million.
As a percentage of net sales, selling, general and administrative expenses were 14%, both in 2006 and 2005.
Research and Development Expenses. The following table shows research and development expenses for our front-end and back-end segments and the percentage change between the years 2005 and 2006:
The decrease in the front-end segment was the result of increased focus in the research and development project portfolio. The year 2005 included one-time charges of 4.4 million related to the consolidation of platforms used in our Capacitor Product group.
The increase in the back-end segment was the result of increased research and development activities supporting more value-innovative products.
As a percentage of net sales, research and development expenses decreased from 12% for the year 2005 to 10% in 2006.
Earnings from Operations amounted to earnings of 129.5 million in 2006 compared to earnings of 66.9 million in 2005. The increase is mainly caused by higher sales levels and gross profit margin, only partially offset by increased operating expenses. Earnings from operations in 2005 included one-time charges of 7.0 million related to the consolidation of platforms used in our Capacitor Product group.
Net Interest Expense amounted to 5.8 million in 2006 compared to 10.4 million in 2005. Net interest expenses decreased due to less debt, the repayment of US$ 94.3 million in convertible subordinated notes in November 2005 and more favorable interest income resulting from increased interest rates.
Income Tax Expense amounted to 14.1 million in 2006 compared to 6.7 million in 2005. The increase is mainly caused by increased earnings from operations.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net Sales. The following table shows our net sales for our front-end and back-end segments and the percentage change between the years 2004 and 2005:
In 2005, net sales of wafer processing equipment (front-end segment) represented 49.4% of total net sales. Net sales of assembly and packaging equipment and materials (back-end segment) represented 50.6% of total net sales in 2005.
Due to strong sales from our front-end segment in the fourth quarter of 2005, the sales level of 2005 ended 1.0% above the sales level of our front-end segment of 2004.
In the back-end segment sales levels increased quarter over quarter in 2005 after a weak second half of 2004.
In the second half of 2005, net sales in the front-end segment increased by 6.4% compared to the first half of 2005, while net sales in the back-end segment for the second half of 2005 increased 53.7% compared to the first half of 2005.
Consolidated sales levels expressed in euro were slightly negatively impacted by the strengthened euro against the US dollar and US dollar related currencies. The decline in exchange rates impacted our full year sales negatively by 0.3%.
Front-end net sales of spare parts and installation and other services increased 3.3% and 21.7% respectively, as compared to 2004. These increases were partly offset by a decrease in net sales of equipment by 2.7%, as compared to 2004. Sales of spare parts and installation and other services represent 26.6% of front-end sales in 2005 and are expected to increase as our installed base further increases.
Back-end net sales of equipment decreased 12.3% as compared to 2004. These sales represent 81.0% of back-end sales in 2005. Revenues from leadframe production increased in 2005 by 16% as compared to 2004.
Gross Profit. The following table shows our gross profit margin for our front-end and back-end segments and the percentage increase or decrease for the year 2004 to 2005:
The gross profit margin of our front-end segment in 2005 decreased as a result of changes in the product mix and impairment and restructuring charges. Increased sales of 300mm systems have negatively impacted the gross profit margin. Impairment charges recorded in our front-end segment in 2005, as a result of the consolidation of platforms used in our Capacitor Product group, had a negative impact on the gross profit margin of 0.4 percentage points.
ASM Front-End Manufacturing Singapore (FEMS) focuses on manufacturing generic subassemblies and components for front-end systems at lower costs. At the end of 2005, most generic subassemblies for 300mm Vertical Furnaces and the first generic subassemblies for the 200mm Vertical Furnaces and 200mm Epitaxy systems were manufactured by FEMS. FEMS is expected to lower our manufacturing costs and mitigate the impact of foreign currency transaction results on our margins.
Although sales from our back-end segment in 2005 decreased as compared to 2004, the gross profit margin increased slightly. One-time charges related to the consolidation of manufacturing activities in Malaysia and additional provisions on slow moving inventories related to new product introductions contributed negatively to the gross profit margin for our back-end segment in 2004.
Selling, General and Administrative Expenses. The following table shows our selling, general and administrative expenses for our front-end and back-end segments and the percentage change for the year 2004 to 2005:
Selling, general and administrative expenses in our front-end segment continue to be stable as a result of our focus on cost control.
The decrease in selling, general and administrative expenses in the back-end segment is mainly the result of lower sales volumes.
As a percentage of net sales, selling, general and administrative expenses decreased from 14.0% for the year 2004 to 13.5% in 2005.
Research and Development Expenses. The following table shows our research and development expenses for our front-end and back-end segments and the percentage change for the year 2004 to 2005:
The increase of research and development expenses in our front-end segment is the result of impairment and restructuring charges, increased research and development activities, the inclusion of the operations of our subsidiary ASM Genitech, which was acquired in August 2004, and the full consolidation of the operations of our subsidiary NanoPhotonics as of January 1, 2005. Impairment charges of 4.4 million, as a result of the consolidation of platforms used in our Capacitor Product group, have been recorded in research and development expenses of our front-end segment in 2005.
As a percentage of net sales, research and development expenses increased from 10.7% for the year 2004 to 12.4% in 2005.
Amortization of Other Intangible Assets. Amortization of Other Intangible Assets was 0.6 million in 2005, compared to 0.3 million in 2004. The amortization mainly relates to the amortization of other intangible assets from the acquisition of Genitech.
Net Interest Expense. Net Interest Expense amounted to 10.4 million in 2005 compared to 10.3 million in 2004. Net interest expenses for the year 2005 included a 0.3 million loss related to the partial early extinguishment of 2005 convertible notes compared to a 1.2 million loss related to the partial early extinguishment of 2005 convertible notes in 2004.
Income Tax Expense. We recorded a 7.3 million tax expense in 2005, compared to a tax expense of 10.6 million in 2004. The decrease in tax expense is primarily the result of decreased earnings. As of December 31, 2005, we had a 396.0 million net operating loss carry forward, which we can apply primarily against future earnings reported in the United States and the Netherlands. At December 31, 2005, the related deferred tax asset for the net operating loss carry forward amounted to 122.0 million, for which we provided a valuation allowance of 115.1 million.
Net Loss from Discontinued Operations. The net loss from discontinued operations amounts to 49.1 million compared to 7.3 million in 2004. As a result of the discontinuation of ASM NuTool in 2006, income and expenses of ASM NuTool have been accounted for as discontinued operations under US GAAP in our Consolidated Financial Statements. The increase is primarily the result of the impairment of goodwill of 31.0 million recorded in 2005.
Net Earnings (Loss). We realized a net loss of 40.2 million in 2005 compared to a net profit of 24.0 million in 2004. Our front-end segment reported a net loss of 91.0 million in 2005 compared to a net loss of 29.4 million in 2004, primarily due to 43.8 million in impairment and restructuring expenses recorded in 2005. Our portion of our back-end segments net earnings was 50.8 million in 2005 compared to 53.4 million in 2004.
Our backlog consists of purchase orders or letters of intent for future periods, typically for up to one year. In some markets, such as Japan, it is common practice for letters of intent to be used instead of firm purchase orders. Under specific circumstances, customers can cancel or reschedule deliveries. In addition, purchase orders are subject to price negotiations and changes in quantities of products ordered as a result of changes in customers requirements. Depending on the complexity of an order, we generally ship our products within one to six months after receipt of an order. We include in the backlog only orders for which a delivery schedule has been specified and to which the customer has assigned an order number. Rescheduled deliveries are included in backlog if they have a firm delivery date.
The following table shows our level of new orders during the year and our backlog at the end of the year for our front-end and back-end segments and the percentage change for the year 2005 to 2006:
For the full year 2006, the ratio of new orders divided by net sales (book-to-bill ratio) was 1.01, compared to 1.05 for the full year 2005.
The backlog of 234.3 million as of December 31, 2006 is 5.6% higher than the backlog of 221.9 million as of December 31, 2005.
Liquidity and Capital Resources
Our liquidity is affected by many factors, some of which are related to our ongoing operations and others of which are related to the semiconductor and semiconductor equipment industries and to the economies of the countries in which we operate. Although our cash requirements fluctuate based on the timing and extent of these factors, we believe that cash generated by operations, together with the liquidity provided by our existing cash resources and our financing arrangements, will be sufficient to fund working capital, capital expenditures and other ongoing business requirements for at least the next twelve months. The cyclicality of the industry could result in lower customer demand and continued fixed costs and as a result, cash generated by operations may be lower than forecasted. In such a situation we might need to further utilize our short-term credit facilities or investigate additional financing.
At December 31, 2006, our principal sources of liquidity consisted of 193.9 million in cash and cash equivalents and 104.5 million in undrawn bank lines. Approximately 89.3 million of the cash and cash equivalents and 28.3 million of the undrawn bank lines are restricted to use in the back-end operations and 25.9 million in undrawn bank lines are restricted to use in the front-end operations in Japan. We believe that our cash on hand of 193.9 million at the end of 2006 is adequate to fund our operations, our investments in capital expenditures and to fulfill our existing contractual obligations for the next 12 months.
For the year 2006, net cash provided by operations was 143.8 million as compared to 50.7 million for 2005. These developments resulted from improved net earnings and decreased working capital.
Net working capital, consisting of accounts receivable, inventories, other current assets, accounts payable, accrued expenses, advance payments from customers and deferred revenue, decreased from 236.0 million at December 31, 2005 to 227.1 million at December 31, 2006. The decrease is primarily the result of increased focus on working capital management, and partially offset by increased sales and manufacturing levels. The number of outstanding days of working capital, measured based on annual sales, decreased from 119 days at December 31, 2005 to 94 days at December 31, 2006.
As of December 31, 2006 we have entered into purchase commitments with suppliers for delivery in 2007 in the amount of 96.0 million and for delivery in 2008 in the amount of 1.2 million.
Our capital expenditures decreased from 44.6 million in 2005 to 40.1 million in 2006. We expect capital expenditures to be between 30 million and 40 million in 2007. Our capital expenditure commitments at December 31, 2006 were 8.9 million.
Net cash used in financing activities for 2006 was 41.8 million. During that period, we received 1.1 million in additional short term bank facilities, repaid 6.3 million of long-term debt, received 2.7 million in new long-term debt and received 11.8 million from the issuance of common shares. In 2006, ASM Pacific Technology paid 51.1 million in dividends to its minority shareholders. In 2005 net cash used in financing activities was 109.7 million. During that period, we repaid the remaining balance of US$ 94.3 million of our 5% convertible subordinated notes due on November 15, 2005, repaid 2.3 million in short term bank facilities, repaid 7.8 million of long-term debt, received proceeds of 13.3 million in new long-term debt and received 0.7 million from the issuance of common shares. In 2005, ASM Pacific Technology paid 31.7 million in dividends to its minority shareholders.
We financed the operations of our front-end segment from operating cash flows, from dividends received from ASM Pacific Technology, and from borrowings. We support borrowings of our front-end subsidiaries with guarantees. Net cash used in front-end operating activities were 5.1 million in 2006.
We historically relied on dividends from ASMPT for a portion of our cash flow for use in our front-end operations. Cash dividends received from ASMPT during 2004, 2005 and 2006 were 40.4 million, 37.0 million and 59.0 million, respectively. In November 2006, we announced our commitment that for at least the next three years we would not use these cash dividends to support our front-end business, but instead would use such dividends to retire outstanding convertible debt, purchase our common shares, pay cash dividends on our common shares or, in the event of dilution resulting from the exercise of employee stock options in ASM Pacific Technology, purchase shares of ASM Pacific Technology to maintain our percentage ownership at its current level. We will determine at the relevant time which combination of uses of the ASM Pacific Technology dividends is the most appropriate for us and our shareholders. See Item 8. Financial InformationDividend Policy.
Our back-end segment, which is conducted through ASM Pacific Technology, our 53.35%-owned subsidiary, is entirely self-financed by ASM Pacific Technology. However, the cash resources and borrowing capacity of ASM Pacific Technology are not available to our front-end segment due to restrictions imposed by the Hong Kong Stock Exchange, on which the ASM Pacific Technology common shares are listed.
Although three of the ten directors of ASM Pacific Technology are affiliates of ASM International, ASM Pacific Technology is under no obligation to declare dividends to shareholders or enter into transactions that are beneficial to us. As a majority shareholder, we can approve the payment of dividends, but cannot compel their payment or size.
The market value of our investment in ASM Pacific Technology at the end of 2006 was approximately 876.8 million, which is lower than the market value at the end of 2005, which was approximately 991.9 million.
Contractual Obligations, Contingent Liabilities and Commitments
The following table summarizes our contractual obligations as at December 31, 2006 aggregated by type of contractual obligation:
For a further discussion of our contractual obligations for notes payable to banks, long-term debt, convertible subordinated debt and commitments and contingencies see Notes 10, 13, 14, and 17 to our Consolidated Financial Statements, which are incorporated herein by reference.
We outsource a substantial portion of the manufacturing of our front-end operations to certain suppliers. As our products are technologically complex, the leadtimes for purchases from our suppliers can vary and can be as long as nine months. Generally contractual commitments are made for multiple modules or systems in order to reduce our purchase prices per module or system. For the majority of our purchase commitments, we have flexible delivery schedules depending on the market conditions, which allow us, to a certain extent, to delay delivery beyond originally planned delivery schedules.
At December 31, 2006 we had contingent payables of 3.1 million, including accrued interest, related to research and development grants received. The grants received are repayable only to the extent we recognize sales of products to which the grants related within an agreed upon time period.
New Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 1 to our Consolidated Financial Statements, which is incorporated herein by reference.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
The names of the current members of our Supervisory Board and Management Board and the years of their birth are as follows:
Paul. C. van den Hoek became a member of the Supervisory Board in March 1981 and is currently Chairman of the Supervisory Board. Mr. van den Hoek is a partner in the European law firm of Stibbe, which is our general legal counsel, and has been with Stibbe since 1965. Mr. van den Hoek also serves on the board of directors of various European companies. At December 31, 2006, Mr. van den Hoek owned 300,000 of our common shares. Mr. van den Hoek holds a Masters Degree in law from the University of Amsterdam, the Netherlands.
Eric A. van Amerongen was elected a member of the Supervisory Board in May 2002 and is currently Vice-Chairman of the Supervisory Board. Mr. van Amerongen served as Chief Executive Officer of Koninklijke Swets & Zeitlinger and later as member of its Supervisory Board. Prior to that, he was active for over 10 years in the position of Group Director of Thomson-CSF (France), Chief Executive Officer of Hollandse Signaal Apparaten B.V. and President and Chief Executive Officer Europe, Middle East and Africa for Lucent Technologies. Mr. van Amerongen also serves on the boards of directors of various European companies.
Leon P.E.M. van den Boom was elected a member of the Supervisory Board in May 2005. Mr. van den Boom is a managing partner of Park Corporate Finance B.V., and before that he worked for, among others, Catalyst Advisors B.V., as a senior partner from 2004 to 2005, NIB Capital Bank N.V., as a member of the executive committee from 2000 to 2002 and as the Managing Director at the Van den Boom Groep from 1989 to 2000. Mr. van den Boom serves on the board of directors of various companies. Mr. van den Boom holds a degree in Business Administration from Rijksuniversiteit Groningen, the Netherlands and a degree in Accountancy from the Vrije Universiteit, Amsterdam, the Netherlands.
Berend C. Brix was elected a member of the Supervisory Board in May 2006. He is a partner in Lesuut Finance B.V. since October 2003. Prior to that, he was appointed as a member of the Management Board of Volmac Software Group N.V. in 1990, which company was renamed Cap Gemini N.V. in 1993, and as Chairman of the Management Board in 1998. In June 2003, Mr. Brix became a member of the Supervisory Board of Getronics N.V. and has been Vice-Chairman of the Supervisory Board since January 2004. He is also Chairman of Getronics N.V.s Audit Committee. In addition, he is a non-executive director of Computer Patent Annuities Holdings Limited, a member of its Remuneration Committee and Nominations Committee, a member of the Supervisory Board of ANP Holding B.V. (Netherlands National News Agency), a member of its Financial Committee, and a member of the Supervisory Board of Koninklijke Swets & Zeitlinger Holding N.V. Mr. Brix holds a degree in Business Administration from Erasmus University, Rotterdam, the Netherlands.
Johan M.R. Danneels was elected a member of the Supervisory Board in May 2000. Mr. Danneels served most recently as Group Vice President of STMicroelectronics. Prior to that, he was Director of
Industrial Coordination at Alcatel Corporate and Chief Executive Officer of Alcatel Microelectronics, where he spent most of his career. In January 2005 Mr. Danneels founded Essensium N.V., a spin-off from IMEC, where he serves as Chief Executive Officer. Mr. Danneels holds a Ph.D. from the University of Leuven, Belgium and a MBA degree from Boston University, Brussels, Belgium.
Heinrich W. Kreutzer was elected a member of the Supervisory Board in November 2006. Mr. Kreutzer is Diplom-Ingenieur and Diplom-Ökonom. He studied at the Technical University of Berlin and the University of Hagen. He worked at several companies, including General Telephone & Electronics in Waltham, USA, and Alcatel in Stuttgart, Germany. From 1999 to 2003, Mr. Kreutzer was a member of the Management Board, and was the Chief Operating Officer and Chief Technology Officer of Alcatel SEL AG. From 2004 to April 2006, he was Managing Director of Kabel Deutschland GmbH in Munich, Germany. Mr. Kreutzer is currently a member of the Board of Directors of Micronas Semiconductor AG in Zurich, Switzerland and Chairman of the Supervisory Board of Micronas Semiconductor GmbH in Freiburg, Germany.
Arthur H. del Prado, our founder, has served as a member of the Management Board, President and Chief Executive Officer since our formation in 1968. Mr. del Prado is also a founder of ASM Lithography N.V. through a joint venture with Philips Electronics N.V. He serves as a Director of MEDEA+, and previously served for many years as a Director of its predecessor, JESSI. Mr. del Prado also serves on the board of directors of various European companies. Mr. del Prado is the parent of Mr. Chuck del Prado.
W.K. Lee became a member of the Management Board of the Company and Chief Executive Officer of ASM Pacific Technology Ltd. effective January 1, 2007 and has been General Manager Southern Region of ASM Pacific Technology since 1990. He has been employed by ASM Pacific Technology for over 25 years. Prior to becoming in 1990 General Manager of ASM Pacific Technologys activities in Singapore, Mr. W.K. Lee was involved in product development. Mr. W.K. Lee studied at the Chinese University of Hong Kong (Bachelor of Science and Master of Philosophy in Electronics) and has a Master Degree in Business Administration from the National University of Singapore.
Charles D. (Chuck) del Prado became a member of the Management Board in May 2006. He is President and General Manager of ASM America since 1 February 2003. In March 2001, he was appointed Director Marketing, Sales & Service of ASM Europe. From February 1996 to 2001, he held various management positions at ASM Lithography in manufacturing and sales in Taiwan and in the Netherlands. Mr. del Prado worked at IBM Nederland N.V. from 1989 to 1996 in several marketing and sales positions. Mr. del Prado received a Master of Science degree in Industrial Engineering and Technology Management from the University of Twente, the Netherlands. Mr. del Prado is the son of Mr. Arthur del Prado.
A. (Naud) J.M. van der Ven became Chief Financial Officer and a member of the Management Board in June 2005. Prior to his joining ASM International, Mr. van der Ven was Chief Financial Officer and Member of the Executive Board of Novamedia Holding B.V. from 2001 to 2004 and of Vedior N.V. from 1997 to 2000. He was Chief Financial Officer of Axxicon Group N.V. from 1991 to 1997 and started his career at McKinsey & Company in 1985. Mr. van der Ven holds a MBA degree from the University of Chicago, United States, and a law degree from the University of Leiden, the Netherlands.
J. (Han) F.M. Westendorp became a member of the Management Board in May 2006. He is Chief Operating Officer front-end operations of ASM International since February 2003. He was appointed General Manager of ASM Europe in July 1999. Mr. Westendorp held various management positions at Tokyo Electron Massachusetts from 1991 to mid-1999, most recently as General Manager. Prior to that, he worked on developing ion implant technology at ASM International. Mr. Westendorp has a doctorate in physics and mathematics from the University of Utrecht, the Netherlands.
Compensation of members of the Management Board is determined by the Supervisory Board. Currently, members of our Management Board are Arthur H. del Prado, W.K. Lee, Charles D. (Chuck) del Prado, A. (Naud) J.M. van der Ven, and J. (Han) F.M. Westendorp.
The following table sets forth as to all current and former members of our Supervisory Board and Management Board information concerning all remuneration from us (including our subsidiaries) for services in all capacities during the year ended December 31, 2006:
Annual Compensation For The Year Ended December 31, 2006
We have granted stock options to certain key employees. For information regarding such options see Note 16 to our Consolidated Financial Statements, which is incorporated herein by reference.
Options to purchase an aggregate of 328,532 common shares are held by members of our Management Board at December 31, 2006. As of February 23, 2007, options to acquire 328,532 common shares were held by members of our Management Board at exercise prices of US$ 11.35 and ranging from 11.18 15.40, with expiration dates from March 16, 2007 to May 19, 2014.
For further information regarding remuneration of members of our Management Board, see our Remuneration Policy, which is posted on our website.
C. Board practices.
Under Netherlands law, Supervisory Board members have the duty to supervise and advise the Management Board members. Persons nominated by the Supervisory Board to be appointed by the shareholders to the Supervisory Board are elected if they receive a majority of the votes cast at a meeting of shareholders. Nominees to the Supervisory 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 a meeting, which affirmative votes represent more than half our issued capital. A resolution to remove a member of the Supervisory Board, other than in accordance with a proposal of the Supervisory Board, shall require the affirmative vote of a majority of the votes cast, which affirmative votes represent more than half our issued capital. The Supervisory Board members serve a four year term. The Supervisory Board members may be re-elected twice.
The Management Board is entrusted with our management under the supervision of the Supervisory Board and has the general authority to enter into binding agreements with third parties. Persons nominated by the Supervisory Board to be appointed by the shareholders to the Management Board are elected if they receive a majority of the votes cast at a meeting of shareholders. Nominees to the 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 a meeting, if such affirmative votes represent more than half our issued capital. A Management Board member may at any time be suspended by the Supervisory Board. A Management Board member may, in accordance with a proposal of the Supervisory Board, be dismissed by the General Meeting of Shareholders with a majority of the votes cast. A resolution to suspend or to dismiss a member of the Management Board, other than in accordance with a proposal of the Supervisory Board, shall require the affirmative vote of a majority of the votes cast at a meeting, which affirmative votes represent more than half our issued capital. There is no statutory term of office for Management Board members.
The Audit Committee has a supervisory task with regard to monitoring the integrity of our financial reports and risk management. The Audit Committee consists of Mr. van den Boom (Chairman), Mr. Brix and Mr. Kreutzer. The Audit Committee supervises the activities of the Management Board with respect to:
The Audit Committee meets periodically to nominate a firm to be appointed as independent auditors to audit the financial statements and to perform services related to the audit, review the scope and results of the audit with the independent auditors, review with management and the independent auditors our annual operating results and consider the adequacy of the internal accounting procedures and the effect of the procedures relating to the auditors independence.
The nomination, selection and remuneration committee advises the Supervisory Board on matters relating to the selection and nomination of the members of the Management Board and Supervisory Board. The committee further monitors and evaluates the remuneration policy for the Management Board and some of our other senior executives. This committee consists of Mr. van Amerongen (Chairman), Mr. Danneels and Mr. van den Hoek.
We have entered into indemnity agreements with each of our Supervisory Board and Management Board members in which we agree to hold each of them harmless, to the extent permitted by law, from damage resulting from a failure to perform or a breach of duties by our board members, and to indemnify each of them for serving in any capacity for the benefit of the Company, except in the case of willful misconduct or gross negligence in certain circumstances.
As of December 31, 2006, we had 10,868 employees, including 958 employees primarily involved in research and development activities, 431 in marketing and sales, 1,114 in customer service, 540 in finance and administration, and 7,825 in manufacturing.
The following table lists the total number of our employees and the number of our employees in our front-end and back-end business at the dates indicated, exclusive of temporary workers:
Our Netherlands operation, which employs 336 persons, is subject to standardized industry bargaining under Netherlands law, and is required to pay wages and meet conditions established as a result of negotiations between all Netherlands employers in their industry and unions representing employees of those employers. Additionally, management personnel in the Netherlands facilities meet as required by Netherlands 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.
E. Share ownership.
Information with respect to shares and options held by members of our Supervisory Board and Management Board is included in Item 7, Major Shareholders and Related Party Transactions and Notes 25 and 26 to our Consolidated Financial Statements, which are incorporated herein by reference. With the exception of Arthur del Prado and Chuck del Prado, as of February 23, 2007, none of the members of our Supervisory Board or Management Board owned beneficially more than 1% of our outstanding common shares.
We maintain various stock option plans for the benefit of our employees. For information about our stock option plans, see Note 16 to our Consolidated Financial Statements, which is incorporated herein by reference.
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders.
The following table sets forth information with respect to the ownership of our common shares as of February 23, 2007 by each beneficial owner of more than 5% of our common shares and by all of the members of our Supervisory Board and Management Board as a group:
A beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares (i) voting power which includes the power to vote, or to direct the voting of, such security and/or (ii) investment power which includes the power to dispose, or to direct the disposition, of such security. In addition, a person shall be deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security, as defined above, within 60 days, including but not limited to any right to acquire: (i) through the exercise of any option, warrant or right; (ii) through the conversion of a security; or (iii) pursuant to the power to revoke, or pursuant to the automatic termination of, a trust, discretionary account, or similar arrangement.
According to SEC filings, FMR Corp. reduced its shareholdings of 6,903,843 of our common shares (of which 5,796,031 were beneficially owned by Fidelity Management & Research Company, a wholly owned subsidiary of FRM Corp.) at February 10, 2006 to 1,931,934 at February 14, 2007 (all of which are beneficially owned by Fidelity Management & Research Company).
On May 28, 1997, we entered into an agreement with Stichting Continuïteit ASM International, or Stichting, pursuant to which Stichting was granted an option to acquire up to that number of our preferred shares that has a total par value equal to 50% of the par value of our common shares issued and outstanding at the date of the exercise. Stichting is a non-membership organization organized under Netherlands law. The objective of Stichting is, amongst others, to acquire, to own and vote our preferred shares in order to maintain our independence and/or continuity and/or identity in case of a takeover attempt. Toward that objective, Stichting will evaluate, when called for, whether a takeover offer is in our best interests. Euronext Amsterdam requires that a majority of the board members of Stichting be unrelated to us. As of December 31, 2006, the members of the board of Stichting are:
We are unaware of any arrangement which we anticipate will result in a change in control of ASM International. All shares of our common stock entitle the holder to the same voting rights.
Of our 53,873,124 outstanding common Shares at February 23, 2007, 9,064,039 are registered with us in the Netherlands, 35,158,389 shares are registered with a transfer agent in the Netherlands, ABN AMRO Bank N.V., and 9,650,696 are registered with a transfer agent in the United States, Citibank, N.A., New York. Our common shares registered with Citibank, N.A., New York are listed on the NASDAQ Global Select Market under the symbol ASMI. As of February 23, 2007 there were approximately 235 record holders in the United States. The common shares registered with ABN AMRO Bank N.V., are in bearer form and are traded on Euronext Amsterdam under the symbol ASM.
B. Related party transactions.
For information regarding related party transactions, see Note 26 to our Consolidated Financial Statements, which is incorporated herein by reference.
Item 8. Financial Information
A. Consolidated statements and other financial information
Consolidated financial statements
See Item 18. Financial Statements.
See Item 4.B. Business Overview and Note 18 to our Consolidated Financial Statements, which is incorporated herein by reference.
We have not paid dividends in any prior year.
We believe that future dividends received from ASM Pacific Technology, our 53% owned subsidiary (ASMPT), are no longer required for investment in our front-end business. The front-end business is now considered financially independent based on the positive momentum in the front-end business and our confidence in its future performance.
In November 2006, we announced a flexible stance with respect to our utilization of dividends received from ASMPT. For dividends received in the years 2007 through at least 2009, we intend to use ASMPT dividends for one or more of the following:
In order to maximize shareholder value and strengthen our financial position, our Supervisory and Managing Boards have a preference at this time to employ the ASMPT dividends to: (i) repurchase a portion of our outstanding convertible debt, (ii) buy back common shares, and/or (iii) purchase additional ASMPT shares. Therefore, we do not intend to pay cash dividends in the near future. We will determine the specific application of the ASMPT dividends as and when the dividends are received.
B. Significant changes
No significant changes have occurred since the date of our Consolidated Financial Statements.
Item 9. The Offer and Listing
A. Offer and listing details.
The following table sets forth, for the periods indicated, the high and low closing prices of our common shares as reported on the NASDAQ Global Select Market and the high and low closing prices as reported on Euronext Amsterdam:
Price Range of Common Shares
B. Plan of distribution.
Our common shares are listed on the NASDAQ Global Select Market under the symbol ASMI and listed on Euronext Amsterdam under the symbol ASM.
D. Selling shareholders.
F. Expenses of the issue.
Item 10. Additional Information
A. Share capital.
B. Memorandum and articles of association.
The information required by Item 10.B. is included in Exhibit 1.1 to this Form 20-F.
C. Material contracts.
D. Exchange controls.
There are no foreign exchange controls or other governmental laws, decrees or regulations in the Netherlands restricting the import or export of capital or affecting the remittance of dividends, interest or other payments to non-resident shareholders. Neither the laws of the Netherlands nor the Articles of Association of ASM International restrict remittances to non-resident shareholders or the right to hold or vote such securities.
Summary of Dutch Tax Provisions Applicable to Nonresident Shareholders with a particular focus on U.S. Shareholders
The statements below briefly summarize the current Dutch tax laws, based on the laws as in force at January 1, 2007. The description is limited to the tax implications for shareholders who neither are nor are deemed to be a resident of the Netherlands for purposes of the relevant tax codes. The description does not address special rules that may apply to holders of special classes of shares and should not be interpreted as extending by implication to matters not specifically referred to in this document. As to individual tax consequences, shareholders are advised to consult their own tax advisors.
Dividends distributed by us generally are subject to a withholding tax imposed by the Netherlands at a rate of 15%. The expression dividends distributed includes, among other things:
If a holder of ordinary shares resides in a country that signed a double taxation convention with the Netherlands and such convention is in effect, such holder of ordinary shares may, depending on the terms of that double taxation convention, be eligible for a full or partial exemption from, reduction or refund of
Dutch dividend withholding tax. The Netherlands has concluded such a convention with the United States, among other countries.
Under the Convention between the United States of America and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the US Tax Treaty) currently in effect, dividends we pay to a corporate holder of our common shares who is not, or is not deemed to be, a resident of the Netherlands for Dutch tax purposes but who is a resident of the United States as defined in the U.S. Tax Treaty may be eligible for a reduction of the 15% Netherlands withholding tax. In the case of certain U.S. corporate shareholders owning at least 10% of ASM International voting power, the Netherlands withholding tax may be reduced to 5%, provided that such shareholder does not have an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment or permanent representative in the Netherlands to which the dividends are attributable. A full exemption of Netherlands withholding tax is applicable for a U.S. corporate shareholder owning at least 80% of voting power in the Company for a period of at least twelve months prior to the distribution, provided that this shareholder meets specific tests of the limitation of benefits clause of the U.S. Tax Treaty. The U.S. Tax Treaty provides for complete exemption from tax on dividends received by exempt pension trusts and exempt organizations, as defined therein. Except in the case of exempt organizations, the reduced dividend withholding rate can be applied at the source upon payment of the dividends, provided that the proper forms have been filed prior to the payment. Exempt organizations remain subject to the statutory withholding rate of 15% and are required to file an application for a refund of such withholding.
A holder who is not, or is not deemed to be, a resident of the Netherlands may not claim the benefits of the U.S. Tax Treaty unless:
Under current Dutch law, we may be permitted under limited circumstances to deduct and retain from the withholding a portion of the amount that otherwise would be required to be remitted to the Dutch Tax Authorities. That portion generally may not exceed 3% of the total dividend distributed by us. If we retain a portion of the amount withheld from the dividends paid, the portion (which is not remitted to the tax authorities) might not be creditable against your domestic income tax or corporate income tax liability. We will endeavor to provide you with information concerning the extent to which we have applied the reduction described above to dividends paid to you and advise you to check the consequences thereof with your local tax advisor.
A refund, reduction, exemption or credit of Dutch dividend withholding tax on the basis of Dutch tax law or on the basis of a tax treaty between the Netherlands and another state, will be granted only if the dividends are paid to the beneficial owner of the dividends. A receiver of a dividend is not considered to be the beneficial owner of a dividend in an event of dividend stripping in which he has paid a consideration related to the receipt of such dividend. In general terms, dividend stripping can be described as the situation in which a foreign or domestic person (usually, but not necessarily, the original shareholder) has transferred his shares or his entitlement to the dividend distributions to a party that has a more favorable right to a refund or reduction of Dutch dividend withholding tax than the foreign or domestic person. In these situations, the foreign or domestic person (usually the original shareholder), by transferring his shares or his entitlement to the dividend distributions, avoids Dutch dividend withholding tax while retaining his beneficial interest in the shares and the dividend distributions. This regime may also apply to the transfer of shares or the entitlement to dividend distributions as described above, if the avoidance of dividend withholding tax is not the main purpose of the transfer.
Income Tax and Corporate Income Tax on Dividends
A nonresident individual or corporate shareholder will not be subject to Dutch income tax with respect to dividends distributed by us or with respect to capital gains derived from the sale, disposal or deemed disposal of our common shares, provided that:
Generally, a nonresident holder will have a substantial interest if he, his partner, certain other relatives (including foster children) or certain persons sharing his household, alone or together, directly or indirectly:
The same criteria apply to a nonresident entity, save for the extension to partners, certain other relatives, and certain persons sharing the holders household.
Gift and Inheritance Tax
In principle, liability for Dutch gift tax or inheritance tax arises in respect of any gifts of common shares by or inheritance of common shares from any person who resides in the Netherlands at the time of the gift or death.
A gift or inheritance of common shares from a nonresident shareholder will not be subject to Dutch gift and inheritance tax, provided that:
For the purposes of Dutch gift and inheritance tax, a Dutch national is deemed to be a resident of the Netherlands if he resided in that country at any time during a period of ten years preceding the date of the gift or death, as the case may be. In addition, for the purposes of Dutch gift tax, a person not possessing Dutch nationality is also deemed to be a Dutch resident, irrespective of his nationality, if he was a Dutch resident at any time during a period of twelve months preceding the time at which the gift was made. The Netherlands has concluded a treaty with the United States, based on which double taxation on inheritances may be avoided if the inheritance is subject to Netherlands and/or U.S. inheritance tax and the deceased was a resident of either the Netherlands or the United States.
Summary of U.S. Federal Tax Provisions Applicable to United States Security Holders
The following is a general description of the material U.S. federal income tax consequences of the ownership and disposition of our common shares. This summary only applies to U.S. Holders (as defined below) that hold their shares as capital assets. This discussion does not purport to deal with all aspects of U.S. federal income taxation that may be relevant to holders of shares in view of their particular circumstances (for example, persons subject to the alternative minimum tax provisions of the Internal Revenue Code of 1986 (Internal Revenue Code)), and does not deal with holders subject to special rules, such as, but not limited to dealers in securities or foreign currencies, traders in securities that elect to use a mark-to-market method of accounting, certain financial institutions, tax-exempt organizations, tax-qualified employer plans and other tax-qualified accounts, insurance companies, persons that actually or constructively own 10% or more of our voting stock, persons holding common shares as part of a straddle,
hedging, conversion or constructive sale transaction or holders of common shares whose functional currency is not the U.S. dollar.
This discussion is based on the Internal Revenue Code, as amended to the date hereof, final, temporary and proposed U.S. Treasury Department regulations promulgated thereunder, and administrative and judicial interpretations thereof, changes to any of which subsequent to the date of this summary, possibly with retroactive effect may affect the tax consequences described in this summary. We will not update this summary for any law changes after the date of this annual report. In addition, there can be no assurance that the Internal Revenue Service will not challenge one or more of the tax consequences described in this summary, and we have not obtained, nor do we intend to obtain, a ruling from the Internal Revenue Service or an opinion of counsel with respect to the U.S. federal income tax consequences of acquiring or holding shares. Prospective holders of shares should consult their own tax advisors as to the application of the U.S. federal income tax laws to their particular situation as well as any tax consequences that may arise under the U.S. federal estate or gift tax and any state, local and foreign tax laws from the ownership and disposition of our shares.
The following discussion is a summary of the tax rules applicable to U.S. Holders of shares and does not consider any U.S. federal income tax consequences to non-U.S. Holders. As used in this summary, U.S. Holder means a beneficial owner of shares that is (i) an individual who is a citizen or resident of the United States (as defined for U.S. federal income tax purposes), (ii) a corporation (or any other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any of its political subdivision, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or a trust if a valid election is in place to treat the trust as a U.S. person, or (v) any other person or entity that would be subject to U.S. federal income tax on a net income basis in respect of the shares. A non-U.S. Holder is a beneficial owner of shares that is not a U.S. Holder as so defined herein.
Taxation of Dispositions
A U.S. Holder will recognize gain or loss for U.S. federal income tax purposes upon the sale or other disposition of shares in an amount equal to the difference between the amount realized and the U.S. Holders adjusted tax basis in the shares. For these purposes, a U.S. Holders adjusted tax basis in the shares generally will equal the U.S. dollar cost of the shares to the U.S. Holder. Subject to the passive foreign investment company rules described below, gain or loss realized by a U.S. Holder on a sale or other disposition generally will be treated as capital gain or loss, and will be long-term capital gain or loss if the shares were held for more than one year. Any such gain generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Net long-term capital gain recognized by a U.S. Holder who is an individual generally is subject to reduced rates of taxation. The deduction of capital losses is subject to certain limitations. Prospective investors should consult their own tax advisors in this regard.
If we repurchase shares, the repurchase generally will be treated as a sale or exchange of the shares subject to the rules discussed above. However, under certain circumstances as provided in Section 302 of the Internal Revenue Code, the repurchase may be treated fully or partially as a dividend taxable as described below under Taxation of Distributions. U.S. Holders should consult their own tax advisors concerning the U.S. federal income tax consequences of our repurchase of their shares.
Taxation of Distributions
Subject to the anti-deferral tax rules described below, the gross amount of any distribution (actually or constructively) paid (before reduction for Netherlands withholding taxes) with respect to shares, will be included in the gross income of a U.S. Holder as foreign source dividend income to the extent the distributions are paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital to the extent of the U.S. Holders adjusted tax basis in the shares (thereby increasing the amount of gain and decreasing the amount of loss to be recognized on the subsequent disposition of the shares), and to the extent that such distribution exceeds the U.S. Holders adjusted tax basis in the shares such excess will be taxed as capital gain. We do not maintain calculations of our earnings and profits under U.S. federal income tax principles, and therefore it may not be possible to determine that a distribution should not be treated as a dividend.
Distributions treated as dividends generally will not be eligible for the dividends received deduction allowed to corporations under the Internal Revenue Code. The availability of this deduction is subject to several complex limitations which are beyond the scope of this summary.
If a U.S. Holder receives a dividend in euros, the amount of the dividend for U.S. federal income tax purposes will be the U.S. dollar value of the dividend, determined at the spot rate in effect on the date of such payment, regardless of whether the payment is later converted into U.S. dollars. In the case of such later conversion, the U.S. Holder may recognize U.S. source ordinary income or loss as a result of currency fluctuations between the date on which the dividend is paid and the date the dividend amount is converted to U.S. dollars.
Recently enacted U.S. tax legislation has extended the reduced 15% maximum tax rate for certain dividends received by individuals through taxable years beginning on or before December 31, 2010, so long as certain holding period requirements are met. Dividends received from qualified foreign corporations generally qualify for the reduced rate. A non-U.S. corporation (other than a passive foreign investment company) generally will be considered to be a qualified foreign corporation if (I) the shares of the non-U.S. corporation are readily tradable on an established securities market in the United States or (II) the non-U.S. corporation is eligible with respect to substantially all of its income for the benefits of a comprehensive income tax treaty with the United States which contains an exchange of information program. We believe that we are, and will continue to be, a qualified foreign corporation. Individual U.S. Holders should consult their tax advisors regarding the impact of distributions paid with respect to their shares of our common stock in light of their particular situations.
Foreign Tax Credit
Dividends distributed by us generally are subject to a withholding tax imposed by the Netherlands at a rate of 15% (see Summary of Dutch Tax Provisions Applicable to Nonresident Shareholders with a particular focus on U.S. ShareholdersWithholding Tax). Subject to certain conditions and limitations set forth in Sections 901 and 904 of the Internal Revenue Code, including certain holding period requirements, foreign tax withheld or paid with respect to dividends on common shares generally will be eligible for credit against a U.S. Holders U.S. federal income tax liability. Alternatively, a U.S. Holder may claim a deduction for the amount of withheld foreign taxes, but only for a year for which the U.S. Holder elects to do so with respect to all foreign income taxes. Under current Dutch law, we may be permitted, under limited circumstances, to retain a portion of Netherlands taxes we withhold from dividends paid to our shareholders, rather than pay that portion of the withheld taxes to the taxing authorities in the Netherlands (see Summary of Dutch Tax Provisions Applicable to Nonresident Shareholders with a particular focus on U.S. ShareholdersWithholding Tax). This amount generally may not exceed 3% of the total dividend distributed by us. If we retain a portion of the Netherlands withholding taxes, the retained amount in all likelihood will not qualify as a creditable tax for U.S. federal income tax purposes. We will endeavor to provide U.S. Holders with information concerning the extent to which we retain any Netherlands taxes on dividends paid to U.S. Holders.
The overall limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income such as passive income, high withholding tax interest, financial services income, shipping income, and certain other classifications of income. For this purpose, dividends distributed by us generally will be passive income, or, in the case of certain U.S. Holders, financial services income. To the extent such dividends on common shares are treated as capital gains, such gain would be U.S. source. Accordingly, a U.S. Holder would not be able to use the foreign tax credit arising from any Netherlands withholding taxes imposed on such distribution unless such credit can be applied (subject to applicable limitations) against U.S. tax due on other foreign source income in the appropriate category for foreign tax credit purposes.
Recent legislation will significantly modify the foreign tax credit rules discussed above. Effective for tax years beginning after December 31, 2006, there will be only two specific classes of income for purposes of calculating foreign tax credit limitations (a passive category and a general category). Other income that would have been included in one of the current categories will be included in one of these two categories.
The rules relating to the determination of the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors with respect to the availability of a foreign tax credit or deduction for foreign, including Netherlands, taxes withheld.
Anti-Deferral Tax Rules
The Internal Revenue Code contains various provisions that impose current U.S. federal income tax on certain foreign corporations or their U.S. shareholders if such corporations derive certain types of passive
income and fail to make adequate distribution of profits to their U.S. shareholders. These provisions include the passive foreign investment company and controlled foreign corporation rules. While we do not believe that any of these rules should apply to us, we are not certain that we can avoid these tax rules because we cannot predict with any degree of certainty the amount and character of our future income or the amount of our shares any particular U.S. Holder will own. Accordingly, we will only briefly summarize those provisions and then only the rules that we believe would have the greatest likelihood of applying to us in the future.
Passive Foreign Investment Company. As a foreign corporation with U.S. Holders, we could potentially be treated as a passive foreign investment company (PFIC) as defined in the Internal Revenue Code. The PFIC provisions of the Internal Revenue Code can have significant tax effects on U.S. Holders. In general, a foreign corporation will be a PFIC in a particular tax year and for all succeeding tax years if:
If we were a PFIC for a taxable year during which a U.S. Holder owned our shares, then a U.S. Holder would likely incur increased tax liabilities (possibly including an interest charge) upon the sale or other disposition of our shares of our common stock or upon receipt of excess distributions. In other words, gain recognized by a U.S. Holder on a sale or other disposition of our shares would be allocated ratably over the U.S. Holders holding period for the shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the amount allocated to that taxable year. Further, any distribution in excess of 125 percent of the average of the annual distributions on shares received by the U.S. Holder during the preceding three years or the U.S. Holders holding period, whichever is shorter, would be subject to taxation as described above.
Certain elections may be available (including a qualified electing fund election and a mark to market election) to U.S. Holders that may mitigate the adverse consequences resulting from PFIC status. In addition, if we were a PFIC in a taxable year in which we pay a dividend or the prior year, the 15% dividend rate discussed above with respect to dividends paid to certain U.S. Holders would not apply.
We believe that we are not a PFIC, and we do not expect to become a PFIC. However, we cannot assure that we will not qualify as a PFIC in the future. The PFIC rules are very complex and U.S. Holders should consult their own tax advisors on this issue.
Controlled Foreign Corporation Rules. If more than 50% of the voting power or total value of all classes of our shares is owned, directly or indirectly, by U.S. Holders, each of which owns 10% or more of the total combined voting power of all classes of our shares, we could be treated as a controlled foreign corporation (CFC) under Subpart F of the Internal Revenue Code. This classification would result in many complex consequences, including the required inclusion into income by such 10% or greater shareholders of their pro rata shares of our Subpart F Income, as defined in the Internal Revenue Code. In addition, under Section 1248 of the Internal Revenue Code, gain from the sale or exchange of shares by any U.S. Holder who is or was a 10% or greater shareholder at any time during the five-year period ending with the sale or exchange will be dividend income to the extent of our earnings and profits attributable to the shares sold or exchanged and accumulated during the periods that we were a CFC. Under certain circumstances, a U.S. Holder that directly owns 10% or more of our voting shares and is a corporation may be entitled to an indirect foreign tax credit for amounts characterized as dividends under Section 1248 of the Internal Revenue Code. We believe that we are not a CFC and we will not become a CFC, however, we can not assure you that we will not become a CFC in the future.
United States Backup Withholding Tax and Information Reporting
Under certain circumstances, a U.S. Holder may be subject to information reporting and backup withholding with respect to certain payments made in respect of the shares and the proceeds received on the disposition of the shares paid within the U.S. (and in certain cases, outside the U.S.). Such amounts may be subject to a 28% U.S. backup withholding tax unless the U.S. Holder otherwise establishes an exemption. For example, backup withholding will not apply to a U.S. Holder who (1) is a corporation or comes within certain other exempt categories and, when required, demonstrates that fact, or (2) furnishes a
correct taxpayer identification number and makes certain other required certifications as provided by the backup withholding rules.
Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holders U.S. federal income tax liability and may entitle a U.S. Holder to a refund, provided that the required information is furnished to the Internal Revenue Service.
* * *
The discussion set forth above is included for general information only and may not be applicable depending upon a holders particular situation. Holders should consult their tax advisors with respect to the tax consequences to them of the purchase, ownership and disposition of shares including the tax consequences under state, local and other tax laws and the possible effects of changes in U.S. federal and other tax laws.
F. Dividends and paying agents.
G. Statement by experts.
H. Documents on display.
Whenever a reference is made in this Form 20-F to any contract, agreement o