ASM International N.V. 20-F 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2011
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)
Versterkerstraat 8, 1322 AP, Almere, the Netherlands
(Address of principal executive offices)
Telephone: (602) 432-1713
Fax: (602) 470-2419
Address: 3440 E. University Dr., Phoenix, AZ 85034, USA
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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:55,377,020 common shares; 0 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x International Financial Reporting Standards as issued by the International
Accounting Standards Board ¨ Other ¨
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ¨ Item 18 ¨
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.
Forward Looking Safe Harbor Statement
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 revenue, sales, income, expenditures, sufficiency of cash generated from operations, maintenance of majority interest in ASM Pacific Technology Ltd. , business strategy, product development, product acceptance, market penetration, market demand, return on investment in new products, product shipment dates, corporate transactions, restructurings, liquidity and financing matters, currency fluctuations, litigation involving intellectual property, shareholder matters, and outlooks. These statements may be found under Item 4, Information on the Company, Item 5, Operating and Financial Review and Prospects and elsewhere in this report. Forward-looking statements are statements other than statements of historical fact and 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 risks discussed in Item 3.D, Risk factors. 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 to update or revise any forward-looking statements to reflect future developments or circumstances.
Item 1. Identity of Directors, Senior Management and Advisors
Item 3. Key Information
A. Selected consolidated financial data.
The following selected financial data has been derived from ASMIs historical audited consolidated financial statements. The selected financial data should be read in conjunction with Item 5, Operating and Financial Review and Prospects and Item 18, Financial Statements, and the accompanying notes for the corresponding fiscal years:
Exchange Rate Information
We publish our consolidated financial statements in euros. In this Annual Report, references to , euro or EUR are to euros, and references to $, U.S. dollar, USD or US$ are to United States dollars.
The following table sets forth, for each period indicated, specified information regarding the U.S. dollar per euro exchange rates based on the rates of the European Central Bank, referred to as the reference rate. On February 29, 2012, the reference rate was 1.3443 U.S dollars per euro. Prior to January 1, 2009, the exchange rate was 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.
U.S. Dollar per Euro Exchange Rate
D. Risk factors.
You should carefully consider each of the risks and uncertainties described below and all other information contained in this Annual Report on Form 20-F. In order to help assess the major risks in our business, we have identified many, but not all, of these risks, which may not be in order of likelihood or materiality. Due to the scope of our operations, a wide range of factors both known and unknown could materially affect future developments and performance.
If any of the following risks are realized, our business, financial condition, cash flow or results of operations could be materially and adversely affected, and as a result, the trading price of our common stock could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Report, including without limitation Item 4 Information on the Company, Item 5 Operating and Financial Review and Prospects, and our Consolidated Financial Statements and related notes.
RISKS RELATED TO OUR INDUSTRY
The industry in which we operate is highly cyclical.
We sell our products to the semiconductor manufacturing industry, which is subject to sudden, extreme, cyclical variations in product supply and demand. Starting late in 2008 and continuing in 2009, this industry experienced a dramatic and unprecedented decline in demand for semiconductor devices due to the worldwide economic downturn, which led to significant layoffs, plant closings, reduced capital expenditures and other cost reduction measures by semiconductor manufacturers. These conditions caused a substantial diminution in the demand for our products, which represent capital expenditures for our customers although a pick-up in demand was evident in the second half of 2009 and continued through 2010. During 2011 order intake was mixed in the uncertain global climate and industry conditions. The timing, length and severity of these cycles cannot be predicted and future downturns may result in changes in the semiconductor manufacturing industry and the manner in which we must conduct our business in ways that cannot now be predicted.
Semiconductor manufacturers may contribute to the severity of downturn and upturn cycles by misinterpreting the conditions in the industry and over-investing or under-investing in semiconductor manufacturing capacity and equipment. In any event, the lag between changes in demand for semiconductor devices and changes in demand for our products by semiconductor manufacturers accentuates the intensity of these cycles in both expansion and contraction phases. We may not be able to respond timely and effectively to these industry cycles in the expansion and contraction phases.
Industry downturns historically have been characterized by reduced demand for semiconductor devices and equipment, production over-capacity and a decline in average selling prices. During periods of declining demand, we must quickly and effectively reduce expenses. However, our ability to reduce expenses is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements. In addition, in a downturn, our ability to reduce inventories quickly is limited by the long lead time for production and delivery of some of our products, reduced sales, order cancellations and delays, and delays associated with reducing deliveries from our supplier pipeline. During an extended downturn, a portion of our inventory may have to be written down as excess or obsolete if it is not sold in a timely manner.
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, and fund such increase of manufacturing capacity. Our inability to quickly respond in times of increased demand, because of the effect, for example, of our ongoing programs to reduce expenses and regulate the rate of purchases from our suppliers, could harm our reputation and cause some of our existing or potential customers to place orders with our competitors rather than us.
Our industry along with global financial markets and regions have been in flux since 2008. In particular, financial turmoil in the Eurozone has recently been unsettling, including the debt burden of certain nations and their ability to meet future obligations, euro currency stability, and the continued suitability of the euro as a single currency. These concerns could possibly result in the reintroduction of individual currencies or even the dissolution of the euro itself. If the euro ended, the contractual and legal consequences for holders of euro denominated obligations cannot be predicted; however, these possible developments and fluid market perceptions could negatively affect the value of euro denominated obligations and assets. These financial concerns in Europe as well as the health of the overall global financial markets and a weaker or deteriorating global economy could also adversely impact our business, financial condition and operating results, such as lower sales due to decreased capital purchases by our customers, financial instability or insolvency of suppliers and customers, and other such similar or related adverse effects.
Our industry is subject to rapid technological change and we may not be able to forecast or respond to commercial and technological trends in time to avoid competitive harm.
Our future success depends upon commercial acceptance of products incorporating new technologies we are developing, such as new plasma enhanced and atomic layer deposition processes, new epitaxy processes and new materials and chemistries. The semiconductor industry and the semiconductor equipment industry are subject to rapid technological change and frequent introductions of enhancements to existing products which can result in significant 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. 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 materially and negatively impact our operating results and our ability to generate the return we intend to achieve on our investments in new products.
If we fail to adequately invest in research and development, we may be unable to compete effectively.
We have limited resources to allocate to research and development, and must allocate our resources among a wide variety of projects in our Front-end and Back-end businesses. If we have insufficient cash flow from our businesses to support the necessary level of research and development, we will have to fund such expenditures by diminishing our cash balances, or utilizing our credit facilities or reducing our level of research and development expenses.
Because of intense competition in our industry and constant technological evolution, the consequences of failing to invest in strategic developments are significant. In order to enhance the benefits obtained from our research and development expenditures, we have contractual and other relationships with independent research institutes. If we fail to adequately invest in research and development or lose our ability to collaborate with these independent research entities, we may be unable to compete effectively in the Front-end and Back-end markets in which we operate.
We face intense competition from companies which have greater resources than we do, and potential competition from new companies entering the market in which we compete. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
We face intense competition in 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 (now LAM Research Corporation), Tokyo Electron, Kokusai, and Jusung. 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 substantially greater financial, technological, engineering, manufacturing, marketing and distribution resources, which 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.
Industry alliances may not select our equipment.
Our customers are entering into alliances or other forms of cooperation with one another to expedite the development of processes and other manufacturing technologies. One of the results of this cooperation may be the definition of a system or particular tool set for a certain function or a series of process steps that uses a specific set of manufacturing equipment. These decisions could work to our disadvantage if a competitors equipment becomes the standard equipment for such function or process. Even if our equipment was previously used by a customer, that equipment may be displaced in current and future applications by the equipment standardized through such cooperation. These forms of cooperation may have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO OUR BUSINESS
Commencing in 2009, we implemented a major restructuring plan in our Front-end operations, the execution of which involved risks to our business and financial results.
Our PERFORM! program, designed to streamline our Front-end global operations and reduce our cost base including a focused effort on lowering our working capital requirements, was started in 2009 and involved the material restructuring of our significant Front-end operating, manufacturing and administrative units. These efforts and other initiatives continued through 2010. While the majority of the initiatives were finalized in 2010, we have continued in 2011 to further implement and build upon these initiatives as we have transitioned to a more global sales organization, a more centralized and cost efficient R&D function and the sharing of platforms among products. Changes of this magnitude across a broad spectrum of our Front-end operations involve significant risks to our operations, including among others the following:
We cannot assure you that we will be able to successfully manage these changes in the future or that the changes will achieve all desired effects of streamlining our operations and reducing our cost base. If such ongoing or new efforts are not successful for any reason, including because the attendant costs are higher or benefits are lower than estimated, it could have a material adverse impact on our competiveness, financial condition, results of operations and cash flows.
Our customers face challenges in economic downturns and if they cannot perform their obligations to us our financial results will suffer.
We face increased payment and performance risk in economic downturns from our customers. If any of our customers become insolvent or commence bankruptcy or similar proceedings, our receivables from such customers may become uncollectible. In order to promote sales, we may be required to provide extended payment terms, financing arrangements or other modified sale terms for some customers, which will increase our sales expenses and further increase our exposure to customer credit risk, all in an environment of downward pressure on average selling prices. Even though we may be a secured creditor in these arrangements with rights in the underlying equipment, the equipment may have only limited value upon a customer default, especially if activity in our markets remains at low levels, which may result in substantial write-downs upon any such default.
If we do not accurately evaluate our customers creditworthiness in connection with sales financing arrangements involving increased exposure to customer payment risk, our bad debt expense will increase. If we are too cautious in our sales practices because of this, we may lose sales. In either case, our results of operations and financial condition would be negatively affected.
We derive a significant percentage of our revenue from sales to a small number of large customers, and if we are not able to retain these customers, or if they reschedule, reduce or cancel orders, or fail to make payments, our revenues would be reduced and our financial results would suffer.
Our largest customers account for a significant percentage of our revenues. Our largest customer accounted for 6.4% of our consolidated net sales in 2011. Our largest customer accounted for 22.8% and 3.5% of our Front-end and Back-end 2011 net sales, respectively. Our ten largest customers accounted for 27.9% of our consolidated net sales in 2011. Our ten largest customers accounted for 70.4% and 20.2% of our Front-end and Back-end 2011 net sales, respectively. Sales to and the relative importance of these large customers have varied significantly from year to year and will continue to fluctuate in the future. These sales also may fluctuate significantly from quarter to quarter. We may not be able to retain our key customers or they may cancel purchase orders or reschedule or decrease their level of purchases from us,
which would reduce our revenues and negatively affect our financial results, perhaps materially. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results.
We may need additional funds to finance our future growth and ongoing research and development activities. If we are unable to obtain such funds, we may not be able to expand our business as planned.
In the past, we have experienced capital constraints that adversely affected our operations and ability to compete, particularly in our Front-end business. We may require additional capital to finance our future growth and fund our ongoing research and development activities particularly with regard to our Front-end business. We have only limited ability to reallocate funds from our Back-end business to our Front-end business and some limitations on our ability to reallocate funds among our Front-end businesses.
If we raise additional funds through the issuance of equity securities, the percentage ownership of our existing shareholders would be diluted. If we finance our capital requirements with debt, we may incur significant interest costs. Additional financing may not be available to us when needed or, if available, may not be available on terms acceptable to us, particularly in times of global or European financial crisis or uncertainty that may dramatically affect the availability of bank and other sources of debt financing.
If we are unable to raise needed additional funds, we may have to reduce the amount we spend on research and development, slow down our introduction of new products, reduce capital expenditures necessary to support future growth and/or take other measures to reduce expenses which could limit our growth and ability to compete.
Our products (primarily in the Front-end) generally have long sales cycles and implementation periods, which increase our costs of obtaining orders and reduce the predictability of our earnings.
Our products are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. In addition, customers often require a significant number of product presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in the 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. Accordingly, the sales cycles of our products often last for many months or even years, thereby requiring us to invest significant resources in attempting to complete sales.
Long sales cycles also subject us to other risks, including customers budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers purchase decisions. The time required for our customers to incorporate our products into their systems can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our earnings from operations.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights from challenges by third parties; claims or litigation regarding intellectual property rights could require us to incur significant costs.
Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights and confidential information. These agreements and measures may not be sufficient to protect our technology from third party infringement or to protect us from the claims of others. In addition, patents issued to us may be challenged, invalidated or circumvented, rights granted to us under patents may not provide competitive advantages to us, and third parties may assert that our products infringe their patents, copyrights or trade secrets. Third parties could also independently develop similar products or duplicate our products.
Intellectual property laws may not adequately support our proprietary rights or may change in an unfavorable manner. Patent rights may not be granted or construed as we expect, and key patents may expire resulting in technology becoming available that may hurt our competitive position.
In addition, monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology. The laws of some countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the Netherlands and the United States and thus make the possibility of piracy of our technology and products more likely in such countries. If competitors are able to use our technology as their own, our ability to compete effectively could be harmed.
In past years, there has been substantial litigation regarding patent and other intellectual property rights in our semiconductor and related technology industries. In the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others.
Claims that our products infringe the proprietary rights of others would force us to defend ourselves and possibly our customers or suppliers against the alleged infringement. Such claims, if successful, could subject us to significant liability for damages and potentially invalidate our proprietary rights. Regardless of the outcome, patent infringement litigation is time-consuming and expensive to resolve and diverts management time and attention.
Intellectual property litigation could force us to do one or more of the following, any one of which could severely harm our business with adverse financial consequences:
We license the use of some patents from a competitor pursuant to a settlement agreement; if the agreement is terminated, our business could be adversely affected.
In October 1997, we entered into an agreement to settle mutual patent infringement litigation with Applied Materials, which was amended and restated in 1998, pursuant to which Applied Materials agreed to grant us a worldwide, non-exclusive and royalty-bearing license to use all of the litigated patents and certain additional patents that were not part of the litigation. In return we agreed to pay Applied Materials a settlement fee and to grant it a worldwide, non-exclusive and royalty-free license to use a number of our patents including but not limited to those patents which we were enforcing in the litigation. All licenses granted by Applied Materials to us expire at the end of the life of the underlying patents which expire at various times through approximately 2016. Our obligation to pay certain royalties to Applied Materials generally continues until the expiration of the corresponding underlying patent to the extent we practice such 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.
We recently determined that various Applied Materials patents licensed under the settlement agreement and applicable to certain epitaxial equipment had expired. Accordingly, as of the third quarter of 2011, we ceased paying royalties on the sale of such equipment and believe we have overpaid prior royalties. Applied Materials disputes our determination and has stated that we are obligated to pay royalties on the sale of these products through 2013. This dispute is being addressed in accordance with the procedures provided in the 1998 settlement agreement. The amount of unpaid royalties which are being sought by Applied Materials is not material.
Additional litigation with Applied Materials regarding the operation of the settlement agreement or other matters could occur. Litigation with Applied Materials, which has greater financial resources than we do, could negatively impact our earnings and financial position.
Our net earnings could be negatively impacted by currency fluctuations.
Our assets, liabilities and operating expenses and those of our subsidiaries are to a large extent denominated in the currency of the country where each entity is established. Our financial statements, including our Consolidated Financial Statements, are expressed in 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 assets, liabilities and operating expenses are exposed to fluctuations of various foreign currency exchange rates.
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 could increase relative to prices of our competitors, and our products may be less competitive in that country. Also, we cannot be sure that our international customers will continue to be willing to place orders denominated in these currencies. If they do not, our revenue and earnings from operations could be subject to additional foreign exchange rate fluctuations.
Although we monitor our exposure to currency fluctuations, these fluctuations could negatively impact our financial position, net earnings and cash flow.
Substantially all of our equipment orders are subject to operating, performance, safety, economic specifications and other contractual obligations. We occasionally experience unforeseen difficulties in compliance with these criteria, which can result in increased design, installation and other costs and expenses.
Substantially all of our equipment sales are conditioned on our demonstration, and our 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 demonstrating compliance with such terms, which can lead to unanticipated expenses for the performance of the contract or the redesign, modification and testing of the equipment and related software. To the extent this occurs in the future, our cost of goods sold and earnings from operations will be adversely affected. If we are not able to demonstrate compliance with the particular contract or the performance and operating specifications in respect of specific equipment, we may have to pay penalties to the customer, issue credit notes to the customer and/or take other remedial action, including payment of damages or adjusted pricing, any one of which could negatively affect our earnings from operations.
We are subject to various legal proceedings and claims, the outcomes of which are uncertain. If we fail to accurately evaluate the probability of loss or the amount of possible losses, an adverse outcome may materially and adversely affect our financial condition and results of operations.
We are party to various legal proceedings and claims generally incidental to our business including without limitation intellectual property and product liability claims, as disclosed in Note 22 of Notes to Consolidated Financial Statements included elsewhere in this report. For each of these proceedings and claims, our management evaluates, based on the relevant facts and legal principles, the likelihood of an unfavorable outcome and whether the amount of the loss can be reasonably estimated, in connection with our determination of whether or not to record a charge to earnings. Significant subjective judgments are required in these evaluations, including judgments regarding the validity of asserted claims and the likely outcome of legal, arbitration and administrative proceedings. The outcome of these proceedings is subject to a number of factors beyond our control. In addition, estimates of the potential costs associated with legal, arbitration and administrative proceedings frequently cannot be subjected to any sensitivity analysis, as damage estimates or settlement offers by claimants may bear little or no relation to the eventual outcome. Finally, in any particular proceeding, even where we believe that we would ultimately prevail, we may agree to settle or to terminate a claim or proceeding where we believe that doing so, when taken together with other relevant commercial considerations, is more cost-effective than engaging in an expensive and protracted contest. If we do not accurately assess the probability of an unfavorable outcome or the range of possible loss, an unfavorable outcome could have a material adverse impact on our financial condition and results of operations.
The Dutch Enterprise Court reviewed and dismissed the inquiry in relation to ASMI and Stichting Continuïteit ASM International.
During 2008, two ASMI shareholders requested the Dutch Enterprise Court to investigate certain corporate governance matters in relation to the Company and Stichting Continuïteit ASM International. In August 2009, the Enterprise Court ordered an inquiry in respect of the affairs of the Company. In July 2010, the Dutch Supreme Court annulled the order of the Enterprise Court and remanded the decision to the Enterprise Court to consider certain observations of the Supreme Court. The Enterprise Court dismissed the inquiry in June 2011 and ordered the matter concluded. The plaintiffs appealed the dismissal ruling to the Dutch Supreme Court. The Dutch Supreme Court has not yet rendered a new decision.
If our products are found to be defective, we may be required to recall and/or replace them, which could be costly and result in a material adverse effect on our business, financial position and net earnings.
One or more of our products may be found to be defective after we have already shipped the products in volume, requiring a product replacement or recall. We may also be subject to product returns and product
liability claims that could impose substantial costs and have a material and adverse effect on our business, financial position and net earnings.
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 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 in our results. 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, 2011, we owned 52.17% of ASM Pacific Technology through our wholly-owned subsidiary, ASM Pacific Holding B.V. and the remaining 47.83% was owned by the public. 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.
The ASM Pacific Technology shares we own are partly pledged as security for our revolving credit facility. If such shares were sold upon the exercise of remedies following an uncured default under this credit facility, we may no longer be able to consolidate the result of operations of ASM Pacific Technology.
ASM Pacific Technology has an employee share incentive program pursuant to which it can issue up to an aggregate of 7.5% of its total issued shares subject to certain limitations. When ASM Pacific Technology issues shares pursuant to this program, our ownership interest is diluted. Our interest could further be diluted if ASM Pacific Technology issues equity for other purposes. 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 makes such decision subject to our approval. We may need to purchase shares of ASM Pacific Technology or take other measures to maintain our majority interest in the future. There is no assurance that we will have sufficient financial resources to do so 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.
Certain directors of ASM Pacific Technology are directors 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 21.4 million, 65.6 million, and 86.9 in 2009, 2010, and 2011, 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 years 2007, 2008 and 2009 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, pay dividends on our common shares, or purchase shares of ASM Pacific Technology. At our 2010 Annual General Meeting, we announced that we would continue this commitment for at least another two years through 2011. 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 affiliates of ASM International who 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 shareholder approval if we have an interest in such transaction.
We may not be able to recruit or retain qualified personnel or integrate qualified personnel into our organization. Consequently, we could experience reduced sales, delayed product development and diversion of management resources.
Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel particularly during sustained economic upturns in the industry. Availability of qualified technical personnel varies from country to country, and may affect the operations of our subsidiaries in some parts of the world. Our operations could be negatively affected if we lose key executives or employees or are unable to attract and retain skilled executives and employees as needed. In particular, if our growth strategies are successful, we may not have sufficient personnel to manage that growth and may not be able to attract the personnel needed. We have agreements with some, but not all, key employees restricting their ability to compete with us after their employment terminates. We do not maintain insurance to protect against the loss of key executives or employees. Our future growth and operating results will depend on:
We have in the past experienced intense competition for skilled personnel during market expansions and believe competition will be intense if the semiconductor market experiences a sustained expansion. Consequently, we generally attempt to minimize reductions in skilled personnel in reaction to industry downturns, which reduces our ability to lower costs by payroll reduction.
Because the costs to semiconductor manufacturers of switching from one semiconductor equipment supplier to another can be high, it may be more difficult to sell our products to customers having a competing installed base, which could limit our growth in sales and market share.
We believe that once a semiconductor manufacturer has selected a 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 reliance on a limited number of suppliers and a single manufacturing facility in our Front-end could result in disruption of our operations.
We outsource a portion of the manufacturing of our Front-end business to a limited number of suppliers. If our suppliers were unable or unwilling to deliver products in a timely manner to us in the quantities we require for any reason, including without limitation, capital constraints, natural disaster, labor unrest, capacity constraints, supply chain management problems or contractual disputes, we may be unable to fill customer orders on a timely basis, which could negatively affect our customer relationships and financial performance. Many of our suppliers face economic challenges in a depressed or difficult global economy, which increases our risk of disruption from a suppliers failure to perform its obligations to us in a timely manner.
We have shifted an increasing portion of our Front-end manufacturing to our Front-end Manufacturing Singapore (FEMS) facility, and expect to increase the concentration of Front-end manufacturing there in the
future. If this facility experiences a manufacturing disruption for any reason, including without limitation, natural disaster, labor unrest, capacity constraints, supply chain management problems or contractual disputes, our ability to timely meet our customers needs may be impaired, which would negatively affect our customer relationships and financial performance.
We operate worldwide; economic, political, military or other events in a country where we make significant sales or have significant operations could interfere with our success or operations there and harm our business.
We market and sell our products and services throughout the world. A substantial portion of our manufacturing employees and operations are in the Peoples Republic of China and the success of our business depends substantially on those operations. In addition, we have operating 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:
These factors could increase our costs of doing business in a particular region or result in delays or cancellations of purchase orders or disrupt our supply chain, any of which could materially and adversely impact our business and operating results.
Environmental laws and regulations may expose us to liability and increase our costs.
Our operations are subject to many environmental laws and regulations wherever we operate governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. To the extent such regulations or directives apply to our business throughout the world, these measures could adversely affect our manufacturing costs or product sales by forcing us or our suppliers to change production processes or use more costly or scarce materials. As with other companies engaged in similar activities, we face inherent risks of environmental liability in our current and historical manufacturing R&D activities. Accordingly, costs associated with such future environmental compliance or remediation obligations could adversely affect our business.
Any acquisitions or investments we may make could disrupt our business and harm our financial condition.
We may consider from time to time additional investments in complementary businesses, products or technologies, such as the recent acquisition by ASM Pacific Technology of the SEAS Business in early 2011. 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:
RISKS RELATED TO AN INVESTMENT IN OUR SHARES
Lehman Bros. liquidation administrators have notified us that our common shares purchased by Lehman and held by Lehman in custody accounts on our behalf may have a shortfall.
During 2008, we engaged Lehman to repurchase ordinary ASMI shares on the Euronext and Nasdaq markets. As of September 15, 2008, Lehman had purchased and held 2,552,071 shares for our account. Lehman went into bankruptcy administration on September 15, 2008, and we subsequently filed a submission giving notice of our proprietary interest in the shares believed to be held in custody by Lehman. At our May 2009 AGM, our shareholders resolved to cancel all of these treasury shares and we so notified Lehman of the cancellation. However we were notified in September 2010 by the Lehman administrators that there is a possible shortfall in the number of shares held by Lehman as reflected in the statements of our accounts with Lehman. To the extent the number of treasury shares held by Lehman as of the date of their cancellation is lower than 2,552,071 only such lower number of shares have been cancelled and the shortfall of shares may still be considered outstanding. The Lehman administrators report that some time prior to its bankruptcy, Lehman put into a segregated client omnibus account a cash sum on our behalf of $6,758,796, which the administrators apparently regard as money to which we have a proprietary right in lieu of some or all of the missing shares. We are uncertain at this time as to the accuracy of the shortfall of shares, the sufficiency of this cash sum to cover the value of any such discrepancy, and our entitlement to all or a portion of such sum when distributions are determined and made since there is likely to also be a shortfall in Lehman assets subject to proprietary rights. Given the magnitude of the overall Lehman administration, the timeline for clarity and resolution of this item is expected to be considerable, perhaps up to several years.
Our founder who is also Chairman of the Board of ASM Pacific Technology controls approximately 20.48% of the voting power which gives him significant influence over matters voted on by our shareholders, including the election of members of our Supervisory Board and Management Board and makes it substantially more difficult for a shareholder group to remove or elect such members without his support.
Our founder, Arthur H. del Prado, controlled approximately 20.48% of the voting power of our outstanding common shares as of December 31, 2011. Accordingly, he has significant influence on the outcome of matters submitted to a shareholder vote, such as the election of the members of our Supervisory Board and Management Board. Persons nominated by the Supervisory Board for appointment by the shareholders to the Supervisory Board or Management Board at a general meeting of shareholders will be elected if they receive a majority of the votes cast at the meeting. Nominees to the Supervisory Board or Management Board who are not proposed by the Supervisory Board are appointed if they receive the affirmative vote of a majority of the votes cast at the meeting, provided such affirmative votes represent at least one third of our issued capital. Members of the Supervisory and Management Boards may be removed only by the affirmative vote of a majority of the votes cast at a meeting, and, unless such removal is recommended by the Supervisory Board, the affirmative votes must represent at least one third of our issued capital. This makes it difficult for a group of shareholders to remove or elect members of our Supervisory Board or Management Board without the support of our founder.
Our anti-takeover provisions may prevent a beneficial change of control.
The Company has granted to Stichting Continuïteit ASM International (Stichting), a non-membership organization with a board composed of three members independent of ASMI, the right to acquire and vote our preferred shares. The objective of Stichting is to serve the interests of the Company. To that objective Stichting may, among other things, acquire, own and vote our preferred shares in order to maintain our independence and/or continuity and/or identity. This may prevent a change of control from occurring that shareholders may otherwise support. On May 14, 2008, Stichting exercised this right in response to a perceived threat to our continuity and acquired shares of our preferred stock representing 29.9% of the total voting power of our outstanding capital shares at that time. These shares were retired in 2009 and a new right was issued to Stichting to acquire and vote preferred shares in certain situations in the future. For additional information regarding Stichting, see Item 7, Major Shareholders and Related Party Transactions.
The voting power of Stichting makes it more difficult for a shareholder or a group of shareholders to cause us to enter into a change of control transaction not supported by Stichting, even if such transaction offers our shareholders an opportunity to sell their shares at a premium over the market price.
We must offer a possible change of control transaction to Applied Materials first.
Pursuant to our 1997 settlement agreement with Applied Materials, as amended and restated in 1998, if we desire to effect a change of control transaction, as defined in the settlement agreement, 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.
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, 2011 and December 31, 2011, the sale price of our common shares, as reported on the NASDAQ Global Select Market, ranged from a low of US$ 22.23 to a high of US$ 44.60. 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.
Our quarterly revenues and earnings from operations have varied significantly in the past and may vary in the future due to a number of factors, including, without limitation:
In addition, in our Front-end segment we derive a substantial portion of our net sales from products that have a high average selling price and significant lead times between the initial order and delivery of the product. The timing and recognition of net sales from customer orders can cause significant fluctuations in our earnings from operations from quarter to quarter. Gross margins realized on product sales vary depending upon a variety of factors, including the mix of products sold during a particular period, negotiated selling prices, the timing of new product introductions and 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 earnings from operations for that period. Further, our need to continue expenditures for research and development and engineering make it difficult for us to reduce expenses in a particular quarter even if our sales goals for that quarter are not met. Our inability to adjust spending quickly enough to compensate for any sales shortfall would magnify the adverse impact of a sales shortfall on our earnings from operations. In addition, announcements by us or our competitors of new products and technologies could cause customers to defer purchases of our existing systems, which could negatively impact our financial position and net earnings.
As a result of these factors, our revenues or earnings from operations may vary significantly from quarter to quarter. Any shortfall in revenues or earnings from operations from levels expected by securities analysts and investors could cause a decrease in the trading price of our common shares.
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 Versterkerstraat 8, 1322 AP, Almere, the Netherlands. Our telephone number at that location is +31 8810 08810. 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.
We are an equipment supplier mainly to the semiconductor, LED and electronics manufacturing industry. We design, manufacture and sell equipment and services to our customers for the production of semiconductor devices, or integrated circuits, for the production of LEDs, and for electronics manufacturing in general. 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. We also sell lead frames for semiconductor assembly. In addition, ASM AS, the newly acquired surface-mount technology (SMT) business unit is offering SMT placement tools for the global electronics manufacturing industries.
Front-end production systems perform processes on round slices of silicon, called wafers, which are typically 200mm or 300mm in diameter. During these processes, thin films, or layers, of various materials are grown or deposited onto the wafer. These films are electrically conductive, electrically insulating, or semiconducting. By depositing multiple layers of films, multi-level, integrated electrical circuits are created. Such circuits are referred to as dies or chips. There are many dies on each wafer. After testing the individual circuits for correct performance, the dies on the wafer are separated. Back-end production systems then assemble and connect one or more known good dies in 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 Front-End Manufacturing Singapore Pte Ltd. (FEMS), located in Singapore, 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 Genitech Korea Ltd. (ASM Genitech) located in Korea.
Our Back-end and SMT equipment 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, Germany and Malaysia. At December 31, 2011, we owned 52.17% of the outstanding equity of ASM Pacific Technology.
The location of our Front-end facilities allows us to interact closely with customers in the worlds major Front-end geographic market segments: Europe, North America, and Asia. The principal market we address in the Front-end is a portion of the deposition market segment. Our Front-end segment accounted for 24.0% of our net sales in 2010 and 28% of our net sales in 2011.
Our Back-end and SMT equipment facilities are in close proximity to where most customer assembly and packaging operations are located. The principal markets we address in Back-end are portions of the Bonding Equipment, Packaging Equipment and Integrated Assembly Systems segments, which segments include assembly and packaging equipment for LEDs. For the SMT equipment business, we mainly address the placement equipment market. We also manufacture and sell lead frames which are substrates connecting the various circuits on a chip to the devices in which the chips are installed. Our Back-end segment accounted for 76.0% of our net sales in 2010 and 72% of our net sales in 2011.
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. 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 32nm (1 nm is equal to one billionth of a meter) long are manufactured in high volume, and several billion transistors can be manufactured on a single die with an area of a few square centimeters.
A second development that has decreased the cost per device is the increased size of the wafer, so that more devices can be produced within one production cycle. Today, almost all 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. In several industry consortia a transition to 450mm wafers is being discussed. The yield, or the fraction of dies that operates according to specifications, is one of the key variables that influences the cost at which integrated circuits can be manufactured. Large initial investments are needed to build an automated production line in an ultra-clean environment to achieve such high yield. The capital equipment in the production line is an important determinant for the yield of the factory, and the speed with which the yield can be optimized for new device generations.
Another emerging trend is that towards vertical or 3D transistors. This trend also helps to keep the industry on track with Moores law (more Moore) because more functions can be stacked vertically on a wafer or chip than in two dimensions. Recent announcements have introduced FinFETs and several 3D memory transistor architectures. Also on die level the trend is towards 3D by stacking several chips in one package. These chips can come from different supply chains, each optimized for its own performance and cost, enabling the manufacture of heterogeneous devices with even more integrated capability. This latter trend is sometimes referred to as more than Moore.
The trends outlined above are the main 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 equipment industry. In this highly cyclical industry, the Front-end and Back-end market segments have historically reacted differently to market forces.
The semiconductor industry had a relatively low growth year in 2011, driven by a US$ 1.7 trillion global electronics industry (VLSI Research Chip Insider February 13, 2012), that required approximately $252 billion (ibid.) in semiconductors. The semiconductor industry in turn, supported the approximately $51 billion (ibid.) semiconductor capital equipment industry, which supplies the needed production systems and services.
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. 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 amongst others the segments in which we participate: Front-end and Back-end.
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) processing). We develop and sell technology, develop, manufacture and sell 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.
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 electrically connect the large amount of transistors and components, and to build additional passive components such as capacitors, inductors and resistors. Patterning of deposited layers with lithography and etching (described below) creates the transistors, passive 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 deposition, and patterning processes are performed on the same wafer.
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. We are 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 lead frame, 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.
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. The individual dies are then attached to a lead frame or other substrate by a bonding process. The lead frame or substrate provides the interface between the electrical circuit on the die and the system in which the die is incorporated. Lead frames are produced by stamping or etching out a pattern on a strip of copper or iron-nickel alloy. High precision lead frames are produced by an etching process, also to achieve a shorter time to market. Stamped frames are typically used for very high volumes on mature designs. The electrical connection of the electrical circuit to the lead frame is made by wire bonding. As few as one or as many as a thousand or more separate wires are connected between the die and the lead frame.
After this assembly and wire bonding interconnection process, the dies are encapsulated to protect them from environmental influences. Singulated dies 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. 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.
LED Manufacturing Process
Light Emitting Diodes (LEDs) are manufactured on sapphire or silicon carbide substrates of typically 2 to 4 in diameter. The LED is formed by depositing thin films on the substrate surface. Following this process electrical contacts are provided by a mask aligner. Individual dies are singulated by a laser scriber and a dicing machine. The individual LED dies are then tested and binned in different performance categories. Subsequently LED dies are attached to the package substrates. The electrodes of the LED die are connected to the leads of the package substrate with fine gold wire by a wire bonder.
The SMT Placement Process (Electronics Assembly)
Modern electronic modules are produced by placing various components and connectors on printed circuit boards. To ensure the precision and efficiency required to handle ever smaller components at ever lower cost, the placement process takes place on highly automated surface-mount technology (SMT) lines.
These SMT lines and the placement process in general can be divided into three main segments:
Modern SMT lines contain additional systems and components such as quality control systems (e.g., automated optical inspection or AOI systems) or special process control systems (e.g., barcode readers).
Important Technology Trends for our Business
Technology Trends in Front-end and Back-end
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, our customers manufacture semiconductor devices having a half-pitch as small as 45 to 22 nanometers (one nanometer is one billionth of a meter). Our customers are qualifying and testing new critical processes to generate devices with line widths at or below 28 to 15nm, and vertical 3D transistors. Simultaneously, in our customers laboratories and several collaborative research environments advanced 11nm and 8nm design rule devices are being developed.
Today, most of the newly installed semiconductor device fabrication capacity employs 300mm wafers. A transition towards 450mm wafers is now being planned. Early research in consortia is already taking place, while the first 450mm factories are not expected before 2015.
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 for the die.
Technology Trends in Electronics Assembly
Our Response to Technology Trends
We develop and manufacture 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.
Today, our leading-edge high volume production systems support the manufacturing of semiconductor devices having a half-pitch as small as 45 to 22 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 28 to 15nm. Simultaneously, we are developing new 15 to 11nm 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. Initial developments of 450mm equipment have started in parallel.
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 improve the performance and 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. Whereas in the recent past much focus has been on the development of the high-k dielectric, today as much focus is on new technologies and materials for the metal electrode and the gate sidewall passivation. Another example of new materials in the FEOL is our silicon-germanium (SiGe) and silicon-carbon (SiC) and silicon-carbon-phosphorous (SiCP) epitaxial materials that can increase the switching speed of the transistors and the circuit in which they are embedded by so-called strain engineering. This can be done without negatively affecting the power these transistors consume.
We expect that the creation of 3D vertical transistors will increase the demand for processes with better coverage of 3D structures. In response to this trend, we have developed and are still developing a variety of Atomic Layer Deposition (ALD) and epitaxy processes. ALD is an advanced technology that deposits atomic layers one at a time on wafers. This process is used to create ultra-thin films of exceptional quality and flatness. Plasma is sometimes used to enhance the process further (Plasma Enhanced ALD, or PEALD).
In the BEOL or interconnect process, a continued demand to improve the speed at which signals travel through thin copper wires has led 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. We have been one of the leaders in successfully introducing these low-k materials in the market. We are continuing to develop improvements to this low-k technology to enable faster interconnect circuits.
We have also developed and sold new processes and wafer processing equipment to enable the creation of narrow lines having dimensions beyond the resolution of common lithography, and with low line width variability. For that purpose we have developed low temperature plasma enhanced ALD processes that are compatible with the photoresist processes that are common to lithography tools.
In addition to addressing the technology needs of our customers, the relentless drive of the industry to reduce cost corresponds to significant spending on development programs that further increase throughput, equipment reliability, and yield in our customers line, and further lower the cost of the wafer processing systems. In order to enable further efficiencies in our manufacturing process, we have improved, and will continue to improve the level of standardization in our equipment portfolio by migrating to common platforms, sub-assemblies and components. This requires a significant engineering effort.
For our Back-end customers, lead frame 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 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 30 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 and looping profiles 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.
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 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, play a major role in the handheld appliance market. 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 newly developed ASM Die Bonder AD8312 offers a wide range of benefits with the sole target of producing highest speed and quality at lowest cost per die placement. Special handling and operating aspects of stacked and thin die are incorporated in the machine concept. The extremely fast vision system and the ultra-light pick and place head with innovative linear motor technology offer a significant increase in performance, product quality and yield.
In Electronics Assembly, in close coordination with customers and other partners, our SMT placement machines, under the brand name SIPLACE, are developed and manufactured to process a broad spectrum of components with high speed, precision and reliability. Our modular machine designs allow customers to flexibly adapt their SMT lines to shorter lead times, fluctuating workloads, frequent product changes and smaller lot sizes.
With their digital vision systems, intelligent SIPLACE X-feeders, head models, conveyor systems and linear drives, all current SIPLACE platforms use a shared pool of basic hardware modules to simplify the production and maintenance of the entire portfolio.
To put the performance and flexibility of its machines to the best possible use, ASM Assembly Systems has developed the extensive SIPLACE software suite, which ranges from production scheduling to line and process control to monitoring, setup verification and traceability. In addition, the SIPLACE FACTS materials management system and the SIPLACE LES line execution system for setup-optimized production synchronization provide customers with powerful software solutions.
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 solution for which the products from that platform are used.
Description of our Front-end Segments Product Platforms
The Advance 400 is our 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 for 300mm wafers. The A412 systems feature two reactors above a rotating carousel, a dual-boat concept for high productivity, and a wide range of process applications with variable load sizes from 25 wafers for shortest cycle time requirements, up to 150 wafers for lowest cost requirements in a single run. In this series, we also offer the A4ALD, for atomic layer deposition of dielectrics and metals.
The Eagle is our single-wafer processing product platform for PECVD applications. While the Eagle 10 is a system for 150 and 200mm wafers, the Eagle 12 and Dragon systems are for 300mm wafers. The Eagle 10 and Dragon have two PECVD reactors, while the Eagle 12 has three PECVD reactors. Different wafers are processed in parallel in the reactors to enhance the throughput. The processes available on the Eagle product platform include insulators (such as silicon oxide, silicon nitride, silicon oxi-nitride), Aurora low-k dielectrics for interconnect applications, as well as hardmask and antireflection layers that aid in the lithography of very fine features.
The Eagle XP is our high productivity extension to the Eagle product platform, for 300mm. The Eagle XP has four PECVD reactors. Substantially all processes on the Eagle 12 and Dragon are available on the Eagle XP.
The XP is being transitioned from a dedicated platform for PECVD to a common high volume platform for all 300mm single wafer processing in our addressed markets. The XP platform will also enable integration of sequential process steps on one platform. The XP is now available with PECVD, PEALD, Pulsar and EmerALD ALD modules. In addition, the functionality of the Epsilon is also currently being merged with the XP platform.
The XP common platform will benefit our customers through reduced operating costs since multiple ASM products now will use many of the same parts and consumables and a common control architecture improves ease of use. The XP common platform enables us to improve the coherency in our product portfolio.
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, silicon germanium (SiGe), silicon-carbon (SiC) used in CMOS devices and silicon germanium carbon (SiGeC) used in bipolar devices. The Epsilon 2000 is a single wafer, single reactor system for 150mm and 200mm wafers. The Epsilon 3200 is a single wafer, single reactor system for 300mm wafers.
The Polygon is a single wafer atomic layer deposition platform. It features a six-sided central vacuum handler, capable of hosting up to four reactors. The Polygon 8200 is used for 150 and 200mm wafers, and for magnetic head substrates. The Polygon 8300 is used for 300mm wafers. One or more Pulsar modules with ALD technology can be integrated onto the platform. Products built on this product platform are currently being used in, among others, ALD high-k gate dielectrics for high performance logic, metal-insulator-metal capacitors for system on a chip applications, and magnetic head gap fill.
Description of our Front-end Segments Process Technology Platforms
Depending on application, a process technology can be used in more than one product platform. 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, for example, is enabled on both our single wafer and batch product platforms. This gives us the principal ability to provide a single wafer tool for a certain application early in the lifecycle,
when short development cycle times are needed, and later in the lifecycle switch to a batch tool for efficiencies in high volume production, using the same chemistry and maintaining basic materials properties.
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. The use of plasma enables us to deposit high quality films at very low temperatures. Collectively ASMI refers to these two technologies as its ALCVD process technology platform. ALCVD is a very versatile technology platform that can be used to deposit high-k insulating materials, conductors, silicon oxide and silicon nitride. Selected ALCVD processes are released on our Polygon, Eagle, XP, and Advance 400 product platforms. We expect that the trends of continued scaling, and evolution towards three dimensional device structures plays into the strength of our ALCVD position.
LPCVD: novel chemistries
On our LPCVD 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. We offer processes on our Epsilon product platform for selective and non-selective epitaxy, single wafer LPCVD, and on our Advance 400 product platform for thin, smooth polycrystalline Si. Our strategy for the LPCVD 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, well in advance of the development of our customers needs.
Back-end Segment Products
The following table lists ASM Pacific Technologies (ASMPT) principal products for Back-end market and the main technologies that they enable.
Die and Flip Chip Bonding, and Die Sorting Products
ASMPT manufactures several die bonding models as well as die sorting equipment to address various markets including semiconductors and light emitting diodes (LED). The latest epoxy die bonder platform for 300mm wafers continues the path undertaken by ASMPT to provide customers with high quality cost-efficient systems. 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 favorable 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 25 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.
The LED business requires both high speed and high precision manipulation of very small devices. Many of these devices are assembled in arrays with a die attach process. In these arrays brightness and color must match. We have developed several platforms for sorting these devices and segregating them according to the customers requirements. The high power LED market for general purpose illumination 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 Eagle Xtreme gold/Cu wire bonder is the successor to our award-winning Eagle60AP generation bonder. The Eagle Xtreme and iHawk Xtreme gold wire bonders continue to extend the productivity of the process as well as exceed the industry roadmaps for required bond pad pitch. Additional features on the Eagle Xtreme allow it to deal with the complex wire geometries and extreme height variations that are prevalent in the stacked die packages being built today at higher productivity rates. The productivity envelope was enlarged with the introduction of our latest dual head platform, the TwinEagle Xtreme and Harrier Xtreme. This tool provides all the capabilities of our standard Xtreme but with higher output per floor space required. 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 take advantage of 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 molding system. With this platform, the emphasis is on quick material and package conversions for low volume, high mix situations. As with all ASMPT products, it can be configured for stand-alone or integrated in the IDEALine (see below) with many of our other Back-end products.
Post Encapsulation Products
Ball placement systems have seen 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 be the exclusive supplier of ball placement systems to the major provider of such components. As the number of package variants continues to increase along with the lead frame 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, package singulation, test handling, inspection, laser marking, packing, and finishing.
The following table lists the ASM Pacific Technologies (ASMPT) principal product platforms for the SMT market and the main applications/industries they are targeted at.
Electronics Assembly Products (Hardware)
Within the platforms, machines with different gantry and head configurations are available (e.g., SIPLACE DX1, SIPLACE DX2, SIPLACE DX4, or SIPLACE SX1, SIPLACE SX2, SIPLACE SX 4 etc.)
Electronics Assembly Products (Software)
The SIPLACE is our powerful high-end SMT platform able to handle 01005 components, which is the smallest component size being processed today, with no slowdown in high-volume environments. The SIPLACE X-Series is an attractive solution for large EMS companies, mobile phone production and the growing LED placement market.
The SIPLACE CA is the first placement platform that can supply components directly from the wafer as well as with classic SMT feeder technologies. For the electronics manufacturer, this capability means increased flexibility and investment protection.
In 2010 the SIPLACE SX placement platform was launched, whose special interchangeable gantries, intelligent feeders and innovative setup concepts make it an ideal solution for high-mix environments. The key feature of this highly innovative solution is the Capacity-on-Demand function. The newly developed SIPLACE MultiStar placement head switches automatically between Collect & Place mode, Pick & Place mode and a special mixed mode, which is why it can be used for the fast placement of standard components as well as for the end-of-line placement of large components. Thanks to these properties, even high-mix lines can operate well balanced at all times for improved total line productivity.
With the digital SIPLACE D-Series, which combines high-tech innovations with proven technologies, a favorable price-performance ratio and cost of ownership, SIPLACE offers a platform for highly cost-sensitive users in the standard and high-performance segment who require lots of flexibility.
In 2011, ASM Assembly Systems has introduced the SIPLACE DX, whose features and price-performance ratio were optimized especially for high-volume production environments in Asia and other parts of the world.
Intellectual Property and Trademarks
Because of the rapid technological advances in the microelectronics field, our products must continually change and improve. Accordingly, we believe that our success will depend upon the technical competence and creative ability of our personnel as well as 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 products and are registered in the principal countries where semiconductor devices or equipment are manufactured or sold. For instance, we have hundreds of issued patents that relate to the ALCVD process technology platform. As another example, we have about 10 issued patents related to Silcore and other specialized LPCVD process chemistries.
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 at the end of the indicated year. As part of a program to reduce cost, the patent portfolio was critically reviewed against the current business strategy in 2009. Cost control measures and stricter patent filing prioritization in 2010 resulted in a lower initial patent filing rate in 2010 compared to 2009. Increased R&D activity in 2011 resulted in a higher filing rate.
We have entered into worldwide, non-exclusive, non-transferable and non-assignable licenses with Applied Materials for patents related to epitaxy and certain chemicals used to deposit insulating layers for PECVD. We pay Applied Materials a royalty on sales of equipment that use the patented technologies. A number of the licensed patents have already expired. The remaining royalty bearing patents that we use expire at various times through 2013. Upon expiration of the patents, the technology may be used royalty-free by the public, including us. For further information, see Item 3.D, Risk factorsWe 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.
We have licensed our intellectual property in our ALCVD process technology platform through non-exclusive, restricted field of use license agreements to a limited number of companies. In addition to generating revenue, we seek to accelerate market acceptance of our ALCVD technology through our licensing.
We have licensed our RTP portfolio of 58 issued patents and 20 pending patents to Levitech BV.
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 importance of patents in the Back-end market segment to increase over the following years. Wherever deemed necessary, ASM Pacific Technology will file for protection of its innovations.
ASM, the ASM International logo, Advance, Aurora, Dragon, Eagle, EmerALD, Epsilon, Polygon, Pulsar and Silcore are our registered trademarks. A400, A412, ALCVD, Atomic Layer CVD, Intrepid, NCP, PEALD, are our trademarks. The Process of Innovation, The Switch Is On and Drive Innovation. Deliver Excellence. are our service marks.
AB500B, DreamPAK, DRYLUB, EQUIPMANAGER, EQUIPMGR, FAB Farming IDEALine, IDEALsystem, IDEALab, IDEALNet, PGS, SMARTWALK, SOFTEC, SmartSurf, and Ultravac are registered trademarks of ASM Pacific Technology Ltd. Cheetah, Eagle60, Harrier, Hummingbird, IDEALCompress,
IDEALmold, OSPREYLine, TwinEagle, SolarCSI, SolarWIS, SolarMTS and SolarLAS are trademarks of ASM Pacific Technology.
SIPLACE is a trademark licensed from Siemens AG by ASM Pacific Technology in respect of its newly-acquired electronics assembly systems business.
There has been substantial litigation regarding patent and other intellectual property rights in semiconductor-related industries. Although we have been involved in significant litigation in the past, we are at present 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 earnings from operations. 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 earnings from operations.
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, chemical engineering, electrical engineering, precision mechanical engineering, software engineering, and system engineering.
Our net research and development expenses were 62.8 million, 78.8 million and 129.4 million in 2009, 2010 and 2011, 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. In 2010, we formed a globally Platform Engineering group that addresses the needs for common platforms for the various products in our Front-end Segment. Selected resources in Belgium, Almere and Helsinki have been grouped under corporate R&D, addressing the common needs for advanced materials research and process integration work for the 15nm, 11nm and smaller nodes.
As part of our research and development activities, we are engaged in various formal and informal arrangements with customers and institutes. At December 31, 2011, our Front-end segment was engaged in several formal joint development programs with customers for 300mm applications of our 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 deposition processes, in cooperation with other processes, either in bilateral or in publicly funded projects. In addition to cooperating with customers and other capital equipment suppliers, we also enter into research projects with technical universities and institutes (including TNO; CNT; IMEC).
We participate also in publicly funded programs, mainly in Europe, to develop the production technology for semiconductor devices with line widths of 22, 15 and 11nm and below and in More-than-Moore technologies. Among our current cooperative efforts are projects awarded under the Information Society Technologies (IST) seventh framework program. We are also a partner in several cluster development programs in the Eureka initiative by MEDEA+ (Micro Electronics Development for European Applications) and its successor CATRENE (Cluster for Application and Technology Research in Europe on Nano-Electronics.
In 2011 we renewed our strategic R&D partnership with the Interuniversity MicroElectronics Center (IMEC) in Leuven, Belgium. Our Epsilon, A412, Pulsar, EmerALD, Dragon and Eagle based products are involved in this partnership. This gives us the opportunity to investigate, both jointly and independently, the integration of individual process steps in process modules and electrically active devices. We have been partnering with IMEC since 1990.
In December 2003, we commenced a five-year partnership with University of Helsinki that aims at further development of atomic layer deposition processes and chemistries. This partnership was extended for a second quinquennial in December 2008.
Manufacturing and Suppliers
Our manufacturing operations consist of the fabrication and assembly of various critical components, product assembly, quality control and testing.
In 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. In 2009 we started the transition of manufacturing of ASM products to be final assembled in Singapore, i.e. including final assembly, test and shipment of the system to the customer from the FEMS facility. We closed down our manufacturing operations in Almere, the Netherlands, at the end of 2009, and we closed our manufacturing facilities in Phoenix (US) and in Nagaoka (Japan) in 2010.
With this transition we have also implemented a global organization for our procurement activities. Further, we plan to move to a global operational excellence system, instead of the historical regionally oriented quality systems.
Our Back-end operations are vertically integrated. 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 Peoples 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. 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 customers 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.
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 customers 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 2 to 4 months for sales of Back-end equipment. Purchase decisions are generally made at a high level within a customers organization, and the sales process involves broad participation across our organization, from senior executive management to the engineers who designed the product.
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.
To execute the sales and service functions in the Front-end, we have established a global sales force, in which all regional units report directly into the global sales organization. We have sales offices located in Europe (in the Netherlands, France, Ireland, Germany and Italy), Israel, Taiwan, Korea, the Peoples Republic of China, Singapore, the United States of America and Japan. At the end of 2011, 158 employees were employed in sales and marketing of Front-end products, representing 10 % of total Front-end segment staff.
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 2011, 516 employees were employed in sales and marketing of Back-end products, representing 4% of total Back-end segment staff.
We sell our products predominantly to manufacturers of semiconductor devices, manufacturers of silicon wafers and assembly companies. 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 9.1%, 5.2% and 6.4% of our net sales in 2009, 2010 and 2011, respectively. For our Front-end segment this was 30.6%, 21.6% and 22.8% of our net sales in 2009, 2010 and 2011, respectively. For our Back-end segment this was 6.0%, 4.3% and 3.5% of our net sales in 2009, 2010 and 2011, respectively. Our ten largest customers accounted for approximately 32.9%, 27.9% and 27.9% of our net sales 2009, 2010 and 2011, respectively. For our Front-end segment this was 61.4%, 61.2% and 70.4% of our net sales in 2009, 2010 and 2011, respectively. For our Back-end segment this was 32.7%, 27.3% and 20.2% of our net sales 2009, 2010 and 2011, 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 customers 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, 512 employees were employed in customer service at the end of 2011 representing 31% of total Front-end segment staff. For our Back-end operations 1,082 employees were employed in customer service at the end of 2011, representing 7% of total Back-end segment.
The semiconductor equipment industry is intensely competitive, and is fragmented among companies of varying size, each with a limited number of products serving particular segments 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 evaluate manufacturing equipment based on 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, Japan and Korea. 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 (now LAM Research Corporation), Tokyo Electron, Kokusai, and Jusung. Our primary competitors in the Back-end market include Kulicke & Soffa, ESEC, Shinkawa, Apic Yamada, BE Semiconductor Industries, Towa, Shinko and Mitsui. The primary competitors of SIPLACE in the placement market are Fuji, Panasonic, Juki, and Yamaha (Japan); Assembleon (Europe); and Universal (U.S.).
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 February 29, 2012:
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 Peoples Republic of China, Singapore and Malaysia. Our principal facilities are summarized below:
Our principal facilities in the Netherlands, the United States, Korea, Finland, Hong Kong, the Peoples Republic of China, Singapore and Malaysia are subject to leases expiring at various times from 2011 to 2024. 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.
Back-ends new manufacturing plant in Huizhou, China is now fully-operational, and is progressing into its second phase of expansion. A new casting center and a fabrication center will be ready by the first half of 2012. It will allow Back-end to further enhance its production capacity to cater for the growth of both the assembly and packaging equipment and SMT equipment businesses, and to facilitate new investments in casting technology. We intend to further supplement our etched lead frame capacity by setting up new etching facilities in Fuyong, China to serve the growing China market.
Item 5. Operating and Financial Review and Prospects
Managements Discussion and Analysis of Financial Condition and Results of Operations
We are an equipment supplier mainly to the semiconductor, LED and electronics manufacturing industry . We design, manufacture and services to our customers for the production of semiconductor devices, or integrated circuits, for the production of LEDs and for electronics manufacturing in general. 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 wafer
processing (Front-end) and assembly and packaging (Back-end). 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 28% of our net sales in 2011, through our principal facilities in the Netherlands, the United States, Japan and Singapore. We conduct our Back-end business, which accounted for 72% of our net sales in 2011, through our principal facilities in Hong Kong, the Peoples Republic of China, Singapore, Malaysia and Germany. Our Back-end operations are conducted through our 52.17% majority-owned subsidiary, ASM Pacific Technology.
We sell our products to the semiconductor manufacturing industry and the assembly (pick and placement) industry, which is subject to sudden, extreme, cyclical variations in product supply and demand.
After a very strong year 2010 for the industry as a whole, the year 2011 Shows a mixed picture. 2011 started strong with a further increase of our order book in Q1 2011, however as from Q2 a reduction in the order intake took place, compensated in the following quarters, especially in the Back-end by deliveries out of our order book. Towards the end of 2011 we saw also a reduction in the order intake in our newly acquired AS activities. As a consequence of this decline in the economic climate sales for the year ended at a level of 1,634 million (excl. AS 1,191 million). Sales in the Front-end show for the full year an increase from 293 million to 456 million. This 55% increase of net sales was driven by increased equipment and higher spares and service sales amongst others due to strong inroads made with enabling new technologies in (PE)ALD and as a result of increased activity at our customers In our Back-end segment sales increased from 930 million to 1,178 million. In the Back-end segment we saw a strong sales increase due to the acquisition of the AS activities of Siemens, which contributed 444 million to the sales in 2011. For the existing activities of the Back-end segment sales decreased from 929 million to 734 million. This decrease was mainly caused by the lower LED equipment sales and the worsening of the business climate in the second half of 2011.
The gross margin for ASMI consolidated decreased from 44.9% in 2010 to 34.9% in 2011. Gross margin in our Front-end segment decreased from 39.1% in 2010 to 37.8% in 2011, while our Back-end segment showed a decrease from 46.8% to 33.8% for the same period. The decrease of the gross margin in our Front-end segment compared to last year is mainly attributable to the product mix differences which impacted especially the Q4 margin. The gross profit margin in the comparable Back-end segment decreased due to mix differences between equipment and lead frame sales, the increase in raw material prices for its lead frame business and, especially in the second half of 2011 due to the lower loading of the factories. The acquisition of the AS business impacted the gross margin as a result of its lower gross margin and the revaluation of acquired inventories at fair value.
The result from operations as a percentage of sales decreased from 26.9% in 2010 to 22.4% in 2011. The purchase price allocation of the newly acquired SEAS business resulted in a gain of bargain purchase of 109 million. The operating margin of our Front-end segment increased from 5.4% in 2010 to 13.7% in 2011. For the same period the operating margin of our comparable Back-end segment decreased from 33.6% to 22.2%.
Net earnings for 2011 were strongly affected by the gain on the bargain purchase of SEAS.
The company generated a positive operational cash flow in 2011 of 217 million, compared to 260 million in 2010. As well the Front-end as the Back-end operations were generating a positive operational cash flow in 2011.
In January 2011, we exercised our right to call the outstanding 4.25% convertible subordinated notes (due 2011), resulting in conversion of all remaining notes at February 15. As a result a revaluation of the conversion option ( 4.4 million) was included in our results for the first quarter of the year 2011.
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 and Europe.
The following table shows the geographic distribution of our Front-end and Back-end sales for the years 2009, 2010 and 2011:
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 61.4%, 61.2% and 70.4% of Front-end net sales in 2009, 2010 and 2011, respectively. The composition of our ten largest Front-end customers changes from year to year. The largest Front-end customer accounted for 30.6%, 21.6% and 22.8% of Front-end net sales in 2009, 2010 and 2011, 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 32.7%, 27.3% and 20.2% of Back-end net sales 2009, 2010 and 2011, 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 6.0%, 4.3% and 3.5% of Back-end net sales 2009, 2010 and 2011, 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. The costs relating to prototypes and experimental models, which we may subsequently sell to customers are charged to the cost of sales.
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 and the United States receive research and development grants and credits from various sources.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies.
A critical accounting policy is defined as one that is both material to the presentation of ASMIs consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on ASMIs financial condition or results of operations. Specifically, these policies have the following attributes: (1) ASMI is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates ASMI could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on ASMIs financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. ASMI bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as ASMIs operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties include those discussed in, Item 3D, Risk Factors. Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that ASMIs consolidated financial statements are fairly stated in accordance with USGAAP, and provide a meaningful presentation of ASMIs financial condition and results of operations.
Analysis of specific sensitivity to changes of estimates and assumptions are included in the notes to the financial statement.
Management believes that the following are critical accounting policies:
ASMI recognizes 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 collectability is probable. Each sale arrangement may contain commercial terms that differ from other arrangements. In addition, we frequently enter into contracts that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition.
In 2009, the Financial Accounting Standards Board issued amended revenue recognition guidance for arrangements with multiple deliverables and certain software sold with tangible products. This new guidance eliminates the residual method of revenue recognition and allows the use of managements best estimate of selling price for individual elements of an arrangement when vendor specific evidence or third party evidence is unavailable. ASMI implemented this guidance beginning in the first quarter of 2011 for transactions that were initiated or materially modified during 2011. The implementation of the new guidance had an insignificant impact on reported net sales as compared to net sales under previous guidance, as the
new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of reported net sales.
A major portion of our revenue is derived from contractual arrangements with customers that have multiple deliverables, such as equipment and installation. For each of the specified deliverables ASMI determines the selling price by using either vendor specific objective evidence (VSOE), third party evidence (TPE) or by best estimate of the selling price (BESP). For transactions entered into, or materially modified, as of January 1, 2011, when the Company is unable to establish relative selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The total arrangement consideration is allocated at inception of the arrangement to all deliverables on the basis of their relative selling price. The revenue relating to the undelivered elements of the arrangements is deferred at their relative selling prices until delivery of these elements. At December 31, 2010 and December 31, 2011 we have deferred revenues from installations in the amount of 4.4 million and 6.3 million respectively.
Our Front-end sales frequently involve sales of complex equipment, which may include customer-specific criteria, sales to new customers or sales of 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. Based on these criteria we may decide to defer revenue until completion of installation at the customers site and obtaining final acceptance from the customer. At December 31, 2010 and December 31, 2011 we had no deferred revenue from sales of equipment.
We provide maintenance on our systems during the warranty period, usually one to two years. Costs of warranty include the cost of labor, material and related overhead necessary to repair a product during the warranty period. For the front-end business and the SMT business we accrue for the estimated cost of the warranty on products shipped in a provision for warranty, upon recognition of the sale of the product. The costs are estimated based on actual historical expenses incurred and on estimated future expenses related to current sales, and are updated periodically. Actual warranty costs are charged against the provision for warranty. 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.
ASC Topic 805 (Business Combinations) requires that companies record acquisitions under the purchase method of accounting. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill. Purchased intangibles with definite lives are amortized over their respective useful lives. When a bargain purchase incurs, which is the case when the fair value of the acquired business exceeds the purchase price, this surplus in fair value is recognized as a gain from bargain purchase.
Long-lived assets include goodwill, other intangible assets and property, plant and equipment.
Goodwill is tested for impairment annually on December 31 and whenever events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable. Our Front-end 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. Our Back-end impairment test is based on the market value of the listed shares of ASMPT. The material assumptions used by management for the annual impairment test performed per December 31, 2011 were:
Management believes that the fair value calculated reflects the amount a market participant would be willing to pay. Based on this analysis management believes that the fair value of the reporting units substantially exceeded its carrying value and that, therefore, goodwill was not impaired as of December 31, 2011.
The calculation of fair value involves certain management judgments and was based on our best estimates and projections at the time of our review. 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 results of operations at that time. At December 31, 2011, a decrease in estimated cash flows of 10% and an increase of 10% of the discount rate used in calculating the fair value would not result in an impairment of the carrying value of goodwill.
Other intangible assets and property, plant and equipment 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. 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. At December 31, 2011, a decrease in estimated cash flows of 10% would not result in an impairment of the carrying value of long-lived assets.
Allowance for doubtful accounts
ASMI maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues ASMI has identified. Changes in circumstances, such as an unexpected material adverse change in a major customers ability to meet its financial obligation to ASMI or its payment trends, may require us to further adjust our estimates of the recoverability of amounts due to ASMI, which could have a material adverse effect on ASMIs financial condition and results of operations. At December 31, 2011 the allowance for doubtful accounts amounted to 7.6 million, which is 2.3% of our total accounts receivable.
Inventories are stated at the lower of cost (first-in, first out method) or market value. Inventory in the newly acquired SEAS business is generally determined on the basis of an average method. Costs include net prices paid for materials purchased, charges for freight and custom duties, production labor cost and factory overhead. Allowances are made for slow moving, obsolete or unsellable inventory and are reviewed on a quarterly basis.
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.
At December 31, 2011 our allowance for inventory obsolescence amounted to 59.0 million, which is 13.5% of our total inventory. If circumstances related to our inventories change, our estimate of the values of inventories could materially change. At December 31, 2011, 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 43 million.
Convertible bonds and conversion option
As per 1 January 2009, ASMI applies ASC 815 Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock. Our convertible bonds due 2010, 2011 and 2014, include a
component that creates a financial liability to the Company and a component that grants an option to the holder of the convertible note to convert it into common shares of the Company (conversion option). ASC 815 requires separate recognition of these components.
For the conversion options of the convertible bonds due 2010 and 2011 the accounting is different from that for the conversion option of the convertible bonds due 2014. As the convertible bonds due 2010 and 2011 are denominated in USD and the ASM International common shares in which they can be converted to are denominated in Euro, these conversion options are recognized as a liability measured at fair value. The conversion option is measured at fair value through the income statement, and for 2011 this revaluation at fair value resulted in a loss of 4.4 million (2010: loss 19.0 million). For the conversion options of the convertible bonds due 2014 the fixedfor-fixed principle is met as both the debt instrument (the bond) and the entitys equity shares into which they can be converted are denominated in the functional currency (Euro). Based on the before mentioned criteria the conversion option qualifies as permanent equity.
The fair value of the liability component is estimated using the prevailing market interest rate at the date of issue, for similar non-convertible debt. Subsequently, the liability is measured at amortized cost. The interest expense on the liability component is calculated by applying the market interest rate for similar non-convertible debt at the date of issue to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible subordinated notes, thus creating a non-cash interest expense. For 2011 this accretion interest was 4.4 million (2010: 6.0 million).
Share-based compensation expenses
The cost relating to employee stock options is measured at fair value on the grant date. The grant-date fair value of stock options is determined using a Black-Scholes option valuation model. This Black-Scholes model requires the use of assumptions, including expected share price volatility, the estimated life of each award and the estimated dividend yield. The risk-free interest rate used in the model is determined, based on a euro government bond with a life equal to the expected life of the options.
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, 2011, 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 76.5 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, 2011 is not realizable, this would result in an additional valuation allowance and an income tax expense of 0.7 million.
Consistent with the provisions of ASC 740, as of December 31,2011, ASMI has a liability of unrecognized tax benefits of 21.7 million (2010: 20.1 million). A reconciliation of the beginning balance at January 1, 2011 and the ending balance at December 31, 2011 of the liability for unrecognized tax benefits is as follows:
Unrecognized tax benefits mainly relate to transfer pricing positions, operational activities in countries where we are not tax registered and tax deductible costs. We estimate that no interest and penalties are related to these unrecognized tax benefits. Unrecognized tax benefits of 21.749 would, if recognized, impact the Companys effective tax rate. The Company provided for the full amount of 21.749 to mitigate possible impact in case of an unfavorable outcome.
The calculation of our tax positions involves dealing with uncertainties in the application of complex tax laws. Our estimate for the potential outcome of any uncertain tax position is highly judgmental. Settlement of uncertain tax positions in a manner inconsistent with our estimates could have a material impact on our 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 2009, 2010 and 2011:
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Net Sales. The following table shows net sales of our Front-end and Back-end segments for the full year 2011 compared to the same period in 2010:
The increase of net sales in the full year 2011 in our Front-end segment compared to last year was driven by increased equipment and higher spares and service sales amongst others due to strong inroads
made with enabling new technologies in (PE)ALD and as a result of increased activity at our customers. In our Back-end segment record sales were realized due to the acquisition of SEAS (ASMAS).
The impact of currency changes year-over-year was a decrease of 5%.
Gross Profit Margin. The following table shows gross profit and gross profit margin for the Front-end and Back-end segments for the full year 2011 compared to the same period in 2010:
The decrease of the gross margin in our Front-end segment compared to the same period last year is mainly attributable to the product mix differences. The gross profit margin in the Back-end segment decreased due to mix differences between equipment and lead frame sales, the increase in raw material prices for its lead frame business, the acquisition of the AS business with its lower gross margin, and the lower trading in the course of 2011.
Business combination accounting rules require us to account for inventories assumed from our acquisitions at their fair values. The revaluation of the acquired inventories increased both cost of sales and the gain on bargain purchase with 11.5 million.
The impact of currency changes year to year was a decrease of 5%.
Selling, General and Administrative Expenses. The following table shows selling, general and administrative expenses for our Front-end and Back-end segments for the full year 2011 compared to the same period in 2010:
As a percentage of net sales, selling, general and administrative expenses were 11% in the full year of 2011, flat compared to the same period of 2010.
For the full year of 2011 selling, general and administrative expenses as a percentage of net sales of our Front-end segment, were reduced to 13% compared with 17% for the full year of 2010. On a comparable base- excluding the AS business- for the period under review the selling, general and administrative expenses in the Back-end segment as a percentage of net sales increased from 9% in 2010 to 10% in 2011.
The impact of currency changes year to year was a decrease of 4%.
Research and Development Expenses. The following table shows research and development expenses for our Front-end and Back-end segments for the full year 2011 compared to the same period in 2010:
As a percentage of net sales, research and development expenses were 8% in the full year of 2011, an increase of 1%-point compared to the same period of 2010.
The impact of currency changes year to year was a decrease of 4%.
Impairment charge property, plant and equipment. In 2011 the Company recorded an impairment charge of 8,038 related to machinery and equipment. The Company impaired certain items of property, plant and equipment related to the Back-end lead frame business. The impairment loss was recognized based on the difference between the carrying value and the fair value of the relevant assets.
Gain on bargain purchase. On 7 January 2011, ASMPT acquired the entire equity interest of 13 direct and indirect subsidiaries of Siemens Aktiengesellschaft (SEAS Entities). We recognized a gain of 109.3 million on the bargain purchase representing the excess of the net fair value of the identifiable assets acquired and the liabilities assumed over the aggregate of the consideration transferred.
The gain on bargain purchase of 109 million was recognized upon completion of the acquisition of the SEAS entities. The gain on bargain purchase was mainly attributable to depressed market value of the acquired business because of years of losses due to challenging economic environment and the bad global economic environment during the period of negotiation of the acquisition.
Earnings from Operations. The following table shows earnings from operations for our Front-end and Back-end segments for the full year 2011 compared to the same period in 2010:
The impact of currency changes year to year was a decrease of 6%.
Net Interest Expense. Net interest expense amounted to 10.6 million in 2011 compared to the net interest expense of 14.5 million in 2010. This decrease in net interest expenses mainly resulted from a lower average debt in 2011.
Accretion interest expense convertible notes. Both our convertible bonds due 2011 and 2014, include a component that creates a financial liability to the Company and a component that grants an option to the holder of the convertible note to convert it into common shares of the Company (conversion option). ASC 815 requires separate recognition of these components.
The fair value of the liability component is estimated using the prevailing market interest rate at the date of issue, for similar non-convertible debt. Subsequently, the liability is measured at amortized cost. The interest expense on the liability component is calculated by applying the market interest rate for similar non-convertible debt at the date of issue to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible subordinated notes, thus creating a non-cash interest expense. For 2011 this accretion interest was 4.4 million (2010; 6.0 million).
Revaluation conversion option. All convertible bonds include a component that creates a financial liability to the Company and a component that grants an option to the holder of the convertible note to convert it into common shares of the Company (conversion option). ASC 815 requires separate recognition of these components.
For the conversion options of the convertible bonds due 2011 the accounting is different from that for the conversion option of the convertible bonds due 2014. As the convertible bonds due 2011 was denominated in USD and the ASM International common shares in which they can be converted to are
denominated in Euro, these conversion options are recognized as a liability measured at fair value. The conversion option is measured at fair value through the income statement, for 2011, until early redemption in February 2011, this revaluation at fair value resulted in a loss of 4.4 million (2010: 19.0 million).
For the conversion options of the convertible bonds due 2014 the fixedfor-fixed principle is met as both the debt instrument (the bond) and the entitys equity shares in which they can be converted to are denominated in the functional currency (Euro). Based on the before mentioned criteria the conversion option qualifies as permanent equity.
Loss resulting from early extinguishment of debt. On January 3, 2011 we announced the redemption for all outstanding principal balance of our 4.25% Convertible Subordinated Notes due 2011, which resulted in the conversion of almost all remaining notes prior to the redemption date. The loss from the early extinguishment of the notes of 824, which includes the write-off of unamortized issuance costs, has been recorded as a loss from early extinguishment of debt in the Consolidated Statement of Operations for the year 2011.
In 2010 US$ 56.5 million convertible subordinated notes have been repurchased for a market value of US$ 74.6 million. The loss from the early extinguishment of the notes of 3,609, which includes the write-off of unamortized issuance costs and the amortization of unamortized interest expenses, has been recorded as a loss from early extinguishment of debt in the Consolidated Statement of Operations for the year 2010.
Income Tax Expense. Income tax expense decreased from 43 million in 2010 to 37 million in 2011, resulting from the balance of an increase of result before tax in 2011 and a release of certain valuation allowances.
Net Earnings allocated to the shareholders of the parent. The following table shows net earnings for our Front-end and Back-end segments for the full year, 2011 compared to the same period in 2010:
Net earnings for the Back-end segment reflect our 52.17% ownership of ASM Pacific Technology.
Subsequent events. On February 27 2012 one of our customers, Elpida Memory Inc (Elpida), filed for bankruptcy protection in Japan. As per 31 December, 2011, we had a total outstanding amount on Elpida of 362 million Yen (equivalent to 3.6 million) while about 65 million Yen (0,6 million) was collected in January 2012 and also have a secured claim for the unpaid amount of the delivered equipment under Japanese Law. On March 23, 2012 the Tokyo District Court made the order to commence corporate reorganization proceedings and appointed Trustees to Elpida. Given such uncertainty, any loss on the outstanding receivable is not yet determinable and ASMI will evaluate the impact (if any) of such proceedings as soon as they become available.
Information regarding the hedging of foreign currency net investments is provided in Item 11, and is incorporated herein by reference.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Sales. The following table shows net sales of our Front-end and Back-end segments for the full year 2010 compared to 2009:
The increase of net sales for the full year of 2010 in our Front-end segment, compared to the same period last year, was driven by higher customer demand in all our equipment segments and in spares and service. In our Back-end segment record quarterly sales were realized in the first quarter, the second quarter and in the third quarter of 2010 due to the high continued strong demand for our traditional products and increasing demand for our LED related products.
The strengthening of the Yen, U.S. dollar and U.S. dollar related currencies against the Euro in 2010 as compared to the same period of 2009 impacted total net sales by 5%.
Gross Profit Margin. The following table shows gross profit and gross profit margin for the Front-end and Back-end segments for the full year 2010 compared to the same period in 2009. In order to improve comparability impairment charges have been disclosed separately in the table below.:
The gross profit margin of both our Front-end segment and our Back-end segment strongly improved in 2010 compared to 2009, driven by significantly higher activity levels. The Front-end margin further improved due to the execution of our PERFORM! program which, among other things, resulted in a lower manufacturing overhead.
In 2009, as a result of the current prolonged contraction in the market and strategic focus of certain of our product configurations a write down of inventories was recorded of 24.2 million.
The strengthening of the Yen, U.S. dollar and U.S. dollar related currencies against the Euro in 2010 as compared to the same period of 2009 negatively impacted gross profit by 6%.
Selling, General and Administrative Expenses. The following table shows selling, general and administrative expenses (including amortization of other intangible assets) for our Front-end and Back-end segments 2010 compared to 2009:
For 2010, selling, general and administrative expenses as a percentage of net sales of our Front-end segment, were reduced to 17% compared with 37% for 2009, reflecting our focus to reduce our fixed cost base as part of our restructuring program PERFORM!.
The selling, general and administrative expenses in the Back-end segment as a percentage of net sales decreased from 12% in 2009 to 9% in 2010.
The strengthening of the Yen, U.S. dollar and U.S. dollar related currencies against the Euro in 2010 as compared to the same period of 2009 increased selling, general and administrative expenses by 5%.
Research and Development Expenses. The following table shows research and development expenses for our Front-end and Back-end segments for the full year 2010 compared to 2009:
The decrease in research and development expense as a percentage of sales, in both our Front-end and Back-end segment, is the result of a further prioritization of research and development projects in combination with a substantial sales increase. In the course of 2010 we saw an increase in the absolute amount of development costs driven by those higher activity levels and related customer specific development activities.
The strengthening of the Yen, U.S. dollar and U.S. dollar related currencies against the Euro in 2010 as compared to the same period of 2009 increased research and development expenses by 6%.
Restructuring Expenses. In 2009 ASMI started the implementation of a major restructuring in the Front-end segment (PERFORM!) as announced on January 9, 2009 and on July 20, 2009. The main components of the Companys accelerated execution plans are:
The following table summarizes the aggregated restructuring expenses by type:
Related to these execution plans, an amount of 11.2 million in restructuring expenses was recorded for of 2010. These expenses were mainly costs for severance packages, retention costs, provisions for vacancy and other costs related to the transition of activities to Singapore.
Related to these execution plans, an amount of 35.7 million in restructuring expenses was recorded in 2009. These charges include:
Result from Operations. The following table shows earnings (loss) from operations for our Front-end and Back-end segments for the full year 2010 compared to the same period in 2009. In order to improve comparability, impairment and restructuring charges have been disclosed separately in the table below:
The strengthening of the Yen, U.S. dollar and U.S. dollar related currencies against the Euro in 2010 as compared to the same period of 2009 impacted operating result by 6%.
Net Interest Expense. Net interest expense amounted to 14.5 million in 2010 compared to the net interest expense of 7.5 million in 2009. This increase in net interest expenses mainly resulted from a higher average debt , higher interest rates and a strengthening of the USD in 2010 against the Euro.
Accretion interest expense convertible notes. Both our convertible bonds due 2010, 2011 and 2014, include a component that creates a financial liability to the Company and a component that grants an option to the holder of the convertible note to convert it into common shares of the Company (conversion option). ASC 815 requires separate recognition of these components.
The fair value of the liability component is estimated using the prevailing market interest rate at the date of issue, for similar non-convertible debt. Subsequently, the liability is measured at amortized cost. The interest expense on the liability component is calculated by applying the market interest rate for similar non-convertible debt at the date of issue to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible subordinated notes, thus creating a non-cash interest expense. For 2010 this accretion interest was 6.0 million (2009; 4.3 million).
Revaluation conversion option. All convertible bonds include a component that creates a financial liability to the Company and a component that grants an option to the holder of the convertible note to convert it into common shares of the Company (conversion option). ASC 815 requires separate recognition of these components.
For the conversion options of the convertible bonds due 2010 and 2011 the accounting is different from that for the conversion option of the convertible bonds due 2014. As the convertible bonds due 2010 and 2011 are denominated in USD and the ASM International common shares in which they can be converted to are denominated in Euro, these conversion options are recognized as a liability measured at fair value. The conversion option is measured at fair value through the income statement, for 2010 this revaluation at fair value resulted in a loss of 19.0 million (2009: 24.4 million).
For the conversion options of the convertible bonds due 2014 the fixedfor-fixed principle is met as both the debt instrument (the bond) and the entitys equity shares in which they can be converted to are denominated in the functional currency (Euro). Based on the before mentioned criteria the conversion option qualifies as permanent equity.
Gain (expense) resulting from early extinguishment of debt. In 2010 US$ 56.5 million convertible subordinated notes have been repurchased for a market value of US$ 74.6 million. The loss from the early
extinguishment of the notes of 3,609, which includes the write-off of unamortized issuance costs and the amortization of unamortized interest expenses, has been recorded as a loss from early extinguishment of debt in the Consolidated Statement of Operations for the year 2010.
In 2009 US$ 4.0 million 5.25% convertible subordinated notes due 2010 and US$ 26.3 million 4.25% convertible subordinated notes due 2011 were repurchased for a market value of US$ 38.9 million. The loss from the early extinguishment of the notes of 1.8 million, which includes the write-off of unamortized issuance costs, has been recorded as a loss from early extinguishment of debt in the Consolidated Statement of Operations for the year 2009.
Income Tax Expense. Income tax expense increased from 3.8 million in 2009 to 42.9 million in 2010, resulting from the increase of result before tax in 2010.
Net Earnings (Loss) allocated to the shareholders of the parent. The following table shows net earnings (loss) for our Front-end and Back-end segments for the full year 2010 compared to the same period in 2009. In order to improve comparability, impairment and restructuring charges, results on early extinguishment of debt and the fair value changes of the conversion option have been disclosed separately in the table below:
Net earnings for the Back-end segment reflect our 52.36% ownership of ASM Pacific Technology (2009; 52.59%).
Information regarding the hedging of foreign currency net investments is provided in Item 11, and is incorporated herein by reference.
B. 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.
Net cash provided by operations in 2011 was 217 million as compared to 260 million for 2010. This decrease results mainly from investments in working capital and higher tax payments, partly offset by improved net earnings. Net cash used in investing activities in 2011 of 80 million was lower compared to 101 million for 2010. Net cash used in financing activities in 2011 was 79 million compared to 123 million for the same period in 2010.
In May 2010 the remaining outstanding US$ 16.9 million of our 5.25% Convertible bonds due 2010 were converted into common shares. In January, July and December 2010 respectively US$ 39.4 million, US$ 7.2 million and US$ 9.9 million of our 4.25% Convertible bonds due 2010 were repurchased. In January , 2011 we announced the redemption for all of the outstanding principal balance of our 4.25%
Convertible Subordinated Notes due 2011, which resulted in the conversion of all remaining notes prior to the redemption date scheduled for February 15, 2011.
In July 2011 we finalized the increase and extension of ASMIs existing standby revolving credit facility. The credit commitment was increased from 90 million to 150 million and the maturity date was extended from 1 November 2012 until July 31 2014. In the event all outstanding convertible bonds due 6 November 2014 are converted, repaid or replaced prior to 30 June 2014, the maturity date will be 31 July 2015. As per December 31, 2011 the amount outstanding of the 6.5% Convertible Subordinated Loan (due 2014) is 150 million. As a result of the dividend paid in 2011 the conversion rated decreased from 17.06 to 16.85.
See notes 4, 5, 14, 17, 18 and 23 to our consolidated financial statements for discussion of our funding, treasury policies and our long-term debt.
At December 31, 2011, the Companys principal sources of liquidity consisted of 390 million in cash and cash equivalents and 249 million in undrawn bank lines. Approximately 162 million of the cash and cash equivalents and 92 million of the undrawn bank lines are restricted to use in the Companys Back-end operations. 20 million of the cash and cash equivalents and 7 million in undrawn bank lines are restricted to use in the Companys Front-end operations in Japan.
For the most part, our cash and cash equivalents are not guaranteed by any governmental agency. We place our cash and cash equivalents with high quality financial institutions to limit our credit risk exposure.
The net cash of ASMI, excluding Back-end, at December 31, 2011 was 65 million (2010; net debt 73 million). This net cash position is the balance of 228 million cash and 163 million debt. The debt of 163 million consists of 135 million convertible debt and 28 million other debt. Furthermore, ASMI, excluding Back-end, has useable undrawn credit lines of 150 million.
Net working capital, consisting of accounts receivable, inventories, other current assets, accounts payable, accrued expenses, advance payments from customers and deferred revenue, increased from 293 million December 31, 2010 to 407 million at December 31, 2011. The number of outstanding days of working capital, measured based on quarterly sales, increased from 76 days at December 31, 2010 to 106 days at December 31, 2011. For the same period, our Front-end segment increased from 93 days to 100 days and our Back-end segment increased from 70 days to 109 days.
The Companys employees of the Front-end segment in the Netherlands, approximately 170 FTE, participate in a multi-employer union plan ,Bedrijfstakpensioenfonds Metalektro, (PME) determined in accordance with the collective bargaining agreements effective for the industry in which ASMI operates. This collective bargaining agreement has no expiration date. This multiemployer union plan covers approximately 1,220 companies and 130,000 contributing members. ASMIs contribution to the multiemployer union plan is less than 5.0% of the total contribution to the plan as per the annual report for the year ended December 31, 2010. The plan monitors its risks on a global basis, not by company or employee, and is subject to regulation by Dutch governmental authorities. By law (the Dutch Pension Act), a multiemployer union plan must be monitored against specific criteria, including the coverage ratio of the plan assets to its obligations. This coverage ratio must exceed 104.3% for the total plan. Every company participating in a Dutch multiemployer union plan contributes a premium calculated as a percentage of its total pensionable salaries, with each company subject to the same percentage contribution rate. The premium can fluctuate yearly based on the coverage ratio of the multiemployer union plan. The pension rights of each employee are based upon the employees average salary during employment.
ASMIs net periodic pension cost for this multiemployer union plan for any period is the amount of the required contribution for that period. A contingent liability may arise from, for example, possible actuarial losses relating to other participating entities because each entity that participates in a multiemployer union plan shares in the actuarial risks of every other participating entity or any responsibility under the terms of a plan to finance any shortfall in the plan if other entities cease to participate
The coverage ratio of the multiemployer union plan decreased to 90.0% as of December 31, 2011 (December 31, 2010: 96.0%). Because of the low coverage ratio PME prepared and executed a so-called Recovery Plan which was approved by De Nederlandsche Bank, the Dutch central bank, which is the
supervisor of all pension companies in the Netherlands. Due to the low coverage ratio and according the obligation of the Recovery Plan the pension premium percentage will increase from 23.0% in 2011 to 24.0% in 2012. The coverage ratio is calculated by dividing the plan assets by the total sum of pension liabilities and is based on actual market interest.
Our Back-end segment, which is conducted through ASM Pacific Technology, our 52.17%-owned subsidiary, is entirely self-financed and at December 31, 2011 had no long-term debt. 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.
We historically relied on dividends from ASM Pacific Technology for a portion of our cash flow for use in our Front-end operations. Cash dividends received from ASM Pacific Technology during 2009, 2010 and 2011 were 21.4 million, 65.6 million and 86.9 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, repurchase our common shares, pay 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.
At our Annual General Meeting of Shareholders in May 2010 we decided to extend this policy for at least the years 2010 and 2011.
The following table shows the dividends received from ASM Pacific Technology and the use of those dividends within the Front-end business: